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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







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

For the quarterly period ended March 31, 2011

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 000-50658





Marchex, Inc.

(Exact name of Registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 35-2194038                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)

520 Pike Street, Suite 2000

Seattle, Washington 98101

(Address of principal executive offices)

Registrants telephone
number, including area code: (206) 331-3300





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 and 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files).    Yes   ̈    No   ̈

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



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|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.



|                                               |  |                           
|---------------------------------------------- |  | --------------------------
|Class                                          |  | Outstanding at May 9, 2011
|Class A common stock, par value $.01 per share |  | 9,991,882                 
|Class B common stock, par value $.01 per share |  | 27,163,358                









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##### Table of Contents

Marchex, Inc.

Form 10-Q

Table of Contents



|          |  |                                                                                       |  |     
|--------- |  | ------------------------------------------------------------------------------------- |  | ----
|          |  |                                                                                       |  | Page
|          |  |                                                                                      
|          |  | Part IFinancial Information                                                          |  | 3   
|          |  |                                                                                      
|Item 1.   |  | Condensed Consolidated Financial Statements (unaudited)                               |  | 3   
|          |  |                                                                                      
|          |  | Condensed Consolidated Balance Sheets                                                 |  | 3   
|          |  |                                                                                      
|          |  | Condensed Consolidated Statements of Operations                                       |  | 4   
|          |  |                                                                                      
|          |  | Condensed Consolidated Statements of Cash Flows                                       |  | 5   
|          |  |                                                                                      
|          |  | Notes to Condensed Consolidated Financial Statements                                  |  | 6   
|          |  |                                                                                      
|Item 2.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 14  
|          |  |                                                                                      
|Item 3.   |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 30  
|          |  |                                                                                      
|Item 4.   |  | Controls and Procedures                                                               |  | 30  
|          |  |                                                                                      
|          |  | Part IIOther Information                                                             |  | 31  
|          |  |                                                                                      
|Item 1.   |  | Legal Proceedings                                                                     |  | 31  
|          |  |                                                                                      
|Item 1A.  |  | Risk Factors                                                                          |  | 31  
|          |  |                                                                                      
|Item 2.   |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 47  
|          |  |                                                                                      
|Item 6.   |  | Exhibits                                                                              |  | 47  
|          | 
|SIGNATURE |  | 48                                                                                   



2



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##### Table of Contents

Part IFinancial Information



|Item 1. | Condensed Consolidated Financial Statements (unaudited)
|------- | -------------------------------------------------------

MARCHEX, INC. AND SUBSIDIARIES

Condensed
Consolidated Balance Sheets

(unaudited)



|                                               |  |                  |              |   |               |   |              |  
|---------------------------------------------- |  | ---------------- | ------------ | - | ------------- | - | ------------ | -
|                                               |  | December 31,2010 |              |   | March 31,2011 |  
|Assets                                         |  |                  |              |   |               |   |              |  
|Current assets:                                |  |                  |              |   |               |   |              |  
|Cash and cash equivalents                      |  | $                | 37,328,052   |   |               | $ | 40,049,068   |  
|Accounts receivable, net                       |  |                  | 20,213,886   |   |               |   | 26,294,051   |  
|Prepaid expenses and other current assets      |  |                  | 3,567,504    |   |               |   | 3,140,110    |  
|Refundable taxes                               |  |                  | 3,248,908    |   |               |   | 2,450,014    |  
|Deferred tax assets                            |  |                  | 868,629      |   |               |   | 944,857      |  
|                                               |  |                  |              |   |               |   |              |  
|Total current assets                           |  |                  | 65,226,979   |   |               |   | 72,878,100   |  
|Property and equipment, net                    |  |                  | 4,709,907    |   |               |   | 4,970,233    |  
|Deferred tax assets                            |  |                  | 50,768,525   |   |               |   | 50,321,582   |  
|Intangible and other assets, net               |  |                  | 2,070,217    |   |               |   | 1,764,053    |  
|Goodwill                                       |  |                  | 35,337,428   |   |               |   | 35,328,143   |  
|Intangible assets from acquisitions, net       |  |                  | 1,576,687    |   |               |   | 1,112,485    |  
|                                               |  |                  |              |   |               |   |              |  
|Total assets                                   |  | $                | 159,689,743  |   |               | $ | 166,374,596  |  
|                                               |  |                  |              |   |               |   |              |  
|Liabilities and Stockholders Equity           |  |                  |              |   |               |   |              |  
|                                               |  |                 
|Current liabilities:                           |  |                  |              |   |               |   |              |  
|Accounts payable                               |  | $                | 11,165,616   |   |               | $ | 13,633,347   |  
|Accrued expenses and other current liabilities |  |                  | 5,106,021    |   |               |   | 5,875,402    |  
|Deferred revenue                               |  |                  | 1,649,851    |   |               |   | 1,749,713    |  
|                                               |  |                  |              |   |               |   |              |  
|Total current liabilities                      |  |                  | 17,921,488   |   |               |   | 21,258,462   |  
|Other non-current liabilities                  |  |                  | 2,076,332    |   |               |   | 2,047,465    |  
|                                               |  |                  |              |   |               |   |              |  
|Total liabilities                              |  |                  | 19,997,820   |   |               |   | 23,305,927   |  
|                                               |  |                 
|Stockholders equity:                          |  |                  |              |   |               |   |              |  
|Class A common stock                           |  |                  | 105,006      |   |               |   | 104,886      |  
|Class B common stock                           |  |                  | 254,802      |   |               |   | 254,318      |  
|Treasury stock                                 |  |                  | (1,360,238   | ) |               |   | (251,582     | )
|Additional paid-in capital                     |  |                  | 281,421,696  |   |               |   | 283,113,952  |  
|Accumulated deficit                            |  |                  | (140,729,343 | ) |               |   | (140,152,905 | )
|                                               |  |                  |              |   |               |   |              |  
|Total stockholders equity                     |  |                  | 139,691,923  |   |               |   | 143,068,669  |  
|                                               |  |                  |              |   |               |   |              |  
|Total liabilities and stockholders equity     |  | $                | 159,689,743  |   |               | $ | 166,374,596  |  
|                                               |  |                  |              |   |               |   |              |  

See accompanying notes to condensed consolidated financial statements.



3



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##### Table of Contents

MARCHEX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited)



|                                                                                               |  |                             |            |   |      |   |            |  
|---------------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                               |  | Three Months
EndedMarch 31, |           
|                                                                                               |  | 2010                        |            |   | 2011 |  
|Revenue                                                                                        |  | $                           | 24,001,981 |   |      | $ | 29,079,855 |  
|                                                                                               |  |                             |            |   |      |   |            |  
|                                                                                               |  |                            
|Expenses:                                                                                      |  |                             |            |   |      |   |            |  
|Service costs (1)                                                                              |  |                             | 12,649,501 |   |      |   | 16,672,382 |  
|Sales and marketing (1)                                                                        |  |                             | 3,910,708  |   |      |   | 2,693,728  |  
|Product development (1)                                                                        |  |                             | 3,962,284  |   |      |   | 4,889,110  |  
|General and administrative (1)                                                                 |  |                             | 3,836,261  |   |      |   | 5,155,435  |  
|Amortization of intangible assets from acquisitions (2)                                        |  |                             | 704,466    |   |      |   | 464,202    |  
|Acquisition related costs                                                                      |  |                             |           |   |      |   | 402,123    |  
|                                                                                               |  |                             |            |   |      |   |            |  
|Total operating expenses                                                                       |  |                             | 25,063,220 |   |      |   | 30,276,980 |  
|Gain on sales and disposals of intangible assets, net                                          |  |                             | 1,327,304  |   |      |   | 1,912,674  |  
|                                                                                               |  |                             |            |   |      |   |            |  
|Income from operations                                                                         |  |                             | 266,065    |   |      |   | 715,549    |  
|                                                                                               |  |                            
|Other income (expense):                                                                        |  |                             |            |   |      |   |            |  
|Interest income                                                                                |  |                             | 18,605     |   |      |   | 130,765    |  
|Interest and line of credit expense                                                            |  |                             | (25,823    | ) |      |   | (26,250    | )
|Other                                                                                          |  |                             | 1,558      |   |      |   | (1,630     | )
|                                                                                               |  |                             |            |   |      |   |            |  
|Total other income (expense)                                                                   |  |                             | (5,660     | ) |      |   | 102,885    |  
|                                                                                               |  |                             |            |   |      |   |            |  
|Income before provision for income taxes                                                       |  |                             | 260,405    |   |      |   | 818,434    |  
|Income tax expense                                                                             |  |                             | 328,179    |   |      |   | 241,996    |  
|                                                                                               |  |                             |            |   |      |   |            |  
|Net income (loss)                                                                              |  |                             | (67,774    | ) |      |   | 576,438    |  
|Dividends paid to participating securities                                                     |  |                             | (43,574    | ) |      |   | (63,505    | )
|                                                                                               |  |                             |            |   |      |   |            |  
|Net income (loss) applicable to common stockholders                                            |  | $                           | (111,348   | ) |      | $ | 512,933    |  
|                                                                                               |  |                             |            |   |      |   |            |  
|                                                                                               |  |                            
|Basic net income (loss) per share applicable to Class A and Class B common stockholders        |  | $                           | (0.00      | ) |      | $ | 0.02       |  
|Diluted net income (loss) per share applicable to Class A and Class B common stockholders      |  | $                           | (0.00      | ) |      | $ | 0.01       |  
|Dividends paid per share                                                                       |  | $                           | 0.02       |   |      | $ | 0.02       |  
|Shares used to calculate basic net income (loss) per share applicable to common stockholders   |  |                             |            |   |      |   |            |  
|Class A                                                                                        |  |                             | 10,835,671 |   |      |   | 10,235,865 |  
|Class B                                                                                        |  |                             | 22,170,607 |   |      |   | 22,169,937 |  
|Shares used to calculate diluted net income (loss) per share applicable to common stockholders |  |                             |            |   |      |   |            |  
|Class A                                                                                        |  |                             | 10,835,671 |   |      |   | 10,235,865 |  
|Class B                                                                                        |  |                             | 33,006,278 |   |      |   | 34,254,797 |  
|(1)     Excludes amortization of intangible assets from acquisitions                           |  |                             |            |   |      |   |            |  
|(2)     Components of amortization of intangible assets from acquisitions:                     |  |                             |            |   |      |   |            |  
|Service costs                                                                                  |  | $                           | 704,466    |   |      | $ | 464,202    |  

See accompanying notes
to condensed consolidated financial statements.



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MARCHEX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited)



|                                                                                         |  |                             |            |   |      |   |            |  
|---------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                         |  | Three Months
EndedMarch 31, |           
|                                                                                         |  | 2010                        |            |   | 2011 |  
|Cash flows from operating activities:                                                    |  |                             |            |   |      |   |            |  
|Net income (loss)                                                                        |  | $                           | (67,774    | ) |      | $ | 576,438    |  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                             |            |   |      |   |            |  
|Amortization and depreciation                                                            |  |                             | 2,096,798  |   |      |   | 1,511,266  |  
|(Gain) loss on sales of fixed assets, net                                                |  |                             | (18        | ) |      |   | 1,624      |  
|Gain on sales and disposals of intangible assets, net                                    |  |                             | (1,327,304 | ) |      |   | (1,912,674 | )
|Allowance for doubtful accounts and advertiser credits                                   |  |                             | 252,224    |   |      |   | 166,874    |  
|Stock-based compensation                                                                 |  |                             | 2,387,323  |   |      |   | 3,511,044  |  
|Deferred income taxes                                                                    |  |                             | 1,645,883  |   |      |   | 370,715    |  
|Change in certain assets and liabilities:                                                |  |                             |            |   |      |   |            |  
|Accounts receivable, net                                                                 |  |                             | (227,293   | ) |      |   | (6,247,039 | )
|Refundable taxes                                                                         |  |                             | (1,318,782 | ) |      |   | 830,084    |  
|Prepaid expenses and other current assets                                                |  |                             | 6,115      |   |      |   | 389,959    |  
|Accounts payable                                                                         |  |                             | (305,329   | ) |      |   | 2,489,981  |  
|Accrued expenses and other current liabilities                                           |  |                             | (300,217   | ) |      |   | 759,787    |  
|Deferred revenue                                                                         |  |                             | (36,444    | ) |      |   | 99,862     |  
|Other non-current liabilities                                                            |  |                             | 213,862    |   |      |   | (28,867    | )
|                                                                                         |  |                             |            |   |      |   |            |  
|Net cash provided by operating activities                                                |  |                             | 3,019,044  |   |      |   | 2,519,054  |  
|Cash flows from investing activities:                                                    |  |                             |            |   |      |   |            |  
|Purchases of property and equipment                                                      |  |                             | (1,271,760 | ) |      |   | (950,476   | )
|Proceeds from sales of property and equipment                                            |  |                             | 18         |   |      |   | 342        |  
|Proceeds from sales of intangible assets                                                 |  |                             | 1,327,521  |   |      |   | 1,913,000  |  
|Purchases of intangibles and changes in other non-current assets                         |  |                             | (14,619    | ) |      |   | (31,815    | )
|                                                                                         |  |                             |            |   |      |   |            |  
|Net cash provided by investing activities                                                |  |                             | 41,160     |   |      |   | 931,051    |  
|Cash flows from financing activities:                                                    |  |                             |            |   |      |   |            |  
|Capital lease obligation principal payments                                              |  |                             | (2,272     | ) |      |   |           |  
|Common stock dividend payments                                                           |  |                             | (705,958   | ) |      |   | (711,835   | )
|Repurchase of Class B common stock                                                       |  |                             | (2,158,913 | ) |      |   | (251,582   | )
|Proceeds from exercises of stock options                                                 |  |                             | 3,150      |   |      |   | 226,431    |  
|Proceeds from employee stock purchase plan                                               |  |                             | 4,098      |   |      |   | 7,897      |  
|                                                                                         |  |                             |            |   |      |   |            |  
|Net cash used in financing activities                                                    |  |                             | (2,859,895 | ) |      |   | (729,089   | )
|                                                                                         |  |                             |            |   |      |   |            |  
|Net increase in cash and cash equivalents                                                |  |                             | 200,309    |   |      |   | 2,721,016  |  
|Cash and cash equivalents at beginning of period                                         |  |                             | 33,638,002 |   |      |   | 37,328,052 |  
|                                                                                         |  |                             |            |   |      |   |            |  
|Cash and cash equivalents at end of period                                               |  | $                           | 33,838,311 |   |      | $ | 40,049,068 |  
|                                                                                         |  |                             |            |   |      |   |            |  
|                                                                                         |  |                            
|Supplemental disclosure of cash flow information:                                        |  |                             |            |   |      |   |            |  
|Cash paid (received) during the period for income taxes, net of refunds                  |  | $                           | 20,964     |   |      | $ | (747,973   | )
|                                                                                         |  |                             |            |   |      |   |            |  

See accompanying notes to condensed consolidated financial statements.



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Marchex, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(1) Description of Business and Basis of Presentation

Marchex, Inc. (the Company) was incorporated in the state of Delaware on January 17, 2003. The Company is a call
advertising and small business marketing company. The Company delivers call and click-based advertising products to tens of thousands of advertisers. The accompanying unaudited condensed consolidated financial statements of Marchex, Inc. and its
wholly-owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2011, or for any other period. The balance sheet at December 31, 2010 has been derived from the audited consolidated financial statements at that date but does not include all of the information and notes required by
accounting principles generally accepted in the United States of America for complete financial statements. These condensed consolidated financial statements and notes should be read in conjunction with the Companys audited consolidated
financial statements and accompanying notes included in the Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC.

The condensed consolidated financial statements include the accounts of Marchex and its wholly-owned subsidiaries. Acquisitions are included in the Companys consolidated financial statements as of
and from the date of acquisition. All inter-company transactions and balances have been eliminated in consolidation. Certain reclassifications have been made to the condensed consolidated financial statements in the prior period to conform to the
current period presentation.

The Companys condensed consolidated financial statements presented include the condensed
consolidated balance sheets as of December 31, 2010 and March 31, 2011, the condensed consolidated statements of operations for the three months ended March 31, 2010 and 2011 and the condensed consolidated statements of cash flows for the
three months ended March 31, 2010 and 2011.

(2) Significant Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) in the United
States 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 revenues
and expenses during the reporting period. These judgments are difficult as matters that are inherently uncertain directly impact their valuation and accounting. Actual results may vary from managements estimates and assumptions.

There have been no changes to the Companys significant accounting policies as disclosed in the Companys Annual Report on Form
10-K for the year ended December 31, 2010 filed with the SEC.



6



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##### Table of Contents

Revenues

The following table presents the Companys revenues, by revenue source, for the periods presented:



|                                  |  |                    |            |  |      |   |            | 
|--------------------------------- |  | ------------------ | ---------- |  | ---- | - | ---------- | 
|                                  |  | Three months ended |           
|                                  |  | March 31,          |           
|                                  |  | 2010               |            |  | 2011 |  
|Partner and Other Revenue Sources |  | $                  | 16,961,742 |  |      | $ | 23,741,369 | 
|Proprietary Traffic Sources       |  |                    | 7,040,239  |  |      |   | 5,338,486  | 
|                                  |  |                    |            |  |      |   |            | 
|Total Revenue                     |  | $                  | 24,001,981 |  |      | $ | 29,079,855 | 
|                                  |  |                    |            |  |      |   |            | 

The Companys partner network revenues are primarily generated using third-party distribution networks
to deliver the advertisers listings. The distribution network includes mobile and online search engines and applications, directories, destination sites, shopping engines, third-party Internet domains or websites, other targeted Web-based
content, and offline sources. The Company generates revenue upon delivery of qualified and reported phone calls or click-throughs to our advertisers or to advertising services providers listings. The Company pays a revenue share to the
distribution partners to access their mobile, online, offline and other user traffic. Other revenues include the Companys call provisioning and call tracking services, presence management services, campaign management services and natural
search optimization services.

The Companys proprietary traffic revenues are generated from the Companys portfolio
of owned websites which are monetized with pay-for-call or pay-per-click listings that are relevant to the websites, as well as other forms of advertising, including banner advertising and sponsorships. When an online user navigates to one of the
Companys owned and operated websites and calls or clicks on a particular listing or completes the specified action, the Company receives a fee.

(3) Stock-based Compensation Plans

The Company accounts for stock-based
compensation for employees and non-employees under the fair value method.

Stock-based compensation expense was included in
the following operating expense categories as follows:



|                               |  |                             |           |  |      |   |           | 
|------------------------------ |  | --------------------------- | --------- |  | ---- | - | --------- | 
|                               |  | Three months endedMarch 31, |          
|                               |  | 2010                        |           |  | 2011 |  
|Service costs                  |  | $                           | 179,483   |  |      | $ | 284,978   | 
|Sales and marketing            |  |                             | 166,657   |  |      |   | 218,841   | 
|Product development            |  |                             | 208,205   |  |      |   | 314,016   | 
|General and administrative     |  |                             | 1,832,978 |  |      |   | 2,693,209 | 
|                               |  |                             |           |  |      |   |           | 
|Total stock-based compensation |  | $                           | 2,387,323 |  |      | $ | 3,511,044 | 
|                               |  |                             |           |  |      |   |           | 

The per share fair value of time-vested stock options granted during the three months ended March 31,
2010 and 2011 was determined on the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used in determining the fair value of time-vested stock option grants for the periods presented:



|                         |  |                             |      |   |      |  |      |  
|------------------------ |  | --------------------------- | ---- | - | ---- |  | ---- | -
|                         |  | Three months endedMarch 31, |     
|                         |  | 2010                        |      |   | 2011 | 
|Expected life (in years) |  |                             | 4.0  |   |      |  | 4.0  |  
|Risk-free interest rate  |  |                             | 2.08 | % |      |  | 1.77 | %
|Expected volatility      |  |                             | 66   | % |      |  | 68   | %
|Expected dividend yield  |  |                             | 1.10 | % |      |  | 0.91 | %

During 2010, the Company
issued stock options and restricted stock units that have vesting based on a combination of certain service and market conditions. The compensation costs and derived service periods for stock option grants with vesting based on a combination of
service and market conditions are estimated using the binomial lattice model to determine the fair value and a Monte Carlo simulation to determine the derived service period. The risk-free interest rate is based on the 10 year bond rate as of the
valuation date based on the contractual life of the option. No stock options were granted during the three months ended March 31, 2011 that have vesting based on a combination of certain service and market conditions.



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Stock option activity during the three months ended March 31, 2011 is summarized as
follows:



|                              |  |        |           |   |                                |   |       |                                                     |  |  |                          |  |  |   |            | 
|----------------------------- |  | ------ | --------- | - | ------------------------------ | - | ----- | --------------------------------------------------- |  |  | ------------------------ |  |  | - | ---------- | 
|                              |  | Shares |           |   | Weighted averageexercise price |   |       | Weighted averageremainingcontractual term(in years) |  |  | Aggregateintrinsic value | 
|Balance at December 31, 2010  |  |        | 6,410,548 |   |                                | $ | 8.48  |                                                     |  |  | 7.20                     |  |  | $ | 14,340,943 | 
|Options granted               |  |        | 219,700   |   |                                |   | 9.57  |                                                     |  |  |                          |  |  |   |            | 
|Options forfeited             |  |        | (69,464   | ) |                                |   | 6.20  |                                                     |  |  |                          |  |  |   |            | 
|Options expired               |  |        | (124,641  | ) |                                |   | 14.59 |                                                     |  |  |                          |  |  |   |            | 
|Options exercised             |  |        | (52,647   | ) |                                |   | 4.28  |                                                     |  |  |                          |  |  |   |            | 
|                              |  |        |           |   |                                |   |       |                                                     |  |  |                          |  |  |   |            | 
|Balance at March 31, 2011 (1) |  |        | 6,383,537 |   |                                | $ | 8.44  |                                                     |  |  | 7.30                     |  |  | $ | 9,896,125  | 
|                              |  |        |           |   |                                |   |       |                                                     |  |  |                          |  |  |   |            | 



|(1) | Includes 765,000 options that have vesting based on a combination of service and market conditions.
|--- | ---------------------------------------------------------------------------------------------------

The Company issues restricted stock to employees for future services and in connection with acquisitions. Restricted stock awards grants
are generally measured at fair value on the date of grant based on the number of awards granted and the quoted price of the Companys common stock. Restricted shares issued are accounted for under FASB ASC 718 using the straight-line method net
of estimated forfeitures.

During 2010, the Company issued restricted stock units which entitle the holder to receive one
share of the Companys Class B common stock upon satisfaction of a combination of certain service and market conditions. The compensation costs and derived service periods for restricted stock units with vesting based on a combination of
service and market conditions are estimated using the binomial lattice model to determine the fair value and a Monte Carlo simulation to determine the derived service period. No restricted stock units were granted during the three months ended
March 31, 2011 that have vesting based on a combination of certain service and market conditions.

Restricted stock
awards and restricted stock units activity during the three months ended March 31, 2011 is summarized as follows:



|                                       |  |        |           |   |                                      |   |      | 
|-------------------------------------- |  | ------ | --------- | - | ------------------------------------ | - | ---- | 
|                                       |  | Shares |           |   | Weighted averagegrant datefair value |  
|Unvested balance at December 31, 2010  |  |        | 3,468,750 |   |                                      | $ | 8.13 | 
|Granted                                |  |        | 109,500   |   |                                      |   | 9.58 | 
|Vested                                 |  |        | (223,125  | ) |                                      |   | 4.90 | 
|                                       |  |        |           |   |                                      |   |      | 
|Unvested balance at March 31, 2011 (1) |  |        | 3,355,125 |   |                                      | $ | 8.39 | 
|                                       |  |        |           |   |                                      |   |      | 



|(1) | Includes 255,000 restricted stock units that have vesting based on a combination of service and market conditions.
|--- | ------------------------------------------------------------------------------------------------------------------

The following table summarizes stock-based compensation expense related to all stock-based awards under the fair value method during the
three months ended March 31, 2010 and 2011:



|                                                                                     |  |                             |           |  |      |   |           | 
|------------------------------------------------------------------------------------ |  | --------------------------- | --------- |  | ---- | - | --------- | 
|                                                                                     |  | Three months endedMarch 31, |          
|                                                                                     |  | 2010                        |           |  | 2011 |  
|Total stock-based compensation included in net income (loss)                         |  | $                           | 2,387,000 |  |      | $ | 3,511,000 | 
|Income tax benefit related to stock-based compensation included in net income (loss) |  | $                           | 659,000   |  |      | $ | 1,036,000 | 

(4) Net Income (Loss) Per Share

We compute net income (loss) per share of Class A and Class B common stock using the two class method. Under the
provisions of the two class method, basic net income (loss) per share is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income
(loss) per share is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of common and dilutive common equivalent shares outstanding during the period. The computation of the diluted net income
(loss) per share of Class B common stock assumes the conversion of Class A common stock to Class B common stock, while the diluted net income (loss) per share of Class A common stock does not assume the conversion of those shares.



8



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In accordance with the two class method, the undistributed earnings for each period are
allocated based on the contractual participation rights of the Class A and Class B common shares and the restricted shares as if the earnings for the year had been distributed. Considering the terms of the Companys charter which provides
that, if and when dividends are declared on our common stock in accordance with Delaware General Corporation Law, equivalent dividends shall be paid with respect to the shares of Class A common stock and Class B common stock and that both
classes of common stock have identical dividend rights and would share equally in our net assets in the event of liquidation, we have allocated undistributed losses on a proportionate basis. Additionally, the Company has paid dividends equally to
both classes of common stock and the unvested restricted shares since it initiated a quarterly cash dividend in November 2006.

Instruments granted in unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents,
whether paid or unpaid, are participating securities prior to vesting. As such, the Companys restricted stock awards are considered participating securities for purposes of calculating earnings per share. Under the two class method, dividends
paid on unvested restricted stock are allocated to these participating securities and therefore impacts the calculation of amounts allocated to common stock.

The following table includes net income (loss) applicable to common stockholders used to compute basic net income (loss) per share for the periods ended:



|                                                                                                            |  |                    |            |   |                    |   |            |         |  |   |            |   |  |   |            |  
|----------------------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | - | ------------------ | - | ---------- | ------- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                            |  | Three months ended |            |   | Three months ended |  
|                                                                                                            |  | March 31, 2010     |            |   | March 31, 2011     |  
|                                                                                                            |  | Class A            |            |   | Class B            |   |            | Class A |  |   | Class B    |  
|Numerator:                                                                                                  |  |                    |            |   |                    |   |            |         |  |   |            |   |  |   |            |  
|Net income (loss)                                                                                           |  | $                  | (36,555    | ) |                    | $ | (31,219    | )       |  | $ | 162,018    |   |  | $ | 414,420    |  
|Dividends paid to participating securities                                                                  |  |                    |            |   |                    |   | (43,574    | )       |  |   |           |   |  |   | (63,505    | )
|                                                                                                            |  |                    |            |   |                    |   |            |         |  |   |            |   |  |   |            |  
|Net income (loss) applicable to common stockholders                                                         |  | $                  | (36,555    | ) |                    | $ | (74,793    | )       |  | $ | 162,018    |   |  | $ | 350,915    |  
|                                                                                                            |  |                    |            |  
|Denominator:                                                                                                |  |                    |            |   |                    |   |            |         |  |   |            |   |  |   |            |  
|Weighted average number of shares outstanding used to calculate basic net income (loss) per share           |  |                    | 10,835,671 |   |                    |   | 22,170,607 |         |  |   | 10,235,865 |   |  |   | 22,169,937 |  
|                                                                                                            |  |                    |            |   |                    |   |            |         |  |   |            |   |  |   |            |  
|                                                                                                            |  |                    |            |  
|Basic net income (loss) per share applicable to common stockholders                                         |  | $                  | (0.00      | ) |                    | $ | (0.00      | )       |  | $ | 0.02       |   |  | $ | 0.02       |  
|                                                                                                            |  |                   
|                                                                                                            |  | Three months ended |            |   | Three months ended |  
|                                                                                                            |  | March 31, 2010     |            |   | March 31, 2011     |  
|                                                                                                            |  | Class A            |            |   | Class B            |   |            | Class A |  |   | Class B    |  
|Numerator:                                                                                                  |  |                    |            |   |                    |   |            |         |  |   |            |   |  |   |            |  
|Net income (loss)                                                                                           |  | $                  | (36,555    | ) |                    | $ | (31,219    | )       |  | $ | 162,018    |   |  | $ | 414,420    |  
|Dividends paid to participating securities                                                                  |  |                    |           |   |                    |   | (43,574    | )       |  |   |           |   |  |   | (63,505    | )
|Reallocation of net income (loss) for Class A shares as a result of conversion of Class A to Class B
shares |  |                    |            |   |                    |   | (36,555    | )       |  |   |            |   |  |   | 162,018    |  
|Reallocation of undistributed earnings to Class A                                                           |  |                    |           |   |                    |   |           |         |  |   | (8,746     | ) |  |   |           |  
|                                                                                                            |  |                    |            |   |                    |   |            |         |  |   |            |   |  |   |            |  
|Net income (loss) applicable to common stockholders                                                         |  | $                  | (36,555    | ) |                    | $ | (111,348   | )       |  | $ | 153,272    |   |  | $ | 512,933    |  
|                                                                                                            |  |                    |            |  
|Denominator:                                                                                                |  |                    |            |   |                    |   |            |         |  |   |            |   |  |   |            |  
|Weighted average number of shares outstanding used to calculate basic net income (loss) per share           |  |                    | 10,835,671 |   |                    |   | 22,170,607 |         |  |   | 10,235,865 |   |  |   | 22,169,937 |  
|Weighted average stock options and warrants and common shares subject to repurchase or cancellation         |  |                    |           |   |                    |   |           |         |  |   |           |   |  |   | 1,848,995  |  
|Conversion of Class A to Class B common shares outstanding                                                  |  |                    |           |   |                    |   | 10,835,671 |         |  |   |           |   |  |   | 10,235,865 |  
|                                                                                                            |  |                    |            |   |                    |   |            |         |  |   |            |   |  |   |            |  
|Weighted average number of shares outstanding used to calculate diluted net income (loss) per share         |  |                    | 10,835,671 |   |                    |   | 33,006,278 |         |  |   | 10,235,865 |   |  |   | 34,254,797 |  
|                                                                                                            |  |                    |            |   |                    |   |            |         |  |   |            |   |  |   |            |  
|                                                                                                            |  |                    |            |  
|Diluted net income (loss) per share applicable to common stockholders                                       |  | $                  | (0.00      | ) |                    | $ | (0.00      | )       |  | $ | 0.01       |   |  | $ | 0.01       |  



9



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##### Table of Contents

The weighted average number of shares used to calculate the diluted net income (loss) per
share includes the weighted average number of shares from the assumed conversion of Class A common stock to Class B common stock.

The computation of diluted net income (loss) per share excludes the following because their effect would be anti-dilutive:



| |  |  | For the three months ended March 31, 2010 and 2011, outstanding options to acquire 5,059,177 and 2,906,562 shares of Class B common stock with a
weighted average exercise price of $9.20 and $12.57 per share, respectively.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For the three months ended March 31, 2010, 2,425,350 shares of unvested Class B restricted common shares at March 31, 2010 issued to
employees and in connection with acquisitions. Unvested shares were excluded from the denominator of the computation of basic net loss per share for the three months ended March 31, 2010.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For the three months ended March 31, 2011, 147,000 stock options and 49,000 restricted stock units with vesting based on satisfaction of certain
service and market conditions. 765,000 stock options and 255,000 restricted stock units with vesting based on satisfaction of certain service and market conditions were excluded from the denominator of the computation of basic net income per share
for the three months ended March 31, 2011.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(5) Concentrations

The Company maintains substantially all of their cash and cash equivalents with one financial institution.

A significant portion of the Companys revenue earned from advertisers is generated through arrangements with distribution partners.
The Company may not be successful in renewing any of these agreements, or if they are renewed, they may not be on terms as favorable as current agreements. The Company may not be successful in entering into agreements with new distribution partners
or advertisers on commercially acceptable terms. In addition, several of these distribution partners or advertisers may be considered potential competitors.

There were no distribution partners representing more than 10% of consolidated revenue for the three months ended March 31, 2010 and 2011.

The advertisers representing more than 10% of consolidated revenue are as follows:



|             |  |                             |    |   |      |  |    |  
|------------ |  | --------------------------- | -- | - | ---- |  | -- | -
|             |  | Three months endedMarch 31, |   
|             |  | 2010                        |    |   | 2011 | 
|Advertiser A |  |                             | 30 | % |      |  | 31 | %
|Advertiser B |  |                             | *  |   |      |  | 11 | %



|* | Less than 10% of revenue.
|- | -------------------------

Advertiser A is also a distribution partner.



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The outstanding receivable balance for each advertiser representing more than 10% of
accounts receivable is as follows:



|             |  |                     |    |   |                  |  |    |  
|------------ |  | ------------------- | -- | - | ---------------- |  | -- | -
|             |  | At December 31,2010 |    |   | At March 31,2011 | 
|Advertiser A |  |                     | 40 | % |                  |  | 52 | %
|Advertiser B |  |                     | 11 | % |                  |  | *  |  
|Advertiser C |  |                     | *  |   |                  |  | 12 | %

(6) Segment Reporting and Geographic
Information

Operating segments are revenue-producing components of the enterprise for which separate financial information
is produced internally for the Companys management. For all periods presented the Company operated as a single segment, principally in domestic markets providing Internet advertiser transaction services to enterprises.

Revenues from advertisers by geographical areas are tracked on the basis of the location of the advertiser. The vast majority of the
Companys revenue and accounts receivable are derived from domestic sales to advertisers engaged in various activities involving the Internet.

Revenues by geographic region are as follows (in percentages):



|                |  |                             |     |   |      |  |     |  
|--------------- |  | --------------------------- | --- | - | ---- |  | --- | -
|                |  | Three months endedMarch 31, |    
|                |  | 2010                        |     |   | 2011 | 
|United States   |  |                             | 96  | % |      |  | 94  | %
|Canada          |  |                             | 3   | % |      |  | 5   | %
|Other countries |  |                             | 1   | % |      |  | *   |  
|                |  |                             |     |   |      |  |     |  
|                |  |                             | 100 | % |      |  | 100 | %
|                |  |                             |     |   |      |  |     |  



|* | Less than 1% of revenue.
|- | ------------------------

(7) Property and
Equipment

Property and equipment consisted of the following:



|                                                |  |                      |             |   |                   |   |             |  
|----------------------------------------------- |  | -------------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                |  | At December 31, 2010 |             |   | At March 31, 2011 |  
|Computer and other related equipment            |  | $                    | 10,709,539  |   |                   | $ | 11,110,055  |  
|Purchased and internally developed software     |  |                      | 6,202,642   |   |                   |   | 6,340,105   |  
|Furniture and fixtures                          |  |                      | 1,129,410   |   |                   |   | 1,197,926   |  
|Leasehold improvements                          |  |                      | 1,665,030   |   |                   |   | 1,760,652   |  
|                                                |  |                      |             |   |                   |   |             |  
|                                                |  | $                    | 19,706,621  |   |                   | $ | 20,408,738  |  
|Less: accumulated depreciation and amortization |  |                      | (14,996,714 | ) |                   |   | (15,438,505 | )
|                                                |  |                      |             |   |                   |   |             |  
|Property and equipment, net                     |  | $                    | 4,709,907   |   |                   | $ | 4,970,233   |  
|                                                |  |                      |             |   |                   |   |             |  

The Company has capitalized certain costs of internally developed software for internal use. The estimated
useful life of costs capitalized is evaluated for each specific project. Amortization begins in the period in which the software is ready for its intended use.

Depreciation and amortization expense, related to property and equipment was approximately $797,000 and $663,000 for the three months ended March 31, 2010 and 2011, respectively.

(8) Commitments

The
Company has commitments for future payments related to office facilities leases and other contractual obligations. The Company leases its office facilities under operating lease agreements expiring through 2018. Certain of these lease agreements
have free or escalating rent payment provisions or fund certain leasehold improvements which the Company accounts for as a lease incentive. The Company recognizes rent expense under such agreements on a straight-line basis over the lease term with
any lease incentive amortized as a reduction of rent expense over the lease term. The Company also has other contractual obligations expiring over varying time periods through 2013. Other contractual obligations primarily relate to minimum
contractual payments due to distribution partners and other outside service providers.



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##### Table of Contents

|                       |  |                           |            |  |                             |   |           |       |  |   |            | 
|---------------------- |  | ------------------------- | ---------- |  | --------------------------- | - | --------- | ----- |  | - | ---------- | 
|                       |  | Facilitiesoperatingleases |            |  | Othercontractualobligations |   |           | Total | 
|2011                   |  | $                         | 1,249,302  |  |                             | $ | 1,944,218 |       |  | $ | 3,193,520  | 
|2012                   |  |                           | 1,862,363  |  |                             |   | 1,473,500 |       |  |   | 3,335,863  | 
|2013                   |  |                           | 2,090,059  |  |                             |   | 325,350   |       |  |   | 2,415,409  | 
|2014                   |  |                           | 2,138,753  |  |                             |   |          |       |  |   | 2,138,753  | 
|2015                   |  |                           | 2,200,806  |  |                             |   |          |       |  |   | 2,200,806  | 
|2016 and after         |  |                           | 5,176,332  |  |                             |   |          |       |  |   | 5,176,332  | 
|                       |  |                           |            |  |                             |   |           |       |  |   |            | 
|Total minimum payments |  | $                         | 14,717,615 |  |                             | $ | 3,743,068 |       |  | $ | 18,460,683 | 
|                       |  |                           |            |  |                             |   |           |       |  |   |            | 

Rent expense incurred by the Company was approximately $433,000 and $466,000 for the three months ended
March 31, 2010 and 2011, respectively.

(9) Credit Agreement

In April 2008, the Company entered into a credit agreement providing for a senior secured $30 million revolving credit facility
(Credit Agreement). Interest on outstanding balances under the Credit Agreement will accrue at LIBOR plus an applicable margin rate, as determined under the agreement and there is an unused commitment fee. The Credit Agreement contains
certain customary representations and warranties, financial covenants, events of default and is secured by substantially all of the assets of the Company. During the first quarter of 2011, the Company signed an amendment to the Credit Agreement
which extended the maturity period through to April 1, 2014 and increased the applicable margin rate by 25 basis points. As of March 31, 2011, the Company had no borrowings under the Credit Agreement.

(10) Contingencies and Taxes

(a) Contingencies

The Company is involved in legal and
administrative proceedings and claims of various types from time to time. While any litigation contains an element of uncertainty, the Company is not aware of any legal proceedings or claims which are pending that the Company believes, based on
current knowledge, will have, individually or taken together, a material adverse effect on the Companys financial condition or results of operations or liquidity.

In some agreements to which we are a party, we have agreed to indemnification provisions of varying scope and terms with advertisers, vendors and other parties with respect to certain matters, including,
but not limited to, losses arising out of the Companys breach of agreements or representations and warranties made by the Company, services to be provided by the Company and intellectual property infringement claims made by third
parties. As a result of these provisions, we may from time to time provide certain levels of financial support to our contract parties to seek to minimize the impact of any associated litigation in which they may be involved. To date,
there have been no known events or circumstances that have resulted in any material costs related to these indemnification provisions and no liabilities therefore have been recorded in the accompanying unaudited condensed consolidated financial
statements. However, the maximum potential amount of the future payments we could be required to make under these indemnification provisions could be material.

(b) Taxes

From time to time, various state, federal and other
jurisdictional tax authorities undertake audits of the Company and its filings. In evaluating the exposure associated with various tax filing positions, the Company on occasion accrues charges for uncertain positions. The Company adjusts these
contingencies in light of changing facts and circumstances, such as the outcome of tax audits. Audits of the Companys federal tax returns for 2005 through 2007 were concluded in the first quarter of 2011 which resulted in certain tax
adjustments. In connection with these tax adjustments, the Company reduced its gross tax contingencies by $285,000 and recognized $181,000 of tax benefit in the first quarter of 2011. The Company does not have any significant interest or penalty
accruals. The provision for income taxes includes the impact of contingency provisions and changes to contingencies that are considered appropriate. The Company files U.S. federal, certain U.S. states, and certain foreign tax returns. Generally,
U.S. federal, U.S. state, and foreign tax returns filed for years after 2005 are within the statue of limitations and are under examination or may be subject to examination.



12



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(11) Intangible Assets from Acquisitions

Intangible assets from acquisitions consisted of the following:





|                   |  |                          |            |  |                             |   |             |     |  |   |           | 
|------------------ |  | ------------------------ | ---------- |  | --------------------------- | - | ----------- | --- |  | - | --------- | 
|                   |  | As of December 31, 2010  |           
|                   |  | Gross Carrying Amount(1) |            |  | Accumulated Amortization(1) |   |             | Net | 
|Trademarks/domains |  | $                        | 41,992,305 |  |                             | $ | (40,415,618 | )   |  | $ | 1,576,687 | 
|                   | 
|                   |  | As of March 31, 2011     |           
|                   |  | Gross Carrying Amount(1) |            |  | Accumulated Amortization(1) |   |             | Net | 
|Trademarks/domains |  | $                        | 41,992,305 |  |                             | $ | (40,879,820 | )   |  | $ | 1,112,485 | 



|(1) | Excludes the original cost and accumulated amortization of fully-amortized intangible assets which were $41.7 million at December 31, 2010 and
March 31, 2011, respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Amortizable intangible assets are amortized on a straight-line basis
over their useful lives. Amortization expense incurred by the Company was approximately $704,000 and $464,000 for the three months ended March 31, 2010 and 2011, respectively. Based upon the current amount of intangible assets subject to
amortization, the estimated amortization expense for the next five years is as follows: $947,000 for the remainder of 2011, $165,000 in 2012, and $0 in 2013 and thereafter.

(12) Goodwill

Changes in the carrying amount of goodwill for the three
months ended March 31, 2011 are as follows:



|                                |  |   |            |  
|------------------------------- |  | - | ---------- | -
|Balance as of December 31, 2010 |  | $ | 35,337,428 |  
|Other                           |  |   | (9,285     | )
|                                |  |   |            |  
|Balance as of March 31, 2011    |  | $ | 35,328,143 |  
|                                |  |   |            |  

Goodwill is tested annually for impairment and is tested for impairment more frequently if events and
circumstances indicate that the asset is more likely than not impaired. Events and circumstances considered in determining whether the carrying value of goodwill may be impaired include, but are not limited to: significant changes in performance
relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; or a significant decline in the Companys stock price and/or market capitalization for a sustained period of
time.

No impairment of the Companys goodwill and intangible assets have been identified to date in 2011. The current
business environment is subject to evolving market conditions and requires significant management judgment to interpret the potential impact to our assumptions. To the extent that changes in the current business environment impact the Companys
ability to achieve levels of forecasted operating results and cash flows, or should other events occur indicating the remaining carrying value of its assets might be impaired, the Company would test its goodwill and intangible assets for impairment
and may recognize an additional impairment loss to the extent that the carrying amount exceeds such assets fair value.

(13)
Intangible and other assets, net

Intangible and other assets, net consisted of the following:



|                                        |  |                  |             |   |               |   |             |  
|--------------------------------------- |  | ---------------- | ----------- | - | ------------- | - | ----------- | -
|                                        |  | December 31,2010 |             |   | March 31,2011 |  
|Internet domain names                   |  | $                | 15,683,320  |   |               | $ | 15,716,149  |  
|Less accumulated amortization           |  |                  | (13,877,115 | ) |               |   | (14,205,728 | )
|                                        |  |                  |             |   |               |   |             |  
|Internet domain names, net              |  |                  | 1,806,205   |   |               |   | 1,510,421   |  
|Other assets:                           |  |                  |             |   |               |   |             |  
|Registration fees, net                  |  |                  | 35,143      |   |               |   | 28,755      |  
|Other                                   |  |                  | 228,869     |   |               |   | 224,877     |  
|                                        |  |                  |             |   |               |   |             |  
|Total intangibles and other assets, net |  | $                | 2,070,217   |   |               | $ | 1,764,053   |  
|                                        |  |                  |             |   |               |   |             |  

The Company capitalizes costs incurred to acquire domain names or URLs, which include the initial
registration fees, to other intangible assets which excludes intangible assets acquired through business combinations. The capitalized costs are amortized over the expected useful life of the domain names on a straight-line basis.

The Company also capitalizes costs incurred to renew or extend the term of the domain names or URLs to prepaid expenses and other current
assets or registration fees, net. The capitalized costs are amortized over the renewal or extended period on a straight-line basis. The total amount of costs incurred for the three months ended March 31, 2011 to renew or extend the term for
domain names was $403,000. The weighted average renewal period for registration fees as of March 31, 2011 was approximately one year.



13



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##### Table of Contents

Amortization expense for internet domain names was approximately $462,000 and $329,000 for
the three months ended March 31, 2010 and 2011, respectively. Based upon the current amount of domains subject to amortization, the estimated expense for the next five years is as follows: $873,000 for the remainder of 2011, $422,000 in 2012,
$175,000 in 2013, $40,000 in 2014 and $0 thereafter.

(14) Common Stock

In January 2011, the Companys board of directors declared a regular quarterly dividend in the amount of $0.02 per share on the
Companys Class A and Class B common stock. The Company paid these dividends on February 15, 2011 to the holders of record as of the close of business on February 1, 2011. The Company paid approximately $712,000.

In November 2006, the Companys board of directors authorized a share repurchase program for the Company to repurchase up to
3 million shares of the Companys Class B common stock as well as the initiation of a quarterly cash dividend for the holders of the Class A and Class B common stock. The Companys board of directors have authorized increases to
the share repurchase program for the Company to repurchase up to 11 million shares in the aggregate (less shares previously repurchased under the share repurchase program) of the Companys Class B common stock. Under the share repurchase
program, repurchases may take place in the open market and in privately negotiated transactions and at times and in such amounts as the Company deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors
including price, corporate and regulatory requirements, capital availability, and other market conditions. This stock repurchase program does not have an expiration date and may be expanded, limited or terminated at any time without prior notice.

During the three months ended March 31, 2011, the Company repurchased 29,000 shares of Class B common stock for
approximately $252,000 at an average stock price of $8.57 per share. The 29,000 shares have been recorded as treasury stock in the condensed consolidated balance sheet as of March 31, 2011.

During the three months ended March 31, 2011, the Companys board of directors approved the retirement of approximately 223,000
shares of treasury stock. The excess of purchase price over par value of $1.4 million was recorded as a deduction to additional paid in capital on the condensed consolidated balance sheet.

(15) Subsequent Events

In April 2011, the Companys board of
directors declared a regular quarterly dividend in the amount of $0.02 per share on the Companys Class A and Class B common stock. The Company will pay these dividends on May 16, 2011 to the holders of record as of the close of
business on May 6, 2011. The Company expects to pay approximately $742,000 for these quarterly dividends.

In April 2011,
the Company acquired 100% of the stock of Jingle Networks, Inc. (Jingle), a provider of mobile voice search performance advertising and technology solutions in North America in a merger. The consideration to Jingles stockholders
consisted of:



| |  |  | approximately $16.7 million in cash, net of cash acquired, and 1,019,103 shares of Marchexs Class B common stock paid at closing; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | future consideration of (i) $18.0 million on the first anniversary of the closing, and (ii) $18.0 million on the eighteenth month anniversary
of closing, with the future consideration payable in either cash or shares of Marchex Class B common stock or some combination to be determined by Marchex. Any shares issued in payment of the future consideration will be increased by 5%.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | following the closing, Marchex issued approximately $3.5 million of restricted stock to employees of Jingle subject to vesting for up to four years.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

This Quarterly Report on Form 10-Q contains 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. We use words such as believes, intends, expects, anticipates, plans, may,
will and similar expressions to identify forward-looking statements. All forward-looking statements, including, but not limited to, statements regarding our future operating



14



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##### Table of Contents

results, financial position, prospects, acquisitions and business strategy, expectations regarding our growth and the growth of the industry in which we operate, and plans and objectives of
management for future operations, are inherently uncertain as they are based on our expectations and assumptions concerning future events. Any or all of our forward-looking statements in this report may turn out to be inaccurate. We have based these
forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. They may be
affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including but not limited to the risks, uncertainties and assumptions described in this report, in Part II, Item 1A. under the caption Risk
Factors and elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2010 and those described from time to time in our future reports filed with the SEC. In light of these risks, uncertainties and
assumptions, the forward-looking events and circumstances discussed in this report may not occur as contemplated, and actual results could differ materially from those anticipated or implied by the forward-looking statements. All forward-looking
statements in this report are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement.

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our
results of operation and financial condition. You should read this analysis in conjunction with the attached condensed consolidated financial statements and related notes thereto, and with our audited consolidated financial statements and the notes
thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2010.

Overview

We are a call advertising and small business marketing company. We deliver call and click-based advertising products and services to tens
of thousands of advertisers, ranging from small businesses to Fortune 500 companies. Our technology-based products and services facilitate the efficient and cost-effective marketing and selling of goods and services for small and national
advertisers who want to market and sell their products through mobile, online and offline; and a proprietary, locally-focused website network where we help consumers find local information, as well as fulfill our advertiser marketing campaigns:



| |  |  | Call Advertising Services. We deliver a variety of call advertising products and services to national advertisers, advertising agencies
and small advertiser reseller partners. These services include pay-for-call through the Marchex Pay-For-Call Exchange and call analytics solutions, which include phone number and call tracking, call mining, keyword-level tracking, click-to-call,
website proxying, and other call-based products which enable our customers to utilize mobile, online and offline advertising to drive calls as well as clicks into their businesses and to measure the effectiveness of their advertising campaigns.
Advertisers pay us a fee for each call they receive from call-based ads we distribute through our sources of call distribution or for each phone number tracked based on a pre-negotiated rate.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Small Business Marketing Products. Our small business marketing products enable reseller partners of small business advertisers, such as
Yellow Pages providers and vertical marketing service providers, to sell call advertising and/or search marketing products through their existing sales channels, which are then fulfilled by us across our distribution network, including mobile
sources, leading search engines and our own proprietary traffic sources. By creating a solution for companies who have relationships with small businesses, it is easier for these small businesses to participate in mobile, online, offline call
advertising. The lead services we offer to small business advertisers through our small business marketing products include products typically available only to national advertisers, including pay-for-call, call tracking, presence management ad
creation, keyword selection, geo-targeting, advertising campaign management, reporting, and analytics. The small business marketing products have the capacity to support hundreds of thousands of advertiser accounts. Reseller partners and publishers
generally pay us account fees and also agency fees for our products in the form of a percentage of the cost of every click or call delivered to their advertisers. Through our contract with Yellowpages.com LLC d/b/a AT&T Interactive which is a
subsidiary of AT&T (collectively, AT&T), AT&T is our largest reseller partner and was responsible for 31% of our total revenues for the three months ended March 31, 2011 of which the majority is derived from our small
business marketing products.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Pay-Per-Click Advertising. We deliver pay-per-click advertisements to online users in response to their keyword search queries or on
pages they visit throughout our distribution network of search engines, shopping engines, certain third party vertical and local websites, mobile distribution and our own Publishing Network. In addition to distributing their ads, we offer account
management services to help our advertisers optimize their pay-per-click campaigns, including editorial and keyword selection recommendations and report analysis. The pay-per-click advertisements are generally ordered based on the amount our
advertisers choose to pay for a placement and the relevancy of their ads to the keyword search. Advertisers pay us when a user clicks on their advertisements in our
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| | distribution network and we pay publishers or distribution partners a percentage of the revenue generated by the click-throughs on their site(s). In addition, we generate revenue from
cost-per-action events that take place on our distribution network. Cost-per-action revenue occurs when the user is redirected from one of our websites or a third-party website in our distribution network to an advertisers website and
completes a specified action. We also offer a private-label platform for publishers, separate and distinct from our small business marketing products which enable them to monetize their websites with contextual advertising from their own customers
or from our advertising relationships. We sell pay-per-click contextual advertising placements on specialized vertical and branded publisher websites on a pay-per-click basis. Advertisers can target the placements by category, site- or page-specific
basis. We believe our site- and page-specific approach provides publishers with an opportunity to generate revenue from their traffic while protecting their brand. Our approach gives advertisers greater transparency into the source of the traffic
and relevancy for their ads and enables them to optimize the return on investment from their advertising campaign. The contextual advertisement placements are generally ordered based on the amount our advertisers choose to pay for a placement and
the relevance of the advertisement, based on historic click-through rates. Advertisers pay us when a user clicks on their advertisements in our network and we pay publishers a percentage of the revenue generated by the click-throughs on their site.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Publishing Network. We believe our Publishing Network is a significant source of local information online and a source of calls within
the Marchex Pay-For-Call Exchange. It includes more than 200,000 of our owned and operated websites focused on helping users make informed decisions about where to get local products and services. It features listings from more than 10 million
small businesses in the U.S. and millions of expert and user-generated reviews on small businesses. The more than 200,000 websites in our network include more than 75,000 U.S. ZIP code sites, including 98102.com and 90210.com, covering ZIP code
areas nationwide, as well as tens of thousands of other locally-focused sites such as Yellow.com, OpenList.com and geo-targeted sites. Traffic to our Publisher Network is primarily monetized with pay-for-call and pay-per-click listings that are
relevant to the websites, as well as other forms of advertising, including banner advertising and sponsorships.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We were incorporated in Delaware on January 17, 2003. Acquisition initiatives have played an important part in our corporate history to date.

We currently have offices in Seattle, Washington; Las Vegas, Nevada; and New York, New York.

Consolidated Statements of Operations

All inter-company transactions and balances within Marchex have been eliminated in consolidation. Our purchase accounting resulted in all assets and liabilities from our acquisitions being recorded at
their estimated fair values on the respective acquisition dates. All goodwill, intangible assets and liabilities resulting from the acquisitions have been recorded in our financial statements.

Presentation of Financial Reporting Periods

The comparative periods presented are for the three months ended March 31, 2010 and 2011.

Revenue

We currently generate revenue through our call advertising
services, pay-per-click advertising, small business marketing products which include our call and click services, and publishing network.

Our primary sources of revenue are the performance-based advertising services, which include pay-for-call services, pay-per-click services, cost-per-action services and historically our feed management
and related services. These primary sources amounted to greater than 75% of our revenues in all periods presented. Our secondary sources of revenue are our small business marketing products which enable partner resellers to sell call advertising
and/or search marketing products, campaign management services, and natural search optimization services. These secondary sources amounted to less than 25% of our revenues in all periods presented. We have no barter transactions.

We recognize revenue upon the completion of our performance obligation, provided that: (1) evidence of an arrangement exists;
(2) the arrangement fee is fixed and determinable; and (3) collection is reasonably assured.

In certain cases, we
record revenue based on available and reported preliminary information from third parties. Collection on the related receivables may vary from reported information based upon third party refinement of the estimated and reported amounts owing that
occurs subsequent to period ends.



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##### Table of Contents

Performance-Based Advertising Services

In providing call advertising services and pay-per-click advertising, we generate revenue upon our delivery of qualified and reported
phone calls or click-throughs to our advertisers or advertising service providers listings. These advertisers and advertising service providers pay us a designated transaction fee for each phone call or click-through, which occurs when a user
makes a phone call or clicks on any of their advertisement listings after it has been placed by us or by our distribution partners. Each phone call or click-through on an advertisement listing represents a completed transaction. The advertisement
listings are displayed within our distribution network, which includes mobile and online search engines and applications, directories, destination sites, shopping engines, third-party Internet domains or websites, our portfolio of owned websites,
other targeted Web-based content and offline sources. We also generate revenue from cost-per-action services, which occurs when the online user is redirected from one of our websites or a third-party website in our distribution network to an
advertiser website and completes the specified action.

We generate revenue from reseller partners and publishers utilizing
our small business marketing products to sell call advertising and/or search marketing products. We are paid account fees and also agency fees for our products in the form of a percentage of the cost of every call or click delivered to advertisers.
The reseller partners or publishers engage the advertisers and are the primary obligor, and we, in certain instances, are only financially liable to the publishers in our capacity as a collection agency for the amount collected from the advertisers.
We recognize revenue for these fees under the net revenue recognition method. In limited arrangements resellers pay us a fee for fulfilling an advertisers campaign in our distribution network and we act as the primary obligor.
We recognize revenue for these fees under the gross revenue recognition method.

In providing pay-per-click contextual
targeting services, advertisers purchase keywords or keyword strings, based on an amount they choose for a targeted placement on vertically-focused websites or specific pages of a website that are specific to their products or services and
their marketing objectives. The contextual results distributed by our services are prioritized for users by the amount the advertiser is willing to pay each time a user clicks on the merchants advertisement and the relevance of the
merchants advertisement, which is dictated by historical click-through rates. Advertisers pay us when a click-through occurs on their advertisement.

Search Marketing Services

Advertisers pay us additional fees for
services such as campaign management and natural search engine optimization. Advertisers generally pay us on a click-through basis, although in certain cases we receive a fixed fee for delivery of these services. In some cases we also deliver banner
campaigns for select advertisers. We may also charge initial set-up, account, service or inclusion fees as part of our services.

Banner advertising revenue may be based on a fixed fee per click and is generated and recognized on click-through activity. In other cases, banner payment terms are volume-based with revenue generated and
recognized when impressions are delivered.

Non-refundable account set-up fees are paid by advertisers and are recognized
ratably over the longer of the term of the contract or the average expected advertiser relationship period, which generally ranges from twelve months to more than two years. Other account and service fees are recognized in the month or period the
account fee or services relate to.

Other inclusion fees are generally associated with monthly or annual subscription-based
services where an advertiser pays a fixed amount to be included in our index of listings or our distribution partners index of listings. Revenues from these subscription arrangements are recognized ratably over the service period.

Industry and Market Factors

We enter into agreements with various mobile, online and offline distribution partners to provide distribution for pay-for-call and pay-per-click advertisement listings which contain call tracking numbers
and/or URL strings of our advertisers. We generally pay distribution partners based on a percentage of revenue or a fixed amount for each phone call or per click-through on these listings. The level of phone calls and click-throughs contributed by
our distribution partners has varied, and we expect it will continue to vary, from quarter to quarter and year to year, sometimes significantly. If we do not add new distribution partners, renew our current distribution partner agreements, replace
traffic lost from terminated distribution agreements with other sources or if our distribution partners search businesses do not grow or are adversely affected, our revenue and results of operations may be materially and adversely affected.
Our ability to grow will be impacted by our ability to increase our distribution, which impacts the number of mobile and Internet users who have access to our advertisers listings and the rate at which our advertisers are able to convert calls
and clicks from these mobile and Internet users into completed transactions, such as a purchase or sign up. Our ability to grow also depends on our ability to continue to increase the number of advertisers who use our services and the amount these
advertisers spend on our services.



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We anticipate that these variables will fluctuate in the future, affecting our ability to
grow and our financial results. In particular, it is difficult to project the number of phone calls or click-throughs we will deliver to our advertisers and how much advertisers will spend with us, and it is even more difficult to anticipate the
average revenue per phone call or click-through. It is also difficult to anticipate the impact of worldwide economic conditions on advertising budgets, including due to the economic uncertainty resulting from recent disruptions in global financial
markets.

In addition, we believe we will experience seasonality. Our quarterly results have fluctuated in the past and may
fluctuate in the future due to seasonal fluctuations in levels of Internet usage and seasonal purchasing cycles of many advertisers. It is generally understood that during the spring and summer months, Internet usage is lower than during other times
of the year, especially in comparison to the fourth quarter of the calendar year. The extent to which usage may decrease during these off-peak periods is difficult to predict. Prolonged or severe decreases in usage during these periods may adversely
affect our growth rate and results. Additionally, the current business environment has generally resulted in advertisers and reseller partners reducing advertising and marketing services budgets, which we expect will impact our quarterly results of
operations in addition to the typical seasonality seen in our industry.

Service Costs

Our service costs represent the cost of providing our performance-based advertising services and our search marketing services. The
service costs that we have incurred in the periods presented primarily include:



| |  |  | user acquisition costs;
| | - |  | -----------------------



| |  |  | amortization of intangible assets;
| | - |  | ----------------------------------



| |  |  | license and content fees;
| | - |  | -------------------------



| |  |  | credit card processing fees;
| | - |  | ----------------------------



| |  |  | network operations;
| | - |  | -------------------



| |  |  | serving our search results;
| | - |  | ---------------------------



| |  |  | telecommunication costs, including the use of phone numbers relating to our call products and services;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | maintaining our Web sites;
| | - |  | --------------------------



| |  |  | domain name registration renewal fees;
| | - |  | --------------------------------------



| |  |  | network fees;
| | - |  | -------------



| |  |  | fees paid to outside service providers;
| | - |  | ---------------------------------------



| |  |  | delivering customer service;
| | - |  | ----------------------------



| |  |  | depreciation of our Web sites, network equipment and internally developed software;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | colocation service charges of our Web site equipment;
| | - |  | -----------------------------------------------------



| |  |  | bandwidth and software license fees;
| | - |  | ------------------------------------



| |  |  | payroll and related expenses of related personnel; and
| | - |  | ------------------------------------------------------



| |  |  | stock-based compensation of related personnel.
| | - |  | ----------------------------------------------

User Acquisition Costs

For the periods presented the largest
component of our service costs consist of user acquisition costs that relate primarily to payments made to distribution partners for access to their online, mobile, offline, or other user traffic. We enter into agreements of varying durations with
distribution partners that integrate our services into their Web sites and indexes. The primary economic structure of the distribution partner agreements is a variable payment based on a specified percentage of revenue. These variable payments are
often subject to minimum payment amounts per phone call or click-through. Other payment structures that to a lesser degree exist include:



| |  |  | fixed payments, based on a guaranteed minimum amount of usage delivered;
| | - |  | ------------------------------------------------------------------------



| |  |  | variable payments based on a specified metric, such as number of paid phone calls or click-throughs; and
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | a combination arrangement with both fixed and variable amounts that may be paid in advance.
| | - |  | -------------------------------------------------------------------------------------------

We expense user acquisition costs based on whether the agreement provides for fixed or variable payments. Agreements with fixed payments
with minimum guaranteed amounts of usage are expensed as the greater of the pro-rata amount over the term of arrangement or the actual usage delivered to date based on the contractual revenue share. Agreements with variable payments based on a
percentage of revenue, number of paid phone calls, click-throughs, or other metrics are expensed as incurred based on the volume of the underlying activity or revenue multiplied by the agreed-upon price or rate.



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##### Table of Contents

Sales and Marketing

Sales and marketing expenses consist primarily of:



| |  |  | payroll and related expenses for personnel engaged in marketing and sales functions;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | advertising and promotional expenditures including online and outside marketing activities;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | cost of systems used to sell to and serve advertisers; and
| | - |  | ----------------------------------------------------------



| |  |  | stock-based compensation of related personnel.
| | - |  | ----------------------------------------------

Product Development

Product development costs consist primarily of
expenses incurred in the research and development, creation and enhancement of our Web sites and services.

Our research and
development expenses include:



| |  |  | payroll and related expenses for personnel;
| | - |  | -------------------------------------------



| |  |  | costs of computer hardware and software;
| | - |  | ----------------------------------------



| |  |  | costs incurred in developing features and functionality of the services we offer; and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | stock-based compensation of related personnel.
| | - |  | ----------------------------------------------

For the periods presented, substantially all of our product development expenses are research and development.

Product development costs are expensed as incurred or capitalized into property and equipment in accordance with FASB ASC 350. This statement requires that costs incurred in the preliminary project and
post-implementation stages of an internal use software project be expensed as incurred and that certain costs incurred in the application development stage of a project be capitalized.

General and Administrative

General and administrative expenses consist
primarily of:



| |  |  | payroll and related expenses for executive and administrative personnel;
| | - |  | ------------------------------------------------------------------------



| |  |  | professional services, including accounting, legal and insurance;
| | - |  | -----------------------------------------------------------------



| |  |  | bad debt provisions;
| | - |  | --------------------



| |  |  | facilities costs;
| | - |  | -----------------



| |  |  | other general corporate expenses; and
| | - |  | -------------------------------------



| |  |  | stock-based compensation of related personnel.
| | - |  | ----------------------------------------------

Stock-Based Compensation

We account for stock-based compensation under the
fair value method. As a result, stock-based compensation consists of the following:



| |  |  | all share-based compensation arrangements granted after January 1, 2006 (adoption date of FASB ASC 718) and for any such arrangements that are
modified, cancelled, or repurchased after that date, and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the portion of previous share-based awards for which the requisite service has not been rendered as of January 1, 2006.
| | - |  | -----------------------------------------------------------------------------------------------------------------------

Stock-based compensation expense has been included in the same lines as compensation paid to the same
employees in the consolidated statement of operations.

Amortization of Intangibles from Acquisitions

Amortization of intangible assets excluding goodwill relates to intangible assets identified in connection with our acquisitions.



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The intangible assets have been identified as:



| |  |  | non-competition agreements;
| | - |  | ---------------------------



| |  |  | trade and Internet domain names;
| | - |  | --------------------------------



| |  |  | distributor relationships;
| | - |  | --------------------------



| |  |  | advertising relationships;
| | - |  | --------------------------



| |  |  | patents; and
| | - |  | ------------



| |  |  | acquired technology.
| | - |  | --------------------

These assets are amortized over useful lives ranging from 12 to 84 months.

Provision for
Income Taxes

We utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax
assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax law is recognized in results of operations in the period that includes the enactment date.

Each reporting period we must assess the likelihood that our deferred tax assets will be recovered from existing deferred tax liabilities
or future taxable income, and to the extent that realization is not more likely than not, a valuation allowance must be established. The establishment of a valuation allowance and increases to such an allowance may result in either an increase
to income tax expense or reduction of income tax benefit in the statement of operations. Although realization is not assured, we believe it is more likely than not, based on operating performance, existing deferred tax liabilities, projections of
future taxable income and tax planning strategies, that our net deferred tax assets, excluding certain state and foreign net operating loss carryforwards, will be realized. In determining that it was more likely than not that we would realize the
deferred tax assets, factors considered included: historical taxable income, historical trends related to advertiser usage rates, projected revenues and expenses, macroeconomic conditions and issues facing our industry, existing contracts, our
ability to project future results and any appreciation of our other assets. The majority of our deferred tax assets are from goodwill and intangible assets recorded in connection with various acquisitions that are tax-deductible over 15 year
periods. Based on projections of future taxable income and tax planning strategies, we expect to be able to recover these assets. The amount of the net deferred tax assets considered realizable, however, may be reduced in the near term from tax
attributes and operating results of acquired businesses, if our projections of future taxable income are reduced or if we do not perform at the levels we are projecting. This may result in increases to the valuation allowance for deferred tax assets
and may increase income tax expense of up to the entire net amount of deferred tax assets.

From time to time, various state,
federal, and other jurisdictional tax authorities undertake reviews of us and our filings. We believe any adjustments that may ultimately be required as a result of any of these reviews will not be material to the financial statements.

As of March 31, 2011, we have net deferred tax assets of $51.3 million, relating primarily to the impairment of goodwill,
amortization of intangibles assets, certain other temporary differences and research and development credits. Although realization is not assured, we believe it is more likely than not that our net deferred tax assets, excluding certain state and
foreign net operating loss carryforwards, will be realized. As of March 31, 2011, based upon both positive and negative evidence available, we have determined it is not more likely than not that certain deferred tax assets primarily relating to
net operating loss carryforwards in certain state and foreign jurisdictions will be realizable and accordingly, have recorded a 100% valuation allowance of $4.0 million against these deferred tax assets. We do not have a history of taxable income in
the relevant jurisdictions and the state and foreign net operating loss carryforwards will more likely than not expire unutilized. Should we determine in the future that we will be able to realize these deferred tax assets, or not be able to realize
all or part of our remaining net deferred tax assets recorded as of March 31, 2011, an adjustment to the net deferred tax assets would impact net income or stockholders equity in the period such determination was made.

As of March 31, 2011, we had federal net operating loss, or NOL, carryforwards of $1.7 million which will begin to expire in 2019.
The Tax Reform Act of 1986 limits the use of NOL and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. We believe that such a change has occurred, and that approximately $1.7 million of NOL
carryforwards is limited such that substantially all of these federal NOL carryforwards will never be available. Accordingly, we have not recorded a deferred tax asset for these NOLs.



20



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##### Table of Contents

Results of Operations

The following table presents certain financial data, derived from our unaudited consolidated statements of operations, as a percentage of total revenue for the periods indicated. The operating results for
the three months ended March 31, 2010 and 2011 and are not necessarily indicative of the results that may be expected for the full year or any future period.



|                                                      |  |                    |     |   |      |  |     |  
|----------------------------------------------------- |  | ------------------ | --- | - | ---- |  | --- | -
|                                                      |  | Three Months Ended |    
|                                                      |  | March 31,          |    
|                                                      |  | 2010               |     |   | 2011 | 
|Revenue                                               |  |                    | 100 | % |      |  | 100 | %
|                                                      |  |                    |     |   |      |  |     |  
|Expenses:                                             |  |                    |     |   |      |  |     |  
|Service costs                                         |  |                    | 53  | % |      |  | 57  | %
|Sales and marketing                                   |  |                    | 16  | % |      |  | 9   | %
|Product development                                   |  |                    | 17  | % |      |  | 17  | %
|General and administrative                            |  |                    | 16  | % |      |  | 18  | %
|Amortization of intangible assets from acquisitions   |  |                    | 3   | % |      |  | 2   | %
|Acquisition related costs                             |  |                    | 0   | % |      |  | 1   | %
|                                                      |  |                    |     |   |      |  |     |  
|Total operating expenses                              |  |                    | 104 | % |      |  | 104 | %
|Gain on sales and disposals of intangible assets, net |  |                    | 6   | % |      |  | 7   | %
|                                                      |  |                    |     |   |      |  |     |  
|Income from operations                                |  |                    | 1   | % |      |  | 2   | %
|Other income (expense):                               |  |                    |     |   |      |  |     |  
|Interest income                                       |  |                    | 0   | % |      |  | 0   | %
|Interest expense                                      |  |                    | 0   | % |      |  | 0   | %
|Other                                                 |  |                    | 0   | % |      |  | 0   | %
|                                                      |  |                    |     |   |      |  |     |  
|Total other income                                    |  |                    | 0   | % |      |  | 0   | %
|                                                      |  |                    |     |   |      |  |     |  
|Income before provision for income taxes              |  |                    | 1   | % |      |  | 3   | %
|Income tax expense                                    |  |                    | 1   | % |      |  | 1   | %
|                                                      |  |                    |     |   |      |  |     |  
|Net income (loss)                                     |  |                    | 0   | % |      |  | 2   | %
|Dividends paid to participating securities            |  |                    | 0   | % |      |  | 0   | %
|                                                      |  |                    |     |   |      |  |     |  
|Net income (loss) applicable to common stockholders   |  |                    | 0   | % |      |  | 2   | %
|                                                      |  |                    |     |   |      |  |     |  

Comparison of the Three months ended March 31, 2010 to the Three months ended March 31, 2011.

Revenue

The following table presents our revenues, by revenue source, for the periods presented:



|                                  |  |           |            |  |      |   |            | 
|--------------------------------- |  | --------- | ---------- |  | ---- | - | ---------- | 
|                                  |  | March 31, |           
|                                  |  | 2010      |            |  | 2011 |  
|Partner and Other Revenue Sources |  | $         | 16,961,742 |  |      | $ | 23,741,369 | 
|Proprietary Traffic Sources       |  |           | 7,040,239  |  |      |   | 5,338,486  | 
|                                  |  |           |            |  |      |   |            | 
|Total Revenue                     |  | $         | 24,001,981 |  |      | $ | 29,079,855 | 
|                                  |  |           |            |  |      |   |            | 

Our partner network revenues are primarily generated using third-party distribution networks to deliver the
advertisers listings. The distribution network includes mobile and online search engine applications, directories, destination sites, shopping engines, third-party Internet domains or websites, other targeted Web-based content and offline
sources. We generate revenue upon delivery of qualified and reported phone calls or click-throughs to our advertisers or to advertising services providers listings. We pay a revenue share to the distribution partners to access their mobile,
online, offline or other user traffic. Other revenues include our call provisioning and call tracking services, presence management services, campaign management services, natural search optimization services and outsourced search marketing
platforms. Our publishing



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network revenues are generated from our portfolio of owned websites which are monetized with pay-for-call or pay-per-click listings that are relevant to the websites, as well as other forms of
advertising, including banner advertising and sponsorships. When an online user navigates to one of our websites and calls or clicks on a particular listing or completes the specified action, we receive a fee.

Revenue increased 21% from $24.0 million for the three months ended March 31, 2010 to $29.1 million in the same period in 2011. The
partner and other revenues increased $6.8 million and were affected primarily by increased revenues of $7.7 million from our call advertising services and small business marketing products which was driven by adding more than 10,000 national and
small business accounts across our call advertising services and small business marketing product platforms. This increase was offset by a $914,000 decrease in revenue from our pay-per-click services.

Under our primary arrangement with AT&T, we generate revenues from our small business marketing products to sell call advertising and
/or search marketing packages through their existing sales channels, which are then fulfilled by us across our distribution network. We are paid account fees and also agency fees for our products in the form of a percentage of the cost of every call
or click delivered to their advertisers. In the second quarter of 2010, we signed an extension of our arrangement with AT&T through June 30, 2015 that includes certain exclusivity provisions for new advertiser accounts and contemplated the
migration of several thousand existing advertiser accounts. As part of the arrangement, we provided pricing reductions including significant 2010 pricing incentives. We expect revenues from our arrangement with AT&T to scale upwards in 2011 with
the addition of new advertiser accounts. AT&T accounted for 30% and 31% of total revenues during the three months ended March 31, 2010 and 2011, respectively.

Our publishing network revenue decreased $1.7 million and was primarily a result of decreased revenues for cost-per-actions from resellers related to our local search and directory Web sites.

Our ability to maintain and grow our revenues will depend in part on maintaining and increasing the number of phone calls and
click-throughs performed by users of our service through our distribution partners and proprietary traffic sources and maintaining and increasing the number and volume of transactions and favorable variable payment terms with advertisers and
advertising services providers, which we believe is dependent in part on marketing our Web sites and delivering high quality traffic that ultimately results in purchases or conversions for our advertisers and advertising services providers. We may
increase our direct monetization of our proprietary traffic sources which may not be at the same rate levels as other advertising providers and could adversely affect our revenues and results of operations. If we do not add new distribution
partners, renew our current distribution partner agreements or replace traffic lost from terminated distribution agreements with other sources or if our distribution partners businesses do not grow or are adversely affected, our revenue and
results of operations may be materially and adversely affected. If revenue grows and the volume of transactions and traffic increases, we will need to expand our network infrastructure. Inefficiencies in our network infrastructure to scale and adapt
to higher traffic volumes could materially and adversely affect our revenue and results of operations.

We anticipate that
these variables will fluctuate in the future, affecting our growth rate and our financial results. In particular, it is difficult to project the number of phone calls and click-throughs we will deliver to our advertisers and how much advertisers
will spend with us, and it is even more difficult to anticipate the average revenue per phone call or click-through. It is also difficult to anticipate the impact of worldwide economic conditions on advertising budgets due to the evolving market
conditions. In addition, we believe we will experience seasonality. Our quarterly results have fluctuated in the past and may fluctuate in the future due to seasonal fluctuations in levels of mobile and Internet usage and seasonal purchasing cycles
of many advertisers. It is generally understood that during the spring and summer months, mobile and Internet usage is lower than during other times of the year, especially in comparison to the fourth quarter of the calendar year. The extent to
which usage may decrease during these off-peak periods is difficult to predict. Prolonged or severe decreases in usage during these periods may adversely affect our growth rate and results.

Expenses

Expenses were as follows:



|                                                    |  |                             |            |  |             |  |     |      |  |   |             |  |  |  |     |  
|--------------------------------------------------- |  | --------------------------- | ---------- |  | ----------- |  | --- | ---- |  | - | ----------- |  |  |  | --- | -
|                                                    |  | Three months
endedMarch 31, |           
|                                                    |  | 2010                        |            |  | % ofrevenue |  |     | 2011 |  |   | % ofrevenue | 
|Service costs                                       |  | $                           | 12,649,501 |  |             |  | 53  | %    |  | $ | 16,672,382  |  |  |  | 57  | %
|Sales and marketing                                 |  |                             | 3,910,708  |  |             |  | 16  | %    |  |   | 2,693,728   |  |  |  | 9   | %
|Product development                                 |  |                             | 3,962,284  |  |             |  | 17  | %    |  |   | 4,889,110   |  |  |  | 17  | %
|General and administrative                          |  |                             | 3,836,261  |  |             |  | 16  | %    |  |   | 5,155,435   |  |  |  | 18  | %
|Amortization of intangible assets from acquisitions |  |                             | 704,466    |  |             |  | 3   | %    |  |   | 464,202     |  |  |  | 2   | %
|Acquisition related costs                           |  |                             |           |  |             |  | 0   | %    |  |   | 402,123     |  |  |  | 1   | %
|                                                    |  |                             |            |  |             |  |     |      |  |   |             |  |  |  |     |  
|                                                    |  | $                           | 25,063,220 |  |             |  | 104 | %    |  | $ | 30,276,980  |  |  |  | 104 | %
|                                                    |  |                             |            |  |             |  |     |      |  |   |             |  |  |  |     |  



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Stock-based compensation expense was included in the following operating expense categories
as follows:



|                               |  |                    |           |  |      |   |           | 
|------------------------------ |  | ------------------ | --------- |  | ---- | - | --------- | 
|                               |  | Three months ended |          
|                               |  | March 31,          |          
|                               |  | 2010               |           |  | 2011 |  
|Service costs                  |  | $                  | 179,483   |  |      | $ | 284,978   | 
|Sales and marketing            |  |                    | 166,657   |  |      |   | 218,841   | 
|Product development            |  |                    | 208,205   |  |      |   | 314,016   | 
|General and administrative     |  |                    | 1,832,978 |  |      |   | 2,693,209 | 
|                               |  |                    |           |  |      |   |           | 
|Total stock-based compensation |  | $                  | 2,387,323 |  |      | $ | 3,511,044 | 
|                               |  |                    |           |  |      |   |           | 

See Note 3Stock-based Compensation Plans of the condensed consolidated financial
statements as well as our Critical Accounting Policies for additional information about stock-based compensation.

Service
Costs. Service costs increased 32%, from $12.6 million in the three months ended March 31, 2010 to $16.7 million in the same period in 2011. The increase was primarily attributable to increases in distribution partner payments, fees paid to
outside service providers, personnel costs, stock compensation, facility costs, communication and network costs, travel, and depreciation totaling $4.2 million, offset primarily by a decrease in Internet domain amortization of $120,000.

Service costs represented 53% of revenue in the three months ended March 31, 2010 as compared to 57% in 2011. The 2011 increase as a
percentage of revenue in service costs as compared to 2010 was primarily a result of an increase in the proportion of revenue attributable to our pay-for-call or cost-per-action services for which there are related distribution partner payments, and
increases in personnel costs and outside service provider fees as a percentage of revenue.

We expect that user acquisition
costs and revenue shares to distribution partners are likely to increase prospectively given the competitive landscape for distribution partners. To the extent that payments to pay-for-call, pay-per-click or cost-per-action distribution partners
make up a larger percentage of future operations, or the addition or renewal of existing distribution partner agreements are on terms less favorable to us, we expect that service costs will increase as a percentage of revenue. To the extent of
revenue declines in these areas, we expect revenue shares to distribution partners to decrease in absolute dollars. Our proprietary traffic sources have a lower service cost as a percentage of revenue relative to our overall service cost percentage.
Our proprietary traffic sources have no corresponding distribution partner payments. To the extent our proprietary traffic sources make up a larger percentage of our future operations, we expect that service costs will decrease as a percentage of
revenue. We expect with an increase in the proportion of partner and other revenue sources, service costs will increase as a percentage of revenue in the near term. We also expect that in the longer term service costs will increase in absolute
dollars as a result of costs associated with the expansion of our operations and network infrastructure as we scale and adapt to increases in the volume of transactions and traffic and invest in our platforms.

Sales and Marketing. Sales and marketing expenses decreased 31%, from $3.9 million for the three months ended March 31, 2010
to $2.7 million in the same period in 2011. As a percentage of revenue, sales and marketing expenses were 16% and 9% for the three months ended March 31, 2010 and 2011, respectively. The net decrease in dollars and percentage of revenue was
related primarily to a decrease in online and outside marketing activities and personnel costs. We expect some volatility in sales and marketing expenses in the near term based on the timing of marketing initiatives but expect sales and marketing
expenses in the near term to be modestly higher in absolute dollars. We expect that sales and marketing expenses will increase in connection with any revenue increase to the extent that we also increase our marketing activities and correspondingly
could increase as a percentage of revenue.

Product Development. Product development expenses increased 23%, from $4.0
million for the three months ended March 31, 2010 to $4.9 million in the same period in 2011. The increase in dollars was primarily due to an increase in personnel costs and stock based compensation of $942,000. As a percentage of revenue,
product development expenses were 17% for both the three months ended March 31, 2010 and 2011. In the near term, we expect product development expenditures to be modestly higher in absolute dollars. In the longer term, we expect that product
development expenses will increase in absolute dollars as we increase the number of personnel and consultants to enhance our service offerings and as a result of additional stock based compensation expense.



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General and Administrative. General and administrative expenses increased 34%, from
$3.8 million in the three months ended March 31, 2010 to $5.2 million in the same period in 2011. The increase in dollars was primarily due to an increase in stock based compensation, personnel costs, fees paid to outside service providers,
travel and other operating costs of $1.4 million. As a percentage of revenue, general and administrative expenses were 16% and 18% for the three months ended March 31, 2010 and 2011, respectively. We expect a modest increase to our general and
administrative expenses in the near term. We expect that our general and administrative expenses will increase in the longer term to the extent that we expand our operations and incur additional costs in connection with being a public company,
including expenses related to professional fees and insurance, and as a result of stock-based compensation expense. We also expect fluctuations in our general and administrative expenses to the extent the recognition timing of stock compensation is
impacted by market conditions relating to our stock price.

Amortization of Intangible Assets from Acquisitions.
Intangible amortization expense decreased 34%, from $704,000 in the three months ended March 31, 2010 to $464,000 in the same period in 2011. The decrease was associated with certain intangible assets from acquisitions being fully amortized.
During the three months ended March 31, 2011, the amortization of intangibles related to service costs.

Our purchase
accounting resulted in all assets and liabilities from our acquisitions being recorded at their estimated fair values on their respective acquisition dates. All goodwill, identifiable intangible assets and liabilities resulting from our acquisitions
have been recorded in our financial statements. The identified intangibles amounted to $83.7 million and are being amortized over a range of useful lives of 12 to 84 months. With the acquisition of Jingle, we expect our intangible amortization will
increase in absolute dollars in the near term. We may acquire identifiable intangible assets as part of future acquisitions, and if so, we expect that our intangible amortization will increase in absolute dollars. Events and circumstances considered
in determining whether the carrying value of amortizable intangible assets and goodwill may not be recoverable include, but are not limited to: significant changes in performance relative to expected operating results; significant changes in the use
of the assets; significant negative industry or economic trends; or a significant decline in the Companys stock price and/or market capitalization for a sustained period of time.

No impairment of the Companys intangible assets has been identified to date in 2011. The current business environment is subject to
evolving market conditions and requires significant management judgment to interpret the potential impact to our assumptions. To the extent that changes in the current business environment impact the Companys ability to achieve levels of
forecasted operating results and cash flows, or should other events occur indicating the remaining carrying value of our assets might be impaired, the Company would test its goodwill and intangible assets for impairment and may recognize an
additional impairment loss to the extent that the carrying amount exceeds such assets fair value.

Acquisition
related costs. Acquisition related costs of $402,000 were primarily for professional fees to perform due diligence and other procedures associated with our acquisition of Jingle in April 2011.

Gain on sales and disposals of intangible assets, net. Gain on sales and disposals of intangible assets, net were $1.3 million and
$1.9 million for the three months ended March 31, 2010 and 2011, respectively, and were primarily attributable to the sales and disposals of Internet domain names.

Other Income (expense), net.Other income (expense), net were $(6,000) and $103,000 in the three months ended March 31, 2010 and 2011, respectively. Interest income increased as a result of a
tax refund.

Income Taxes. The income tax expense was $328,000 for the three months ended March 31, 2010 compared
to $242,000 in the same period in 2011.

In the three months ended March 31, 2010, the effective tax rate of 126%
differed from the expected effective tax rate of 35% due to state income taxes, non-deductible stock-based compensation related to restricted stock and incentive stock options recorded under the fair-value method and other non-deductible amounts.

In the three months ended March 31, 2011, our effective tax rate of 30% differed from our expected effective tax rate of
35% due to state income taxes, non-deductible stock-based compensation related to restricted stock and incentive stock options recorded under the fair-value method, other non-deductible amounts offset partially by a research and experimentation
credit for the period. In addition, we recorded $181,000 of income tax benefit associated with the completion of our federal return audits for years 2005 through 2007 in the first quarter of 2011.

Net Income (Loss). Net income increased from a net loss of $68,000 for the three months ended March 31, 2010 to a net income
of $576,000 in the same period in 2011. The increase was primarily attributable to an increase in revenues offset by operating costs increases which included acquisition related costs of $402,000 in which there were no comparable costs in 2010. The
increase was also due to an increase in gain and on sales of intangible assets and interest income and a decrease in income tax expense.



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Liquidity and Capital Resources

As of March 31, 2011, we had cash and cash equivalents of $40.0 million and we had current and long term contractual obligations of
$18.5 million, of which $14.7 million is for rent under our facility leases.

Cash provided by operating activities primarily
consists of net income adjusted for certain non-cash items such as depreciation and amortization, deferred income taxes, stock-based compensation, gain on sales and disposals of intangible assets, net and changes in working capital. Cash provided by
operating activities for the three months ended March 31, 2011 of approximately $2.5 million consisted primarily of net income of $576,000 adjusted for non-cash items of $5.6 million, including depreciation, amortization of intangible assets,
allowance for doubtful accounts and advertiser credits, stock-based compensation, and deferred income taxes, gain on sales and disposals of intangible and fixed assets, net of $1.9 million and approximately $1.7 million used for working capital and
other activities. Cash provided by operating activities for the three months ended March 31, 2010 of approximately $3.0 million consisted primarily of a net loss of $68,000 adjusted for non-cash items of $6.4 million, including depreciation,
amortization of intangible assets, allowance for doubtful accounts and advertiser credits, stock-based compensation and deferred income taxes, gain on sales and disposals of intangible and fixed assets, net of $1.3 million and approximately $2.0
million used for working capital and other activities.

With respect to a significant portion of our call-based and
pay-per-click advertising services, the amount payable to the distribution partners will be calculated at the end of a calendar month, with a payment period following the delivery of the phone calls or click-throughs. We generally receive payment
from advertisers in close proximity or in some cases prior to the timing of the corresponding payments to the distribution partners who provide placement for the listings. These services constituted the majority of revenues for the three months
ended March 31, 2010 and 2011. In certain cases, payments to distribution partners are paid in advance or are fixed in advance based on a guaranteed minimum amount of usage delivered. We have no corresponding payments to distribution partners
related to our proprietary revenues.

Nearly all of the reseller partner arrangements are billed on a monthly basis following
the month of our phone call or click-through delivery. This payment structure results in our advancement of monies to the distribution partners who have provided the corresponding placements of the listings. For these services, reseller partner
payments are generally received one to three weeks following payment to the distribution partners. We expect that in the future periods, if the amounts from our reseller partner arrangements account for a greater percentage of our operating
activity, working capital requirements will increase as a result.

We have payment arrangements with reseller partners
particularly related to our proprietary traffic sources or our small business marketing products, such as AT&T, SuperMedia Inc., Yellowbook USA Inc., The Cobalt Group, and Yellow Pages Group Canada, whereby we receive payment between 30 and 60
days following the delivery of services. For the three months ended and as of March 31, 2011 amounts from these partners totaled 48% of revenue and $19.2 million in accounts receivable, respectively. Based on the timing of payments, we
generally have this level of amounts in outstanding accounts receivable at any given time from these partners. There can be no assurances that these partners or other advertisers will not experience further financial difficulty, curtail operations,
reduce or eliminate spend budgets, delay payments or otherwise forfeit balances owed. Net accounts receivable balances outstanding at March 31, 2011 from AT&T totaled $13.8 million

Cash provided by investing activities for the three months ended March 31, 2011 of approximately $931,000 was primarily attributable
to net purchases for property and equipment of $950,000 which were more than offset by proceeds from the sales of intangible assets of approximately $1.9 million. Cash provided by investing activities for the three months ended March 31, 2010
of approximately $41,000 was primarily attributable to net purchases for property and equipment of less than $1.3 million which were more than offset by proceeds from the sales of intangible assets of approximately $1.3 million. We expect property
and equipment purchases will increase as we continue to invest in equipment and software. To the extent our operations increase, we expect to increase expenditures for our systems and personnel. We expect our expenditures for product development
initiatives and internally developed software will increase in the longer term in absolute dollars as our development activities accelerate and we increase the number of personnel and consultants to enhance our service offerings. In April 2011, we
acquired Jingle Networks, Inc. in which $16.7 million was paid in cash at closing and includes future consideration of two payments of $18.0 million that can be paid in cash or shares of Class B common stock or a combination of both at
Marchexs option on the 12th and 18th month anniversaries of the closing.

Cash used in financing activities for the
three months ended March 31, 2011 of approximately $729,000 was primarily attributable to the repurchase of 29,000 shares of Class B common stock for treasury stock totaling approximately $252,000 and common stock dividend payments of $712,000,
partially offset by net proceeds of approximately $234,000 from the sale of stock through employee stock options and employee stock plan purchases. . Cash used in financing activities for the three months ended March 31, 2010 of approximately
$2.9 million was primarily attributable to the repurchase of 411,000 shares of Class B common stock for treasury stock totaling approximately $2.2 million, and common stock dividend payments of $706,000.The following table summarizes our contractual
obligations as of March 31, 2011, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.



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|                                       |  |       |            |  |                  |   |           |           |  |   |           |  |  |            |           |  |  |   |           | 
|-------------------------------------- |  | ----- | ---------- |  | ---------------- | - | --------- | --------- |  | - | --------- |  |  | ---------- | --------- |  |  | - | --------- | 
|                                       |  | Total |            |  | Less than 1 year |   |           | 1-3 years |  |   | 4-5 years |  |  | thereafter |          
|Contractual Obligations:               |  |       |            |  |                  |   |           |           |  |   |           |  |  |            |           |  |  |   |           | 
|Operating leases                       |  | $     | 14,717,615 |  |                  | $ | 1,249,302 |           |  | $ | 3,952,422 |  |  | $          | 4,339,559 |  |  | $ | 5,176,332 | 
|Other contractual obligations          |  |       | 3,743,068  |  |                  | $ | 1,944,218 |           |  |   | 1,798,850 |  |  |            |          |  |  |   |          | 
|                                       |  |       |            |  |                  |   |           |           |  |   |           |  |  |            |           |  |  |   |           | 
|Total contractual obligations (1), (2) |  | $     | 18,460,683 |  |                  | $ | 3,193,521 |           |  | $ | 5,751,272 |  |  | $          | 4,339,559 |  |  | $ | 5,176,332 | 
|                                       |  |       |            |  |                  |   |           |           |  |   |           |  |  |            |           |  |  |   |           | 



|(1) | In February 2005 we entered into a license agreement with an advertising partner which provides for a contingent royalty based on a discounted rate of 3% (3.75% under
certain circumstances) of certain of our gross revenues payable on a quarterly basis through December 2016. The royalty payment is recognized as incurred in service costs and is not included in the above schedule.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Our tax contingencies of $285,000 are not included due to their uncertainty.
|--- | ----------------------------------------------------------------------------

We anticipate that we will need to invest working capital towards the development and expansion of our overall operations. We may also make a significant number of acquisitions, which could result in the
reduction of our cash balances or the incurrence of debt. Furthermore, we expect that capital expenditures may increase in future periods, particularly if our operating activity increases. On April 1, 2008, we entered into a three year credit
agreement which provides us with a $30 million senior secured revolving credit line, which may be used for various corporate purposes including financing permitted acquisitions, subject to compliance with applicable covenants. During the first
quarter of 2011, we signed an amendment to the credit agreement which extends the maturity period through to April 1, 2014 and increases the applicable margin rate by 25 basis points. As of March 31, 2011, we had $30 million of
availability under the credit agreement.

In November 2006, our Board of Directors authorized a share repurchase program to
repurchase up to 3 million shares of our Class B common stock as well as the initiation of a quarterly cash dividend for the holders of the Class A common stock and Class B common stock. The Board of Directors have authorized increases in
the share repurchase program to provide for the repurchase of up to 11 million shares in the aggregate (less shares previously repurchased under the share repurchase program) of our Class B common stock. Under the revised share repurchase
program, repurchases may take place in the open market and in privately negotiated transactions and at times and in such amounts as we deem appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including
price, corporate and regulatory requirements, capital availability, and other market conditions. This stock repurchase program does not have an expiration date and may be expanded, limited or terminated at any time without prior notice. During the
three months ended March 31, 2011, approximately 29,000 shares of Class B common stock were repurchased. The quarterly cash dividend was initiated at $0.02 per share of Class A common stock and Class B common stock. For 2010, quarterly
dividends were paid on February 15, May 17, August 16 and November 15 to Class A and Class B common stockholders of record as of the close of business of February 4, May 5, August 6 and November 5,
respectively. For 2011, quarterly dividends were paid on February 15 to Class A and Class B common stockholders of record as of the close of business of February 4. The aggregate quarterly dividend paid in February 2011was
approximately $712,000. Under Delaware law, dividends to stockholders may be made only from the surplus of a company, or, in certain situations, from the net profits for the current fiscal year before the dividend is declared by the board of
directors. In April 2011, our Board of Directors declared a regular quarterly dividend of $0.02 per share on our Class A common stock and Class B common stock. Marchex will pay these dividends on May 16, 2011 to the holders of record as of
the close of business on May 6, 2011. Although we expect that the annual cash dividend, subject to capital availability, will be $0.08 per common share or approximately $2.9 million for the foreseeable future, there can be no assurance that we
will continue to pay dividends at such a rate or at all.

Based on our operating plans we believe that our existing credit
availability, resources and cash flow provided by ongoing operations, will be sufficient to fund our operations for at least twelve months. Additional equity and debt financing may be needed to support our acquisition strategy, our long-term
obligations and our companys needs. If additional financing is necessary, it may not be available; and if it is available, it may not be possible for us to obtain financing on satisfactory terms. Failure to generate sufficient revenue or raise
additional capital could have a material adverse effect on our ability to continue as a going concern and to achieve our intended business objectives.



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Critical Accounting Policies

The policies below are critical to our business operations and the understanding of our results of operations. In the ordinary course of business, we make a number of estimates and assumptions relating to
the reporting of our results.

Our consolidated financial statements have been prepared using accounting principles generally
accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and the related disclosures of
contingent assets and liabilities. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our critical accounting policies relate to the following matters and are described below:



| |  |  | Revenue;
| | - |  | --------



| |  |  | Goodwill and intangible assets;
| | - |  | -------------------------------



| |  |  | Stock-based compensation;
| | - |  | -------------------------



| |  |  | Allowance for doubtful accounts, advertiser and incentive program credits; and
| | - |  | ------------------------------------------------------------------------------



| |  |  | Provision for income taxes.
| | - |  | ---------------------------

Revenue

We currently generate revenue through our operating
businesses by delivering call and click-based advertising products that enable advertisers of all sizes to reach local consumers across online, mobile and offline sources. The primary revenue driver has been performance-based advertising, which
includes call advertising service, pay-per-click advertising, cost-per-action services and feed management and related services. For pay-for-call, pay-per-click advertising and feed management and related services, revenue is recognized upon our
delivery of qualified and reported phone calls or click-throughs to our advertisers or advertising service providers listing which occurs when an online, mobile, or offline user makes a phone call or clicks based on any of their advertisements
after it has been placed by us or by our distribution partners. Each phone call or click-through on an advertisement listing represents a completed transaction. For cost-per-action services, revenue is recognized when the online user is redirected
from one of our Web sites or a third-party Web site in our distribution network to an advertiser Web site and completes the specified action, such as when a call is placed. In certain cases, we record revenue based on available and reported
preliminary information from third parties. Collection on the related receivables may vary from reported information based upon third party refinement of the estimated and reported amounts owing that occurs subsequent to period ends.

We have entered into agreements with various distribution partners in order to expand our distribution network, which includes search
engines, directories, product shopping engines, third-party vertical and branded Web sites, mobile and offline sources, and our portfolio of owned Web sites, on which we include our advertisers listings. We generally pay distribution partners
based on a specified percentage of revenue or a fixed amount per phone call or click-through on these listings. We act as the primary obligor in these transactions, and we are responsible for providing customer and administrative services to the
advertiser. In accordance with FASB ASC 605, the revenue derived from advertisers who receive paid introductions through us as supplied by distribution partners is reported gross based upon the amounts received from the advertiser. We also
recognize revenue for certain agency contracts with advertisers under the net revenue recognition method. Under these specific agreements, we purchase listings on behalf of advertisers from search engines and directories. We are paid account fees
and also agency fees based on the total amount of the purchase made on behalf of these advertisers. Under these agreements, our advertisers are primarily responsible for choosing the publisher and determining pricing, and the Company, in certain
instances, is only financially liable to the publisher for the amount collected from our advertisers. This creates a sequential liability for media purchases made on behalf of advertisers. In certain instances, the web publishers engage the
advertisers directly and we are paid an agency fee based on the total amount of the purchase made by the advertiser. In limited arrangements resellers pay us a fee for fulfilling an advertisers campaign in our distribution network and we act
as the primary obligor. We recognize revenue for these fees under the gross revenue recognition method.

We apply FASB ASC 605
to account for revenue arrangements with multiple deliverables. FASB ASC 605 addresses certain aspects of accounting by a vendor for arrangements under which the vendor will perform multiple revenue-generating activities. When an arrangement
involves multiple deliverables, the entire fee from the arrangement is allocated to each respective deliverable based on its relative selling price and recognized when revenue recognition criteria for each deliverable are met. Selling price for each
deliverable is established based on the sales price charged when the same deliverable is sold separately, the price at which a third party sells the same or similar and largely interchangeable deliverable on a standalone basis or the estimated
selling price if the deliverable were to be sold separately.



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Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed in
business combinations accounted for under the purchase method.

We apply the provisions of FASB ASC 350 Goodwill and
intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of FASB ASC 350. FASB ASC 350
also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with FASB ASC 360. Goodwill is tested annually
for impairment and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. Events and circumstances considered in determining whether the carrying value of goodwill may not be recoverable
include, but are not limited to: significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; and a significant decline in the
Companys stock price and/or market capitalization for a sustained period of time. If our stock price were to trade below book value per share for an extended period of time and/or we continue to experience adverse effects of a continued
downward trend in the overall economic environment, changes in the business itself, including changes in projected earnings and cash flows, we may have to recognize an impairment of all or some portion of our goodwill. An impairment loss is
recognized to the extent that the carrying amount exceeds the assets fair value. If the fair value is lower than the carrying value, a material impairment charge may be reported in our financial results. We exercise judgment in the assessment
of the related useful lives of intangible assets, the fair values and the recoverability. In certain instances, the fair value is determined in part based on cash flow forecasts and discount rate estimates. We review our long-lived assets for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. To the extent such evaluation indicates that the useful lives of intangible assets are different than originally
estimated, the amortization period is reduced or extended and, accordingly, amortization expense is increased or decreased. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset group to estimated
undiscounted future cash flows expected to be generated by the asset group. If such asset group is considered to be impaired, the impairment is to be recognized by the amount by which the carrying amount of the assets exceeds fair value. Assets to
be disposed of are separately presented on the balance sheet and reported at the lower of their carrying amount or fair value less costs to sell, and are no longer depreciated. We cannot accurately predict the amount and timing of any impairment of
goodwill or other intangible assets. Should the value of goodwill or other intangible assets become impaired, we would record the appropriate charge, which could have an adverse effect on our financial condition and results of operations.

No impairment of our intangible assets has been identified to date in 2011. The current business environment is subject to
evolving market conditions and requires significant management judgment to interpret the potential impact to our assumptions. To the extent that changes in the current business environment impact our ability to achieve levels of forecasted operating
results and cash flows, or should other events occur indicating the remaining carrying value of our assets might be impaired, we would test our intangible assets for impairment and may recognize an additional impairment loss to the extent that the
carrying amount exceeds such assets fair value.

Any future additional impairment charges or changes to the estimated
amortization periods could have a material adverse effect on our financial results.

Stock-Based Compensation

FASB ASC 718 requires the measurement and recognition of compensation for all stock-based awards made to employees,
non-employees and directors including stock options, restricted stock issuances, and restricted stock units based on estimated fair values. Under the fair value recognition provisions, we recognize stock-based compensation net of an estimated
forfeiture rate, and therefore only recognize compensation cost for those shares expected to vest over the requisite service period.

We generally use the Black-Scholes option pricing model as our method of valuation for stock-based awards with time-based vesting. Our determination of the fair value of stock-based awards on the date of
grant using an option pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the expected life of the award, our expected
stock price, volatility over the term of the award and actual and projected exercise behaviors. For stock-based awards with time-based vesting, we are required to estimate the expected forfeiture rate and only recognize expense for those shares
expected to vest. We estimate the forfeiture rate based on historical experience of our stock-based awards that are granted, exercised and cancelled. If our actual forfeiture rate is materially different from our estimate, the stock-based
compensation expense could be significantly different from what we have recorded in the current period.



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During 2010, we issued equity awards of stock options and restricted stock units that have
vesting based on a combination of certain service and market conditions. For equity awards with vesting based on a combination of certain service and market conditions, we factor an estimated probability of achieving certain service and market
conditions and recognize compensation cost over the requisite service period of the award. We used a binomial lattice model to determine the fair value and a Monte Carlo simulation to determine the derived service period. There were no stock options
or restricted stock units that have vesting based on a combination of certain service and market conditions granted during the first quarter of 2011.

Although the fair value of stock-based awards is determined in accordance with FASB ASC 718, the assumptions used in calculating fair value of stock-based awards, the use of the Black-Scholes option
pricing model, and the use of the binomial lattice model and a Monte Carlo simulation are highly subjective, and other reasonable assumptions could provide differing results. As a result, if factors change and we use different assumptions, our
stock-based compensation expense could be materially different in the future. See Note 3 Stock-based Compensation Plans in the condensed consolidated financial statements for additional information.

Allowance for Doubtful Accounts and Advertiser Credits

Accounts receivable balances are presented net of allowance for doubtful accounts and advertiser credits. The allowance for doubtful
accounts is our best estimate of the amount of probable credit losses in our accounts receivable. We determine our allowance based on analysis of historical bad debts, advertiser concentrations, advertiser creditworthiness and current economic
trends. We review the allowance for collectability on a quarterly basis. Account balances are written off against the allowance after all reasonable means of collection have been exhausted and the potential recovery is considered remote. If the
financial condition of our advertisers were to deteriorate, resulting in an impairment of their ability to make payments, or if we underestimated the allowances required, additional allowances may be required which would result in increased general
and administrative expenses in the period such determination was made.

We determine our allowance for advertiser credits and
adjustments based upon our analysis of historical credits. Material differences may result in the amount and timing of our revenue for any period if our management made different judgments and estimates.

Provision for Income Taxes

We utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax law is recognized in results of operations in the period that
includes the enactment date.

Each reporting period we must assess the likelihood that our deferred tax assets will be
recovered from existing deferred tax liabilities or future taxable income, and to the extent that realization is not more likely than not, a valuation allowance must be established. The establishment of a valuation allowance and increases to
such an allowance may result in either an increase to income tax expense or reduction of income tax benefit in the statement of operations. Although realization is not assured, we believe it is more likely than not, based on operating performance,
existing deferred tax liabilities, projections of future taxable income and tax planning strategies, that our net deferred tax assets, excluding certain state and foreign net operating loss carryforwards, will be realized. In determining that it was
more likely than not that we would realize the deferred tax assets, factors considered included: historical taxable income, historical trends related to advertiser usage rates, projected revenues and expenses, macroeconomic conditions and issues
facing our industry, existing contracts, our ability to project future results and any appreciation of our other assets. The majority of our deferred tax assets are from goodwill and intangible assets recorded in connection with various acquisitions
that are tax-deductible over 15 year periods. Based on projections of future taxable income and tax planning strategies, we expect to be able to recover these assets. The amount of the net deferred tax assets considered realizable, however, may be
reduced in the near term from tax attributes and operating results of acquired businesses, if our projections of future taxable income are reduced or if we do not perform at the levels we are projecting. This may result in increases to the valuation
allowance for deferred tax assets and may increase income tax expense of up to the entire net amount of deferred tax assets. From time to time, various state, federal, and other jurisdictional tax authorities undertake reviews of us and our filings.
We believe any adjustments that may ultimately be required as a result of any of these reviews will not be material to the financial statements.

FASB ASC 740 clarifies the accounting for uncertainty in income taxes recognized in the financial statements. This pronouncement prescribes a recognition threshold and measurement process for recording in
the financial statements uncertain tax positions taken or expected to be taken in the our tax return. FASB ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure
requirements for uncertain tax positions.



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As of March 31, 2011, we have net deferred tax assets of $51.3 million, relating
to the impairment of goodwill, amortization of intangibles assets, certain other temporary differences and research and development credits. Although realization is not assured, we believe it is more likely than not that our net deferred tax assets,
excluding certain state and foreign net operating loss carryforwards, will be realized. As of March 31, 2011, based upon both positive and negative evidence available, we have determined it is not more likely than not that certain deferred tax
assets primarily relating to net operating loss carryforwards in certain state and foreign jurisdictions will be realizable and accordingly, have recorded a 100% valuation allowance of $4.0 million against these deferred tax assets. We do not
have a history of taxable income in the relevant jurisdictions and the state and foreign net operating loss carryforwards will more likely than not expire unutilized. Should we determine in the future that we will be able to realize these deferred
tax assets, or not be able to realize all or part of our remaining net deferred tax assets recorded as of March 31, 2011, an adjustment to the net deferred tax assets would impact net income or stockholders equity in the period such
determination was made.

As of March 31, 2011, we had federal net operating loss, or NOL, carryforwards of $1.7
million which will begin to expire in 2019. The Tax Reform Act of 1986 limits the use of NOL and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. We believe that such a change has occurred,
and that approximately $1.7 million of NOL carryforwards is limited such that substantially all of these federal NOL carryforwards will never be available. Accordingly, we have not recorded a deferred tax asset for these NOLs.



|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

Our exposure to market risk is limited to interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because the majority of our investments are in
short-term, money market funds. Due to the nature of our short-term investments, we believe that we are not subject to any material market risk exposure. We do not have any material foreign currency or other derivative financial instruments.

Our existing credit facility bears interest at a rate which will be, at our option, either: (i) the applicable margin
rate (depending on our leverage) plus the one-month LIBOR rate reset daily, or (ii) the applicable margin rate plus the 1, 2, 3, or 6-month LIBOR rate. This facility is exposed to market rate fluctuations and may impact the interest paid on any
borrowings under the credit facility. Currently, we have no borrowings under this facility; however, an increase in interest rates would impact interest expense on future borrowings.



|Item 4. | Controls and Procedures
|------- | -----------------------

Evaluation of
Disclosure Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of our chief executive officer and our chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934). Based on this evaluation, our chief executive officer and our chief financial officer have concluded that, as of the date of the evaluation, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

During the quarter ended March 31, 2011, no change was made to our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.

Limitations on the Effectiveness of Controls

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how
well designed and operated, cannot provide absolute assurance of achieving the desired control objectives.

In addition,
because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



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Part IIOther Information



|Item 1. | Legal Proceedings
|------- | -----------------

We are
not a party to any material legal proceedings. From time to time, however, we may be subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of intellectual property rights, and a variety
of claims arising in connection with our services.



|Item 1A. | Risk Factors
|-------- | ------------

Set forth
below and elsewhere in this report and in other documents we file with the SEC are risks and uncertainties that could cause our actual results to materially differ from the results contemplated by the forward-looking statements contained in this
report and in other documents we file with the SEC. Some of the risk factors were previously disclosed in our December 31, 2010 Annual Report on Form 10-K. They have been updated to include information as of May 10, 2011.

Risks Relating to Our Company

We
have largely incurred net losses since our inception, and we may incur net losses in the foreseeable future.

We had an
accumulated deficit of $140.2 million as of March 31, 2011. Our net expenses may increase based on the initiatives we undertake which for instance, may include increasing our sales and marketing activities, hiring additional personnel,
incurring additional costs as a result of being a public company, acquiring additional businesses and making additional equity grants to our employees.

We are dependent on certain distribution partners, for distribution of our services, and we derive a significant portion of our total revenue through these distribution partners. A loss of distribution
partners or a decrease in revenue from certain distribution partners could adversely affect our business.

A relatively
small number of distribution partners currently deliver a significant percentage of calls and traffic to our advertisers, although no one distribution partner accounts for in excess of 10% of our revenues.

Our existing agreements with many of our other larger distribution partners permit either company to terminate without penalty on short
notice and are primarily structured on a variable-payment basis, under which we make payments based on a specified percentage of revenue or based on the number of paid phone calls or click-throughs. We intend to continue devoting resources in
support of our larger distribution partners, but there are no guarantees that these relationships will remain in place over the short- or long-term. In addition, we cannot be assured that any of these distribution partners will continue to generate
current levels of revenue for us or that we will be able to maintain the applicable variable payment terms at their current levels. A loss of any of these distribution partners or a decrease in revenue due to lower calls and traffic or less
favorable variable payment terms from any one of these distribution relationships could have a material adverse effect on our business, financial condition and results of operations.

Companies distributing advertising through mobile or online Internet have experienced, and will likely continue to experience,
consolidation. This consolidation has reduced the number of partners that control the mobile and online advertising outlets with the most user calls and traffic. According to the comScore Media Metrix Core Search Report for December 2010, Yahoo!
accounted for 16% of the online searches in the United States and Google accounted for 67%. As a result, the larger distribution partners have greater control over determining the market terms of distribution, including placement of call and
click-based advertisements and cost of placement. In addition, many participants in the performance-based advertising and search marketing industries control significant portions of mobile and online traffic that they deliver to advertisers. We do
not believe, for example, that Yahoo! and Google are as reliant as we are on a third-party distribution network to deliver their services. This gives these companies a significant advantage over us in delivering their services, and with a lesser
degree of risk.

We rely on certain advertiser reseller partners and agencies, including AT&T (through our contract with
AT&Ts subsidiary Yellowpages.com LLC d/b/a AT&T Interactive), Yellowbook USA Inc., The Cobalt Group, Super Media, Inc., and Yellow Pages Group Canada for the purchase of various advertising and marketing services, as well as to provide
us with a large number of advertisers. A loss of certain advertiser reseller partners and agencies or a decrease in revenue from these reseller partners could adversely affect our business. Such advertisers are subject to varying terms and
conditions which may result in claims or credit risks to us.



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We benefit from the established relationships and national sales teams that certain of our
reseller partners, who are leading reseller partners of advertisers and advertising agencies, have in place throughout the U.S. and international markets. These advertiser reseller partners and agencies refer or bring advertisers to us for the
purchase of various advertising products and services. We derive a sizeable portion of our total revenue through these advertiser reseller partners and agencies. A loss of certain advertiser reseller partners and agencies or a decrease in revenue
from these clients could adversely affect our business. AT&T is our largest advertiser reseller partner and was responsible for 31% of our total revenues for the three months ended March 31, 2011. In the second quarter of 2010, we entered
into an amendment to our agreement with AT&T which extends its term through June 30, 2015.

These advertisers may in
certain cases be subject to negotiated terms and conditions separate from those applied to online clients accepted and processed through our automated advertiser management platform. In some cases, the applicable contract terms may be the result of
legacy or industry association documentation or simply customized advertising solutions for large reseller partners and agencies. In any case, as a consequence of such varying terms and conditions, we may be subject to claims or credit risks that we
may otherwise mitigate more efficiently across our automated advertiser management platform.

These claims and risks may vary
depending on the nature of the aggregated client base. Among other claims, we may be subject to disputes based on third party tracking information or analysis. We may also be subject to differing credit profiles and risks based on the agency
relationship associated with these advertisers. For such advertisers, payment may be made on an invoice basis, unlike our retail platform which in many instances is paid in advance of the service. In some limited circumstances we may also have
accepted individual advertiser payment liability in place of liability of the advertising agency or media advisor.

We received
approximately 48% and 58% of our revenue from our five largest customers for the year ended December 31, 2010, and for the three months ended March 31, 2011, respectively, and the loss of one or more of these customers could adversely
impact our results of operations and financial condition.

Our five largest customers accounted for approximately 48% and
58% of our total revenues for the year ended December 31, 2010 and the three months ended March 31, 2011, respectively. AT&T is our largest customer and was responsible for 31% of our total revenues for the three months ended
March 31, 2011 and 52% of accounts receivable at March 31, 2011. In the second quarter of 2010, we entered into an amendment to our agreement with AT&T which extends its term through June 30, 2015. Certain of these customers are
not subject to long term contracts with us and are generally able to reduce advertising spending at any time and for any reason. A significant reduction in advertising spending by our largest customers, or the loss of one or more of these customers,
if not replaced by new customers or an increase in business from existing customers, would adversely affect revenues. This could have a material adverse effect on our results of operations and financial condition.

Our large customers have substantial negotiating leverage, which may require that we agree to terms and conditions that may have an adverse effect on
our business.

Our large customers have substantial purchasing power and leverage in negotiating contractual arrangements
with us. These customers may seek for us to develop additional features, may require penalties for failure to deliver such features, may seek discounted product or service pricing and may seek more favorable contractual terms. As we sell more
products and services to this class of customer, we may be required to agree to such terms and conditions. Such large customers also have substantial leverage in negotiating resolution of any disagreements or disputes than may arise. Any of the
foregoing factors could result in a material adverse effect on our business, financial condition and results of operations.

If some of our
customers experience financial distress, their weakened financial position could negatively affect our own financial position and results.

We have a diverse customer base and, at any given time, one or more customers may experience financial distress, file for bankruptcy protection or go out of business. If a customer with whom we do a
substantial amount of business experiences financial difficulty, it could delay or jeopardize the collection of accounts receivable, result in significant reductions in services provided by us and may have a material adverse effect on our results of
operations and liquidity.

We may incur liabilities for the activities of our advertisers, reseller partners, distribution partners and
other users of our services, which could adversely affect our business.

Many of our advertisement generation and
distribution processes are automated. In some cases, advertisers or reseller partners use our online tools and account management systems to create and submit advertiser listings and in other cases we create and submit advertising listing on behalf
of our advertisers or reseller partners. These advertiser listings are submitted in a bulk data feed or through the distribution partners user interface. Although we monitor our distribution partners on an ongoing basis primarily for traffic
quality, these partners control the distribution of the advertiser listings provided in the data feed or user interface submissions.



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We have a large number of distribution partners who display our advertiser listings on their
networks. Our advertiser listings are delivered to our distribution partners in an automated fashion through an XML data feed or data dump or through the distribution partners user interface. Our distribution partners are contractually
required to use the listings created by our advertiser customers in accordance with applicable laws and regulations and in conformity with the publication restrictions in our agreements, which are intended to promote the quality and validity of the
traffic provided to our advertisers. Nonetheless, we do not operationally control or manage these distribution partners and any breach of these agreements on the part of any distribution partner or its affiliates could result in liability for our
business. These agreements include indemnification obligations on the part of our distribution partners, but there is no guarantee that we would be able to collect against offending distribution partners or their affiliates in the event of a claim
under these indemnification provisions.

We do not conduct a manual editorial review of a substantial number of the advertiser
listings directly submitted by advertisers or reseller partners online, nor do we manually review the display of the vast majority of the advertiser listings by our distribution partners submitted to us by XML data feeds or data dumps or the
distribution partners user interface. Likewise, in cases where we provide editorial or value-added services for our large reseller partners or agencies, such as ad creation and optimization for local advertisers or landing pages and
micro-sites for pay-for-call customers, we rely on the content and information provided to us by these agents on behalf of their individual advertisers. We do not investigate the individual business activities of these advertisers other than the
information provided to us or in some cases review of advertiser websites. We may not successfully avoid liability for unlawful activities carried out by our advertisers or reseller partners and other users of our services or unpermitted uses of our
advertiser listings by distribution partners and their affiliates.

Our potential liability for unlawful activities of our
advertisers and other users of our services or unpermitted uses of our advertiser listings and advertising services and platform by distribution partners and reseller partners and agencies could require us to implement measures to reduce our
exposure to such liability, which may require us, among other things, to spend substantial resources, to discontinue certain service offerings or to terminate certain distribution partner relationships. For example, as a result of the actions of
advertisers in our network, we may be subject to private or governmental actions relating to a wide variety of issues, such as privacy, gambling, promotions, and intellectual property ownership and infringement. Under agreements with certain of our
larger distribution partners, we may be required to indemnify these distribution partners against liabilities or losses resulting from the content of our advertiser listings or resulting from third- party intellectual property infringement claims.
Although our advertisers agree to indemnify us with respect to claims arising from these listings, we may not be able to recover all or any of the liabilities or losses incurred by us as a result of the activities of our advertisers.

Our insurance policies may not provide coverage for liability arising out of activities of users of our services. In addition, our
reliance on some content and information provided to us by our large advertiser reseller partners and agencies may expose us to liability not covered by our insurance policies. Furthermore, we may not be able to obtain or maintain adequate insurance
coverage to reduce or limit the liabilities associated with our businesses. Any costs incurred as a result of such liability or asserted liability could have a material adverse effect on our business, operating results and financial condition.

If we do not maintain and grow a critical mass of advertisers and distribution partners, the value of our services could be adversely
affected.

Our success depends, in large part, on the maintenance and growth of a critical mass of advertisers and
distribution partners and a continued interest in our pay-for-call, performance-based advertising, telemarketing analytics and search marketing services. Advertisers will generally seek the most competitive return on investment from advertising and
marketing services. Distribution partners will also seek the most favorable payment terms available in the market. Advertisers and distribution partners may change providers or the volume of business with a provider, unless the product and terms are
competitive. In this environment, we must compete to acquire and maintain our network of advertisers and distribution partners.

If our business is unable to maintain and grow our base of advertisers, our current distribution partners may be discouraged from
continuing to work with us, and this may create obstacles for us to enter into agreements with new distribution partners. Our business also in part depends on certain of our large reseller partners and agencies to grow their base of advertisers as
these advertisers become increasingly important to our business and our ability to attract additional distribution partners and opportunities. Similarly, if our distribution network does not grow and does not continue to improve over time, current
and prospective advertisers and reseller partners and agencies may reduce or terminate this portion of their business with us. Any decline in the number of advertisers and distribution partners could adversely affect the value of our services.



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We are dependent upon the quality of mobile, online, offline and other traffic sources in our network to
provide value to our advertisers and the advertisers of our reseller partners, and any failure in our quality control could have a material adverse effect on the value of our services to our advertisers and adversely affect our revenues.

We utilize certain monitoring processes with respect to the quality of the mobile, online, offline and other traffic
sources that we deliver to our advertisers. Among the factors we seek to monitor are sources and causes of low quality phone calls such as unwanted telemarketer calls and clicks such as non-human processes, including robots, spiders or other
software, the mechanical automation of clicking, and other types of invalid clicks, click fraud, or click spam, the purpose of which is something other than to view the underlying content. Additionally, we also seek to identify other indicators
which may suggest that a user may not be targeted by or desirable to our advertisers. Even with such monitoring in place, there is a risk that a certain amount of low quality mobile, online, offline and other traffic or traffic that is deemed to be
less valuable by our advertisers will be delivered to such advertisers, which may be detrimental to those relationships. We have regularly refunded fees that our advertisers had paid to us which were attributed to low quality mobile, online, offline
and other traffic. If we are unable to stop or reduce low quality internet traffic and low quality phone calls, these refunds may increase. Low quality mobile, online, offline and other traffic may further prevent us from growing our base of
advertisers and cause us to lose relationships with existing advertisers, or become the target of litigation, both of which would adversely affect our revenues.

We depend on being able to secure enough phone numbers to support our advertisers and other users of our services and any obstacles that we face which prevent us from meeting this demand could
adversely affect our business.

We utilize phone numbers that we are able to secure for our pay-for-call, call tracking
and call analytics services. Our services that utilize phone numbers are designed to enable advertisers and other users of our services to utilize mobile, online and offline advertising and to help measure the effectiveness of mobile, online and
offline advertising campaigns. We secure a majority of our phone numbers through telecommunication carriers that we have contracted with and a smaller number through the 800 Service Management System, and such telecommunication carriers provide the
underlying telephone service. We are subject to the rules and guidelines established by the Federal Communications Commission as well as our telecommunication carriers. The Federal Communications Commission and our telecommunication carriers may
change the rules and guidelines for securing phone numbers or change the requirements for retaining the phone numbers we have already secured. As a result, we may not be able to secure or retain sufficient phone numbers needed for our services.

Our acquisition of certain automated voice and mobile advertising-based technologies is heavily reliant on vendors.

Certain voice and mobile advertising-based products that we acquired as part of our recent acquisition of Jingle Networks are heavily
reliant on vendors. The free directory product that we now provide relies on technology provided by third-party vendors that include voice recognition software and business, government and residence data listings. We cannot guarantee that the
technology and services provided by our third-party vendors will be of sufficient quality to meet the demands of our customers. Further, we cannot guarantee that the technologies and services will be available to us in the future on acceptable
terms, if at all. Any perception by our customers that our voice and mobile advertising-based products are incomplete or not of sufficient quality could lead to a loss in confidence by our customers, which in turn could lead to a decline in
revenues. If we are unable to continue maintaining, advancing and improving our voice and mobile advertising-based products, our operating results may be adversely affected.

We may be subject to intellectual property claims, which could adversely affect our financial condition and ability to use certain critical technologies, divert our resources and management attention
from our business operations and create uncertainty about ownership of technology essential to our business.

Our success
depends, in part, on our ability to protect our intellectual property and to operate without infringing on the intellectual property rights of others in the process. There can be no guarantee that any of our intellectual property will be adequately
safeguarded, or that it will not be challenged by third parties. We may be subject to patent infringement claims or other intellectual property infringement claims, including claims of trademark infringement in connection with our acquisition of
previously-owned Internet domain names and claims of copyright infringement with respect to certain of our proprietary websites that would be costly to defend and could limit our ability to use certain critical technologies.



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The expansion of our call advertising business increases the potential intellectual property
infringement claims we may be subject to. Jingle Networks, which we recently acquired, is subject to patent infringement claims which were unsuccessful at trial but which may be appealed and no assurances can be given as to their ultimate outcome.

Any patent or other intellectual property litigation could negatively impact our business by diverting resources and
management attention from other aspects of the business and adding uncertainty as to the ownership of technology, services and property that we view as proprietary and essential to our business. In addition, a successful claim of patent infringement
against us and our failure or inability to license the infringed or similar technology on reasonable terms, or at all, could prevent us from using critical technologies which could have a material adverse effect on our business.

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

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

Our acquisitions could divert managements attention, cause ownership dilution to our stockholders, cause our earnings to decrease and be difficult to integrate.

Our business strategy includes identifying, structuring, completing and integrating acquisitions. Acquisitions in the technology and
Internet sectors involve a high degree of risk. We may also be unable to find a sufficient number of attractive opportunities to meet our objectives which include revenue growth, profitability and competitive market share. Our acquired companies may
have histories of net losses and may expect net losses for the foreseeable future. Acquisitions are accompanied by a number of risks that could harm our business, operating results and financial condition:



| |  |  | We could experience a substantial strain on our resources, including time and money, and we may not be successful;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | Our managements attention could be diverted from our ongoing business concerns;
| | - |  | --------------------------------------------------------------------------------



| |  |  | While integrating new companies, we may lose key executives or other employees of these companies;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | We may issue shares of our Class B common stock as consideration for acquisitions which may result in ownership dilution to our stockholders;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We could fail to successfully integrate our financial and management controls, technology, reporting systems and procedures, or adequately expand,
train and manage our workforce;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We could experience customer dissatisfaction or performance problems with an acquired company or technology;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | We could become subject to unknown or underestimated liabilities of an acquired entity or incur unexpected expenses or losses from such acquisitions;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We could incur possible impairment charges related to goodwill or other intangible assets or other unanticipated events or circumstances, any of which
could harm our business; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We may be exposed to investigations and/or audits by federal, state or other taxing authorities.
| | - |  | ------------------------------------------------------------------------------------------------

Consequently, we might not be successful in integrating any acquired businesses, products or technologies, and might not achieve
anticipated revenue and cost benefits.

Our expanding international operations subject us to additional risks and uncertainties and we may
not be successful with our strategy to continue to expand such operations.

One potential area of growth for us is in
international markets. We have initiated operations, through our subsidiaries, in Ireland and the United Kingdom. Our international expansion and the integration of international operations present unique challenges and risks. Compliance with
complex foreign and U.S. laws and regulations that apply to our international operations increases our cost of doing business in international jurisdictions and could interfere with our ability to offer our products and services to one or more
countries or expose us or our employees to fines and penalties. Our continued international expansion also subjects us to increased foreign currency exchange rate risks and will require additional management attention and resources. We cannot assure
you that we will be successful in our international expansion. There are risks inherent in conducting business in international markets, including the need to localize our products and services to foreign customers preferences and customs,
difficulties in managing operations due to language barriers, distance, staffing and cultural differences, application of foreign laws and regulations to us, tariffs and other trade barriers, fluctuations in



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currency exchange rates, establishing management systems and infrastructures, reduced protection for intellectual property rights in some countries, changes in foreign political and economic
conditions, and potentially adverse tax consequences. Our failure to address these risks adequately could materially and adversely affect our business, revenue, results of operations and financial condition.

The loss of our senior management, including our founders, could harm our current and future operations and prospects.

We are heavily dependent upon the continued services of Russell C. Horowitz, our chairman and chief executive officer, and the other
members of our senior management team. Each member of our senior management team is an at-will employee and may voluntarily terminate his employment with us at any time with minimal notice. Russell C. Horowitz, Ethan A. Caldwell, Peter
Christothoulou and John Keister, our founders, each own shares of fully vested Class A common stock. Following any termination of employment, each of these employees would only be subject to a twelve-month non-competition and non-solicitation
obligation with respect to our customers and employees under our standard confidentiality agreement.

Further, as of
March 31, 2011, Russell C. Horowitz, Ethan A. Caldwell, Peter Christothoulou and John Keister together controlled 92% of the combined voting power of our outstanding capital stock. Their collective voting control is not tied to their continued
employment with Marchex. The loss of the services of any member of our senior management, including our founders, for any reason, or any conflict among our founders, could harm our current and future operations and prospects.

We may have difficulty retaining current personnel as well as attracting and retaining additional qualified, experienced, highly skilled personnel,
which could adversely affect the implementation of our business plan.

Our performance is largely dependent upon the
talents and efforts of highly skilled individuals. In order to fully implement our business plan, we will need to retain our current qualified personnel, as well as attract and retain additional qualified personnel. Thus, our success will in
significant part depend upon our retention of current personnel as well as the efforts of personnel not yet identified and upon our ability to attract and retain highly skilled managerial, engineering, sales and marketing personnel. We are also
dependent on managerial and technical personnel to the extent they may have knowledge or information about our businesses and technical systems that may not be known by our other personnel. There can be no assurance that we will be able to attract
and retain necessary personnel. The failure to hire and retain such personnel could adversely affect the implementation of our business plan.

If we are unable to obtain and maintain adequate insurance, our financial condition could be adversely affected in the event of uninsured or
inadequately insured loss or damage. Our ability to effectively recruit and retain qualified officers and directors may also be adversely affected if we experience difficulty in maintaining adequate directors and officers liability
insurance.

We may not be able to obtain and maintain insurance policies on terms affordable to us that would adequately
insure our business and property against damage, loss or claims by third parties. To the extent our business or property suffers any damages, losses or claims by third parties that are not covered or adequately covered by insurance, our financial
condition may be materially adversely affected.

We currently have directors and officers liability insurance. If
we are unable to maintain sufficient insurance as a public company to cover liability claims made against our officers and directors, we may not be able to retain or recruit qualified officers and directors to manage our company, which could have a
material adverse effect on our operations.

It may be difficult for us to retain or attract qualified officers and directors, which could
adversely affect our business and our ability to maintain the listing of our Class B common stock on the Nasdaq Global Select Market.

We may be unable to attract and retain qualified officers, directors and members of board committees required to provide for our effective management as a result of changes in the rules and regulations
which govern publicly-held companies, including, but not limited to, certifications from executive officers and requirements for financial experts on boards of directors. The perceived increased personal risk associated with these recent changes may
deter qualified individuals from accepting these roles. Further, applicable rules and regulations of the Securities and Exchange Commission and the Nasdaq Stock Market heighten the requirements for board or committee membership, particularly with
respect to an individuals independence from the corporation and level of experience in finance and accounting matters. We may have difficulty attracting and retaining directors with the requisite qualifications. If we are unable to attract and
retain qualified officers and directors, our business and our ability to maintain the listing of our shares of Class B common stock on the Nasdaq Global Select Market could be adversely affected.



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If we fail to maintain an effective system of internal controls, we may not be able to accurately report
our financial results or prevent fraud, which could harm our brand and operating results.

Effective internal controls are
necessary for us to provide reliable and accurate financial reports and effectively prevent fraud. We have devoted significant resources and time to comply with the internal control over financial reporting requirements of the Sarbanes-Oxley Act of
2002. In addition, Section 404 under the Sarbanes-Oxley Act of 2002 requires that we assess and our auditors attest to the effectiveness of our controls over financial reporting. Our current and future compliance with the annual internal
control report requirement will depend on the effectiveness of our financial reporting and data systems and controls across our operating subsidiaries. We expect these systems and controls to become increasingly complex to the extent that we
integrate acquisitions and our business grows. To effectively manage this growth, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. We cannot be certain that these
measures will ensure that we design, implement and maintain adequate controls over our financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation
or operation, could harm our operating results or cause us to fail to meet our financial reporting obligations. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a
negative effect on the trading price of our stock and our access to capital.

Impairment of goodwill and other intangible assets would
result in a decrease in earnings.

Current accounting rules require that goodwill and other intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. These rules also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events and circumstances considered in determining whether the carrying value of
amortizable intangible assets and goodwill may not be recoverable include, but are not limited to: significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry
or economic trends; or a significant decline in our stock price and/or market capitalization for a sustained period of time. To the extent such evaluation indicates that the useful lives of intangible assets are different than originally estimated,
the amortization period is reduced or extended and, accordingly, the quarterly amortization expense is increased or decreased. To the extent such evaluation indicates that the useful lives of intangible assets are different than originally
estimated, the amortization period is reduced or extended and, accordingly, amortization expense is increased or decreased.

We recorded a substantial non-cash impairment charge for goodwill and intangible assets during the fourth quarter of 2008 as a result of
the impact of the recent adverse economic environment including the deterioration in the equity and credit markets. We may be required to record future charge to earnings in our financial statements during the period in which any additional
impairment of our goodwill or amortizable intangible assets is determined. Any impairment charges or changes to the estimated amortization periods could have a material adverse effect on our financial results.

We may be required to establish a valuation allowance against our deferred income tax assets.

Factors in our ability to realize a tax benefit from our deferred income tax assets include tax attributes and operating results of
acquired businesses, the nature, extent and periods that temporary differences are expected to reverse and our expectations about future operating results. If we determine that all or a portion of our deferred income tax assets will not result in a
future tax benefit, a valuation allowance may be established with a corresponding charge to net income. Such charges may have a material adverse effect on our results of operations or financial condition. The likelihood of recording such a valuation
allowance may be impacted by our acquisitions, and increases during periods of economic downturn.

We may not be able to realize the
intended and anticipated benefits from our acquisitions of Internet domain names, which could affect the value of these acquisitions to our business and our ability to meet our financial obligations and targets.

We may not be able to realize the intended and anticipated benefits that we currently expect from our acquisitions of Internet domain
names. These intended and anticipated benefits include increasing our cash flow from operations, broadening our distribution offerings and delivering services that strengthen our advertiser relationships.

If the acquired assets are not integrated into our business as we anticipate, we may not be able to achieve these benefits or realize the
value paid for our acquisitions of Internet domain names, which could materially harm our business, financial condition and results of operations.



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We do not control the means by which users access our websites, and material changes to current
navigation practices or technologies or marketing practices or significant increases in our marketing costs could result in a material adverse effect on our business.

The success of our Publishing Network depends in large part upon consumer access to our websites. Consumers access our websites primarily through the following methods: directly accessing our websites by
typing descriptive keywords or keyword strings into the uniform resource locator (URL) address box of an Internet browser; accessing our websites by clicking on bookmarked websites; and accessing our websites through search engines and directories.

Each of these methods requires the use of a third party product or service, such as an Internet browser or search engine
application or directory. Internet browsers may provide alternatives to the URL address box to locate websites, and search engines may from time to time change and establish rules regarding the indexing and optimization of websites. We also market
certain websites through search engine applications. Historically, we have limited our search engine marketing to less than five leading search engines.

Product developments and market practices for these means of access to our websites are not within our control. We may experience a decline in traffic to our websites if third party browser technologies
or search engine methodologies and rules are changed to our disadvantage. We have experienced abrupt search engine algorithm and policy changes in the past. We expect the search engine applications we utilize to market and drive users to our
websites to continue to periodically change their algorithms, policies and technologies. These changes may result in an interruption in users ability to access our websites or impair our ability to maintain and grow the number of users who visit our
websites. We may also be forced to significantly increase marketing expenditures in the event that market prices for online advertising and paid-listings escalate. Any of these changes could have a material adverse effect on our business.

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

The Name Development,
Pike Street and AreaConnect asset acquisitions involved the acquisition of a large number of previously-owned Internet domain names. Furthermore, we have separately acquired and may acquire in the future additional previously-owned Internet domain
names. In some cases, these acquired names may have trademark significance that is not readily apparent to us or is not identified by us in the bulk purchasing process. As a result we may face demands by third party trademark owners asserting
infringement or dilution of their rights and seeking transfer of acquired Internet domain names under the Uniform Domain Name Dispute Resolution Policy administered by ICANN or actions under the U.S. Anti-Cybersquatting Consumer Protection Act.
Additionally, we display pay-for-call or pay-per-click listings on third party domain names and third party websites that are part of our distribution network, which also could subject us to a wide variety of civil claims including intellectual
property ownership and infringement.

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

Risks Relating to Our Business and Our Industry

If we are unable to compete in the highly competitive performance-based advertising and search marketing industries, we may experience reduced demand for our products and services.

We operate in a highly competitive and changing environment. We principally compete with other companies which offer services in the
following areas:



| |  |  | sales to advertisers of pay-for-call services;
| | - |  | ----------------------------------------------



| |  |  | sales to advertisers of pay-per-click services;
| | - |  | -----------------------------------------------



| |  |  | aggregation or optimization of online advertising for distribution through mobile and online search engines and applications, product shopping engines,
directories, websites or other offline outlets;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provision of local and vertical websites containing information and user feedback designed to attract users and help consumers make better, more
informed local decisions, while providing targeted advertising inventory for advertisers;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | delivery of pay-for-call advertising to end users or customers of advertisers through mobile and online destination websites or other offline
distribution outlets;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | delivery of online advertising to end users or customers of advertisers through mobile and online destination websites or other offline distribution
outlets;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | local search sales training;
| | - |  | ----------------------------



| |  |  | services and outsourcing of technologies that allow advertisers to manage their advertising campaigns across multiple networks and track the success of
these campaigns;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | third party domain monetization; and
| | - |  | ------------------------------------



| |  |  | sales to advertisers of call tracking, call analytics, and presence management services.
| | - |  | ----------------------------------------------------------------------------------------

Although we currently pursue a strategy that allows us to potentially partner with all relevant companies in the industry, there are
certain companies in the industry that may not wish to partner with us. Despite the fact that we currently work with several of our potential competitors, there are no guarantees that these companies will continue to work with us in the future.

We currently or potentially compete with a variety of companies, including Google, IAC/InterActiveCorp, Microsoft, Yahoo!,
WebVisible and ReachLocal. Many of these actual or perceived competitors also currently or may in the future have business relationships with us, particularly in distribution. However, such companies may terminate their relationships with us.
Furthermore, our competitors may be able to secure agreements with us on more favorable terms, which could reduce the usage of our services, increase the amount payable to our distribution partners, reduce total revenue and thereby have a material
adverse effect on our business, operating results and financial condition.

We expect competition to intensify in the future
because current and new competitors can enter our market with little difficulty. The barriers to entering our market are relatively low. In fact, many current Internet and media companies presently have the technical capabilities and advertiser
bases to enter the search marketing services industry. Further, if the consolidation trend continues among the larger media and search engine companies with greater brand recognition, the share of the market remaining for smaller search marketing
services providers could decrease, even though the number of smaller providers could continue to increase. These factors could adversely affect our competitive position.

Some of our competitors, as well as potential entrants into our market, may be better positioned to succeed in this market. They may have:



| |  |  | longer operating histories;
| | - |  | ---------------------------



| |  |  | more management experience;
| | - |  | ---------------------------



| |  |  | an employee base with more extensive experience;
| | - |  | ------------------------------------------------



| |  |  | better geographic coverage;
| | - |  | ---------------------------



| |  |  | larger customer bases;
| | - |  | ----------------------



| |  |  | greater brand recognition; and
| | - |  | ------------------------------



| |  |  | significantly greater financial, marketing and other resources.
| | - |  | ---------------------------------------------------------------

Currently, and in the future, as the use of the Internet and other mobile and online services increases, there will likely be larger,
more well-established and well-financed entities that acquire companies and/or invest in or form joint ventures in categories or countries of interest to us, all of which could adversely impact our business. Any of these trends could increase
competition and reduce the demand for any of our services.

We face competition from traditional media companies, and we may not be
included in the advertising budgets of large advertisers, which could harm our operating results.

In addition to Internet
companies, we face competition from companies that offer traditional media advertising opportunities. Most large advertisers have set advertising budgets, a very small portion of which is allocated to Internet advertising. We expect that large
advertisers will continue to focus most of their advertising efforts on traditional media. If we fail to convince these companies to spend a portion of their advertising budgets with us, or if our existing advertisers reduce the amount they spend on
our programs, our operating results would be harmed.

If we are not able to respond to the rapid technological change characteristic of our
industry, our products and services may cease to be competitive.

The market for our products and services is
characterized by rapid change in business models and technological infrastructure, and we will need to constantly adapt to changing markets and technologies to provide new and competitive products and services. If we are unable to ensure that our
users, advertisers, reseller partners, and distribution partners have a



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high-quality experience with our products and services, then they may become dissatisfied and move to competitors products and services. Accordingly, our future success will depend, in
part, upon our ability to develop and offer competitive products and services for both our target market and for applications in new markets. We may not, however, be able to successfully do so, and our competitors may develop innovations that render
our products and services obsolete or uncompetitive.

Our technical systems are vulnerable to interruption and damage that may be costly
and time-consuming to resolve and may harm our business and reputation.

A disaster could interrupt our services for an
indeterminate length of time and severely damage our business, prospects, financial condition and results of operations. Our systems and operations are vulnerable to damage or interruption from:



| |  |  | fire;
| | - |  | -----



| |  |  | floods;
| | - |  | -------



| |  |  | network failure;
| | - |  | ----------------



| |  |  | hardware failure;
| | - |  | -----------------



| |  |  | software failure;
| | - |  | -----------------



| |  |  | power loss;
| | - |  | -----------



| |  |  | telecommunications failures;
| | - |  | ----------------------------



| |  |  | break-ins;
| | - |  | ----------



| |  |  | terrorism, war or sabotage;
| | - |  | ---------------------------



| |  |  | computer viruses;
| | - |  | -----------------



| |  |  | denial of service attacks;
| | - |  | --------------------------



| |  |  | penetration of our network by unauthorized computer users and hackers and other similar events;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | natural disaster; and
| | - |  | ---------------------



| |  |  | other unanticipated problems.
| | - |  | -----------------------------

We may not have developed or implemented adequate protections or safeguards to overcome any of these events. We also may not have anticipated or addressed many of the potential events that could threaten
or undermine our technology network. Any of these occurrences could cause material interruptions or delays in our business, result in the loss of data or render us unable to provide services to our customers. In addition, if a person is able to
circumvent our security measures, he or she could destroy or misappropriate valuable information, including sensitive customer information, or disrupt our operations. We have deployed firewall hardware intended to thwart hacker attacks. Although we
maintain property insurance and business interruption insurance, our insurance may not be adequate to compensate us for all losses that may occur as a result of a catastrophic system failure or other loss, and our insurers may not be able or may
decline to do so for a variety of reasons.

If we fail to address these issues in a timely manner, we may lose the confidence
of our advertisers, reseller partners, and distribution partners, our revenue may decline and our business could suffer. In addition, as we expand our service offerings and enter into new business areas, we may be required to significantly modify
and expand our software and technology platform. If we fail to accomplish these tasks in a timely manner, our business and reputation will likely suffer.

We rely on third party technology, platforms, carriers, communications providers, and server and hardware providers, and a failure of service by these providers could adversely affect our business and
reputation.

We rely upon third party colocation providers to host our main servers. If these providers are unable to
handle current or higher volumes of use, experience any interruption in operations or cease operations for any reason or if we are unable to agree on satisfactory terms for continued hosting relationships, we would be forced to enter into a
relationship with other service providers or assume hosting responsibilities ourselves. If we are forced to switch hosting facilities, we may not be successful in finding an alternative service provider on acceptable terms or in hosting the computer
servers ourselves. We may also be limited in our remedies against these providers in the event of a failure of service. In the past, we have experienced short-term outages in the service maintained by one of our colocation providers.

We also rely on a select group of third party providers for components of our technology platform and support for our advertising and
call-based services, such as hardware and software providers, telecommunications carriers and Voice over Internet Protocol (VoIP) providers, credit card processors and domain name registrars. As a result, key operational resources of our business
are concentrated with a limited number of third party providers. A failure or limitation of service or available capacity by any of these third party providers could adversely affect our business and reputation. Furthermore, if any of these
significant providers are unable to provide the levels of service and dedicated resources over time that we required in our business, we may not be able to replace certain of these providers in a manner that is efficient, cost-effective or
satisfactory to our customers, and as a result our business could be materially and adversely affected.



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If our security measures are breached or are perceived as not being secure, we may lose advertisers,
reseller partners and distribution partners and we may incur significant legal and financial exposure.

We store and
transmit data and information about our advertisers, reseller partners, distribution partners and their respective users. We deploy security measures to protect this data and information, as do third parties we utilize to assist in data and
information storage. Our security measures and those of the third parties we partner with to assist in data and information storage may suffer breaches. Security breaches of our data storage systems or our third party colocation and technology
providers we utilize to store data and information relating to our advertisers, reseller partners, distribution partners and their respective users, could expose us to significant potential liability. In addition, security breaches, actual or
perceived, could result in the loss of advertisers, reseller partners and distribution partners that could potentially have an adverse effect on our business.

We may not be able to protect our intellectual property rights, which could result in our competitors marketing competing products and services utilizing our intellectual property and could adversely
affect our competitive position.

Our success and ability to compete effectively are substantially dependent upon our
internally developed and acquired technology and data resources, which we protect through a combination of copyright, trade secret, and patent and trademark law. To date, we acquired U.S. Patent Number 6,822,663 titled Transform Rule Generator
for Web-Based Markup Languages through our Voice Services transaction. We also own U.S. Patent Number 7,668,950 titled Automatically Updating Performance-Based Online Advertising System and Method, non-provisional U.S. Patent
Application Number 11/985,188 titled Method and System for Tracking Telephone Calls, non-provisional U.S. Patent Application Number 12/512,821 titled Facility for Reconciliation of Business Records Using Genetic Algorithms,
non-provisional U.S. Patent Application Number 12/829,372 titled System and Method to Direct Telephone Calls to Advertisers, non-provisional U.S. Patent Application Number 12/829,373 titled System and Method for Calling Advertised
Telephone Numbers on a Computing Device, non-provisional U.S. Patent Application Number 12/829,375 titled System and Method to Analyze Calls to Advertised Telephone Numbers, and non-provisional U.S Patent Application Number
12/844,488 titled Systems and Methods for Blocking Telephone Calls. In the future, additional patents may be filed with respect to internally developed or acquired technologies. Our industry is highly competitive and many individuals and
companies have sought to patent processes in the industry. We may decide not to protect certain intellectual properties or business methods which may later turn out to be significant to us. In addition, the patent process takes several years and
involves considerable expense. Further, patent applications and patent positions in our industry are highly uncertain and involve complex legal and factual questions due in part to the number of competing technologies. As a result, we may not be
able to successfully prosecute these patents, in whole or in part, or any additional patent filings that we may make in the future. We also depend on our trademarks, trade names and domain names. We may not be able to adequately protect our
technology and data resources. In addition, intellectual property laws vary from country to country, and it may be more difficult to protect our intellectual property in some foreign jurisdictions in which we may plan to enter. If we fail to obtain
and maintain patent or other intellectual property protection for our technology, our competitors could market competing products and services utilizing our technology.

Despite our efforts to protect our proprietary rights, unauthorized parties domestically and internationally may attempt to copy or otherwise obtain and use our services, technology and other intellectual
property. We cannot be certain that the steps we have taken will prevent any misappropriation or confusion among consumers and advertisers. If we are unable to protect our intellectual property rights from unauthorized use, our competitive position
could be adversely affected.

We may be involved in lawsuits to protect or enforce our patents, which could be expensive and time
consuming.

We may initiate patent litigation against third parties to protect or enforce our patent rights, and we may be
similarly sued by others. We may also become subject to interference proceedings conducted in the patent and trademark offices of various countries to determine the priority of inventions. The defense and prosecution, if necessary, of intellectual
property suits, interference proceedings and related legal and administrative proceedings is costly and may divert our technical and management personnel from their normal responsibilities. We may not prevail in any of these suits. An adverse
determination of any litigation or defense proceedings could put our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not being issued.



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Furthermore, because of the substantial amount of discovery required in connection with
intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, during the course of this kind of litigation, there could be public
announcements of the results of hearings, motions or other interim proceedings or developments in the litigation. If securities analysts or investors perceive these results to be negative, it could have an adverse effect on the trading price of our
Class B common stock.

Our quarterly results of operations might fluctuate due to seasonality, which could adversely affect our growth rate
and in turn the market price of our securities.

Our quarterly results have fluctuated in the past and may fluctuate in
the future due to seasonal fluctuations in the level of mobile and Internet usage. As is typical in our industry, the second and third quarters of the calendar year generally experience relatively lower usage than the first and fourth quarters. It
is generally understood that during the spring and summer months of the year, mobile and Internet usage is lower than during other times of the year, especially in comparison to the fourth quarter of the calendar year. The extent to which usage may
decrease during these off-peak periods is difficult to predict. Prolonged or severe decreases in usage during these periods may adversely affect our growth rate and in turn the market price of our securities. Additionally, the recent deterioration
in the economic conditions has resulted in many advertisers and reseller partners reducing advertising and marketing services budgets, which we expect will impact our quarterly results of operations in addition to the typical seasonality seen in our
industry.

We are susceptible to general economic conditions, and a downturn in advertising and marketing spending by advertisers could
adversely affect our operating results.

Our operating results will be subject to fluctuations based on general economic
conditions, in particular those conditions that impact advertiser-consumer transactions. Deterioration in economic conditions could cause decreases in or delays in advertising spending and reduce and/or negatively impact our short term ability to
grow our revenues. Further, any decreased collectability of accounts receivable or early termination of agreements due to deterioration in economic conditions could negatively impact our results of operations.

We depend on the growth of the Internet and mobile and Internet infrastructure for our future growth and any decrease in growth or anticipated growth
in mobile and Internet usage could adversely affect our business prospects.

Our future revenue and profits, if any,
depend upon the continued widespread use of the Internet as an effective commercial and business medium. Factors which could reduce the widespread use of the Internet include:



| |  |  | possible disruptions or other damage to the mobile, Internet or telecommunications infrastructure;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | failure of the individual networking infrastructures of our advertisers, reseller partners, and distribution partners to alleviate potential
overloading and delayed response times;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a decision by advertisers and consumers to spend more of their marketing dollars on offline programs;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | increased governmental regulation and taxation; and
| | - |  | ---------------------------------------------------



| |  |  | actual or perceived lack of security or privacy protection.
| | - |  | -----------------------------------------------------------

In particular, concerns over the security of transactions conducted on the Internet and the privacy of users, including the risk of identity theft, may inhibit the growth of Internet usage, especially
mobile and online commercial transactions. In order for the mobile and online commerce market to develop successfully, we and other market participants must be able to transmit confidential information, including credit card information, securely
over public networks. Any decrease in anticipated Internet growth and usage could have a material adverse effect on our business prospects.

We are exposed to risks associated with credit card fraud and credit payment, and we may continue to suffer losses as a result of fraudulent data or
payment failure by advertisers.

We have suffered losses and may continue to suffer losses as a result of payments made
with fraudulent credit card data. Our failure to control fraudulent credit card transactions could reduce our net revenue and gross margin and negatively impact our standing with applicable credit card authorization agencies. In addition, under
limited circumstances, we extend credit to advertisers who may default on their accounts payable to us or fraudulently charge-back amounts on their credit cards for services that have already been delivered by us.

Government regulation of the Internet may adversely affect our business and operating results.

Mobile and online search, e-commerce and related businesses face uncertainty related to future government regulation of the Internet
through the application of new or existing federal, state and international laws. Due to the rapid growth and widespread use of the Internet, legislatures at the federal and state level have enacted and may continue to enact various laws and
regulations relating to the Internet. Individual states may also enact consumer protection laws that are more restrictive than the ones that already exist.



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Furthermore, the application of existing laws and regulations to Internet companies remains
somewhat unclear. For example, as a result of the actions of advertisers in our network, we may be subject to existing laws and regulations relating to a wide variety of issues such as consumer privacy, gambling, sweepstakes, advertising,
promotions, defamation, pricing, taxation, financial market regulation, quality of products and services, computer trespass, spyware, adware, child protection and intellectual property ownership and infringement. In addition, it is not clear whether
existing laws that require licenses or permits for certain of our advertisers lines of business apply to us, including those related to insurance and securities brokerage, law offices and pharmacies. Existing federal and state laws that may
impact the growth and profitability of our business include, among others:



| |  |  | The Digital Millennium Copyright Act (DMCA) provides protection from copyright liability for online service providers that list or link to third party
websites. We currently qualify for the safe harbor under
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the DMCA; however, if it were determined that we did not meet the safe harbor requirements, we could be exposed to copyright infringement litigation,
which could be costly and time-consuming.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Childrens Online Privacy Protection Act (COPPA) restricts the distribution of certain materials deemed harmful to children and imposes
limitations on websites ability to collect personal information from minors. COPPA allows the Federal Trade Commission (FTC) to impose fines and penalties upon website operators whose sites do not fully comply with the laws requirements.
We do not currently offer any websites directed to children, nor do we collect personal data from children.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Protection of Children from Sexual Predators Act requires online service providers to report evidence of violations of federal child pornography
laws under certain circumstances.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Controlling the Assault of Non-Solicited Pornography and Marketing (CAN SPAM) Act of 2003 establishes requirements for those who send commercial
e-mails, spells out penalties for entities that transmit noncompliant commercial e-mail and/or whose products are advertised in noncompliant commercial e-mail and gives consumers the right to opt-out of receiving commercial e-mails. The majority of
the states also have adopted similar statutes governing the transmission of commercial e-mail. The FTC and the states, as applicable, are authorized to enforce the CAN-SPAM Act and the state-specific statutes, respectively. CAN-SPAM gives the
Department of Justice the authority to enforce its criminal sanctions. Other federal and state agencies can enforce the law against organizations under their jurisdiction, and companies that provide Internet access may sue violators as well.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Electronic Communications Privacy Act prevents private entities from disclosing Internet subscriber records and the contents of electronic
communications, subject to certain exceptions.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Computer Fraud and Abuse Act and other federal and state laws protect computer users from unauthorized computer access/hacking, and other actions
by third parties which may be viewed as a violation of privacy. Michigan and Utah child protection laws, designed to protect children under the age of 18 from receiving adult content via e-mail and other electronic forms of communication (e.g., cell
phones and IM). Both Michigan and Utah have developed lists of minors e-mail addresses based on parents and guardians submissions. Once an address has been on a list for 30 days, Web publishers are prohibited from sending the
address anything containing, or even linking to, advertising for a product or service that a minor is legally prohibited from purchasing or using, even if the owner of that address previously requested to receive the information. In addition,
senders need to match their own mailing lists against the state registries on at least a monthly basis, for which they must pay both Michigan and Utah a per-address fee. Courts may apply each of these laws in unintended and unexpected ways. As a
company that provides services over the Internet as well as call recording and call tracking services, we may be subject to an action brought under any of these or future laws.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Among the types of legislation currently being considered at the federal and state levels are consumer laws regulating for the use of certain types of
software applications or downloads and the use of cookies. These proposed laws are intended to target specific types of software applications often referred to as spyware, invasiveware or adware, and
may also cover certain applications currently used in the online advertising industry to serve and distribute advertisements. In addition, the FTC has sought inquiry regarding the implementation of a do-not-track requirement. Federal
legislation is also expected to be introduced that would regulate online behavioral advertising practices. If passed, these laws would impose new obligations for companies that use such software applications or technologies.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Many Internet services are automated, and companies such as ours may be unknowing conduits for illegal or
prohibited materials. It is possible that some courts may impose a strict liability standard or require such companies to monitor their customers conduct. Although we would not be responsible or involved in any way in such illegal conduct, it
is possible that we would somehow be held responsible for the actions of our advertisers or distribution partners.



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We may also be subject to costs and liabilities with respect to privacy issues. Several
companies have incurred penalties for failing to abide by the representations made in their public-facing privacy policies. In addition, several states have passed laws that require businesses to implement and maintain reasonable security procedures
and practices to protect sensitive personal information and to provide notice to consumers in the event of a security breach. Further, it is anticipated that additional federal and state privacy-related legislation will be enacted. Such legislation
could negatively affect our business.

In addition, foreign governments may pass laws which could negatively impact our
business and/or may prosecute us for violating existing laws. Such laws might include EU member country conforming legislation under applicable EU Privacy, eCommerce, Telecommunications and Data Protection Directives. Any costs incurred in
addressing foreign laws could negatively affect the viability of our business. Our exposure to this risk will increase to the extent we expand our operations internationally.

Federal and state regulation of telecommunications may adversely affect our business and operating results.

Subsidiaries of the Company provide information and analytics services to certain advertisers and reseller partners that may include information services. In connection therewith, the Company, through its
subsidiaries, obtains certain telecommunications products and services from carriers in order to deliver these packages of information and analytic services.

Telecommunications laws and regulations (and interpretations thereof) are evolving in response to rapid changes in the telecommunications industry. If our carrier partners were to be subject to any
changes in applicable law or regulation (or interpretations thereof), or additional taxes or surcharges, then we in turn may be subject to increased costs for their products and services or receive products and services that may be of less value to
our customers, which in turn could adversely affect our business and operating results. Furthermore, to the extent we offer call recording and pay-for-call services, we may be directly subject to certain telecommunications-related regulations.
Finally, in the event that any federal or state regulators were to expand the scope of applicable laws and regulations or their application to include certain end users and information service providers, then our business and operating results could
also be adversely affected.

The following existing and possible future federal and state laws could impact the growth and
profitability of our business:



| |  |  | The Communications Act of 1934, as amended by the Telecommunications Act of 1996 (the Act), and the regulations promulgated by the Federal
Communications Commission under Title II of the Act, may impose federal licensing, reporting and other regulatory obligations on the Company. To the extent we contract with and use the networks of voice over IP service providers, new legislation or
FCC regulation in this area could restrict our business, prevent us from offering service or increase our cost of doing business. There are an increasing number of regulations and rulings that specifically address access to commerce and
communications services on the Internet, including IP telephony. We are unable to predict the impact, if any, that future legislation, legal decisions or regulations concerning voice services offered via the Internet may have on our business,
financial condition, and results of operations.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The U.S. Congress, the FCC, state legislatures or state agencies may target, among other things, access or settlement charges, imposing taxes related
to Internet communications, imposing tariffs or other regulations based on encryption concerns, or the characteristics and quality of products and services that we may offer. Any new laws or regulations concerning these or other areas of our
business could restrict our growth or increase our cost of doing business.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The FCC has initiated a proceeding regarding the regulation of broadband services. The increasing growth of the broadband IP telephony market and
popularity of broadband IP telephony products and services heighten the risk that the FCC or other legislative bodies will seek to regulate broadband IP telephony and the Internet. In addition, large, established telecommunication companies may
devote substantial lobbying efforts to influence the regulation of the broadband IP telephony market, which may be contrary to our interests.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | There is risk that a regulatory agency will require us to conform to rules that are unsuitable for IP communications technologies or rules that cannot
be complied with due to the nature and efficiencies of IP routing, or are unnecessary or unreasonable in light of the manner in which we offer voice-related services such as call recording and pay-for-call services to our customers.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Federal and state telemarketing laws including the Telephone Consumer Protection Act, the Telemarketing Sales Rule, the Telemarketing Consumer Fraud
and Abuse Prevention Act and the rules and regulations promulgated thereunder.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Laws affecting telephone call recording and data protection, such as consent and personal data statutes. Under the federal Wiretap Act, at least one
party taking part in a call must be notified if the call is being recorded. Under this law, and most state laws, there is nothing illegal about one of the parties to a telephone call recording the conversation. However, several states (i.e.,
California, Connecticut, Florida, Illinois, Maryland, Massachusetts, Michigan, Montana, Nevada, New Hampshire, Pennsylvania and Washington) require that all parties consent when one party wants to record a telephone conversation. The telephone
recording laws in other states, like federal law, require only one party to be aware of the recording. A Wiretap Act violation is a Class D felony; the maximum authorized penalties for a violation of section 2511(1) of the Wiretap Act are
imprisonment of not more than five years and a fine under Title 18. Authorized fines are typically not more than $250,000 for individuals or $500,000 for an organization, unless there is a substantial loss. State laws impose similar penalties.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Communications Assistance for Law Enforcement Act may require that the Company undertake material modifications to its platforms and processes to
permit wiretapping and other access for law enforcement personnel.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Under various Orders of the Federal Communications Commission, the Company may be required to make material retroactive and prospective contributions
to funds intended to support Universal Service, Telecommunications Relay Service, Local Number Portability, the North American Numbering Plan and the budget of the Federal Communications Commission.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Laws in most states of the United States of America may require registration or licensing of one or more subsidiaries of the Company, and may impose
additional taxes, fees or telecommunications surcharges on the provision of the Companys services which the Company may not be able to pass through to customers.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Future regulation of search engines may adversely affect the commercial utility of our search marketing services.

The FTC, has reviewed the way in which search engines disclose paid placements or paid inclusion practices to Internet users. In 2002, the FTC issued guidance recommending that all search engine companies
ensure that all paid search results are clearly distinguished from non-paid results, that the use of paid inclusion is clearly and conspicuously explained and disclosed and that other disclosures are made to avoid misleading users about the possible
effects of paid placement or paid inclusion listings on search results. Such disclosures if ultimately mandated by the FTC or voluntarily made by us may reduce the desirability of our paid placement and paid inclusion services. We believe that some
users will conclude that paid search results are not subject to the same relevancy requirements as non-paid search results, and will view paid search results less favorably. If such FTC disclosure reduces the desirability of our paid placement and
paid inclusion services, and click-throughs of our paid search results decrease, our business could be adversely affected.

State and local governments may in the future be permitted to levy additional taxes on Internet access and electronic commerce transactions, which
could result in a decrease in the level of usage of our services. In addition, we may be required to pay additional income, sales, or other taxes.

On November 19, 2004, the federal government passed legislation placing a three-year ban on state and local governments imposition of new taxes on Internet access or electronic commerce
transactions. On October 31, 2007, this ban was extended for another seven years. Unless the ban is further extended, state and local governments may begin to levy additional taxes on Internet access and electronic commerce transactions upon
the legislations expiration in November 2014. An increase in taxes may make electronic commerce transactions less attractive for advertisers and businesses, which could result in a decrease in the level of usage of our services. Additionally,
from time to time, various state, federal and other jurisdictional tax authorities undertake reviews of the Company and the Companys filings. In evaluating the exposure associated with various tax filing positions, the Company on occasion
accrues charges for probable exposures. We cannot predict the outcome of any of these reviews.

Risks Relating to Ownership of our Common
Stock

Our Class B common stock prices have been and are likely to continue to be highly volatile.

The trading prices of our Class B common stock have been and are likely to continue to be highly volatile and subject to wide
fluctuations. Since our initial public offering, the closing sale price of our Class B common stock on the Nasdaq Global Select Market (formerly, the Nasdaq National Market) ranged from $3.00 to $26.14 per share through March31, 2011. Our stock
prices may fluctuate in response to a number of events and factors, which may be the result of our business strategy or events beyond our control, including:



| |  |  | developments concerning proprietary rights, including patents, by us or a competitor;
| | - |  | -------------------------------------------------------------------------------------



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| |  |  | announcements by us or our competitors of significant contracts, acquisitions, financings, commercial relationships, joint ventures or capital
commitments;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | registration of additional shares of Class B common stock in connection with acquisitions;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | actual or anticipated fluctuations in our operating results;
| | - |  | ------------------------------------------------------------



| |  |  | developments concerning our various strategic collaborations;
| | - |  | -------------------------------------------------------------



| |  |  | lawsuits initiated against us or lawsuits initiated by us;
| | - |  | ----------------------------------------------------------



| |  |  | announcements of acquisitions or technical innovations;
| | - |  | -------------------------------------------------------



| |  |  | potential loss or reduced contributions from distribution partners, reseller partners and agencies, or advertisers;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | changes in earnings estimates or recommendations by analysts;
| | - |  | -------------------------------------------------------------



| |  |  | changes in the market valuations of similar companies;
| | - |  | ------------------------------------------------------



| |  |  | changes in our industry and the overall economic environment;
| | - |  | -------------------------------------------------------------



| |  |  | volume of shares of Class B common stock available for public sale, including upon conversion of Class A common stock or upon exercise of stock
options;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Class B common stock repurchases under our previously announced share repurchase program;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | sales and purchases of stock by us or by our stockholders, including sales by certain of our executive officers and directors pursuant to written
pre-determined selling and purchase plans under Rule 10b5-1 of the Securities Exchange Act of 1934; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | short sales, hedging and other derivative transactions on shares of our Class B common stock.
| | - |  | ---------------------------------------------------------------------------------------------

In addition, the stock market in general, and the Nasdaq Global Select Market and the market for mobile and online commerce companies in
particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the listed companies. These broad market and industry factors may seriously harm the market price
of our Class B common stock, regardless of our operating performance. In the past, following periods of volatility in the market, securities class action litigation has often been instituted against these companies.

Litigation against us, whether or not judgment is entered against us, could result in substantial costs and potentially economic loss,
and a diversion of our managements attention and resources, any of which could seriously harm our financial condition. Additionally, there can be no assurance that an active trading market of our Class B common stock will be sustained.

Our founders control the outcome of stockholder voting, and there may be an adverse effect on the price of our Class B common stock due to
the disparate voting rights of our Class A common stock and our Class B common stock.

As of March 31, 2011,
Russell C. Horowitz, Ethan A. Caldwell, Peter Christothoulou and John Keister, our founders, beneficially owned 100% of the outstanding shares of our Class A common stock, which shares represented 91% of the combined voting power of all
outstanding shares of our capital stock. These founders together control 92% of the combined voting power of all outstanding shares of our capital stock. The holders of our Class A common stock and Class B common stock have identical rights
except that the holders of our Class B common stock are entitled to one vote per share, while holders of our Class A common stock are entitled to twenty-five votes per share on all matters to be voted on by stockholders. This concentration of
control could be disadvantageous to our other stockholders with interests different from those of these founders. This difference in the voting rights of our Class A common stock and Class B common stock could adversely affect the price of our
Class B common stock to the extent that investors or any potential future purchaser of our shares of Class B common stock give greater value to the superior voting rights of our Class A common stock.

Further, as long as these founders have a controlling interest, they will continue to be able to elect all or a majority of our board of
directors and generally be able to determine the outcome of all corporate actions requiring stockholder approval. As a result, these founders will be in a position to continue to control all fundamental matters affecting our company, including any
merger involving, sale of substantially all of the assets of, or change in control of, our company. The ability of these founders to control our company may result in our Class B common stock trading at a price lower than the price at which such
stock would trade if these founders did not have a controlling interest in us. This control may deter or prevent a third party from acquiring us which could adversely affect the market price of our Class B common stock.



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Anti-takeover provisions may limit the ability of another party to acquire us, which could cause our
stock price to decline.

Our certificate of incorporation, as amended, our by-laws and Delaware law contain provisions
that could discourage, delay or prevent a third party from acquiring us, even if doing so may be beneficial to our stockholders. In addition, these provisions could limit the price investors would be willing to pay in the future for shares of our
Class B common stock. The following are examples of such provisions in our certificate of incorporation, as amended, or our by-laws:



| |  |  | the authorized number of our directors can be changed only by a resolution of our board of directors;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | advance notice is required for proposals that can be acted upon at stockholder meetings;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | there are limitations on who may call stockholder meetings; and
| | - |  | ---------------------------------------------------------------



| |  |  | our board of directors is authorized, without prior stockholder approval, to create and issue blank check preferred stock.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------

We are also subject to Section 203 of the Delaware General Corporation Law, which provides, subject to
enumerated exceptions, that if a person acquires 15% or more of our voting stock, the person is an interested stockholder and may not engage in business combinations with us for a period of three years from the time the
person acquired 15% or more of our voting stock. The application of Section 203 of the Delaware General Corporation Law could have the effect of delaying or preventing a change of control of our company.

We may not be able to continue to pay dividends on our common stock in the future which could impair the value of such stock.

Under Delaware law, dividends to stockholders may be made only from the surplus of a company, or, in certain situations, from the net
profits for the current fiscal year or the fiscal year before which the dividend is declared. We have initiated and paid a quarterly dividend on our common stock since November 2006. However, there is no assurance that we will be able to pay
dividends in the future. Our ability to pay dividends in the future will depend on our financial results, liquidity and financial condition.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

During the first quarter of 2011, share repurchase activity was as follows:



|                                     |  |                                |        |  |                            |   |      |                                                                             |  |  |                                                                                                              |  |  |  |           | 
|------------------------------------ |  | ------------------------------ | ------ |  | -------------------------- | - | ---- | --------------------------------------------------------------------------- |  |  | ------------------------------------------------------------------------------------------------------------ |  |  |  | --------- | 
|Period                               |  | Total number ofsharespurchased |        |  | Averageprice paidper share |   |      | Total number ofsharespurchased aspart of publiclyannounced plansor
programs |  |  | Maximum number ofshares (or
approximatedollar value) that may yetbe purchased under theplans or programs (1) | 
|January 1, 2011  January 31, 2011   |  |                                | 4,100  |  |                            | $ | 9.63 |                                                                             |  |  | 4,100                                                                                                        |  |  |  | 1,014,364 | 
|February 1, 2011  February 28, 2011 |  |                                | 7,022  |  |                            | $ | 9.23 |                                                                             |  |  | 7,022                                                                                                        |  |  |  | 1,007,342 | 
|March 1, 2011  March 31, 2011       |  |                                | 18,249 |  |                            | $ | 8.07 |                                                                             |  |  | 18,249                                                                                                       |  |  |  | 989,093   | 
|                                     |  |                                |        |  |                            |   |      |                                                                             |  |  |                                                                                                              |  |  |  |           | 
|Total Class B Common Shares          |  |                                | 29,371 |  |                            | $ | 8.57 |                                                                             |  |  | 29,371                                                                                                       |  |  |  | 989,093   | 



|(1) | We have established a share repurchase program which currently authorizes the Company to repurchase up to 11 million shares in the aggregate (less shares
previously repurchased under the share repurchase program) of the Companys Class B common stock. No shares will be knowingly purchased from company insiders or their affiliates. The timing and actual number of shares repurchased will depend on
a variety of factors including price, corporate and regulatory requirements, capital availability, and other market conditions. This stock repurchase program does not have an expiration date and may be expanded, limited or terminated at any time
without prior notice.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item 6. | Exhibits
|------- | --------

Exhibits:



|        |  |                                                           
|------- |  | ----------------------------------------------------------
|31(i)  |  | Certification of CEO pursuant to Rule 13a-14(a)/15d-14(a).
|31(ii) |  | Certification of CFO pursuant to Rule 13a-14(a)/15d-14(a).
|32.1  |  | Certification of CEO pursuant to Section 1350.            
|32.2  |  | Certification of CFO pursuant to Section 1350.            





| | Filed herewith.
|- | ---------------

| | Furnished herewith.
|-- | -------------------



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SIGNATURE

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



MARCHEX, INC.By:

/S/    MICHAEL M.
MILLERName:

Michael M. MillerTitle:

Senior VP Accounting and Corporate Controller
(Principal Accounting Officer)


May 10, 2011



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