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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 September 30, 2010
| | --- | ---------------------------------------------

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 November 4, 2010
|Class A common stock, par value $.01 per share |  | 10,503,591                     
|Class B common stock, par value $.01 per share |  | 24,554,150                     









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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 |    |      | 16 | 
|Item 3.   |  | Quantitative and Qualitative Disclosures about Market Risk                            |    |      | 32 | 
|Item 4.   |  | Controls and Procedures                                                               |    |      | 32 | 
|          |  | Part IIOther Information                                                             |    |      |    | 
|Item 1.   |  | Legal Proceedings                                                                     |    |      | 33 | 
|Item 1A.  |  | Risk Factors                                                                          |    |      | 33 | 
|Item 2.   |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |    |      | 48 | 
|Item 6.   |  | Exhibits                                                                              |    |      | 49 | 
|SIGNATURE |  |                                                                                       | 50 |     



2



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Part IFinancial Information



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

MARCHEX, INC. AND SUBSIDIARIES

Condensed
Consolidated Balance Sheets

(unaudited)



|                                               |  |                  |              |   |                   |   |              |  
|---------------------------------------------- |  | ---------------- | ------------ | - | ----------------- | - | ------------ | -
|                                               |  | December 31,2009 |              |   | September 30,2010 |  
|Assets                                         |  |                  |              |   |                   |   |              |  
|Current assets:                                |  |                  |              |   |                   |   |              |  
|Cash and cash equivalents                      |  | $                | 33,638,002   |   |                   | $ | 32,003,763   |  
|Trade accounts receivable, net                 |  |                  | 14,783,429   |   |                   |   | 20,736,743   |  
|Prepaid expenses and other current assets      |  |                  | 3,463,430    |   |                   |   | 3,840,893    |  
|Refundable taxes                               |  |                  | 5,380,029    |   |                   |   | 6,061,571    |  
|Deferred tax assets                            |  |                  | 950,477      |   |                   |   | 1,042,317    |  
|                                               |  |                  |              |   |                   |   |              |  
|Total current assets                           |  |                  | 58,215,367   |   |                   |   | 63,685,287   |  
|Property and equipment, net                    |  |                  | 5,051,717    |   |                   |   | 4,818,774    |  
|Deferred tax assets                            |  |                  | 52,690,910   |   |                   |   | 50,538,512   |  
|Intangible and other assets, net               |  |                  | 3,667,398    |   |                   |   | 2,398,934    |  
|Goodwill                                       |  |                  | 35,438,289   |   |                   |   | 35,346,712   |  
|Intangible assets from acquisitions, net       |  |                  | 4,309,478    |   |                   |   | 2,189,999    |  
|                                               |  |                  |              |   |                   |   |              |  
|Total assets                                   |  | $                | 159,373,159  |   |                   | $ | 158,978,218  |  
|                                               |  |                  |              |   |                   |   |              |  
|Liabilities and Stockholders Equity           |  |                  |              |   |                   |   |              |  
|                                               |  |                 
|Current liabilities:                           |  |                  |              |   |                   |   |              |  
|Accounts payable                               |  | $                | 8,763,090    |   |                   | $ | 11,835,851   |  
|Accrued expenses and other current liabilities |  |                  | 6,158,966    |   |                   |   | 5,842,153    |  
|Deferred revenue                               |  |                  | 2,020,728    |   |                   |   | 1,599,980    |  
|                                               |  |                  |              |   |                   |   |              |  
|Total current liabilities                      |  |                  | 16,942,784   |   |                   |   | 19,277,984   |  
|Other non-current liabilities                  |  |                  | 1,005,444    |   |                   |   | 1,671,206    |  
|                                               |  |                  |              |   |                   |   |              |  
|Total liabilities                              |  |                  | 17,948,228   |   |                   |   | 20,949,190   |  
|                                               |  |                 
|Stockholders equity:                          |  |                  |              |   |                   |   |              |  
|Class A common stock                           |  |                  | 111,317      |   |                   |   | 107,661      |  
|Class B common stock                           |  |                  | 251,939      |   |                   |   | 247,685      |  
|Treasury stock                                 |  |                  | (3,204,884   | ) |                   |   | (530,849     | )
|Additional paid-in capital                     |  |                  | 281,952,605  |   |                   |   | 279,578,838  |  
|Accumulated deficit                            |  |                  | (137,686,046 | ) |                   |   | (141,374,307 | )
|                                               |  |                  |              |   |                   |   |              |  
|Total stockholders equity                     |  |                  | 141,424,931  |   |                   |   | 138,029,028  |  
|                                               |  |                  |              |   |                   |   |              |  
|Total liabilities and stockholders equity     |  | $                | 159,373,159  |   |                   | $ | 158,978,218  |  
|                                               |  |                  |              |   |                   |   |              |  

See accompanying notes to condensed consolidated financial statements.



3



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MARCHEX, INC. AND
SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited)



|                                                                                                    |  |                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|--------------------------------------------------------------------------------------------------- |  | ------------------------------ | ---------- | - | ------------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                    |  | Nine Months EndedSeptember 30, |            |   | Three Months EndedSeptember 30, |  
|                                                                                                    |  | 2009                           |            |   | 2010                            |   |            | 2009 |  |   | 2010       |  
|Revenue                                                                                             |  | $                              | 69,823,816 |   |                                 | $ | 69,590,175 |      |  | $ | 22,171,794 |   |  | $ | 24,194,841 |  
|                                                                                                    |  |                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Expenses:                                                                                           |  |                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Service costs (1)                                                                                   |  |                                | 34,934,455 |   |                                 |   | 40,909,245 |      |  |   | 12,048,245 |   |  |   | 14,604,200 |  
|Sales and marketing (1)                                                                             |  |                                | 14,485,213 |   |                                 |   | 10,605,457 |      |  |   | 3,213,946  |   |  |   | 3,183,374  |  
|Product development (1)                                                                             |  |                                | 10,969,807 |   |                                 |   | 12,482,042 |      |  |   | 3,369,290  |   |  |   | 4,193,428  |  
|General and administrative (1)                                                                      |  |                                | 12,055,096 |   |                                 |   | 12,809,459 |      |  |   | 3,997,361  |   |  |   | 4,683,639  |  
|Amortization of intangible assets from acquisitions (2)                                             |  |                                | 4,680,879  |   |                                 |   | 2,119,479  |      |  |   | 1,211,328  |   |  |   | 704,106    |  
|                                                                                                    |  |                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Total operating expenses                                                                            |  |                                | 77,125,450 |   |                                 |   | 78,925,682 |      |  |   | 23,840,170 |   |  |   | 27,368,747 |  
|Gain on sales and disposals of intangible assets, net                                               |  |                                | 2,832,968  |   |                                 |   | 4,650,182  |      |  |   | 1,048,113  |   |  |   | 2,632,634  |  
|                                                                                                    |  |                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Loss from operations                                                                                |  |                                | (4,468,666 | ) |                                 |   | (4,685,325 | )    |  |   | (620,263   | ) |  |   | (541,272   | )
|Other income (expense):                                                                             |  |                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Interest income                                                                                     |  |                                | 41,686     |   |                                 |   | 55,556     |      |  |   | 13,016     |   |  |   | 17,891     |  
|Interest and line of credit expense                                                                 |  |                                | (72,202    | ) |                                 |   | (79,894    | )    |  |   | (26,709    | ) |  |   | (27,256    | )
|Other                                                                                               |  |                                | 13,091     |   |                                 |   | 158,226    |      |  |   | 50         |   |  |   | 111,968    |  
|                                                                                                    |  |                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Total other income (expense)                                                                        |  |                                | (17,425    | ) |                                 |   | 133,888    |      |  |   | (13,643    | ) |  |   | 102,603    |  
|                                                                                                    |  |                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Loss before provision for income taxes                                                              |  |                                | (4,486,091 | ) |                                 |   | (4,551,437 | )    |  |   | (633,906   | ) |  |   | (438,669   | )
|Income tax expense (benefit)                                                                        |  |                                | (2,387,821 | ) |                                 |   | (863,176   | )    |  |   | (1,376,830 | ) |  |   | 54,202     |  
|                                                                                                    |  |                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss)                                                                                   |  |                                | (2,098,270 | ) |                                 |   | (3,688,261 | )    |  |   | 742,924    |   |  |   | (492,871   | )
|Dividends paid to participating securities                                                          |  |                                | (137,035   | ) |                                 |   | (146,229   | )    |  |   | (46,576    | ) |  |   | (54,540    | )
|                                                                                                    |  |                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) applicable to common stockholders                                                 |  | $                              | (2,235,305 | ) |                                 | $ | (3,834,490 | )    |  | $ | 696,348    |   |  | $ | (547,411   | )
|                                                                                                    |  |                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Basic and diluted net income (loss) per share applicable to Class A and Class B common stockholders |  | $                              | (0.07      | ) |                                 | $ | (0.12      | )    |  | $ | 0.02       |   |  | $ | (0.02      | )
|Dividends paid per share                                                                            |  | $                              | 0.06       |   |                                 | $ | 0.06       |      |  | $ | 0.02       |   |  | $ | 0.02       |  
|Shares used to calculate basic net income (loss) per share applicable to common stockholders        |  |                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Class A                                                                                             |  |                                | 10,889,326 |   |                                 |   | 10,725,333 |      |  |   | 10,869,216 |   |  |   | 10,556,988 |  
|Class B                                                                                             |  |                                | 22,971,777 |   |                                 |   | 22,037,273 |      |  |   | 22,724,209 |   |  |   | 21,948,520 |  
|Shares used to calculate diluted net income (loss) per share applicable to common stockholders      |  |                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Class A                                                                                             |  |                                | 10,889,326 |   |                                 |   | 10,725,333 |      |  |   | 10,869,216 |   |  |   | 10,556,988 |  
|Class B                                                                                             |  |                                | 33,861,103 |   |                                 |   | 32,762,606 |      |  |   | 33,930,390 |   |  |   | 32,505,508 |  
|(1) Excludes amortization of intangible assets from acquisitions                                    |  |                                |            |   |                                 |   |            |      |  |   |            |   | 
|(2) Components of amortization of intangible assets from acquisitions:                              |  |                                |            |   |                                 |   |            |      | 
|Service costs                                                                                       |  | $                              | 4,636,435  |   |                                 | $ | 2,119,479  |      |  | $ | 1,211,328  |   |  | $ | 704,106    |  
|General and administrative                                                                          |  |                                | 44,444     |   |                                 |   | -          |      |  |   | -          |   |  |   | -          |  
|                                                                                                    |  |                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Total                                                                                               |  | $                              | 4,680,879  |   |                                 | $ | 2,119,479  |      |  | $ | 1,211,328  |   |  | $ | 704,106    |  
|                                                                                                    |  |                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  

See accompanying notes to condensed consolidated financial statements.



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MARCHEX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited)



|                                                                                |  |                                |            |   |      |   |            |  
|------------------------------------------------------------------------------- |  | ------------------------------ | ---------- | - | ---- | - | ---------- | -
|                                                                                |  | Nine Months EndedSeptember 30, |           
|                                                                                |  | 2009                           |            |   | 2010 |  
|Cash flows from operating activities:                                           |  |                                |            |   |      |   |            |  
|Net loss                                                                        |  | $                              | (2,098,270 | ) |      | $ | (3,688,261 | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                                |            |   |      |   |            |  
|Amortization and depreciation                                                   |  |                                | 9,404,409  |   |      |   | 5,991,304  |  
|Leasehold improvement incentive                                                 |  |                                | -          |   |      |   | 779,100    |  
|Gain on sales of fixed assets, net                                              |  |                                | (615       | ) |      |   | (198       | )
|Gain on sales and disposals of intangible assets, net                           |  |                                | (2,832,968 | ) |      |   | (4,650,182 | )
|Allowance for doubtful accounts and merchant advertiser credits                 |  |                                | 563,729    |   |      |   | 988,936    |  
|Stock-based compensation                                                        |  |                                | 7,316,570  |   |      |   | 7,906,255  |  
|Deferred income taxes                                                           |  |                                | 3,579,470  |   |      |   | 2,060,558  |  
|Excess tax benefit related to stock options                                     |  |                                | (68,827    | ) |      |   | -          |  
|Change in certain assets and liabilities, net of acquisition:                   |  |                                |            |   |      |   |            |  
|Trade accounts receivable, net                                                  |  |                                | 8,061,003  |   |      |   | (6,942,250 | )
|Refundable taxes                                                                |  |                                | (4,145,758 | ) |      |   | (1,208,053 | )
|Prepaid expenses, other current assets and restricted cash                      |  |                                | 399,030    |   |      |   | (1,425,984 | )
|Accounts payable                                                                |  |                                | (4,811,731 | ) |      |   | 3,052,390  |  
|Accrued expenses and other current liabilities                                  |  |                                | (1,601,431 | ) |      |   | 358,987    |  
|Deferred revenue                                                                |  |                                | (178,838   | ) |      |   | (420,750   | )
|Other non current liabilities                                                   |  |                                | (13,164    | ) |      |   | 665,762    |  
|                                                                                |  |                                |            |   |      |   |            |  
|Net cash provided by operating activities                                       |  |                                | 13,572,609 |   |      |   | 3,467,614  |  
|Cash flows from investing activities:                                           |  |                                |            |   |      |   |            |  
|Purchases of property and equipment                                             |  |                                | (1,391,536 | ) |      |   | (2,727,614 | )
|Proceeds from sales of property and equipment                                   |  |                                | 615        |   |      |   | 198        |  
|Proceeds from sales of intangible assets                                        |  |                                | 2,925,677  |   |      |   | 4,652,208  |  
|Purchases of intangibles and changes in other non-current assets                |  |                                | 18,577     |   |      |   | (65,599    | )
|                                                                                |  |                                |            |   |      |   |            |  
|Net cash provided by investing activities                                       |  |                                | 1,553,333  |   |      |   | 1,859,193  |  
|Cash flows from financing activities:                                           |  |                                |            |   |      |   |            |  
|Capital lease obligation principal payments                                     |  |                                | (30,730    | ) |      |   | (6,161     | )
|Excess tax benefit related to stock options                                     |  |                                | 68,827     |   |      |   | -          |  
|Common stock dividend payments                                                  |  |                                | (2,180,971 | ) |      |   | (2,114,763 | )
|Repurchase of Class B common stock                                              |  |                                | (7,501,226 | ) |      |   | (4,882,930 | )
|Proceeds from exercises of stock options                                        |  |                                | 89,906     |   |      |   | 30,458     |  
|Proceeds from employee stock purchase plan                                      |  |                                | 32,384     |   |      |   | 12,350     |  
|                                                                                |  |                                |            |   |      |   |            |  
|Net cash used in financing activities                                           |  |                                | (9,521,810 | ) |      |   | (6,961,046 | )
|                                                                                |  |                                |            |   |      |   |            |  
|Net increase (decrease) in cash and cash equivalents                            |  |                                | 5,604,132  |   |      |   | (1,634,239 | )
|Cash and cash equivalents at beginning of period                                |  |                                | 27,418,396 |   |      |   | 33,638,002 |  
|                                                                                |  |                                |            |   |      |   |            |  
|Cash and cash equivalents at end of period                                      |  | $                              | 33,022,528 |   |      | $ | 32,003,763 |  
|                                                                                |  |                                |            |   |      |   |            |  
|Supplemental disclosure of cash flow information:                               |  |                                |            |   |      |   |            |  
|Cash paid during the period for income taxes, net of refunds                    |  | $                              | 77,914     |   |      | $ | (1,651,963 | )
|                                                                                |  |                                |            |   |      |   |            |  

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 and nine months ended September 30, 2010 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2010, or for any other period. The balance sheet at December 31, 2009 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, 2009 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. The Companys purchase accounting resulted in all assets and liabilities of acquired businesses being recorded at their estimated fair
values on the acquisition dates. 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 year to conform to the
current year presentation.

The Companys condensed consolidated financial statements presented include the condensed
consolidated balance sheets as of December 31, 2009 and September 30, 2010, the condensed consolidated statements of operations for the three and nine months ended September 30, 2009 and 2010 and the condensed consolidated statements
of cash flows for the nine months ended September 30, 2009 and 2010.

(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, 2009 filed with the SEC.

Recently Issued Accounting Pronouncements

In October 2009, the FASB issued Accounting Standards Update (ASU) 2009No. 13 Multiple-Deliverable Revenue
Arrangements, which amends FASB ASC 605 Revenue Recognition. This provides amendments to the criteria for separating deliverables, measuring and allocating arrangement consideration to one or more units of accounting. This update
establishes a selling price hierarchy for determining the selling price of a deliverable. ASU 2009No. 13 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The
Company is required to and plans to adopt the provisions of this update beginning in the first quarter of 2011. The Company is currently assessing the impact of the adoption of ASU 2009No. 13.



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Revenues

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



|                                  |  |                                |            |  |                                 |   |            |      |  |   |            |  |  |   |            | 
|--------------------------------- |  | ------------------------------ | ---------- |  | ------------------------------- | - | ---------- | ---- |  | - | ---------- |  |  | - | ---------- | 
|                                  |  | Nine months endedSeptember 30, |            |  | Three months endedSeptember 30, |  
|                                  |  | 2009                           |            |  | 2010                            |   |            | 2009 |  |   | 2010       | 
|Partner and Other Revenue Sources |  | $                              | 45,270,588 |  |                                 | $ | 49,894,781 |      |  | $ | 15,899,331 |  |  | $ | 17,999,797 | 
|Proprietary Traffic Sources       |  |                                | 24,553,228 |  |                                 |   | 19,695,394 |      |  |   | 6,272,463  |  |  |   | 6,195,044  | 
|                                  |  |                                |            |  |                                 |   |            |      |  |   |            |  |  |   |            | 
|Total Revenue                     |  | $                              | 69,823,816 |  |                                 | $ | 69,590,175 |      |  | $ | 22,171,794 |  |  | $ | 24,194,841 | 
|                                  |  |                                |            |  |                                 |   |            |      |  |   |            |  |  |   |            | 

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

The Companys proprietary traffic revenues are generated from the Companys portfolio of owned
Web sites which are monetized with pay-per-click listings that are relevant to the Web sites, as well as other forms of advertising, including call-based advertising units, banner advertising and sponsorships. When an online user navigates to one of
the Companys Web sites and 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:



|                               |  |                                |           |  |                                 |   |           |      |  |   |           |  |  |   |           | 
|------------------------------ |  | ------------------------------ | --------- |  | ------------------------------- | - | --------- | ---- |  | - | --------- |  |  | - | --------- | 
|                               |  | Nine months endedSeptember 30, |           |  | Three months endedSeptember 30, |  
|                               |  | 2009                           |           |  | 2010                            |   |           | 2009 |  |   | 2010      | 
|Service costs                  |  | $                              | 317,561   |  |                                 | $ | 608,304   |      |  | $ | 120,505   |  |  | $ | 223,672   | 
|Sales and marketing            |  |                                | 1,222,037 |  |                                 |   | 602,995   |      |  |   | 239,528   |  |  |   | 221,901   | 
|Product development            |  |                                | 478,925   |  |                                 |   | 740,553   |      |  |   | 180,493   |  |  |   | 280,377   | 
|General and administrative     |  |                                | 5,298,047 |  |                                 |   | 5,954,403 |      |  |   | 1,785,936 |  |  |   | 2,199,285 | 
|                               |  |                                |           |  |                                 |   |           |      |  |   |           |  |  |   |           | 
|Total stock-based compensation |  | $                              | 7,316,570 |  |                                 | $ | 7,906,255 |      |  | $ | 2,326,462 |  |  | $ | 2,925,235 | 
|                               |  |                                |           |  |                                 |   |           |      |  |   |           |  |  |   |           | 

The per share fair value of stock options granted during the three and nine months ended September 30,
2009 and 2010 was determined on the date of grant using the Black-Scholes option-pricing model unless the stock options are subject to certain service and market conditions, in which case the Company uses other fair value models. The following
weighted average assumptions were used in determining the fair value of option grants for the periods presented:



|                         |  |                                |      |   |                                 |  |      |      |  |  |      |   |  |  |      |  
|------------------------ |  | ------------------------------ | ---- | - | ------------------------------- |  | ---- | ---- |  |  | ---- | - |  |  | ---- | -
|                         |  | Nine months endedSeptember 30, |      |   | Three months endedSeptember 30, | 
|                         |  | 2009                           |      |   | 2010                            |  |      | 2009 |  |  | 2010 |  
|Expected life (in years) |  |                                | 3.6  |   |                                 |  | 4.5  |      |  |  | 3.5  |   |  |  | 4.0  |  
|Risk-free interest rate  |  |                                | 1.58 | % |                                 |  | 1.71 | %    |  |  | 1.88 | % |  |  | 1.00 | %
|Expected volatility      |  |                                | 64   | % |                                 |  | 66   | %    |  |  | 66   | % |  |  | 68   | %
|Expected dividend yield  |  |                                | 1.1  | % |                                 |  | 1.1  | %    |  |  | 1.1  | % |  |  | 1.1  | %

In May 2010, the
Companys Board of Directors approved an amendment to the Companys 2003 Amended and Restated Stock Incentive Plan (the Plan) which provides for the grant of restricted stock units to eligible participants under the Plan.

In May 2010, the Companys Compensation Committee of the Board of Directors (the Compensation
Committee) approved stock option grants of 157,500 and restricted stock grants of 315,000 to certain executive officers. The stock options vest 25% on the first annual anniversary of the grant date and 1/12thof the remainder will vest quarterly thereafter for the following
three years. The



7



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##### Table of Contents

restricted shares will vest 25% on each of the first, second, third and fourth annual anniversaries of the grant date. The fair value of these awards is $2.0 million and is being recognized over
their respective vesting periods.

In May 2010, the Compensation Committee also approved performance based equity awards to
certain executive officers which included 405,000 stock option grants and grants of 135,000 restricted stock units. Each restricted stock unit represents the right to receive one share of the Companys Class B common stock upon satisfaction of
certain vesting considerations. These performance based awards have vesting based on certain service and market conditions. These performance based awards were issued in three separate tranches and each successive tranche will vest on the later of
(a) the 12, 21, or 30 month anniversary of the grant date, respectively, and (b) the Companys Class B common stock upon reaching certain average stock price targets for each tranche. The fair value of these performance based equity
awards is being recognized over their explicit service periods.

Stock option activity during the nine months ended
September 30, 2010 is summarized as follows:



|                                  |  |        |           |   |                                |   |       |                                                     |  |  |                          |  |  |   |           | 
|--------------------------------- |  | ------ | --------- | - | ------------------------------ | - | ----- | --------------------------------------------------- |  |  | ------------------------ |  |  | - | --------- | 
|                                  |  | Shares |           |   | Weighted averageexercise price |   |       | Weighted averageremainingcontractual term(in years) |  |  | Aggregateintrinsic value | 
|Balance at December 31, 2009      |  |        | 4,701,151 |   |                                | $ | 9.59  |                                                     |  |  | 5.61                     |  |  | $ | 1,669,404 | 
|Options granted (1)               |  |        | 1,294,750 |   |                                |   | 5.05  |                                                     |  |  |                          |  |  |   |           | 
|Options exercised                 |  |        | (5,437    | ) |                                |   | 3.29  |                                                     |  |  |                          |  |  |   |           | 
|Options expired                   |  |        | (221,038  | ) |                                |   | 12.97 |                                                     |  |  |                          |  |  |   |           | 
|Options forfeited                 |  |        | (178,483  | ) |                                |   | 7.46  |                                                     |  |  |                          |  |  |   |           | 
|                                  |  |        |           |   |                                |   |       |                                                     |  |  |                          |  |  |   |           | 
|Balance at September 30, 2010 (1) |  |        | 5,590,943 |   |                                | $ | 8.52  |                                                     |  |  | 6.95                     |  |  | $ | 2,529,193 | 
|                                  |  |        |           |   |                                |   |       |                                                     |  |  |                          |  |  |   |           | 



|(1) | Includes 405,000 options that have vesting based on certain service and market conditions.
|--- | ------------------------------------------------------------------------------------------

Restricted stock awards and restricted stock units activity during the nine months ended September 30, 2010 is summarized as
follows:



|                                                       |  |        |           |   |                                      |   |      | 
|------------------------------------------------------ |  | ------ | --------- | - | ------------------------------------ | - | ---- | 
|                                                       |  | Shares |           |   | Weighted averagegrant datefair value |  
|Awarded and unvested balance at December 31, 2009      |  |        | 2,541,802 |   |                                      | $ | 8.99 | 
|Granted (1)                                            |  |        | 908,500   |   |                                      |   | 5.05 | 
|Vested                                                 |  |        | (553,802  | ) |                                      |   | 8.64 | 
|Forfeited                                              |  |        | (40,500   | ) |                                      |   | 3.91 | 
|                                                       |  |        |           |   |                                      |   |      | 
|Awarded and unvested balance at September 30, 2010 (1) |  |        | 2,856,000 |   |                                      | $ | 7.87 | 



|(1) | Includes 135,000 restricted stock units which entitle the holder to receive one share of the Companys Class B common stock upon satisfaction of certain 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 and nine months ended September 30, 2009 and 2010:



|                                                                                     |  |                                |           |  |                                 |   |           |      |  |   |           |  |  |   |           | 
|------------------------------------------------------------------------------------ |  | ------------------------------ | --------- |  | ------------------------------- | - | --------- | ---- |  | - | --------- |  |  | - | --------- | 
|                                                                                     |  | Nine months endedSeptember 30, |           |  | Three months endedSeptember 30, |  
|                                                                                     |  | 2009                           |           |  | 2010                            |   |           | 2009 |  |   | 2010      | 
|Total stock-based compensation included in net income (loss)                         |  | $                              | 7,317,000 |  |                                 | $ | 7,906,000 |      |  | $ | 2,326,000 |  |  | $ | 2,925,000 | 
|Income tax benefit related to stock-based compensation included in net income (loss) |  | $                              | 2,163,000 |  |                                 | $ | 2,186,000 |      |  | $ | 670,000   |  |  | $ | 822,000   | 



8



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(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.

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.

The provisions of FASB ASC
260 (previously FSP EITF 03-6-1) became effective for the Company on January 1, 2009, under this method 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 loss per share for the periods ended:



|                                                                                                  |  |                                      |            |   |                                      |   |            |         |  |   |            |   |  |   |            |  
|------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ---------- | - | ------------------------------------ | - | ---------- | ------- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                  |  | Nine months endedSeptember 30, 2009  |            |   | Nine months endedSeptember 30, 2010  |  
|                                                                                                  |  | Class A                              |            |   | Class B                              |   |            | Class A |  |   | Class B    |  
|Numerator:                                                                                        |  |                                      |            |   |                                      |   |            |         |  |   |            |   |  |   |            |  
|Net loss                                                                                          |  | $                                    | (718,847   | ) |                                      | $ | (1,379,423 | )       |  | $ | (1,255,278 | ) |  | $ | (2,432,983 | )
|Dividends paid to participating securities                                                        |  |                                      | -          |   |                                      |   | (137,035   | )       |  |   | -          |   |  |   | (146,229   | )
|                                                                                                  |  |                                      |            |   |                                      |   |            |         |  |   |            |   |  |   |            |  
|Net loss applicable to common stockholders                                                        |  | $                                    | (718,847   | ) |                                      | $ | (1,516,458 | )       |  | $ | (1,255,278 | ) |  | $ | (2,579,212 | )
|                                                                                                  |  |                                      |            |  
|Denominator:                                                                                      |  |                                      |            |   |                                      |   |            |         |  |   |            |   |  |   |            |  
|Weighted average number of shares outstanding used to calculate basic net loss per share          |  |                                      | 10,889,326 |   |                                      |   | 22,971,777 |         |  |   | 10,725,333 |   |  |   | 22,037,273 |  
|                                                                                                  |  |                                      |            |   |                                      |   |            |         |  |   |            |   |  |   |            |  
|Basic net loss per share applicable to common stockholders                                        |  | $                                    | (0.07      | ) |                                      | $ | (0.07      | )       |  | $ | (0.12      | ) |  | $ | (0.12      | )
|                                                                                                  |  |                                     
|                                                                                                  |  | Three months endedSeptember 30, 2009 |            |   | Three months endedSeptember 30, 2010 |  
|                                                                                                  |  | Class A                              |            |   | Class B                              |   |            | Class A |  |   | Class B    |  
|Numerator:                                                                                        |  |                                      |            |   |                                      |   |            |         |  |   |            |   |  |   |            |  
|Net income (loss)                                                                                 |  | $                                    | 225,305    |   |                                      | $ | 517,619    |         |  | $ | (177,786   | ) |  | $ | (315,085   | )
|Dividends paid to participating securities                                                        |  |                                      |            |   |                                      |   | (46,576    | )       |  |   | -          |   |  |   | (54,540    | )
|                                                                                                  |  |                                      |            |   |                                      |   |            |         |  |   |            |   |  |   |            |  
|Net income (loss) applicable to common stockholders                                               |  | $                                    | 225,305    |   |                                      | $ | 471,043    |         |  | $ | (177,786   | ) |  | $ | (369,625   | )
|                                                                                                  |  |                                      |            |  
|Denominator:                                                                                      |  |                                      |            |   |                                      |   |            |         |  |   |            |   |  |   |            |  
|Weighted average number of shares outstanding used to calculate basic net income (loss) per share |  |                                      | 10,869,216 |   |                                      |   | 22,724,209 |         |  |   | 10,556,988 |   |  |   | 21,948,520 |  
|                                                                                                  |  |                                      |            |   |                                      |   |            |         |  |   |            |   |  |   |            |  
|Basic net income (loss) per share applicable to common stockholders                               |  | $                                    | 0.02       |   |                                      | $ | 0.02       |         |  | $ | (0.02      | ) |  | $ | (0.02      | )



9



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##### Table of Contents



|                                                                                                    |  |                                      |            |   |                                      |   |            |         |  |   |            |   |  |   |            |  
|--------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ---------- | - | ------------------------------------ | - | ---------- | ------- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                    |  | Nine months endedSeptember 30, 2009  |            |   | Nine months endedSeptember 30, 2010  |  
|                                                                                                    |  | Class A                              |            |   | Class B                              |   |            | Class A |  |   | Class B    |  
|Numerator:                                                                                          |  |                                      |            |   |                                      |   |            |         |  |   |            |   |  |   |            |  
|Net loss                                                                                            |  | $                                    | (718,847   | ) |                                      | $ | (1,379,423 | )       |  | $ | (1,255,278 | ) |  | $ | (2,432,983 | )
|Dividends paid to participating securities                                                          |  |                                      | -          |   |                                      |   | (137,035   | )       |  |   | -          |   |  |   | (146,229   | )
|Reallocation of net loss for Class A shares as a result of conversion of Class A to Class B shares  |  |                                      |            |   |                                      |   | (718,847   | )       |  |   |            |   |  |   | (1,255,278 | )
|                                                                                                    |  |                                      |            |   |                                      |   |            |         |  |   |            |   |  |   |            |  
|Net loss applicable to common stockholders                                                          |  | $                                    | (718,847   | ) |                                      | $ | (2,235,305 | )       |  | $ | (1,255,278 | ) |  | $ | (3,834,490 | )
|                                                                                                    |  |                                      |            |  
|Denominator:                                                                                        |  |                                      |            |   |                                      |   |            |         |  |   |            |   |  |   |            |  
|Weighted average number of shares outstanding used to calculate basic net loss per share            |  |                                      | 10,889,326 |   |                                      |   | 22,971,777 |         |  |   | 10,725,333 |   |  |   | 22,037,273 |  
|Conversion of Class A to Class B common shares outstanding                                          |  |                                      |            |   |                                      |   | 10,889,326 |         |  |   |            |   |  |   | 10,725,333 |  
|Weighted average number of shares outstanding used to calculate diluted net loss per share          |  |                                      | 10,889,326 |   |                                      |   | 33,861,103 |         |  |   | 10,725,333 |   |  |   | 32,762,606 |  
|                                                                                                    |  |                                      |            |   |                                      |   |            |         |  |   |            |   |  |   |            |  
|Diluted net loss per share applicable to common stockholders                                        |  | $                                    | (0.07      | ) |                                      | $ | (0.07      | )       |  | $ | (0.12      | ) |  | $ | (0.12      | )
|                                                                                                    |  |                                      |            |   |                                      |   |            |         |  |   |            |   |  |   |            |  
|                                                                                                    |  |                                     
|                                                                                                    |  | Three months endedSeptember 30, 2009 |            |   | Three months endedSeptember 30, 2010 |  
|                                                                                                    |  | Class A                              |            |   | Class B                              |   |            | Class A |  |   | Class B    |  
|Numerator:                                                                                          |  |                                      |            |   |                                      |   |            |         |  |   |            |   |  |   |            |  
|Net income (loss)                                                                                   |  | $                                    | 225,305    |   |                                      | $ | 517,619    |         |  | $ | (177,786   | ) |  | $ | (315,085   | )
|Dividends paid to participating securities                                                          |  |                                      | -          |   |                                      |   | (46,576    | )       |  |   | -          |   |  |   | (54,540    | )
|Reallocation of net loss for Class A shares as a result of conversion of Class A to Class B shares  |  |                                      | -          |   |                                      |   | 225,305    |         |  |   | -          |   |  |   | (177,786   | )
|                                                                                                    |  |                                      |            |   |                                      |   |            |         |  |   |            |   |  |   |            |  
|Net income (loss) applicable to common stockholders                                                 |  | $                                    | 225,305    |   |                                      | $ | 696,348    |         |  | $ | (177,786   | ) |  | $ | (547,411   | )
|                                                                                                    |  |                                      |            |  
|Denominator:                                                                                        |  |                                      |            |   |                                      |   |            |         |  |   |            |   |  |   |            |  
|Weighted average number of shares outstanding used to calculate basic net loss per share            |  |                                      | 10,869,216 |   |                                      |   | 22,724,209 |         |  |   | 10,556,988 |   |  |   | 21,948,520 |  
|Conversion of Class A to Class B common shares outstanding                                          |  |                                      | -          |   |                                      |   | 10,869,216 |         |  |   | -          |   |  |   | 10,556,988 |  
|Weighted average stock options and warrants and common shares subject to repurchase or cancellation |  |                                      | -          |   |                                      |   | 336,965    |         |  |   | -          |   |  |   |            |  
|                                                                                                    |  |                                      |            |   |                                      |   |            |         |  |   |            |   |  |   |            |  
|Weighted average number of shares outstanding used to calculate diluted net income (loss) per share |  |                                      | 10,869,216 |   |                                      |   | 33,930,390 |         |  |   | 10,556,988 |   |  |   | 32,505,508 |  
|                                                                                                    |  |                                      |            |   |                                      |   |            |         |  |   |            |   |  |   |            |  
|Diluted net income (loss) per share applicable to common stockholders                               |  | $                                    | 0.02       |   |                                      | $ | 0.02       |         |  | $ | (0.02      | ) |  | $ | (0.02      | )

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 loss per share excludes the following because their effect would be anti-dilutive:



| |  |  | For the three and nine months ended September 30, 2009, outstanding options to acquire 4,007,959 and 4,645,528 shares of Class B common stock with
a weighted average exercise price of $11.18 and $9.92 per share, respectively. For the
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



10



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| | three and nine months ended September 30, 2010, outstanding options to acquire 4,810,941 and 4,483,907 shares of Class B common stock with a weighted average exercise price of $9.37 and
$9.89 per share, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For the three and nine months ended September 30, 2009, 2,344,504 shares of unvested Class B restricted common shares at September 30, 2009
issued to employees and in connection with acquisitions. For the three and nine months ended September 30, 2010, 2,721,000 shares of unvested Class B restricted common shares at September 30, 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 and nine months ended September 30, 2010, 405,000 stock options and 135,000 restricted stock units of performance based awards until
certain service and market conditions are met. These performance based awards were excluded from the denominator of the computation of basic net loss per share.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(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 and nine months ended
September 30, 2009 and 2010.

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



|             |  |                                |    |   |                                 |  |    |      |  |  |      |   |  |  |    |  
|------------ |  | ------------------------------ | -- | - | ------------------------------- |  | -- | ---- |  |  | ---- | - |  |  | -- | -
|             |  | Nine months endedSeptember 30, |    |   | Three months endedSeptember 30, | 
|             |  | 2009                           |    |   | 2010                            |  |    | 2009 |  |  | 2010 |  
|Advertiser A |  |                                | 11 | % |                                 |  | *  |      |  |  | 12   | % |  |  | *  |  
|Advertiser B |  |                                | 22 | % |                                 |  | 23 | %    |  |  | 23   | % |  |  | 20 | %
|Advertiser D |  |                                | 11 | % |                                 |  | *  |      |  |  | 12   | % |  |  | *  |  



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

Advertiser A and B are also distribution partners.

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



|             |  |  |  |  |  |  |  |                     |  |  |                      |   |  |  |    |  
|------------ |  |  |  |  |  |  |  | ------------------- |  |  | -------------------- | - |  |  | -- | -
|             |  |  |  |  |  |  |  | At December 31,2009 |  |  | At September 30,2010 |  
|Advertiser A |  |  |  |  |  |  |  |                     |  |  | 11                   | % |  |  | *  |  
|Advertiser B |  |  |  |  |  |  |  |                     |  |  | 43                   | % |  |  | 44 | %

(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):



|                |  |                                |     |   |                                 |  |     |      |  |  |      |   |  |  |     |  
|--------------- |  | ------------------------------ | --- | - | ------------------------------- |  | --- | ---- |  |  | ---- | - |  |  | --- | -
|                |  | Nine months endedSeptember 30, |     |   | Three months endedSeptember 30, | 
|                |  | 2009                           |     |   | 2010                            |  |     | 2009 |  |  | 2010 |  
|United States   |  |                                | 99  | % |                                 |  | 96  | %    |  |  | 99   | % |  |  | 95  | %
|Canada          |  |                                | *   |   |                                 |  | 4   | %    |  |  | *    |   |  |  | 4   | %
|Other countries |  |                                | *   |   |                                 |  | *   |      |  |  | *    |   |  |  | *   |  
|                |  |                                |     |   |                                 |  |     |      |  |  |      |   |  |  |     |  
|                |  |                                | 100 | % |                                 |  | 100 | %    |  |  | 100  | % |  |  | 100 | %
|                |  |                                |     |   |                                 |  |     |      |  |  |      |   |  |  |     |  



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



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(7) Property and Equipment

Property and equipment consisted of the following:



|                                                |  |                     |             |   |                       |   |             |  
|----------------------------------------------- |  | ------------------- | ----------- | - | --------------------- | - | ----------- | -
|                                                |  | At December 31,2009 |             |   | At September 30, 2010 |  
|Computer and other related equipment            |  | $                   | 9,169,886   |   |                       | $ | 10,231,047  |  
|Purchased and internally developed software     |  |                     | 6,436,820   |   |                       |   | 6,194,913   |  
|Furniture and fixtures                          |  |                     | 936,170     |   |                       |   | 1,118,695   |  
|Leasehold improvements                          |  |                     | 1,210,415   |   |                       |   | 1,634,260   |  
|                                                |  |                     |             |   |                       |   |             |  
|                                                |  | $                   | 17,753,291  |   |                       | $ | 19,178,915  |  
|Less: accumulated depreciation and amortization |  |                     | (12,701,574 | ) |                       |   | (14,360,141 | )
|                                                |  |                     |             |   |                       |   |             |  
|Property and equipment, net                     |  | $                   | 5,051,717   |   |                       | $ | 4,818,774   |  
|                                                |  |                     |             |   |                       |   |             |  

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 $868,000 and $738,000 for the three months ended September 30, 2009 and 2010, respectively, and was $2.9
million and $2.3 million for the nine months ended September 30, 2009 and 2010, 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. The Company 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 service providers. Future minimum payments are approximately as follows:



|                       |  |                           |            |  |                             |   |           |       |  |   |            | 
|---------------------- |  | ------------------------- | ---------- |  | --------------------------- | - | --------- | ----- |  | - | ---------- | 
|                       |  | Facilitiesoperatingleases |            |  | Othercontractualobligations |   |           | Total | 
|2010                   |  | $                         | 318,239    |  |                             | $ | 647,435   |       |  | $ | 965,674    | 
|2011                   |  |                           | 1,409,230  |  |                             |   | 2,196,399 |       |  |   | 3,605,629  | 
|2012                   |  |                           | 1,593,537  |  |                             |   | 1,238,804 |       |  |   | 2,832,341  | 
|2013                   |  |                           | 1,769,788  |  |                             |   | 175,350   |       |  |   | 1,945,138  | 
|2014                   |  |                           | 1,840,062  |  |                             |   | -         |       |  |   | 1,840,062  | 
|2015 and after         |  |                           | 6,397,143  |  |                             |   | -         |       |  |   | 6,397,143  | 
|                       |  |                           |            |  |                             |   |           |       |  |   |            | 
|Total minimum payments |  | $                         | 13,327,999 |  |                             | $ | 4,257,988 |       |  | $ | 17,585,987 | 
|                       |  |                           |            |  |                             |   |           |       |  |   |            | 

In June 2009, the Company entered into a lease agreement for office facilities in Seattle, Washington which
commenced in the fourth quarter of 2009 and expires on March 31, 2018. In the third quarter of 2010, the lessor paid $779,000 towards certain leasehold improvements which the Company accounted for as a lease incentive and is amortizing as a
reduction of rent expense over the lease term.

In May 2010, the Company entered into a lease agreement for office facilities
in New York, New York which commenced in the second quarter of 2010 and expires in March 2018. Future minimum payments related to these new facilities are approximately as follows: $2,000 for the remainder of 2010, $209,000 in 2011, $243,000 in
2012, $249,000 in 2013, $273,000 in 2014, and $978,000 in aggregate thereafter.

Rent expense incurred by the Company was
approximately $410,000 and $414,000 for the three months ended September 30, 2009 and 2010, respectively, and was $1.2 million and $1.3 million for the nine months ended September 30, 2009 and 2010, respectively.



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(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). The Credit Agreement matures and all outstanding borrowings are due in April 2011. 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. As of September 30, 2010, 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 reviews of the Company and its tax filings. In evaluating the exposure associated with various tax filing
positions, the Company on occasion accrues for uncertain tax positions. The Company adjusts these contingencies in light of changing facts and circumstances, such as the outcome of tax audits.

The Company does not have a material amount of unrecognized tax benefits. There were no changes to the amount of unrecognized tax
benefits during the three and nine months ended September 30, 2010. The Company believes any adjustments that may ultimately be required as a result of any of these reviews will not be material to the financial statements. The Company will
continue to evaluate its unresolved uncertain tax positions as of each balance sheet date to ensure appropriate accounting treatment.

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.

(11) Intangible Assets from Acquisitions

Intangible assets from acquisitions consisted of the following:



|                                  |  |                          |            |  |                          |   |             |     |  |   |           | 
|--------------------------------- |  | ------------------------ | ---------- |  | ------------------------ | - | ----------- | --- |  | - | --------- | 
|                                  |  | As of December 31, 2009  |           
|                                  |  | Gross Carrying Amount    |            |  | Accumulated Amortization |   |             | Net | 
|Advertiser relationship           |  | $                        | 11,340,000 |  |                          | $ | (11,340,000 | )   |  | $ |          | 
|Distribution partner relationship |  |                          | 3,100,000  |  |                          |   | (3,100,000  | )   |  |   |          | 
|Non-compete agreements            |  |                          | 10,360,000 |  |                          |   | (10,360,000 | )   |  |   |          | 
|Trademarks/domains                |  |                          | 42,436,650 |  |                          |   | (38,414,950 | )   |  |   | 4,021,700 | 
|Acquired technology               |  |                          | 16,900,000 |  |                          |   | (16,612,222 | )   |  |   | 287,778   | 
|                                  |  |                          |            |  |                          |   |             |     |  |   |           | 
|                                  |  | $                        | 84,136,650 |  |                          | $ | (79,827,172 | )   |  | $ | 4,309,478 | 
|                                  |  |                          |            |  |                          |   |             |     |  |   |           | 
|                                  | 
|                                  |  | As of September 30, 2010 |           
|                                  |  | Gross Carrying Amount    |            |  | Accumulated Amortization |   |             | Net | 
|Advertiser relationship           |  | $                        | 11,340,000 |  |                          | $ | (11,340,000 | )   |  | $ |          | 
|Distribution partner relationship |  |                          | 3,100,000  |  |                          |   | (3,100,000  | )   |  |   |          | 
|Non-compete agreements            |  |                          | 10,360,000 |  |                          |   | (10,360,000 | )   |  |   |          | 
|Trademarks/domains                |  |                          | 42,253,179 |  |                          |   | (40,063,180 | )   |  |   | 2,189,999 | 
|Acquired technology               |  |                          | 16,900,000 |  |                          |   | (16,900,000 | )   |  |   |          | 
|                                  |  |                          |            |  |                          |   |             |     |  |   |           | 
|                                  |  | $                        | 83,953,179 |  |                          | $ | (81,763,180 | )   |  | $ | 2,189,999 | 
|                                  |  |                          |            |  |                          |   |             |     |  |   |           | 



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Amortizable intangible
assets are amortized on a straight-line basis over their useful lives. Amortization expense incurred by the Company was approximately $1.2 million and $704,000 for the three months ended September 30, 2009 and 2010, respectively, and was $4.7
million and $2.1 million for the nine months ended September 30, 2009 and 2010, respectively. Based upon the current amount of intangible assets subject to amortization, the estimated amortization expense for the next five years is as follows:
$468,000 for the remainder of 2010, $1.2 million in 2011, and $476,000 in 2012, and $0 in 2013 and thereafter.

(12) Goodwill

Changes in the carrying amount of goodwill for the three months ended September 30, 2010 are as follows:



|                                 |  |   |            |  
|-------------------------------- |  | - | ---------- | -
|Balance as of December 31, 2009  |  | $ | 35,438,289 |  
|Other                            |  |   | (91,577    | )
|                                 |  |   |            |  
|Balance as of September 30, 2010 |  | $ | 35,346,712 |  
|                                 |  |   |            |  

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 indicators of impairment of the Companys intangible assets have been identified to date in 2010. 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 31,2009 |             |   | September 30,2010 |  
|Internet domain names                   |  | $                | 15,686,370  |   |                   | $ | 15,669,873  |  
|Less accumulated amortization           |  |                  | (12,417,328 | ) |                   |   | (13,553,744 | )
|                                        |  |                  |             |   |                   |   |             |  
|Internet domain names, net              |  |                  | 3,269,042   |   |                   |   | 2,116,129   |  
|Other assets:                           |  |                  |             |   |                   |   |             |  
|Registration fees, net                  |  |                  | 146,412     |   |                   |   | 46,436      |  
|Other                                   |  |                  | 251,944     |   |                   |   | 236,369     |  
|                                        |  |                  |             |   |                   |   |             |  
|Total intangibles and other assets, net |  | $                | 3,667,398   |   |                   | $ | 2,398,934   |  
|                                        |  |                  |             |   |                   |   |             |  

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 and nine months ended September 30, 2010 to renew or extend the
term for domain names was $625,000 and $1.7 million, respectively. The weighted average renewal period for registration fees as of September 30, 2010 was approximately one year.

Amortization expense for internet domain names was approximately $508,000 and $378,000 for the three months ended September 30, 2009
and 2010, respectively, and was $1.6 million and $1.2 million for the nine months ended September 30, 2009 and 2010, respectively. Based upon the current amount of domains subject to amortization, the estimated expense for the next five years
is as follows: $373,000 for the remainder of 2010, $1.1 million in 2011, $422,000 in 2012, $175,000 in 2013 and $40,000 in 2014.



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(14) Common Stock

In July 2010, 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 August 16, 2010 to the holders of record as of the close of business on August 6, 2010. The Company paid approximately $705,000.

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 nine months ended September 30, 2010, the Company repurchased 982,000 shares of Class B common stock for
approximately $4.9 million at an average stock price of $4.95 per share. The 982,000 shares have been recorded as treasury stock in the condensed consolidated balance sheet as of September 30, 2010.

During the nine months ended September 30, 2010, the Companys board of directors approved the retirement of approximately
1.6 million shares of treasury stock. The excess of purchase price over par value of $7.5 million was recorded as a deduction to additional paid in capital on the condensed consolidated balance sheet.

(15) Related Party Transactions

During the three and nine months ended September 30, 2010, a member of the Companys board of directors entered into a consulting agreement with an advertiser of the Company. The majority of the
Companys revenue from the advertiser was derived from our feed management services which were discontinued as of December 31, 2009. The amounts related to this advertiser follow:



|                    |  |                                |         |  |                                 |   |        |                     |  |   |                      |  |  |   |       | 
|------------------- |  | ------------------------------ | ------- |  | ------------------------------- | - | ------ | ------------------- |  | - | -------------------- |  |  | - | ----- | 
|                    |  | Nine months endedSeptember 30, |         |  | Three months endedSeptember 30, |  
|                    |  | 2009                           |         |  | 2010                            |   |        | 2009                |  |   | 2010                 | 
|Revenue             |  | $                              | 256,735 |  |                                 | $ | 25,869 |                     |  | $ | 73,202               |  |  | $ | 3,310 | 
|                    |  |                                |         | 
|                    |  |                                |         |  |                                 |   |        | At December 31,2009 |  |   | At September 30,2010 | 
|Accounts Receivable |  |                                |         |  |                                 |   |        |                     |  | $ | 18,387               |  |  | $ | 250   | 

(16) Subsequent Events

In October 2010, 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 November 15, 2010 to the holders of record as of the close of business on November 5, 2010. The Company expects to pay approximately
$702,000 for these quarterly dividends.



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|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 results, financial position, 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, 2009 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, 2009.

Overview

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



| |  |  | Small and Medium-Sized Businesses Marketing Products. Our small and medium-sized businesses marketing products enable reseller partners
of local advertisers, such as Yellow Pages providers and vertical marketing service providers, to sell search marketing and/or call advertising packages through their existing sales channels, which are then fulfilled by us across our distribution
network, including leading search engines and our own proprietary traffic sources. By creating a solution for companies who have relationships with small and medium-sized businesses, it makes it easy for these small and medium-sized businesses to
participate in online, mobile, offline and call advertising. The lead services we offer to local advertisers through our small and medium-sized businesses marketing products include products typically available only to national advertisers,
including ad creation, keyword selection, geo-targeting, call tracking, pay-for-call, advertising campaign management, reporting, and analytics. The small and medium-sized businesses 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 advertiser reseller partner and was responsible for 20% and 23% of our total revenues for
the three and nine months ended September 30, 2010 of which the majority is derived from our small and medium-sized businesses marketing products.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Call Advertising Services. We deliver a variety of call advertising services to national advertisers, advertising agencies and small and
medium-sized advertiser reseller partners. These services include pay-for-call, phone number and call tracking, call analytics, click-to-call, Web site proxying, and other call-based services which enable our customers to utilize mobile,
offline and online advertising to drive calls as well as clicks into their businesses and to use call tracking to measure the effectiveness of both their online, mobile and offline advertising campaigns. Advertisers pay us a fee for each call they
receive from call-based ads we distribute on our distribution network or for each phone number tracked and a pre-negotiated rate.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 Web sites, 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 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 Web
sites or a third-party Web site in our distribution network to an advertisers Web site and completes a specified action. We also offer a private-label platform for publishers, separate and distinct from our small
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



16



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| | and medium-sized businesses marketing products which enable them to monetize their Web sites 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 Web sites 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 that our Publishing Network is a significant source of local information online. It includes more than
200,000 of our owned and operated Web sites focused on helping users find and make informed decisions about where to get local products and services. It features listings from more than 10 million local businesses in the U.S. and millions of
expert and user-generated reviews on local businesses. The more than 200,000 Web sites in our network include more than 75,000 U.S. ZIP code sites, such as 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 such as chicagodoctors.com, seattleautorepairs.com, bostonmortgage.com and others. Traffic to our Publisher Network is primarily monetized with
pay-per-click listings that are relevant to the Web sites, as well as other forms of advertising, including call-based ad units, banner advertising and sponsorships.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Feed Management and Related Services. Through the end of 2009, we used our proprietary technology to crawl and extract relevant product
content from advertisers databases and Web sites to create automated and highly-targeted product and service listings feed, which we delivered primarily into Yahoo!s search submit product. Advertisers generally paid us a fixed price for
each click they received on an advertisement or listing included in the feed. In addition and as a supplement to feed management services, we offered campaign management services to enable our advertisers to consolidate the purchasing, management,
optimization and reporting from their search and vertical advertising campaigns across a large number of search engines, local Web sites and pay-per-click networks into one centralized location. Under these services advertisers paid us a
pre-negotiated rate for each click they receive on their advertisement placed or managed as part of our campaign management services. Yahoo! discontinued its feed management service relationship with us effective December 31, 2009 as a
result of its recently announced partnership with Microsoft. Accordingly, we discontinued our feed management and related service offerings as of that date. We generated $7.5 million in revenues from feed management and related services for the
year ended December 31, 2009. The impact on our financial statements attributable to our ending this service is lessened by the relatively low operating margin attributable to this service given our revenue share arrangement with Yahoo! with
respect thereto.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We were incorporated in Delaware on January 17, 2003. Acquisition initiatives have
played an important part in our corporate history to date. We have completed the following acquisitions since our inception:



| |  |  | On February 28, 2003, we acquired eFamily together with its direct wholly-owned subsidiary, formerly known as Enhance Interactive.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | On October 24, 2003, we acquired TrafficLeader.
| | - |  | -----------------------------------------------



| |  |  | On July 27, 2004, we acquired goClick.
| | - |  | --------------------------------------



| |  |  | On February 14, 2005, we acquired certain assets of Name Development.
| | - |  | ---------------------------------------------------------------------



| |  |  | On April 26, 2005, we acquired certain assets of Pike Street Industries.
| | - |  | ------------------------------------------------------------------------



| |  |  | On July 27, 2005, we acquired IndustryBrains.
| | - |  | ---------------------------------------------



| |  |  | On May 1, 2006, we acquired certain assets of AreaConnect.
| | - |  | ----------------------------------------------------------



| |  |  | On May 26, 2006, we acquired certain assets of Open List.
| | - |  | ---------------------------------------------------------



| |  |  | On September 19, 2007, we acquired VoiceStar.
| | - |  | ---------------------------------------------

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

Consolidated Statements of Operations

The assets, liabilities and
operations of our acquisitions are included in our consolidated financial statements as of and from the date of the respective acquisitions.

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.



17



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Presentation of
Financial Reporting Periods

The comparative periods presented are for the three and nine months ended
September 30, 2009 and 2010.

Revenue

We currently generate revenue through our suite of services, including our small and medium-sized businesses marketing products, call
advertising services, pay-per-click advertising, publishing network, and historically our feed management and related services. 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
campaign management services, natural search optimization services and outsourced search marketing platforms. 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.

Performance-Based Advertising Services

In providing call advertising and pay-per-click services, 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 an online user makes a
phone call or clicks on based on any of their advertisement listings after it has been placed by us or by our distribution partners. Each qualified phone call or click-through on an advertisement listing represents a completed transaction. The
advertisement listings are displayed within our distribution network, which includes search engines, directories, destination sites, third-party Internet domains or Web sites, our portfolio of owned Web sites, other targeted Web-based content and
mobile and offline sources. We also generate revenue from cost-per-action services, which occurs 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 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 Web sites or specific pages of a Web site 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.

In providing feed management services, advertisers pay for their Web pages and product databases to be crawled, or searched, and included in search engine, directory and product shopping engine results
within our distribution network. Generally, the feed management listings are presented in a different section of the Web page than the pay-per-click listings. For this service, revenue is generated when an online user clicks on a feed management
listing from search engine, directory or product shopping engine results. Each click-through on an advertisement listing represents a completed transaction for which the advertiser pays for on a per-click basis. The placement of a feed management
result is largely determined by its relevancy, as determined by the distribution partner. Yahoo! discontinued its feed management service relationship with us effective December 31, 2009 as a result of its recently announced partnership with
Microsoft. Accordingly, we discontinued our feed management and related service offerings as of that date.

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.



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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.

Outsourced Search Marketing Platforms

We generate revenue from reseller partners and publishers utilizing our web-based technologies. We are paid a management or agency fee
based on the total amount of the purchase made by the advertiser. The 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.

Industry and Market Factors

We enter into agreements with various
distribution partners to provide distribution for the URL strings and advertisement listings 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 or 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 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 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.

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;
| | - |  | ----------------------------



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| |  |  | 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.

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 (previously the American Institute of Certified Public Accountants
Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use). 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;
| | - |  | -----------------------------------------------------------------



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| |  |  | 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.

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, available carrybacks 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 increases 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, available carrybacks and projections of future taxable income, 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 available carrybacks and projections of future taxable income, the Company expects to be able to recover these assets. The amount of the net deferred tax assets considered realizable, however, could be
reduced in the near term if our projections of future taxable income are reduced or if we do not perform at the levels we are projecting. This could result in increases to the valuation allowance for deferred tax assets and a corresponding increase
to 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 September 30, 2010, we have net deferred tax assets of $51.6 million, relating to the impairment of goodwill,
amortization of intangibles assets and certain other temporary differences. 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 September 30, 2010, based upon both positive and negative evidence available, we have determined it is not more likely than not that



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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 $3.8 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 September 30, 2010, an adjustment to the net deferred tax assets
would impact net income or stockholders equity in the period such determination was made.

As of September 30,
2010, 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.

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 and nine months ended September 30, 2009 and 2010 and are not necessarily indicative of the results that may be expected for the full year or any future period.



|                                                      |  |                                |     |   |                                 |  |     |      |  |  |      |   |  |  |     |  
|----------------------------------------------------- |  | ------------------------------ | --- | - | ------------------------------- |  | --- | ---- |  |  | ---- | - |  |  | --- | -
|                                                      |  | Nine Months EndedSeptember 30, |     |   | Three Months EndedSeptember 30, | 
|                                                      |  | 2009                           |     |   | 2010                            |  |     | 2009 |  |  | 2010 |  
|Revenue                                               |  |                                | 100 | % |                                 |  | 100 | %    |  |  | 100  | % |  |  | 100 | %
|                                                      |  |                                |     |   |                                 |  |     |      |  |  |      |   |  |  |     |  
|Expenses:                                             |  |                                |     |   |                                 |  |     |      |  |  |      |   |  |  |     |  
|Service costs                                         |  |                                | 50  | % |                                 |  | 59  | %    |  |  | 54   | % |  |  | 60  | %
|Sales and marketing                                   |  |                                | 21  | % |                                 |  | 15  | %    |  |  | 15   | % |  |  | 13  | %
|Product development                                   |  |                                | 16  | % |                                 |  | 18  | %    |  |  | 15   | % |  |  | 17  | %
|General and administrative                            |  |                                | 17  | % |                                 |  | 18  | %    |  |  | 18   | % |  |  | 19  | %
|Amortization of intangible assets from acquisitions   |  |                                | 7   | % |                                 |  | 3   | %    |  |  | 6    | % |  |  | 3   | %
|                                                      |  |                                |     |   |                                 |  |     |      |  |  |      |   |  |  |     |  
|Total operating expenses                              |  |                                | 110 | % |                                 |  | 113 | %    |  |  | 108  | % |  |  | 113 | %
|Gain on sales and disposals of intangible assets, net |  |                                | 4   | % |                                 |  | 7   | %    |  |  | 5    | % |  |  | 11  | %
|                                                      |  |                                |     |   |                                 |  |     |      |  |  |      |   |  |  |     |  
|Loss from operations                                  |  |                                | -6  | % |                                 |  | -7  | %    |  |  | -3   | % |  |  | -2  | %
|Other income (expense):                               |  |                                |     |   |                                 |  |     |      |  |  |      |   |  |  |     |  
|Interest income                                       |  |                                | 0   | % |                                 |  | 0   | %    |  |  | 0    | % |  |  | 0   | %
|Interest expense                                      |  |                                | 0   | % |                                 |  | 0   | %    |  |  | 0    | % |  |  | 0   | %
|Other                                                 |  |                                | 0   | % |                                 |  | 0   | %    |  |  | 0    | % |  |  | 1   | %
|                                                      |  |                                |     |   |                                 |  |     |      |  |  |      |   |  |  |     |  
|Total other income                                    |  |                                | 0   | % |                                 |  | 0   | %    |  |  | 0    | % |  |  | 1   | %
|                                                      |  |                                |     |   |                                 |  |     |      |  |  |      |   |  |  |     |  
|Loss before provision for income taxes                |  |                                | -6  | % |                                 |  | -6  | %    |  |  | -3   | % |  |  | -2  | %
|Income tax expense (benefit)                          |  |                                | -3  | % |                                 |  | -1  | %    |  |  | -6   | % |  |  | 0   | %
|                                                      |  |                                |     |   |                                 |  |     |      |  |  |      |   |  |  |     |  
|Net income (loss)                                     |  |                                | -3  | % |                                 |  | -5  | %    |  |  | 3    | % |  |  | -2  | %
|Dividends paid to participating securities            |  |                                | 0   | % |                                 |  | 0   | %    |  |  | 0    | % |  |  | 0   | %
|                                                      |  |                                |     |   |                                 |  |     |      |  |  |      |   |  |  |     |  
|Net income (loss) applicable to common stockholders   |  |                                | -3  | % |                                 |  | -5  | %    |  |  | 3    | % |  |  | -2  | %
|                                                      |  |                                |     |   |                                 |  |     |      |  |  |      |   |  |  |     |  

Comparison of the Three months ended September 30, 2009 to the Three months ended September 30, 2010 and of the
Nine months ended September 30, 2009 to the Nine months ended September 30, 2010

Revenue

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



|                                  |  |                                |            |  |                                 |   |            |      |  |   |            |  |  |   |            | 
|--------------------------------- |  | ------------------------------ | ---------- |  | ------------------------------- | - | ---------- | ---- |  | - | ---------- |  |  | - | ---------- | 
|                                  |  | Nine months endedSeptember 30, |            |  | Three months endedSeptember 30, |  
|                                  |  | 2009                           |            |  | 2010                            |   |            | 2009 |  |   | 2010       | 
|Partner and Other Revenue Sources |  | $                              | 45,270,588 |  |                                 | $ | 49,894,781 |      |  | $ | 15,899,331 |  |  | $ | 17,999,797 | 
|Proprietary Traffic Sources       |  |                                | 24,553,228 |  |                                 |   | 19,695,394 |      |  |   | 6,272,463  |  |  |   | 6,195,044  | 
|                                  |  |                                |            |  |                                 |   |            |      |  |   |            |  |  |   |            | 
|Total Revenue                     |  | $                              | 69,823,816 |  |                                 | $ | 69,590,175 |      |  | $ | 22,171,794 |  |  | $ | 24,194,841 | 
|                                  |  |                                |            |  |                                 |   |            |      |  |   |            |  |  |   |            | 



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Our partner network
revenues are primarily generated using third-party distribution networks to deliver the advertisers listings. The distribution network includes search engines, shopping engines, directories, destination sites, third-party Internet domains or
Web sites, other targeted Web-based content, mobile 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 online, mobile, offline or other user traffic. Other revenues include our call provisioning and call tracking services, campaign management services, natural search optimization services and
outsourced search marketing platforms. Our publishing network revenues are generated from our portfolio of owned Web sites which are monetized with pay-per-click listings that are relevant to the Web sites, as well as other forms of advertising,
including call-based advertising units, banner advertising and sponsorships. When an online user navigates to one of our Web sites and clicks on a particular listing or completes the specified action, we receive a fee.

Revenue increased 9% from $22.2 million for the three months ended September 30, 2009 to $24.2 million in the same period in 2010.
The partner and other revenues increased $2.1 million and were affected primarily by increased revenues of $5.3 million from our call advertising services which in part was driven by adding more than 10,000 national and small and medium-sized
business accounts to our platform across our small and medium-sized business marketing and call advertising services. This increase was offset by a decrease in revenue from AT&T from pricing reductions and incentives as part of an extension of
our arrangement with AT&T, along with a $1.3 million decrease in revenue from our pay-per-click services, and a $1.5 million decrease in revenue generated from our feed management services. Effective December 31, 2009 Yahoo! discontinued
its feed management service relationship with us as a result of its recently announced partnership with Microsoft. Accordingly, we discontinued our feed management service offering as of that date.

Under our primary arrangement with AT&T, we generate revenues from our small and medium-sized businesses marketing products to sell
search marketing packages and/or call advertising 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 contemplates the migration of several thousand existing advertiser accounts over the following six to nine months. As part of the arrangement, we provided pricing reductions including significant near term pricing incentives.
These incentives in comparison to the prior arrangement pricing could generate an estimated $8 million in savings for AT&T during 2010 and accordingly, we experienced a decrease in revenues but to a lesser extent in the third quarter
relative to the second. We expect revenues from our arrangement with AT&T to scale back upwards further in the fourth quarter of 2010.

Our publishing network revenue was relatively consistent with higher revenues for cost-per-actions from resellers related to our local search and directory Web sites offset primarily by a $589,000
decrease in revenues from our arrangement with Yahoo! whereby we receive payment upon click-throughs on pay-per-click listings presented on our Web sites. This decrease was principally due to fewer click-throughs on pay-per-click listings from
Yahoo!. Our paid listings arrangement with Yahoo! related to our Web sites expired on September 30, 2010, although we expect to continue various other contractual arrangements with Yahoo!. We have entered into a paid listings arrangement with
another advertiser service provider and we do not anticipate any significant near term impact to our publishing network revenues.

AT&T and Yahoo! in the third quarter of 2009 accounted for 23% and 12%, respectively, of our total revenues compared to 20% and less than 10%, respectively, in the third quarter of 2010.

Except for our arrangement with AT&T where we generate revenues from our small and medium-sized businesses marketing products, in the
near term we expect advertisers and resellers to have relatively stable advertising and marketing service budgets compared to the third quarter of 2010 and anticipate modest increases in our call advertising revenues.

Revenue was $69.8 million for the nine months ended September 30, 2009 compared to $69.6 million in the same period in 2010. The
partner and other revenues increased $4.6 million and were affected primarily by increased revenues of $11.0 million in our call advertising services which in part was driven by adding more than 15,000 national and small and medium-sized business
accounts to our platform across our small and medium-sized business marketing and call advertising services. This increase was offset by a decrease in revenue from AT&T from pricing reductions and incentives as part of an extension of our
arrangement with AT&T in the second quarter of 2010 along with a decrease in revenue of $5.5 million generated from our feed management and related services. Effective December 31, 2009 Yahoo! discontinued its feed management service
relationship with us as a result of its recently announced partnership with Microsoft. Accordingly, we discontinued our feed management service offering as of that date.

Our publishing network revenue decreased primarily due to $2.8 million lower revenues for cost-per-actions from resellers such as Dex One Corporation, WhitePages, Inc. and Intelius, Inc., particularly
related to our local search and directory Web sites. The remainder of such decrease was largely due to lower revenues from our arrangement with Yahoo! whereby we receive payment upon click-throughs on pay-per-click listings presented on our Web
sites. This decrease was principally due to fewer click-throughs on pay-per-click listings from Yahoo!.



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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 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.

Expenses

Expenses were as follows:



|                                                    |  |                                 |            |  |                                  |  |     |      |  |   |             |  |  |      |     |   |             |   |            |      |  |  |             |   |  |   |            |  |  |  |     |  
|--------------------------------------------------- |  | ------------------------------- | ---------- |  | -------------------------------- |  | --- | ---- |  | - | ----------- |  |  | ---- | --- | - | ----------- | - | ---------- | ---- |  |  | ----------- | - |  | - | ---------- |  |  |  | --- | -
|                                                    |  | Nine months ended September 30, |            |  | Three months ended September 30, | 
|                                                    |  | 2009                            |            |  | % ofrevenue                      |  |     | 2010 |  |   | % ofrevenue |  |  | 2009 |     |   | % ofrevenue |   |            | 2010 |  |  | % ofrevenue |  
|Service costs                                       |  | $                               | 34,934,455 |  |                                  |  | 50  | %    |  | $ | 40,909,245  |  |  |      | 59  | % |             | $ | 12,048,245 |      |  |  | 54          | % |  | $ | 14,604,200 |  |  |  | 60  | %
|Sales and marketing                                 |  |                                 | 14,485,213 |  |                                  |  | 21  | %    |  |   | 10,605,457  |  |  |      | 15  | % |             |   | 3,213,946  |      |  |  | 15          | % |  |   | 3,183,374  |  |  |  | 13  | %
|Product development                                 |  |                                 | 10,969,807 |  |                                  |  | 16  | %    |  |   | 12,482,042  |  |  |      | 18  | % |             |   | 3,369,290  |      |  |  | 15          | % |  |   | 4,193,428  |  |  |  | 17  | %
|General and administrative                          |  |                                 | 12,055,096 |  |                                  |  | 17  | %    |  |   | 12,809,459  |  |  |      | 18  | % |             |   | 3,997,361  |      |  |  | 18          | % |  |   | 4,683,639  |  |  |  | 19  | %
|Amortization of intangible assets from acquisitions |  |                                 | 4,680,879  |  |                                  |  | 7   | %    |  |   | 2,119,479   |  |  |      | 3   | % |             |   | 1,211,328  |      |  |  | 5           | % |  |   | 704,106    |  |  |  | 3   | %
|                                                    |  |                                 |            |  |                                  |  |     |      |  |   |             |  |  |      |     |   |             |   |            |      |  |  |             |   |  |   |            |  |  |  |     |  
|                                                    |  | $                               | 77,125,450 |  |                                  |  | 110 | %    |  | $ | 78,925,682  |  |  |      | 113 | % |             | $ | 23,840,170 |      |  |  | 108         | % |  | $ | 27,368,747 |  |  |  | 113 | %
|                                                    |  |                                 |            |  |                                  |  |     |      |  |   |             |  |  |      |     |   |             |   |            |      |  |  |             |   |  |   |            |  |  |  |     |  

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



|                               |  |                                |           |  |                                 |   |           |      |  |   |           |  |  |   |           | 
|------------------------------ |  | ------------------------------ | --------- |  | ------------------------------- | - | --------- | ---- |  | - | --------- |  |  | - | --------- | 
|                               |  | Nine months endedSeptember 30, |           |  | Three months endedSeptember 30, |  
|                               |  | 2009                           |           |  | 2010                            |   |           | 2009 |  |   | 2010      | 
|Service costs                  |  | $                              | 317,561   |  |                                 | $ | 608,304   |      |  | $ | 120,505   |  |  | $ | 223,672   | 
|Sales and marketing            |  |                                | 1,222,037 |  |                                 |   | 602,995   |      |  |   | 239,528   |  |  |   | 221,901   | 
|Product development            |  |                                | 478,925   |  |                                 |   | 740,553   |      |  |   | 180,493   |  |  |   | 280,377   | 
|General and administrative     |  |                                | 5,298,047 |  |                                 |   | 5,954,403 |      |  |   | 1,785,936 |  |  |   | 2,199,285 | 
|                               |  |                                |           |  |                                 |   |           |      |  |   |           |  |  |   |           | 
|Total stock-based compensation |  | $                              | 7,316,570 |  |                                 | $ | 7,906,255 |      |  | $ | 2,326,462 |  |  | $ | 2,925,235 | 
|                               |  |                                |           |  |                                 |   |           |      |  |   |           |  |  |   |           | 

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 21%, from $12.0 million in the three months ended September 30, 2009 to $14.6 million in the same period in 2010. The increase was primarily attributable to an increase in distribution partner payments, fees
paid to outside service providers, personnel costs, stock compensation, facility costs, communication and network costs of $2.7 million, partially offset by a decrease in Internet domain amortization, depreciation and credit card processing fees of
$165,000.



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Service costs
represented 54% of revenue in the three months ended September 30, 2009 as compared to 60% in 2010. The 2010 increase as a percentage of revenue in service costs as compared to 2009 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 to a lesser extent communication and network costs, and the effect of the pricing incentives to AT&T.

Service costs represented 50% of revenue in the nine months ended September 30, 2009 as compared to 59% in 2010. The 2010 increase
as a percentage of revenue in service costs as compared to 2009 was primarily a result of an increase in the proportion of revenue attributable to our pay-for-call, pay-per-click or cost-per-action services for which there are related distribution
partner payments and to a lesser extent communication and network costs and the effect of the pricing incentives to AT&T. Payments to pay-for-call, pay-per-click or cost-per-action distribution partners account for higher user acquisition costs
as a percentage of revenue relative to our overall service cost percentage.

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 publishing network sources have a lower service cost as a percentage of revenue relative to our overall service cost percentage. Our publishing
network sources have no corresponding distribution partner payments. To the extent our publishing network sources make up a larger percentage of our future operations, we expect that service costs will decrease as a percentage of revenue. As a
result of significant pricing incentives we have provided for under our arrangement with AT&T, our recent service costs as a percentage of revenue have been higher. We expect with the addition of more accounts in the near term, service costs
will decrease as a percentage of revenue. 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 were $3.2 million for both the three months ended September 30, 2009 and 2010. As a percentage of revenue, sales and marketing expenses were 15% and 13% for the three months ended September 30, 2009 and 2010,
respectively. Sales and marketing expenses in total dollars were relatively unchanged year over year as a result of a decrease in online and outside marketing activities being offset by an increase in personnel costs, travel, fees paid to outside
service providers and depreciation. 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 relatively stable to 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.
We also expect fluctuations in marketing expenditures as we redirect our online marketing efforts towards more of our updated Web sites and direct monetization of our proprietary traffic sources but expect expenditures related to these efforts to
increase in absolute dollars in the long term.

Sales and marketing expenses decreased 27% from $14.5 million for the nine
months ended September 30, 2009 to $10.6 million in the same period in 2010. As a percentage of revenue, sales and marketing expenses were 21% and 15% for the nine months ended September 30, 2009 and 2010, respectively. The net decrease in
dollars and percentage of revenue was related primarily to a decrease in online and outside marketing activities and stock compensation.

Product Development. Product development expenses increased 24%, from $3.4 million for the three months ended September 30, 2009 to $4.2 million in the same period in 2010. The increase in
dollars was primarily due to an increase in personnel costs and stock based compensation of $908,000. As a percentage of revenue, product development expenses were 15% and 17% for the three months ended September 30, 2009 and 2010,
respectively. The 2010 increase as a percentage of revenue in product development expense as compared to 2009 was primarily a result of an increase in the proportion of personnel costs relative to revenue. In the near term, we do not expect
significant changes to our product development expenditures. 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.

Product development expenses increased 14%, from $11.0
million for the nine months ended September 30, 2009 to $12.5 million in the same period in 2010. The increase in dollars was primarily due to an increase in personnel costs and stock based compensation of $1.8 million. As a percentage of
revenue, product development expenses were 16% and 18% for the nine months ended September 30, 2009 and 2010, respectively. The 2010 increase as a percentage of revenue in product development expense as compared to 2009 was primarily a result
of an increase in the proportion of personnel costs relative to revenue.

General and Administrative. General and
administrative expenses increased 17%, from $4.0 million in the three months ended September 30, 2009 to $4.7 million in the same period in 2010. The increase in dollars was primarily due to an increase in stock based compensation, personnel
costs, fees paid to outside service providers, bad debt, and other operating costs of $770,000. As a percentage of revenue, general and administrative expenses were 18% and 19% for the three months ended September 30, 2009 and 2010,
respectively. We do not expect significant changes to our general and administrative expenses in the near term. We expect that our



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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.

General and administrative expenses increased 6%, from $12.1 million in the
nine months ended September 30, 2009 to $12.8 million in the same period in 2010. The increases were primarily attributable to stock-based compensation, personnel costs, fees paid to outside service providers, and bad debt of $1.1 million which
were offset by decreases in facility related costs and other operating costs. As a percentage of revenue, general and administrative expenses were 17% and 18% for the nine months ended September 30, 2009 and 2010, respectively.

Amortization of Intangible Assets from Acquisitions. Intangible amortization expense decreased 42%, from $1.2 million in the three
months ended September 30, 2009 to $704,000 in the same period in 2010. The decrease was associated with certain intangible assets from acquisitions being fully amortized. During the three months ended September 30, 2010, the amortization
of intangibles related to service costs.

Intangible amortization expense decreased 55%, from $4.7 million in the nine months
ended September 30, 2009 to $2.1 million in the same period in 2010. The decrease was associated with certain intangible assets from acquisitions being fully amortized. During the nine months ended September 30, 2010, 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 $84.0 million and are being amortized over a range of useful lives of 12 to 84 months. 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 indicators of impairment of the Companys intangible assets have been identified to date in 2010. 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.

Gain on sales and disposals of intangible assets, net. Gains on sales and disposals of intangible assets, net were $1.0 million
and $2.8 million for the three and nine months ended September 30, 2009, respectively, as compared to $2.6 million and $4.7 million in the same periods in 2010, and were primarily attributable to the sales and disposals of Internet domain names
and other intangible assets.

Other Income (expense), net.Other income (expense), net were ($14,000) and ($17,000) in
the three and nine months ended September 30, 2009, respectively, compared to $103,000 and $134,000 in the same periods in 2010.

Income Taxes. The income tax benefits were $1.4 million and $2.4 million for the three and nine months ended September 30, 2009 as compared to income tax expense of $54,000 and income tax
benefit of $863,000 in the same periods in 2010, respectively.

In the three and nine months ended September 30, 2010,
the effective tax rate of (12%) and 19%, respectively, 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.

During the three months ended September 30, 2009, we
completed an analysis and recorded an adjustment totaling $1.3 million to reflect updated filings for research and experimentation tax credits for the periods 2005 through September 30, 2009. Our effective tax rate for the three and nine months
ended September 30, 2009 was a benefit of 217% and 53%, respectively. In addition, our effective tax rate for these periods 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.

Net Income (Loss). Net income decreased from $743,000 for the three months ended September 30, 2009 to a net loss of $493,000
in the same period in 2010. The decrease was primarily attributable to the income tax benefit of $1.4 million for the three months ended September 30, 2009 compared to a $54,000 tax expense in the same period in 2010. The decrease was also a
result of operating cost increases in distribution partner payments, communication and network costs, personnel costs and stock based compensation and less revenue due to pricing reductions and incentives to AT&T. This was offset by lower online
and outside marketing costs and higher revenue and gain on sales and disposals of intangible assets.



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Net loss increased
from $2.1 million for the nine months ended September 30, 2009 to a net loss of $3.7 million in the same period in 2010. The increase was primarily attributable to an income tax benefit of $2.4 million for the nine months ended
September 30, 2009 compared to an $863,000 tax benefit in the same period in 2010. The increase was also a result of operating cost increases in distribution partner payments, communication and network costs, personnel costs and stock based
compensation, and less revenue due to pricing reductions and incentives to AT&T. This was offset by lower online and outside marketing costs and higher gain on sales and disposals of intangible assets.

Liquidity and Capital Resources

As of September 30, 2010, we had cash and cash equivalents of $32.0 million and we had current and long term contractual obligations of $17.6 million, of which $13.3 million is for rent under our
facility leases.

Cash provided by operating activities primarily consists of net loss adjusted for certain non-cash items
such as depreciation and amortization, deferred income taxes, stock-based compensation, excess tax benefit related to stock options, and changes in working capital. Cash provided by operating activities for the nine months ended September 30,
2010 of approximately $3.5 million consisted primarily of net loss of $3.7 million adjusted for non-cash items of $16.9 million, including depreciation, amortization of intangible assets, allowance for doubtful accounts and advertiser credits,
stock-based compensation, and deferred income taxes, and approximately $9.8 million used for working capital and other activities which is net of cash received of $779,000 related to a lease incentive. Cash provided by operating activities for the
nine months ended September 30, 2009 of approximately $13.6 million consisted primarily of net loss of $2.1 million adjusted for non-cash items of $20.8 million, including depreciation, amortization of intangible assets, allowance for doubtful
accounts and advertiser credits, stock-based compensation, deferred income taxes, and excess tax benefit related to stock options and approximately $5.1 million used for working capital and other activities.

With respect to a significant portion of our call advertising and pay-per-click services, we have no corresponding payments to
distribution partners related to our proprietary revenues or we receive payment from advertisers prior to our delivery of related phone calls or click-throughs with the corresponding payments to the distribution partners who provide placement for
the listings generally made only after our delivery of a phone call or click-through. In most cases, the amount payable to the distribution partner will be calculated at the end of a calendar month, with a payment period following the delivery of
the phone calls or click-throughs. This payment structure results in a lag period between the earlier receipt of the cash from the advertisers and the later payment to the distribution partners. These services constituted the majority of revenue in
the nine months ended September 30, 2009 and 2010. 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.

Nearly all of the advertising services provider arrangements are billed on a monthly basis following the month of our 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, advertisers 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 advertising services provider 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 and medium-sized businesses marketing products, such as AT&T, SuperMedia Inc., Yellowbook USA Inc., The Cobalt Group, WhitePages, Inc., and Vantage Media LLC, whereby we receive payment between 30 and 60 days
following the delivery of services. For the nine months ended and as of September 30, 2010 amounts from these partners along with Yahoo! totaled 48% of revenue and $13.5 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 September 30, 2010 from Yahoo! and AT&T totaled $1.3 million and $9.1 million, respectively.

Cash provided by investing activities for the nine months ended September 30, 2010 of approximately $1.9 million was
primarily attributable to net purchases for property and equipment of $2.7 million which were more than offset by proceeds from the sales of intangible assets of approximately $4.7 million. Cash provided by investing activities for the nine months
ended September 30, 2009 of approximately $1.6 million was primarily attributable to net purchases for property and equipment of $1.4 million which were more than offset by proceeds from the sales of intangible assets of approximately $2.9
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. Additionally, we have
expended amounts for product development initiatives as well as amounts recorded as part of property and equipment for internally developed software. 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.

Cash used in financing activities for the nine months ended September 30, 2010 of approximately $7.0 million was primarily
attributable to the repurchase of 982,000 shares of Class B common stock for treasury stock totaling approximately $4.9 million and



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common stock dividend payments of $2.1 million. Cash used in financing activities for the nine months ended September 30, 2009 of approximately $9.5 million was primarily attributable to the
repurchase of 2.1 million shares of Class B common stock for treasury stock totaling approximately $7.5 million, and common stock dividend payments of $2.2 million, partially offset by net proceeds of approximately $122,000 from the sale of
stock through employee stock options and employee stock plan purchases and $69,000 of excess tax benefits related to stock options.

The following table summarizes our contractual obligations as of September 30, 2010, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.



|                                       |  |       |            |  |                 |   |         |           |  |   |           |  |  |            |           |  |  |   |           | 
|-------------------------------------- |  | ----- | ---------- |  | --------------- | - | ------- | --------- |  | - | --------- |  |  | ---------- | --------- |  |  | - | --------- | 
|                                       |  | Total |            |  | Less than 1year |   |         | 1-3 years |  |   | 4-5 years |  |  | thereafter |          
|Contractual Obligations:               |  |       |            |  |                 |   |         |           |  |   |           |  |  |            |           |  |  |   |           | 
|Operating leases                       |  | $     | 13,327,999 |  |                 | $ | 318,239 |           |  | $ | 3,002,767 |  |  | $          | 3,609,850 |  |  | $ | 6,397,143 | 
|Other contractual obligations          |  |       | 4,257,988  |  |                 | $ | 647,435 |           |  |   | 3,435,203 |  |  |            | 175,350   |  |  |   | -         | 
|                                       |  |       |            |  |                 |   |         |           |  |   |           |  |  |            |           |  |  |   |           | 
|Total contractual obligations (1), (2) |  | $     | 17,585,987 |  |                 | $ | 965,674 |           |  | $ | 6,437,970 |  |  | $          | 3,785,200 |  |  | $ | 6,397,143 | 
|                                       |  |       |            |  |                 |   |         |           |  |   |           |  |  |            |           |  |  |   |           | 



|(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 are not included due to their uncertainty.
|--- | ----------------------------------------------------------------

|(3) | In May 2010, we entered into a lease agreement for office facilities in New York, New York which commenced in the second quarter of 2010 and expires in March 2018.
Future minimum payments related to these new facilities are approximately as follows: $2,000 for the remainder of 2010, $209,000 in 2011, $243,000 in 2012, $249,000 in 2013, $273,000 in 2014, and $978,000 in aggregate thereafter.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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. As of September 30, 2010, 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 nine months ended September 30, 2010, approximately 982,000 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 2009, quarterly dividends were paid on February 17, May 15, August 17 and November 16, to Class A and Class
B common stockholders of record as of the close of business of February 6, May 4, August 7 and November 6, respectively. For 2010, quarterly dividends were paid on February 15, May 17, and August 16 to Class A
and Class B common stockholders of record as of the close of business of February 4, May 5, and August 6, respectively. The aggregate quarterly dividend paid in February 2010, May 2010, and August 2010 was approximately $2.1
million. 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 October
2010, 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 November 15, 2010 to the holders of record as of the close of
business on November 5, 2010. Although we expect that the annual cash dividend, subject to capital availability, will be $0.08 per common share or approximately $2.8 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 (previously Emerging Issues Task Force Issue (EITF) No. 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent), 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 (previously EITF Issue No. 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables), 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 elements, the entire fee from the arrangement is allocated to each respective element based on its relative fair value and recognized when revenue recognition criteria for each element are met. Fair value for each
element is established based on the sales price charged when the same element is 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 (previously SFAS No. 142, Goodwill and Other Intangible Assets). 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 (previously SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived AssetSFAS 144).

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 a 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.

In the fourth quarter of
2008 we performed our annual goodwill impairment testing in accordance with FASB ASC 350 and in light of the then adverse macroeconomic environment and significant decrease in market capitalization. We also performed a review on certain of our
intangible assets under FASB ASC 360. As a result of this testing, we recorded $176.7 million pre-tax impairment charge on goodwill and intangible assets in the fourth quarter of 2008. The impairment charge resulted in part from adverse equity and
credit market conditions that caused a sustained decrease in market multiples and the companys stock price, a decrease in valuations of U.S. public companies and corresponding increased costs of capital created by the weakness in the U.S.
financial markets and decreases in cash flow forecasts for us and the markets in which we operate. Certain technology and domain assets were written-down due to the decreased cash flow forecasts and planned utilization of the assets. The impairment
charges will not result in any current or future cash expenditures.

No indicators of impairment of our intangible assets have
been identified to date in 2010. 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. In the second quarter of 2010, we issued performance based awards of stock options and restricted stock units that have vesting based on certain service and market conditions. 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 service period of the award. For performance based
awards, we factor an estimated probability of achieving certain service and market conditions and recognize compensation cost over the service period of the award.



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We generally use the
Black-Scholes option pricing model as our method of valuation for stock-based awards with time-based vesting and use other fair value models for performance based awards that have vesting based on certain service and market conditions. 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. 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 and the Black-Scholes option pricing model and other fair value models 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. 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. See Note 3 Stock-based Compensation Plans in the condensed consolidated financial statements
for additional information.

Allowance for Doubtful Accounts and Advertiser and Incentive Program 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. Under the advertiser incentive program, we grant advertisers credits depending upon the individual amounts of prepayments made. The incentive program allowance is
determined based on the historical rate of incentives earned and used by advertisers compared to the related revenues recognized by us. 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, available carrybacks 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 increases 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, available carrybacks and projections of future taxable income, 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, 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 have arisen due
to deductions taken in our financial statements related to the impairment of goodwill and amortization of intangible assets recorded in connection with various acquisitions that are tax-deductible over 15 year periods. Based on available carrybacks
and projections of future taxable income the Company expects to be able to recover these assets. The amount of the net deferred tax assets considered realizable, however, could be reduced in the near term if our projections of future taxable income
are reduced or if we do not perform at the levels we are projecting. This could result in increases to the valuation allowance for deferred tax assets and a corresponding increase to 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 (previously FIN No. 48, Accounting for Uncertainty in Income Taxes), clarifies the accounting for uncertainty in income taxes recognized in the financial statements. This
pronouncement prescribes a recognition threshold and measurement



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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.

As of September 30, 2010, we have net deferred tax assets of $51.6 million, relating to the impairment of goodwill,
amortization of intangibles assets and certain other temporary differences. 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 September 30, 2010, 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 valuation allowance of $3.8 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 September 30, 2010, an adjustment to the net deferred tax assets would impact net income or stockholders equity in the period such determination was made.

As of September 30, 2010, 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.

Recently Issued Accounting Pronouncements

In October 2009, the FASB issued Accounting Standards Update (ASU) 2009No. 13 Multiple-Deliverable Revenue Arrangements, which amends FASB ASC 605 Revenue Recognition. This provides
amendments to the criteria for separating deliverables, measuring and allocating arrangement consideration to one or more units of accounting. This update establishes a selling price hierarchy for determining the selling price of a deliverable. ASU
2009No. 13 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company is required to and plans to adopt the provisions of this update beginning in the first
quarter of 2011. The Company is currently assessing the impact of the adoption of ASU 2009No. 13.



|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 September 30, 2010, 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, can not provide absolute assurance of achieving the desired control objectives.



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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.

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
|-------- | ------------

We have
updated the risk factors previously disclosed in Part I, Item 1A. under the caption Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2009, which was filed with the SEC on March 10,
2010. We do not believe any of the changes constitute material changes to the risk factors. An investment in our Class B common stock involves various risks, including those mentioned below and those that are discussed from time to time in our
other periodic filings with the SEC. Investors should carefully consider these risks, along with the other information contained in this report, before making an investment decision regarding our stock. There may be additional risks of which we are
currently unaware, or which we currently consider immaterial. All of these risks could have a material adverse effect on our financial condition, our results of operations, and the value of our stock.

Risks Relating to Our Company

Our
limited operating history makes evaluation of our business difficult.

We were formally incorporated in January of 2003. We
acquired Enhance Interactive in February of 2003, TrafficLeader in October of 2003, and goClick in July of 2004. In February and April of 2005, we completed the acquisitions of certain assets of Name Development and Pike Street Industries,
respectively. In July of 2005 we completed the acquisition of IndustryBrains. In May of 2006 we completed the acquisition of certain assets of AreaConnect and Open List. In September of 2007, we completed the acquisition of VoiceStar.

We have limited historical financial data upon which to base planned operating expenses or forecast accurately our future operating
results. Further, our limited operating history will make it difficult for investors and securities analysts to evaluate our business and prospects. Our failure to address these risks and difficulties successfully could seriously harm us.

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 $141.4 million as of September 30, 2010. 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 may increase our direct monetization of our proprietary traffic sources, which could adversely affect our
revenues.

Our strategic plan has been to increase our direct monetization of our proprietary traffic sources by using more
of the advertising listings on our Publishing Network to display the advertisements of advertisers who are on our direct technology platform and those with whom we have direct relationships, as opposed to advertisers from third parties. This
monetization may not be of the same rate levels as other advertising providers and as a result could adversely affect our revenues.

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 traffic and calls 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 click-throughs. Yahoo! discontinued its feed management service relationship with us effective December 31, 2009 as a result of its recently
announced partnership with Microsoft. Accordingly, we ended our feed management and related service offerings to advertisers on that date. We generated $7.5 million in revenues from feed management and related services for the year ended
December 31, 2009. The impact on our financial statements attributable to our ending this service is lessened by the relatively low operating margin attributable to this service given our revenue share arrangement with Yahoo! with respect
thereto. 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 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.



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Companies distributing
advertising on the Internet have experienced, and will likely continue to experience, consolidation. This consolidation has reduced the number of partners that control the online advertising outlets with the most user traffic. According to the
comScore Media Metrix Core Search Report for December 2009, Yahoo! accounted for 17% of the online searches in the United States and Google accounted for 66%. As a result, the larger distribution partners have greater control over determining the
market terms of distribution, including placement of advertisements and cost of placement. In addition, many participants in the performance-based advertising and search marketing industries control significant portions of the 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., Vantage Media, LLC, 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.

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 country and in local 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 23% of our total revenues for the nine months
ended September 30, 2010. We recently 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 52% and 47% of our revenue from our five largest customers for the year ended December 31, 2009, and for the nine months ended September 30, 2010, 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 52% of our total revenues for the year ended December 31, 2009 and 47% for the nine months ended September 30, 2010, respectively. AT&T is our largest customer and was responsible for
23% of our total revenues for the nine months ended September 30, 2010 and 44% of accounts receivable at September 30, 2010. We recently 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 (including AT&T and Yahoo!) 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.



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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, 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 most cases, advertisers
use our online tools and account management systems to create and submit advertiser listings. These advertiser listings are submitted in a bulk data feed to our distribution partners. 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.

We have a large number of distribution partners who display our advertiser listings on their networks. Our advertiser listings are
predominantly delivered to our distribution partners in an automated fashion through an XML data feed or data dump. 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 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. 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 Web sites. We may not successfully avoid liability for unlawful
activities carried out by our advertisers 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 advertiser 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.



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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 advertiser 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.

We are dependent
upon the quality of traffic in our network to provide value to our advertisers and the advertisers of our 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 Internet and
voice traffic that we deliver to our advertisers. Among the factors we seek to monitor are sources and causes of low quality clicks such as non-human processes, including robots, spiders or other software, the mechanical automation of clicking, and
other types of invalid clicks, 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 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 traffic. If we are unable to stop or reduce low quality traffic, these refunds may increase. Low-quality
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 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 Web sites that would be costly to defend and could limit our ability
to use certain critical technologies.

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;
| | - |  | --------------------------------------------------------------------------------------------------



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| |  |  | 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.

The loss of our senior management, including our founding executive officers, 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 founding executive officers, 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 September 30, 2010, 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 founding executive officers, for any reason, or any conflict among our founding
executive officers, 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 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



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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 Market could be adversely affected.

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.

Accounting for employee stock options using the fair value method has significantly reduced and will likely continue to significantly reduce our net
income.

We adopted the provisions of FASB ASC 718 on January 1, 2006. Thus, our consolidated financial statements
reflect the fair value of stock options granted to employees as a compensation expense, which has had, and will in the future likely continue to have a significant adverse impact on our results of operations and net income per share. We rely heavily
on stock options to compensate existing employees and to attract new employees. If we reduce or alter our use of stock-based compensation to minimize the recognition of these expenses, our ability to recruit, motivate and retain employees may be
impaired, which could put us at a competitive disadvantage in the employee marketplace. In order to prevent any net decrease in their overall compensation packages, we may choose to make corresponding increases in the cash compensation or other
incentives we pay to existing and new employees. Any increases in employee wages and salaries would diminish our cash available for marketing, product development and other uses and might cause our GAAP profits to decline. Any of these effects might
cause the market price of our Class B common stock to decline.

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 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.



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Factors that could
affect our ability to achieve these benefits include:



| |  |  | Our revenue will also depend on the levels of traffic, calls and click-throughs that occur on our network of Web sites is able to achieve in any
period. Traffic levels, calls and click-throughs will increase and decrease based upon a number of factors not entirely within our control, including the extent of indexing of our Web sites within search engines and directories, placement within
search results and success of marketing efforts. Traffic levels, the number of calls and click-throughs may also be affected by service interruptions or other technical outages. Our ability to meet the traffic demands, calls and click-throughs of
our network of Web sites is also dependent on a number of third party vendors and our technical teams to manage the operations effectively. Any downtime of our servers or other outages will negatively impact the revenue from our Publishing Network.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will need to continue to acquire commercially valuable Internet domain names to grow our presence in local online advertising. We will need to
continuously improve our technologies to acquire valuable Internet domain names as competition in the marketplace for appropriate Internet domain names intensifies. Our domain name acquisition efforts are subject to rules and guidelines in the
United States and in foreign countries established by registries which maintain Internet domain name registrations and the registrars which process and facilitate Internet domain name registrations. The registries and registrars may change the rules
and guidelines for acquiring Internet domains or establish additional requirements for previously-owned Internet domain names or modify the requirements for holding Internet domain names. As a result, we might not acquire or maintain names that
contribute to our financial results.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Some of our existing distribution partners may perceive our Publishing Network as a competitive threat and therefore may decide to terminate their
agreements with us.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We intend to apply our technology and expertise to geography-specific Web sites that we believe are under-commercialized and not yet mature from a
monetization perspective. However, if the current disparities in traffic and monetization of such search terms do not narrow in a favorable way, we may expend significant company resources on business efforts that do not realize the results we
anticipate.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

We do not control the means by which users access our Web sites, 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 Web sites. Consumers access our Web sites primarily through the following methods: directly accessing our Web sites by typing descriptive keywords or keyword strings
into the uniform resource locator (URL) address box of an Internet browser; accessing our Web sites by clicking on bookmarked Web sites; and accessing our Web sites 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 or directory.
Internet browsers may provide alternatives to the URL address box to locate Web sites, and search engines may from time to time change and establish rules regarding the indexing and optimization of Web sites. We also market certain Web sites through
search engines. 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 Web sites are not within our control. We may experience a decline in traffic to our Web sites 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 engines we utilize to market and drive users to our Web sites to continue to periodically change their algorithms, policies
and technologies. These changes may result in an interruption in users ability to access our Web sites or impair our ability to maintain and grow the number of users who visit our Web sites. 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 intend to continue to 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



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Protection Act. Additionally, we display paid listings on third party domain names and third party Web sites 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-per-click services;
| | - |  | -----------------------------------------------



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



| |  |  | aggregation or optimization of online advertising for distribution through search engines, product shopping engines, directories, Web sites or other
outlets;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provision of local and vertical Web sites 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 online advertising to end users or customers of advertisers through destination Web sites or other distribution outlets;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | delivery of pay-for-call advertising to end users or customers of advertisers through destination Web sites or other 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 and call analytics 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 in the search marketing services industry.

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
| | - |  | ------------------------------



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

Currently, and in the future, as the use of the Internet and other 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, and
distribution partners have a 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 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.



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If we fail to address
these issues in a timely manner, we may lose the confidence of our advertisers 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 collocation 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 collocation 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.

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 11/868,398 titled System and Method for Classifying Search Queries, 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



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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.

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 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, 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. Recent disruptions in the global financial markets and the resulting deterioration in economic conditions has caused and
could cause additional decreases in or delays in advertising spending and is likely to 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 the recent deterioration in economic conditions could negatively impact our results of operations.

We depend on the
growth of the Internet and Internet infrastructure for our future growth and any decrease in growth or anticipated growth in 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 Internet or telecommunications infrastructure;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | failure of the individual networking infrastructures of our advertisers 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
online commercial transactions. In order for the 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.

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



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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.

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
Web sites. 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 Web sites ability to collect personal information from minors. COPPA allows the Federal Trade Commission (FTC) to impose fines and penalties upon Web site 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 FTC is
authorized to enforce the CAN-SPAM Act. This law also 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, federal legislation is expected to
be introduced which 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.

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.



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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 the
enhanced transmission of voice 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), 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, particularly in light of the Companys acquisition of Marchex Voice Services.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 increasing growth of the broadband IP telephony market and popularity of broadband IP telephony products and services heighten the risk that governments 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Federal and state telemarketing laws including the Telephone Consumer Protection Act, 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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 Market (formerly, the Nasdaq National Market) ranged from $3.00 to $26.14 per share through September 30, 2010. 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;
| | - |  | -------------------------------------------------------------------------------------



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



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| |  |  | 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 Market and the market for 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 founding executive officers 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
September 30, 2010, Russell C. Horowitz, Ethan A. Caldwell, Peter Christothoulou and John Keister, our founding executive officers, 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 founding executive officers 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 founding executive officers. 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 founding executive officers 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 founding executive officers 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 founding executive officers 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 founding executive officers 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.

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



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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 third quarter of 2010, 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) | 
|July 1, 2010  July 31, 2010               |  |                                | 168,068 |  |                            | $ | 4.16 |                                                                             |  |  | 168,068                                                                                                      |  |  |  | 1,385,356 | 
|August 1, 2010  August 31, 2010           |  |                                | 28,234  |  |                            | $ | 4.82 |                                                                             |  |  | 28,234                                                                                                       |  |  |  | 1,357,122 | 
|September 1, 2010  September 30, 2010 (2) |  |                                | 116,142 |  |                            | $ | 3.40 |                                                                             |  |  | 86,142                                                                                                       |  |  |  | 1,270,980 | 
|                                           |  |                                |         |  |                            |   |      |                                                                             |  |  |                                                                                                              |  |  |  |           | 
|Total Class B Common Shares                |  |                                | 312,444 |  |                            | $ | 3.94 |                                                                             |  |  | 282,444                                                                                                      |  |  |  | 1,270,980 | 



|(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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes 30,000 shares of restricted equity subject to vesting which were issued to certain employees. We repurchased shares which were not already vested for $0.01 per
share upon termination of employment.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|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 A. ARENDSName:

Michael A. ArendsTitle:

Chief Financial Officer (Principal Accounting Officer)


November 5, 2010



50