You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in the "Risk Factors" section.

Overview

We operate a consumer-driven service for our members to research, hire, rate and review local professionals for critical needs, such as home, health care and automotive services. Our ratings and reviews, which are available only to our members, help our members find the best provider for their local service needs. We had more than 1.2 million paid memberships as of March 31, 2012. We allow local service providers who are highly rated by our members to advertise discounts and other promotions to our members.

We generate revenue from both our members and our service providers. We derive membership revenue from subscription fees and, in certain cases, non-refundable initiation fees for monthly, annual and multi-year memberships. These fees typically are charged in advance and recognized ratably over the subscription period and the expected life of the membership, respectively. As of March 31, 2012, approximately 89% of our total membership base had purchased annual or multi-year memberships. These subscription fees represent a significant source of working capital and provide a relatively predictable revenue stream.

We derive service provider revenue principally from term-based sales of advertising to local service providers. Our members grade local service providers on an "A" to "F" scale, and we invite local service providers with an average grade of "B" or better and at least two reviews submitted in the last three years to advertise to our members through any or all of our website, email promotions, monthly magazine and call center. Service provider contracts can be prepaid or invoiced monthly at the option of the service provider and carry an early termination penalty. We recognize service provider revenue for these contracts ratably over the period in which an advertising campaign is run. We are expanding our service provider sales force to continue to drive increased service provider revenue. Our high service provider renewal rates, both in number of service providers renewing and as a percentage of initial contract value renewed, have provided us with a relatively predictable revenue stream.

To establish a new geographic market, we begin by offering free memberships and actively soliciting members' reviews of local service providers. As the number of members and the number of reviews of service providers grow, we begin charging membership fees and offering advertising opportunities to eligible local service providers. Historically, we have begun to convert most markets to paid membership status within 24 months after launch.

Increasing new paid memberships is our key growth strategy. Increased penetration in a market results in more member reviews of local service providers, which increases the value of our service to consumers and drives further membership growth in that market. Increased penetration in a market also drives increased advertising sales to service providers and supports higher advertising rates as the pool of members actively seeking to hire service providers grows. However, our ability to increase advertising rates tends to lag increased penetration of our markets due to our inability to increase rates under existing service provider contracts prior to renewal. Our primary strategy for new member acquisition is national advertising. We expect marketing expense to increase in future periods as we accelerate our advertising spending to acquire new paid memberships.

Market Cohort Analysis

To analyze our progress in executing our expansion plan, we compile certain financial and operating data regarding markets we have entered grouped by the years in which the markets transitioned to paid membership status. The table below summarizes this data for twelve month period ended March 31, 2012 by the following cohorts. The pre-2003 cohort includes our ten most established markets, where we initially built out our business model. The markets in this cohort include several mid-sized urban markets in the Midwest as well as Chicago and Boston. The 2003 through 2007 cohort includes the first major subset of markets, including many of our largest potential markets, that we targeted in our national expansion strategy. The markets in these cohorts have begun to achieve penetration rates that allow us to transition beyond introductory membership and advertising rates. The 2008-2010 and post-2010 cohorts include markets that have most recently converted to paid status and that still have predominantly introductory membership and advertising rates. The markets in these cohorts generally are smaller markets that we entered to fill out our national presence.

                                                                   Service            Avg.                                                    Annual
                             Avg.            Membership           Provider          Marketing                             Estimated         Membership
              # of         Revenue/         Revenue/Paid        Revenue/Paid        Expense/          Total Paid         Penetration          Growth
Cohort       Markets       Market(1)       Membership (2)      Membership (3)      Market (4)       Memberships(5)         Rate(6)           Rate(7)
Pre-2003           10     $ 3,621,617     $          50.78     $        109.02     $   995,174              271,800               6.8 %              50 %
2003-2007          35       1,736,684                43.21               76.01       1,022,888              655,982               4.6 %              80 %
2008-2010         103          59,506                15.36               14.81         145,424              278,193               4.6 %             117 %
Post 2010          38           5,871                11.63               15.12          49,935               15,412               2.0 %               *

Total             186                                                                                     1,221,387

* Not meaningful

(1) Average revenue per market is calculated by dividing the revenue recognized for the markets in a given cohort by the number of markets in the cohort at period end.

(2) Membership revenue per paid membership is calculated as our membership revenue in the cohort divided by the average number of paid memberships in the cohort. We calculate this average per market to facilitate comparisons among cohorts, but it is not intended to represent typical characteristics of actual markets within the cohort.

(3) Service provider revenue per paid membership is calculated as service provider revenue in the cohort divided by the average number of paid memberships in the cohort.

(4) Average marketing expense per market is calculated first by allocating marketing expense to each cohort based on the percentage of our total target demographic for all markets in such cohort, as determined by third-party data, and then dividing the allocated cohort marketing expense by the number of markets in the cohort at period end. We calculate this average per market to facilitate comparisons among cohorts, but it is not intended to represent typical characteristics of actual markets within the cohort. According to a February 2012 demographic study by LogicLab LLC that we commissioned, there were approximately 29 million households in the United States in our target demographic, which consists of homeowners aged 35 to 64 with an annual household income of at least $75,000. Approximately 25 million of these households were in our markets. The average number of households per market in our demographic target was 400,000, 410,000, 60,000 and 20,000 for the pre-2003, 2003-2007, 2008-2010 and post-2010 cohorts, respectively.

(5) Includes total paid memberships as of March 31, 2012. Total paid memberships in each cohort includes a de minimis number of complimentary memberships in our paid markets for the period presented. All revenue and paid memberships relating to locations that were not identified as part of a specific market are included in the 2008-2010 cohort.

(6) Estimated penetration rate is calculated by dividing the number of paid memberships in a given cohort as of March 31, 2012 by the number of households meeting our target demographic criteria in such cohort.

(7) Annual membership growth rate is the rate of increase in the total number of paid memberships in the cohort between March 31, 2011 and March 31, 2012.

Our average revenue per market, membership revenue per paid membership and service provider revenue per paid membership generally increase with the maturity and corresponding increased penetration of our markets. However, we expect total revenue per paid membership to fluctuate from period to period and in recent periods we generally recorded declining total revenue per paid membership overall. This decline reflects a lag in our ability to leverage increased penetration in a market into increased advertising rates as our average advertising contract term in effect as of March 31, 2012 was 13.9 months and we are only able to increase rates for a given participating service provider upon contract renewal. In addition, the decline reflects rapid membership growth in less penetrated markets where the average membership and service provider revenue per paid member is lower than in more penetrated markets.

We also have adopted a dynamic pricing model in 61 of our mature markets to offer members the opportunity to purchase only those segments of Angie's List that are most relevant to them, which includes the original Angie's List, which covers 320 categories, including home, lawn, car and pets, Angie's List Health & Wellness or Angie's List Classic Cars. These segments continue to be offered in all other markets as a single bundle. We anticipate unbundling our offerings in more of our markets as market penetration increases and the number and categories of local service providers reviewed by members in such markets grow. We believe this pricing model will enable us to offer a better value proposition to our members and preserve cross-selling opportunities as members' needs evolve. Although we expect that this strategy may result in lower average membership fees per paid membership overall, we believe the new members generated by this pricing model should ultimately produce increased service provider revenue per paid membership.

As a market matures, our penetration rate typically increases. Historically, while the absolute number of paid members may grow faster in large markets, our small and medium markets have often achieved greater penetration over a shorter time period than our larger markets. We believe that a principal reason for our lower penetration rates in large markets is the manner in which we market Angie's List to our target demographic in such markets. We have chosen to spend 100% of our marketing dollars on national advertising. We believe that this advertising strategy provides us the most cost-efficient manner of acquiring new paid memberships. However, advertising nationally means we deliver the same volume of advertising regardless of the size of the market. Since each market differs in terms of the number of advertising outlets available, the impact of our spending on national advertising varies across markets. In our experience, smaller markets typically have fewer advertising outlets than larger markets. We believe the same volume of advertising in a smaller market is more effective in building brand awareness and generating new memberships than in larger markets. We expect to continue to see lower relative penetration rates in our larger markets for these reasons. Because several of these larger markets are in the 2003-2007 cohort, over time our penetration rate in this cohort may lag other cohorts.

Key Operating Metrics

In addition to the line items in our financial statements, we regularly review a number of other operating metrics related to our membership and service provider bases to evaluate our business, determine the allocation of resources and make decisions regarding business strategies. We believe information on these metrics is useful for investors and analysts to understand the underlying trends in our business. The following table summarizes our key operating metrics, which are unaudited, for the three months ended March 31, 2012 and 2011:

                                                           Three Months Ended March 31,
                                                            2012                    2011
Total paid memberships (end of period)                       1,221,387              674,490
Gross paid memberships added (in period)                       215,431              112,761
Marketing cost per paid membership acquisition
(in period)                                            $            82           $       98
First-year membership renewal rate (in period)                      73 %                 71 %
Average membership renewal rate (in period)                         76 %                 75 %
Participating service providers (end of period)                 27,100               17,577
Total service provider contract value (end of
period, in thousands)                                  $        87,335           $   50,303

Total paid memberships. Total paid memberships reflects the number of paid memberships at the end of each period presented. Total paid memberships also includes a de minimis number of complimentary memberships in our paid markets for all periods presented. We generally expect that there will be one membership per household and, as such, each membership may actually represent multiple individual consumers.

Gross paid memberships added. Gross paid memberships added reflects the total number of new paid memberships added in a reporting period. Gross paid memberships added increased substantially in each period presented, which we believe has been driven by our increasing investment in national advertising and, to a lesser extent, by "word of mouth" referrals from our existing members.

Marketing cost per paid membership acquisition. We calculate marketing cost per paid membership acquisition in a reporting period as marketing expense divided by gross paid memberships added in that period. Because we advertise in national media, some of our marketing expense also increases the number of unpaid memberships. On a comparative basis, marketing cost per paid membership acquisition can reflect our success in generating "word of mouth" referrals and experimentation and adjustments to our marketing expense to focus on more effective advertising outlets for membership acquisition. We typically have higher marketing expense and marketing cost per paid membership acquisition in the second and third quarters of the year in order to attract consumers during the periods when we have found they are most actively seeking Angie's List services. As such, marketing cost per paid membership also tends to be higher in these periods, particularly in the second quarter, as we ramp up spending to build brand awareness. Our marketing expense and marketing cost per paid membership acquisition is normally reduced in the fourth quarter, reflecting reduced consumer activity in the service sector and higher advertising rates generally due to holiday promotional activity.

Membership renewal rates. First-year membership renewal rate reflects the percentage of paid memberships expiring in the reporting period after the first year of membership that are renewed. Average membership renewal rate reflects the percentage of all paid memberships expiring in the reporting period that are renewed. Renewal rates do not include monthly memberships, which comprised approximately 11% of our total membership base as of March 31, 2012. Given the correlation between increased penetration and higher total revenue per paid membership, we view first-year membership renewal rate and average membership renewal rate as key indicators of expected operating results in future periods.

Participating service providers. We include in participating service providers the total number of service providers under contract for advertising at the end of the period.

Total service provider contract value. We calculate service provider contract value as the total contract value of active service provider contracts at the end of the period. Contract value is the total payment obligation of a service provider to us, including amounts already recognized in revenue, over the stated term of the contract.

In addition, we have recently begun tracking contract value backlog as a key metric. Contract value backlog consists of the portion of service provider contract value at the stated date which has not yet been recognized as revenue. At March 31, 2012, our contract value backlog was $55.1 million.

Results of Operations

The following tables set forth our results of operations for the periods
presented in absolute dollars and as a percentage of our revenue for those
periods. The period-to-period comparison of financial results is not necessarily
indicative of future results.



                                                                     Three Months Ended
                                                                          March 31,
                                                                   2012               2011
                                                                   (dollars in thousands)
             Revenue
             Membership                                         $     9,975         $   7,033
             Service provider                                        21,119            10,595

             Total revenue                                           31,094            17,628
             Operating expenses
             Operations and support                                   5,775             3,399
             Selling                                                 12,409             6,084
             Marketing                                               17,606            11,099
             Technology(1)                                            3,127             1,843
             General and administrative(1)                            5,171             3,904

             Operating loss                                         (12,994 )          (8,701 )
             Interest expense                                           456               935

             Loss before income taxes                           $   (13,450 )       $  (9,636 )
             Income tax expense                                          -                 -

             Net loss                                           $   (13,450 )       $  (9,636 )


(1)  Includes non-cash stock-based compensation as follows:

             Technology                                         $       146         $     238
             General and administrative                                 534               355

                                                                $       680         $     593


                                                                     Three Months Ended
                                                                          March 31,
                                                                   2012               2011
             Revenue
             Membership                                                  32 %              40 %
             Service provider                                            68                60

             Total revenue                                              100 %             100 %
             Operating expenses
             Operations and support                                      19                19
             Selling                                                     40                35
             Marketing                                                   56                63
             Technology                                                  10                10
             General and administrative                                  17                22

             Operating loss                                             (42 )             (49 )
             Interest expense                                             1                 6

             Loss before income taxes                                   (43 )             (55 )
             Income tax expense                                          -                 -

             Net loss                                                   (43 )%            (55 )%

Comparison of the three months ended March 31, 2012 and 2011

Revenue

                                                      Three Months Ended
                                                           March 31,
                                                    2012                2011              % Change
                                                    (dollars in thousands)
Revenue
Membership                                      $      9,975          $   7,033                  42 %
Service provider                                      21,119             10,595                  99 %

Total revenue                                   $     31,094          $  17,628                  76 %

Percentage of revenue by type
Membership                                                32 %               40 %
Service provider                                          68 %               60 %

Total revenue                                            100 %              100 %

Total paid memberships (end of period)             1,221,387            674,490                  81 %
Gross paid memberships added (in period)             215,431            112,761                  91 %
Participating service providers (end of
period)                                               27,100             17,577                  54 %

Total revenue increased $13.5 million for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011.

Membership revenue increased $2.9 million primarily due to an 81% increase in the total number of paid memberships, partially offset by a 21% decrease in membership revenue per paid membership in the three months ended March 31, 2012. The decrease in membership revenue per paid membership resulted primarily from growth in paid memberships in less penetrated markets where average membership fees per paid membership are lower. This decline also reflected the effect of allowing members in our more penetrated markets to purchase only those segments of Angie's List that are most relevant to them at a lower membership rate than applicable for the full service. We offer only bundled memberships to members in less penetrated markets. The decrease in membership revenue per paid membership in the three months ended March 31, 2012 also resulted from an increase from 87% to 89% of total memberships constituting annual and multi-year memberships. Consumers pay more per month for a monthly membership than for an annual membership. Therefore, in periods in which our percentage of memberships shifts to more annual and multi-year memberships, our membership revenue per paid membership decreases.

Service provider revenue increased $10.6 million to 68% of revenue primarily as a result of a 54% increase in the number of local service providers participating in our advertising programs and an 11% increase in the average service provider contract value. We included e-commerce revenue of $3.8 million and $0.7 million in service provider revenue in the three months ended March 31, 2012 and 2011, respectively. Our e-commerce revenue is generated by our Angie's List Big Deal and Storefront offerings. While we are encouraged by the early results of these offerings, we expect the revenue contribution from these offerings to fluctuate from period to period as the offerings evolve.

Operations and support

                                  Three Months Ended March 31,
                                   2012                  2011            % Change
                                     (dollars in thousands)
      Operations and support   $       5,775         $       3,399              70 %
      Percentage of revenue               19 %                  19 %

Operations and support expense increased $2.4 million for the three months ended March 31, 2012 compared to the three months ended March 31, 2011. This increase was due in part to a $0.6 million increase in call center costs as compared to the prior year period as a result of increased headcount from 62 to 126 due to the recent growth of our membership. In addition, there was a $0.5 million increase in credit card processing fees for member enrollment and service provider transactions and a $0.7 million increase in costs associated with the collection of member reviews of service providers as we continued to increase the content on our website. Publication-related costs increased by $0.4 million due to a 61% increase in circulation of our monthly publication. We expect operations and support to continue to increase in absolute dollars as we grow our membership and service provider base. Operations and support expense as a percentage of revenue was flat due to the increase in revenue and our realization of economies of scale, offset by the increased expenses noted above.

Selling



                                  Three Months Ended March 31,
                                    2012                  2011          % Change
                                     (dollars in thousands)
       Selling                 $       12,409         $      6,084            104 %
       Percentage of revenue               40 %                 35 %

Selling expense increased $6.3 million for the three months ended March 31, 2012 compared to the three months ended March 31, 2011. This increase was due in part to an 83% increase in new advertising contract origination value. We incur greater effective sales commission rates on new advertising contracts as compared to renewals. In connection with our increased selling efforts, we increased the number of our sales personnel originating new advertising contracts by 96% to 408 from 208 and the number of our sales personnel responsible for contract renewals by 57% to 94 from 60 from the end of the prior year period. The increase in selling expense included $0.5 million of draws in excess of commissions earned as our more recent sales hires for new advertising generally do not produce as much revenue as more experienced sales personnel.

. . .