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

FORM 10-K

[X]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

OR

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

For the transition from ________________ to _________________

COMMISSION FILE NUMBER 000-26365

Overture Services, Inc.
(Formerly GoTo.com, Inc.)
(Exact name of registrant as specified in its charter)

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 95-4652060                          
|(State or Other Jurisdiction of
Incorporation or Organization) |  | (I.R.S. Employer
Identification No.)

74 NORTH PASADENA AVENUE 3RD FLOOR
PASADENA, CALIFORNIA 91103
(Address of principal executive offices)

626-685-5600
(Registrants telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.0001 par value

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [   ]

The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based on the closing price for the
registrants common stock in the Nasdaq National Market on January 31, 2002,
was approximately $1.5 billion. This calculation does not reflect a
determination that certain persons are or are not affiliates of the registrant
for any other purposes and assumes that shares held by affiliates include only
shares held by executive officers, members of the board of directors (but not
any fund of which any such persons may be a partner), holders of greater than
5% and all shares that have been reported on Schedule 13D,
consisting of; Bill Gross idealab! or members of the group
filing such Schedule 13D dated November 27, 2001; TCW Business
Unit filing such Schedule 13D dated December 31, 2001; and RS
Investment Management Co. filing such Schedule 13D dated
December 31, 2001. The number of outstanding shares of the registrants
common stock as of the close of business on January 31, 2002 was 57,673,375.

DOCUMENTS INCORPORATED BY REFERENCE

Items 10, 11, 12 and 13 of Part III incorporate information by reference from
the definitive proxy statement for the registrants 2002 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission
not later than 120 days after December 31, 2001.

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|              |                                                                                               |  |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | ITEM 1. BUSINESS                                                                             
|              | ITEM 2. PROPERTIES                                                                           
|              | ITEM 3. LEGAL PROCEEDINGS                                                                    
|              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II      
|              | ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                
|              | ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)           
|              | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|              | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|              | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|              | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III     
|              | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|              | ITEM 11. EXECUTIVE COMPENSATION                                                              
|              | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|              | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|              | ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                    
|SIGNATURES   
|Exhibit 10.23
|EXHIBIT 23.1 



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OVERTURE SERVICES, INC.

FISCAL YEAR 2001 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

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|         | ITEM 2.  | PROPERTIES                                                                            |  |            | 11 |     
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|         | ITEM 3.  | LEGAL PROCEEDINGS                                                                     |  |            | 11 |     
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|         | ITEM 5.  | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
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|         | ITEM 6.  | SELECTED FINANCIAL DATA                                                               |  |            | 14 |     
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|         | ITEM 7.  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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|         | ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  |            | 36 |     
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|         | ITEM 8.  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                           |  |            | 36 |     
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AND FINANCIAL DISCLOSURE   |  |            | 36 |     
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|PART III
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|         | ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                    |  |            | 36 |     
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|         | ITEM 11. | EXECUTIVE COMPENSATION                                                                |  |            | 36 |     
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|         | ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                        |  |            | 36 |     
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|         | ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                        |  |            | 37 |     
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|PART IV 
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|         | ITEM 14. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                       |  |            | 37 |     
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|         |          |                                                                                       |  | SIGNATURES |    |      |  | 

Forward Looking Statement

In addition to historical information, this Form 10-K contains
forward-looking statements, including statements related to the expected growth
of our affiliate program, the amount of traffic that will be directed to us
from our affiliates in the future, the timing and amount of any increase in our
average price per paid introduction, continued profitability, the timing and
amount of our number of paid introductions, the amount of future advertiser
spending with Overture, fluctuation in the price of our common stock, changes
in our quarter-to-quarter financial results and future competition. We use
words such as anticipates, believes, plans, expects, future,
intends and similar expression to identify these forward-looking statements.
These forward-looking statements are subject to certain risks and
uncertainties, as well as assumptions that could cause actual results to differ
materially from those reflected in these forward-looking statements. Factors that might cause actual results
to differ include, but are not limited to, those discussed in the sections
entitled Managements Discussion and Analysis of Financial Condition and
Results of Operations and Risks That Could Affect Our Financial Condition and
Results of Operations. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect managements opinions only as
of the date hereof. The Company undertakes no obligation to revise or publicly
release the results of any revision to these forward-looking statements.

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PART I




ITEM 1. BUSINESS

OVERVIEW

Overture Services, Inc. (formerly GoTo.com, Inc.) (the Company or
Overture) is the leader in Pay-For-Performance search on the Internet. Overture
operates an online marketplace that introduces consumers and
businesses who
search the Internet to advertisers that provide products, services and
information. Advertisers participating in our marketplace include retail
merchants, wholesale and service businesses and manufacturers. Overture
facilitates these introductions through our search service, which enables
advertisers to bid in an ongoing auction for priority placement in our search
results after editorial approval. Priority placement means that the search results appear on the page
ranked in descending order of bid price, with the highest bidders listing
appearing first. Each advertiser pays Overture the amount of its bid whenever a
consumer or business clicks on the advertisers listing in our search results.
Advertisers pay Overture for each clickthrough, so advertisers bid only on
keywords relevant to the products, services or information that they offer.
Because each advertiser chooses the bid amount and advertisement placement that
is optimal for its business, we believe the Overture marketplace provides
advertisers with a cost-effective way to target consumers and businesses.
Consumers and businesses access the Overture search service primarily through
our affiliates, a network of Web sites that have integrated Overtures search
service into their sites or that direct consumer and business traffic to our
site. Consumers and businesses can also access Overtures search service
directly through Overtures Web site.

The Company was incorporated on September 15, 1997 in the state of
Delaware and officially launched its services on June 1, 1998. On October 8,
2001, the Company changed its corporate name to Overture Services, Inc. and
changed its Nasdaq Stock Market trading symbol to OVER.

INDUSTRY OVERVIEW

EVOLUTION OF SEARCH SERVICES

Search services enable consumers and businesses to search the Internet for
a listing of Web sites based on a specific product, service or topic of
interest. After e-mail, consumers use search services more than any other
Internet application. Initially, these search services offered consumers and
businesses the ability to efficiently locate desired information on Web sites.
However, the companies who provide search services realized that increasing the
number, frequency and duration of visits to their own sites, rather than sending
consumers and businesses to other Web sites, yielded greater potential
advertising and electronic commerce opportunities. Accordingly, these companies
evolved into portals, or online media companies that, in addition to search
services, deliver a broad array of content and other services designed to keep
consumers and businesses at their sites.

UNMET SEARCH NEEDS OF CONSUMERS AND BUSINESSES

We believe that consumers who are searching for products, services or
information services are best served by receiving search results, which list
Web sites relevant to their query. We believe that relevance is achieved by an
online marketplace that allows businesses to pay for prominence on a
Pay-For-Performance basis, since advertisers have economic incentives to ensure
relevance, because they pay for each clickthrough. In turn, clickthroughs from
relevant searches are more likely to convert into a sale for that advertiser.

Other search tools, such as algorithmic search engines, which create
search results by using software to search the Internet or editorial search
engines, which rely on editors to categorize search results, are limited in
their ability to provide relevant results, because they offer only one
relevance filter. The algorithmic search tool places undue reliance on the
ability of computer programs to categorize information in a method that will be
useful to users, while the editorial search tool requires extensive human
capital to categorize information.

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Historically, businesses have found it difficult to generate high quality,
self-qualified and highly measurable sales leads. Overtures service allows
businesses to actively manage the number of leads and price per lead that they
pay. We believe that generally, the more a business pays, the more leads it
generates. We believe that in the U.S., search provides more leads than direct
mail or yellow pages. According to the Direct Marketing Association, direct mail
receives approximately 1.7 million responses on approximately 10.7 million
pieces read per day. According to data from the Yellow Pages
Publishers Association, yellow pages advertisers receive approximately 25 million to 30 million phone calls on
approximately 30 million to 40 million references per day. We estimate that
through users searching on the Internet for products, services and information
services, there are approximately 60 million to 70 million commercial leads on
approximately 170 million to 180 million searches per day.

LIMITATIONS OF TRADITIONAL INTERNET ADVERTISING

Historically, online advertising has failed to exploit many of
the unique attributes of the Internet. To date, Internet advertising has
primarily taken the form of banner or sponsorship advertisements, which, like
traditional media advertising, are typically priced by advertisers, paying for
exposures to potential consumers and businesses. This approach, which is called
impression-based advertising, inefficiently exploits the Internets direct
marketing potential, resulting in what we believe are low consumer clickthrough
rates of approximately 0.3%, as reported by eMarketer, a market research
service firm. Advertisers are therefore paying for exposure to many viewers who
are not interested in the product or service advertised. In addition, sometimes
banner advertising on certain key words or Web sites are sold on an exclusive
basis, limiting the advertising opportunities for advertisers and limiting the
number of advertisers who can participate.

OUTSOURCED INTERNET SERVICES

Like many portals, other Web sites seek to attract and retain consumer and
business attention and maximize the revenue opportunity represented by that
attention; however, all but the largest Web sites are limited in their ability
to do so. We believe that although Web properties other than the major portal
sites, such as AOL, MSN and Yahoo, currently represent a majority of all page
views on the Web, Internet advertising spending is concentrated on the portals.

In an effort to more effectively capitalize on their consumer and business
audiences and provide more valuable advertising vehicles, many Web sites are
now outsourcing popular consumer and business services and content offerings.
In traditional media such as television, radio, and print, syndicated content
has been widely used by local media in order to augment their core programming
and, in so doing, extend their audience reach and retention. On the Internet,
providers have emerged offering Web sites syndicated services such as search,
e-mail and mapping, as well as content, such as stock quotes and news wires.
Web sites use these offerings to enhance consumer and business usage, loyalty
and retention. In order to address issues of sales force scale for
the specific content and
targetability for advertisers, some companies that develop syndicated content
also sell the advertising that goes with it.

THE NEED FOR AN ONLINE CONSUMER, BUSINESS AND ADVERTISER SEARCH SERVICE

Advertisers find it increasingly difficult to cost-effectively acquire
qualified consumer and business leads on the Internet for many reasons,
including the diffusion of consumer and business attention across the Internet,
the concentration of online advertising on large Web sites, the pricing of
Internet advertisements on an impression basis with significant minimum
expenditure requirements, and the frequent use of exclusive arrangements. This
is particularly true for advertisers seeking to reach targeted markets, despite
the unique abilities of the Internet to facilitate direct marketing. As a
result, the needs of consumers and businesses and the desires of advertisers to
meet those needs often go unmatched. Overture believes there is a significant
need for a sophisticated, distributed search service to serve both of these
constituencies by providing a targeted, cost-effective Internet advertising
solution.

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THE OVERTURE SOLUTION

We believe the Overture marketplace offers consumers and businesses quick,
easy and relevant search results for products, services and information, while
providing advertisers with a cost-effective way to target them. Key elements of
Overtures solution include the following:

SEARCH PERFORMANCE. Overture is dedicated to assisting consumers and
businesses. Since advertisers must pay for each clickthrough, or paid
introduction, to their Web site, advertisers select and bid only on those
search keywords that are most relevant to their offerings. These choices of
keywords and bids are consistent with their economic incentive to secure high
conversion rates, that is, to convert traffic or leads into sales. That same incentive
encourages advertisers to write descriptions of their products, services and
information services that describe their offerings as accurately as possible.
Overture believes that its Pay-For-Performance advertising model efficiently
aligns the interests of consumers, businesses and advertisers and improves the
ability of consumers and businesses to quickly and easily find relevant search
listings for products, services and information on the Overture service.
Consequently, we believe Overture can provide more relevant and higher quality
search results by requiring advertisers to assign a cost to their placement
decisions.

In addition, Overture believes it ensures relevant search results by
having its product quality team of more than 100 people review and edit
advertisers site descriptions and requiring that advertisers appear only on
search results pages that relate to their site. Furthermore, by foregoing
exclusive advertising relationships, Overture removes significant barriers and
enables consumers and businesses to locate relevant information and pass
quickly through our Web site or through our search service on other Web sites,
which we call affiliates, to the desired information source.

TARGETED PAY-FOR-PERFORMANCE ADVERTISING. Any advertiser in the Overture
marketplace is able to specifically target those consumers and businesses who
are interested in the products, services or information offered by the
advertiser. We believe Overture enables highly efficient and cost-effective
advertising expenditures. An advertiser pays only for consumers and businesses
who elect to visit its Web site after searching targeted keywords on which the
advertiser has bid. As a result, advertisers pay only for self-qualified leads
rather than exposures to potential consumers and businesses, as with
impression-based advertising.

Advertisers maintain control on a real-time basis over the amounts of
their bids for keywords they have selected and the aggregate amount spent on
advertising with Overture. As a result, advertisers are able to precisely
control their costs of customer acquisition using the Overture service. In
addition, Overture does not enter into exclusive advertising arrangements,
thereby enabling access to the marketplace by all potential advertisers.

OUR AFFILIATE NETWORK. By offering our search service to other Web sites,
we have created a network of affiliates that have integrated the Overture
search service into their sites or that direct consumer and business traffic to
the Overture Web site. Of Overtures total traffic for the three months ended
December 31, 2001, more than 95% came from affiliates as follows: approximately
40% came from our portal affiliates including Alta Vista, AOL, Excite.com,
go.com, iWon, Terra Lycos and Yahoo; approximately 25% came from
the browsers, Microsofts Internet Explorer and Netscapes browser product; and
approximately 35% came from other affiliates including Ask Jeeves,
InfoSpace (including MetaCrawler and Dogpile) and our Web site. We generally
provide our top three to five search listings, which we call Premium Listings,
to the portals to offer in their search results. The contracts between Overture
and the Internet browsers provide that the Overture search service is offered
on the browsers search page or as part of the browsers search functionality.
Affiliates can also provide Internet search capabilities by having an Overture
search box on their sites, which either transfers their users to the Overture
Web site or generates Overture search results while maintaining the look, feel
and navigation features specific to the affiliates sites. This enables
affiliates to enhance their users experience with search functionality and to
generate additional revenue from the consumer and business audiences visiting
their sites through the sale of advertising on search pages. The economics of
these agreements vary from affiliate to affiliate. Because Overture focuses on
deriving its revenue primarily from search results rather than banner
advertising, Overture can provide these benefits to affiliates without
conflicts for consumer and business attention for non-search content.
Overtures agreements with its portal and browser affiliates vary in initial
duration from three months to three years, and depending on the agreement, may
be terminable upon the occurrence of certain events, including for our failure
to meet certain service levels, for general breaches of agreement terms, for
changes in control or in some instances, at will. Through our network, we are
building relationships with affiliates that are intended to increase the number
of clickthroughs delivered to advertisers, which would increase the value of
the Overture advertising proposition.

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MARKET SIZE

We believe that Internet search in the U.S. generates more than $1 billion
in revenue on an annualized basis, including all forms of search-based
revenues: search listings, sponsorships and graphical advertisements. We
believe search listings represent the fastest growing segment.

We believe search listings also have tremendous growth potential, since by
our estimates, only approximately 15% of leads, or clickthroughs to businesses
are monetized today. We believe that improvements in the quality, relevance,
breadth and depth of paid listings will likely drive growth for clickthroughs
on commercial inquiries for the foreseeable future.

We also believe that the price per paid introduction advertisers pay has
growth potential. Relative to alternatives, a lead on Overture at an average
price of $0.23 is less expensive, and yet more targeted and measurable. We
therefore believe an Overture lead is more likely to convert from clickthrough
to a sale.

We believe that our business can also experience growth outside the US as
Internet and e-commerce continues to grow in those territories.

OVERTURE STRATEGY

Overtures objective is to expand participation and increase transactions
in its online marketplace. We believe that a critical mass of advertisers,
consumers, businesses, and affiliates stimulates growth in the number of
marketplace participants, which in turn can increase the efficiency of the
Overture service. We further believe that this efficiency will increase the
competition for prominent search result placement on our search service and
may, thereby, increase the amounts advertisers are willing to bid for
participation in the Overture marketplace. We believe that advertisers are
attracted to Overture as a result of the large number of opportunities to reach
interested consumers and businesses, and that consumers and businesses find
Overture useful due to the breadth of relevant advertiser links displayed on
the Overture service. A large and active base of paying advertisers increases
Overtures ability to generate comprehensive, relevant search results and to
monetize consumer and business search requests. The resulting service quality
and revenue opportunity provides the incentive for Overtures affiliates to
feature Overture search results on the their site. Elements of Overtures
strategy include:

INCREASE ADVERTISER SPENDING. During December 2001, the Overture
marketplace had approximately 53,000 paying advertisers. Overture intends to
increase the revenue from advertisers through its sales force and leverage its
reputation for Pay-For-Performance, targeting direct response market among
advertisers and their intermediaries, such as search engine marketing consultants and media
buyers. Overture reaches these constituencies through multiple marketing
channels, including targeted online marketing, mailings, sponsorship of Web
sites where advertisers congregate, participation at trade shows, appearances
in advertising industry periodicals and agreements with companies who refer
advertisers to us. We believe that the Overture marketplace is scalable and can
support a broader and deeper array of advertisers than traditional online
advertising solutions. Accordingly, Overture intends to capture a
share of the advertising from the growing number of online businesses.

EXPAND CONSUMER AND BUSINESS BASE WITH OUR AFFILIATE NETWORK. The Overture
marketplace had approximately 442 million paid introductions in the fourth
quarter of 2001. Overture believes it can increase the number of consumers and
businesses participating in the Overture marketplace by enhancing the search service implementations with our
current affiliates (more Overture search results, better placement,
etc.), as well as by distributing the
Overture search service on other Web sites not currently in our affiliate
network.

USE TECHNOLOGY TO EFFECTIVELY SCALE OUR CUSTOMER SUPPORT. The services
Overture currently provides to advertisers include online account creation and
keyword bidding, as well as a proprietary account management product that
allows advertisers to log in to a secure Web site where they can perform
account management functions, such as adding funds to their accounts, viewing
performance reports and changing their bids in real time. Overture also offers
account monitoring tools, which allow advertisers to track their total
spending, account balance and clickthroughs in real-time. These tools also
allow advertisers to manage their monthly spending plans and provide a forecast
volume of clickthroughs for keyword and listing rank, based on
activity history. Overture intends to utilize its technology to grow an efficient and
scalable operations infrastructure enabling a high volume of advertisers at a
high quality service level and at a relatively low internal cost. In addition,
Overture plans to continue to enhance the services it provides to advertisers.
Overture intends to increasingly automate the sale of advertising, enabling
advertisers to have greater control over, and satisfaction with, advertising on
the Overture marketplace.

PROVIDE EXCELLENT
SERVICE. We believe that Overture's sophisticated account management
systems and processes are a competitive advantage. Accordingly, we
believe that a high service level is attractive to advertisers. We
believe that continued investments in our account management system
and processes are an integral component
of building a larger and more active advertiser base. In addition to
providing high quality service to advertisers, we believe that
reliable technical service is important to our affiliates and our
ability to attract new affiliates.

Overture offers Full Serve and Full Serve
Advantage programs which offer the advertiser a customized plan with
recommended terms and bid amounts for either 20 or 100 search listings and
submission of their Web site to 12 additional search engines for maximum
exposure. Overture has a product quality team of more than 100 people that
review and edit advertisers site descriptions and ensure that advertisers
appear only on search result pages that relate to their site. The Overture
service uses proprietary analytical systems that are designed to exclude from
an advertisers charges clickthroughs that are unlikely to be genuine leads.
Overture provides additional tools to their advertisers, which allow online
account creation and keyword bidding, as well as a proprietary account
management product that allows advertisers to log in to a secure Web site where
they can perform account management functions, such as adding funds to their
accounts, viewing performance reports and changing their bids in real time.
Overture also offers account monitoring tools, which allow advertisers to track
their total spending, account balance and clickthroughs in real-time. These
tools also allow advertisers to manage their monthly spending plans and provide
a forecast volume of clickthroughs for keyword and listing rank, based on
activity history. In addition, Overture plans to continue to enhance the
services it provides to advertisers.

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DERIVE STRATEGIC ADVANTAGE FROM EFFICIENT COST STRUCTURE. Overture
believes that its business model provides a number of competitive advantages.
The advertisers participating in the Overture marketplace can provide their own
Web site descriptions and, through competitive bidding, with bid amounts
visible at the Overture Web site to all participants, rank and set the prices
paid for their position in the search results and, consequently, the amounts
they pay Overture for each click on their search result. This reduces the costs
Overture must pay to perform these tasks. In addition, for a fee, Overture will
provide some of theses services for advertisers. In addition, our business
model does not require us to carry any physical inventory. Overture is
therefore able to direct the capital that would otherwise be used for these
purposes towards growing our business, enhancing our services and pursuing
other strategic opportunities.

EXPAND THE OVERTURE SERVICE INTO INTERNATIONAL MARKETS. Overture believes
that international consumers and businesses also desire quick, easy and
relevant search results for products, services and information and that
international advertisers can benefit from a cost-effective, targeted way to
reach consumers and businesses using Overtures Pay-For-Performance model.
Overture also believes that its automated advertiser sign-up technology,
distributed affiliate network model and efficient cost structure will enable it
to replicate its U.S.-based marketplace in other countries. As a result, we
launched the Overture service in the United Kingdom in November 2000 and
launched our German-speaking search service in February 2002. We are
considering launching our search service in Japan and France during 2002.

THE OVERTURE SERVICE

SEARCH TOOL

Consumers and businesses use the Overture search service to locate desired
providers of products, services and information, and can access the Overture
search service from either the tens of thousands of Web sites that are
Overtures affiliates or from Overtures home page. After entering a targeted
keyword search, or performing a directory search from an affiliates Web site
or from the Overture home page, consumers and businesses are presented with
Overture search results.

BIDDING FOR PRIORITY PLACEMENT IN SEARCH RESULTS

Overture search results for the search service are prioritized for
consumers and businesses based on advertiser bids for placement of their search
listings within the search results. Paying advertisers are listed in descending
bid order, with the highest bidder appearing as the first search result. Bids
are expressed as the amount advertisers pay Overture for each paid
introduction. As of the end of December 2001, Overtures proprietary database
included approximately 8 million search listings.

Overture promotes an
open and efficient marketplace allowing advertisers to see the bids
of other advertisers. Using
the open bidding information, advertisers are able to determine the bids
necessary to achieve their desired ranking, which enables competition among
advertisers and promotes greater relevance for consumers and businesses.

ADVERTISING ON OVERTURE

Overture offers a self-service, online form where advertisers can sign up
and bid for search listings. Potential advertisers find the Overture Web site
directly or through custom offer pages on our affiliates sites. On the welcome
page of the sign up form, potential advertisers are able to access a frequently
asked questions page that contains information about Overtures guidelines for
crafting relevant search results, instructions for opening a new account and
account maintenance information.

As part of the sign up process for new advertisers, advertisers enter
basic contact information and select a unique user ID and password for
accessing and maintaining account information online using Overtures
proprietary account maintenance product. Each advertiser will select one of
three plans; 1) Self Service 2) Full Serve and 3) Full Serve Advantage. Under
the Self Service plan, the advertiser enters keywords on which it wishes to
bid, the bid amounts, with a minimum bid of five cents per keyword, and
information about the advertisers Web site, including a title customized for
the applicable keyword, a description of its Web site offerings and information
necessary for hypertext linking. For $99, the Full Serve plan offers the advertiser a customized
plan with recommended terms and bid amounts for up to 20 search listings. For
$199, the Full Serve Advantage plan offers the advertiser a customized plan
with recommended terms and bid amounts for up to 100 search listings and their
Web site will be submitted to 12 additional search engines for maximum
exposure.

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During the sign up process, advertisers also enter payment information.
Advertisers must currently commit to a minimum initial payment of $25 or $50.
In addition, since March 1, 2001 every new advertiser is required to spend a
minimum of $20 per month and every keyword (from both new and
existing advertisers) require a minimum bid of five
cents. An advertiser may choose to pre-pay by check, wire or credit card and in
some cases, Overture may grant credit terms, in which case the advertiser is
invoiced each month. After entering payment information, advertisers are
presented the terms and conditions of advertising on the Overture service,
which must be accepted before an order is processed. After the advertiser
accepts these terms, a confirmation screen appears with a tracking number for
the advertisers convenience. If an advertiser contacts Overtures customer
service, the tracking number enables us to quickly find the advertisers
enrollment application. Once the sign up process has been completed, the
advertiser receives a confirmation by e-mail that Overture received the sign up
form.

By automating the sale and maintenance of advertising accounts, Overture
enables advertisers to have greater control over the advertising process, while
simultaneously reducing Overtures operating costs. Overture also employs a
sales and support team to attract accounts, review advertising for
relevance
and assist advertisers in cases where more personal attention is required.

Overture offers advertisers a variety of payment plans to ensure that
advertisers maintain sufficient funds in their Overture account and remain
active on the service. Advertisers on the Overture service pay for advertising
in advance, or for qualified accounts, may elect to be invoiced. Overture
notifies advertisers using its service by e-mail when account balances are
running low so that they can add to their account balances. As an alternative,
advertisers that prepay Overture may authorize Overture to charge them on a
monthly basis to refresh their account or to charge them an additional fixed
amount each time their account approaches a zero balance.

To promote fairness and efficiency, Overture has adopted marketplace rules
and policies. For example, advertisers are not permitted to bid on search
results unrelated to their Web site offerings. Each advertisers compliance
with these rules and policies is enforced in part by other advertisers
participating in the service. The Overture service also uses proprietary
clickthrough analysis systems that are designed to exclude from an advertisers
charges, clickthroughs that are unlikely to be genuine leads.

MARKETING, SALES AND SERVICE

Consumers, Businesses and Affiliates

Overture
has established relationships with search engines and portals, including
AltaVista, AOL, Ask Jeeves, go.com, InfoSpace (including
MetaCrawler, Dogpile and Excite.com), iWon, MSN, Terra Lycos and Yahoo, that
offer Overtures Premium Listings as part of their search results. Overture has
also established relationships with browsers that offer Overture search
functionality as a default search service in rotation with other providers of
search functionality.

Web sites can become
an affiliate in two ways:

First, a consumer or business queries the Overture search
service at an affiliates Web site and receives Overtures search results with
or without leaving the affiliates site, at the affiliates choice.

Second, an affiliate offers the Overture search results as part of other
search results that they provide their users. For example, as part of our
affiliate network, we have established contracts with Web sites that aggregate
the search offerings of several providers of search services. These contracts
provide that our search service is included in the aggregated search offerings
on these sites. Similarly, Overture has entered into contracts with portals, in
which our Premium Listings are offered in their search results. Finally, in
contracts with Internet browsers, like Microsoft Internet Explorer and
Netscapes browser product, our search service is offered on the browsers
search page or as part of the browsers search functionality.

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The economic
arrangements with affiliates vary and may include:



| |  |  | fixed guarantees, provided the affiliate meets and maintains certain performance standards;
| | - |  | -------------------------------------------------------------------------------------------
|
| |  |  | payment based on a percentage of revenue;                                                  
|
| |  |  | payment for clicks on our search results;                                                  
|
| |  |  | payment for impressions of our search results;                                             
|
| |  |  | payment for searches done on our service;                                                  
|
| |  |  | payment for impressions of our search box; and                                             
|
| |  |  | combinations of the foregoing.                                                             

We believe affiliates electing to host Overture search functionality on
their sites can take advantage of any or all of the following benefits:



| |  |  | obtain an economic advantage in monetizing search;                                                                                                                                                                              
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | experience superior technical and customer service;                                                                                                                                                                             
|
| |  |  | deliver to their users high quality and relevant search results;                                                                                                                                                                
|
| |  |  | acquire turnkey search service without the need to develop and manage it in-house;                                                                                                                                              
|
| |  |  | generate revenue without the costs and challenges associated with
building and maintaining the marketing, sales and service, and
supporting functions and systems;                                                              
|
| |  |  | enable rapid implementation of search functionality with no
out-of-pocket investment; and                                                                                                                                       
|
| |  |  | build and maintain brand loyalty by delivering content with the look,
feel and navigation features specific to each affiliate, creating the
impression to consumers and businesses that they have not left the
affiliates site.

The following are Overtures significant affiliate agreements:

|                                    |  |               |  |                
|----------------------------------- |  | ------------- |  | ---------------
|Affiliate                           |  | Commencement  |  | Expiration Date
|                                    |  |               |  |                
|                                   
|                                   
|                                   
|                                   
|AOL                                 |  | August 2000   |  | March 2002     
|AOL Europe
(UK, Germany and France) |  | January 2002  |  | March 2005     
|                                   
|AltaVista                           |  | November 2000 |  | May 2002       
|                                   
|CompuServe                          |  | May 2000      |  | May 2002       
|                                   
|Yahoo                               |  | November 2001 |  | June 2002      
|                                   
|Netscape Premier Provider           |  | July 2001     |  | June 2002      
|                                   
|Infoseek (go.com)                   |  | March 2002    |  | March 2003     
|                                   
|Ask Jeeves                          |  | July 2001     |  | July 2003      
|                                   
|iWon                                |  | January 2001  |  | July 2003      

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|               |  |               |  |                
|-------------- |  | ------------- |  | ---------------
|Affiliate      |  | Commencement  |  | Expiration Date
|               |  |               |  |                
|Terra Lycos    |  | November 2000 |  | November 2003  
|              
|Freeserve (UK) |  | November 2001 |  | November 2003  
|              
|Microsoft      |  | February 2002 |  | December 2003  
|              
|InfoSpace      |  | November 2001 |  | February 2004  

Advertisers

Overture attracts advertisers through direct marketing efforts, which
include mailings and other promotional material sent directly to advertising
agencies and to targeted accounts. To build further advertiser participation,
Overture will continue to leverage its reputation for Pay-For-Performance, and
direct response marketing among advertisers and their intermediaries, such as
advertising consultants and media buyers. Overture will continue to reach these
constituencies through multiple marketing channels, including our direct sales
force, targeted online marketing, mailings, sponsorship of Web sites where
advertisers congregate, participation at trade shows and appearances in
advertising industry periodicals. Overture also enters into referral agreements
with companies that receive payment for each advertiser that they refer to us
who becomes an advertiser of our service.

We believe that Internet use is higher during the fourth quarter of the
calendar year as opposed to other quarters, particularly due to holiday
shopping patterns. We believe this seasonality of Internet use results in more
traffic to our search service, which generates more paid clicks and revenues
for us during the period from October through December. As a result, seasonal
fluctuations in Internet use could affect our operating results.

TECHNOLOGY

The Overture technical operating environment is designed to provide the
best search experience on the Internet to consumers and businesses, advertisers
and affiliates. Overture intends to continue investing in its technology
infrastructure to maintain and enhance its competitive advantage.

Overture makes its services available to advertisers, consumers and
businesses through a combination of its own proprietary technology and
commercially available technology from industry leading providers such as Sun
Microsystems, Cisco, Oracle, and Kana. Overture also relies upon third
parties to provide Web hosting services, including hardware support and service
and network coordination.

Any disruption in the Internet access or other services provided by third
parties could have a material adverse effect on our business. Accordingly, our
research and development efforts include the development and implementation of
business continuity and disaster recovery systems, improvement of data
retention, backup and recovery processes and systems and standardization of
technology platforms. Overture also protects its computer systems by
maintaining multiple serving sites which allow for global load
balancing, designing our systems for peak loads and non-stop operation.

COMPETITION

Overture competes with online services, other Web sites and advertising
networks such as DoubleClick Inc. and 24/7 Media, Inc., as well as traditional
offline media such as television, radio and print, for a share of advertisers
total advertising budgets. We believe that the number of companies selling
Web-based advertising and the available inventory of advertising space has
recently increased. Accordingly, Overture may face increased pricing pressure
for the sale of advertisements and direct marketing opportunities, which could
have a material adverse effect on our business, operating results and financial
condition.

Overture also competes with providers of Web directories, search, and
information services, all of which offer search services competitive to those
provided by Overture, including, among others, AltaVista, AOL,
Ask Jeeves, Inc., CNET, Inc., Fast Search &Transfer ASA, Google, Inc., Inktomi
Corporation, LookSmart, Ltd., Microsoft Corporation (LinkExchange, Inc. and
msn.com), Terra Lycos (including HotBot) and Yahoo!, Inc. In addition,
Espotting Media, FindWhat.com, Inc., Google and PRIMEDIA, through its About.com
Sprinks product, each offer a search-based pay-per-click advertising service.
There are also other companies that offer directly competing services. We have
affiliate arrangements with companies that currently provide other search and
advertising services, which may indirectly compete with our offerings, and may
in the future offer their own pay-per-click search service.

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Recently, some of our search service competitors, such as Google and Terra
Lycos, have introduced pay-per-click advertising services that are similar to
ours. Although we believe that our large network of affiliates, number of
advertisers, level of service and proprietary technology differentiate our service from those of
these competitors, we cannot assure you that another search service will not
successfully offer a competitive pay-per-click advertising product. We believe
it is likely that there will be additional entrants to the pay-per-click search
market. These new competitors will likely compete against us for affiliate
arrangements and therefore may require us to enter into affiliate agreements
with less favorable terms or we may lose traffic from some affiliates. These
new competitors will also compete with us for users, which could reduce our
number of clickthroughs and total revenues. In addition, these new
competitors will also compete with us for our advertisers, which
could reduce our number of advertisers or our advertisers' budgets,
therefore possibly reducing our revenue. These new competitors could
therefore have a material adverse effect on our business, operating results and
financial condition.

In addition, some of our competitors, as well as potential entrants into
our market, have longer operating histories, larger customer or user bases,
greater brand recognition and significantly greater financial, marketing and
other resources than we do. Many of these current and potential competitors can
devote substantially greater resources to promotion and Web site and systems
development than we can. In addition, as the use of the Internet and other
online services increases, larger, well-established and well-financed entities
may continue to acquire, invest in or form joint ventures with providers of Web
directories, search and information services or advertising solutions, and
existing providers of Web directories, search and information services or
advertising solutions may continue to consolidate. In addition, providers of
Internet browsers and other Internet products and services who are affiliated
with providers of Web directories and information services in competition with
the Overture service may more tightly integrate these affiliated offerings into
their browsers or other products or services. Any of these trends would
increase the competition we face and could have a material adverse effect on
our business, operating results and financial condition.

INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS AND LICENSES

Overture has been granted two patents and has filed for others.

We seek to protect our copyrights, service marks, trademarks, trade dress
and trade secrets through a combination of laws and contractual restrictions,
such as confidentiality agreements. For example, we attempt to register our
trademarks and service marks in the United States and other countries
throughout the world. However, effective trademark, service mark, copyright and
trade secret protection may not be available in every country in which our
services are made available online.

EMPLOYEES

Overture had 559
full-time employees as of January 31, 2002. As of
January 31, 2002, 145 of Overtures employees were engaged in technical
operations and product development, 300 in marketing, sales and
service and 114
in finance, administration and operations. Marketing, sales and service
employees include customer service representatives, salespeople, sales
administration personnel, marketing and communications personnel and creative
services personnel.




ITEM 2. PROPERTIES

During 2001, Overture
leased approximately 12,000 square feet of office space in San Mateo,
California and approximately 2,000 square feet of office space in
London, England and subleased approximately 58,000 square feet of
office space from Bill Gross' idealab! in Pasadena, California. In
March 2002, Overture entered into an arrangement with Parfinco EWA,
LLC and Bill Gross' idealab! whereby Bill Gross' idealab! assigned
their lease with Parfinco to Overture for the existing 58,000 square
feet of office space in Pasadena, California and Overture entered
into an arrangement with Parfinco for an additional 29,000 square
feet of office space in Pasadena, California. The additional office
space lease expires at the same time as our existing 58,000 square
feet of office space, in October 2004. We believe our facilities are
adequate for our current needs, but we may require additional
facilities as we expand in the future.




ITEM 3. LEGAL PROCEEDINGS

On June 19, 2001, InternetFuel.com, Inc. filed a complaint against
Overture in the Superior Court of the State of California for the County of Los
Angeles. The complaint alleges that Overture wrongfully terminated an agreement
pursuant to which InternetFuel participated in Overtures affiliate program.
The complaint also alleges libel for messages allegedly placed by Overture on
an Internet forum, and it contains claims of unfair business practices. The
complaint seeks, among other remedies, monetary damages for the value of the
terminated agreement and for alleged harm to InternetFuels reputation,
punitive and exemplary relief and an injunction against alleged unfair business
practices. In December 2001, Overture successfully moved the court to transfer
the case to arbitration. The parties are in the process of selecting
arbitrators. Overture believes that it has meritorious defenses to the
complaint. Overture intends to contest the allegations vigorously.

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On July 12, 2001, the first of several purported securities class action
lawsuits was filed in the United States District Court, Southern District of
New York against certain underwriters involved in Overtures initial public
offering, Overture, and certain of Overtures current and former officers and
directors. The Court consolidated the cases against Overture into case number
01 Civ. 6339. Plaintiffs allege, among other things, violations of the
Securities Act of 1933 and the Securities Exchange Act of 1934 involving
undisclosed compensation to the underwriters, and improper practices by the
underwriters and seek unspecified damages.

Similar complaints were filed in the same court against numerous public
companies that conducted initial public offerings of their common stock since
the mid-1990s. All of these lawsuits were consolidated for pretrial purposes
before Judge Shira Scheindlin of the United States District Court for the
Southern District of New York. Judge Scheindlin has ordered that the time for
all defendants to respond to any complaint be postponed until further order of
the Court. Thus, Overture has not been required to answer the complaint, and
no discovery has been served. Overture denies the allegations against it,
believes that it has meritorious defenses to the complaint and intends to
contest the allegations vigorously.

On October 2, 2000, 800-JR-Cigar, Inc. (JR Cigar) served a complaint
against the Company in the United States District Court for the District of New
Jersey alleging that the Company has committed acts of trademark infringement,
trademark dilution, unfair competition, consumer fraud and deceptive
telemarketing. JR Cigars allegations are based on the Companys allowing
competitors to bid on the term JR CIGAR (and related terms) in order to obtain
priority when an Internet user searches for cigar related Web sites. The
Company denies that it has violated JR Cigars rights and is vigorously
contesting the lawsuit. The parties have filed motions for summary judgment,
which have been fully briefed and are pending before the court. A trial date
has not been scheduled.

On January 17, 2002, FindWhat.com (FindWhat) filed a lawsuit against the
Company in the United States District Court for the Southern District of New
York. The initial complaint was never served upon the Company. An amended
complaint was served on the Company on January 25, 2002. The amended complaint
seeks a declaratory judgment of invalidity, unenforceability and
non-infringement relating to the Companys U.S. Patent No. 6,269,361 (the 361
patent), entitled System And Method For Influencing A Position On A Search
Result List Generated By A Computer Network Search Engine. On January 25,
2002, the Company filed a complaint for patent infringement against FindWhat in
the United States District Court for the Central District of California,
Western Division. In this action, the Company seeks an adjudication that the
361 patent is enforceable, not invalid, and infringed by FindWhat. The
Company also seeks a permanent injunction against FindWhat, an award of
increased damages, and an award of attorneys fees, costs and expenses. The
Company has moved to dismiss FindWhats New York action in favor of the
Companys California action.

On January 28, 2002, Mark Nutritionals, Inc. (MNI) filed a complaint
against the Company in the United States District Court for the Western
District of Texas. The initial complaint was never served on the Company. An
amended complaint was served on the Company on February 6, 2002. The amended
complaint alleges that the Company has committed acts of trademark
infringement, trademark dilution, unfair competition, misappropriation and
tortious interference with prospective economic advantage. MNIs allegations
are based on the Companys allowing competitors to bid on the term body
solutions in order to obtain priority when an Internet user searches for
diet-related Web sites. The Company is indemnifying and defending an
affiliate, who has been named a defendant in a related action. The Company denies that it has violated MNIs rights
and will vigorously contest the lawsuit.

On January 31,
2002, a complaint was filed against the Company as a result of its
acquisition in May 2000 of AuctionRover.com, Inc., and other defendants in
North Carolina Superior Court by an individual, Paul Rony, relating to alleged
trade secrets concerning interaction with Internet auction Web sites. The
causes of action alleged against the Company include misappropriation of trade
secrets, quantum meruit, and constructive trust. The Company denies liability
and will vigorously contest the lawsuit.




ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by Item 10 of Form 10-K with respect to executive
officers of the Company is set forth below. The following table sets forth
certain information with respect to the executive officers of Overture as of
January 31, 2002.

|                  |  |     |    |          |  |                                      
|----------------- |  | --- | -- | -------- |  | -------------------------------------
|NAME              |  | AGE |    | POSITION
|                  |  |     |    |         
|Ted Meisel        |  |     | 38 |          |  | Chief Executive Officer and President
|Jaynie Studenmund |  |     | 47 |          |  | Chief Operating Officer              
|Todd Tappin       |  |     | 40 |          |  | Chief Financial Officer              

Ted Meisel has served as a Director and as Chief Executive Officer since
February 2000 and he has served as President since May 1999. From December 1998
until January 2000, he also served as Chief Operating Officer. From April 1996
to November 1998, he served in a variety of roles at Ticketmaster
Online-CitySearch, Inc. (formerly CitySearch, Inc.), an online provider of city
guides and live-event ticketing, most recently as Vice President of the
Products and Technology Group. From November 1991 to March 1996, he worked at
McKinsey & Company, a management-consulting firm, most recently as an
Engagement Manager. Mr. Meisel holds a B.A. in History from Dartmouth College
and a J.D. from Stanford Law School.

Jaynie Studenmund has served as Chief Operating Officer since January
2001. From February 2000 to December 2000, Ms. Studenmund was the President
and Chief Operating Officer for PayMyBills, a leading Internet bill management
company, where she was responsible for all line, technology, operations and
staff functions. From 1997 to 1998, she was the Executive Vice President for
Retail Banking at Home Savings of America, and from 1996 to 1997, served as an
Executive Vice President for Retail Banking at Great Western Bank. From 1991 to
1996, Ms. Studenmund served as an Executive Vice President at First Interstate
Bank of California. Ms. Studenmund has a B.A. in Economics from Wellesley
College and a M.B.A. from Harvard Business School.

Todd Tappin has served as Chief Financial Officer since October 1998. From
March 1992 to October 1998, Mr. Tappin served as Senior Vice President of
Finance for News Corp.-Twentieth Century Fox, where he oversaw all Finance,
Strategic Planning and Business Development for the Home Entertainment and
Interactive Divisions, and as the General Manager of Twentieth Century Foxs
Home Entertainment Division in Canada. Mr. Tappin began his professional career
as a certified public accountant at Deloitte, Haskins and Sells. He holds a
B.S. in Business from the University of Colorado.




PART II




ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock has been quoted on the Nasdaq National Market since our
initial public offering on June 18, 1999 and currently trades under the symbol
OVER. From June 18, 1999 to October 7, 2001, our common stock was quoted
under the symbol GOTO. In conjunction with our name change from GoTo.com,
Inc. to Overture Services, Inc., our common stock began trading under the
symbol OVER on October 8, 2001. Prior to June 18, 1999, there was no public
market for our common stock. According to records of our transfer agent, there
were approximately 603 stockholders of record as of December 31, 2001 and we
believe there are a substantially greater number of beneficial holders. The
following table sets forth the high and low per share sale prices of our common
stock as reported on the Nasdaq National Market for the periods indicated:

|             |                |  |            |         |           |  |   |        | 
|------------ | -------------- |  | ---------- | ------- | --------- |  | - | ------ | 
|             |                |  | High Price |         | Low Price
|             |                |  |            |         |          
|Fiscal 2001: |                |  |            |         |           |  |   |       
|             | Fourth Quarter |  | $          | 37.070  |           |  | $ | 11.900 | 
|             | Third Quarter  |  | $          | 25.150  |           |  | $ | 10.200 | 
|             | Second Quarter |  | $          | 28.280  |           |  | $ | 7.000  | 
|             | First Quarter  |  | $          | 15.250  |           |  | $ | 5.766  | 
|Fiscal 2000: |                |  |            |         |           |  |   |       
|             | Fourth Quarter |  | $          | 18.250  |           |  | $ | 4.813  | 
|             | Third Quarter  |  | $          | 25.250  |           |  | $ | 10.000 | 
|             | Second Quarter |  | $          | 46.000  |           |  | $ | 13.125 | 
|             | First Quarter  |  | $          | 102.000 |           |  | $ | 35.875 | 

We have not paid dividends and do not anticipate declaring dividends on
our common stock in the foreseeable future.

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ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE
DATA)

The following selected consolidated financial data should be read in
conjunction with Managements Discussion and Analysis of Financial Condition
and Results of Operations and the financial statements appearing elsewhere in
this Form 10-K. The statements of operations data set forth below for the years
ended December 31, 2001, 2000 and 1999 and the balance sheet data at December
31, 2001 and 2000 are derived from our audited financial statements included
elsewhere in this Form 10-K. Certain changes have been made to the description
and presentation of the Statement of Operations during the current year. The
line item Cost of Revenue has been renamed Search Serving, the Gross
Profit line item has been removed, the Search Serving line item is now shown
as a component of operating expenses, and Traffic Acquisition has been
separately reported from Marketing, Sales and Service. Prior year
presentation has been changed to conform to current year presentation. These
changes to the description and presentation of the Statement of Operations had
no effect on net income or loss. The historical results are not necessarily
indicative of results to be expected for any future period.

|                                                                                           |                                                                                                  |                                                           |         |                         |         |              |          |      |         |      |         |      |        |   |         |   |       |   |       |                    |    | 
|------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------ | --------------------------------------------------------- | ------- | ----------------------- | ------- | ------------ | -------- | ---- | ------- | ---- | ------- | ---- | ------ | - | ------- | - | ----- | - | ----- | ------------------ | -- | 
|                                                                                           |                                                                                                  |                                                           |         |                         |         |              |          |      |         |      |         |      |        |   |         |   |       |   |       | SEPTEMBER 15, 1997
|                                                                                           |                                                                                                  |                                                           |         |                         |         |              |          |      |         |      |         |      |        |   |         |   |       |   |       | (INCEPTION) TO    
|                                                                                           |                                                                                                  |                                                           |         | YEAR ENDED DECEMBER 31, |         | DECEMBER 31,
|                                                                                           |                                                                                                  |                                                           |         |                         |         |             
|                                                                                           |                                                                                                  |                                                           |         | 2001                    |         | 2000         |          | 1999 |         | 1998 |         | 1997
|                                                                                           |                                                                                                  |                                                           |         |                         |         |              |          |      |         |      |         |     
|                                                                                           |                                                                                                  |                                                           |         | (IN THOUSANDS)         
|STATEMENT OF OPERATIONS DATA:                                                              |                                                                                                  |                                                           |         |                         |         |              |          |      |         |      |         |      |        |   |         |   |       |   |       |                   
|Revenue                                                                                    |                                                                                                  | $                                                         | 288,133 |                         |         | $            | 103,052  |      |         | $    | 26,809  |      |        | $ | 822     |   |       | $ | 22    |                   
|                                                                                           |                                                                                                  |                                                           |         |                         |         |              |          |      |         |      |         |      |        |   |         |   |       |   |       |                   
|Operating expenses:                                                                        |                                                                                                  |                                                           |         |                         |         |              |          |      |         |      |         |      |        |   |         |   |       |   |       |                   
|                                                                                           |                                                                                                  | Search serving                                            |         |                         | 20,962  |              |          |      | 13,109  |      |         |      | 6,213  |   |         |   | 1,429 |   |       |                    | 6  | 
|                                                                                           |                                                                                                  | Traffic acquisition                                       |         |                         | 162,072 |              |          |      | 66,433  |      |         |      | 14,290 |   |         |   |      |   |       |                    |   | 
|                                                                                           |                                                                                                  | Marketing, sales and service                              |         |                         | 28,078  |              |          |      | 28,098  |      |         |      | 20,169 |   |         |   | 9,645 |   |       |                    | 65 | 
|                                                                                           |                                                                                                  | General and administrative                                |         |                         | 44,917  |              |          |      | 33,798  |      |         |      | 12,467 |   |         |   | 1,655 |   |       |                    | 24 | 
|                                                                                           |                                                                                                  | Product development                                       |         |                         | 12,811  |              |          |      | 13,523  |      |         |      | 3,689  |   |         |   | 1,232 |   |       |                    | 46 | 
|                                                                                           |                                                                                                  | Amortization of deferred
compensation                     |         |                         | 849     |              |          |      | 1,376   |      |         |      | 3,585  |   |         |   | 1,199 |   |       |                    |   | 
|                                                                                           |                                                                                                  | Write-off of acquired in-process
research and development |         |                         |        |              |          |      | 7,550   |      |         |      |       |   |         |   |      |   |       |                    |   | 
|                                                                                           |                                                                                                  | Amortization of intangible assets                         |         |                         | 1,192   |              |          |      | 115,600 |      |         |      |       |   |         |   |      |   |       |                    |   | 
|                                                                                           |                                                                                                  | Impairment of intangible assets                           |         |                         |        |              |          |      | 309,253 |      |         |      |       |   |         |   |      |   |       |                    |   | 
|                                                                                           |                                                                                                  | Loss on closure of GoTo Shopping                          |         |                         | 1,002   |              |          |      |        |      |         |      |       |   |         |   |      |   |       |                    |   | 
|                                                                                           |                                                                                                  | Loss on disposition of GoTo Auctions                      |         |                         | 2,008   |              |          |      |        |      |         |      |       |   |         |   |      |   |       |                    |   | 
|                                                                                           |                                                                                                  |                                                           |         |                         |         |              |          |      |         |      |         |      |        |   |         |   |       |   |       |                   
|                                                                                           |                                                                                                  |                                                           | 273,891 |                         |         |              | 588,740  |      |         |      | 60,413  |      |        |   | 15,160  |   |       |   | 141   |                   
|                                                                                           |                                                                                                  |                                                           |         |                         |         |              |          |      |         |      |         |      |        |   |         |   |       |   |       |                   
|Income (loss) from operations                                                              |                                                                                                  |                                                           | 14,242  |                         |         |              | (485,688 | )    |         |      | (33,604 | )    |        |   | (14,338 | ) |       |   | (119  | )                 
|                                                                                           |                                                                                                  |                                                           |         |                         |         |              |          |      |         |      |         |      |        |   |         |   |       |   |       |                   
|                                                                                           |                                                                                                  | Interest income, net                                      |         |                         | 4,260   |              |          |      | 5,809   |      |         |      | 3,777  |   |         |   | 316   |   |       |                    |   | 
|                                                                                           |                                                                                                  | Other income                                              |         |                         | 2,561   |              |          |      | 21,259  |      |         |      | 566    |   |         |   |      |   |       |                    |   | 
|                                                                                           |                                                                                                  |                                                           |         |                         |         |              |          |      |         |      |         |      |        |   |         |   |       |   |       |                   
|Income (loss) before provision for
income taxes                                            |                                                                                                  |                                                           | 21,063  |                         |         |              | (458,620 | )    |         |      | (29,261 | )    |        |   | (14,022 | ) |       |   | (119  | )                 
|Provision for income taxes                                                                 |                                                                                                  |                                                           | 900     |                         |         |              | 1        |      |         |      | 1       |      |        |   | 1       |   |       |   | 1     |                   
|                                                                                           |                                                                                                  |                                                           |         |                         |         |              |          |      |         |      |         |      |        |   |         |   |       |   |       |                   
|Net income (loss)                                                                          |                                                                                                  | $                                                         | 20,163  |                         |         | $            | (458,621 | )    |         | $    | (29,262 | )    |        | $ | (14,023 | ) |       | $ | (120  | )                 
|                                                                                           |                                                                                                  |                                                           |         |                         |         |              |          |      |         |      |         |      |        |   |         |   |       |   |       |                   
|Historical basic net income (loss) per share                                               |                                                                                                  | $                                                         | 0.38    |                         |         | $            | (9.54    | )    |         | $    | (1.04   | )    |        | $ | (1.36   | ) |       | $ | (0.01 | )                 
|                                                                                           |                                                                                                  |                                                           |         |                         |         |              |          |      |         |      |         |      |        |   |         |   |       |   |       |                   
|Historical diluted net income (loss) per share                                             |                                                                                                  | $                                                         | 0.36    |                         |         | $            | (9.54    | )    |         | $    | (1.04   | )    |        | $ | (1.36   | ) |       | $ | (0.01 | )                 
|                                                                                           |                                                                                                  |                                                           |         |                         |         |              |          |      |         |      |         |      |        |   |         |   |       |   |       |                   
|Weighted average shares used to
compute historical basic net income (loss)
per share(a)    |                                                                                                  |                                                           | 53,363  |                         |         |              | 48,065   |      |         |      | 28,207  |      |        |   | 10,296  |   |       |   | 9,869 |                   
|                                                                                          
|Weighted average shares used to compute
historical diluted net income (loss) per
share (a) |                                                                                                  |                                                           | 55,533  |                         |         |              | 48,065   |      |         |      | 28,207  |      |        |   | 10,296  |   |       |   | 9,869 |                   
|                                                                                           |                                                                                                  |                                                           |         |                         |         |              |          |      |         |      |         |      |        |   |        
|                                                                                           |                                                                                                  |                                                           | 2001    |                         | 2000    |              | 1999     |      | 1998    |      | 1997   
|                                                                                           |                                                                                                  |                                                           |         |                         |         |              |          |      |         |      |         |     
|                                                                                           | If deferred compensation were allocated to
expense categories, it would be allocated as
follows: |                                                           |         |                         |         |              |          |      |         |      |         |      |        |   |         |   |       |   |       |                    |    | 
|                                                                                           |                                                                                                  | Search serving                                            |         | $                       | 1       |              |          | $    | 4       |      |         | $    | 16     |   |         | $ | 24    |   |       | $                  |   | 
|                                                                                           |                                                                                                  | Marketing, sales and service                              |         |                         | 157     |              |          |      | 381     |      |         |      | 670    |   |         |   | 265   |   |       |                    |   | 
|                                                                                           |                                                                                                  | General and administrative                                |         |                         | 664     |              |          |      | 922     |      |         |      | 2,673  |   |         |   | 745   |   |       |                    |   | 
|                                                                                           |                                                                                                  | Product development                                       |         |                         | 27      |              |          |      | 69      |      |         |      | 226    |   |         |   | 165   |   |       |                    |   | 
|                                                                                           |                                                                                                  |                                                           |         |                         |         |              |          |      |         |      |         |      |        |   |         |   |       |   |       |                    |    | 
|                                                                                           |                                                                                                  | Total amortization of deferred
compensation               |         | $                       | 849     |              |          | $    | 1,376   |      |         | $    | 3,585  |   |         | $ | 1,199 |   |       | $                  |   | 
|                                                                                           |                                                                                                  |                                                           |         |                         |         |              |          |      |         |      |         |      |        |   |         |   |       |   |       |                    |   

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|                    |                                                                                       |  |                |         |      |  |      |         |      |  |      |         |  |  |   |        |  |  |   |     | 
|------------------- | ------------------------------------------------------------------------------------- |  | -------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------ |  |  | - | --- | 
|                    |                                                                                       |  | DECEMBER 31,  
|                    |                                                                                       |  |               
|                    |                                                                                       |  | 2001           |         | 2000 |  | 1999 |         | 1998 |  | 1997
|                    |                                                                                       |  |                |         |      |  |      |         |      |  |     
|                    |                                                                                       |  | (IN THOUSANDS)
|BALANCE SHEET DATA: |                                                                                       |  |                |         |      |  |      |         |      |  |      |         |  |  |   |        |  |  |   |    
|                    | Unrestricted cash, cash
equivalents, short-term
investments and long-term
investments |  | $              | 170,287 |      |  | $    | 54,973  |      |  | $    | 110,255 |  |  | $ | 16,357 |  |  | $ | 87  | 
|                    | Working capital                                                                       |  |                | 102,874 |      |  |      | 52,956  |      |  |      | 95,165  |  |  |   | 15,215 |  |  |   | 18  | 
|                    | Total assets                                                                          |  |                | 231,927 |      |  |      | 121,413 |      |  |      | 129,512 |  |  |   | 19,969 |  |  |   | 214 | 
|                    | Long-term capital lease
obligations                                                   |  |                |        |      |  |      | 78      |      |  |      | 768     |  |  |   | 183    |  |  |   |    | 
|                    | Total stockholders equity                                                            |  | $              | 179,443 |      |  | $    | 88,095  |      |  | $    | 112,774 |  |  | $ | 16,397 |  |  | $ | 123 | 



---

|(a) |  | See Note 1 of Notes to the Financial Statements for an explanation of the
determination of the number of shares used in computing per share data for
the years ended December 31, 2001, 2000 and 1999.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



QUARTERLY RESULTS OF OPERATIONS

The following table sets forth certain unaudited consolidated quarterly
statement of operations data for the eight quarters ended December 31, 2001.
These unaudited consolidated financial statements have been prepared on the
same basis as the annual financial statements and, in the opinion of
management, reflect all adjustments, which include only normal recurring
adjustments, necessary to present fairly the Companys financial position,
results of operations and cash flows for the periods shown, except for the
write-off of approximately $7.6 million of in-process research and development
associated with Overtures acquisition of Cadabra in the first quarter of 2000,
other income of approximately $21.5 million from the settlement of Overtures
trademark infringement lawsuit against The Walt Disney Company in the second
quarter of 2000 and an impairment of intangible assets of approximately $309.3
million in the fourth quarter of 2000. The consolidated quarterly data should
be read in conjunction with our audited consolidated financial statements and
the notes to such statements appearing elsewhere in this report. The results of
operations for any quarter are not necessarily indicative of the results of
operations for any future period.

|                                                                                                 |                               |                                                           |                             |        |                            |    |               |       |          |     |           |        |              |       |               |        |          |    |           |          |         |      |         |         |        |   |         |         |        |        |         |         |        |    | 
|------------------------------------------------------------------------------------------------ | ----------------------------- | --------------------------------------------------------- | --------------------------- | ------ | -------------------------- | -- | ------------- | ----- | -------- | --- | --------- | ------ | ------------ | ----- | ------------- | ------ | -------- | -- | --------- | -------- | ------- | ---- | ------- | ------- | ------ | - | ------- | ------- | ------ | ------ | ------- | ------- | ------ | -- | 
|                                                                                                 |                               |                                                           |                             |        | FOR THE THREE MONTHS ENDED
|                                                                                                 |                               |                                                           |                             |        |                           
|                                                                                                 |                               |                                                           |                             |        | DECEMBER 31,               |    | SEPTEMBER 30, |       | JUNE 30, |     | MARCH 31, |        | DECEMBER 31, |       | SEPTEMBER 30, |        | JUNE 30, |    | MARCH 31,
|                                                                                                 |                               |                                                           |                             |        | 2001                       |    | 2001          |       | 2001     |     | 2001      |        | 2000         |       | 2000          |        | 2000     |    | 2000     
|                                                                                                 |                               |                                                           |                             |        |                            |    |               |       |          |     |           |        |              |       |               |        |          |    |          
|                                                                                                 |                               |                                                           |                             |        | (IN THOUSANDS)            
|STATEMENT OF OPERATIONS DATA:                                                                    |                               |                                                           |                             |        |                            |    |               |       |          |     |           |        |              |       |               |        |          |    |           |          |         |      |         |         |        |   |         |         |        |        |         |        
|Revenue                                                                                          |                               | $                                                         | 101,188                     |        |                            | $  | 72,523        |       |          | $   | 62,463    |        |              | $     | 51,959        |        |          | $  | 39,776    |          |         | $    | 25,050  |         |        | $ | 21,011  |         |        | $      | 17,215  |        
|Operating expenses:                                                                              |                               |                                                           |                             |        |                            |    |               |       |          |     |           |        |              |       |               |        |          |    |           |          |         |      |         |         |        |   |         |         |        |        |         |        
|                                                                                                 |                               | Search serving                                            |                             |        | 5,042                      |    |               |       | 6,050    |     |           |        | 5,157        |       |               |        | 4,713    |    |           |          | 4,381   |      |         |         | 3,310  |   |         |         | 2,813  |        |         |         | 2,605  |   
|                                                                                                 |                               | Traffic acquisition                                       |                             |        | 51,911                     |    |               |       | 38,551   |     |           |        | 36,929       |       |               |        | 34,681   |    |           |          | 30,780  |      |         |         | 15,500 |   |         |         | 11,289 |        |         |         | 8,864  |   
|                                                                                                 |                               | Marketing, sales and service                              |                             |        | 8,063                      |    |               |       | 6,412    |     |           |        | 6,709        |       |               |        | 6,894    |    |           |          | 7,985   |      |         |         | 5,685  |   |         |         | 6,978  |        |         |         | 7,450  |   
|                                                                                                 |                               | General and administrative                                |                             |        | 13,030                     |    |               |       | 10,769   |     |           |        | 12,053       |       |               |        | 9,065    |    |           |          | 10,464  |      |         |         | 9,012  |   |         |         | 8,055  |        |         |         | 6,267  |   
|                                                                                                 |                               | Product development                                       |                             |        | 3,104                      |    |               |       | 2,768    |     |           |        | 3,240        |       |               |        | 3,699    |    |           |          | 3,526   |      |         |         | 3,534  |   |         |         | 4,262  |        |         |         | 2,201  |   
|                                                                                                 |                               | Amortization of deferred
Compensation                     |                             |        | 198                        |    |               |       | 213      |     |           |        | 202          |       |               |        | 236      |    |           |          | 265     |      |         |         | 311    |   |         |         | 375    |        |         |         | 425    |   
|                                                                                                 |                               | Write-off of acquired
in-process
research and development |                             |        |                           |    |               |       |         |     |           |        |             |       |               |        |         |    |           |          |        |      |         |         |       |   |         |         |       |        |         |         | 7,550  |   
|                                                                                                 |                               | Amortization of intangible assets                         |                             |        | 291                        |    |               |       | 292      |     |           |        | 292          |       |               |        | 317      |    |           |          | 35,667  |      |         |         | 35,401 |   |         |         | 30,578 |        |         |         | 13,954 |   
|                                                                                                 |                               | Impairment of intangible
assets                           |                             |        |                           |    |               |       |         |     |           |        |             |       |               |        |         |    |           |          | 309,253 |      |         |         |       |   |         |         |       |        |         |         |       |   
|                                                                                                 |                               | (Gain)/loss on closure of
GoTo Shopping                   |                             |        | (497                       | )  |               |       |         |     |           |        | 1,499        |       |               |        |         |    |           |          |        |      |         |         |       |   |         |         |       |        |         |         |       |   
|                                                                                                 |                               | (Gain)/loss on disposition
of GoTo Auctions               |                             |        | (104                       | )  |               |       |         |     |           |        | 2,112        |       |               |        |         |    |           |          |        |      |         |         |       |   |         |         |       |        |         |         |       |   
|                                                                                                 |                               |                                                           |                             |        |                            |    |               |       |          |     |           |        |              |       |               |        |          |    |           |          |         |      |         |         |        |   |         |         |        |        |         |        
|                                                                                                 |                               |                                                           | 81,038                      |        |                            |    | 65,055        |       |          |     | 68,193    |        |              |       | 59,605        |        |          |    | 402,321   |          |         |      | 72,753  |         |        |   | 64,350  |         |        |        | 49,316  |        
|                                                                                                 |                               |                                                           |                             |        |                            |    |               |       |          |     |           |        |              |       |               |        |          |    |           |          |         |      |         |         |        |   |         |         |        |        |         |        
|                                                                                                 | Income (loss) from operations |                                                           |                             | 20,150 |                            |    |               | 7,468 |          |     |           | (5,730 | )            |       |               | (7,646 | )        |    |           | (362,545 | )       |      |         | (47,703 | )      |   |         | (43,339 | )      |        |         | (32,101 | )     
|                                                                                                 |                               | Interest income, net                                      |                             |        | 1,295                      |    |               |       | 1,177    |     |           |        | 833          |       |               |        | 955      |    |           |          | 1,159   |      |         |         | 1,592  |   |         |         | 1,511  |        |         |         | 1,547  |   
|                                                                                                 |                               |                                                           | Other income (expense), net |        |                            | 73 |               |       |          | 479 |           |        |              | 2,017 |               |        |          | (8 | )         |          |         | (306 | )       |         |        | 8 |         |         |        | 21,512 |         |         |        | 45 | 
|                                                                                                 |                               |                                                           |                             |        |                            |    |               |       |          |     |           |        |              |       |               |        |          |    |           |          |         |      |         |         |        |   |         |         |        |        |         |        
|Income (loss) before provision
for income taxes                                                  |                               |                                                           | 21,518                      |        |                            |    | 9,124         |       |          |     | (2,880    | )      |              |       | (6,699        | )      |          |    | (361,692  | )        |         |      | (46,103 | )       |        |   | (20,316 | )       |        |        | (30,509 | )      
|Provision for income taxes                                                                       |                               | $                                                         | 750                         |        |                            |    | 150           |       |          |     |          |        |              |       |              |        |          |    | 1         |          |         |      |        |         |        |   |        |         |        |        |        |        
|                                                                                                 |                               |                                                           |                             |        |                            |    |               |       |          |     |           |        |              |       |               |        |          |    |           |          |         |      |         |         |        |   |         |         |        |        |         |        
|Net income (loss)                                                                                |                               | $                                                         | 20,768                      |        |                            | $  | 8,974         |       |          | $   | (2,880    | )      |              | $     | (6,699        | )      |          | $  | (361,693  | )        |         | $    | (46,103 | )       |        | $ | (20,316 | )       |        | $      | (30,509 | )      
|                                                                                                 |                               |                                                           |                             |        |                            |    |               |       |          |     |           |        |              |       |               |        |          |    |           |          |         |      |         |         |        |   |         |         |        |        |         |        
|Historical basic net income
(loss) per share                                                     |                               | $                                                         | 0.37                        |        |                            | $  | 0.16          |       |          | $   | (0.06     | )      |              | $     | (0.13         | )      |          | $  | (7.27     | )        |         | $    | (0.94   | )       |        | $ | (0.42   | )       |        | $      | (0.67   | )      
|                                                                                                 |                               |                                                           |                             |        |                            |    |               |       |          |     |           |        |              |       |               |        |          |    |           |          |         |      |         |         |        |   |         |         |        |        |         |        
|Historical diluted net income
(loss) per share                                                   |                               | $                                                         | 0.35                        |        |                            | $  | 0.15          |       |          | $   | (0.06     | )      |              | $     | (0.13         | )      |          | $  | (7.27     | )        |         | $    | (0.94   | )       |        | $ | (0.42   | )       |        | $      | (0.67   | )      
|                                                                                                 |                               |                                                           |                             |        |                            |    |               |       |          |     |           |        |              |       |               |        |          |    |           |          |         |      |         |         |        |   |         |         |        |        |         |        
|Weighted average shares used to
compute historical basic net
income (loss) per share             |                               |                                                           | 56,652                      |        |                            |    | 55,552        |       |          |     | 50,906    |        |              |       | 50,217        |        |          |    | 49,768    |          |         |      | 48,998  |         |        |   | 48,007  |         |        |        | 45,323  |        
|                                                                                                
|Weighted average shares used to
compute historical diluted
net income (loss) per share           |                               |                                                           | 59,685                      |        |                            |    | 58,324        |       |          |     | 50,906    |        |              |       | 50,217        |        |          |    | 49,768    |          |         |      | 48,998  |         |        |   | 48,007  |         |        |        | 45,323  |        
|                                                                                                
|If deferred compensation were
allocated to expense categories,
it would be allocated as follows: |                               |                                                           |                             |        |                            |    |               |       |          |     |           |        |              |       |               |        |          |    |           |          |         |      |         |         |        |   |         |         |        |        |         |        
|Search serving costs                                                                             |                               | $                                                         |                            |        |                            | $  |              |       |          | $   |          |        |              | $     | 1             |        |          | $  |          |          |         | $    | 1       |         |        | $ | 1       |         |        | $      | 2       |        
|Marketing, sales and service                                                                     |                               |                                                           | 32                          |        |                            |    | 35            |       |          |     | 36        |        |              |       | 54            |        |          |    | 63        |          |         |      | 67      |         |        |   | 148     |         |        |        | 103     |        
|General and administrative                                                                       |                               |                                                           | 159                         |        |                            |    | 169           |       |          |     | 166       |        |              |       | 170           |        |          |    | 189       |          |         |      | 224     |         |        |   | 214     |         |        |        | 295     |        
|Product development                                                                              |                               |                                                           | 7                           |        |                            |    | 9             |       |          |     |          |        |              |       | 11            |        |          |    | 13        |          |         |      | 19      |         |        |   | 12      |         |        |        | 25      |        
|                                                                                                 |                               |                                                           |                             |        |                            |    |               |       |          |     |           |        |              |       |               |        |          |    |           |          |         |      |         |         |        |   |         |         |        |        |         |        
|Total amortization of deferred
compensation                                                      |                               | $                                                         | 198                         |        |                            | $  | 213           |       |          | $   | 202       |        |              | $     | 236           |        |          | $  | 265       |          |         | $    | 311     |         |        | $ | 375     |         |        | $      | 425     |        
|                                                                                                 |                               |                                                           |                             |        |                            |    |               |       |          |     |           |        |              |       |               |        |          |    |           |          |         |      |         |         |        |   |         |         |        |        |         |        

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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In addition to historical information, this Form 10-K contains
forward-looking statements, including statements related to the expected growth
of our affiliate program, the amount of traffic that will be directed to us
from our affiliates in the future, the timing and amount of any increase in our
average price per paid introduction, continued profitability, the timing and
amount of our number of paid introductions, the amount of future advertiser
spending with Overture, fluctuation in the price of our common stock, changes
in our quarter-to-quarter financial results and future competition. We use
words such as anticipates, believes, plans, expects, future,
intends and similar expression to identify these forward-looking statements.
These forward-looking statements are subject to certain risks and
uncertainties, as well as assumptions that could cause actual results to differ
materially from those reflected in these forward-looking statements. Factors
that might cause actual results to differ include, but are not limited to,
those discussed in the sections entitled Managements Discussion and Analysis
of Financial Condition and Results of Operations and Risks That Could Affect
Our Financial Condition and Results of Operations. Readers are cautioned not
to place undue reliance on these forward-looking statements, which reflect
managements opinions only as of the date hereof. The Company undertakes no
obligation to revise or publicly release the results of any revision to these
forward-looking statements.

OVERVIEW

Overture is the leader in Pay-For-Performance search on the Internet. We
introduce consumers and businesses that search the Internet to advertisers who
bid for placement in our search results, which are ranked by the advertisers
bid price. Advertisers pay us only when consumers and businesses click through
to the advertisers search listings, so we refer to our service as
Pay-For-Performance search. We provide consumers and businesses with relevant
search results by charging advertisers for each paid introduction, or
clickthrough, and by requiring advertisers to bid only on keywords that are
relevant to their offering. We distribute our search results to consumers and
businesses through our affiliates, a network of portals, Web browsers, Internet
service providers and other Web properties, as well as through our own Web
site. We believe our service offers advertisers a highly targeted, controllable
and cost-effective marketing solution and provides affiliates with incremental
revenue and a relevant search service.

Overture was incorporated in September 1997 and has approximately a
four-year operating history. We launched a proof-of-concept version of our
search service in the fiscal year ended December 31, 1997. Our
Pay-For-Performance service was announced in February 1998, and following
further proof-of-concept testing, was officially launched in June 1998.
Overture has devoted significant resources to launching and expanding its
search service, including developing an infrastructure and building a
management team. On October 8, 2001, GoTo.com, Inc. changed its name to
Overture Services, Inc.

Through the acquisition of Cadabra in January 2000, Overture operated a
comparison-shopping site, GoTo Shopping. On April 30, 2001, Overture closed its
comparison-shopping site. Through the acquisition of AuctionRover in May 2000,
Overture operated an auction service, GoTo Auctions. On June 29, 2001, Overture
completed a management buyout of GoTo Auctions, whereby the operating
management of GoTo Auctions purchased GoTo Auctions assets from Overture. The
newly formed company is called ChannelAdvisor Corporation. Overture retains a
minority stake of 8% in this new corporation, whose goal is to provide online
and offline businesses with the ability to leverage online auctions as a
channel of distribution. In connection with the disposition of GoTo Auctions
and closure of GoTo Shopping operations, Overture incurred net one-time charges
of approximately $2.0 million and $1.0 million, respectively, in the year
ending December 31, 2001. In 2000, the Company incurred total losses of
approximately $432.4 million which includes non-cash charges of approximately
$115.6 million of amortization of intangibles resulting from our acquisitions
of Cadabra, AuctionRover and the assets of SearchUP; a write-off of
approximately $7.6 million for acquired in-process research and development;
and a $309.3 million write-down of impaired goodwill associated with the
Cadabra and AuctionRover acquisitions.

A significant component of our expenses consist of costs incurred to
attract consumers and businesses to our service through our affiliate network.
We expect to continue to rely upon these sources for the majority of searches
conducted on our service. Our future success is dependent upon increasing the
revenue we derive from this traffic. A significant portion of the
Companys traffic is and has been generated from a small number
of the Companys larger affiliates. If we are not successful in
renewing any of these agreements, or if they are renewed but on less
favorable terms, it could harm our business and ability to generate
revenue.

International Expansion

We launched our service in the United Kingdom in November 2000 and
launched our German-speaking search service in February 2002. We are
considering launching our search service in Japan and France in 2002. We expect our
international expansion will require continued investment to build internal
infrastructure and grow our advertiser and affiliate bases overseas.

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RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

|                                                |                                                           |   |                         |         |      |   |          |         | 
|----------------------------------------------- | --------------------------------------------------------- | - | ----------------------- | ------- | ---- | - | -------- | ------- | 
|                                                |                                                           |   | YEAR ENDED DECEMBER 31,
|                                                |                                                           |   |                        
|                                                |                                                           |   | 2001                    |         | 2000
|                                                |                                                           |   |                         |         |     
|                                                |                                                           |   | (IN THOUSANDS)         
|Revenue                                         |                                                           | $ | 288,133                 |         |      | $ | 103,052  |        
|Operating expenses:                             |                                                           |   |                         |         |      |   |          |        
|                                                | Search serving                                            |   |                         | 20,962  |      |   |          | 13,109  | 
|                                                | Traffic acquisition                                       |   |                         | 162,072 |      |   |          | 66,433  | 
|                                                | Marketing, sales and service                              |   |                         | 28,078  |      |   |          | 28,098  | 
|                                                | General and administrative                                |   |                         | 44,917  |      |   |          | 33,798  | 
|                                                | Product development                                       |   |                         | 12,811  |      |   |          | 13,523  | 
|                                                | Amortization of deferred compensation                     |   |                         | 849     |      |   |          | 1,376   | 
|                                                | Write-off of acquired in-process research and
development |   |                         |        |      |   |          | 7,550   | 
|                                                | Amortization of intangible assets                         |   |                         | 1,192   |      |   |          | 115,600 | 
|                                                | Impairment of intangible assets                           |   |                         |        |      |   |          | 309,253 | 
|                                                | Loss on closure of GoTo Shopping                          |   |                         | 1,002   |      |   |          |        | 
|                                                | Loss on disposition of GoTo Auctions                      |   |                         | 2,008   |      |   |          |        | 
|                                                |                                                           |   |                         |         |      |   |          |        
|                                                |                                                           |   | 273,891                 |         |      |   | 588,740  |        
|                                                |                                                           |   |                         |         |      |   |          |        
|Income (loss) from operations                   |                                                           |   | 14,242                  |         |      |   | (485,688 | )      
|                                               
|                                                | Interest income, net                                      |   |                         | 4,260   |      |   |          | 5,809   | 
|                                                | Other income                                              |   |                         | 2,561   |      |   |          | 21,259  | 
|                                                |                                                           |   |                         |         |      |   |          |        
|Income (loss) before provision for income taxes |                                                           |   | 21,063                  |         |      |   | (458,620 | )      
|Provision for income taxes                      |                                                           |   | 900                     |         |      |   | 1        |        
|                                                |                                                           |   |                         |         |      |   |          |        
|Net Income (loss)                               |                                                           | $ | 20,163                  |         |      | $ | (458,621 | )      
|                                                |                                                           |   |                         |         |      |   |          |        

Revenue. Revenue is generated primarily through paid introductions, that
is, Overture generates revenue when a user clicks on an advertisers listings
after an advertiser has bid for priority placement in search results by making
a payment based on this clickthrough. Revenue is recognized when earned based
on click-through activity to the extent that the advertiser has deposited
sufficient funds with us or collection is probable. Revenue also consists of
banner advertising, and our Full Serve and Full Serve Advantage programs,
whereby the Company charges a service fee for listing services. Banner
advertising, Full Serve and Full Serve Advantage constitute less than 1% and 5%
of our revenue for the years ended December 31, 2001 and 2000, respectively.
Banner advertisement revenue is recognized when earned under the terms of the
contractual arrangement with the advertiser or advertising agency, provided
that collection is probable. Full Serve and Full Serve Advantage revenue is
recognized when Overture has provided all of the services under the terms of
the arrangement. Overture has no barter transactions.

The number of worldwide paid introductions for each of the last twelve
fiscal quarters is as follows:

|                             |  |                      
|---------------------------- |  | ---------------------
|NUMBER OF PAID INTRODUCTIONS |  | FOR THE QUARTER ENDED
|                             |  |                      
|442 million                  |  | December 31, 2001    
|338 million                  |  | September 30, 2001   
|327 million                  |  | June 30, 2001        
|318 million                  |  | March 31, 2001       
|228 million                  |  | December 31, 2000    
|114 million                  |  | September 30, 2000   
|93 million                   |  | June 30, 2000        
|88 million                   |  | March 31, 2000       
|73 million                   |  | December 31, 1999    
|54 million                   |  | September 30, 1999   
|31 million                   |  | June 30, 1999        
|15 million                   |  | March 31, 1999       

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The average price per paid introduction results from advertisers online
bidding for priority placement in the search results. The worldwide average
price per paid introduction for each of the last twelve fiscal quarters is as
follows:

|                                    |  |                      
|----------------------------------- |  | ---------------------
|AVERAGE PRICE PER PAID INTRODUCTION |  | FOR THE QUARTER ENDED
|                                    |  |                      
|$0.23                               |  | December 31, 2001    
|0.21                                |  | September 30, 2001   
|0.19                                |  | June 30,2001         
|0.16                                |  | March 31, 2001       
|0.17                                |  | December 31, 2000    
|0.21                                |  | September 30, 2000   
|0.21                                |  | June 30, 2000        
|0.19                                |  | March 31, 2000       
|0.17                                |  | December 31, 1999    
|0.14                                |  | September 30, 1999   
|0.11                                |  | June 30, 1999        
|0.08                                |  | March 31, 1999       

We believe the increase in the worldwide number of paid introductions from
September 30, 2001 to December 31, 2001 was primarily due to the addition of
large affiliate partners, Yahoo and Excite.com, as well as seasonality, as
Internet usage typically leads to more paid introductions during the period
from October to December. We believe that the worldwide average price per paid
introduction increased as a result of better than expected effects of
seasonality. In addition, advertisers are increasing their budgets with
Overture, as the average spend per advertiser in the three months ended
December 31, 2001 rose by 31% over the previous three months and by 10% in the
three months ended September 30, 2001 compared to the three months ended June
30, 2001. We cannot assure you that the paid introductions and average price
per click will continue to increase and if it does increase, at what rate, or
that it will not decrease from historical levels.

We believe the quarterly number of paid introductions and average price
per paid introduction listed above are not necessarily indicative of future
results and that the periods prior to the three-month period ended September
30, 1998 are not relevant because our service was only in its initial stage. It
is difficult to forecast the future growth of the average price per paid
introduction, as advertisers, rather than Overture, determine the price paid.
We believe that after our large increase in traffic, we may experience a drop
in the average price per paid introduction and may subsequently experience a
recovery period in which the price may continue to drop slightly or be flat for
a period of time. We do not anticipate our historical revenue growth rate
expressed as a percentage of revenue, to continue. Our growth rate and results
depend on our ability to continue to increase the number of advertisers who use
our service, the amount our advertisers spend on our service and the number of
consumers who use our service. Traffic from affiliates varies as we enter into
new agreements and existing agreements are renewed or expire. We anticipate
these variables to fluctuate, affecting our growth rate and results.

Revenue was approximately $288.1 million for the year ended December 31,
2001 compared to approximately $103.1 million for the year ended December 31,
2000. The increase was the result of continued growth of our marketplace and
the corresponding participants, our affiliates and advertisers. We do not
anticipate our historical revenue growth rate to continue as a percentage of
growth as expressed on a year-to-year basis.

Our growth is dependent on obtaining additional traffic and increasing the
average price per paid introduction. During the quarter ended December 31,
2001, approximately 40% of Overtures total traffic came from portals,
including Alta Vista, AOL, Excite.com, go.com, iWon, Terra Lycos and Yahoo;
approximately 25% of the total traffic came from the browsers, including
Microsoft Internet Explorer and Netscape; and approximately 35% of the total
traffic came from other affiliates including Ask Jeeves, InfoSpace
(including MetaCrawler and Dogpile) and our Web site. Even though we currently
anticipate growth in traffic from existing and new affiliates, we must renew
our affiliate agreements or replace this traffic with other sources and grow
our advertising base; otherwise, our revenue may be materially, adversely
affected.

Search Serving.Search serving costs consist primarily of costs associated
with serving our search results, maintaining our Web site and fees paid to
outside service providers that provide and manage our unpaid listings. Costs
associated with serving our search results and maintaining our Web site include
depreciation of Web site equipment, co-location charges for our Web site
equipment bandwidth, software license fees and salaries of related personnel. Search
serving costs were approximately $21.0 million for the year ended December 31,
2001 compared to approximately $13.1 million for the year ended December 31,
2000. The increase was primarily due to the increased database and hardware
capacity requirements as a result of an increase in our affiliate base and
corresponding number of searches, an increase in the number of personnel
required to support our services and increased fees paid to outside service
providers. We anticipate search serving costs to continue to increase as our
traffic and number of advertisers increase.

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Traffic Acquisition.Traffic acquisition costs relate to payments made to
our affiliates that have integrated the Overture search service into their
sites or that direct consumer and business traffic to the Overture Web site.
There are generally three ways that economic terms of affiliate
agreements are structured: 1) fixed payments based on a guaranteed
minimum amount of traffic delivered, 2) variable payments based on a
percentage of our revenue or based on a certain metric, such as
number of searches or paid clicks, or 3) a combination of the above. Traffic acquisition costs were approximately $162.1 million for
the year ended December 31, 2001 compared to approximately $66.4 million for
the year ended December 31, 2000. The increase was primarily due to increased
distribution of our search service. We believe that increased distribution of
our search services is critical to attaining our
strategic objectives and, as a result, expect these costs to continue to
increase in the future. In addition to our domestic affiliates, we anticipate
traffic acquisition costs to also increase as a result of the expansion of our
service overseas. Because Overture has only recently entered into the overseas
markets, we expect traffic acquisition costs as a percentage of revenue to be
considerably higher in those markets as we expand overseas.

The following are Overtures significant affiliate agreements:

|                                    |  |               |  |                
|----------------------------------- |  | ------------- |  | ---------------
|Affiliate                           |  | Commencement  |  | Expiration Date
|                                    |  |               |  |                
|AOL                                 |  | August 2000   |  | March 2002     
|AOL Europe
(UK, Germany and France) |  | January 2002  |  | March 2005     
|                                    |  |               |  |                
|AltaVista                           |  | November 2000 |  | May 2002       
|                                    |  |               |  |                
|CompuServe                          |  | May 2000      |  | May 2002       
|                                    |  |               |  |                
|Yahoo                               |  | November 2001 |  | June 2002      
|                                    |  |               |  |                
|Netscape Premier Provider           |  | July 2001     |  | June 2002      
|                                    |  |               |  |                
|Infoseek (go.com)                   |  | March 2002    |  | March 2003     
|                                    |  |               |  |                
|Ask Jeeves                          |  | July 2001     |  | July 2003      
|                                    |  |               |  |                
|iWon                                |  | January 2001  |  | July 2003      
|                                    |  |               |  |                
|Terra Lycos                         |  | November 2000 |  | November 2003  
|                                    |  |               |  |                
|Freeserve (UK)                      |  | November 2001 |  | November 2003  
|                                    |  |               |  |                
|Microsoft                           |  | February 2002 |  | December 2003  
|                                    |  |               |  |                
|InfoSpace                           |  | November 2001 |  | February 2004  

Traffic acquisition costs as a percentage of revenue were approximately
56% and 64% for the years ended December 31, 2001 and 2000, respectively. The
decrease was primarily due to better margins on new or renegotiated agreements,
and in cases where traffic acquisition costs were fixed and payments were
guaranteed, revenue increases, which were proportionately more than the
respective traffic acquisition costs, resulted in better margins. Traffic
acquisition costs as a percentage of revenue were approximately 51% and 77% in
the fourth quarters ended December 31, 2001 and 2000, respectively. Throughout
2001, we have been able to improve margins due to our increasing ability to
monetize search. We anticipate traffic acquisition costs as a percentage of
revenue to be between 53% and 57% in 2002.

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Marketing, Sales and Service. Marketing, sales and service expenses
consist primarily of payroll and related expenses for personnel engaged in
marketing, customer service and sales functions; advertising and promotional
expenditures; and cost of systems used to sell and serve advertisers.
Marketing, sales and service expenses were approximately $28.1 million for the
year ended December 31, 2001 compared to approximately $28.1 million for the
year ended December 31, 2000. Although marketing, sales and service expenses
were constant from year to year, we anticipate that these costs will rise in
the future as we continue to expand our marketplace, including international
expansion, and invest in product quality.

General and Administrative. General and administrative expenses consist
primarily of payroll and related expenses for executive and administrative
personnel; facilities; professional services, including legal; insurance and
other general corporate expenses. General and administrative expenses were
approximately $44.9 million for the year ended December 31, 2001 compared to
approximately $33.8 million for the year ended December 31, 2000. The increase
was the result of increased headcount and related expenses, including
facilities, credit card processing fees and increased personnel-related
insurance costs. We expect general and administrative expenses to continue to
increase with the growth of our business. In addition, we expect these costs to
grow as a result of our international expansion efforts, as our international
expansion efforts are at an early stage and we will experience costs related to
establishing infrastructure in international locations.

Product Development. Product development expenses consist primarily of
payroll and related expenses for personnel responsible for development of
features and functionality for our service, as well as costs incurred in the
preliminary project and post-implementation stage of computer software
developed for internal use. Statement of Position 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use (SOP 98-1)
requires that cost 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. Product development expenses were approximately $12.8 million for
the year ended December 31, 2001 compared to approximately $13.5 million for
the year ended December 31, 2000. The decrease was a result of
the closure of GoTo Shopping and disposition of GoTo Auctions and increased staffing and
associated costs relating to enhancing features and functionality to our Web
site and search service, net of
capitalization of software under SOP 98-1 of approximately $2.0 million in the
year ended December 31, 2001. We believe our continued investment in product
development and product quality is critical to attaining our strategic
objectives and, as a result, expect product development expenses to increase in
the future.

Amortization of Deferred Compensation. Certain stock options granted from
the inception of Overture through our initial public offering have been
considered to be compensatory for financial accounting purposes. Overture also
issued options below fair market value in 2001, which are considered
compensatory. Total compensation expense resulting from these stock options
amounted to approximately $7.8 million. This amount represents the difference
between the exercise price of the stock options and the deemed fair value of
our common stock at the time of the grants or issuances, adjusted for the
return of unvested options or the repurchase of restricted stock resulting from
employee terminations. Compensation associated with these stock options is
amortized and expensed over the applicable vesting periods using a graded
methodology. Approximately $849,000 and $1.4 million were amortized and charged
to operations for the years ended December 31, 2001 and 2000, respectively.
Based on existing grants, we expect to have charges to amortization of deferred
compensation of approximately $404,000 in the year end December 31,
2002 and the remaining approximately $359,000 through 2006.

Loss on Closure of GoTo Shopping. On April 30, 2001, Overture closed its
GoTo Shopping operations and recorded a charge for restructuring and exit
costs. The net charges were approximately $1.0 million, which included
approximately $201,000 of cash termination benefits associated with the
involuntary termination of 21 GoTo Shopping employees. The terminations of
these positions, primarily in sales and service and product development
functions were completed by June 30, 2001. The charge also included
approximately $59,000 for non-cash termination benefits related to the
acceleration of options; approximately $256,000 for fixed asset write-downs;
approximately $485,000 for the remaining lease payments on a facility lease
which Overture has not been able to sub-lease; and other exit costs of
approximately $1,000. These costs were included in the Loss on Closure of GoTo
Shopping in the statement of operations. Cash payments were funded from
operations and did not have a significant impact on Overture s liquidity.

Loss on Disposition of GoTo Auctions. On June 29, 2001, Overture
completed a management buyout of GoTo Auctions, whereby the operating
management of GoTo Auctions purchased GoTo Auctions assets from Overture. The
newly formed company is called ChannelAdvisor Corporation. Overture received a
minority stake in this new corporation and as of December 31, 2001, Overture
retained approximately 8% of ChannelAdvisor. ChannelAdvisors goal is to
provide online and offline businesses with the ability to leverage online
auctions as a channel of distribution. In connection with the management
buyout, Overture incurred net charges for the disposition of certain assets and
exit costs. The net charges were approximately $2.0 million, which included in
the exit costs were approximately $280,000 of cash termination benefits
associated with the involuntary termination of 31 GoTo Auction employees. The

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terminations of these positions, primarily in sales and service and
product development functions, were completed by June 30, 2001. The charge also
included approximately $1.6 million for fixed asset write-downs and
approximately $109,000 for other exit costs. These costs were included in Loss
on Disposition of GoTo Auctions in the statement of operations. Cash payments
were funded from operations and did not have a significantly impact on Overture
s liquidity.

Interest Income.Interest income consists primarily of earnings on our
cash, cash equivalents and short-term and long-term investments, net of
interest expense attributable to leased equipment. Interest income was
approximately $4.3 million for the year ended December 31, 2001 compared to
approximately $5.8 million for the year ended December 31, 2000. The decrease
was primarily due to lower interest rates and lower returns from our
investments in commercial paper and treasury securities partially offset from
earnings from additional cash proceeds from our follow-on offering of approximately $58.2
million received in July 2001.

Other Income. Other income of approximately $2.6 million for the year
ended December 31, 2001 consists primarily of the reimbursement for legal costs
associated with the settlement of the MercExchange litigation (see Note 6 to
the financial statements) compared to approximately $21.3 million for the year
ended December 31, 2000, which consisted primarily of the settlement of
litigation with Disney.

Provision For Income Taxes.Although the Company had sufficient net
operating loss carryforwards to offset its taxable income for the year ended
December 31, 2001, it has recorded a current tax provision equal to the
alternative minimum tax for both Federal and California purposes of
approximately $900,000.

As of December 31, 2001, the Company had net operating loss carryforwards
of approximately $76.1 million and $54.7 million available to reduce future
federal and state taxable income, respectively. These net operating loss
carryforwards are carried on the Companys balance sheet as a deferred tax
asset, but due to the uncertainty surrounding the timing of realizing the
benefits of its deferred tax assets from its net operating loss carryforwards
in future years, the Company has recorded a 100% valuation allowance against
its deferred tax assets. The Company expects to release the valuation allowance
against its deferred tax assets to the extent it has taxable income, therefore
the Company only expects to incur alternative minimum taxes in 2002.

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YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

|                                       |                                                           |   |                         |         |      |   |         |        | 
|-------------------------------------- | --------------------------------------------------------- | - | ----------------------- | ------- | ---- | - | ------- | ------ | 
|                                       |                                                           |   | YEAR ENDED DECEMBER 31,
|                                       |                                                           |   |                        
|                                       |                                                           |   | 2000                    |         | 1999
|                                       |                                                           |   |                         |         |     
|                                       |                                                           |   | (IN THOUSANDS)         
|Revenue                                |                                                           | $ | 103,052                 |         |      | $ | 26,809  |       
|Operating expenses:                    |                                                           |   |                         |         |      |   |         |       
|                                       | Search serving                                            |   |                         | 13,109  |      |   |         | 6,213  | 
|                                       | Traffic acquisition                                       |   |                         | 66,433  |      |   |         | 14,290 | 
|                                       | Marketing, sales and service                              |   |                         | 28,098  |      |   |         | 20,169 | 
|                                       | General and administrative                                |   |                         | 33,798  |      |   |         | 12,467 | 
|                                       | Product development                                       |   |                         | 13,523  |      |   |         | 3,689  | 
|                                       | Amortization of deferred compensation                     |   |                         | 1,376   |      |   |         | 3,585  | 
|                                       | Write-off of acquired in-process research and
development |   |                         | 7,550   |      |   |         |       | 
|                                       | Amortization of intangible assets                         |   |                         | 115,600 |      |   |         |       | 
|                                       | Impairment of intangible assets                           |   |                         | 309,253 |      |   |         |       | 
|                                       |                                                           |   |                         |         |      |   |         |       
|                                       |                                                           |   | 588,740                 |         |      |   | 60,413  |       
|                                       |                                                           |   |                         |         |      |   |         |       
|Loss from operations                   |                                                           |   | (485,688                | )       |      |   | (33,604 | )     
|                                       |                                                           |   |                         |         |      |   |         |        | 
|                                       | Interest income, net                                      |   |                         | 5,809   |      |   |         | 3,777  | 
|                                       | Other income                                              |   |                         | 21,259  |      |   |         | 566    | 
|                                       |                                                           |   |                         |         |      |   |         |       
|Loss before provision for income taxes |                                                           |   | (458,620                | )       |      |   | (29,261 | )     
|Provision for income taxes             |                                                           |   | 1                       |         |      |   | 1       |       
|                                       |                                                           |   |                         |         |      |   |         |       
|Net loss                               |                                                           | $ | (458,621                | )       |      | $ | (29,262 | )     
|                                       |                                                           |   |                         |         |      |   |         |       

Revenue.
Revenue from banner advertising constituted less than 5 percent
of our revenue for the year ended December 31, 2000. Overture had no barter
transactions. Revenue was approximately $103.1 million for the year ended
December 31, 2000 compared to approximately $26.8 million for the year ended
December 31, 1999. The increase was the result of continued growth of our
marketplace and the corresponding participants, our advertisers and the number
of consumers using our product.

During the year ended December 31, 2000, approximately 20% of Overtures
total traffic came from portals (AOL, Terra Lycos and AltaVista), and
approximately 15% of the total traffic came from the browsers (Microsoft
Internet Explorer and Netscape), and approximately 65% of the total traffic
came from other affiliates and our Web site.

Search Serving. Search serving costs were approximately $13.1 million for
the year ended December 31, 2000 compared to approximately $6.2 million for the
year ended December 31, 1999. The increase was primarily due to the increased
database and hardware capacity requirements, an increase in the number of
personnel required to support our Web site and increased fees paid to outside
service providers.

Traffic Acquisition.Traffic acquisition costs were approximately $66.4
million for the year ended December 31, 2000 compared to approximately $14.3
million for the year ended December 31, 1999. The increase was primarily due to
increased distribution of our search service.

Marketing, Sales and Service. Marketing, sales and service expenses were
approximately $28.1 million for the year ended December 31, 2000 compared to
approximately $20.2 million for the year ended December 31, 1999. The increase
was primarily due to the hiring of additional personnel for marketing, sales
and service functions.

General and Administrative. General and administrative expenses were
approximately $33.8 million for the year ended December 31, 2000 compared to
approximately $12.5 million for the year ended December 31, 1999. The increase
was the result of increased headcount and related expenses, including
facilities and increased personnel-related insurance costs, as well as
increased professional services.

Product Development. Product development expenses were approximately $13.5
million for the year ended December 31, 2000 compared to approximately $3.7
million for the year ended December 31, 1999. The increase was a result of
increased staffing and associated costs relating to enhancing features and
functionality to our Web site and search service. The increase was offset by
the capitalization of software under Statement of Position 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use of
approximately $4.7 million, which we began amortizing in the third quarter of
2000.

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Amortization of Deferred Compensation. Approximately $1.4 million and $3.6
million were amortized and charged to operations for the years ended December
31, 2000 and 1999, respectively for compensatory stock option grants, which are
amortized and expensed over the applicable vesting periods using a graded
methodology.

Impairment of Intangible Assets. During the fourth quarter of 2000 and in
accordance with SFAS 121, management identified certain conditions as
indicators of asset impairment on the net assets from the acquisitions of
Cadabra and AuctionRover. These indicators included:



|1. |  | The significant decline in the valuations of public companies operating in
the Internet space.             
|-- |  | -----------------------------------------------------------------------------------------------------------
|  
|2. |  | Managements re-evaluation of its strategies and fit for these business
lines.                             
|  
|3. |  | A significant decrease in the stock price of Overture compared to the
purchase price of these acquisitions.
|  
|4. |  | Managements decision to decrease its investment in these business lines.                                  

In accordance with SFAS 121, an impairment loss should be measured as the
amount by which the carrying amount of the asset exceeds the estimated fair
value of the asset. The estimate of fair value shall consider selling prices or
fair values for similar assets and the results of valuation techniques (e.g.,
discounted cash flows) as well as other strategic and market factors to the
extent available in the circumstances. Management has estimated the fair value
of the net assets acquired, based on discounted future cash flows as well as
strategic and market factors, to be below the carrying values of goodwill and
intangible assets. Accordingly, Overture took a charge to operations during the
fourth quarter of 2000 for approximately $309.3 million, to write down these
assets. An additional factor considered by management was the difficulty in
estimating future cash flows for the comparison-shopping business line and the
Internet auctions business line because they were still in their infancy.
Overture exited the comparison-shopping and auctions businesses in 2001.

Interest Income. Interest income was approximately $5.8 million for the
year ended December 31, 2000 compared to approximately $3.8 million for the
year ended December 31, 1999. The increase was primarily due to Overtures
holding the initial public offering proceeds for the entire year of 2000 versus
partial year in 1999, together with the $21.5 million settlement paid by the
Walt Disney Company to Overture in settlement of trademark litigation, offset
by the declining balance of cash and investments.

Other Income. Other income of approximately $21.3 million for the year
ended December 31, 2000 consisted primarily of the settlement of litigation with
The Walt Disney Company compared to approximately $566,000 for the year ended
December 31, 1999, which consisted primarily of a settlement of an early
termination of a distribution agreement.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities totaled approximately $64.8
million for the year ended December 31, 2001 and net cash used in operating
activities totaled approximately $30.4 million for the year ended December 31,
2000. The change was primarily due to operating income in 2001 versus operating
losses in 2000. Net cash used in investing activities totaled approximately
$84.8 million for the year ended December 31, 2001 and net cash provided by
investing activities totaled approximately $30.2 million for the year ended
December 31, 2000. The change resulted from purchases of short-term and
long-term investments in 2001, versus sales of short-term and long-term
investments in 2000. Net cash provided by financing activities totaled
approximately $69.1 million and $1.3 million for the years ended December 31,
2001 and 2000, respectively. The increase was due primarily to the issuance of
common stock through our follow-on offering, which raised net proceeds of
approximately $58.2 million.

Our principal sources of liquidity consisted of unrestricted cash, cash
equivalents and short-term investments of approximately $170.3 million as of
December 31, 2001 and approximately $55.0 million as of December 31, 2000. We
believe that our cash and liquid investment reserves are sufficient to sustain
operations through the foreseeable future. We are obligated to make guaranteed
payments totaling approximately $29.1 million in 2002, under contracts to
provide search services to its affiliates. The Company leases office space
under operating lease agreements expiring in October 2004. In
March 2002, Overture entered into an arrangement with Parfinco EWA,
LLC and Bill Gross' idealab! whereby Bill Gross' idealab! assigned
their lease with Parfinco to Overture for the existing 58,000 square
feet of office space in Pasadena, California and Overture entered into
an arrangement with Parfinco for an additional 29,000 square feet of
office space in Pasadena, California. The additional office space
lease expires at the same time as our existing 58,000 square feet of
office space, in October 2004. Overture is obligated to make total
remaining office lease payments of approximately $6.4 million.

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ACCOUNTING POLICIES SUBJECT TO ESTIMATION AND JUDGMENT

The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to allowance for doubtful accounts, long-term contracts,
intangible assets, income tax, restructuring and litigation. We base our
estimates on historical experience and on various other assumptions that are
believed 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.

Note 1 to the Notes of the Consolidated Financial Statements
describes our significant accounting policies. We believe the
following accounting policies are more subject
to management's estimates and judgments.

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required which would result in an additional general and administrative expense
in the period such determination was made.

Income Tax

As of December 31, 2001, the Company had net operating loss carryforwards
of approximately $76.1 million and $54.7 million available to reduce future
federal and state taxable income, respectively. These net operating loss
carryforwards are carried on the Companys balance sheet as a deferred tax
asset, but due to the uncertainty surrounding the timing of realizing the
benefits of its deferred tax assets from its net operating loss carryforwards
in future years, the Company has recorded a 100% valuation allowance against
its deferred tax assets. Financial Accounting Statement Standard No. 109,
Accounting for Income Taxes (SFAS 109) requires that a valuation allowance be
setup to reduce a deferred tax asset to the extent it is more likely than not
that the related tax benefits will not be realized. In order for a company to
realize the tax benefits associated with a net operating loss, it must have
taxable income within the applicable carryback or carryfoward periods. Sources
of taxable income that may allow for the realization of those tax benefits
include:



| |  |  | Taxable income in the current year or prior years that is available
though a carryback claim;                                                           
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Future taxable income that will result from the reversal of existing
taxable temporary differences, (i.e. the reversal of deferred tax
liabilities); and
|
| |  |  | Future taxable income generated by future operations.                                                                                                   

SFAS 109 indicates that all available evidence, both positive and
negative, should be identified and considered in making a determination as to
whether it is more likely than not that all or some portion of the deferred tax
asset will not be realized. Examples of positive evidence include:



| |  |  | Strong earnings history                         
| | - |  | ------------------------------------------------
|
| |  |  | Existing contracts or backlog; and              
|
| |  |  | Assets with net built in gains for tax purposes.

Examples of negative evidence include but are not limited to the following:



| |  |  | A pretax loss for financial reporting purposes for the current or a recent preceding year;
| | - |  | ------------------------------------------------------------------------------------------
|
| |  |  | A deficit in stockholders equity;                                                        
|
| |  |  | A history of operating loss or tax credit carryforwards expiring unused; and              
|
| |  |  | Cumulative losses in recent years.                                                        

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We believe that Overtures losses in recent years present negative
evidence that required a valuation allowance to be set up to reduce the
deferred tax asset associated with the net operating losses. Accordingly, the
Company has not taken a benefit for that asset. If the Company generates
taxable income in 2002, this would be positive evidence that could allow the
Company to release a portion of the valuation allowance set up against the
asset. However, since the Company still has losses in recent years and because
there is no other compelling positive evidence, we believe that it would not be
appropriate for the Company to release any more of the valuation than can be
utilized in 2002. In addition to generating taxable income, if Overture had
other positive evidence, for example signing multi-year affiliate agreements
with large portals, the Company could release a portion or all of the
remaining valuation allowance, which would result in a tax benefit in the
period such determination was made.

Affiliate Prepayments and Commitments

The Company's
agreements with some of its affiliates may include prepayments or commitments
for future minimum payments to these affiliates. The recoverability
of prepayments and profitability related to future minimum payments
and commitments are subject to the judgment of management.
Periodically, the Company assesses affiliate prepayments and
commitments on a per agreement basis, considering historical margins,
price per click and other financial trends, the development stage of
the market, and any other relevant factors to determine
realizability. Negative results from these assessments could result
in additional one-time charges to traffic acquisition expense
resulting from the impairment writedown of prepayments or accrual of
losses.

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RISKS THAT COULD AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS BECAUSE
OF MANY FACTORS, AND ANY OF THESE COULD ADVERSELY AFFECT OUR STOCK PRICE

We believe that quarter-to-quarter comparisons of our operating results
are not a good indication of our future performance. It is likely that, in some
future quarter, our operating results may be below historical levels, and/or
the expectations of public market analysts and investors and, as a result of
these or other factors, the price of our common stock may fall and/or
significantly fluctuate. The price of our common stock may decline or may be
extremely volatile. Since our initial public offering in June 1999, the per
share trading price of our common stock has ranged from an intra-day high of
$114.50 on November 15, 1999 to an intra-day low of $4.81 on December 21, 2000.
Our operating results have varied widely in the past, and we expect that they
will continue to vary widely from quarter to quarter due to a number of
factors, including:



| |  |  | demand for our services by advertisers, consumers and businesses,
including the number of searches performed by consumers and businesses
and the rate at which they click through to paid search results;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | prices paid by advertisers using the Overture services, which are not
determined by Overture;                                                                                                            
|
| |  |  | our costs of attracting consumers and businesses to use Overtures
services, including costs of exposure on affiliate Web sites;                                                                         
|
| |  |  | decrease in traffic from our affiliates for any reason, including
loss of our agreements with affiliates or demand for the services of
affiliates;                                                       
|
| |  |  | costs related to agreements with affiliates;                                                                                                                                                             
|
| |  |  | ability to protect our business model from competitors;                                                                                                                                                  
|
| |  |  | the percentage of Overtures search listings that are bidded listings;                                                                                                                                   
|
| |  |  | our ability to maintain and grow our affiliate program including amendments, extensions or new affiliate agreements;                                                                                     
|
| |  |  | seasonal fluctuations in the use of our service, typical of our
industry, in which online traffic has typically been lower in the second
and third quarters of the calendar year;                        
|
| |  |  | the amount and timing of operating costs and capital expenditures relating to expansion of our operations;                                                                                               
|
| |  |  | costs and delays in introducing any new Overture services and improvements to existing services;                                                                                                         
|
| |  |  | our ability to successfully introduce new products or services;                                                                                                                                          
|
| |  |  | changes in the growth rate of Internet usage and acceptance by consumers of e-commerce;                                                                                                                  
|
| |  |  | technical difficulties, system failures, system security breaches, or Internet downtime;                                                                                                                 
|
| |  |  | government regulations related to the Internet;                                                                                                                                                          
|
| |  |  | our ability to upgrade and develop our information technology systems and infrastructure;                                                                                                                
|
| |  |  | costs related to any acquisitions or dispositions of technologies or businesses;                                                                                                                         
|
| |  |  | general economic conditions, as well as those specific to the Internet and related industries; and                                                                                                       
|
| |  |  | ability to expand and compete internationally.                                                                                                                                                           

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As a result of our limited operating history, it is difficult to
accurately forecast our revenue, and we have limited meaningful historical
financial data upon which to base planned operating expenses. We plan to
significantly increase our operating expenses to expand our marketing and sales
operations and broaden our customer support capabilities. We base our current
and future expense levels on our operating plans and estimates of future
revenue. Other than a portion of our affiliate costs, our expenses are
relatively fixed. Revenue and operating results are difficult to forecast
because they generally depend upon the volume of the searches conducted on our
service, the amounts bid by advertisers for search listings on the service and
the number of advertisers that bid on the service, each of which we cannot
control directly. As a result, we may be unable to adjust our spending in a
timely manner to compensate for any unexpected revenue shortfall. We also may
be unable to increase our spending and expand our operations in a timely manner
to adequately meet user demand, to the extent such demand exceeds our
expectations.

WE DEPEND ON A LIMITED NUMBER OF SOURCES TO DIRECT CONSUMERS AND BUSINESSES TO
OUR SERVICE TO CONDUCT SEARCHES

The consumers and businesses who conduct searches on our service come
primarily from a limited number of sources. Our sources for consumers and
businesses conducting searches are members of our affiliate network, including
portals such as Alta Vista, AOL, Excite.com, go.com, iWon, MSN, Terra Lycos
and Yahoo; providers of Internet browsers such as Microsoft Internet Explorer
and Netscapes browser product; aggregators of search offerings of various
providers including Ask Jeeves, InfoSpace (including
MetaCrawler and Dogpile) and from Overtures Web site. In any given month, we typically depend
upon one or a few of these sources for a significant amount of traffic and
searches conducted on our service. Revenue is generated from clickthroughs that
users make on advertisers listings and, generally, the more traffic from any
given source, the greater number of clickthroughs we will generate. Of
Overtures total traffic, for the three months ended December 31, 2001,
approximately 40% came from our portal affiliate; approximately 25% came from
our browser affiliates and approximately 35% came from other affiliates and
our Web site.

The following are Overtures significant affiliate agreements:

|                                    |  |               |  |                
|----------------------------------- |  | ------------- |  | ---------------
|Affiliate                           |  | Commencement  |  | Expiration Date
|                                    |  |               |  |                
|AOL                                 |  | August 2000   |  | March 2002     
|AOL Europe
(UK, Germany and France) |  | January 2002  |  | March 2005     
|                                   
|AltaVista                           |  | November 2000 |  | May 2002       
|                                   
|CompuServe                          |  | May 2000      |  | May 2002       
|                                   
|Yahoo                               |  | November 2001 |  | June 2002      
|                                   
|Netscape Premier Provider           |  | July 2001     |  | June 2002      
|                                   
|Infoseek (go.com)                   |  | March 2002    |  | March 2003     
|                                   
|Ask Jeeves                          |  | July 2001     |  | July 2003      
|                                   
|iWon                                |  | January 2001  |  | July 2003      
|                                   
|Terra Lycos                         |  | November 2000 |  | November 2003  
|                                   
|Freeserve (UK)                      |  | November 2001 |  | November 2003  
|                                   
|Microsoft                           |  | February 2002 |  | December 2003  
|                                   
|InfoSpace                           |  | November 2001 |  | February 2004  

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Even though we currently anticipate growth in traffic from existing and
new affiliates, we must renew our affiliate agreements or replace this traffic
with other sources and grow our advertising base; otherwise, our revenue may be
materially, adversely affected. We depend on each of our portal and browser
affiliates and the loss of any of these affiliates could harm our revenue and
business.

The amount of traffic from each of our affiliates has varied, and we
expect it will continue to vary, from quarter to quarter, sometimes
significantly, and in any single quarter we have been and could continue to be
significantly dependent on traffic from a single or limited number of portal or
browser affiliates. Certain of Overtures affiliate agreements do not require
the affiliate to display Overtures search results and may allow the affiliate
to stop displaying Overtures search results after a short notice period. If we
are unable to replace traffic from any portal or browser affiliate after
expiration of our contract with it or if an affiliate upon which we depend
stops displaying Overtures search results, it would seriously harm our
business, financial condition and results of operations, particularly if we are
significantly dependent on that affiliate at the time. Overtures agreements
with its affiliates vary in initial duration from three months to three years,
and depending on the agreement, may be terminable upon the occurrence of
certain events, including for our failure to meet certain service levels, for
general breaches of agreement terms, for changes in control or in some
instances, at will. We may not be successful in renewing any of these
agreements, or if they are renewed, any new agreement may not be on as
favorable terms. We may not be successful in entering into distribution
agreements with new affiliates on commercially acceptable terms. In addition,
several of these affiliates may be considered potential competitors, including
Yahoo. In November 2001, Yahoo announced the launch of Yahoo Sponsor Matches,
which was introduced through an alliance with Overture. This agreement will be
effective until at least June 2002, at which time Yahoo may offer its own
Sponsor Matches program independently.

OUR SUCCESS IS DEPENDENT UPON FURTHER DEVELOPING AND MAINTAINING THE AFFILIATE
NETWORK

We believe that our success in penetrating our target markets depends in
part on our ability to further develop and maintain relationships with
affiliates, which provide their users with Overture services on their sites or
direct their traffic to our Web site. We believe these relationships are
important to facilitate broad market acceptance of our services and enhance our
sales. Our ability to attract consumers to our services is dependent upon the
growth of our affiliate network, which is new and unproven. Our success depends
in part on the success of our affiliates and our relationships with our
affiliates. In addition, our affiliates may not regard us as significant for
their own businesses. Therefore, they could reduce their commitment to us or
terminate their respective relationships with us, pursue other partnerships or
relationships, or attempt to develop or acquire products or services that
compete with our services. If we are unable to successfully develop and
maintain relationships with affiliates, our business, operating results and
financial condition will be materially and adversely affected.

OUR SUCCESS DEPENDS UPON ACHIEVING A LARGE AND ACTIVE BASE OF ADVERTISERS,
CONSUMERS AND BUSINESSES

Our ability to increase the volume of transactions on our service and the
amounts bid by our advertisers is dependent upon achieving market acceptance by
having more advertisers, consumers and businesses using our services. Most
potential advertisers have only limited experience advertising on the Internet
and have not devoted a significant portion of their advertising expenditures to
Internet advertising. Advertising through priority placement on our services in
particular has been introduced only recently, and we cannot predict the level
of its acceptance as an advertising medium. Our services may not achieve
significant acceptance by consumers and businesses. Among other things, because
our services prioritize search results based on advertising bids associated
with keywords rather than on algorithmic or other traditional search and
retrieval technologies, consumers and businesses may not use our service
because they perceive our results to be less objective than those provided by
traditional search methods. Failure to achieve and maintain a large and active
base of advertisers and of consumers and businesses could have a material
adverse effect on our business, operating results and financial condition.

A SIGNIFICANT PORTION OF OUR REVENUE IS CONCENTRATED AMONG A LIMITED NUMBER OF
ADVERTISERS

If our major advertisers were to substantially cut back their advertising
or stop using our services, our business would be seriously harmed. Although no
one advertiser accounts for a material portion of our revenue during any given
period, a majority of our total revenue is derived from a small proportion of
our advertisers. We believe that a substantial amount of revenue from
advertising sales in any given future period may come from a relatively small
number of advertisers. We do not have formal contractual relationships with
many of our advertisers, and when we do have contracts, all are terminable at
any time by the advertiser. As a result, our advertisers are not obligated to
purchase advertising from us in the future.

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WE HAVE A LIMITED OPERATING HISTORY, SO WE CANNOT BE SURE THAT WE WILL BE
SUCCESSFUL IN IMPLEMENTING OUR BUSINESS STRATEGY

Overture was founded in September 1997, officially launched its service in
June 1998, and has a limited operating history. An investor in our common stock
must consider the risks and difficulties frequently encountered by companies in
new and rapidly evolving markets. These risks include our:



| |  |  | complete dependence on online advertising and consumer search
services with only limited market acceptance;                                                              
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | need to continually develop and upgrade our infrastructure, including
internal controls, transaction processing systems, data storage and
retrieval systems and Web site;
|
| |  |  | reliance on affiliates to direct consumers and businesses to our service to conduct searches;                                                                            
|
| |  |  | need to manage changing operations; and                                                                                                                                  
|
| |  |  | dependence upon and need to hire and retain key personnel.                                                                                                               

The Overture service may not retain its existing, or attract new,
advertisers, consumers and businesses, and affiliates, which are Web sites that
include Overtures Pay-For-Performance search services on their sites or that
direct consumer traffic to the Overture Web site. Overture may not achieve
additional revenues or maintain operating margins in future periods. Overtures
services may not continue to achieve commercial acceptance and, if they do not,
our business, operating results and financial condition may be materially and
adversely affected.

OUR INABILITY TO CONTINUE TO GROW AND MAINTAIN OUR ADVERTISER, CONSUMER AND
BUSINESS, AND AFFILIATE CONSTITUENCIES COULD ADVERSELY AFFECT OUR REVENUES AND
BUSINESS

Our growth depends, in part, on the maintenance of a critical mass of
advertisers, consumers and businesses, and affiliates, and the continued growth
of these constituencies, which encourages increased participation by each of
the constituencies. To the extent that we experience a decline in the growth or
number of any one constituency, the value of our service to one or more of our
other constituencies could be harmed, and our revenues or business could be
adversely affected. A continued decline could seriously harm our revenues and
business.

WE CANNOT ASSURE YOU WE WILL NOT INCUR NET LOSSES IN ANY PARTICULAR FUTURE
PERIOD

Prior to the six months ended December 31, 2001, we had a history of
losses and we cannot assure you we will not incur net losses again in any
particular future period. Although we had net income of approximately
$20.2
million in the year ended December 31, 2001 as a result of our achieving
profitability in the third and fourth quarters of 2001, we had net losses of
approximately $9.6 million for the six-months ended June 30, 2001 and net
losses of approximately $458.6 million for the year ended December 30, 2000.
Because our expense levels are relatively fixed in the short term, if our
revenues do not keep pace with our expense levels, we may not sustain or
increase profitability in any particular quarter or we may incur losses again.
We expect to continue to increase our marketing, sales and service and general
and administrative expenses and we cannot be certain that revenue growth will
continue to grow. If our revenue growth does not continue, we may experience a loss in
one or more future periods and it may as a result cause our stock price to
decline. This may in turn impact our ability to implement our business
strategy.

OUR INDUSTRY IS HIGHLY COMPETITIVE, AND WE MAY NOT BE ABLE TO COMPETE
EFFECTIVELY

Overture competes with online services, other Web sites and advertising
networks such as DoubleClick Inc. and 24/7 Media, Inc., as well as traditional
offline media such as television, radio and print, for a share of advertisers
total advertising budgets. We believe that the number of companies selling
Web-based advertising and the available inventory of advertising space has
recently increased. Accordingly, Overture may face increased pricing pressure
for the sale of advertisements and direct marketing opportunities, which could
have a material adverse effect on our business, operating results and financial
condition.

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Overture also competes with providers of Web directories, search, and
information services, all of which offer search services competitive to those
provided by Overture, including, among others, AltaVista, AOL Time Warner Inc.,
Ask Jeeves, Inc., CNET, Inc., Fast Search & Transfer ASA, Google, Inc., Inktomi
Corporation, LookSmart, Ltd., Microsoft Corporation (LinkExchange, Inc. and
msn.com), Terra Lycos (including HotBot) and Yahoo!, Inc. In addition,
Espotting Media, FindWhat.com, Inc., Google and PRIMEDIA, through its About.com
Sprinks product, each offer a search-based pay-per-click advertising service.
There are also other companies that offer directly competing services. We have
affiliate arrangements with companies that currently provide other search and
advertising services, which may indirectly compete with our offerings, and may
in the future offer their own pay-per-click search service.

Recently, some of our search service competitors, such as Google and Terra
Lycos, have introduced pay-per-click advertising services that are similar to
ours. Although we believe that our large network of affiliates, number of
advertisers and proprietary technology differentiate our service from those of
these competitors, we cannot assure you that another search service will not
successfully offer a competitive pay-per-click advertising product. We believe
it is likely that there will be additional entrants to the pay-per-click search
market. These new competitors will likely compete against us for affiliate
arrangements and therefore may require us to enter into affiliate agreements
with less favorable terms or we may lose traffic from some affiliates. These
new competitors will also compete with us for users, which could reduce our
number of clickthroughs and total revenues. These new competitors could
therefore have a material adverse effect on our business, operating results and
financial condition.

In addition, some of our competitors, as well as potential entrants into
our market, have longer operating histories, larger customer or user bases,
greater brand recognition and significantly greater financial, marketing and
other resources than we do. Many of these current and potential competitors can
devote substantially greater resources to promotion and Web site and systems
development than we can. In addition, as the use of the Internet and other
online services increases, larger, well-established and well-financed entities
may continue to acquire, invest in or form joint ventures with providers of Web
directories, search and information services or advertising solutions, and
existing providers of Web directories, search and information services or
advertising solutions may continue to consolidate. In addition, providers of
Internet browsers and other Internet products and services who are affiliated
with providers of Web directories and information services in competition with
the Overture service may more tightly integrate these affiliated offerings into
their browsers or other products or services. Any of these trends would
increase the competition we face and could have a material adverse effect on
our business, operating results and financial condition.

WE FACE THE RISKS OF SYSTEM FAILURES

We do not currently have fully redundant systems for our services at an
alternate site, but are in the process of implementing a comprehensive disaster
recovery plan. Until a comprehensive disaster recovery plan is in place, a
disaster such as fire, flood, earthquake, power loss, telecommunications
failure, break-in, sabotage or a similar event could severely damage our
business and results of operations, because our services could be interrupted
for an indeterminate length of time. Our operations depend upon our ability to
maintain and protect our computer systems, which are located in Pasadena,
California and at other offsite locations. These offsite locations are managed
by third parties in California, Virginia, Washington State and Ireland.

Any system failure, including network or hardware failure, that causes an
interruption in our service or our affiliates service or the security of any
other internet provider or a decrease in responsiveness could result in reduced
traffic and reduced revenue. Although we believe that our current back-up
methods are adequate, the back-up servers could fail or cause interruptions in
our service.

Our California and Washington State sites exist on or near known
earthquake fault zones. The occurrence of a natural disaster or unanticipated
problems at our principal headquarters or at a third-party facility could cause
interruptions or delays in our business, limited loss of data or could render
us unable to provide some services. In addition, failure by the third-party
facility to provide the data communications capacity required by us, as a
result of human error, natural disaster or other operational disruptions, could
cause interruptions in our service. The occurrence of any or all of these
events could adversely affect our reputation, brand and business, which could
have a material adverse effect on our business, operating results and financial
condition.

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CONTINUED ADOPTION OF THE INTERNET AS A METHOD OF CONDUCTING BUSINESS IS
NECESSARY FOR OUR FUTURE GROWTH

The failure of the Internet to continue to develop as a commercial and
business medium could have a material adverse effect on our business, operating
results and financial condition. The widespread acceptance and adoption of the
Internet by traditional businesses for conducting business and exchanging
information is likely only if the Internet provides these businesses with
greater efficiencies and improvements.

FAILURE TO EXPAND INTERNET INFRASTRUCTURE COULD LIMIT OUR FUTURE GROWTH

The growth in Internet traffic has caused frequent periods of decreased
performance, and if Internet usage continues to grow rapidly, the Internets
infrastructure may not be able to support these demands, and its performance
and reliability may decline. Consequently, the emergence and growth of the
market for our services depend upon improvements being made to the entire
Internet, as well as to the individual networking infrastructures of our
advertisers, consumers and businesses, and affiliates to alleviate overloading
and congestion.

INCREASED SECURITY RISKS OF ONLINE COMMERCE MAY DETER FUTURE USE OF OUR
SERVICES

Concerns over the security of transactions conducted on the Internet and
the privacy of consumers may also inhibit the growth of the Internet and other
online services generally, and online commerce in particular. Our failure to
prevent security breaches could significantly harm our business and results of
operations. Anyone who is able to circumvent our security measures could
misappropriate proprietary information, including advertiser credit card data,
cause interruptions in our operations or damage our brand and reputation. We do
not believe that our data repositories, financial systems and other technology
resources are completely secure from security breaches or sabotage, and we
occasionally experience attempts at hacking or security breaches. We may be
required to incur significant costs to protect against security breaches or to
alleviate problems caused by breaches. Any well-publicized compromise of our
security or the security of any other Internet provider could deter people from
using our services or the Internet to conduct transactions that involve
transmitting confidential information or downloading sensitive materials, which
would adversely affect the business of our advertisers and, accordingly, our
business.

WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS, AND ANY FAILURE TO
MANAGE THIS GROWTH COULD DAMAGE OUR BUSINESS

Our ability to successfully offer products and services and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. We have increased, and plan to continue to increase, the
scope of our operations. These expansion efforts could be expensive and put a
strain on management, and, if we do not manage growth properly, it could
adversely affect our business. We will need to expand our infrastructure, which
will include hiring certain key employees and continuing to increase our
headcount. Hiring key employees, in particular, has historically been
difficult, and we cannot assure you that we will be able to successfully
attract and retain a sufficient number of qualified personnel.

OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS,
AND THESE OFFICERS AND KEY PERSONNEL MAY NOT REMAIN WITH US IN THE FUTURE

Our future success depends upon the continued service of our executive
officers and other key technology, marketing, sales and support personnel. None
of our officers or key employees is bound by an employment agreement for any
specific term. If we lost the services of one or more of our key employees, or
if one or more of our executive officers or employees decided to join a
competitor or otherwise compete directly or indirectly with us, this could have
a material adverse effect on our business, operating results and financial
condition.

WE MAY BE UNABLE TO EXECUTE OUR BUSINESS MODEL IN INTERNATIONAL MARKETS

One component of our strategy is to expand our operations into selected
international markets. For example, we launched our service in the United
Kingdom in November 2000 and launched our German-speaking search service in
February 2002. We are considering launching our search service in Japan and
France during 2002. To date, we have only operated internationally in a few
countries, and we may be unable to execute our business model in this market or
new markets. Further, foreign providers of competing online services may have a
substantial advantage over us in attracting users in their country due to
earlier established businesses in that

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country, greater knowledge with respect to the cultural differences of
users residing in that country and/or their focus on a single market. We expect
to continue to experience higher costs as a percentage of revenues in
connection with the development and maintenance of international online
services. International markets we have selected may not develop at a rate that
supports our level of investment. In particular, international markets
typically have been slower than domestic markets in adopting the Internet as an
advertising and commerce medium.

In pursuing our international expansion strategy, we face several
additional risks, including:



| |  |  | lower per capita Internet usage in many countries abroad, due to a
variety of causes such as lower disposable incomes, lack of
telecommunications and computer infrastructure and questions regarding
adequate online security for e-commerce transactions;               
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | relatively small Internet markets in some countries, which may
prevent us from aggregating sufficient traffic and advertising revenues
and scaling our business model in those countries;                                                                                 
|
| |  |  | entering into affiliate agreements with margins not as favorable as
in the U.S.;                                                                                                                                                                                          
|
| |  |  | our potential inability to aggregate a large amount of Internet
traffic and find and develop relationships with international
advertisers, consumers and businesses, and affiliates;                                                                                      
|
| |  |  | competition in international markets from a broad range of
competitors, including Alta Vista, Espotting.com, LookSmart, Yahoo and
other United States and foreign search engines, content aggregators and
portals, some of which have greater local experience than we do;
|
| |  |  | difficulties in recruiting qualified and knowledgeable staff and in
building locally relevant products and services, which could prevent us
from aggregating a large advertiser base;                                                                                     
|
| |  |  | higher costs of doing business in foreign countries, including
different employment laws;                                                                                                                                                                                 
|
| |  |  | trade barriers and unexpected changes and differences in regulatory,
tax and legal requirements applicable to Internet services; and                                                                                                                                      
|
| |  |  | longer payment cycles and foreign currency fluctuations.                                                                                                                                                                                                                  

One or more of these factors could have a material adverse effect on our
future international operations and, consequently, on our business, operating
results and financial condition.

WE ARE EXPOSED TO RISKS ASSOCIATED WITH CREDIT CARD FRAUD, CREDIT PAYMENT AND
SUDDEN LOSS OF ADVERTISERS

We have suffered losses and may continue to suffer losses as a result of
orders placed with fraudulent credit card data, even though the associated
financial institution approved payment of the orders. Under current credit card
practices, a merchant is liable for fraudulent credit card transactions when,
as is the case with the transactions we process, that merchant does not obtain
a cardholders signature. A failure to adequately control fraudulent credit
card transactions would result in significantly higher credit card-related
costs and may ultimately result in advertisers inability to use credit cards
as a means of payment, which would have a material adverse effect on our
business, operating results and financial condition.

Some of our advertisers have limited operating histories, are operating at
a loss, have limited cash reserves or have limited access to capital. If an
advertiser experiences financial difficulties, the advertiser may stop
advertising suddenly. In addition, in some instances we extend credit to
advertisers who may default on their accounts receivable. If any significant
part of our advertiser base experiences financial difficulties, is not
commercially successful or is unable to pay our advertising fees for any other
reason, our business, operating results and financial condition will be
materially and adversely affected.

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WE FACE RISKS OF CLAIMS FROM THIRD PARTIES FOR INTELLECTUAL PROPERTY
INFRINGEMENT AND OTHER MATTERS THAT COULD ADVERSELY AFFECT OUR BUSINESS

Our services operate in part by making Internet services and content
available to our users. This creates the potential for claims to be made
against us, either directly or through contractual indemnification provisions
with third parties. These claims might, for example, be made for defamation,
negligence, copyright, trademark or patent infringement, personal injury,
invasion of privacy or other legal theories. Allegations are made against us
from time to time concerning these types of claims. For example, we are in
litigation with companies that have alleged that allowing advertisers to bid on
certain search terms may constitute trademark infringement. Although we deny
such allegations, any claims could result in costly litigation and be time
consuming to defend, divert managements attention and resources, cause delays
in releasing new or upgrading existing services or require us to enter into
royalty or licensing agreements. Royalty or licensing agreements, if required,
may not be available on acceptable terms, if at all. If a court were to
determine that the sale of advertising related to certain search terms
constitutes trademark infringement, it could negatively impact our revenues and
business. There can be no assurance that our services do not infringe the
intellectual property rights of third parties. A successful claim of
infringement against us and our failure or inability to license the infringed
or similar technology could have a material adverse effect on our business,
operating results and financial condition.

WE MAY NOT BE ABLE TO PROTECT OUR INTERNET DOMAIN NAME OR INTELLECTUAL PROPERTY
RIGHTS UPON WHICH OUR BUSINESS RELIES

Our success and ability to compete also are substantially dependent upon
our internally developed technology and data resources, which we protect
through a combination of copyright, trade secret, patent and trademark law. We
also depend on our trade name and domain name. 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.

Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use our services,
technology and other intellectual property, and we cannot be certain that the
steps we have taken will prevent any misappropriation or confusion among
consumers and advertisers.

WE MAY NEED ADDITIONAL CAPITAL, WHICH COULD DILUTE THE OWNERSHIP INTEREST OF
INVESTORS

We require substantial working capital to fund our business. If we raise
additional funds through the issuance of equity, equity-related or convertible
debt securities, these securities may have rights, preferences or privileges
senior to those of the rights of our common stock, and our stockholders may
experience additional dilution. We cannot be certain that additional financing
will be available to us on favorable terms when required, or at all. We
experienced negative cash flow from operations from our inception through the
first quarter of 2001, and we could experience negative cash flow from
operations in the future. We currently anticipate that our available funds will
be sufficient to meet our anticipated needs for working capital and capital
expenditure through the foreseeable future. However, we may choose to raise
additional funds in the future.

POTENTIAL ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS,
DILUTE STOCKHOLDER VALUE AND ADVERSELY AFFECT OUR OPERATING RESULTS

We may make investments in or acquire complementary products, technologies
and businesses. These acquisitions and investments could disrupt our ongoing
business, distract our management and employees and increase our expenses. If
we acquire a company, we could face difficulties in assimilating that companys
personnel and operations. In addition, the key personnel of the acquired
company may decide not to work for us. Acquisitions of additional services or
technologies also involve risks of incompatibility and the need for integration
into our existing services and marketing, sales and support efforts. If we
finance the acquisitions by issuing equity securities, this could dilute our
existing stockholders. Any amortization of intangible assets, or other charges
resulting from the costs of these acquisitions could have a material adverse
effect on our business, operating results and financial condition. In addition,
we may pay more for an acquisition than an acquired product, technology or
business is ultimately worth. We also ceased operations of GoTo Shopping, and
we completed a management buyout of GoTo Auctions, whereby the operating
management of GoTo Auctions purchased GoTo Auctions assets from Overture. We
have incurred charges related to the impairment of the assets acquired in
connection with our exit from the auctions operations and comparison shopping
operations, and incurred approximately $2.0 million and $1.0 million in net
charges relating to our exit from the GoTo Auctions and GoTo Shopping
operations, respectively in the year ending December 31, 2001.

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OUR MARKET MAY UNDERGO RAPID TECHNOLOGICAL CHANGE AND OUR FUTURE SUCCESS WILL
DEPEND ON OUR ABILITY TO MEET THE CHANGING NEEDS OF OUR INDUSTRY

If new industry standards and practices emerge in the Internet and online
advertising industry, our existing services, technology and systems may become
obsolete. Our future success will depend on our ability to:



| |  |  | license and internally develop leading technologies useful in our business;                                                                                 
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | enhance our existing services;                                                                                                                              
|
| |  |  | develop new services and technologies that address the increasingly
sophisticated and varied needs of prospective advertisers, consumers and
businesses; and
|
| |  |  | respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.                                       

GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES MAY DAMAGE OUR BUSINESS

The laws and regulations applicable to the Internet and our services are
evolving and unclear and could damage our business. There are currently few
laws or regulations directly applicable to access to, or commerce on, the
Internet. Due to the increasing popularity and use of the Internet, it is
possible that Internet laws and regulations may be adopted, covering issues
such as user privacy, defamation, database protection, consumer protection,
pricing, taxation, content regulation, quality of products and services, and
intellectual property ownership and infringement. Such legislation could expose
Overture to substantial liability as well as dampen the growth in use of the
Internet, decrease the acceptance of the Internet as a communications and
commercial medium, or require Overture to incur significant expenses in
complying with any new regulations.

WE MAY INCUR LIABILITIES FOR THE ACTIVITIES OF USERS OF OUR SERVICE

The law relating to the liability of providers of online services for
activities of their users is currently unsettled and could damage our business.
Our insurance policies may not provide coverage for liability for activities of
our users. Overture may not successfully avoid civil or criminal liability for
unlawful activities carried out by users of our service. The imposition upon
Overture of potential liability for unlawful activities of users of our service
could require us to implement measures to reduce our exposure to such
liability, which may require us, among other things, to spend substantial
resources or to discontinue certain service offerings. 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.

OUR CHARTER DOCUMENTS AND CHANGE OF CONTROL SEVERANCE AGREEMENTS WITH OUR
MANAGEMENT WILL MAKE IT MORE DIFFICULT TO ACQUIRE US

Provisions of our certificate of incorporation and bylaws could make it
more difficult for a third party to acquire us, even if doing so would be
beneficial to our stockholders. For example, our board of directors is divided
into three classes, with one class being elected each year by our stockholders,
which generally makes it more difficult for stockholders to replace a majority
of directors and obtain control of our board. In addition, stockholder meetings
may be called only by our board of directors, the chairman of the board and the
president, advanced notice is required prior to stockholder proposals, and
stockholders may not act by written consent. Further, we have authorized
preferred stock that is undesignated, making it possible for the board of
directors to issue preferred stock with voting or other rights or preferences
that could impede the success of any attempt to change control of Overture.
Delaware law also could make it more difficult for a third party to acquire us.
Specifically, Section 203 of the Delaware General Corporation Law may have an
anti-takeover effect with respect to transactions not approved in advance by
the board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by our
stockholders.

We have entered into change of control severance agreements with members
of our senior management and certain other key employees. These agreements
provide for certain benefits, including acceleration of option vesting, to
these persons if they are terminated other than for cause following an
acquisition of Overture. These agreements could make us less attractive to a
third party who may want to acquire us, because they will make any replacement
of management and other personnel more expensive.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Overture is exposed to the impact of interest rate changes and foreign
currency fluctuations:

Overtures exposure to market rate risk for changes in interest rates
relate primarily to Overtures investment portfolio. Overture has not used
derivative financial instruments in its investment portfolio. Overture invests
its excess cash in high quality credit instruments, which are spread over many
issuers. Overtures investments are principally confined to cash equivalents
and available-for-sale debt securities.

Overtures international business is subject to risks typical of an
international business, including, but not limited to differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility.
Accordingly, the impact of changes in these or other factors could have a
material adverse effect on our business, operating results and financial
condition.

Overtures exposure to foreign exchange rate fluctuations arises in part
from intercompany accounts in which costs incurred in the United States are
charged to Overtures foreign sales subsidiaries. Overture is also exposed to
foreign exchange rate fluctuations as the financial results of foreign
subsidiaries are translated into U.S. dollars in consolidation. As exchange
rates vary, these results, when translated, may vary from expectations and
adversely impact overall expected profitability. The effect of foreign exchange
rate fluctuations on Overture's 2001 results was not material.




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See item 14 (A).




ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.




PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding the directors of Overture is incorporated by
reference to the sections entitled Directors and Section 16(a) Beneficial
Ownership Reporting Compliance appearing in the Overtures Definitive Proxy
Statement for the Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission (the Commission) within 120 days after the
end of the Companys fiscal year ended December 31, 2001. Certain information
with respect to persons who are or may be deemed to be executive officers of
the Registrant is set forth under the caption Executive Officers of the
Registrant in Item 4 of this Form 10-K.




ITEM 11. EXECUTIVE COMPENSATION

Information regarding executive compensation is incorporated by reference
to the information set forth under the caption Compensation of Executive
Officers and Other Matters in Overtures Definitive Proxy Statement for the
Annual Meeting of Stockholders to be filed with Commission within 120 days
after the end of the Companys fiscal year ended December 31, 2001.




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information regarding security ownership of certain beneficial owners and
management is incorporated by reference to the information set forth under the
caption Principal Ownership of Overture Common Stock in Overtures Definitive
Proxy Statement for the Annual Meeting of Stockholders to be filed with the
Commission within 120 days after the end of Overtures fiscal year ended
December 31, 2001.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and related transactions are
incorporated by reference to the information set forth under the caption
Certain Transactions in Overtures Definitive Proxy Statement for the Annual
Meeting of Stockholders to be filed with the Commission within 120 days after
the end of Overtures fiscal year ended December 31, 2001.




ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(A)(1) INDEX TO FINANCIAL STATEMENTS

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INDEX TO FINANCIAL STATEMENTS

|                                                |  |  |     | 
|----------------------------------------------- |  |  | --- | 
|Report of Independent Auditors                  |  |  | F-2 | 
|FINANCIAL STATEMENTS:                           |  |  |     | 
|Consolidated Balance Sheets                     |  |  | F-3 | 
|Consolidated Statements of Operations           |  |  | F-4 | 
|Consolidated Statements of Stockholders Equity |  |  | F-5 | 
|Consolidated Statements of Cash Flows           |  |  | F-6 | 
|Notes to Consolidated Financial Statements      |  |  | F-8 | 





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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Overture Services, Inc.

We have audited the accompanying consolidated balance sheets of Overture
Services, Inc. (formerly GoTo.com, Inc.) as of December 31, 2001 and 2000, and
the related consolidated statements of operations, stockholders equity, and
cash flows for each of the three years in the period ended December 31, 2001.
These consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Overture Services, Inc. at December 31, 2001 and 2000, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.



| | /s/ ERNST & YOUNG LLP
| | ---------------------

Los Angeles, California
February 6, 2002

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OVERTURE SERVICES, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)

|                                                                |                                                                                                                                                                                             |   |              |          |      |   |         |          |  
|--------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------ | -------- | ---- | - | ------- | -------- | -
|                                                                |                                                                                                                                                                                             |   | AS OF       
|                                                                |                                                                                                                                                                                             |   | DECEMBER 31,
|                                                                |                                                                                                                                                                                             |   |             
|                                                                |                                                                                                                                                                                             |   | 2001         |          | 2000
|                                                                |                                                                                                                                                                                             |   |              |          |     
|ASSETS                                                          |                                                                                                                                                                                             |   |              |          |      |   |         |         
|CURRENT ASSETS:                                                 |                                                                                                                                                                                             |   |              |          |      |   |         |         
|                                                                | Cash and cash equivalents                                                                                                                                                                   |   | $            | 61,974   |      |   | $       | 12,986   |  
|                                                                | Short-term investments                                                                                                                                                                      |   |              | 71,837   |      |   |         | 41,694   |  
|                                                                | Accounts receivable, net of allowance of $2,100 and $1,000
for 2001 and 2000, respectively                                                                                                  |   |              | 10,973   |      |   |         | 5,365    |  
|                                                                | Prepaid expenses and other                                                                                                                                                                  |   |              | 1,920    |      |   |         | 1,970    |  
|                                                                | Prepaid traffic acquisition expense                                                                                                                                                         |   |              | 8,590    |      |   |         | 23,605   |  
|                                                                |                                                                                                                                                                                             |   |              |          |      |   |         |         
|Total current assets                                            |                                                                                                                                                                                             |   | 155,294      |          |      |   | 85,620  |         
|                                                               
|Property and equipment:                                         |                                                                                                                                                                                             |   |              |          |      |   |         |         
|                                                                | Computer hardware                                                                                                                                                                           |   |              | 30,452   |      |   |         | 21,035   |  
|                                                                | Computer software                                                                                                                                                                           |   |              | 15,497   |      |   |         | 11,364   |  
|                                                                | Furniture and fixtures                                                                                                                                                                      |   |              | 3,974    |      |   |         | 3,942    |  
|                                                                |                                                                                                                                                                                             |   |              |          |      |   |         |         
|                                                                |                                                                                                                                                                                             |   | 49,923       |          |      |   | 36,341  |         
|Accumulated depreciation and amortization                       |                                                                                                                                                                                             |   | (21,957      | )        |      |   | (10,265 | )       
|                                                                |                                                                                                                                                                                             |   |              |          |      |   |         |         
|                                                                |                                                                                                                                                                                             |   | 27,966       |          |      |   | 26,076  |         
|Intangible assets, net                                          |                                                                                                                                                                                             |   | 2,042        |          |      |   | 3,234   |         
|Restricted investments                                          |                                                                                                                                                                                             |   | 5,744        |          |      |   | 5,564   |         
|Long-term investments                                           |                                                                                                                                                                                             |   | 36,476       |          |      |   | 293     |         
|Long-term prepaid traffic acquisition expenses and other assets |                                                                                                                                                                                             |   | 4,405        |          |      |   | 626     |         
|                                                                |                                                                                                                                                                                             |   |              |          |      |   |         |         
|Total assets                                                    |                                                                                                                                                                                             | $ | 231,927      |          |      | $ | 121,413 |         
|                                                                |                                                                                                                                                                                             |   |              |          |      |   |         |         
|LIABILITIES AND STOCKHOLDERS EQUITY                            |                                                                                                                                                                                             |   |              |          |      |   |         |         
|CURRENT LIABILITIES:                                            |                                                                                                                                                                                             |   |              |          |      |   |         |         
|                                                                | Accounts payable                                                                                                                                                                            |   | $            | 38,111   |      |   | $       | 23,284   |  
|                                                                | Accrued payroll expenses                                                                                                                                                                    |   |              | 3,774    |      |   |         | 2,491    |  
|                                                                | Accrued expenses                                                                                                                                                                            |   |              | 1,497    |      |   |         | 1,657    |  
|                                                                | Deferred revenue                                                                                                                                                                            |   |              | 8,949    |      |   |         | 4,441    |  
|                                                                | Current portion of capital lease obligations                                                                                                                                                |   |              | 89       |      |   |         | 791      |  
|                                                                |                                                                                                                                                                                             |   |              |          |      |   |         |         
|Total current liabilities                                       |                                                                                                                                                                                             |   | 52,420       |          |      |   | 32,664  |         
|                                                               
|Other long-term liabilities                                     |                                                                                                                                                                                             |   | 64           |          |      |   | 576     |         
|Long-term capital lease obligations                             |                                                                                                                                                                                             |   |             |          |      |   | 78      |         
|Commitments and contingencies (See Note 6)                      |                                                                                                                                                                                             |   |              |          |      |   |         |         
|                                                               
|STOCKHOLDERS EQUITY:                                           |                                                                                                                                                                                             |   |              |          |      |   |         |         
|                                                                | Common stock, $0.0001 par value, 200,000
shares authorized as of December 31, 2001 and
2000; shares issued and outstanding57,616
and 52,566 as of December 31, 2001 and 2000,
respectively |   |              | 6        |      |   |         | 5        |  
|                                                                | Additional paid-in capital                                                                                                                                                                  |   |              | 662,039  |      |   |         | 591,239  |  
|                                                                | Deferred compensation, net                                                                                                                                                                  |   |              | (763     | )    |   |         | (1,128   | )
|                                                                | Accumulated deficit                                                                                                                                                                         |   |              | (481,863 | )    |   |         | (502,026 | )
|                                                                | Accumulated other comprehensive income                                                                                                                                                      |   |              | 24       |      |   |         | 5        |  
|                                                                |                                                                                                                                                                                             |   |              |          |      |   |         |         
|Total stockholders equity                                      |                                                                                                                                                                                             |   | 179,443      |          |      |   | 88,095  |         
|                                                                |                                                                                                                                                                                             |   |              |          |      |   |         |         
|Total liabilities and stockholders equity                      |                                                                                                                                                                                             | $ | 231,927      |          |      | $ | 121,413 |         
|                                                                |                                                                                                                                                                                             |   |              |          |      |   |         |         

The accompanying notes are an integral part of the consolidated financial statements.

F-3



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OVERTURE SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

|                                                                                       |                                                           |   |                                 |         |      |   |          |         |  |   |         |        | 
|-------------------------------------------------------------------------------------- | --------------------------------------------------------- | - | ------------------------------- | ------- | ---- | - | -------- | ------- |  | - | ------- | ------ | 
|                                                                                       |                                                           |   | FOR THE YEAR ENDED DECEMBER 31,
|                                                                                       |                                                           |   |                                
|                                                                                       |                                                           |   | 2001                            |         | 2000 |   | 1999    
|                                                                                       |                                                           |   |                                 |         |      |   |         
|Revenue                                                                                |                                                           | $ | 288,133                         |         |      | $ | 103,052  |         |  | $ | 26,809  |       
|                                                                                      
|Operating expenses:                                                                    |                                                           |   |                                 |         |      |   |          |         |  |   |         |       
|                                                                                       | Search serving                                            |   |                                 | 20,962  |      |   |          | 13,109  |  |   |         | 6,213  | 
|                                                                                       | Traffic acquisition                                       |   |                                 | 162,072 |      |   |          | 66,433  |  |   |         | 14,290 | 
|                                                                                       | Marketing, sales and service                              |   |                                 | 28,078  |      |   |          | 28,098  |  |   |         | 20,169 | 
|                                                                                       | General and administrative                                |   |                                 | 44,917  |      |   |          | 33,798  |  |   |         | 12,467 | 
|                                                                                       | Product development                                       |   |                                 | 12,811  |      |   |          | 13,523  |  |   |         | 3,689  | 
|                                                                                       | Amortization of deferred compensation                     |   |                                 | 849     |      |   |          | 1,376   |  |   |         | 3,585  | 
|                                                                                       | Write-off of acquired in-process research and
development |   |                                 |        |      |   |          | 7,550   |  |   |         |       | 
|                                                                                       | Amortization of intangible assets                         |   |                                 | 1,192   |      |   |          | 115,600 |  |   |         |       | 
|                                                                                       | Impairment of intangible assets                           |   |                                 |        |      |   |          | 309,253 |  |   |         |       | 
|                                                                                       | Loss on closure of GoTo Shopping                          |   |                                 | 1,002   |      |   |          |        |  |   |         |       | 
|                                                                                       | Loss on disposition of GoTo Auctions                      |   |                                 | 2,008   |      |   |          |        |  |   |         |       | 
|                                                                                       |                                                           |   |                                 |         |      |   |          |         |  |   |         |       
|                                                                                       |                                                           |   | 273,891                         |         |      |   | 588,740  |         |  |   | 60,413  |       
|                                                                                       |                                                           |   |                                 |         |      |   |          |         |  |   |         |       
|Income (loss) from operations                                                          |                                                           |   | 14,242                          |         |      |   | (485,688 | )       |  |   | (33,604 | )     
|                                                                                      
|Other income:                                                                          |                                                           |   |                                 |         |      |   |          |         |  |   |         |       
|                                                                                       | Interest income, net                                      |   |                                 | 4,260   |      |   |          | 5,809   |  |   |         | 3,777  | 
|                                                                                       | Other income                                              |   |                                 | 2,561   |      |   |          | 21,259  |  |   |         | 566    | 
|                                                                                       |                                                           |   |                                 |         |      |   |          |         |  |   |         |       
|Income (loss) before provision for income taxes                                        |                                                           |   | 21,063                          |         |      |   | (458,620 | )       |  |   | (29,261 | )     
|Provision for income taxes                                                             |                                                           |   | 900                             |         |      |   | 1        |         |  |   | 1       |       
|                                                                                       |                                                           |   |                                 |         |      |   |          |         |  |   |         |       
|Net income (loss)                                                                      |                                                           | $ | 20,163                          |         |      | $ | (458,621 | )       |  | $ | (29,262 | )     
|                                                                                       |                                                           |   |                                 |         |      |   |          |         |  |   |         |       
|Historical basic net income (loss) per share                                           |                                                           | $ | 0.38                            |         |      | $ | (9.54    | )       |  | $ | (1.04   | )     
|                                                                                       |                                                           |   |                                 |         |      |   |          |         |  |   |         |       
|Historical diluted net income (loss) per share                                         |                                                           | $ | 0.36                            |         |      | $ | (9.54    | )       |  | $ | (1.04   | )     
|                                                                                       |                                                           |   |                                 |         |      |   |          |         |  |   |         |       
|Weighted average shares used to compute historical
basic net income (loss) per share   |                                                           |   | 53,363                          |         |      |   | 48,065   |         |  |   | 28,207  |       
|                                                                                      
|Weighted average shares used to compute historical
diluted net income (loss) per share |                                                           |   | 55,533                          |         |      |   | 48,065   |         |  |   | 28,207  |       

|                                                                                                 |                              |   |      |     |      |   |       |     |  |   |       |       | 
|------------------------------------------------------------------------------------------------ | ---------------------------- | - | ---- | --- | ---- | - | ----- | --- |  | - | ----- | ----- | 
|                                                                                                 |                              |   | 2001 |     | 2000 |   | 1999 
|                                                                                                 |                              |   |      |     |      |   |      
|If
deferred compensation were allocated to expense categories, it would
be allocated as follows: |                              |   |      |     |      |   |       |     |  |  
|                                                                                                 | Search serving               |   | $    | 1   |      |   | $     | 4   |  |   | $     | 16    | 
|                                                                                                 | Marketing,
sales and service |   |      | 157 |      |   |       | 381 |  |   |       | 670   | 
|                                                                                                 | General
and administrative   |   |      | 664 |      |   |       | 922 |  |   |       | 2,673 | 
|                                                                                                 | Product
development          |   |      | 27  |      |   |       | 69  |  |   |       | 226   | 
|                                                                                                 |                              |   |      |     |      |   |       |     |  |   |       |      
|Total
amortization of deferred compensation                                                      |                              | $ | 849  |     |      | $ | 1,376 |     |  | $ | 3,585 |      
|                                                                                                 |                              |   |      |     |      |   |       |     |  |   |       |      

The accompanying notes are an integral part of the consolidated financial statements.

F-4



---



##### Table of Contents



OVERTURE SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(IN THOUSANDS)



|                                                                                                                   |  |                 |      |                 |  |                 |      |        |  |        |         |        |  |   |         |   |  |  |        |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------ |  | --------------- | ---- | --------------- |  | --------------- | ---- | ------ |  | ------ | ------- | ------ |  | - | ------- | - |  |  | ------ | - |  | - | ------- | -
|                                                                                                                   |  | Series A        |      | Series B and C  |  | Series D       
|                                                                                                                   |  | Convertible     |      | Convertible     |  | Convertible    
|                                                                                                                   |  | Preferred Stock |      | Preferred Stock |  | Preferred Stock
|                                                                                                                   |  |                 |      |                 |  |                
|                                                                                                                   |  | Shares          |      | Amount          |  | Shares          |      | Amount |  | Shares |         | Amount
|                                                                                                                   |  |                 |      |                 |  |                 |      |        |  |        |         |       
|BALANCE AT DECEMBER 31, 1998                                                                                       |  |                 | 471  |                 |  | $               | 212  |        |  |        | 19,022  |        |  | $ | 28,433  |   |  |  |       |   |  | $ |        |  
|Issuance of common stock, net of
issuance costs of $8,655                                                          |  |                 |     |                 |  |                 |     |        |  |        |        |        |  |   |        |   |  |  |       |   |  |   |        |  
|Issuance of series D convertible
preferred stock                                                                   |  |                 |     |                 |  |                 |     |        |  |        |        |        |  |   |        |   |  |  | 3,628  |   |  |   | 24,969  |  
|Conversion of preferred stock to
common stock                                                                      |  |                 | (471 | )               |  |                 | (212 | )      |  |        | (19,022 | )      |  |   | (28,433 | ) |  |  | (3,628 | ) |  |   | (24,969 | )
|Exercise of common stock options and
warrants, net of repurchases                                                  |  |                 |     |                 |  |                 |     |        |  |        |        |        |  |   |        |   |  |  |        |   |  |   |         |  
|Issuance of warrants and options for
services                                                                      |  |                 |     |                 |  |                 |     |        |  |        |        |        |  |   |        |   |  |  |       |   |  |   |        |  
|Stock option compensation                                                                                          |  |                 |     |                 |  |                 |     |        |  |        |        |        |  |   |        |   |  |  |       |   |  |   |        |  
|Amortization of deferred compensation                                                                              |  |                 |     |                 |  |                 |     |        |  |        |        |        |  |   |        |   |  |  |       |   |  |   |        |  
|Unrealized losses on short-term and
long-term investments                                                          |  |                 |     |                 |  |                 |     |        |  |        |        |        |  |   |        |   |  |  |       |   |  |   |        |  
|Net loss                                                                                                           |  |                 |     |                 |  |                 |     |        |  |        |        |        |  |   |        |   |  |  |       |   |  |   |        |  
|                                                                                                                   |  |                 |      |                 |  |                 |      |        |  |        |         |        |  |   |         |   |  |  |        |   |  |   |         |  
|BALANCE AT DECEMBER 31, 1999                                                                                       |  |                 |     |                 |  |                 |     |        |  |        |        |        |  |   |        |   |  |  |       |   |  |   |        |  
|Exercise of common stock, net of
repurchases and issuance of common stock
pursuant to Employee Stock Purchase Plan |  |                 |     |                 |  |                 |     |        |  |        |        |        |  |   |        |   |  |  |       |   |  |   |        |  
|Issuance of common stock for acquisitions                                                                          |  |                 |     |                 |  |                 |     |        |  |        |        |        |  |   |        |   |  |  |       |   |  |   |        |  
|Amortization of deferred compensation                                                                              |  |                 |     |                 |  |                 |     |        |  |        |        |        |  |   |        |   |  |  |       |   |  |   |        |  
|Unrealized gains on short-term and
long-term investments                                                           |  |                 |     |                 |  |                 |     |        |  |        |        |        |  |   |        |   |  |  |       |   |  |   |        |  
|Cumulative translation adjustment                                                                                  |  |                 |     |                 |  |                 |     |        |  |        |        |        |  |   |        |   |  |  |       |   |  |   |        |  
|Net loss                                                                                                           |  |                 |     |                 |  |                 |     |        |  |        |        |        |  |   |        |   |  |  |       |   |  |   |        |  
|                                                                                                                   |  |                 |      |                 |  |                 |      |        |  |        |         |        |  |   |         |   |  |  |        |   |  |   |         |  
|BALANCE AT DECEMBER 31, 2000                                                                                       |  |                 |     |                 |  |                 |     |        |  |        |        |        |  |   |        |   |  |  |       |   |  |   |        |  
|Exercise of common stock, net of
repurchases and issuance of common stock
pursuant to Employee Stock Purchase Plan |  |                 |     |                 |  |                 |     |        |  |        |        |        |  |   |        |   |  |  |       |   |  |   |        |  
|Issuance of common stock, net of
issuance costs of $3,684                                                          |  |                 |     |                 |  |                 |     |        |  |        |        |        |  |   |        |   |  |  |       |   |  |   |        |  
|Amortization of deferred compensation                                                                              |  |                 |     |                 |  |                 |     |        |  |        |        |        |  |   |        |   |  |  |       |   |  |   |        |  
|Stock option compensation                                                                                          |  |                 |     |                 |  |                 |     |        |  |        |        |        |  |   |        |   |  |  |       |   |  |   |        |  
|Unrealized losses on short-term and
long-term investments                                                          |  |                 |     |                 |  |                 |     |        |  |        |        |        |  |   |        |   |  |  |       |   |  |   |        |  
|Cumulative translation adjustment                                                                                  |  |                 |     |                 |  |                 |     |        |  |        |        |        |  |   |        |   |  |  |       |   |  |   |        |  
|Net income                                                                                                         |  |                 |     |                 |  |                 |     |        |  |        |        |        |  |   |        |   |  |  |       |   |  |   |        |  
|                                                                                                                   |  |                 |      |                 |  |                 |      |        |  |        |         |        |  |   |         |   |  |  |        |   |  |   |         |  
|BALANCE AT DECEMBER 31, 2001                                                                                       |  |                 |     |                 |  | $               |     |        |  |        |        |        |  | $ |        |   |  |  |       |   |  | $ |        |  
|                                                                                                                   |  |                 |      |                 |  |                 |      |        |  |        |         |        |  |   |         |   |  |  |        |   |  |   |         |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                                                   |  |              |        |            |  |          |   |               |  |               |         |         |  |       |        |   |  |             |     |   |  |   |          |   |  |   |          |  
|------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------ | ---------- |  | -------- | - | ------------- |  | ------------- | ------- | ------- |  | ----- | ------ | - |  | ----------- | --- | - |  | - | -------- | - |  | - | -------- | -
|                                                                                                                   |  |              |        |            |  |          |   |               |  |               |         |         |  |       |        |   |  | Accumulated |     |   |  |   |          |   |  |  
|                                                                                                                   |  | Common Stock |        | Additional |  | Deferred |   | Other         |  |               |         |         |  |       |        |  
|                                                                                                                   |  |              |        | Paid-in    |  | Compen-  |   | Comprehensive |  | Accumulated   |         |         |  |      
|                                                                                                                   |  | Shares       |        | Amount     |  | Capital  |   | sation, net   |  | Income (Loss) |         | Deficit |  | Total
|                                                                                                                   |  |              |        |            |  |          |   |               |  |               |         |         |  |      
|BALANCE AT DECEMBER 31, 1998                                                                                       |  |              | 10,444 |            |  | $        | 1 |               |  | $             | 3,212   |         |  | $     | (1,318 | ) |  | $           |    |   |  | $ | (14,143  | ) |  | $ | 16,397   |  
|Issuance of common stock, net of
issuance costs of $8,655                                                          |  |              | 6,900  |            |  |          | 1 |               |  |               | 94,834  |         |  |       |       |   |  |             |    |   |  |   |         |   |  |   | 94,835   |  
|Issuance of series D convertible
preferred stock                                                                   |  |              |       |            |  |          |  |               |  |               |        |         |  |       |       |   |  |             |    |   |  |   |         |   |  |   | 24,969   |  
|Conversion of preferred stock to
common stock                                                                      |  |              | 23,121 |            |  |          | 2 |               |  |               | 53,612  |         |  |       |       |   |  |             |    |   |  |   |         |   |  |   |         |  
|Exercise of common stock options and
warrants, net of repurchases                                                  |  |              | 5,054  |            |  |          | 1 |               |  |               | 2,044   |         |  |       |       |   |  |             |    |   |  |   |         |   |  |   | 2,045    |  
|Issuance of warrants and options for
services                                                                      |  |              |       |            |  |          |  |               |  |               | 246     |         |  |       |       |   |  |             |    |   |  |   |         |   |  |   | 246      |  
|Stock option compensation                                                                                          |  |              |       |            |  |          |  |               |  |               | 4,851   |         |  |       | (4,851 | ) |  |             |    |   |  |   |         |   |  |   |         |  
|Amortization of deferred compensation                                                                              |  |              |       |            |  |          |  |               |  |               |        |         |  |       | 3,585  |   |  |             |    |   |  |   |         |   |  |   | 3,585    |  
|Unrealized losses on short-term and
long-term investments                                                          |  |              |       |            |  |          |  |               |  |               |        |         |  |       |       |   |  |             | (41 | ) |  |   |         |   |  |   | (41      | )
|Net loss                                                                                                           |  |              |       |            |  |          |  |               |  |               |        |         |  |       |       |   |  |             |    |   |  |   | (29,262  | ) |  |   | (29,262  | )
|                                                                                                                   |  |              |        |            |  |          |   |               |  |               |         |         |  |       |        |   |  |             |     |   |  |   |          |   |  |   |          |  
|BALANCE AT DECEMBER 31, 1999                                                                                       |  |              | 45,519 |            |  |          | 5 |               |  |               | 158,799 |         |  |       | (2,584 | ) |  |             | (41 | ) |  |   | (43,405  | ) |  |   | 112,774  |  
|Exercise of common stock, net of
repurchases and issuance of common stock
pursuant to Employee Stock Purchase Plan |  |              | 768    |            |  |          |  |               |  |               | 2,863   |         |  |       |       |   |  |             |    |   |  |   |         |   |  |   | 2,863    |  
|Issuance of common stock for acquisitions                                                                          |  |              | 6,279  |            |  |          |  |               |  |               | 429,657 |         |  |       |       |   |  |             |    |   |  |   |         |   |  |   | 429,657  |  
|Amortization of deferred compensation                                                                              |  |              |       |            |  |          |  |               |  |               | (80     | )       |  |       | 1,456  |   |  |             |    |   |  |   |         |   |  |   | 1,376    |  
|Unrealized gains on short-term and
long-term investments                                                           |  |              |       |            |  |          |  |               |  |               |        |         |  |       |       |   |  |             | 87  |   |  |   |         |   |  |   | 87       |  
|Cumulative translation adjustment                                                                                  |  |              |       |            |  |          |  |               |  |               |        |         |  |       |       |   |  |             | (41 | ) |  |   |         |   |  |   | (41      | )
|Net loss                                                                                                           |  |              |       |            |  |          |  |               |  |               |        |         |  |       |       |   |  |             |    |   |  |   | (458,621 | ) |  |   | (458,621 | )
|                                                                                                                   |  |              |        |            |  |          |   |               |  |               |         |         |  |       |        |   |  |             |     |   |  |   |          |   |  |   |          |  
|BALANCE AT DECEMBER 31, 2000                                                                                       |  |              | 52,566 |            |  |          | 5 |               |  |               | 591,239 |         |  |       | (1,128 | ) |  |             | 5   |   |  |   | (502,026 | ) |  |   | 88,095   |  
|Exercise of common stock, net of
repurchases and issuance of common stock
pursuant to Employee Stock Purchase Plan |  |              | 1,300  |            |  |          |  |               |  |               | 11,627  |         |  |       |       |   |  |             |    |   |  |   |         |   |  |   | 11,627   |  
|Issuance of common stock, net of
issuance costs of $3,684                                                          |  |              | 3,750  |            |  |          | 1 |               |  |               | 58,191  |         |  |       |       |   |  |             |    |   |  |   |         |   |  |   | 58,192   |  
|Amortization of deferred compensation                                                                              |  |              |       |            |  |          |  |               |  |               | (18     | )       |  |       | 867    |   |  |             |    |   |  |   |         |   |  |   | 849      |  
|Stock option compensation                                                                                          |  |              |       |            |  |          |  |               |  |               | 1,000   |         |  |       | (502   | ) |  |             |    |   |  |   |         |   |  |   | 498      |  
|Unrealized losses on short-term and
long-term investments                                                          |  |              |       |            |  |          |  |               |  |               |        |         |  |       |       |   |  |             | (16 | ) |  |   |         |   |  |   | (16      | )
|Cumulative translation adjustment                                                                                  |  |              |       |            |  |          |  |               |  |               |        |         |  |       |       |   |  |             | 35  |   |  |   |         |   |  |   | 35       |  
|Net income                                                                                                         |  |              |       |            |  |          |  |               |  |               |        |         |  |       |       |   |  |             |    |   |  |   | 20,163   |   |  |   | 20,163   |  
|                                                                                                                   |  |              |        |            |  |          |   |               |  |               |         |         |  |       |        |   |  |             |     |   |  |   |          |   |  |   |          |  
|BALANCE AT DECEMBER 31, 2001                                                                                       |  |              | 57,616 |            |  | $        | 6 |               |  | $             | 662,039 |         |  | $     | (763   | ) |  | $           | 24  |   |  | $ | (481,863 | ) |  | $ | 179,443  |  
|                                                                                                                   |  |              |        |            |  |          |   |               |  |               |         |         |  |       |        |   |  |             |     |   |  |   |          |   |  |   |          |  

The accompanying notes are an integral part of the consolidated financial statements.

F-5



---



##### Table of Contents



OVERTURE SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

|                                                             |                                                                                                    |                                       |        |                         |        |      |        |          |         |   |        |          |        |  
|------------------------------------------------------------ | -------------------------------------------------------------------------------------------------- | ------------------------------------- | ------ | ----------------------- | ------ | ---- | ------ | -------- | ------- | - | ------ | -------- | ------ | -
|                                                             |                                                                                                    |                                       |        | YEAR ENDED DECEMBER 31,
|                                                             |                                                                                                    |                                       |        |                        
|                                                             |                                                                                                    |                                       |        | 2001                    |        | 2000 |        | 1999    
|                                                             |                                                                                                    |                                       |        |                         |        |      |        |         
|CASH FLOWS FROM OPERATING ACTIVITIES:                        |                                                                                                    |                                       |        |                         |        |      |        |          |         |   |        |         
|                                                             | Net income (loss)                                                                                  |                                       | $      | 20,163                  |        |      | $      | (458,621 | )       |   | $      | (29,262  | )     
|                                                             | Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities: |                                       |        |                         |        |      |        |          |         |   |        |          |       
|                                                             | Amortization of deferred compensation                                                              |                                       |        | 849                     |        |      |        | 1,376    |         |   |        | 3,585    |       
|                                                             | Accretion of discounts from the purchase
of short-term and long-term investments                   |                                       |        | 335                     |        |      |        | (1,357   | )       |   |        | (1,990   | )     
|                                                             | Non-cash portion of closure &
disposition charges                                                  |                                       |        | 2,398                   |        |      |        |         |         |   |        |         |       
|                                                             | Losses from disposition of property and
equipment                                                  |                                       |        | 199                     |        |      |        | 351      |         |   |        |         |       
|                                                             | Other common stock and warrants                                                                    |                                       |        |                        |        |      |        |         |         |   |        | 246      |       
|                                                             | Depreciation and amortization                                                                      |                                       |        | 13,548                  |        |      |        | 8,422    |         |   |        | 2,247    |       
|                                                             | Write-off of acquired in-process
research and development                                          |                                       |        |                        |        |      |        | 7,550    |         |   |        |         |       
|                                                             | Amortization of intangible assets                                                                  |                                       |        | 1,192                   |        |      |        | 115,600  |         |   |        |         |       
|                                                             | Impairment of intangible assets                                                                    |                                       |        |                        |        |      |        | 309,359  |         |   |        |         |       
|                                                             | Changes in operating assets and
liabilities:                                                       |                                       |        |                         |        |      |        |          |         |   |        |          |       
|                                                             |                                                                                                    | Accounts receivable                   |        |                         | (5,608 | )    |        |          | (2,415  | ) |        |          | (2,571 | )
|                                                             |                                                                                                    | Prepaid expenses and other            |        |                         | (51    | )    |        |          | (1,026  | ) |        |          | (701   | )
|                                                             |                                                                                                    | Prepaid traffic acquisition expense   |        |                         | 11,643 |      |        |          | (21,571 | ) |        |          | (293   | )
|                                                             |                                                                                                    | Accounts payable and accrued expenses |        |                         | 15,429 |      |        |          | 9,541   |   |        |          | 9,929  |  
|                                                             |                                                                                                    | Deferred revenues                     |        |                         | 4,682  |      |        |          | 2,383   |   |        |          | 1,877  |  
|                                                             |                                                                                                    |                                       |        |                         |        |      |        |          |         |   |        |         
|                                                             | Net cash provided by (used in) operating
activities                                                |                                       |        | 64,779                  |        |      |        | (30,408  | )       |   |        | (16,933  | )     
|                                                            
|CASH FLOWS FROM INVESTING ACTIVITIES:                        |                                                                                                    |                                       |        |                         |        |      |        |          |         |   |        |         
|                                                             | Sales/(purchases) of short-term and
long-term investments, net                                     |                                       |        | (66,767                 | )      |      |        | 52,194   |         |   |        | (96,392  | )     
|                                                             | Capital expenditures for property and
equipment                                                    |                                       |        | (17,601                 | )      |      |        | (20,575  | )       |   |        | (12,820  | )     
|                                                             | Net cash used in acquisition                                                                       |                                       |        |                        |        |      |        | (863     | )       |   |        |         |       
|                                                             | Other assets                                                                                       |                                       |        | (436                    | )      |      |        | (596     | )       |   |        | (745     | )     
|                                                             |                                                                                                    |                                       |        |                         |        |      |        |          |         |   |        |         
|                                                             | Net cash provided by (used in) investing
activities                                                |                                       |        | (84,804                 | )      |      |        | 30,160   |         |   |        | (109,957 | )     
|                                                            
|CASH FLOWS FROM FINANCING ACTIVITIES:                        |                                                                                                    |                                       |        |                         |        |      |        |          |         |   |        |         
|                                                             | Proceeds from the issuance of common
stock, net                                                    |                                       |        | 69,819                  |        |      |        | 2,863    |         |   |        | 96,880   |       
|                                                             | Proceeds from the issuance of preferred
stock, net                                                 |                                       |        |                        |        |      |        |         |         |   |        | 24,969   |       
|                                                             | Proceeds from lease line                                                                           |                                       |        |                        |        |      |        |         |         |   |        | 1,203    |       
|                                                             | Repayments under lease line                                                                        |                                       |        | (751                    | )      |      |        | (708     | )       |   |        | (499     | )     
|                                                             | Repayment of debt                                                                                  |                                       |        |                        |        |      |        | (835     | )       |   |        | (106     | )     
|                                                             |                                                                                                    |                                       |        |                         |        |      |        |          |         |   |        |         
|                                                             | Net cash provided by financing activities                                                          |                                       |        | 69,068                  |        |      |        | 1,320    |         |   |        | 122,447  |       
|                                                            
|Effect of exchange rate changes on cash
and cash equivalents |                                                                                                    |                                       | (55    | )                       |        |      |       |          |         |   |       |         
|                                                            
|Net increase in cash and cash equivalents                    |                                                                                                    |                                       | 48,988 |                         |        |      | 1,072  |          |         |   | (4,443 | )       
|Cash and cash equivalents at beginning of
period             |                                                                                                    |                                       | 12,986 |                         |        |      | 11,914 |          |         |   | 16,357 |         
|                                                             |                                                                                                    |                                       |        |                         |        |      |        |          |         |   |        |         
|Cash and cash equivalents at end of period                   |                                                                                                    | $                                     | 61,974 |                         |        | $    | 12,986 |          |         | $ | 11,914 |         
|                                                             |                                                                                                    |                                       |        |                         |        |      |        |          |         |   |        |         

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|                                             |                                                        |  |   |                         |  |      |   |         |  |  |   |     |  | 
|-------------------------------------------- | ------------------------------------------------------ |  | - | ----------------------- |  | ---- | - | ------- |  |  | - | --- |  | 
|                                             |                                                        |  |   | YEAR ENDED DECEMBER 31,
|                                             |                                                        |  |   |                        
|                                             |                                                        |  |   | 2001                    |  | 2000 |   | 1999   
|                                             |                                                        |  |   |                         |  |      |   |        
|Cash paid during the period for:             |                                                        |  |   |                         |  |      |   |         |  |  |   |    
|                                             | Income taxes                                           |  | $ | 4                       |  |      | $ | 1       |  |  | $ | 1   | 
|                                             | Interest                                               |  | $ | 64                      |  |      | $ | 178     |  |  | $ | 214 | 
|Non-cash investing and
financing activities: |                                                        |  |   |                         |  |      |   |         |  |  |   |    
|                                             | Issuance of common stock for
acquisition of businesses |  | $ |                        |  |      | $ | 422,106 |  |  | $ |    | 
|                                             | Acquired equipment under
capital leases arrangements   |  |   |                        |  |      |   |        |  |  |   | 525 | 
|                                             | Acquired equipment under debt
arrangement              |  | $ |                        |  |      | $ |        |  |  | $ | 237 | 

The accompanying notes are an integral part of the consolidated financial statements.

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##### Table of Contents



OVERTURE SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES

GENERAL

Overture Services, Inc. (formerly GoTo.com, Inc.) (the Company or
Overture) is the leader in Pay-For-Performance search on the Internet. We
introduce consumers and businesses that search the Internet to advertisers who
bid for placement in our search results, which are ranked by the advertisers
bid price. Advertisers pay us only when consumers and businesses click through
to the advertisers search listings, so we refer to our service as
Pay-For-Performance search. We provide consumers and businesses with relevant
search results by charging advertisers for each paid introduction, or
clickthrough, and by requiring advertisers to bid only on keywords that are
relevant to their offering. We distribute our search results to consumers and
businesses through our affiliates, a network of portals, Web browsers, Internet
service providers and other Web properties, as well as through our own Web
site. We believe our service offers advertisers a highly targeted, controllable
and cost-effective marketing solution and provides affiliates with incremental
revenue and a relevant search service.

The Company was incorporated on September 15, 1997 in the state of
Delaware and officially launched its services on June 1, 1998. On October 8,
2001, GoTo.com, Inc. changed its corporate name to Overture Services, Inc. and
changed its Nasdaq Stock Market trading symbol to OVER. The Company operates
in one reportable business segment.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Overture and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.

FOREIGN CURRENCY

Generally, the functional currency of the Companys international
subsidiaries is the local currency. The financial statements of these
subsidiaries are translated to United States dollars using year-end rates of
exchange for assets and liabilities, and average rates of exchange for the year
for revenues, costs and expenses. Translation gains (losses) are deferred and
accumulated in accumulated other comprehensive income as a component of
stockholders equity. Net gains and losses resulting from foreign exchange
transactions would be included in the consolidated statements of operations.
The Company did not incur significant net gains or losses resulting from
foreign exchange transactions during the periods presented.

ESTIMATES AND ASSUMPTIONS

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could differ materially from those
estimates.

RECLASSIFICATION

Certain changes have been made to the description and presentation of the
Balance Sheet and Statement of Operations during the current year. The line
item Prepaid Marketing Expenses has been renamed Prepaid Traffic Acquisition
Expense The line item Cost of Revenue has been renamed Search Serving, the
Gross Profit line item has been removed, the Search Serving line item is
now shown as a component of operating expenses, and Traffic Acquisition has
been separately reported from Marketing, Sales and Service. Prior year
presentation has been changed to conform to current year presentation. These
changes to the description and presentation of the Statement of Operations had
no effect on net income or loss.

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##### Table of Contents

\

REVENUE RECOGNITION

Revenue is generated primarily through paid introductions, that is,
Overture generates revenue when a user clicks on an advertisers listings after
an advertiser has bid for priority placement in search results by making or committing to make a
payment based on the amount bid for each clickthrough. Revenue is recognized when earned based on
click-through activity to the extent that the advertiser has deposited
sufficient funds with us or collection is probable. Revenue is also generated from
banner advertising, and from our Full Serve and Full Serve Advantage programs.
Full Serve and Full Serve Advantage programs, whereby
the Company charges a service fee for listing services, and banner advertising constitute
less than 1%, 5% and 5% of our revenue for the years ended December 31, 2001, 2000 and 1999,
respectively. Banner advertising revenue is recognized when earned under the
terms of the contractual arrangement with the advertiser or advertising agency,
provided that collection is probable. Full Serve and Full Serve Advantage
revenue is recognized when Overture has provided all of the services under the
terms of the arrangement. Overture has no barter transactions.

In December 1999, the SEC issued Staff Accounting Bulletin 101, Revenue
Recognition (SAB 101), which outlines the basic criteria that must be met to
recognize revenue and provides guidance for presentation of revenue and for
disclosure related to revenue recognition policies in financial statements
filed with the SEC, which the Company adopted in 2000.

COMPREHENSIVE INCOME (LOSS)

The Company accounts for comprehensive income (loss) using Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
130). SFAS 130 establishes standards for reporting comprehensive income (loss)
and its components in financial statements. Comprehensive income (loss), as
defined therein, refers to revenues, expenses, gains and losses that are not
included in net income (loss) but rather are recorded directly in shareholders
equity. The differences between total comprehensive income (loss) and net
income (loss) for 2001, 2000 and 1999 were insignificant.

SEARCH SERVING

Search serving costs consist primarily of costs associated with serving
our search results, maintaining our Web site and fees paid to outside service
providers that provide and manage unpaid listings. Costs associated with
serving our search results and maintaining our Web site includes depreciation
of Web site equipment, co-location charges for equipment, software licensing
fees and salaries of related personnel.

TRAFFIC ACQUISITION

The Company enters into agreements of varying durations with other
Internet companies (affiliates) whereby the Company provides search services
within the affiliates Web sites or the affiliates provide a link to the
Companys site. There are generally three ways that economic terms of affiliate
agreements are structured: 1) fixed payments based on a guaranteed minimum
amount of traffic delivered, 2) variable payments based on a percentage of our
revenue or based on a certain metric, such as number of searches or paid
clicks, or 3) a combination of the above. The Company pays these affiliates in
a number of ways, including fixed amounts at the beginning of the term of the
agreement, fixed amounts at pre-determined dates throughout the term of the
agreement, or periodically during the term of the agreement, monthly or
quarterly, based on activity.

The Company expenses traffic acquisition costs under two methods;
agreements with fixed payments are generally expensed pro-rata over the term
the fixed payment covers, and agreements based on a percentage of revenue,
number of paid clicks, number of searches, or other metric are generally
expensed based on the volume of the underlying activity or revenue multiplied
by the agreed-upon price or rate.

Traffic is
concentrated among several affiliates. Of Overture's total traffic
for the year ended December 31, 2001, more than 95% came from
affiliates as follows: approximately 35% came from our portal
affiliates including Alta Vista, AOL, Excite.com, go.com, iWon, Terra
Lycos and Yahoo; approximately 20% came from browsers,
Microsoft's Internet Explorer and Netscape's browser product; and
approximately 45% came from other affiliates including InfoSpace
(including MetaCrawler and Dogpile) and our Web site.
A significant portion of the Companys traffic is and has
been generated from a small number of the Companys larger
affiliates. If we are not successful in renewing any of these
agreements, or if they are renewed but on less favorable terms,
it could harm our business and ability to generate revenue.

ADVERTISING COSTS

The Company expenses advertising media costs as incurred and production
cost upon first airing or printing. For the years ended December 31, 2001, 2000
and 1999, the Company incurred advertising costs of approximately $6.1 million,
$14.8 million and $15.9 million, respectively.

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PRODUCT DEVELOPMENT

Product development expenses consist of expenses incurred by the Company
in the development, creation and enhancement of its Internet site and service.
Product development expenses include compensation and related expenses, costs
of computer hardware and software, and costs incurred in developing features
and functionality of the service. Product development costs are expensed as
incurred or capitalized in accordance with Statement of Position 98-1
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use (SOP 98-1). SOP 98-1 requires that cost 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.

CASH, CASH EQUIVALENTS, SHORT-TERM INVESTMENTS, LONG-TERM INVESTMENTS AND
RESTRICTED INVESTMENTS

The Company considers those investments that are highly liquid, readily
convertible to cash and which mature within three months from the original date
of purchase to be cash equivalents. All of the Companys cash equivalents,
short-term and long-term investments are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses included in unrealized losses on short-term and long-term
investments as a separate component of stockholders equity net of applicable
income taxes. As of December 31, 2001, the fair value of these securities
approximated cost and the unrealized holding gains were approximately $79,000.
The realized gains and losses on sales of available-for-sale investments for
the year ended December 31, 2001 were not significant. Long-term investments
have original maturities of up to 24 months.

The estimated fair value of cash, cash equivalents and short-term and
long-term investments and restricted investments, which approximates the
carrying costs as of December 31, 2001 and 2000, are as follows (in thousands):

|                        |  |               |        |             |  |             |        |             |  |   |        |  |  |   |       | 
|----------------------- |  | ------------- | ------ | ----------- |  | ----------- | ------ | ----------- |  | - | ------ |  |  | - | ----- | 
|                        |  | CASH AND CASH |        | SHORT-TERM  |  | LONG-TERM   |        | RESTRICTED 
|                        |  | EQUIVALENTS   |        | INVESTMENTS |  | INVESTMENTS |        | INVESTMENTS
|                        |  |               |        |             |  |             |        |            
|Cash                    |  | $             | 18,785 |             |  | $           |       |             |  | $ |       |  |  | $ |      | 
|Commercial Paper        |  |               | 10,005 |             |  |             | 498    |             |  |   |       |  |  |   | 5,744 | 
|Certificates of deposit |  |               |       |             |  |             | 10,351 |             |  |   |       |  |  |   |      | 
|US Treasury bills       |  |               | 33,184 |             |  |             | 60,988 |             |  |   | 36,476 |  |  |   |      | 
|                        |  |               |        |             |  |             |        |             |  |   |        |  |  |   |       | 
|                        |  | $             | 61,974 |             |  | $           | 71,837 |             |  | $ | 36,476 |  |  | $ | 5,744 | 
|                        |  |               |        |             |  |             |        |             |  |   |        |  |  |   |       | 

|                        |  |                   |        |             |  |             |        |             |  |   |     |  |  |   |       | 
|----------------------- |  | ----------------- | ------ | ----------- |  | ----------- | ------ | ----------- |  | - | --- |  |  | - | ----- | 
|                        |  | December 31, 2000
|                        |  |                  
|                        |  | CASH AND CASH     |        | SHORT-TERM  |  | LONG-TERM   |        | RESTRICTED 
|                        |  | EQUIVALENTS       |        | INVESTMENTS |  | INVESTMENTS |        | INVESTMENTS
|                        |  |                   |        |             |  |             |        |            
|Cash                    |  | $                 | 5,839  |             |  | $           |       |             |  | $ |    |  |  | $ |      | 
|Commercial Paper        |  |                   | 2,481  |             |  |             | 28,490 |             |  |   | 293 |  |  |   | 5,564 | 
|Certificates of deposit |  |                   | 1,001  |             |  |             | 8,132  |             |  |   |    |  |  |   |      | 
|US Treasury bills       |  |                   | 3,665  |             |  |             | 5,072  |             |  |   |    |  |  |   |      | 
|                        |  |                   |        |             |  |             |        |             |  |   |     |  |  |   |       | 
|                        |  | $                 | 12,986 |             |  | $           | 41,694 |             |  | $ | 293 |  |  | $ | 5,564 | 
|                        |  |                   |        |             |  |             |        |             |  |   |     |  |  |   |       | 

See Note 6 for additional information on restricted investments.

ACCOUNTS RECEIVABLE

The allowance for doubtful account activity for the periods indicated is
as follows (in thousands):

|                                 |                   |  |              |       |            |  |            |       |        |  |            |     |  |  |   |       | 
|-------------------------------- | ----------------- |  | ------------ | ----- | ---------- |  | ---------- | ----- | ------ |  | ---------- | --- |  |  | - | ----- | 
|                                 |                   |  |              |       |            |  | ADDITIONS  |       |        |  |            |     |  |  |  
|                                 |                   |  | BALANCE AT   |       | CHARGED TO |  |            |       |        |  | BALANCE AT
|                                 |                   |  | BEGINNING OF |       | COSTS AND  |  |            |       |        |  | END OF    
|                                 |                   |  | PERIOD       |       | EXPENSES   |  | WRITE-OFFS |       | PERIOD
|                                 |                   |  |              |       |            |  |            |       |       
|Allowance for doubtful accounts: |                   |  |              |       |            |  |            |       |        |  |            |     |  |  |   |      
|                                 | December 31, 1998 |  | $            |      |            |  | $          | 86    |        |  | $          |    |  |  | $ | 86    | 
|                                 | December 31, 1999 |  | $            | 86    |            |  | $          | 164   |        |  | $          |    |  |  | $ | 250   | 
|                                 | December 31, 2000 |  | $            | 250   |            |  | $          | 1,041 |        |  | $          | 291 |  |  | $ | 1,000 | 
|                                 | December 31, 2001 |  | $            | 1,000 |            |  | $          | 1,735 |        |  | $          | 635 |  |  | $ | 2,100 | 

CONCENTRATION OF CREDIT RISK

Accounts receivable are typically unsecured and are due from customers
primarily located in the United States. Many of Overtures customers are in the
Internet industry. Credit losses have generally been within managements
expectations. At December 31, 2001 and 2000, no customer represented more than
10 percent of total accounts receivable.

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PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Property and equipment consists
of computer hardware, computer software, which includes costs incurred in the
application development stage for computer software developed for internal use,
and furniture and fixtures. Depreciation is provided using the straight-line
method based upon estimated useful lives of the assets, which range from 18
months to five years. Equipment under capital leases and leasehold improvements
are recorded at cost. Amortization is provided using the straight-line method
over the shorter of the term of the related lease or estimated useful lives of
the assets.

LONG-LIVED ASSETS

The Company evaluates the recoverability of its long-lived assets in
accordance with SFAS No. 121 Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of (SFAS 121). The Company
assesses the impairment of long-lived assets and certain identifiable
intangibles whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment loss would be
recognized when estimated future cash flows expected to result from the use of
the asset and its eventual disposition is less than its carrying amount.
Accordingly, in 2000, Overture recorded an impairment charge on the goodwill
and intangible assets from the acquisitions of Cadabra and AuctionRover of
approximately $309.3 million.

DEFERRED REVENUE

Deferred revenue represents all payments received from customers in excess
of revenue earned based on line-item click-through activity and will be
recognized as actual clickthroughs occur.

INCOME TAXES

Income taxes are accounted for under SFAS No. 109, Accounting for Income
Taxes (SFAS 109). Under SFAS 109, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax basis of
assets and liabilities, and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Valuation
reserves against deferred tax assets are provided as necessary.

ACCOUNTING FOR STOCK-BASED COMPENSATION

SFAS No. 123, Accounting for Stock-Based Compensation, requires that
stock awards granted subsequent to January 1, 1995 be recognized as
compensation expense based on their fair value at the date of grant.
Alternatively, a company may account for granted stock awards under Accounting
Principles Board Opinion (APB) No. 25 Accounting for Stock Issued to
Employees (APB 25) and disclose pro forma income amounts, which would have
resulted from recognizing such awards at their fair value. The Company has
elected to account for stock-based compensation expense under APB 25 and make
the required pro forma disclosures for compensation expense (see Note 4).

INCOME (LOSS) PER SHARE COMPUTATION

Historical basic net income (loss) per share is computed using the
weighted average number of shares of common stock outstanding. Historical
diluted net income (loss) per share is computed using the weighted average
number of shares of common stock outstanding and the effects of outstanding
stock options and unvested portion of stock issued in connection with the
exercise of such options subject to repurchase.

Pro forma basic net income (loss) per share is computed using the
historical weighted average number of shares of common stock outstanding plus
the weighted average number of shares resulting from the assumed conversion of
all outstanding convertible preferred stock as though such conversion occurred
at the beginning of the period or original date of issuance, if later. Pro
forma diluted net income (loss) per share is computed using the historical
weighted average number of shares of common stock outstanding, the weighted
average number of shares resulting from the assumed conversion of all
outstanding convertible preferred stock as though such conversion occurred at
the beginning of the period or original date of issuance, if later, and the
effect of outstanding stock options and unvested portion of stock issued in
connection with the exercise of such options subject to repurchase.

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Options to purchase approximately 7.6 million and 6.5 million shares of
common stock were outstanding as of December 31, 2001 and 2000, respectively.
In addition, as of December 31, 2001, there were approximately 620,000 shares
of unvested common stock outstanding that were issued in connection with the
exercise of options and are subject to repurchase.

The following table sets forth the computation of historical basic and
diluted net income (loss) per share and pro forma basic and diluted net income
(loss) per share for the periods indicated (in thousands, except per share
amounts):

|                                                 |                                                                          |  |                        |        |      |  |      |          |   |  |   |         |  
|------------------------------------------------ | ------------------------------------------------------------------------ |  | ---------------------- | ------ | ---- |  | ---- | -------- | - |  | - | ------- | -
|                                                 |                                                                          |  | YEAR ENDED DECEMBER 31
|                                                 |                                                                          |  |                       
|                                                 |                                                                          |  | 2001                   |        | 2000 |  | 1999
|                                                 |                                                                          |  |                        |        |      |  |     
|Numerator:                                       |                                                                          |  |                        |        |      |  |      |          |   |  |   |        
|                                                 | Net loss                                                                 |  | $                      | 20,163 |      |  | $    | (458,621 | ) |  | $ | (29,262 | )
|Denominator:                                     |                                                                          |  |                        |        |      |  |      |          |   |  |   |        
|                                                 | Denominator for historical basic
calculation  weighted average shares   |  |                        | 53,363 |      |  |      | 48,065   |   |  |   | 28,207  |  
|                                                 | Common stock equivalents                                                 |  |                        | 2,170  |      |  |      |         |   |  |   |        |  
|                                                 |                                                                          |  |                        |        |      |  |      |          |   |  |   |        
|                                                 | Denominator for historical diluted
calculation  weighted average
shares |  |                        | 55,533 |      |  |      | 48,065   |   |  |   | 28,207  |  
|Weighted average effect of pro forma
securities: |                                                                          |  |                        |        |      |  |      |          |   |  |   |        
|                                                 | Series A convertible preferred stock                                     |  |                        |       |      |  |      |         |   |  |   | 226     |  
|                                                 | Series B convertible preferred stock                                     |  |                        |       |      |  |      |         |   |  |   | 3,994   |  
|                                                 | Series C convertible preferred stock                                     |  |                        |       |      |  |      |         |   |  |   | 5,147   |  
|                                                 | Series D convertible preferred stock                                     |  |                        |       |      |  |      |          |   |  |   | 645     |  
|                                                 |                                                                          |  |                        |        |      |  |      |          |   |  |   |        
|                                                 | Denominator for pro forma
calculation                                    |  |                        | 55,533 |      |  |      | 48,065   |   |  |   | 38,219  |  
|                                                 |                                                                          |  |                        |        |      |  |      |          |   |  |   |        
|Net income (loss) per share:                     |                                                                          |  |                        |        |      |  |      |          |   |  |   |        
|                                                 | Pro forma basic and diluted net
income (loss) per share                  |  | $                      | 0.36   |      |  | $    | (9.54    | ) |  | $ | (0.77   | )
|                                                 | Historical basic net income (loss)
per share                             |  | $                      | 0.38   |      |  | $    | (9.54    | ) |  | $ | (1.04   | )
|                                                 | Historical diluted net income
(loss) per share                           |  | $                      | 0.36   |      |  | $    | (9.54    | ) |  | $ | (1.04   | )

2. INCOME TAXES

As a result of the net operating losses incurred since inception, no
income tax provision has been recorded except for state minimum taxes of $800
for the years ended December 31, 2000 and 1999. Although the Company will have
sufficient net operating loss carryforwards to offset its taxable income for
the year ended December 31, 2001, it has recorded a current tax provision equal
to the alternative minimum tax for both Federal and California purposes. The
following is a reconciliation of the statutory federal income tax rate to the
Companys effective income tax rate:

|                                            |  |              |     |      |  |      |     |    |  |  |     |   
|------------------------------------------- |  | ------------ | --- | ---- |  | ---- | --- | -- |  |  | --- | --
|                                            |  | DECEMBER 31,
|                                            |  |             
|                                            |  | 2001         |     | 2000 |  | 1999
|                                            |  |              |     |      |  |     
|Statutory federal rate                      |  |              | 35  | %    |  |      | (34 | )% |  |  | (34 | )%
|State income taxes (net of federal benefit) |  |              | 6   |      |  |      | (1  | )  |  |  | (6  | ) 
|Valuation allowance                         |  |              | (47 | )    |  |      | 3   |    |  |  | 36  |   
|Nondeductible expenses                      |  |              | 2   |      |  |      | 32  |    |  |  | 4   |   
|Unbenefited foreign losses                  |  |              | 8   |      |  |      |    |    |  |  |    |   
|                                            |  |              |     |      |  |      |     |    |  |  |     |   
|                                            |  |              | 4   | %    |  |      |    | %  |  |  |    | % 
|                                            |  |              |     |      |  |      |     |    |  |  |     |   

The components of the deferred tax assets and related valuation allowance
at December 31, 2001 and 2000 are as follows (in thousands):

|                                 |  |              |         |      |  |   |         |  
|-------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | -
|                                 |  | DECEMBER 31,
|                                 |  |             
|                                 |  | 2001         |         | 2000
|                                 |  |              |         |     
|Net operating loss carryforwards |  | $            | 29,655  |      |  | $ | 37,838  |  
|Deferred revenue                 |  |              | 3,520   |      |  |   |        |  
|Tax credit carryforwards         |  |              | 1,465   |      |  |   |        |  
|Intangibles                      |  |              | 1,111   |      |  |   |        |  
|Other                            |  |              | 991     |      |  |   | 503     |  
|                                 |  |              |         |      |  |   |         |  
|Deferred tax assets              |  |              | 36,742  |      |  |   | 38,341  |  
|Valuation allowance              |  |              | (36,742 | )    |  |   | (38,341 | )
|                                 |  |              |         |      |  |   |         |  
|                                 |  | $            |        |      |  | $ |        |  
|                                 |  |              |         |      |  |   |         |  

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The provision for income taxes is composed of the following (in
thousands):

|          |         |                |     |              |     |      |   |      |   |   |   |   |   | 
|--------- | ------- | -------------- | --- | ------------ | --- | ---- | - | ---- | - | - | - | - | - | 
|          |         |                |     | DECEMBER 31,
|          |         |                |     |             
|          |         |                |     | 2001         |     | 2000 |   | 1999
|          |         |                |     |              |     |      |   |     
|Current:  |         |                |     |              |     |      |   |      |   |   |   |  
|          | Federal |                | $   | 725          |     |      | $ |     |   |   | $ |  |  
|          | State   |                |     | 175          |     |      |   | 1    |   |   |   | 1 |  
|          | Foreign |                |     |             |     |      |   |     |   |   |   |  |  
|          |         |                |     |              |     |      |   |      |   |   |   |  
|          |         | Total current  |     |              | 900 |      |   |      | 1 |   |   |   | 1 | 
|          |         |                |     |              |     |      |   |      |   |   |   |  
|Deferred: |         |                |    |              |     |      |  |      |   |   |  |  
|          | Federal |                |     |             |     |      |   |     |   |   |   |  |  
|          | State   |                |     |             |     |      |   |     |   |   |   |  |  
|          | Foreign |                |     |             |     |      |   |     |   |   |   |  |  
|          |         |                |     |              |     |      |   |      |   |   |   |  
|          |         | Total deferred |     |              |    |      |   |      |  |   |   |   |  | 
|          |         |                |     |              |     |      |   |      |   |   |   |  
|          |         | $              | 900 |              |     | $    | 1 |      |   | $ | 1 |  
|          |         |                |     |              |     |      |   |      |   |   |   |  

Due to the uncertainty surrounding the timing of realizing the benefits of
its deferred tax assets in future tax returns, the Company has recorded a
valuation allowance against its deferred tax assets.

As of December 31, 2001, the Company had net operating loss carry forwards
of approximately $76.1 million and $54.7 million available to reduce future
federal and state taxable income, respectively, which expire beginning in the
years 2017 through 2020 for federal and in 2005 to 2015 for state purpose.
Under Section 382 of the Internal Revenue Code, the utilization of the net
operating loss carryforwards can be limited based on changes in the percentage
of ownership of the Company.

Approximately $13.9 million of the valuation allowance for deferred tax
assets relating to net operating loss carryforwards is attributable to employee
stock option deductions, the benefit from which will be allocated to additional
paid in capital, when and if subsequently realized.

3. STOCKHOLDERS EQUITY

COMMON AND PREFERRED STOCK

Overture issued shares of its preferred stock as described below:

In March 1998, Overture issued a total of 471,111 shares of series A
preferred stock to various investors at a purchase price of $0.45 per share.

In May 1998, Overture issued a total of 8,311,688 shares of series B
preferred stock to various investors at a purchase price of $0.77 per share.

In July 1998, November 1998 and December 1998, Overture issued a total of
10,710,348 shares of series C preferred stock to various investors at a
purchase price of $2.076 per share.

In April 1999, Overture issued a total of 3,628,447 shares of series D
preferred stock to various investors at a purchase price of $6.89 per share.

As part of the series B preferred stock financing, Bill Gross, the
Companys founder, paid a consultant 111,111 shares of the Companys common
stock owned by him for services provided in connection with the series B
preferred stock financing. The exchange of the founders shares was recorded at
the fair market value of the common stock, on the date of the exchange, as a
contribution to capital and cost of the series B preferred financing.

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In June 1999, the Company completed its initial public offering and issued
6,900,000 shares of its common stock at a price to the public of $15.00 per
share. The Company received approximately $94.8 million in cash, net of
underwriting discounts, commissions and other offering costs. Simultaneously
with the closing of the initial public offering, each outstanding share of
series A, B, C and D preferred stock was automatically converted into one share
of common stock.

Upon completion of the Companys initial public offering the number of
common and undesignated preferred shares authorized for issuance changed to
200,000,000 and 10,000,000, respectively.

Overture issued common stock in connection with its acquisitions during
2000 (see Note 7).

On July 5, 2001, Overture completed a follow-on offering of 3,750,000
primary shares of its common stock. Overtures sale of its shares raised net
proceeds of approximately $58.2 million for the company.

WARRANTS

In February 1999, the Company issued additional warrants in exchange for
certain consulting and other services to purchase 41,699 shares of the
Companys common stock at exercise prices ranging from $2.076 to $5.00 per
share. The warrants were fully exercisable upon issuance and those warrants not
exercised by the warrant holders for common stock prior to our initial public
offering on June 18, 1999 were terminated. The deemed fair value of warrants
issued in 1999 was $180,000; these amounts were recorded in general and
administrative expenses in the respective periods.

DEFERRED STOCK OPTION COMPENSATION

The excess of the deemed fair value of the Companys common stock over the
exercise price of options at the date of grant, adjusted for the return of
unvested options or repurchase of restricted stock resulting from employee
terminations, amounted to an aggregate of approximately $7.8 million.
Subsequent to our initial public offering in June 1999, the deemed fair value
of the common stock was determined by closing stock price on the date the
options were issued as quoted on the Nasdaq National Market. Prior to our
initial public offering, the deemed fair value of the common stock was
determined by the Company based on the selling prices of contemporaneous sales
of each series of preferred stock considering the relative rights and
privileges of each security, the stages of development of the Companys
business and the inherent risks and perceived future potential of the Company
at the time of grant or issuance. The typical vesting period of the options is
20%, 10% or zero immediately upon grant with the remaining balance vesting
evenly either annually or quarterly over the following four years. The
amortization of deferred compensation is charged to operations on a graded
methodology basis over the vesting period of the options. During the year ended
December 31, 2001, 2000, and 1999, deferred compensation amortization of
approximately $849,000, $1.4 million and $3.6 million, respectively, was
recorded. At December 31, 2001 and 2000, deferred compensation of approximately
$763,000 million and $1.1 million, respectively, was reflected as a reduction
of stockholders equity. The deferred compensation amortization relates only to
stock options awarded to employees; the salaries and related benefits of these
employees are included in the applicable search serving or operating expense
line items.

4. STOCK PLAN AND STOCK PURCHASE PLAN

The Companys 1998 Stock Plan provides for the granting of options for the
purchase of up to 17.9 million shares of the Companys common stock, plus an
annual increase to be added on the first day of the Companys fiscal year
beginning in 2002 equal to the lesser of (i) 7.50 million shares, (ii) 5% of
the outstanding shares on such date or (iii) a lesser amount determined by the
Board. The increase for fiscal 2002 was determined to be approximately 2.9
million shares. Under terms of the plan, options may be granted to employees,
non-employee directors or consultants at prices not less than the fair value at
the date of grant. Options granted to non-employees are recorded at the value
of negotiated services received. All options are immediately exercisable,
however, shares issuable upon exercise of the option vest typically 20%, 10% or
zero immediately upon grant of the option with the remaining balance vesting
evenly either annually or quarterly over the following four years. The Company
has the right to repurchase unvested shares issued upon exercise of the option.

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Information relating to the outstanding stock options is as follows:

|                                 |           |  |                |        |                |   |          |       | 
|-------------------------------- | --------- |  | -------------- | ------ | -------------- | - | -------- | ----- | 
|                                 |           |  |                |        |                |   | WEIGHTED
|                                 |           |  |                |        |                |   | AVERAGE 
|                                 |           |  | SHARES         |        | EXERCISE PRICE
|                                 |           |  |                |        |               
|                                 |           |  | (IN THOUSANDS) |        |                |   |         
|Outstanding at December 31, 1998 |           |  | 5,000          |        |                |   | 0.16     |      
|                                 | Granted   |  |                | 2,979  |                |   |          | 19.62 | 
|                                 | Exercised |  |                | (5,035 | )              |   |          | 0.37  | 
|                                 | Cancelled |  |                | (114   | )              |   |          | 11.58 | 
|                                 |           |  |                |        |                |   |          |      
|Outstanding at December 31, 1999 |           |  | 2,830          |        |                |   | 19.87    |      
|                                 | Granted   |  |                | 5,161  |                |   |          | 25.87 | 
|                                 | Exercised |  |                | (720   | )              |   |          | 2.11  | 
|                                 | Cancelled |  |                | (789   | )              |   |          | 36.27 | 
|                                 |           |  |                |        |                |   |          |      
|Outstanding at December 31, 2000 |           |  | 6,482          |        |                |   | 24.66    |      
|                                 |           |  |                |        |                |   |          |      
|                                 | Granted   |  |                | 3,451  |                |   |          | 14.33 | 
|                                 | Exercised |  |                | (1,136 | )              |   |          | 8.18  | 
|                                 | Cancelled |  |                | (1,194 | )              |   |          | 19.44 | 
|                                 |           |  |                |        |                |   |          |      
|Outstanding at December 31, 2001 |           |  | 7,603          |        |                | $ | 23.04    |      
|                                 |           |  |                |        |                |   |          |      

The following table summarizes information regarding options outstanding
and options exercisable at December 31, 2001:

|                         |  |                             |       |             |  |          |     |          |  |   |        | 
|------------------------ |  | --------------------------- | ----- | ----------- |  | -------- | --- | -------- |  | - | ------ | 
|                         |  | OUTSTANDING AND EXERCISABLE
|                         |  |                            
|                         |  |                             |       |             |  | WEIGHTED |     |          |  |  
|                         |  |                             |       |             |  | AVERAGE  |     | WEIGHTED
|                         |  | NUMBER                      |       | REMAINING   |  | AVERAGE 
|                         |  | OF                          |       | CONTRACTUAL |  | EXERCISE
|RANGE OF EXERCISE PRICES |  | SHARES                      |       | LIFE        |  | PRICE   
|                         |  |                             |       |             |  |         
|                         |  | (IN THOUSANDS)             
|$0.01 - $10.06           |  |                             | 826   |             |  |          | 7.7 |          |  | $ | 3.63   | 
|$10.38 - $11.00          |  |                             | 1,936 |             |  |          | 9.3 |          |  | $ | 11.00  | 
|$11.38 - $17.06          |  |                             | 1,838 |             |  |          | 8.2 |          |  | $ | 13.16  | 
|$17.48 - $34.50          |  |                             | 1,847 |             |  |          | 7.6 |          |  | $ | 27.31  | 
|$34.56 -$68.31           |  |                             | 947   |             |  |          | 8.1 |          |  | $ | 57.01  | 
|$108.25 - $108.25        |  |                             | 209   |             |  |          | 8.1 |          |  | $ | 108.25 | 
|                         |  |                             |       |             |  |          |     |          |  |   |        | 
|                         |  |                             | 7,603 |             |  |          |     |          |  |   |        | 
|                         |  |                             |       |             |  |          |     |          |  |   |        | 

Options available for future grant totaled approximately 4.0 and 4.2
million at December 31, 2001 and 2000, respectively. As of January 1, 2002 the
Company added approximately 2.9 million shares available for future grant in
accordance with the Companys 1998 Stock Plan.

The fair value of these options were estimated at the date of grant using
a Black-Scholes option pricing model with the following assumptions:

|                          |  |                         |      |      |  |      |      |   |  |  |      |  
|------------------------- |  | ----------------------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                          |  | YEAR ENDED DECEMBER 31,
|                          |  |                        
|                          |  | 2001                    |      | 2000 |  | 1999
|                          |  |                         |      |      |  |     
|Risk free interest rate   |  |                         | 3.75 | %    |  |      | 5.0  | % |  |  | 5.38 | %
|Expected lives (in years) |  |                         | 3.0  |      |  |      | 3.0  |   |  |  | 2.5  |  
|Dividend yield            |  |                         |     |      |  |      |     |   |  |  |     |  
|Expected volatility       |  |                         | 0.80 |      |  |      | 0.80 |   |  |  | 0.80 |  

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\

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. Under SFAS
123, the Company would have incurred an additional compensation expense of
approximately $6.5 million, $22.8 million and $2.4 million for the years ended
December 31, 2001, 2000 and 1999, respectively.

|                                                     |  |                |        |      |  |      |          |   |  |   |         |  
|---------------------------------------------------- |  | -------------- | ------ | ---- |  | ---- | -------- | - |  | - | ------- | -
|                                                     |  | 2001           |        | 2000 |  | 1999
|                                                     |  |                |        |      |  |     
|                                                     |  | (IN THOUSANDS)
|Net income (loss), as reported                       |  | $              | 20,163 |      |  | $    | (458,621 | ) |  | $ | (29,262 | )
|Pro forma net income (loss)                          |  |                | 13,689 |      |  |      | (481,381 | ) |  |   | (31,656 | )
|Pro forma net (loss) per share                       |  |                | 0.25   |      |  |      | (10.02   | ) |  |   | (0.83   | )
|Pro forma historical basic
income (loss) per share   |  |                | 0.26   |      |  |      | (10.02   | ) |  |   | (1.12   | )
|Pro forma historical diluted
income (loss) per share |  | $              | 0.25   |      |  | $    | (10.02   | ) |  | $ | (1.12   | )

Applying SFAS 123 in the pro forma disclosure may not be representative of
the effects on pro forma net income (loss) for future years as options vest
over several years and additional awards will likely be made each year.

In April 1999, the Board of Directors also approved the establishment,
upon the closing of the Companys initial public offering, of the 1999 Employee
Stock Purchase Plan (1999 Purchase Plan). The 1999 Purchase Plan initially
reserves 2,000,000 shares of common stock for future issuance, which will
increase annually by the lesser of 1,000,000 shares, 3% of the outstanding
shares on such date, or a lesser amount determined by the Board. The 1999
Purchase Plan provides for successive six month offering periods and allows
eligible employees to participate in the plan through payroll deductions that
will be used to purchase common stock at the end of each six month period for
the lesser of 85% of the price of the common stock at the beginning or the end
of the six month offering period.

5. RELATED PARTY TRANSACTIONS

During 1999, Bill Gross idealab! provided certain payroll processing
services to Overture and charged a fee for those services. On February 1,
1999, Overture entered into a lease with Bill Gross idealab! for office space.
Overture also uses a shared local area computer communications network. In
1999, Overture entered into a lease agreement with Bill Gross idealab! for
additional office space. The term of the agreement was from August 1999 through
January 2000. In January 2000, Overture terminated both leases in effect during
1999 and entered into an arrangement with Bill Gross idealab! for
approximately 58,000 square feet of office space. Overture is obligated to make
total lease payments of approximately $7.1 million commencing on January 15,
2000 and terminating on October 31, 2004. See Note 9 for
description of a lease agreement signed subsequent to year end.

The total management and leasing fee associated with both facilities was
approximately $2.1 million, $1.8 million and $364,000 during the years ended
December 31, 2001, 2000 and 1999, respectively. Management believes these
amounts are materially representative of the fair value of services recorded.

During 2001, 2000 and
1999, Overture recorded approximately $501,000,
$377,000 and $53,000, respectively, of search listing advertising revenue from Bill Gross
idealab!, which with its affiliate, idealab! Holdings, L.L.C., is a significant
stockholder of Overture. During 2000, Overture also recorded approximately
$143,000 of search listing and banner revenue from Cadabra. Cadabra began
listing on Overture on December 17, 1999 and ceased advertising on Overture on
January 13, 2000. On January 31, 2000, Overture acquired Cadabra (see Note 7).
Management believes these amounts are materially representative of the fair
value of advertising services provided.

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6. COMMITMENTS AND CONTINGENCIES

LEASES

The Company leases office space under operating lease agreements expiring
through October 2004. The future minimum lease payments under non-cancelable
operating leases and present value of future minimum capital lease payments are
as follows (in thousands):

|                                  |  |           |       |         |  |   |    |  
|--------------------------------- |  | --------- | ----- | ------- |  | - | -- | -
|                                  |  | OPERATING |       | CAPITAL
|                                  |  | LEASE     |       | LEASE  
|                                  |  |           |       |        
|2002                              |  | $         | 1,834 |         |  | $ | 91 |  
|2003                              |  |           | 1,440 |         |  |   |   |  
|2004                              |  |           | 1,200 |         |  |   |   |  
|2005                              |  |           |      |         |  |   |   |  
|2006                              |  |           |      |         |  |   |   |  
|                                  |  |           |       |         |  |   |    |  
|Total minimum lease payments      |  | $         | 4,474 |         |  |   | 91 |  
|                                  |  |           |       |         |  |   |    |  
|Less amount representing interest |  |           |       |         |  |   | (2 | )
|                                  |  |           |       |         |  |   |    |  
|                                  |  |           |       |         |  | $ | 89 |  
|                                  |  |           |       |         |  |   |    |  

See Note 9 for
description of a lease agreement signed subsequent to year end.

Total rent expense was approximately $2.0 million, $2.0 million and
$504,000 during the years ended December 31, 2001, 2000 and 1999, respectively.

LETTER OF CREDIT

In August 2000, Overture entered into a 19-month agreement under which
America Online (AOL) will display Overtures listings on the search results
page of AOL, AOL.com and Netscapess Netcenter. The agreement calls for a
guaranteed payment by Overture of $50 million over the term of the agreement.
As part of the guaranteed payment, Overture issued to AOL a letter of credit
for the benefit of AOL, in the amount of $5 million. In order to secure the
letter of credit, Overture has an investment of approximately $5.7 million,
which is restricted until the termination of the letter of credit in March
2002.

AFFILIATE COMMITMENTS

The Company is obligated to make guaranteed payments totaling
approximately $29.1 million in 2002, under contracts to provide search services
to its affiliates.

LITIGATION

The Company is party to routine claims and suits brought against it in
ordinary course of business. In the opinion of management, such routine claims
should not have any material adverse effect upon the results of operations,
cash flows or financial position of the Company.

On November 3, 2000, Overture was served with a summons and complaint by
MercExchange, L.L.C., alleging patent infringement relating to Overtures
online auction service ((AuctionRover.com, Inc. (AuctionRover or GoTo
Auctions)) and shopping services (GoTo Shopping). On June 1, 2001, Overture
entered into a settlement agreement and release with MercExchange, under which
MercExchange agreed to dismiss the litigation in exchange for a cash payment,
the amount of which was paid from the escrow funds created in connection with
Overtures acquisitions of AuctionRover and Cadabra. In addition, legal fees
and other expenses paid by Overture to defend this litigation were reimbursed
to Overture from the escrow funds and were recorded in other income, net for
the three months ended June 30, 2001.

On June 19, 2001, InternetFuel.com, Inc. filed a complaint against
Overture in the Superior Court of the State of California for the County of Los
Angeles. The complaint alleges that Overture wrongfully terminated an agreement
pursuant to which InternetFuel participated in Overtures affiliate program.
The complaint also alleges libel for messages allegedly placed by Overture on
an Internet forum, and it contains claims of unfair business practices. The
complaint seeks, among other remedies, monetary damages for the value of the
terminated agreement and for alleged harm to InternetFuels reputation,
punitive and exemplary relief and an injunction against alleged unfair business
practices. In December 2001, Overture successfully moved the court to transfer
the case to arbitration. The parties are in the process of selecting
arbitrators. Overture believes that it has meritorious defenses to the
allegations and intends to contest the allegations vigorously.

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On July 12, 2001, the first of several purported securities class action
lawsuits was filed in the United States District Court, Southern District of
New York against certain underwriters involved in Overtures initial public
offering, Overture, and certain of Overtures current and former officers and
directors. The Court consolidated the cases against Overture into case number
01 Civ. 6339. Plaintiffs allege, among other things, violations of the
Securities Act of 1933 and the Securities Exchange Act of 1934 involving
undisclosed compensation to the underwriters, and improper practices by the
underwriters and seek unspecified damages.

Similar complaints were filed in the same court against numerous public
companies that conducted initial public offerings of their common stock since
the mid-1990s. All of these lawsuits were consolidated for pretrial purposes
before Judge Shira Scheindlin of the United States District Court for the
Southern District of New York. Judge Scheindlin has ordered that the time for
all defendants to respond to any complaint be postponed until further order of
the Court. Thus, Overture has not been required to answer the complaint, and
no discovery has been served. Overture denies the allegations against it,
believes that it has meritorious defenses to the complaint and intends to
contest the allegations vigorously.

On October 2, 2000, 800-JR-Cigar, Inc. (JR Cigar) served a complaint
against the Company in the United States District Court for the District of New
Jersey alleging that the Company has committed acts of trademark infringement,
trademark dilution, unfair competition, consumer fraud and deceptive
telemarketing. JR Cigars allegations are based on the Companys allowing
competitors to bid on the term JR CIGAR (and related terms) in order to obtain
priority when an Internet user searches for cigar related Web sites. The
Company denies that it has violated JR Cigars rights and is vigorously
contesting the lawsuit. The parties have filed motions for summary judgment,
which have been fully briefed and are pending before the court. A trial date
has not been scheduled.

On January 17, 2002, FindWhat.com (FindWhat) filed a lawsuit against the
Company in the United States District Court for the Southern District of New
York. The initial complaint was never served upon the Company. An amended
complaint was served on the Company on January 25, 2002. The amended complaint
seeks a declaratory judgment of invalidity, unenforceability and
non-infringement relating to the Companys U.S. Patent No. 6,269,361 (the 361
patent), entitled System And Method For Influencing A Position On A Search
Result List Generated By A Computer Network Search Engine. On January 25,
2002, the Company filed a complaint for patent infringement against FindWhat in
the United States District Court for the Central District of California,
Western Division. In this action, the Company seeks an adjudication that the
361 patent is enforceable, not invalid, and infringed by FindWhat. The
Company also seeks a permanent injunction against FindWhat, an award of
increased damages, and an award of attorneys fees, costs and expenses. The
Company has moved to dismiss FindWhats New York action in favor of the
Companys California action.

On January 28, 2002, Mark Nutritionals, Inc. (MNI) filed a complaint
against the Company in the United States District Court for the Western
District of Texas. The initial complaint was never served on the Company. An
amended complaint was served on the Company on February 6, 2002. The amended
complaint alleges that the Company has committed acts of trademark
infringement, trademark dilution, unfair competition, misappropriation and
tortious interference with prospective economic advantage. MNIs allegations
are based on the Companys allowing competitors to bid on the term body
solutions in order to obtain priority when an Internet user searches for
diet-related Websites. The Company is indemnifying and defending an
affiliate, who has been named a defendant in a related action. The Company denies that it has violated MNIs rights
and will vigorously contest the lawsuit.

On January 31, 2002, a complaint was filed against the
Company as a result of its
acquisition in May 2000 of AuctionRover.com, Inc., and other defendants in
North Carolina Superior Court by an individual, Paul Rony, relating to alleged
trade secrets concerning interaction with Internet auction Web sites. The
causes of action alleged against the Company include misappropriation of trade
secrets, quantum meruit, and constructive trust. The Company denies liability
and will vigorously contest the lawsuit.

7. ACQUISITIONS

Cadabra

On January 31, 2000, Overture acquired Cadabra, an online comparison
shopping service, which we called GoTo Shopping. Pursuant to the Agreement
and Plan of Reorganization, Overture acquired all of the outstanding shares of
capital stock and assumed all outstanding options to acquire shares of capital
stock of Cadabra, for $8.0 million in cash and 3,283,672 shares of Overture
common stock, including 214,833 shares to be issued upon the exercise of
options assumed by Overture. The acquisition was accounted for as a purchase.
Under the purchase method of accounting, the purchase price was allocated to
the assets acquired and liabilities assumed based on their estimated fair
values as determined by Overture at the date of the acquisition. The operations
of Cadabra have been included in our results of operations since the date of
the acquisition. The total purchase price of the acquisition

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was approximately $263.1 million and consisted of cash of $8.0 million;
Overture common stock of $252.5 million valued at the closing price of
Overtures common stock on the date the exchange ratio was set, net of expected
proceeds from the exercise of Cadabra stock options assumed by Overture; and
acquisition costs of $2.6 million, primarily for investment banking, legal and
accounting costs. Of the purchase price, $7.6 million was assigned to
in-process research and development which was expensed immediately following
the consummation of the acquisition, $6.0 million was assigned to the value of
purchased technology and other intangibles and will be amortized on a
straight-line basis over three years and $4.4 million was allocated to the net
tangible assets. The excess purchase price over the estimated fair value of the
assets acquired and liabilities assumed has been allocated to goodwill in the
amount of $245.1 million and was scheduled to be amortized on a straight-line
basis over three years. The projects identified as in-process research and
development were those that were underway at the time of the acquisition, that
required additional effort to establish technological feasibility, had no
alternative future use and were expected to add features that would enhance the
operating capabilities of the service. At the acquisition date, these projects
were approximately 80% complete. Overture completed these projects in the third
quarter of 2000, incurring additional costs of approximately $1.2 million to do
so. To determine the value of in-process research and development, the
expected future cash flows, including costs to reach technological feasibility,
were discounted at an after-tax rate of 25%, taking into account risks related
to the characteristics and applications of the technology, existing and future
markets, and assessments of the life cycle stage of the technology. Overture
obtained an independent appraisal to derive the purchase price allocation.

AuctionRover

On May 3, 2000, Overture acquired AuctionRover, an online resource for
auctions, which we called GoTo Auctions. Pursuant to the Agreement and Plan
of Reorganization, Overture acquired all of the outstanding shares of capital
stock and assumed all outstanding options to acquire shares of capital stock of
AuctionRover for 3,470,588 shares of Overture common stock, including 521,408
shares to be issued upon the exercise of options assumed by Overture. The
acquisition was accounted for as a purchase. The operations of AuctionRover
have been included in Overtures results of operations since the date of
acquisition. Based on the price of Overture common stock on the date the
exchange ratio was set, the purchase price was valued at approximately $174.2
million, which consisted of Overture common stock of $173.7 million, net of
expected proceeds from the exercise of stock options assumed by Overture and
including acquisition costs of approximately $500,000 for legal and accounting
services. The purchase price was determined by arms-length negotiations
between the parties. Timothy Draper, who was a director Overture at the time
of the AuctionRover acquisition, is affiliated with certain entities that were
principal stockholders of AuctionRover. Of the purchase price, $6.7 million
was assigned to the value of purchased technology and other intangible assets
and amortized on a straight-line basis over three years and $600,000 was
allocated to the net tangible assets. The excess purchase price over the
estimated fair value of the assets acquired and liabilities assumed has been
allocated to goodwill in the amount of $167.0 million and was scheduled to be
amortized on a straight-line basis over three years. Overture assumed a line of
credit with an outstanding balance of approximately $700,000, which Overture
paid off in the second quarter of 2000.

The following unaudited pro forma financial information presents the
combined results of operations of Overture, Cadabra and AuctionRover as if the
acquisitions had occurred as of the beginning of each period presented, after
giving effect to certain adjustments, including amortization of goodwill and
intangible assets, but excludes the non-recurring charge for the write-off of
in-process research and development associated with the Cadabra acquisition.
The pro forma financial information does not necessarily reflect the results of
operations that would have occurred had Overture, Cadabra and AuctionRover
constituted a single entity during such periods (in thousands).

|                              |  |                   |          |                   |  |   |          |  
|----------------------------- |  | ----------------- | -------- | ----------------- |  | - | -------- | -
|                              |  | Year Ended        |          | Year Ended       
|                              |  | December 31, 2000 |          | December 31, 1999
|                              |  |                   |          |                  
|Revenue                       |  | $                 | 102,927  |                   |  | $ | 27,057   |  
|Net loss                      |  |                   | (346,773 | )                 |  |   | (171,412 | )
|Pro forma net loss per share  |  |                   | (7.10    | )                 |  |   | (4.07    | )
|Historical net loss per share |  | $                 | (7.10    | )                 |  | $ | (5.33    | )

During the fourth quarter of 2000 and in accordance with SFAS 121,
management identified certain conditions as indicators of asset impairment
related to the net assets resulting from the acquisitions of Cadabra and
AuctionRover. These indicators included:



| | 1. |  | The significant declines in the valuations of public companies
operating in the Internet space.
| | -- |  | -----------------------------------------------------------------------------------------------
|
| | 2. |  | Managements re-evaluation of its strategies and fit for these
business lines.                 

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| | 3. |  | A significant decrease in the stock price of Overture compared
to the purchase price of these acquisitions.
| | -- |  | -----------------------------------------------------------------------------------------------------------
|
| | 4. |  | Managements decision to decrease its investment in these
business lines.                                  

In accordance with SFAS 121, an impairment loss should be measured as the
amount by which the carrying amount of the asset exceeds the estimated fair
value of the asset. The estimate of fair value shall consider selling prices or
fair values for similar assets and the results of valuation techniques (e.g.,
discounted cash flows) as well as other strategic and market factors to the
extent available in the circumstances. Management has estimated the fair value
of the net assets acquired, based on discounted future cash flows as well as
strategic and market factors, to be below the carrying values of goodwill and
intangible assets. Accordingly, Overture took a charge to operations during the
fourth quarter of 2000 for approximately $309.3 million, to write down these
assets.

SearchUP

On October 25, 2000, Overture acquired substantially all the assets of
SearchUP, which did not have significant business operations. Pursuant to the
Asset Purchase Agreement, Overture acquired SearchUPs operational Web site,
registered URLs, trademarks and patent on its URL Position Manager. The
acquisition was accounted for as a purchase. The total purchase price was
approximately $3.5 million and was determined by the closing price of
Overtures common stock on the purchase date. Overture allocated the purchase
price to the intangible assets acquired based on their estimated fair values as
determined by Overture. It is anticipated that such amounts will be amortized
on a straight-line basis over three years.

8. LOSS ON CLOSURE OF GOTO SHOPPING AND DISPOSITION OF GOTO AUCTIONS

Overture operated a consumer-shopping site, GoTo Shopping, which began
operations in January 2000. On April 30, 2001, Overture closed the GoTo
Shopping operations and recorded a charge for restructuring and exit costs. The
net charges were approximately $1.0 million, which included approximately
$201,000 of cash termination benefits associated with the involuntary
termination of 21 GoTo Shopping employees. The terminations of these positions,
primarily in sales and service, and product development functions, were
completed by June 30, 2001. The charge, also included approximately $59,000 for
non-cash termination benefits, related to the acceleration of options;
approximately $256,000 for fixed asset write-downs; approximately $485,000 for
the remaining lease payments on a facility lease which Overture has not been
able to sub-lease; and other exit costs of approximately $1,000. These costs
were included in the Loss on Closure of GoTo Shopping in the statement of
operations. Cash payments were funded from operations and did not have a
significant impact on Overtures liquidity.

Overture operated an auction service, GoTo Auctions, which began
operations in May 2000. On June 29, 2001, Overture completed a management
buyout of GoTo Auctions, whereby the operating management of GoTo Auctions
purchased GoTo Auctions assets from Overture. The newly formed company is
called ChannelAdvisor Corporation. Overture received a minority stake in this
new corporation and as of December 31, 2001, Overture retained approximately 8%
of ChannelAdvisor. ChannelAdvisors goal is to provide online and offline
businesses with the ability to leverage online auctions as a channel of
distribution. In connection with the management buyout, Overture incurred net
charges for the disposition of certain assets and exit costs. The net charges
were approximately $2.0 million, which included in the exit costs was
approximately $280,000 of cash termination benefits associated with the
involuntary termination of 31 GoTo Auction employees. The terminations of these
positions, primarily in sales and service, and product development functions,
were completed by June 30, 2001. The charge also included approximately $1.6
million for fixed asset write-downs and approximately $102,000 for other exit
costs. These costs were included in Loss on Disposition of GoTo Auctions in the
statement of operations. Cash payments were funded from operations and did not
have a significantly impact on Overtures liquidity.

9. SUBSEQUENT EVENT (UNAUDITED)

In March 2002,
Overture entered into an arrangement with Parfinco EWA, LLC and Bill
Gross idealab! whereby Bill Gross idealab! assigned their
lease with Parfinco to Overture for the 58,000 square feet of office
space and Overture entered into an arrangement with Parfinco for an
additional 29,000 square feet of office space. Overture is obligated
to make lease payments on this additional office space of
approximately $1.9 million commencing in March 2002 and expires at
the same time as our existing 58,000 square feet of office space, in
October 2004. Overture has an option to extend both leases for 5 more
years beyond October 2004.

F-20



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##### Table of Contents



(A)(2) FINANCIAL STATEMENT SCHEDULES

All financial statement schedules required by Item 14(A)(2) have been
omitted because they are inapplicable or because the required information has
been included in Item 6 and Notes to the financial statements.

(B) REPORTS ON FORM 8-K

(C) EXHIBITS

The following exhibits are filed herewith or are incorporated by reference
to exhibits previously filed with the Commission. The Company shall furnish
copies of exhibits for a reasonable fee (covering the expense of furnishing
copies) upon request

|        |  |                                                                                                                                                    
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT |  |                                                                                                                                                    
|NUMBER  |  |                                                                                                                                                    
|        |  |                                                                                                                                                    
|3.1**   |  | Amended and Restated Certificate of Incorporation of GoTo to be in effect after the closing of the
offering made under this Registration Statement.
|3.2**   |  | Amended and Restated Bylaws of GoTo to be in effect after the closing of the offering made under
this Registration Statement.                      
|4.1**   |  | Specimen Common Stock Certificate.                                                                                                                 
|10.1**  |  | Form of Indemnification Agreement between GoTo and certain of its officers and each of its directors.                                              
|10.2**  |  | Form of Change of Control Severance Agreement between GoTo and certain of its officers.                                                            
|10.3**  |  | 1998 Stock Plan and forms of option agreements there under.                                                                                        
|10.4**  |  | 1999 Employee Stock Purchase Plan and form of agreement there under.                                                                               
|10.5**  |  | Series A Preferred Stockholders Rights Agreement among GoTo and certain investors.                                                                
|10.6**  |  | Amended and Restated Series B Preferred Stockholders Rights Agreement among GoTo and certain
investors.                                           
|10.7**  |  | Series C Preferred Stockholders Rights Agreement among GoTo and certain investors.                                                                
|10.8**  |  | Series D Preferred Stockholders Rights Agreement among GoTo and certain investors.                                                                
|10.9**  |  | Sublease Agreement dated February 1, 1999 between GoTo and Bill Gross idealab!                                                                    
|10.13** |  | GlobalCenter Master Service Agreement between GoTo, and GlobalCenter, Inc.                                                                         
|10.21*  |  | Sublease Agreement dated December 14, 1999 between GoTo and Bill Gross idealab!                                                                   
|10.22*  |  | idealab! Stockholder Agreement dated March 3, 2000 between GoTo and Bill Gross idealab!                                                           
|10.23   |  | Form of Change of Control Severance Agreement between Overture and
Jaynie Studenmund, effective January 16, 2001.                                  
|23.1    |  | Consent from Ernst & Young LLP.                                                                                                                    
|24.1**  |  | Power of Attorney.                                                                                                                                 



---

|*  |  | Previously filed as an Exhibit to the Form 10-K filed on March 16, 2000
and incorporated by reference herein.                                              
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|  
|  
|  
|** |  | Previously filed as an Exhibit to the Registrants Registration
Statement in Form S-1 (Commission File No. 333-76415) and incorporated by
reference herein.





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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, on March 7, 2002.

| |                                                  |                   
| | ------------------------------------------------ | ------------------
| | Overture Services, Inc.                         
|
| | By:                                              | /s/     TED MEISEL
| |                                                 
| | Ted Meisel
President and Chief Executive Officer

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints, jointly and severally, Ted Meisel and
Todd Tappin, each of them acting individually, as his or her attorney-in-fact,
each with full power of substitution, for him or her any and all capacities, to
sign any and all amendments to this Form 10-K, with all exhibits and any and
all documents required to be filed with respect thereto, with the Securities
and Exchange Commission or any regulatory authority, granting unto such
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
order to effectuate the same as fully to all intents and purposes as he or she
might or could do if personally present, hereby ratifying and confirming all
that such attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.

|                                                   |  |                                                                                        |  |              
|-------------------------------------------------- |  | -------------------------------------------------------------------------------------- |  | -------------
|SIGNATURE                                          |  | TITLE                                                                                  |  | DATE         
|                                                   |  |                                                                                        |  |              
|                                                  
|/s/     TED MEISEL(Ted Meisel)                     |  | President, Chief Executive Officer and Director
(Principal Executive Officer)          |  | March 7, 2002
|                                                  
|/s/     TODD TAPPIN(Todd Tappin)                   |  | Chief Financial Officer (Principal
Financial Officer and Principal Accounting Officer) |  | March 7, 2002
|                                                  
|/s/     ROBERT M. KAVNER(Robert M. Kavner)         |  | Chairman of the Board                                                                  |  | March 7, 2002
|                                                  
|/s/     JEFFREY S. BREWER(Jeffrey S. Brewer)       |  | Director                                                                               |  | March 7, 2002
|                                                  
|/s/     WILLIAM GROSS(William Gross)               |  | Director                                                                               |  | March 7, 2002
|                                                  
|/s/     LINDA FAYNE LEVINSON(Linda Fayne Levinson) |  | Director                                                                               |  | March 7, 2002
|                                                  
|/s/     WILLIAM ELKUS(William Elkus)               |  | Director                                                                               |  | March 7, 2002
|                                                  
|/s/     STEVE ALESIO(Steve Alesio)                 |  | Director                                                                               |  | March 7, 2002