<PAGE>

-------------------------------------------------------------------------------
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                    U.S. SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                               ----------------

                                   FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934

  For the Quarterly Period Ended June 30, 2001

                                      OR

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

  For the transition period from _______ to _______

                       Commission File Number: 000-26357

                               ----------------

                                LOOKSMART, LTD.
            (Exact Name of Registrant as Specified in its Charter)

<TABLE>
<S>                                            <C>
                  Delaware                                       13-3904355
       (State or other jurisdiction of                        (I.R.S. Employer
       incorporation or organization)                       Identification No.)
</TABLE>

                               625 Second Street
                        San Francisco, California 94107
             (Address of Principal Executive Offices and Zip Code)
                                (415) 348-7000
             (Registrant's Telephone Number, Including Area Code)

                               ----------------

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

   As of July 31, 2001, there were 92,672,669 shares of the registrant's
common stock outstanding.

-------------------------------------------------------------------------------
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<PAGE>

                                   FORM 10-Q

                                     INDEX

<TABLE>
<CAPTION>
                                                                             Page
                                                                             ----
 <C>     <S>                                                                 <C>
 PART I  FINANCIAL INFORMATION

 ITEM 1: Condensed Consolidated Financial Statements (unaudited)

         Condensed Consolidated Balance Sheets as of December 31, 2000 and
         June 30, 2001....................................................     3

         Condensed Consolidated Statements of Operations and Comprehensive
          Loss for the three and six months ended June 30, 2000 and 2001..     4

         Condensed Consolidated Statements of Cash Flows for the six
          months ended June 30, 2000 and 2001.............................     5

         Notes to Condensed Consolidated Financial Statements.............     6

         Management's Discussion and Analysis of Financial Condition and
 ITEM 2: Results of Operations............................................    10

 ITEM 3: Quantitative and Qualitative Disclosures About Market Risk.......    28

 PART II OTHER INFORMATION

 ITEM 1: Legal Proceedings................................................    29

 ITEM 2: Changes in Securities and Use of Proceeds........................    29

 ITEM 3: Defaults Upon Senior Securities..................................    29

 ITEM 4: Submission of Matters to a Vote of Security Holders..............    29

 ITEM 5: Other Information................................................    29

 ITEM 6: Exhibits and Reports on Form 8-K.................................    30

 ITEM 7: Signatures.......................................................    32
</TABLE>

                                       2
<PAGE>

                        PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                        LOOKSMART, LTD. AND SUBSIDIARIES

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                  (Unaudited)
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                          December 31, June 30,
                                                              2000       2001
                                                          ------------ --------
<S>                                                       <C>          <C>
                         ASSETS
                         ------
Current assets:
  Cash and cash equivalents..............................   $ 52,617   $ 43,345
  Restricted cash........................................     43,297     40,796
  Short-term investments.................................      2,979          0
  Trade accounts receivable, net.........................     18,307      8,831
  Accounts receivable from related parties...............      3,585      1,351
  Prepaid expenses.......................................      7,718      2,663
  Other current assets...................................      1,963        708
                                                            --------   --------
    Total current assets.................................    130,466     97,694
Property and equipment, net..............................     13,259     11,235
Goodwill and intangible assets, net......................     31,895     19,828
Security deposits........................................      2,902      2,901
Long term tnvestments....................................      1,759      1,941
Other assets.............................................      2,115        327
                                                            --------   --------
    Total assets.........................................   $182,396   $133,926
                                                            ========   ========

           LIABILITIES & STOCKHOLDERS' EQUITY
           ----------------------------------

Current liabilities:
  Trade accounts payable.................................   $  7,414   $  1,320
  Other accrued liabilities..............................     21,800     11,978
  Deferred revenue.......................................     13,622     11,743
                                                            --------   --------
    Total current liabilities............................     42,836     25,041
Credit facility from joint venture partner...............     50,154     50,420
Other liabilities........................................     10,184     15,076
                                                            --------   --------
    Total liabilities....................................    103,174     90,537

Stockholders' equity:
  Capital stock..........................................         92         92
  Warrants...............................................        913        913
  Additional paid-in capital.............................    234,539    234,808
  Deferred stock compensation and other..................     (5,797)    (3,599)
  Accumulated deficit....................................   (150,525)  (188,825)
                                                            --------   --------
    Total stockholders' equity...........................     79,222     43,389
                                                            --------   --------
    Total liabilities and stockholders' equity...........   $182,396   $133,926
                                                            ========   ========
</TABLE>

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

                                       3
<PAGE>

                        LOOKSMART, LTD. AND SUBSIDIARIES

     CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                    (In Thousands, except per share amounts)

<TABLE>
<CAPTION>
                                   Three Months Ended      Six Months Ended
                                        June 30,               June 30,
                                 ----------------------  ----------------------
                                    2000        2001        2000        2001
                                 ----------- ----------  ----------  ----------
                                 (unaudited) (unaudited) (unaudited) (unaudited)
<S>                              <C>         <C>         <C>         <C>
Revenues:
  Listings.....................   $  1,612    $ 8,089     $  2,243    $ 14,510
  Advertising syndication......     17,582      7,358       29,954      16,228
  Licensing....................      4,396      2,924        9,763       8,049
  Ecommerce/distribution.......      3,711        525        6,840       8,497
                                  --------    -------     --------    --------
   Total revenues..............     27,301     18,896       48,800      47,284
Cost of revenues:
  Listings.....................          0      1,971            0       3,217
  Advertising syndication......      1,134      1,443        2,087       2,761
  Ecommerce/distribution.......      2,277        329        4,164       5,337
                                  --------    -------     --------    --------
   Total cost of revenues......      3,411      3,743        6,251      11,315
                                  ========    =======     ========    ========
Gross profit...................     23,890     15,153       42,549      35,969
                                  ========    =======     ========    ========
Operating expenses:
  Sales and marketing (includes
   deferred stock compensation
   of $285 and $444 in the
   three months ended June 30,
   2000 and 2001, respectively,
   and $771 and $1,024 in the
   six months ended June 30,
   2000 and 2001,
   respectively)...............     19,880      9,586       37,083      26,920
  Product development (includes
   deferred stock compensation
   of $77 and $282 in the three
   months ended June 30, 2000
   and 2001, respectively, and
   $376 and $586 in the six
   months ended June 30, 2000
   and 2001, respectively).....      9,522      6,887       18,431      15,785
  General and administrative
   (includes deferred stock
   compensation of $27 and $21
   in the three months ended
   June 30, 2000 and 2001,
   respectively, and $495 and
   $252 in the six months ended
   June 30, 2000 and 2001,
   respectively)...............      3,293      3,073        6,628       6,421
  Amortization of goodwill and
   intangibles.................      1,831      1,979        3,776       4,420
  Other non-recurring charges..          0      2,357            0      11,791
                                  --------    -------     --------    --------
   Total operating expenses....     34,526     23,882       65,918      65,337
                                  --------    -------     --------    --------
   Loss from operations........    (10,636)    (8,729)     (23,369)    (29,368)
Non-operating income
 (expenses):
Interest and other non-
 operating income(expense),
 net...........................       (417)    (2,353)         (36)     (3,325)
Share of joint venture loss....     (1,973)    (2,648)      (3,547)     (5,568)
                                  --------    -------     --------    --------
   Loss before income taxes....    (13,026)   (13,730)     (26,952)    (38,261)
Income tax.....................        (47)       (44)         (93)        (76)
Minority interest..............        206         29          395          35
                                  --------    -------     --------    --------
   Net loss....................    (12,867)   (13,745)     (26,650)    (38,302)
Other comprehensive income
  Change in foreign currency
   translation adjustment
   during the period...........        (48)       (63)        (100)       (218)
  Change in unrealized
   gains/(losses) during the
   period......................       (341)       203            8         333
                                  --------    -------     --------    --------
   Comprehensive loss..........   $(13,256)   (13,605)    $(26,742)   $(38,187)
                                  ========    =======     ========    ========
Basic and diluted net loss per
 share.........................   $  (0.14)   $ (0.15)    $  (0.30)   $  (0.42)
                                  ========    =======     ========    ========
Weighted average shares
 outstanding used in per share
 calculation...................     89,292     91,511       87,982      91,362
                                  ========    =======     ========    ========
</TABLE>

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

                                       4
<PAGE>

                        LOOKSMART, LTD. AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                            Six Months Ended
                                                                June 30,
                                                            ------------------
                                                              2000      2001
                                                            --------  --------
                                                               (unaudited)
<S>                                                         <C>       <C>
Cash flows from operating activities:
  Net loss................................................. $(26,650) $(38,302)
  Adjustments to reconcile net loss to cash used in
   operating activities:
    Share of joint venture loss............................    3,547     5,568
    Depreciation and amortization..........................    5,907     7,965
    Impairment of goodwill.................................        0     8,371
    Non-cash charges.......................................      157       205
    Amortization of deferred stock compensation............    1,642     1,862
    Loss on foreign currency transactions..................        0        14
    Net gains from the sales of assets.....................        0      (112)
    Changes in operating assets and liabilities:
      Trade accounts receivable............................   (5,160)    9,476
      Prepaid Expenses.....................................   (2,997)    5,055
      Inventory............................................      (34)    1,418
      Other assets.........................................   (1,358)    2,264
      Trade accounts payable...............................    1,925    (6,094)
      Other accrued liabilities and payables...............    7,605    (4,054)
      Deferred revenues....................................   (3,151)   (1,879)
      Minority interest....................................     (393)      (35)
                                                            --------  --------
        Net cash used in operating activities..............  (18,960)   (8,278)
                                                            --------  --------

Cash flows from investing activities:
  Acquisitions.............................................     (125)        0
  Purchase of investments..................................   (1,978)     (321)
  Proceeds from sale of investments........................   26,105     4,036
  Proceeds from the sale of property & equipment...........        0       142
  Funding to joint venture.................................   (5,000)   (3,375)
  Purchase of property and equipment.......................   (4,268)   (1,113)
                                                            --------  --------
    Net cash provided by (used in) investing activities....   14,734      (631)
                                                            --------  --------

Cash flows from financing activities:
  Proceeds from note.......................................      472         0
  Repayment on notes.......................................      (20)      (16)
  Repayments on equipment lease............................     (362)     (563)
  Proceeds from issuance of common stock...................    3,234       327
                                                            --------  --------
    Net cash provided by (used in) financing activities....    3,324      (252)
Effect of exchange rate changes on cash....................     (100)     (111)
                                                            --------  --------
Decrease in cash and cash equivalents......................   (1,002)   (9,272)
Cash and cash equivalents, beginning of period.............   75,971    52,617
                                                            --------  --------

Cash and cash equivalents, end of period................... $ 74,969  $ 43,345
                                                            ========  ========
</TABLE>

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

                                       5
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (unaudited)

1. Summary of Significant Accounting Policies

 Nature of Business and Principles of Consolidation

   LookSmart creates leads for online and offline businesses by offering its
distribution partners and consumers comprehensive Internet search
infrastructure services. LookSmart distributes its proprietary directories to
a large number of Internet users through strategic partners, including
portals, Internet service providers and media companies.

   The consolidated financial statements include the accounts of the Company
and its subsidiaries: LookSmart International Pty Ltd, Futurecorp
International Pty Ltd, BeSeen.com, Inc., LookSmart Netherlands B.V., LookSmart
Holdings (Delaware), Ltd., LookSmart (Barbados), Inc., and LookSmart Germany
GmbH. All significant intercompany balances and transactions have been
eliminated in consolidation. Investments in 20% to 50% owned partnerships and
affiliates are accounted for by the equity method and investments in less than
20% owned affiliates are accounted for by the cost method.

 Revenue Recognition

   The Company generates revenues from listings, advertising and syndication,
licensing and ecommerce activities. Listings revenues are derived from Express
Submit fees and from LookListings. Express Submit fees result from the
expedited review of customers' web sites. The Company recognizes as revenue a
one time review fee upon completion of the review. LookListings involve
placement of multiple URLs within the Company's featured listings, directory
listings, or index listings. Typically LookListings contracts are paid on a
cost-per-click (CPC) basis. The Company recognizes the CPC element as earned.
In some cases, there is also an upfront and maintenance fee, which is
recognized ratably over the longer of the term of the contract or the expected
relationship with the customer, generally 12 to 18 months.

   Advertising and syndication revenues are derived from the sale of
advertisements on the websites of the Company and its distribution affiliates
in conjunction with returning search content. Advertising and syndication
revenues are recognized ratably as impressions are delivered over the period
in which the advertisement is displayed, provided that no significant Company
obligations remain at the end of a period and collection of the resulting
receivable is reasonably assured. Company obligations typically include
guarantees of a minimum number of "impressions," or times that an
advertisement appears in pages viewed by users of the Company's or its
partners' online properties. To the extent minimum guaranteed impressions are
not met, the Company defers recognition of the corresponding revenues until
the remaining guaranteed impression levels are achieved.

   Revenues also include barter transactions which are the exchange of
advertising space on the Company's websites for advertising space on other
websites. In accordance with EITF No. 99-17, "Accounting for Advertising
Barter Transactions", these transactions are recorded at the fair value of
similar advertisement for which cash was received. For the three months ended
June 30, 2000 and 2001, the Company recognized $1,179,839, and $26,236,
respectively, in revenue and expenses for barter transactions. For the six
months ended June 30, 2000 and 2001 the Company recognized $1,385,898 and
$376,325, respectively, in revenue and expenses for barter transactions.

   Revenues associated with licensing contracts are recognized as delivery
occurs as specified under the contracts, all performance obligations have been
satisfied, and no refund obligations exist. Payments from customers received
in advance of delivery are recorded as deferred revenues.

   The Company's ecommerce revenues are generated by the sale of merchandise.
In accordance with EITF Issue No. 99-19, "Reporting Gross Revenue vs. Net",
revenue from the sale of merchandise is reported on a gross basis if the
Company acts as the principal or on a net basis for transactions in which the
Company acts as an agent.

                                       6
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                  (unaudited)


 Recently Issued Accounting Pronouncements

   In July 2001, the FASB issued two Statements; Statement No. 141, "Business
Combinations" (SFAS No. 141), and Statement No. 142, "Goodwill and Other
Intangible Assets" (SFAS No. 142). SFAS No 141 revises the accounting
treatment for business combinations, requiring the use of purchase accounting
and prohibiting the use of the pooling-of-interests method for all business
combinations initiated after June 30, 2001, and broadens the criteria for
recording intangible assets separate from goodwill for all business
combinations completed after June 30, 2001. SFAS No. 142 revises the
accounting for goodwill and other intangible assets by not allowing the
amortization of goodwill and establishing accounting for the impairment of
goodwill and other intangible assets. SFAS No. 142 will be effective for
fiscal years beginning after December 15, 2001. The Company will adopt the
pronouncement as of January 1, 2002 and perform the first of the required
impairment tests of goodwill. The Company has not yet determined the effect of
the pronouncements on its financial statements.

 Reclassifications

   Certain reclassifications have been made to prior periods' consolidated
financial statements to conform to the current presentation.

2. Unaudited Interim Financial Information

   The accompanying unaudited condensed consolidated financial statements
reflect all adjustments which are normal and recurring in nature, and, in the
opinion of management, are necessary for a fair statement of the results of
operations for the periods shown. The results of operations for such periods
are not necessarily indicative of the results expected for any full fiscal
year or for any future period.

   Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission's rules and regulations. These unaudited interim condensed
consolidated financial statements should be read in conjunction with
LookSmart's audited financial statements and notes for the year ended December
31, 2000, as included in LookSmart's Annual Report to Shareholders on Form 10-
K, as filed with the Securities and Exchange Commission.

3. Other Nonrecurring Charges

   Other non-recurring charges include a $6,014,000 write-off of goodwill and
capitalized software related to the Inside The Web and LookSmart Live!
services, which LookSmart is no longer offering, in the quarter ended March
31, 2001, $2,357,000 impairment of goodwill related to Guthy-Renker in the
quarter ended June 30, 2001, and a $1,264,000 write-off of prepaid advertising
expenses for the termination of long-term advertising contracts in the quarter
ended March 31, 2001.

   Other non-recurring charges in the first quarter of 2001 also included
$2,156,000 in severance costs related to a workforce reduction which occurred
in January 2001.

                                       7
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                  (unaudited)


4. Net Loss Per Share:

   In accordance with the requirements of SFAS No. 128, a reconciliation of
the numerator and denominator of basic and diluted loss per share is provided
as follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                          Three Months      Six Months Ended
                                         Ended June 30,         June 30,
                                        ------------------  ------------------
                                          2000      2001      2000      2001
                                        --------  --------  --------  --------
                                           (unaudited)         (unaudited)
<S>                                     <C>       <C>       <C>       <C>
Numerator--Basic and diluted:
  Net loss............................. $(12,867) $(13,745) $(26,650) $(38,302)
                                        --------  --------  --------  --------
Denominator--Basic and diluted:
  Weighted average common shares
   outstanding.........................   89,292    91,511    87,982    91,362
                                        --------  --------  --------  --------
  Basic and diluted loss per share..... $  (0.14) $  (0.15) $  (0.30) $  (0.42)
                                        ========  ========  ========  ========
</TABLE>

   Diluted net loss per share for the three and six months ended June 30, 2000
and 2001 does not include the effect of 11,842,000 and 13,856,000 stock
options, respectively, or 2,062,000 and 2,008,000 common stock warrants,
respectively, which were outstanding at the end of the period, as the effect
of their inclusion is antidilutive during each period.

5. Related Party Transactions

   The Company has a distribution and sponsorship agreement with Guthy-Renker
Corporation (GRC), one of the Company's stockholders. At June 30, 2001, the
Company had a receivable of $262,725 from GRC arising from transactions under
the distribution agreement. During the three months ended and six months ended
June 30, 2001, the Company paid GRC $10,324 and $68,400, respectively, for
marketing and administrative support. During the three months ended June 30,
2000 and 2001, the Company earned $3,669,000 and $780,901 in revenue from
Guthy-Renker, respectively. During the six months ended June 30, 2000, and
2001, the Company earned $6,420,000 and $4,758,444 in revenue from Guthy-
Renker, respectively.

   The Company receives advertising revenue from QSound Labs, Inc. The Company
had an equity investment in QSound from May 2000 to May 2001. Total revenue
received from QSound for the three months ended June 30, 2000 and June 30,
2001 was $125,000 and $265,066, respectively. Total revenue received from
Qsound for the six months ended June 30, 2000 and June 30, 2001 was $125,000
and $395,066, respectively.

   The Company has a joint venture with British Telecommunications called BT
LookSmart. At June 30, 2001 the Company had an account receivable from the
joint venture in the amount of $1,087,656 related to joint venture charge back
expenses. In addition, the Company received revenues from BT LookSmart for the
licensing of LookSmart database content. Total revenue received from BT
LookSmart for the three months ended June 30, 2000 and 2001 was $250,000 and
$0, respectively. Total revenue received from BT LookSmart for the six months
ended June 30, 2000 and 2001 was $375,000 and $42,000, respectively.

   The Company pays Macquarie Bank, Limited, one of its stockholders, for
financial consulting services. During the three months ended June 30, 2000 and
2001, the Company incurred $268,018 and $46,487, respectively, in consulting
expenses for services provided by Macquarie Bank. During the six months ended
June 30, 2000 and 2001, the Company incurred $268,018 and $213,487,
respectively, in consulting expenses for services provided by Macquarie Bank.

                                       8
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                                  (unaudited)


6. Segment Information

   The Company operates in four segments: advertising and syndication,
listings, licensing and ecommerce. In the Condensed Consolidated Statements of
Operations and Comprehensive Loss, the Company reports revenue and cost of
revenues for these four segments based on the services currently provided by
each. With the exception of accounts receivable and deferred revenue,
information available to the chief operating decision makers of the Company
does not include allocations of assets and liabilities or operating costs to
the Company's segments. As of December 31, 2000 and June 30, 2001, accounts
receivable by segments are as follows (in thousands):

<TABLE>
<CAPTION>
                                                          December 31, June 30,
                                                              2000       2001
                                                          ------------ --------
                                                               (unaudited)
   <S>                                                    <C>          <C>
   Listings..............................................   $ 2,806    $ 4,245
   Advertising and syndication...........................    19,260      7,490
   Licensing.............................................       424      1,064
   Ecommerce.............................................       989         75
                                                            -------    -------
   Total.................................................    23,479     12,874
   Allowance for doubtful accounts.......................    (4,195)    (3,780)
                                                            -------    -------
   Accounts receivable, net..............................   $19,284    $ 9,094
                                                            =======    =======
</TABLE>

   The segmented accounts receivable balances above include receivables from
Guthy Renker, a related party, in the amount of $977,000 and $262,725 at
December 31, 2000 and June 30, 2001, respectively.

   As of December 31, 2000 and June 30, 2001 deferred revenue by segment was
as follows (in thousands):

<TABLE>
<CAPTION>
                                                           December 31, June 30,
                                                               2000       2001
                                                           ------------ --------
                                                                (unaudited)
   <S>                                                     <C>          <C>
   Listings...............................................   $   309    $   343
   Advertising and syndication............................       253        910
   Licensing..............................................    13,060     10,476
   Ecommerce..............................................         0         14
                                                             -------    -------
   Total..................................................   $13,622    $11,743
                                                             =======    =======
</TABLE>

7. Stock Option Plan

   During the six months ended June 30, 2001, the Company granted 11,988,658
stock options at the then current fair market value of its underlying common
stock. During such period employees exercised an aggregate of 977,169 options,
and 10,686,376 options were cancelled. Total outstanding stock options were
13,856,067 as of June 30, 2001.

                                       9
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

   The following discussion should be read in conjunction with the condensed
consolidated financial statements included in this Form 10-Q and the notes to
those statements. The following discussion contains forward-looking statements
that reflect our plans, estimates and beliefs, including without limitation
forward-looking statements regarding anticipated revenue growth, trends in
costs of revenues and operating expenses, international expansion and
introduction of additional services. Our actual results could differ
materially from those discussed in the forward-looking statements. Factors
that could cause or contribute to such differences include, but are not
limited to, those discussed below and elsewhere in this Quarterly Report on
Form 10-Q, particularly in the section below entitled "Factors Affecting
Operating Results".

 Overview

   LookSmart is a global leader in Web directories, helping online and offline
businesses find qualified leads on the Internet through search. LookSmart has
built 32 Web directories spanning 27 countries and 13 languages. These
directories include more than 2.5 million URLs aggregated by human editors and
classified appropriately within the directories. LookSmart directories are
distributed through portals, search engines, Internet service providers, media
companies, and wireless providers. By providing its directories through a
worldwide network of partners, LookSmart is focused on enabling businesses to
access qualified customers at the very moment they are searching for products,
services and information.

 Revenues and Cost of Revenues

   Listings. The Company's Listings revenues are derived from Express Submit
and LookListings fees. Express Submit fees result from the expedited review of
customers' web sites. The Company recognizes as revenue a one-time review fee
upon completion of the review. LookListings involve placement of multiple URLs
within the Company's Featured Listings, Directory Listings, or Index Listings.
Typically LookListings are paid on a cost-per-click (CPC) basis. The Company
recognizes the CPC element as earned. In some cases there is also an upfront
and maintenance fee, which is recognized ratably over the term of the
contract, generally 12 to 18 months. Listings revenues also include partner
commissions derived from the Company's Affiliates program. Revenues associated
with Listings contracts are recognized once collectibility is established, as
delivery of services occurs (as specified under the contracts), once all
performance obligations have been satisfied and when no refund obligations
exist. Any upfront fees collected are recognized over the expected life of the
relationship with the customer. We expect Listings revenues to continue to
grow as a proportion of our overall revenues.

   The Company's costs of Listings revenue are the distribution fees paid to
partners based on LookListings "cost-per-click" revenues because there is no
LookSmart branding or other direct sales and marketing efforts associated with
the generation of these revenues. In contrast, payments made to distribution
partners for our Express Submit are reflected as a sales and marketing
expense.

   Advertising and Syndication. The Company's advertising and syndication
revenues are derived from providing advertisers with one to three month
agreements to serve a minimum number of banner, text link or other advertising
impressions over the term of the agreement. We offer advertisers the ability
to specify the category of traffic for their advertisements, and we are able
to charge premiums on some categories based on advertisers' perceptions of
economic value. This value is derived from the location of the advertisement
on the page, the targeting by category or keyword, and the size of the
audience requesting the page.

   We generate revenues from syndication agreements with our distribution
partners through serving advertisements to the traffic referred from those
partners. We collect the gross revenues from advertisers and then forward a
portion of revenues to the syndication partner. We work with our ISP partners
to "co-brand" or create partner-specific home pages which have the "look and
feel" a partner desires and which provide the ISP subscriber with fully-
functional access to the LookSmart database. In these cases, LookSmart derives
the advertising and syndication revenues from the traffic generated by the ISP
partner and compensates the partner, typically on a per impression or per
referral basis, for this traffic. This cost is reflected as a sales and
marketing expense.

                                      10
<PAGE>

   Revenues associated with advertising contracts are recognized once
collectibility is established, as delivery occurs (as specified under the
contracts), once all performance obligations have been satisfied and when no
refund obligations exist. Barter does not represent a significant component of
revenues. To the extent that barter revenues are included, LookSmart adheres
to Emerging Issues Task Force EITF No. 99-17 "Accounting of Advertising Barter
Transactions".

   The principal components of cost of advertising and syndication revenues
are personnel costs of our in-house advertising operations employees,
equipment depreciation, other expenses relating to hosting advertising
operations and agency commissions paid to outside advertising sales
organizations.

   We expect that Listings and advertising revenues will continue to account
for a significant portion of our revenues. Our ability to maintain or increase
current levels of Listings and advertising revenues will depend on our ability
to attract new customers, re-sign or replace existing customers as their
contracts expire, effectively manage our advertising inventory by combining
our premium category-based products with other products and services, and grow
our inventory by increasing traffic to Internet properties using our search
solutions.

   Because Listings and advertising revenues represent a significant portion
of our business, fluctuations in revenues due to pricing pressures, our
ability to collect from our customers, the timing or cancellation of
contracts, inventory management, seasonality, site down time or other factors
may have a significant effect on our Listings and/or advertising revenues.
However, our costs of advertising revenues are fixed, at least in the short-
term, and cannot be expected to track fluctuations in advertising revenues. To
the extent that costs do not track changes in advertising revenues,
fluctuations from this revenue source will have a disproportionate impact on
net income or loss. For Listings revenues, however, costs are variable and any
fluctuations in revenues will have corresponding fluctuations in costs.

   Licensing. We license our database content to some of our partners,
including Microsoft, BT LookSmart, LookSmart's joint venture with British
Telecom, Inktomi, and Excite@Home. Revenues associated with licensing
contracts are recognized as delivery occurs, as specified under the contracts,
once all performance obligations have been satisfied and no refund obligations
exist. We expect revenues from licensing to fluctuate from period to period
because these revenues are dependent upon the particular terms of our
licensing arrangements and the expiration, renewal and addition of agreements
with current and future partners. We do not anticipate recurring cost of
licensing revenues in connection with our licensing activities; the cost of
developing URL databases is included in product development.

   Ecommerce. The Company's ecommerce revenues are generated primarily by the
sale of merchandise through online stores such as BuyItOnTheWeb (a wholly-
owned business unit of LookSmart). Revenues from the sale of merchandise are
reported on a gross basis (net of provisions for returns and refunds and
charges for shipping and handling) if the Company acts as the principal in the
transactions as defined under the guidelines of Securities and Exchange
Commission Staff Accounting Bulletin SAB 101 "Revenue Recognition in Financial
Statements". Revenue is recognized at the time goods are shipped. Associated
direct product costs are reported as cost of revenues.

   Effective April 1, 2001, LookSmart renegotiated its contract with Guthy-
Renker Corporation, which supplies a majority of the products offered for sale
through LookSmart's ecommerce channels. This relationship has evolved into an
advertising and Listings partnership (resulting in increased revenues in those
segments) and less on the sale of merchandise, and LookSmart no longer assumes
inventory risk on Guthy-Renker products. As a result, effective April 1, 2001,
Ecommerce revenues and Ecommerce cost of revenues declined significantly as
LookSmart now records only the commissions from initial sales to new
customers.

 Operating Expenses

   We do not track operating expenses by reportable segment, but treat these
as shared overhead of our four reportable segments.

                                      11
<PAGE>

   Sales and Marketing. Sales and marketing expenses include payments to
syndication partners who are portals, ISP partners and other traffic providers
for directing online users to the LookSmart directories and referring Express
Submit customers. Traffic payments can exhibit significant fluctuations from
period to period depending on the contracts in effect, volume of traffic going
to the partner sites and the contracted rates. Further, traffic payments as a
percentage of revenues can vary significantly depending on the structure of
the payment arrangements between LookSmart and its affiliates. When a traffic
arrangement is structured so that we collect the gross advertising revenues
and forward a portion to our affiliate, we record as revenues the entire
amount of the gross advertising revenues, and the portion forwarded to the
partner is recorded as sales and marketing expense. We expect payments to our
affiliate and distribution partners to increase as we expand our business.

   Sales and marketing expenses also include the costs of advertising, trade
shows and public relations activities. Due to the one-time nature of these
expenditures, sales and marketing expenses will be subject to significant
fluctuations from period to period.

   Sales and marketing costs also include salaries and associated costs of
employment overhead and facilities, any provisions taken for uncollected trade
receivables, as well as amortization of unearned compensation. Sales and
marketing costs are expensed as incurred.

   Product Development. Product development costs, including research and
development costs, have been expensed as incurred except to the extent that
costs for internal use software are required to be capitalized and amortized
under American Institute of Certified Public Accountants Statement of Position
98-1 (SOP 98-1). Product development expenses include the editorial
development costs of building our content database and engineering costs of
maintaining and improving the development environment, including our
proprietary Editorial Support System software. These costs include salaries
and associated costs of employment, overhead, facilities and amortization of
unearned compensation. Software licensing and computer equipment depreciation
related to supporting product development functions are also included in
product development expenses. These costs are relatively fixed in the short-
term.

   General and Administrative. General and administrative expenses include
overhead costs such as executive management, human resources, finance, legal
and facilities personnel. These costs include salaries and associated costs of
employment, overhead, facilities and amortization of unearned compensation.
General and administrative expenses include related consulting and
professional service fees that will vary significantly over time.

   Other Nonrecurring Charges. In January 2001, LookSmart announced a
restructuring of its management and operations. The costs associated with
these activities resulted in a nonrecurring charge related to LookSmart's exit
from non-core businesses, such as Inside The Web and LookSmart Live!, the
amendment of certain PBS-related underwriting agreements, and a reduction of
staff by 172 employees. In April 2001, Looksmart recognized an impairment
charge related to goodwill from the 1999 Guthy-Renker Internet asset purchase.

   Amortization of Goodwill and Intangibles. We are amortizing goodwill and
intangibles as a result of the purchase of intellectual property at our
inception in 1996, the BeSeen.com acquisition in October 1998, the Guthy-
Renker Internet asset purchase in April 1999 (through March 31, 2001), the ITW
NewCorp asset purchase in June 1999 (through December 31, 2000), the
Futurecorp investment made in December 1999 and in July 2000, and the Zeal
Media, Inc. acquisition in October 2000.


                                      12
<PAGE>

   Income Taxes. Although we are not yet profitable on a consolidated basis,
tax charges are incurred in connection with our operations in foreign
jurisdictions. We expect that foreign taxes will become more significant with
continued overseas business growth and expansion.

Results of Operations

 Revenues

   Listings. Listings revenue was $8.1 million in the quarter ended June 30,
2001 and $14.5 million in the first half of 2001. This represented an increase
of 402% and 547%, respectively, compared with the corresponding periods in
2000. The increase is a result of the growth in our distribution network,
additional products like Featured Listings, and our sales and marketing
efforts promoting our Express and LookListings products.

   Advertising and syndication. Advertising and syndication revenues were $7.4
million in the quarter ended June 30, 2001 and $16.2 million in the first half
of 2001. This represented a decrease of 58% and 46%, respectively, compared
with the corresponding periods in 2000. The decrease in advertising and
syndication revenues is attributable to the downturn in the online advertising
market resulting in reduced demand and prices for these products.

   Licensing. Licensing revenue was $2.9 million in the quarter ended June 30,
2001 and $8.0 million in the first half of 2001. This represented a decrease
of 33% and 18%, respectively, compared with the corresponding periods in 2000.
The decrease in licensing revenue is attributable to a decline in the number
of paid URL reviews that LookSmart produced and the timing of delivery of such
URLs. During 2000, Looksmart delivered incremental URL reviews under the terms
of its Microsoft agreement for international directories.

   Ecommerce. Ecommerce revenues were $525,000 in the quarter ended June 30,
2001 and $8.5 million in the first half of 2001. This represented a decrease
of 86% and an increase of 24%, respectively, compared with the corresponding
periods in 2000. The quarter over quarter decrease is predominantly a result
of changes in the contract with Guthy-Renker, a related party, effective April
2001. Under the terms of the new contract, LookSmart no longer assumes
inventory risk for these products. LookSmart now only collects and records a
commission on initial sales of Guthy-Renker products sold to new customers
through LookSmart's BuyItOnTheWeb site. This was a significant factor in the
decrease in revenues in the second quarter of 2001 compared to the second
quarter of 2000; however, the six month over six month increase in revenues
was attributable to overall increased revenue prior to the effective date of
the contract renegotiation. This increase in volume was due to intensified
branding and website exposure from a variety of new media sources, including
listings in the LookSmart directory.

 Cost of Revenues

   Listings. Listings cost of revenues was $2.0 million in the quarter ended
June 30, 2001 and $3.2 million in the first half of 2001. There was no
Listings cost of revenues in the corresponding periods of 2000, as we did not
incur distribution costs while the Listings products were being developed.

   Advertising and syndication. Advertising and syndication cost of revenues
was $1.4 million in the quarter ended June 30, 2001 and $2.8 million in the
first half of 2001. This represented an increase of 27% and 32%, respectively,
compared with the corresponding periods in 2000. The increase in advertising
and syndication cost of revenues is primarily attributable to the increase in
the costs of our in-house advertising operations employees and related
expenses.

   Ecommerce. Ecommerce cost of revenues was $329,000 in the quarter ended
June 30, 2001 and $5.3 million in the first half of 2001. This represented a
decrease of 86% and an increase of 28%, respectively, compared with the
corresponding periods in 2000. The quarter over quarter decrease is
predominantly a result of

                                      13
<PAGE>

the change in the contract with Guthy-Renker, a related party, effective April
2001. Under the terms of the new contract, LookSmart no longer assumes
inventory risk for these products. LookSmart now only collects and records a
commission on initial sales of Guthy-Renker products sold to new customers
through LookSmart's BuyItOnTheWeb site. For Guthy-Renker products, therefore,
LookSmart no longer records a cost of sales. The renegotiation of this
contract was also a significant factor in the decrease in cost of revenues in
the second quarter of 2001 compared to the second quarter of 2000; however;
the six month over six month increase in cost of revenues was attributable to
the growth in revenues in the ecommerce segment and the associated merchandise
costs paid to Guthy-Renker and other suppliers for merchandise sold online
during the first quarter of 2001.

Operating Expenses

   Sales and Marketing. Including charges for amortization of unearned
compensation, sales and marketing expenses decreased 52% to $9.6 million in
the quarter ended June 30, 2001 from $19.9 million in the quarter ended June
30, 2000. In the first half of 2001, sales and marketing expenses decreased
27% to $26.9 million from $37.1 million in the same period of 2000. As a
percentage of revenues, sales and marketing expenses decreased to 51% in the
quarter ended June 30, 2001 from 73% in the quarter ended June 30, 2000.
During the first half of 2001, sales and marketing expense as a percentage of
revenues decreased to 57% from 76% in the same period of 2000. The decline in
period over period expense as well expense as a percentage of revenues was
driven primarily by an overall decrease in distribution costs as well as
reduced marketing spending.

   Product Development. Including charges for amortization of unearned
compensation, product development expenses decreased 28% to $6.9 million in
the quarter ended June 30, 2001 from $9.5 million in the quarter ended June
30, 2000. In the first half of 2001, product development expenses decreased
14% to $15.8 million from $18.4 million in the same period of 2000. As a
percentage of revenues, product development expenses increased to 36% in the
quarter ended June 30, 2001 from 35% in the quarter ended June 30, 2000.
During the first half of 2001, product development expense as a percentage of
revenues decreased to 33% from 38% in the same period of 2000. The period over
period decrease in expense was driven by the overall decrease in employee
related expenses in the Product Development and Engineering areas resulting
from the January 2001 company-wide restructuring.

   General and Administrative. Including charges for amortization of unearned
compensation, general and administrative expenses decreased 7% to $3.1 million
in the quarter ended June 30, 2001 from $3.3 million in the quarter ended June
30, 2000. In the first half of 2001, general and administrative expenses
decreased 4% to $6.4 million from $6.6 million in the same period of 2000. As
a percentage of revenues, general and administrative expenses increased to 16%
in the quarter ended June 30, 2001 from 12% in the quarter ended June 30,
2000. During the first half of 2001, general and administrative expenses as a
percentage of revenues remained flat at 14% compared to the same period of
2000.

   Other Nonrecurring Charges. In January 2001, LookSmart announced a
restructuring of its management and operations. The costs associated with
these activities resulted in a one-time charge of $9.4 million in the quarter
ended March 31, 2001. This included charges related to the exit from non-core
businesses, such as Inside The Web and LookSmart Live! ($6.0 million in
goodwill and capitalized development costs), the termination of certain PBS-
related marketing contracts ($1.3 million in prepaid advertising), and a
reduction of staff by 172 employees ($2.2 million in severance and related
employee payments). In April 2001, LookSmart recognized an impairment charge
of $2.4 million related to goodwill from the 1999 Guthy-Renker Internet asset
purchase. During the first six months of 2001, as a percentage of revenues,
other nonrecurring charges were 25%.

   Amortization of Goodwill and Intangibles. We are amortizing goodwill and
intangibles as a result of the purchase of intellectual property at our
inception in 1996, the BeSeen.com acquisition in October 1998, the Guthy-
Renker Internet asset purchase in April 1999 (through March 31, 2001), the
Futurecorp investments in December 1999 and in July 2000, and the Zeal Media,
Inc. acquisition made in October 2000. Amortization of these assets increased
8% to $2.0 million in the quarter ended June 30, 2001 from $1.8 million in the
quarter ended June 30, 2000 and by 17% to $4.4 million in the first half of
2001 from $3.8 million in the first six months

                                      14
<PAGE>

of 2000. The period over period increases were due to the additional
investment in Futurecorp and the acquisition of Zeal Media, Inc.

   Other Non-Operating Income (Expense). Other non-operating income (expense)
primarily includes realized gains (losses) on investments and foreign exchange
gains (losses) arising from the change in the value of foreign currencies,
primarily the Australian dollar, relative to the United States dollar. Other
non-operating expense was $268,000 in the quarter ended June 30, 2001 compared
to $64,000 in the same period of 2000. Other non-operating income was $233,000
in the first half of 2001 compared to $64,000 of non-operating expense in the
same period of 2000.

   Interest Income (Expense), Net. Net interest income (expense) includes
interest expense on our debt and capital lease obligations, net of interest
income from our cash and cash equivalents and investments. We recorded net
interest expense of $2.1 million in the quarter ended June 30, 2001 compared
to $353,000 in the quarter ended June 30, 2000 and $3.6 million during the
first half of 2001 compared to net interest income of $29,000 during the same
period of 2000. The change from net interest income to net interest expense
between the two periods is primarily the result of interest expense related to
the Company's $50.0 million convertible credit facility with British
Telecommunications established in February 2000.

   Share of Joint Venture Income (Expense). Share of Joint Venture Income
(Expense) includes LookSmart's 50% share of the income (expenses) of BT
LookSmart. LookSmart recorded $2.6 million of expense in the quarter ended
June 30, 2001 compared to $2.0 million recorded during the quarter ended June
30, 2000 and expense of $5.6 million during the first half of 2001 compared to
$3.5 million in the same period of 2000. This increase is related to an
increase in the number of BT Looksmart branches between 2000 and 2001.

Income Taxes

   We recorded income tax expense of $44,000 in the quarter ended June 30,
2001 compared to $47,000 in the quarter ended June 30, 2000. For the first
half of 2001, we recorded income tax expense of $76,000 compared to $93,000 in
the same period of 2000. Income tax expense is primarily associated with our
Australian operations.

Joint Venture

   In February 2000, LookSmart entered into a joint venture agreement with
British Telecommunications (BT). LookSmart and BT have an equal equity
interest in the joint venture, BT LookSmart, which provides localized
directory services in Europe and Asia. We account for our investment in the
joint venture using the equity method of accounting. Our share of the joint
venture's net income or loss is reported as non-operating income or expense.

   The agreement establishing the joint venture requires that LookSmart and BT
provide funding equally for the operations of the joint venture. Under the
terms of the agreement, BT extended a $50.0 million credit facility with
interest at 20% per annum. LookSmart drew down $50.0 million from the credit
facility in February 2000. BT may at its discretion convert the loan and
related interest to LookSmart common stock at $35.00 per share, or upon an
event of default may take possession of that portion of LookSmart's shares in
BT LookSmart that LookSmart pledged as collateral for the credit facility.

Liquidity and Capital Resources

   LookSmart invests cash pending use predominantly in investment grade debt
instruments with maturities of less than one year, with the intent to make
such funds available for operating purposes. As of June 30, 2001, LookSmart
had $43.3 million of unrestricted cash and cash equivalents and $40.8 million
of restricted cash and short-term investments. Restricted cash is only
available for investment in BT LookSmart.


                                      15
<PAGE>

   LookSmart has incurred losses and consumed cash each year since inception.
Operating activities used $8.3 million of cash in the six months ended June
30, 2001 compared to $19.0 million in the same period in 2000. Net cash used
in operations for the six months ended June 30, 2001 resulted primarily from
the net losses for the period offset by a decrease of $9.5 million in accounts
receivable, a write off of $8.4 million of goodwill, a $5.6 million joint
venture net loss, $8.0 million of amortization and depreciation, a $10.1
million decrease in payables and other liabilities, a $2.3 million decrease in
other assets, and a decrease of $5.1 million in prepaid expenses.

   Net cash used in investing activities was $631,000 in the six months ended
June 30, 2001. In the first six months of 2000, investing activities provided
$14.7 million. Investment activity in each of the periods consisted of
purchases and sales of investments and fixed assets. In the six months ended
June 30, 2001, we sold $4.0 million worth of investments compared with $26.1
million during the same period of 2000. In the six months ended June 30, 2001,
we provided $3.4 million of funding to BT LookSmart, sold $142,000 worth of
property and equipment and purchased $1.1 million worth of equipment and
$321,000 of long-term investments.

   Net cash used in financing activities was $252,000 in the six months ended
June 30, 2001. In the first six months of 2000, financing activities had
provided $3.3 million, primarily due to $3.2 million in proceeds from the
issuance of common stock. The consumption of financing cash in the six months
ended June 30, 2001, was the result of an equipment lease repayment of
$563,000, offset by $327,000 of proceeds from the issuance of common stock.

   Our capital requirements depend on numerous business factors, including our
staffing and product development needs, the funding needs of our strategic
alliances and distribution agreements and the pace at which we pursue overseas
expansion of our business. We have experienced a substantial increase in
expenditures since inception driven by growth in the size and nature of our
operations. We will continue to evaluate acquisitions and strategic
investments in complementary businesses both in the United States and
internationally. These acquisitions may require the use of cash and, to the
extent that acquired interests have not reached cash flow breakeven, we may
need to fund the operations and expansion of these acquired interests in
addition to funding the growth of our current business.

   Management believes that our current cash balance is sufficient to meet our
operating requirements and funding commitments to BT LookSmart until at least
June 30, 2002. We may need to seek additional financing to fund further
expansion. We cannot guarantee that such financing will be available on
reasonable terms. If we raise funds through the issuance of equity or
convertible debt securities, our existing stockholders will experience
dilution of their holdings.

Recently Issued Accounting Pronouncements

   In July 2001, the FASB issued two Statements; Statement No. 141, "Business
Combinations" (SFAS No. 141), and Statement No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142). SFAS No 141 revises the accounting treatment
for business combinations, requiring the use of the use of purchase accounting
and prohibiting the use of the pooling-of-interests method for all business
combinations initiated after June 30, 2001 and broadens the criteria for
recording intangible assets separate from goodwill for all business
combinations completed after June 30, 2001. SFAS No. 142 revises the
accounting for goodwill and other intangible assets by not allowing
amortization of goodwill and establishing accounting for impairment of
goodwill and other intangible assets. SFAS No. 142 will be effective for
fiscal years beginning after December 15, 2001. The Company will adopt the
pronouncement as of January 1, 2002 and perform the first of the required
impairment tests of goodwill. The Company has not yet determined the effect of
the pronouncements on the financial statements.

                                      16
<PAGE>

                      Factors Affecting Operating Results

We have a history of net losses and expect to continue to incur net losses

   We have incurred net losses since our inception, including net losses of
approximately $64.7 million in 1999 and $62.6 million in 2000. As of June 30,
2001, we had an accumulated deficit of approximately $188.8 million. We may
continue to have net losses and negative cash flow in the foreseeable future.
The size of these net losses will depend, in part, on our ability to grow our
revenues, capitalize on new sources of revenue and contain our expenses. We
expect to spend significant amounts to:

  .  maintain and expand our network of distribution partners;

  .  develop our international business, particularly through our BT
     LookSmart joint venture with British Telecommunications;

  .  continue to develop and expand directories of Internet listings, both in
     the U.S. and abroad;

  .  develop new products and enhance the functionality of our search and
     directory listings services; and

  .  acquire complementary technologies and businesses.

   Because our operating expenses are likely to continue to exceed our
revenues in the near term, we will need to generate significant additional
revenues to achieve operating profitability. Even if we do achieve operating
profitability, we may not be able to maintain or increase our operating
profitability on a quarterly or annual basis.

Our quarterly revenues and operating results may fluctuate, each of which may
negatively affect our stock price

   Our quarterly revenues may fluctuate significantly as a result of a variety
of factors that could affect our operating results in any particular quarter.
These factors include:

  .  the level of user traffic on our and our distribution partners' websites
     and our ability to derive revenue from that traffic in any given
     quarter;

  .  the demand for our Internet search services and, in particular, the
     number of queries to our databases;

  .  the demand for, and prevailing prices of, Internet advertising and
     marketing services;

  .  the timing of revenue recognition under our listings, licensing and
     advertising contracts;

  .  the timing of our entry into and magnitude of new contracts for
     advertising, licensing and syndication;

  .  seasonality of our advertising revenues, as Internet usage is typically
     lower in the first and third quarters of the year;

  .  technical difficulties and systems downtime or failures, whether caused
     by us, third party service providers or hackers;

  .  changes in our or our partners' pricing policies or termination of
     contracts; and

  .  the timing of our delivery of URLs under our contract with Microsoft. We
     recognize quarterly revenues under this contract based on the number of
     URLs added to our database during the quarter relative to the total
     number of URLs we are required to add to our database during the
     relevant six-month period. As a result, to the extent that we satisfy
     our database update obligations unevenly, the revenues we recognize
     under this contract may be skewed on a quarter-to-quarter basis.

   Our expense levels are based in part on expectations of future revenues
and, to a large extent, are fixed. We may be unable to adjust spending quickly
enough to compensate for any unexpected revenue shortfall. Our operating
results may vary as a result of changes in our expenses and costs. Due to the
above factors, we believe that period-to-period comparisons of our operating
results are not necessarily meaningful, and you should not rely on them as
indicators of our future performance. If our operating results in any future
period fall below the expectations of securities analysts and investors, the
market price of our securities would likely decline.

                                      17
<PAGE>

We may need additional capital in the future to support our growth and
additional financing may not be available to us

   Although we believe that our working capital will provide adequate
liquidity to fund our operations and meet our other cash requirements until at
least June 30, 2002, unanticipated developments in the short term, such as the
entry into agreements which require large cash payments, further deterioration
of the online advertising market or the acquisition of businesses with
negative cash flows, may necessitate additional financing. In any case, we may
seek to raise additional funds through public or private debt or equity
financings in order to:

  .  fund our operations and capital expenditures;

  .  take advantage of favorable business opportunities, including geographic
     expansion or acquisitions of complementary businesses or technologies;

  .  develop and upgrade our technology infrastructure;

  .  reduce outstanding debt;

  .  develop new product and service offerings;

  .  take advantage of favorable conditions in capital markets; or

  .  respond to competitive pressures.

   The capital markets, and in particular the public equity market for
Internet companies, have traditionally been volatile. It is difficult to
predict when, if at all, it will be possible for Internet companies to raise
capital through these markets. We cannot assure you that the additional
financing will be available on terms favorable to us, or at all.

Our business prospects depend on the success of our new businesses,
particularly our LookListings business

   To increase our revenues, we will need to expand into new service and
business areas. In this regard, we have expanded our business to include
LookListings, a suite of products including directory listings, index listings
and keyword listings. Our success will depend upon the extent to which
businesses choose to use our LookListings products. These products are in
early stages and we cannot predict whether they will meet projected levels of
revenues in future quarters. Also, these products will require both
modification of existing software and systems and the creation or acquisition
of new software and systems. We may lack the managerial, editorial and
technical resources necessary to expand our service offerings. For these and
other reasons, these initiatives may not generate sufficient revenues to
offset their costs. If we are unable to generate significant additional
revenues from our new business areas, they may harm our results of operations
and financial condition.

Our business prospects depend on the continued growth of internet advertising
and our ability to generate advertising revenues

   For the quarter ended June 30, 2001, advertising and syndication revenues
accounted for 38.9% of our total revenues, as compared to 64.4% of our total
revenues in the quarter ended June 30, 2000. We expect that revenues from
advertising and syndication will continue to represent a significant portion
of our total revenues for the foreseeable future. Our advertising and
syndication revenues have decreased significantly since the quarter ended
September 30, 2000, and such revenue decreased $1.5 million sequentially from
the first quarter of 2001. Advertising and syndication revenues may continue
to decrease due to weakness in the online advertising market, reductions in
online advertising expenditures by Internet companies and downward pressure on
advertising rates industry-wide.

   We compete with traditional media such as television, radio and print, as
well as online advertisers and high-traffic websites, for a share of
advertisers' total advertising expenditures. We have experienced, and may
continue to experience, downward pressure on advertising prices in the
industry due to the increasing amount of

                                      18
<PAGE>

advertising inventory becoming available on the Internet. As the Internet
evolves, advertisers may find Internet advertising to be a less effective
means of promoting their products or services relative to traditional
advertising media and may reduce or eliminate their expenditures on Internet
advertising. Many potential advertisers and advertising agencies have only
limited experience advertising on the Internet and have not devoted a
significant portion of their advertising expenditures to Internet advertising.
Acceptance of the Internet among advertisers will depend, to a large extent,
on the perceived effectiveness of Internet advertising and the continued
growth of commercial usage of the Internet.

   Currently, there are a variety of pricing models for selling advertising on
the Internet, including models based on the number of impressions delivered,
the number of click-throughs by users, the number of conversions to sale by
users, or the number of keywords to which the advertisement is linked. It is
difficult to predict which pricing model, if any, will emerge as the industry
standard. This uncertainty makes it difficult to project our future
advertising rates and revenues that we may generate from advertising. In some
cases, we share advertising revenue with our network partners based on the
number of users directed to advertisements or third party web sites. A
decrease in advertising sold or advertising rates or an increase in revenue
sharing obligations could adversely affect our operating results. In addition,
our ability to earn advertising revenues depends on the number of advertising
impressions per search and the number of click-throughs.

   In addition, our advertising revenues will depend on our ability to
achieve, measure and demonstrate to advertisers the breadth of the traffic
base using our search service and the value of our targeted advertising.
Filter software programs that limit or prevent advertising from being
displayed on a user's computer are available. It is unclear whether this type
of software will become widely accepted, but if it does, it would negatively
affect Internet-based advertising.

We derive a significant amount of our revenues from Microsoft, and if
Microsoft terminates its contract with us, our business could be harmed

   We derive a significant amount of our revenues under an agreement with
Microsoft Corporation, and either party may terminate the agreement for any
reason on six months' notice. For the quarter ended June 30, 2001, revenues
from Microsoft under this agreement accounted for $2.6 million or 13.8% of our
total revenues. The cash payments we receive for each six-month period under
this agreement are subject to full or partial refund if we fail to provide the
stated number of URLs during that period. After the agreement is terminated,
Microsoft has the right to continue to use the content we delivered during the
term of the agreement. Microsoft also has the right to sublicense these rights
to others, both during and for up to two years after the term of the
agreement.

Our revenues and income potential are unproven and our business model is
continuing to evolve

   We were formed in July 1996 and launched our Internet directory in October
1996. Because of our limited operating history, it is extremely difficult to
evaluate our business and prospects. You should evaluate our business in light
of the risks, uncertainties, expenses, delays and difficulties associated with
managing and growing a relatively new business, many of which are beyond our
control. In addition, we compete in the relatively new and rapidly evolving
Internet search infrastructure market, which presents many uncertainties that
could require us to further refine or change our business model. Our success
will depend on many factors, including our ability to:

  .  profitably establish and expand our new product offerings, particularly
     LookListings;

  .  expand and maintain our network of distribution relationships, thereby
     increasing the amount of traffic using our web directories; and

  .  attract and retain a large number of advertisers from a variety of
     industries.

   Our failure to succeed in one or more of these areas may harm our business,
results of operations and financial condition.


                                      19
<PAGE>

BT LookSmart will require a substantial investment of resources and may not
ever become profitable

   Our success will depend in part upon the success of BT LookSmart, our joint
venture with British Telecommunications. We face many risks associated with BT
LookSmart, such as:

  .  we will recognize 50% of the net loss from the joint venture as non-
     operating expense on our statement of operations. For the quarter ended
     June 30, 2001, our share of the joint venture's net loss was
     $2.6 million. We expect the venture to incur significant losses and
     require capital expenditures for the foreseeable future. We cannot
     project when BT LookSmart will generate cash for us or become
     profitable, if at all;

  .  we were initially obligated under the joint venture documents to make
     funding contributions of up to $108 million over the first three years
     of BT LookSmart's operation. While the budget for the joint venture will
     be determined by the joint venture's board of directors, we expect that
     our financial contributions in 2001 will not exceed our financial
     contributions in 2000 of $12.7 million. However, there can be no
     assurance in this regard. If we are unable to meet our financing
     obligations, our equity ownership of the joint venture will be
     proportionately reduced;

  .  the joint venture will face competition in international markets from a
     range of competitors, including AOL Time Warner, Deutsche Telecom,
     France Telecom, GoTo, Terra Lycos, Scandinavian Online, Sonera Plaza,
     Tele Denmark, UK Plus, Yahoo!, and other search infrastructure, media,
     telecommunications and portal companies, many of which have greater
     capital resources and local experience in these markets;

  .  the joint venture may fail to offer locally-relevant web directories,
     which would prevent it from aggregating a large number of database
     queries;

  .  the joint venture faces risks associated with conducting operations in
     many different countries, including risks of currency fluctuations,
     government and legal restrictions, privacy and tax laws, cultural or
     technical incompatibilities and economic or political instability;

  .  the joint venture may be unable to generate advertising and other
     revenue streams from its traffic;

  .  the joint venture may fail to establish an effective management team and
     hire experienced and qualified personnel in each of the countries in
     which it competes; and

  .  we may be unable to maintain an effective working relationship with our
     partner in the joint venture due to differences in business goals,
     assessment of, and appetite for risk or other factors.

Many of our advertisers are emerging Internet companies that represent credit
risks

   We expect to continue to derive a significant portion of our revenues from
the sale of advertising and listings to Internet companies. Many of these
companies originally comprising our target customer group have gone out of
business. Many of those remaining have limited operating histories and are
operating at a loss. Moreover, many of these companies have limited cash
reserves and limited access to additional capital. We have in some cases
experienced difficulties collecting outstanding accounts receivable and, as a
result, our reserve for doubtful accounts receivable as of June 30, 2001 was
$3.8 million, compared to $5.2 million as of December 31, 2000. We may
continue to have these difficulties in the future. If any significant part of
our customer base experiences commercial difficulties or is unable or
unwilling to pay our advertising or listing fees for any reason, our business
will suffer.

                                      20
<PAGE>

If we are unsuccessful in expanding the network of affiliates using our
directory and search services, we may be unable to increase future revenues

   Our success depends on our ability to distribute our directories through a
network of portals, ISPs, and media companies. We have invested, and will
continue to invest, a significant amount of our human and capital resources to
expand this network. However, we cannot assure you that we will maintain and
expand the network of websites using our directories on financially favorable
terms, if at all. If we are unsuccessful in doing so, the reach of our
directories, and consequently our ability to generate revenues, could be
seriously harmed. In that event, our business prospects and results of
operations may deteriorate.

A failure to manage and integrate businesses we acquire could divert
management's attention and harm our operations. Acquisitions will likely also
dilute our existing stockholders

   If we are presented with appropriate opportunities, we intend to make
additional acquisitions of, or significant investments in, complementary
companies or technologies to increase our technological capabilities and
expand our service offerings. Acquisitions may divert the attention of
management from the day-to-day operations of LookSmart. In addition,
integration of acquired companies into LookSmart could be expensive, time
consuming and strain our managerial resources. It may be difficult to retain
key management and technical personnel of the acquired company during the
transition period following an acquisition. We may not be successful in
integrating any acquired businesses or technologies and these transactions may
not achieve anticipated business benefits.

   Acquisitions or other strategic transactions may also result in dilution to
our existing stockholders if we issue additional equity securities and may
increase our debt. For example, as a result of our acquisition of Zeal Media,
Inc. on October 27, 2000, we issued or reserved for issuance 1,363,419 shares
of our common stock, which diluted existing stockholders. We may also be
required to amortize significant amounts of goodwill or other intangible
assets in connection with future acquisitions, which would adversely affect
our operating results.

Our stock price is extremely volatile and investors may not be able to resell
their shares for a profit

   The stock market has recently experienced significant price and volume
fluctuations, and the market prices of technology companies, particularly
Internet companies, have been extremely volatile. These broad market and
industry fluctuations may adversely affect the market price of our common
stock, regardless of our actual operating performance. You may not be able to
sell your shares for a profit as a result of a number of factors that may
cause a decline in our stock price, including:

  .  changes in the market valuations of Internet companies in general and
     comparable companies in particular;

  .  quarterly fluctuations in our operating results;

  .  our potential failure to meet analyst expectations on a quarterly basis;

  .  changes in ratings or financial estimates by securities analysts;

  .  announcements of technological innovations, partnerships, acquisitions
     or new products or services by us or our competitors; or

  .  conditions or trends in the Internet that suggest a continuing decline
     in the growth rates of advertising-based Internet companies.

   In the past, securities class action litigation has often been instituted
after periods of volatility in the market price of a company's securities. A
securities class action suit against us could result in substantial costs and
the diversion of management's attention and resources, regardless of the
outcome.

                                      21
<PAGE>

We may be unable to address capacity constraints on our software and
infrastructure systems in a timely manner

   We have developed custom, proprietary software for use by our editors to
create the LookSmart directories, and we also use proprietary and licensed
software to distribute the directories and serve advertising to associated web
pages. This software may contain undetected errors, defects or bugs or may
fail to operate with other software applications. The following developments
may strain our capacity and result in technical difficulties with our website
or the websites of our distribution affiliates partners:

  .  substantial increases in editorial activity or the number of URLs in our
     directory;

  .  customization of our directory for syndication with particular partners;

  .  substantially increased traffic using our directory; and

  .  the addition of new features or changes in our directory structure.

   If we fail to address these constraints and difficulties in a timely
manner, our advertising and other revenues may decline and our business would
likely suffer. In addition, as we expand our service offerings and enter into
new business areas, we may be required to significantly modify and expand our
software and infrastructure systems. If we fail to accomplish these tasks in a
timely manner, our business will suffer.

The operating performance of our systems is critical to our business and
reputation

   Any system failure, including network, software or hardware failure,
whether caused by us, a third party service provider, power interruptions,
unauthorized intruders and hackers, or natural disasters, that causes an
interruption in our service or a decrease in the responsiveness of the web
pages that we serve could result in reduced user traffic, a decline in
revenues and damage to our reputation. Our users, partners and customers
depend on Internet service providers, or ISPs, online service providers and
other third parties for access to the LookSmart directories. These service
providers have experienced significant outages in the past and could
experience outages, delays and other operating difficulties in the future.

   In February 1999, we entered into an agreement with GlobalCenter, Inc.,
subsequently acquired by Exodus Communications, Inc., to house our networking
and web serving hardware equipment at their facilities in Sunnyvale,
California. In December 2000, we entered into an agreement with Savvis
Communications, Inc. to house additional networking and web serving hardware.
Our networking hardware is now fully redundant at separate locations. However,
we do not presently maintain fully redundant web serving systems at both
locations, so our operations depend on each of Exodus' and Savvis's ability to
protect the systems in its data center from system failures, earthquake, fire,
power loss, water damage, telecommunications failure, hackers, vandalism and
similar events. Neither Exodus nor Savvis guarantees that our Internet access
will be uninterrupted, error-free or secure. We have deployed intrusion
detection and firewall hardware at each facility to thwart hacker attacks. We
have not developed a disaster recovery plan to respond to system failures.
Although we maintain property insurance and business interruption insurance,
we cannot guarantee that our insurance will be adequate to compensate us for
all losses that may occur as a result of any system failure.

If we are unable to compete effectively in the Internet search infrastructure
market, our business and profitability will suffer

   We compete in the Internet search infrastructure market, which is
relatively new and highly competitive. We expect competition to intensify as
this market evolves. Many of our competitors have longer operating histories,
larger user bases, longer relationships with consumers, greater brand
recognition and significantly greater financial, technical and marketing
resources than we have. As a result of their greater resources, our
competitors may be in a position to respond more quickly to new or emerging
technologies and changes in consumer requirements and to develop and promote
their products and services more effectively than we do.


                                      22
<PAGE>

   The barriers to entry into some segments of the Internet search
infrastructure market are relatively low. As a result, new market entrants
pose a threat to our business, particularly with respect to software-based
search solutions and providing Internet search services to vertical market
segments. We do not own any patented technology that precludes or inhibits
competitors from entering the Internet search infrastructure market. Existing
or future competitors may develop or offer technologies or services that are
comparable or superior to ours, which could harm our competitive position and
business.

   We currently face direct competition from companies that provide directory
content, search algorithms, content aggregation and licensing, targeted
advertising and online interactive service capabilities. As we expand the
scope of our Internet services, we will compete directly with a greater number
of Internet search infrastructure providers, content aggregators and other
media companies across a wide range of different online services, including:

  .  subject-specific websites where competitors may have advantages in
     expertise and brand recognition;

  .  portals that have a branded franchise and a high frequency of repeat
     visitors;

  .  metasearch services and software applications that allow a user to
     search the databases of several directories and catalogs simultaneously;
     and

  .  category-based and directory-based services that offer information
     search and retrieval capabilities.

   To date, the Internet search infrastructure market has been characterized
by intense competition for consumer traffic. This has resulted in the payment
of consumer referral fees by us and others to frequently-used websites, such
as portals and ISPs. If these companies fail to provide these referrals, or
the market for these referrals becomes more competitive so that the cost of
referrals increases, our business and potential profitability could be harmed.

Recent acquisitions and strategic alliances involving our competitors could
reduce traffic on our network

   A number of significant acquisitions and other alliances have been
completed or announced in the Internet search infrastructure market involving
some of our competitors, including:

  .  America OnLine's acquisition of Time Warner, Inc. and search partnership
     with GoTo.com, Inc.;

  .  Terra Networks, S.A.'s acquisition of Lycos, Inc.;

  .  InfoSpace's acquisition of Go2Net;

  .  The Walt Disney Company's (Go Network) agreement with GoTo regarding the
     use of GoTo's search results on the Go Network portal;

  .  CMGI's acquisition of a controlling interest in AltaVista; and

  .  Yahoo, Inc.'s search partnership with Google.

   Although we cannot predict the effect of these transactions and agreements
on our business with certainty, these transactions could provide our
competitors with significant opportunities to increase traffic on their
websites and expand their service offerings, which could drive down traffic
for our network. In addition, these transactions align some of our competitors
with companies, including television networks, that are significantly larger
and have substantially greater capital, brand, marketing and technical
resources than LookSmart. As a result, these competitors may be able to
respond more quickly to new technologies and changes in consumer requirements
and to develop and promote their products and services more effectively than
we can.

We may be unable to execute our business model in international markets

   A key component of our strategy is to expand our operations into selected
international markets, both through BT LookSmart in Europe and Asia and
through our direct offerings of search and navigation services in

                                      23
<PAGE>

Australia, Canada and selected countries in Latin America. To date, we have
limited experience in syndicating localized versions of our service offerings
in international markets, and we may be unable to execute our business model
in these markets. In addition, most foreign markets have lower levels of
Internet usage and online advertising than the United States. In pursuing our
international expansion strategy, we face several additional risks, including:

  .  lower per capita Internet usage and online shopping rates 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 on-line security for e-commerce
     transactions;

  .  less-developed Internet advertising markets in foreign markets, which
     may make it more difficult to generate revenue from the traffic on our
     international directories;

  .  relatively small Internet markets in some countries may prevent us from
     aggregating sufficient traffic and advertising revenues and scaling our
     business model in those countries;

  .  competition in international markets from a broad range of competitors,
     including Yahoo!, Alta Vista and other United States and foreign
     telecommunications firms, search engines, content aggregators and
     portals, many of which have greater local experience than we have;

  .  uncertainty of market acceptance in new regions due to language,
     cultural, technological or other factors;

  .  our potential inability to aggregate a large amount of Internet traffic
     and find and develop relationships with advertisers;

  .  difficulties in recruiting qualified and knowledgeable staff and in
     building locally relevant products and services;

  .  unexpected changes and differences in regulatory, tax and legal
     requirements applicable to Internet services; and

  .  foreign currency fluctuations.

Our failure to address these risks adequately could inhibit or preclude our
efforts to expand our business in international markets.

Our management and internal systems may be inadequate to handle the growth of
our business

   Our workforce has grown from 55 employees on January 1, 1998 to
approximately 420 employees worldwide on July 31, 2001. In January 2001, we
implemented a restructuring plan that resulted in staff reductions of 172
employees. In addition, many members of our management team have only recently
started in their current positions. Implementation of our growth strategy
requires that we hire additional highly qualified personnel. Our growth has
placed, and will continue to place, a significant strain on our management,
our engineering and product development staff, and our internal accounting,
operational and administrative systems. To manage future growth, we must
continue to improve these systems and expand, train, retain and manage our
employee base. If our systems, procedures and controls are inadequate to
support our operations, our expansion could be slowed. We cannot assure you
that we will be able to manage our growth effectively, and any failure to do
so could harm our business.

Our future success depends on our ability to attract and retain key personnel

   Our future success depends, in part, on the continued service of our key
management personnel, particularly Evan Thornley, our Chairman and Chief
Executive Officer, and Tracey Ellery, a member of our board of directors. Mr.
Thornley and Ms. Ellery are husband and wife. The loss of the services of
either of these individuals, or the services of other key employees, could
adversely affect our business. LookSmart does not

                                      24
<PAGE>

have an employment agreement with Mr. Thornley, and he does not have stock
options or restricted stock subject to vesting based on continued service.

   Our success also depends on our ability to identify, attract, retain and
motivate highly skilled administrative, technical, editorial, finance and
marketing personnel. Competition for such personnel, particularly in the San
Francisco Bay area, is intense, and we cannot assure you that we will be able
to retain our key employees or that we can identify, attract and retain highly
skilled personnel in the future.

If we become subject to unfair hiring claims, we could be prevented from
hiring needed personnel, incur liability for damages and incur substantial
costs in defending ourselves

   Companies in our industry whose employees accept positions with competitors
frequently claim that these competitors have engaged in unfair hiring
practices or that the employment of these persons would involve the disclosure
or use of trade secrets. These claims could prevent us from hiring personnel
or cause us to incur liability for damages. We could also incur substantial
costs in defending ourselves or our employees against these claims, regardless
of their merits. Defending ourselves from these claims could also divert the
attention of our management away from our operations.

We may face liability for intellectual property claims or information
contained in our search infrastructure services, and these claims may be
costly to resolve

   We make information available to end users on our search infrastructure
services, both on our website and our distribution affiliates' websites.
Although we do not believe that our website content and services infringe any
proprietary rights of others, we cannot assure you that others will not assert
claims against us in the future or that these claims will not be successful.
We or our distribution affiliates could be subject to claims for defamation,
invasion of privacy, negligence, copyright or trademark infringement, breach
of contract or other theories based on the nature and content of our
information and services. These types of claims have been brought, sometimes
successfully, against online service providers in the past. In addition, we
are obligated under some agreements to indemnify other parties as a result of
claims that we infringe on the proprietary rights of others. Even if such
claims do not result in liability to us or our distribution affiliates, we
could incur significant costs and diversion of management time in
investigating and defending against them. Our insurance may not cover claims
of this type, may not be adequate to cover all costs incurred in defense of
these claims, and may not indemnify us for all liability we incur.

Our business prospects depend on the continued growth in the use of the
Internet

   Our business is dependent upon continued growth in the use of the Internet
as a medium for advertising, obtaining information and commercial
transactions. Internet usage and e-commerce have not and in the future may not
grow at projected rates, for various reasons, including:

  .  user inability or frustration in locating and accessing required
     information;

  .  actual or perceived lack of security of information;

  .  limitations of the Internet infrastructure resulting in traffic
     congestion, reduced reliability or increased access costs;

  .  inconsistent quality of service;

  .  governmental regulation, such as tax or privacy laws;

  .  general economic problems in the United States or abroad which decreases
     users' disposable income;

  .  uncertainty regarding intellectual property ownership; and

  .  lack of appropriate communications equipment.


                                      25
<PAGE>

We believe that capacity constraints caused by growth in the use of the
Internet may, unless resolved, impede further growth in Internet use. Further,
the adoption of the Internet for commerce and communications, particularly by
those individuals and companies that have historically relied upon traditional
means of commerce and communication, generally requires the understanding and
acceptance of a new way of conducting business and exchanging information.
Companies that have already invested substantial resources to conduct commerce
and exchange information through other means may be particularly reluctant or
slow to adopt a new Internet-based strategy that may make their existing
personnel and infrastructure obsolete. If any of the foregoing factors affects
the continuing growth in the use of the Internet, our business could be
harmed.

Privacy-related regulation of the Internet could limit the ways we currently
collect and use personal information which could decrease our advertising
revenues or increase our costs

   Internet user privacy has become an issue both in the United States and
abroad. The Federal Trade Commission and government agencies in some states
and countries have been investigating some Internet companies, and lawsuits
have been filed against some Internet companies, regarding their use of
personal information. The European Union has adopted a directive that imposes
restrictions on the collection and use of personal data, guaranteeing citizens
of European Union member states various rights, including the right of access
to their data, the right to know where the data originated and the right to
recourse in the event of unlawful processing. Any laws imposed to protect the
privacy of Internet users may affect the way in which we collect and use
personal information. We could incur additional expenses if new regulations or
court judgments regarding the use of personal information are introduced or if
any regulator chooses to investigate our privacy practices.

   As is typical with most websites, our website places information, known as
cookies, on a user's hard drive, generally without the user's knowledge or
consent. This technology enables website operators to target specific users
with a particular advertisement and to limit the number of times a user is
shown a particular advertisement. Although some Internet browsers allow users
to modify their browser settings to remove cookies at any time or to prevent
cookies from being stored on their hard drives, many consumers are not aware
of or technically proficient enough to customize these options. In addition,
some Internet commentators, privacy advocates and governmental bodies have
suggested limiting or eliminating the use of cookies. If this technology is
reduced or limited, the Internet may become less attractive to advertisers and
sponsors, which could result in a decline in our revenues.

   We and some of our partners retain information about our users. If others
were able to penetrate our network security and gain access to, or in some
other way misappropriate, our users' information, we could be subject to
liability. These claims could result in litigation, our involvement in which,
regardless of the outcome, could require us to expend significant time and
financial resources.

New tax treatment of companies engaged in Internet commerce may adversely
affect the Internet industry and our company

   Tax authorities at the international, federal, state and local levels are
currently reviewing the appropriate tax treatment of companies engaged in
Internet commerce. New or revised state tax regulations may subject us to
additional state sales, income and other taxes. We cannot predict the effect
of current attempts to impose sales, income or other taxes on commerce over
the Internet. However, new or revised taxes and, in particular, sales taxes,
would likely increase our cost of doing business and decrease the
attractiveness of advertising and selling goods and services over the
Internet. Any of these events would likely have an adverse effect on our
business and results of operations.

Future sales of our securities may cause our stock price to decline

   The market price of our common stock could decline as a result of sales of
substantial amounts of our common stock in the public market, or the
perception that such sales could occur. As of July 31, 2001,

                                      26
<PAGE>

approximately 52.2 million shares of common stock were held by non-affiliates
and approximately 40.4 million shares were held by affiliates, all of which
are currently available for resale in the public market without registration,
subject to compliance with Rule 144 under the Securities Act. Moreover, as of
July 31, 2001, the holders of up to 42.2 million shares of common stock and
warrants to purchase up to approximately 2.1 million shares of common stock
had rights to require us to register those shares under the Securities Act.

   In addition, the Chess Depository Interests, or CDIs, which are publicly
traded on the Australian Stock Exchange under the symbol "LOK", are
exchangeable into shares of LookSmart common stock at a ratio of 20 CDIs per
share of common stock. Holders of CDIs may decide to exchange their CDIs for
shares of LookSmart common stock at any time. In that event, the exchanged
shares of common stock may be immediately available for resale at the option
of the holders in the Nasdaq National Market, which could depress the Nasdaq
market price of LookSmart common stock. As of July 31, 2001, the CDIs
registered for trading on the Australian Stock Exchange were exchangeable into
an aggregate of approximately 20.3 million shares of common stock.

   These resales of common stock in the Nasdaq National Market, or the
perception that they may occur, could cause our stock price to decline. These
events may also make it more difficult for us to raise funds through future
offerings of common stock.

LookSmart's stock may be delisted from the Nasdaq National Market

   Our common stock is currently listed on the Nasdaq National Market, which
requires us to satisfy certain continued listing requirements, including
maintaining a minimum closing bid price for our common stock of at least $1.00
per share. Under Nasdaq listing requirements, if the closing bid price of our
common stock remains below $1.00 for a period of 30 consecutive trading days,
Nasdaq may, at its discretion, begin delisting proceedings.

   From July 13, 2001, through the date of this report, our stock price has
closed below $1.00 at the end of each trading day. Although we have not yet
received notice from Nasdaq that it has initiated delisting proceedings, if
our stock price continues to close below $1.00 we may receive such notice
before the end of August 2001. We anticipate that we would appeal any
determination to delist our common stock from the Nasdaq National Market, but
there can be no assurance of success. If we lose our Nasdaq National Market
status, we anticipate that our common stock would trade in the over-the-
counter market, which is viewed by most investors as a less desirable, and
less liquid, marketplace. The loss of our Nasdaq listing would most likely
harm our business and financial condition.

Directors, officers and significant stockholders have substantial influence
over LookSmart, which could prevent or delay a change in control

   As of July 31, 2001, our executive officers, directors and significant
stockholders collectively owned approximately 43.7% of the outstanding shares
of LookSmart common stock. If these stockholders choose to act or vote
together, they will have the power to influence matters requiring stockholder
approval, including the election of our directors, amendments to our charter
and approval of significant corporate transactions, including mergers or asset
sales. This concentration of ownership may have the effect of discouraging
others from making a tender offer or bid to acquire LookSmart at a price per
share that is above the then-current market price.

The anti-takeover provisions of Delaware's general corporation law and
provisions of our charter and bylaws may discourage a takeover attempt

   Our charter and bylaws and provisions of Delaware law may deter or prevent
a takeover attempt, including an attempt that might result in a premium over
the market price for our common stock. Our board of directors has the
authority to issue shares of preferred stock and to determine the price,
rights, preferences and restrictions, including voting rights, of those shares
without any further vote or action by the stockholders. The issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate

                                      27
<PAGE>

purposes, could have the effect of making it more difficult for a third party
to acquire a majority of our outstanding voting stock. In addition, our
charter and bylaws provide for a classified board of directors. These
provisions, along with Section 203 of the Delaware General Corporation Law,
could discourage potential acquisition proposals and could delay or prevent a
change of control.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   Interest Rate Risk. The Company's exposure to market risk for interest rate
changes relates primarily to its short-term investments of restricted cash.
The Company had no derivative financial instruments as of June 30, 2001 or
2000. The Company invests in debt instruments of high-quality corporate
issuers with original maturities greater than three months and current
maturities less than twelve months. The amount of credit exposure to any one
issue and issuer is limited.

   Foreign Currency Risk. International revenues from the Company's foreign
subsidiaries were less than 10% of total revenues in the quarters ended June
30, 2001 and 2000, and were derived entirely from our Australian operations.
The Company'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,
particularly the exchange rate between the Australian dollar and the United
States dollar. The effect of foreign exchange rate fluctuations on the Company
for quarters ended June 30, 2001 and 2000 were not material.

                                      28
<PAGE>

                          PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

   We are not a party to any material legal proceedings.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

   None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

   None.

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

   On June 12, 2001, the Company held its annual stockholder meeting. At the
meeting, a quorum the stockholders of the Company considered two proposals:
(1) the election of three directors (Scott Whiteside, Anthony Castagna and
James Tananbaum) to the board of directors and (2) the ratification of the
appointment of the Company's independent accountants, PricewaterhouseCoopers
LLP, for the fiscal year ending December 31, 2001. The remaining directors,
Evan Thornley, Tracey Ellery, Mariann Byerwalter and Robert Ryan, were
incumbent directors who did not stand for election at the meeting. The
following table shows the results of the voting on these matters.

(1) Election of Directors:

<TABLE>
<CAPTION>
            Name                        For     Withheld
            ----                     ---------- --------
            <S>                      <C>        <C>
            Whiteside............... 48,352,300  24,491
            Castagna................ 48,353,117  23,674
            Tananbaum............... 48,352,609  24,183
</TABLE>

(2) Ratification of Independent Auditors:

<TABLE>
<CAPTION>
               For               Against              Abstain
               ---               -------              -------
            <S>                  <C>                  <C>
            48,347,624           24,888                4,279
</TABLE>

ITEM 5. OTHER INFORMATION

   On August 27, 2001, Dianne Dubois will become the Chief Financial Officer
for the Company. Ms. Dubois most recently served as the Vice President of
Finance, North America for E*TRADE, an online financial services company.
Prior to joining E*TRADE in 2000, Ms. Dubois was Vice President of Finance for
PIMCO Advisors L.P., an investment advisor. Previously, Ms. Dubois served as
Vice President, Financial Planning and Analysis for WellPoint Health Networks.
Prior to that time, Ms. Dubois served for five years at the Walt Disney
Company in a variety of positions. Martha Clark, LookSmart's prior interim
Chief Financial Officer, has resigned from the Company to pursue other
interests.

                                      29
<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(1) Exhibits

<TABLE>
<CAPTION>
  Exhibit
   Number                         Description of Document
  -------   -------------------------------------------------------------------
 <C>        <S>
  3.1(1)    Restated Certificate of Incorporation
  3.2(1)    Bylaws
  4.1(2)    Form of Specimen Stock Certificate
  4.2(1)    Second Amended and Restated Investor Rights Agreement dated March
             24, 1999
 10.1(1)    Form of Indemnification Agreement entered into between the
             Registrant and each of its directors and officers
 10.2(1)    Amended and Restated 1998 Stock Plan
 10.3(1)    1999 Employee Stock Purchase Plan
 10.4+(1)   License and Update Agreement with Microsoft Corporation
 10.5+(1)   Asset Purchase Agreement with Guthy-Renker Internet LLC
 10.6+(1)   Development Agreement with Cox Interactive Media, Inc.
 10.7+(1)   Premier Positions on US Search Pages with Netscape Communications
             Corporation
 10.8+(2)   1999-2000 U.S. Net Search Premier Provider Agreement with Netscape
             Communications Corporation
 10.9+(1)   PBS Group Sponsorship Agreements
 10.10(1)   Lease Agreement with 487 Bryant Street, LLC for property located at
             487 Bryant Street, San Francisco, California, dated May 4, 1998
 10.11(1)   Sublease Agreement with Jaran, Inc. for property located at 275
             Brannan Street, San Francisco, California, dated April 30, 1999
 10.12(1)   Lease Agreement with Rosenberg SOMA Investments III, LLC for
             property located at 625 Second Street, San Francisco, California,
             dated May 5, 1999
 10.13(1)   Consent to Sublease Agreement with Ninety Park Property LLC, and
             First Manhattan Consulting Group Inc. for property located at 90
             Park Avenue, New York, New York, dated October 22, 1998
 10.14(1)   Lease Agreement with Euro Asia Properties Pty Ltd for property
             located at Level 5, 388 Lonsdale Street, Melbourne, Australia,
             dated September 1, 1998
 10.15(1)   Lease Agreement with Tonicalon Pty Limited for property located at
             Level 3, 68 Alfred Street, Milsons Point, Sydney, Australia, dated
             June 1, 1999
 10.16(1)   Summary Plan Description of 401(k) Plan
 10.17+(3)  Joint Venture Agreement between the Registrant, Transceptgate Ltd.,
             BT LookSmart Ltd., LookSmart (Barbados), Inc. and British
             Telecommunications Plc dated February 15, 2000
 10.18+(3)  Joint Venture Know How Technology and Database License Agreement
             between the Registrant, BT LookSmart Ltd., and LookSmart
             (Barbados), Inc. dated February 15, 2000
 10.19(3)   Loan Letter Agreement between the Registrant and Transceptgate Ltd.
             dated February 15, 2000
 10.20++(4) Restated and Final Tagging and Marketing Agreement with Guthy-
             Renker Corporation dated August 9, 1999
 10.21(4)   Employment Agreement with Kevin Berk dated September 29, 2000
 10.22(4)   Employment Agreement with Brian Goler dated September 29, 2000
 10.23(5)   Separation Agreement and General Release between the Company and
             Brian Cowley, dated as of January 29, 2001
 10.24(5)   Separation Agreement and General Release between the Company and
             Chris Tucher, dated as of January 29, 2001
 10.25(5)   Agreement between the Company and Ned Brody, dated as of January
             25, 2001
 21.1(1)    List of Subsidiaries
</TABLE>

                                       30
<PAGE>

--------
(1) Filed in connection with the Company's Registration Statement on Form S-1
    (File No. 333-80581) filed with the SEC on June 14, 1999.
(2) Filed in connection with the Company's Amendment No. 1 to the Registration
    Statement on Form S-1 (File No. 333-80581) filed with the SEC on July 27,
    1999.

(3) Filed in connection with the Company's Annual Report on Form 10-K filed
    with the SEC on March 30, 2000.

(4) Filed in connection with the Company's Annual Report on Form 10-K filed
    with the SEC on March 16, 2001.

(5) Filed in connection with the Company's Quarterly Report on Form 10-Q filed
    with the SEC on May 15, 2001.

(+) Confidential treatment has been granted with respect to portions of the
    exhibit.

(++) Confidential treatment has been requested with respect to portions of the
     exhibit.

(2) Current Reports on Form 8-K.

   The Company filed a Current Report on Form 8-K on April 27, 2001.

                                       31
<PAGE>

                                   SIGNATURE

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

Date: August 13, 2001
                                          LOOKSMART, LTD.

                                                    /s/ Robert Mally
                                          By:
                                            -----------------------------------
                                                       Robert Mally
                                                Senior Controller and Vice
                                                    President, Finance
                                                 (Principal Accounting and
                                                    Financial Officer)

                                       32