U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549










FORM 10-Q










|x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------



For the Quarterly Period Ended June
30, 2013



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)










|Delaware                                                               |  | 13-3904355                                  
|---------------------------------------------------------------------- |  | --------------------------------------------
|(State or other jurisdiction of
        incorporation or organization) |  | (I.R.S. Employer
        Identification No.)



555 California Street, Suite 324

San Francisco, California 94105

(415) 348-7000

(Address, including zip code, and telephone
number, including area code, of Registrant’s principal executive offices)



NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(b)
of the Act:

Common Stock, par value $0.001 per share



Securities registered pursuant to Section 12(g)
of the Act:

None








Indicate by check mark whether
the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.    YesxNo ̈



Indicate by check
mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YesxNo ̈



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



|Large accelerated filer |  |  ̈ |  | Accelerated filer         |  |  ̈
|----------------------- |  | - |  | ------------------------- |  | -
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller reporting company |  | x



Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈Nox



As of August 5, 2013 there were 17,308,059 shares of the registrant’s
common stock outstanding, par value $0.001 per share.











TABLE OF CONTENTS



|PART I. FINANCIAL INFORMATION
|-----------------------------
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|ITEM 1                       
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|ITEM 2.                      
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|ITEM 3.                      
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|ITEM 4.                      
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|PART II. OTHER INFORMATION   
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|ITEM 1.                      
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|ITEM 1A.                     
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|ITEM 2.                      
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|ITEM 3.                      
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|ITEM 4.                      
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|ITEM 5.                      
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|ITEM 6.                      
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|SIGNATURE                    
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|EXHIBIT INDEX                



2







PART I



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------



LOOKSMART, LTD.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)



|                                                                                                                                                                       |  | June 30, 2013 |          |   | December 31, 2012 |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ----------------- | -
|                                                                                                                                                                       |  | (Unaudited)   |          |   |                   |  
|ASSETS                                                                                                                                                                 |  |               |          |   |                   |  
|Current assets:                                                                                                                                                        |  |               |          |   |                   |  
|Cash and cash equivalents                                                                                                                                              |  | $             | 7,903    |   |                   | $
|Short-term investments                                                                                                                                                 |  |               | 2,960    |   |                   |  
|Total cash, cash equivalents and short-term investments                                                                                                                |  |               | 10,863   |   |                   |  
|Trade accounts receivable, net                                                                                                                                         |  |               | 862      |   |                   |  
|Prepaid expenses and other current assets                                                                                                                              |  |               | 414      |   |                   |  
|Total current assets                                                                                                                                                   |  |               | 12,139   |   |                   |  
|Long-term investments                                                                                                                                                  |  |               | 1,991    |   |                   |  
|Property and equipment, net                                                                                                                                            |  |               | 258      |   |                   |  
|Other assets, net                                                                                                                                                      |  |               | 88       |   |                   |  
|Total assets                                                                                                                                                           |  | $             | 14,476   |   |                   | $
|                                                                                                                                                                       |  |               |          |   |                   |  
|LIABILITIES & STOCKHOLDERS' EQUITY                                                                                                                                     |  |               |          |   |                   |  
|Current liabilities:                                                                                                                                                   |  |               |          |   |                   |  
|Trade accounts payable                                                                                                                                                 |  | $             | 742      |   |                   | $
|Accrued liabilities                                                                                                                                                    |  |               | 285      |   |                   |  
|Deferred revenue and customer deposits                                                                                                                                 |  |               | 1,030    |   |                   |  
|Current portion of capital lease obligations                                                                                                                           |  |               | -        |   |                   |  
|Total current liabilities                                                                                                                                              |  |               | 2,057    |   |                   |  
|Long-term portion of deferred rent                                                                                                                                     |  |               | 156      |   |                   |  
|Total liabilities                                                                                                                                                      |  |               | 2,213    |   |                   |  
|Commitment and contingencies                                                                                                                                           |  |               | -        |   |                   |  
|Stockholders' equity:                                                                                                                                                  |  |               |          |   |                   |  
|Convertible preferred stock, $0.001 par value; Authorized: 5,000 shares; Issued and Outstanding: none at June 30, 2013 and December 31, 2012                           |  |               | -        |   |                   |  
|Common stock, $0.001 par value; Authorized: 80,000 shares; Issued and Outstanding:17,308 shares and 17,305 shares at June 30, 2013 and December 31, 2012, respectively |  |               | 17       |   |                   |  
|Additional paid-in capital                                                                                                                                             |  |               | 262,497  |   |                   |  
|Accumulated other comprehensive loss                                                                                                                                   |  |               | (60      | ) |                   |  
|Accumulated deficit                                                                                                                                                    |  |               | (250,130 | ) |                   |  
|Treasury stock at cost:  76 shares at June 30, 2013 and December 31, 2012                                                                                              |  |               | (61      | ) |                   |  
|Total stockholders' equity                                                                                                                                             |  |               | 12,263   |   |                   |  
|Total liabilities and stockholders' equity                                                                                                                             |  | $             | 14,476   |   |                   | $



The accompanying Notes are an integral part
of these Unaudited Consolidated Financial Statements.



3







LOOKSMART, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                                                                           |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|------------------------------------------------------------------------------------------ |  | --------------------------- | ------ | - | ------------------------- | -
|                                                                                           |  | 2013                        |        |   | 2012                      |  
|Revenue                                                                                    |  | $                           | 1,548  |   |                           | $
|Cost of revenue                                                                            |  |                             | 983    |   |                           |  
|Gross profit                                                                               |  |                             | 565    |   |                           |  
|Operating expenses:                                                                        |  |                             |        |   |                           |  
|Sales and marketing                                                                        |  |                             | 115    |   |                           |  
|Product development and technical operations                                               |  |                             | 713    |   |                           |  
|General and administrative                                                                 |  |                             | 778    |   |                           |  
|Restructuring charge                                                                       |  |                             | 7      |   |                           |  
|Total operating expenses                                                                   |  |                             | 1,613  |   |                           |  
|Loss from operations                                                                       |  |                             | (1,048 | ) |                           |  
|Non-operating income (expense), net                                                        |  |                             |        |   |                           |  
|Interest income                                                                            |  |                             | 33     |   |                           |  
|Interest expense                                                                           |  |                             | -      |   |                           |  
|Other income (expense), net                                                                |  |                             | 2      |   |                           |  
|Loss from operations before income taxes                                                   |  |                             | (1,013 | ) |                           |  
|Income tax expense                                                                         |  |                             | -      |   |                           |  
|Net loss                                                                                   |  | $                           | (1,013 | ) |                           | $
|Net loss per share - Basic and Diluted                                                     |  | $                           | (0.06  | ) |                           | $
|Weighted average shares outstanding used in computing basic and diluted net loss per share |  |                             | 17,248 |   |                           |  



The accompanying Notes are an integral part
of these Unaudited Consolidated Financial Statements.



4







LOOKSMART, LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME LOSS

(In thousands)

(Unaudited)



|                                               |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|---------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | -
|                                               |  | 2013                        |        |   | 2012                      |  
|Net loss                                       |  | $                           | (1,013 | ) |                           | $
|Other comprehensive income (loss):             |  |                             |        |   |                           |  
|Foreign currency translation adjustments       |  |                             | (3     | ) |                           |  
|Unrealized loss on investments                 |  |                             | (2     | ) |                           |  
|Change in accumulated other comprehensive loss |  |                             | (5     | ) |                           |  
|Comprehensive loss                             |  | $                           | (1,018 | ) |                           | $



The accompanying Notes are an integral part
of these Unaudited Consolidated Financial Statements.



5







LOOKSMART, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                           |  | Six Months Ended June 30, |       
|-------------------------------------------------------------------------- |  | ------------------------- | ------
|                                                                           |  | 2013                      |       
|Cash flows from operating activities:                                      |  |                           |       
|Net loss                                                                   |  | $                         | (2,470
|Adjustment to reconcile net loss to net cash used in operating activities: |  |                           |       
|Depreciation and amortization                                              |  |                           | 120   
|Provision for doubtful accounts                                            |  |                           | 201   
|Share-based compensation                                                   |  |                           | 33    
|Other non-cash charges                                                     |  |                           | 18    
|Deferred rent                                                              |  |                           | (21   
|Deferred lease incentive                                                   |  |                           | 38    
|Restructuring charge                                                       |  |                           | 32    
|Changes in operating assets and liabilities:                               |  |                           |       
|Trade accounts receivable                                                  |  |                           | 992   
|Prepaid expenses and other current assets                                  |  |                           | 34    
|Trade accounts payable                                                     |  |                           | (685  
|Accrued liabilities                                                        |  |                           | (1,025
|Deferred revenue and customer deposits                                     |  |                           | (117  
|Net cash used in operating activities                                      |  |                           | (2,850
|Cash flows from investing activities:                                      |  |                           |       
|Purchase of investments                                                    |  |                           | (5,266
|Proceeds from sale of investments                                          |  |                           | 9,800 
|Payments for property, equipment, and capitalized software                 |  |                           | -     
|Net cash provided by (used in) investing activities                        |  |                           | 4,534 
|Cash flows from financing activities:                                      |  |                           |       
|Principal payments of capital lease obligations                            |  |                           | (110  
|Proceeds from issuance of common stock                                     |  |                           | 1     
|Payments for repurchase of common stock                                    |  |                           | (13   
|Net cash used in financing activities                                      |  |                           | (122  
|Effect of exchange rate changes on cash and cash equivalents               |  |                           | (11   
|Increase (decrease) in cash and cash equivalents                           |  |                           | 1,551 
|Cash and cash equivalents, beginning of period                             |  |                           | 6,352 
|Cash and cash equivalents, end of period                                   |  | $                         | 7,903 
|Supplemental disclosure of cash flow information:                          |  |                           |       
|Interest paid                                                              |  | $                         | 9     
|Supplemental disclosure of noncash activities:                             |  |                           |       
|Change in unrealized gain (loss) on investments                            |  | $                         | (3    
|Share-based compensation capitalized as software development costs         |  | $                         | -     



The accompanying Notes are an integral part
of these Unaudited Consolidated Financial Statements.



6







LOOKSMART, LTD. AND SUBSIDIARIES



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS



1. Summary of Significant Accounting Policies



Nature of Business



LookSmart, Ltd. (“LookSmart”
or the “Company”) is a digital advertising solutions company that provides relevant solutions for search and display
advertising customers. LookSmart was organized in 1996 and is incorporated in the State of Delaware.



LookSmart operates in a large online advertising
ecosystem serving ads that target user queries on partner sites.



LookSmart offers search advertising customers
targeted search via a monitored search advertising distribution network using the Company’s “AdCenter” platform
technology. The Company’s search advertising network includes publishers and search advertising customers, including intermediaries
and direct advertising customers and their agencies, as well as self-service customers in the United States and certain other countries.



LookSmart also offers advertisers the ability
to buy graphical display advertising. LookSmart’s trading desk personnel utilize DSP technology and licensed data from third
party providers to buy targeted advertising on a real-time bidded basis. By leveraging our extensive historical search marketing
network data along with performance data from a conversion pixel, LookSmart constructs models of the highest performing audiences,
and targets them via exchange inventory. LookSmart offers its trading desk as a managed service.



Our largest category of customers is Intermediaries,
the majority of which sell into the affiliate networks of the large search engine providers. Another category of customers is Direct
Advertisers and their agencies whose objective is to obtain conversions or sales from the clicks, while others want unique page
views. The last category of customers is Self-Service advertisers that sign-up online and pay by credit card.



In addition, LookSmart offers publishers
licensed private-label search advertiser network solutions based on its AdCenter platform technology (“Publisher Solutions”).
Publisher Solutions consist of hosted auction-based ad serving with an ad backfill capability that allows publishers and portals
to manage their advertiser relationships, distribution channels and accounts.



Principles of Consolidation



The Unaudited Consolidated Financial Statements
as of June 30, 2013 and December 31, 2012, and for the three and six months ended June 30, 2013 and 2012, include the accounts
of the Company and its subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.



Unaudited Interim Financial Information



The accompanying Unaudited Consolidated
Financial Statements as of June 30, 2013, and for the three and six months ended June 30, 2013 and 2012, reflect all adjustments
that are normal and recurring in nature and, in the opinion of management, are necessary for a fair representation of the Company’s
financial position as of June 30, 2013 and the results of operations for the periods shown. These Unaudited Consolidated Financial
Statements should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto included
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 (“Annual Report”). The
Consolidated Balance Sheet as of December 31, 2012 has been derived from the audited financial statements at that date, but
does not include all of the information and footnotes required by accounting principles generally accepted in the United States
(“GAAP”) for complete financial statements. The results of operations for the interim period ended June 30, 2013 is
not necessarily indicative of results to be expected for the full year.



Use of Estimates and Assumptions



The Unaudited Consolidated Financial Statements
have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). This
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue, expenses,
and contingent assets and liabilities during the reporting period. The Company bases its estimates on various factors and information
which may include, but are not limited to, history and prior experience, experience of other enterprises in the same industry,
new related events, and current economic conditions and information from third party professionals that is believed to be reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results could differ from those estimates. In management’s opinion,
all adjustments necessary for a fair statement are reflected in the interim periods presented.



7







Investments



The Company invests its excess cash primarily
in debt instruments of high-quality corporate and government issuers. All highly liquid instruments with maturities at the date
of purchase greater than ninety days are considered investments. Such securities are classified as short-term investments. These
securities are classified as available-for-sale and carried at fair value.



Changes in the value of these investments
are primarily related to changes in interest rates and are considered to be temporary in nature. Except for declines in fair value
that are not considered temporary, net unrealized gains or losses on these investments are reported as a component of Other Comprehensive
Loss in the Unaudited Consolidated Statements of Comprehensive Loss. The Company recognizes realized gains and losses upon sale
of investments using the specific identification method.



Fair Value of Financial Instruments



The Company’s estimate of fair value
for assets and liabilities is based on a framework that establishes a hierarchy of the inputs used in valuation and gives the highest
priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available. The disclosure
of fair value estimates is based on whether the significant inputs into the valuation are observable. In determining the level
of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets
and the lowest priority to unobservable inputs that reflect our significant market assumptions. The three levels of the hierarchy
are as follows:



|Level 1: | Unadjusted quoted market prices for identical assets or liabilities in active markets that we have the ability to access.                                                                                                                                                                                                  
|-------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                                                                                                                                                                                                                            
|Level 2: | Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, default rates, etc.) or can be corroborated by observable market data.
|         |                                                                                                                                                                                                                                                                                                                            
|Level 3: | Valuations based on models where significant inputs are not observable. The unobservable inputs reflect our assumptions about the assumptions that market participants would use.                                                                                                                                          



Revenue Recognition



Our online search advertising revenue is
composed of per-click fees that we charge customers and profit sharing arrangements we enter with Intermediaries. The per-click
fee charged for keyword-targeted listings is calculated based on the results of online bidding for keywords or page content, up
to a maximum cost per keyword or page content set by the customer. The Company has profit-sharing agreements with several customers
that call for the sharing of profits and losses. Profit sharing arrangements are governed by contractual agreements. Revenue from
these profit-sharing agreements is reported net of the customer’s share of profit.



Revenue also includes revenue share from
licensing of private-labeled versions of our AdCenter Platform.



Revenues associated with online advertising
products, including Advertiser Networks, are generally recognized once collectability is established, delivery of services has
occurred, all performance obligations have been satisfied, and no refund obligations exist. We pay distribution network partners
based on clicks on the advertiser’s ad that are displayed on the websites of these distribution network partners. These payments
are called TAC and are included in cost of revenue. The revenue derived from these arrangements that involve traffic supplied by
distribution network partners is reported gross of the payment to the distribution network partners. This revenue is reported gross
due to the fact that we are the primary obligors to the advertisers who are the customers of the advertising service.



We also enter into agreements to provide
private-labeled versions of our products, including licenses to the AdCenter platform technology. These license arrangements may
include some or all of the following elements: revenue-sharing based on the publisher’s customer’s monthly revenue
generated through the AdCenter application; upfront fees; minimum monthly fees; and other license fees. We recognize upfront fees
over the term of the arrangement or the expected period of performance, other license fees over the term of the license, and revenue-sharing
portions over the period in which such revenue is earned. In all cases, revenue is recognized only when the price is fixed or determinable,
persuasive evidence of an arrangement exists, the service is performed, and collectability of the resulting receivable is reasonably
assured.



8







We provide a provision against revenue
for estimated reductions resulting from billing adjustments and customer refunds. The amounts of these provisions are evaluated
periodically based upon customer experience and historical trends. The allowance included in trade receivables, net is insignificant
at both June 30, 2013 and December 31, 2012, respectively.



Deferred revenue is recorded when payments
are received in advance of performance in underlying agreements. Customer deposits are recorded when customers make prepayments
for online advertising.



The Company evaluates individual arrangements
with customers to make a determination under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 605-45 Revenue Recognition. We test and record revenue accordingly.



Allowance for Doubtful Accounts



The Company maintains an allowance for
doubtful accounts for estimated losses resulting from customers failing to make required payments. This valuation allowance is
reviewed on a periodic basis. The review is based on factors including the application of historical collection rates to current
receivables and economic conditions. Additional allowances for doubtful accounts are considered and recorded if there is deterioration
in past due balances, if economic conditions are less favorable than the Company anticipated or for customer-specific circumstances,
such as bankruptcy. The allowance for doubtful accounts included in trade accounts receivable, net is $0.9 and $0.7 million at
June 30, 2013 and December 31, 2012, respectively. Bad debt expense included in general and administrative expense was $0.3
million and $0.2 million for three and six months ended June 30, 2013, respectively. Bad debt expense included in general and administrative
expense was not significant and $0.3 million for the three and six months ended June 30, 2012, respectively.



Concentrations, Credit Risk and Credit Risk Evaluation



Concentration of Credit Risk



Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash equivalents, investments, and accounts receivable.
As of June 30, 2013 and December 31, 2012, the Company placed its cash equivalents and investments primarily through one financial
institution, City National Bank (“CNB”), and mitigated the concentration of credit risk by placing percentage limits
on the maximum portion of the investment portfolio, which may be invested in any one investment instrument. These amounts exceed
federally insured limits at June 30, 2013 and December 31, 2012. The Company has not experienced any credit losses on these cash
equivalents and investment accounts and does not believe it is exposed to any significant credit risk on these funds. The fair
value of these accounts is subject to fluctuation based on market prices.



Credit Risk, Customer and Vendor Evaluation



Accounts receivable are typically unsecured
and are derived from sales to customers. The Company performs ongoing credit evaluations of its customers and maintains allowances
for estimated credit losses. The Company applies judgment as to its ability to collect outstanding receivables based primarily
on management’s evaluation of the customer’s financial condition and past collection history and records a specific
allowance. In addition, the Company records an allowance based on the length of time the receivables are past due. Historically,
such losses have been within management’s expectations.



The following table reflects customers
that accounted for more than 10% of net accounts receivable:



|          |  | June 30, |    |   | December 31, | 
|--------- |  | -------- | -- | - | ------------ | 
|          |  | 2013     |    |   | 2012         | 
|Company 1 |  |          | 58 | % |              | 



9







Revenue and Cost Concentrations



The following table reflects the concentration
of revenue by geographic locations that accounted for more than 10% of net revenue:



|                               |  | Three Months Ended June 30, |    |   | Six Months Ended June 30, | 
|------------------------------ |  | --------------------------- | -- | - | ------------------------- | 
|                               |  | 2013                        |    |   | 2012                      | 
|United States                  |  |                             | 88 | % |                           | 
|Europe, Middle East and Africa |  |                             | ** |   |                           | 








** Less than 10%



LookSmart derives its revenue from two
service offerings, or “products”: Advertiser Networks and Publisher Solutions. The percentage distributions between
the two service offerings are as follows:



|                    |  | Three Months Ended June 30, |    |   | Six Months Ended June 30, | 
|------------------- |  | --------------------------- | -- | - | ------------------------- | 
|                    |  | 2013                        |    |   | 2012                      | 
|Advertiser Networks |  |                             | 84 | % |                           | 
|Publisher Solutions |  |                             | 16 | % |                           | 



The following table reflects the percentage
of revenue attributed to customers who accounted for more than 10% of net revenue, all of which are Intermediaries:



|          |  | Three Months Ended June 30, |    |  | Six Months Ended June 30, | 
|--------- |  | --------------------------- | -- |  | ------------------------- | 
|          |  | 2013                        |    |  | 2012                      | 
|Company 1 |  |                             | ** |  |                           | 








** Less than 10%



The Company derives its revenue primarily
from its relationships with significant distribution network partners. The following table reflects the distribution partners that
accounted for more than 10% of total TAC:



|                       |  | Three Months Ended June 30, |    |   | Six Months Ended June 30, | 
|---------------------- |  | --------------------------- | -- | - | ------------------------- | 
|                       |  | 2013                        |    |   | 2012                      | 
|Distribution Partner 1 |  |                             | 13 | % |                           | 
|Distribution Partner 2 |  |                             | ** |   |                           | 
|Distribution Partner 3 |  |                             | ** |   |                           | 
|Distribution Partner 4 |  |                             | ** |   |                           | 
|Distribution Partner 5 |  |                             | ** |   |                           | 
|Distribution Partner 6 |  |                             | ** |   |                           | 








** Less than 10%



Property and Equipment



Property and equipment are stated at cost,
except when an impairment analysis requires the use of fair value, and depreciated using the straight-line method over the estimated
useful lives of the assets as follows:



|Computer equipment     |  |  |  | 3 to 4 years
|---------------------- |  |  |  | ------------
|Furniture and fixtures |  |  |  | 5 to 7 years
|Software               |  |  |  | 2 to 3 years



Leasehold improvements are amortized on
a straight-line basis over the shorter of their estimated useful lives or the lease term.



When assets are retired or otherwise disposed
of, the cost and accumulated depreciation and amortization are removed from their respective accounts, and any gain or loss on
such sale or disposal is reflected in operating expenses. Maintenance and repairs are charged to expense as incurred. Expenditures
that substantially increase an asset’s useful life are capitalized.



At December
31, 2012, the Company determined thatcontinuing losses associated with the use of long-lived assets and a projection of
associated future cash flows required the adjustment of long-lived assets to fair value at December 31, 2012. Accordingly, long-lived
assets including capitalized software, computer equipment, furniture and fixtures, software and leasehold improvements with a recorded
net value of $2.7 million were reduced to fair value of $0.4 million at December 31, 2012. These assets are being depreciated using
the straight-line method over their estimated remaining useful lives, which is 19 months.



10







Internal-Use Software Development Costs



The Company capitalizes external direct
costs of materials and services consumed in developing and obtaining internal-use computer software and the payroll and payroll-related
costs for employees who are directly associated with and who devote time to developing the internal-use computer software. These
costs are capitalized after certain milestones have been achieved and generally amortized over a three-year period once the project
is placed in service.



Management exercises judgment in determining
when costs related to a project may be capitalized, in assessing the ongoing value of the capitalized costs, and in determining
the amortization period for the capitalized costs, which is generally three years. The Company expects to continue to invest in
internally developed software and to capitalize such costs in the future, although no such costs were incurred or capitalized in
the three and six months ended June 30, 2013.



Restructuring Charges



In August 2012, the Company entered into
an agreement to sublease its office space in San Francisco under terms generally equivalent to its existing commitment. Restructuring
costs associated with the sub-lease of the San Francisco, totaling $0.1 million at June 30, 2013, are being amortized over the
remaining term of the underlying lease.



Impairment of Long-Lived Assets



The Company reviews long-lived assets held
or used in operations, including property and equipment and internally developed software, for impairment in accordance with ASC
360-10 “Impairment and Disposal of Long-Lived Assets”.



The Company
reviews assets for evidence of impairment annually at year-end and whenever events or changes in circumstances indicate the carrying
values may not be recoverable. The impairment review requires the Company to make significant estimates about its future performance
and cash flows, as well as other assumptions. These estimates can be affected by numerous factors, including changes in economic,
industry or market conditions, changes in business operations and changes in competition. At December 31, 2012, the Company determined
thatcontinuing losses associated with the use of long-lived assets and a projection of associated future cash flows required
the adjustment of long-lived assets to fair market value at December 31, 2012. The lower projected operating
results reflect changes in assumptions related to revenue growth rates, market trends, business mix, cost structure, and other
expectations about the anticipated short-term and long-term operating results.Accordingly, long-lived assets including
capitalized software, computer equipment, furniture and fixtures, software and leasehold improvements with a recorded net book
value of $2.7 million were reduced to fair market value of $0.4 million at December 31, 2012.



The fair value of the long-lived assets
was derived based on Level 3 inputs, which are based on significant inputs that are not observable.  The fair value of the
capitalized software long-lived assets was determined using an income approach, based on expected future cash flows and market
considerations.  The fair value of the computer equipment, furniture and fixtures, software and leasehold improvements long-lived
assets was determined using a market approach, based on comparable fair values of similar assets.



Traffic Acquisition Costs



The Company enters into agreements of varying
durations with its distribution network partners that display the Company’s listings ads on their sites in return for a percentage
of the revenue-per-click that the Company receives when the ads are clicked on those partners’ sites.



The Company also enters into agreements
of varying durations with third party affiliates. These affiliate agreements provide for variable payments based on a percentage
of the Company’s revenue or based on a certain metric, such as number of searches or paid clicks.



TAC expense is recorded in cost of revenue.



11







Share-Based Compensation



The Company recognizes share-based compensation
costs for all share-based payment transactions with employees, including grants of employee stock options, restricted stock awards,
and employee stock purchases related to the Employee Stock Purchase Plan, over the requisite service period based on their relative
fair values. We estimate the fair value of each option award on the date of grant using the Black-Scholes option valuation model.
Our assumptions about stock-price volatility are based on the actual volatility of our publically traded stock. The risk-free interest
rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of the
grant. We estimate the expected term based upon the historical exercise activity. The value of the portion of the award that is
ultimately expected to vest is recognized as expense in the Company’s Consolidated Statements of Operations over the requisite
service periods. Share-based compensation expense recognized for both the three and six months ended June 30, 2013 was not significant
and $0.1 million for both the three and six months ended June 30, 2012, which was related to stock option grants and employee stock
purchases.



Forfeitures are estimated at the time of
grant in order to estimate the amount of share-based awards that will ultimately vest. The forfeiture rate is determined at the
end of each fiscal quarter, based on historical rates.



The Company elected to adopt the alternative
transition method for calculating the tax effects of share-based compensation to establish the beginning balance of the additional
paid-in capital pool (“APIC pool”) related to the tax effects of employee share-based compensation, and to determine
the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee share-based compensation
awards.



Advertising Costs



Advertising costs are charged to sales
and marketing expenses as incurred and were insignificant in both the three and six months ended June 30, 2013 as well as both
the three and six months ended June 30, 2012.



Product Development Costs



Research of new product ideas and enhancements
to existing products are charged to expense as incurred.



Income Taxes



The Company accounts for income taxes using
the liability method. Under the liability method, deferred tax liabilities and assets are determined based on the difference between
the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences
are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected
to be realized. The Company records liabilities, where appropriate, for all uncertain income tax positions. The Company recognizes
potential accrued interest and penalties related to unrecognized tax benefits within operations as income tax expense.



Comprehensive Loss



Other comprehensive loss as of June 30,
2013 and December 31, 2012, consists of unrealized gains and losses on marketable securities categorized as available-for-sale
and foreign currency translation adjustments.



Net Loss per Common Share



Basic net loss per share is calculated
using the weighted average shares of common stock outstanding, excluding treasury stock. Diluted net loss per share is calculated
using the weighted average number of common and potentially dilutive common shares outstanding, excluding treasury stock, during
the period, using the treasury stock method for stock options. As a result of the Company’s net loss position at both June
30, 2013 and 2012, there is no dilution.



Segment Information



The Company has one operating segment,
online advertising. While the Company operates under one operating segment, management reviews revenue under two product offerings—Advertiser
Networks and Publisher Solutions.



As of June 30, 2013 and December 31, 2012,
all of the Company’s accounts receivable and deferred revenue are related to the online advertising segment. All long-lived
assets are located in the United States and Canada.



Adoption of New Accounting Standards



On January 1, 2013, we adopted guidance
issued by the Financial Accounting Standards Board (“FASB”), Accounting Standards Update (“ASU”) 2012-02,
“Intangibles – Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment”, which amends
the indefinite-lived intangible asset impairment guidance, providing an option for companies to use a qualitative approach to test
indefinite-lived intangible assets for impairment if certain conditions are met. Adoption of this new guidance had no impact on
our financial statements.



12







On January 1, 2013, we adopted guidance
issued by the FASB, ASU 2012-04, “Technical Corrections and Improvements”, which clarifies or corrects unintended
application of guidance and includes amendments identifying when the use of fair value should be linked to the definition of fair
value in Topic 820, “Fair Value Measurement”. Adoption of this new guidance did not have a material impact on
our financial statements.



On January 1, 2013, we adopted guidance
issued by the FASB, ASU 2013-02, “Comprehensive Income – Reporting of Amounts Reclassified Out of Accumulated Other
Comprehensive Income”, which requires companies to provide information about the amounts reclassified out of accumulated
other comprehensive income by component. Adoption of this new guidance did not have a material impact on our financial statements.



On January 1, 2013, we adopted guidance
issued by the FASB, ASU 2013-05, “Foreign Currency Matters – Parent’s Accounting for the Cumulative Translation
Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign
Entity”, on releasing Cumulative Translation Adjustments when a reporting entity (parent) ceases to have a controlling
financial interest in a subsidiary or group of assets. Adoption of this new guidance had no impact on our financial statements.



Recent Accounting Pronouncements



In December 2011, the FASB issued an amendment
to an existing accounting standard which indefinitely defers the requirement to present components of reclassifications of other
comprehensive income on the face of the income statement.



In February 2013, the FASB issued ASU 2013-04,
“Liabilities – Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of
the Obligation is Fixed at the Reporting Date”, an amendment providing guidance for the recognition, measurement, and
disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation
is fixed at the reporting date. The Company is required to adopt this standard as of January 1, 2014. Adoption of this new guidance
is not expected to have an impact on the Company’s consolidated financial position or results of operations.



2. Cash and Available for Sale Securities



The following table summarizes the Company’s
cash and available-for-sale securities’ amortized cost and estimated fair value by significant investment category as of
June 30, 2013, and December 31, 2012 (in thousands):



|                                                             |  | Amortized Cost and Estimated  Fair  Value |       
|------------------------------------------------------------ |  | ----------------------------------------- | ------
|                                                             |  | June 30,  2013                            |       
|Cash and cash equivalents:                                   |  |                                           |       
|Cash                                                         |  | $                                         | 906   
|Cash equivalents                                             |  |                                           |       
|Money market mutual funds                                    |  |                                           | 2,297 
|Certificates of deposit                                      |  |                                           | -     
|Commercial paper                                             |  |                                           | 4,700 
|Total cash equivalents                                       |  |                                           | 6,997 
|Total cash and cash equivalents                              |  |                                           | 7,903 
|Short-term investments:                                      |  |                                           |       
|Corporate bonds                                              |  |                                           | 510   
|Certificates of deposit                                      |  |                                           | 1,200 
|Commercial paper                                             |  |                                           | 1,250 
|Total short-term investments                                 |  |                                           | 2,960 
|Long-term investments:                                       |  |                                           |       
|Collateralized debt obligations                              |  |                                           | 1,991 
|Total long-term investments                                  |  |                                           | 1,991 
|Total cash, and cash equivalents, and short-term investments |  | $                                         | 12,854



Realized gains and losses were not significant
for either of the three and six months ended June 30, 2013 and 2012. As of June 30, 2013, and December 31, 2012, there were
no significant unrealized gains or losses on investments. The cost of all securities sold is based on the specific identification
method.



13







The contractual maturities of cash equivalents
and short-term investments at June 30, 2013, and December 31, 2012, were less than one year. The contractual maturity of the long-term
investments is 1.25 years as of June 30, 2013. There were no long-term investments at December 31, 2012.



The Company typically invests in highly
rated securities and its policy generally limits the amount of credit exposure to any one issuer. When evaluating the investments
for other-than-temporary impairment, the Company reviews such factors as the length of time and extent to which fair value has
been below cost basis, the financial condition of the issuer, and the Company’s intent to sell, or whether it is more likely
than not it will be required to sell the investment before recovery of the investment’s amortized cost basis. During the
three and six months ended June 30, 2013 and 2012, the Company did not recognize any impairment charges on outstanding investments.
As of June 30, 2013, the Company does not consider any of its investments to be other-than-temporarily impaired.



3. Property and Equipment



Property and equipment consist of the following
at June 30, 2013, and December 31, 2012 (in thousands):



|                       |  | June 30, 2013  |     |  | December 31, 2012        |  
|---------------------- |  | -------------- | --- |  | ------------------------ | -
|                       |  | Net Book Value |     |  | Accumulated Depreciation |  
|Computer equipment     |  | $              | 377 |  |                          | $
|Furniture and fixtures |  |                | -   |  |                          |  
|Software               |  |                | -   |  |                          |  
|Leasehold improvements |  |                | -   |  |                          |  
|Total                  |  | $              | 377 |  |                          | $



Depreciation
expense on property and equipment for both the three and six months ended June 30, 2013, was $0.06 million and is recorded in operating
expenses. Depreciation expense on property and equipment for the three and six months ended June 30, 2012, including the cost of
property and equipment under capital lease was $0.3 million and $0.7 million, respectively. There was no equipment under capital
lease at June 30, 2013. Equipment under capital leasetotaled $1.1 million as of June 30, 2012.
Depreciation expense on equipment under capital lease was $0.1 million and $0.2 million, respectively, for the three and six months
ended June 30, 2012. Additionally, accumulated depreciation on equipment under capital lease was $0.5 million December 31,
2012.



At December
31, 2012, the Company determined thatcontinuing losses associated with the use of long-lived assets and a projection of
associated future cash flows required the adjustment of long-lived assets to fair value at December 31, 2012. Accordingly, long-lived
assets including computer equipment and equipment under capital lease, furniture and fixtures, software and leasehold improvements
with a recorded net value of $2.7 million were reduced to fair value of $0.4 million at December 31, 2012.



4. Other Assets



The Company’s other assets are as
follows at June 30, 2013, and December 31, 2012 (in thousands):



|                         |  | June 30, 2013 |    |  | December 31, 2012        |  
|------------------------ |  | ------------- | -- |  | ------------------------ | -
|                         |  | Gross Amount  |    |  | Accumulated Amortization |  
|Capitalized software     |  | $             | -  |  |                          | $
|Other assets             |  |               | 50 |  |                          |  
|Deferred lease incentive |  |               | 38 |  |                          |  
|Total                    |  | $             | 88 |  |                          | $



At December
31, 2012, the Company determined thatcontinuing losses associated with the use of long-lived assets and a projection of
associated future cash flows required the adjustment of long-lived assets to fair value at December 31, 2012. Accordingly, long-lived
assets including capitalized software with a recorded net value of $1.8 million was reduced to $0 at December 31, 2012.



14







5. Accrued Liabilities



Accrued liabilities
consisted of the following as ofJune 30, 2013, and December 31, 2012 (in thousands):



|                                          |  | June 30, 2013 |     |  | December 31, 2012 |  
|----------------------------------------- |  | ------------- | --- |  | ----------------- | -
|Accrued distribution and partner costs    |  | $             | 195 |  |                   | $
|Accrued compensation and related expenses |  |               | 65  |  |                   |  
|Accrued professional service fees         |  |               | 21  |  |                   |  
|Other                                     |  |               | 4   |  |                   |  
|Total accrued liabilities                 |  | $             | 285 |  |                   | $



6. Restructuring Charges



In August 2012, the Company entered into
an agreement to sublease its office space in San Francisco under terms generally equivalent to its existing commitment. Restructuring
costs associated with the sub-lease of the San Francisco, totaling $0.1 million at June 30, 2013, are being amortized over the
remaining term of the underlying lease.



7. Capital Lease and Other Obligations



Capital lease and other obligations consist
of the following at June 30, 2013, and December 31, 2012 (in thousands):



|                                                            |  | June 30, |     |  | December 31, |  
|----------------------------------------------------------- |  | -------- | --- |  | ------------ | -
|                                                            |  | 2013     |     |  | 2012         |  
|Capital lease obligations                                   |  | $        | -   |  |              | $
|Deferred rent                                               |  |          | 156 |  |              |  
|Total capital lease and other obligations                   |  |          | 156 |  |              |  
|Less: current portion of capital lease obligations          |  |          | -   |  |              |  
|Capital lease and other obligations, net of current portion |  | $        | 156 |  |              | $



Refer to Note 8 for future minimum payment
details.



Capital Lease Obligations



City National Bank



In April 2007, the Company entered into
a master equipment lease agreement with City National Bank (“CNB”) for an original amount of up to $5.0 million for
the purchase of computer equipment. The lease expired on April 30, 2010, at which time the Company had drawn down approximately
$4.9 million of the available lease line of credit. Interest on the capital leases was calculated using interest rates ranging
from 4.32% to 7.95% per annum. In 2011, the master equipment lease agreement was amended to modify two financial covenants, with
which the Company was in compliance as of June 30, 2013, and December 31, 2012.



The agreements with CNB, consisting of
an outstanding standby letter of credit (“SBLC”) and a master equipment lease agreement, contain cross-default provisions,
whereby a default under one is deemed a default for the other, and are secured by a general lien on all assets of the Company.
As of June 30, 2013, all remaining equipment leases were paid in full and the Company was not in default on the SBLC. As of December
31, 2012, the Company was not in default on either agreement with CNB. For further discussion see Note 8, Commitments and Contingencies.



15







8. Commitments and Contingencies



As of June 30, 2013, future minimum net
payments under all operating leases are as follows (in thousands):



|                                    |  | Operating Leases |    
|----------------------------------- |  | ---------------- | ---
|Six months ending December 31, 2013 |  | $                | 66 
|Years ending December 31,           |  |                  |    
|2014                                |  |                  | 60 
|2015                                |  |                  | 81 
|Total minimum net payments          |  | $                | 207



Operating Leases



In August 2009,
the Company entered into an agreement to sublease office space for its headquarters in San Francisco, California, under an operating
lease that commenced in November 2009 and expires on December 30, 2014.In July 2012, the
Company entered into an agreement to sublease this subleased office space under terms generally equivalent to its existing commitment
for a term that commenced in August 2012 and expires in December 2014. Accordingly, beginning in August 2012, the Company has utilized
a smaller space for its corporate office in San Francisco, California under a six-month sublease expiring in August 2013.



On August 2, 2013, The Company entered
into an agreement to lease office space of approximately 2,341 square feet for its headquarters in San Francisco, California, under
an operating lease that will commence on September 1, 2013 and expire on August 31, 2018.



The Company leases office space in Kitchener,
Canada of approximately of 5,222 square feet. The lease has a constant term of six months. The Company plans to close the Kitchener
office in August 2013.



The Company leases office space in Los
Angeles, California of approximately of 4,803 square feet. The lease expires in July 2015.



Rent expense under all operating leases
was $0.02 and $0.05 million for the three and six months ended June 30, 2013, respectively. Rent expense under all operating leases
was $0.2 and $0.3 million for the three and six months ended June 30, 2012, respectively.



Letters of Credit



We have an outstanding standby letter of
credit (“SBLC”) issued by City National Bank (“CNB”) of approximately $0.2 million at June 30, 2013, related
to security of the subleased corporate office lease and secured by a general lien on all assets of the Company. As of June 30,
2013, and December 31, 2012, the Company was in compliance with the SBLC.



For further discussion, see Note 7, Capital
Lease and Other Obligations.



Purchase Obligations



The Company had a non-cancelable three-month
contractual obligation relating to IT data center operations as of June 30, 2013.



Guarantees and Indemnities



During its normal course of business, the
Company has made certain guarantees, indemnities and commitments under which it may be required to make payments in relation to
certain transactions. These indemnities include intellectual property and other indemnities to the Company’s customers and
distribution network partners in connection with the sales of its products, and indemnities to various lessors in connection with
facility leases for certain claims arising from such facility or lease.



Officer and Director Indemnification



The Company has agreements whereby it indemnifies
its officers and directors for certain events or occurrences while the officer or director is, or was, serving, at the Company’s
request, in such capacity, to the maximum extent permitted under the laws of the State of Delaware. The maximum potential amount
of future payments the Company could be required to make under these indemnification agreements is unlimited. However, the Company
maintains directors and officers insurance coverage that may contribute, up to certain limits, a portion of any future amounts
paid, for indemnification of directors and officers. The Company believes the estimated fair value of these indemnification agreements
in excess of applicable insurance coverage is minimal. Historically, the Company has not incurred any losses or recorded any liabilities
related to performance under these types of indemnities.



16







Legal Proceedings



In January 2013, Cowen and Company, a New
York based investment banking firm, claimed $0.9 million due for the payment of a transaction fee related to closure of the PEEK
Investments LLC tender offer. Management is challenging the claim and does not believe the demand has any merit; therefore no liability
was recorded as of June 30, 2013.



The Company is involved, from time to time,
in various other legal proceedings arising from the normal course of business activities. Although the results of litigation and
claims cannot be predicted with certainty, the Company does not expect resolution of these matters to have a material adverse impact
on its consolidated results of operations, cash flows or financial position unless stated otherwise. However, an unfavorable resolution
of a matter could, depending on its amount and timing, materially affect its results of operations, cash flows or financial position
in a future period. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense costs, diversion
of management resources and other factors.



9. Stockholders’ Equity



Share-Based Compensation



Stock Option Plans



In December 1997, the Company approved
the 1998 Stock Option Plan (the “1998 Plan”). In June 2007, the stockholders approved the LookSmart 2007 Equity Incentive
Plan (the “2007 Plan”). Under the 2007 Plan, the Company may grant incentive stock options, nonqualified stock options,
stock appreciation rights and stock rights to employees, directors and consultants. Share-based incentive awards are provided under
the terms of these two plans (collectively, the “Plans”).



The Compensation Committee of the Board
of Directors administers the Company’s Plans. Awards under the Plans principally include at-the-money options and fully vested
restricted stock. Outstanding stock options generally become exercisable over a four-year period from the grant date and have a
term of seven years. Grants can only be made under the 2007 Plan. The 1998 Plan is closed to further share issuance and all options
have expired or been forfeited as of June 30, 2013. The number of shares issued or reserved for issuance under the 2007 Plan was
3.7 million shares of common stock as of June 30, 2013. The number of shares issued or reserved for issuance under both Plans was
4.1 million shares of common stock as of December 31, 2012. There were 3.5 million shares available to be granted under the
2007 Plan at June 30, 2013.



Share-based compensation expense recorded
during three and six months ended June 30, 2013, and 2012 was included in the Company’s Unaudited Consolidated Statements
of Operations as follows (in thousands):



|                                                  |  | Three Months Ended June 
    30, |    |  | Six Months Ended June 30, |  
|------------------------------------------------- |  | -------------------------------- | -- |  | ------------------------- | -
|                                                  |  | 2013                             |    |  | 2012                      |  
|Sales and marketing                               |  | $                                | 1  |  |                           | $
|Product development and technical operations      |  |                                  | 2  |  |                           |  
|General and administrative                        |  |                                  | 12 |  |                           |  
|Total share-based compensation expense            |  |                                  | 15 |  |                           |  
|Amounts capitalized as software development costs |  |                                  | -  |  |                           |  
|Total share-based compensation                    |  | $                                | 15 |  |                           | $



Total unrecognized share-based compensation
expense related to share-based compensation arrangements at June 30, 2013 was $0.1 million and is expected to be recognized over
a weighted-average period of approximately 1.8 years. The total fair value of equity awards vested during both the three and six
months ended June 30, 2013 was not significant. The total fair value of equity awards vested during both the three and six months
ended June 30, 2012 was $0.1 million.



17







Option Awards



Stock option activity under the Plans during
the three and six months ended June 30, 2013 is as follows:



|                                             |  | Shares         |        |   | Weighted- Average Exercise Price Per Share |   |      | Weighted- Average Remaining Contractual Term |  |  | Aggregate Intrinsic Value | 
|-------------------------------------------- |  | -------------- | ------ | - | ------------------------------------------ | - | ---- | -------------------------------------------- |  |  | ------------------------- | 
|                                             |  | (in thousands) |        |   |                                            |   |      | (in years)                                   |  |  | (in thousands)            | 
|Options outstanding at December 31, 2012     |  |                | 2,114  |   |                                            | $ | 2.47 |                                              |  |  |                           | 
|Granted                                      |  |                | -      |   |                                            |   | -    |                                              |  |  |                           | 
|Exercised                                    |  |                | -      |   |                                            |   | -    |                                              |  |  |                           | 
|Expired                                      |  |                | (413   | ) |                                            |   | 3.98 |                                              |  |  |                           | 
|Forfeited                                    |  |                | (515   | ) |                                            |   | 1.22 |                                              |  |  |                           | 
|Options outstanding at March 31, 2013        |  |                | 1,186  |   |                                            | $ | 2.48 |                                              |  |  |                           | 
|Granted                                      |  |                | -      |   |                                            |   | -    |                                              |  |  |                           | 
|Exercised                                    |  |                | -      |   |                                            |   | -    |                                              |  |  |                           | 
|Expired                                      |  |                | -      |   |                                            |   | -    |                                              |  |  |                           | 
|Forfeited                                    |  |                | (1,004 | ) |                                            | $ | 2.65 |                                              |  |  |                           | 
|Options outstanding at June 30, 2013         |  |                | 182    |   |                                            | $ | 1.58 |                                              |  |  | 2.42                      | 
|Vested and expected to vest at June 30, 2013 |  |                | 168    |   |                                            | $ | 1.61 |                                              |  |  | 1.89                      | 
|Exercisable at June 30, 2013                 |  |                | 135    |   |                                            | $ | 1.73 |                                              |  |  | 1.70                      | 



The aggregate intrinsic values in the table
above represent the total pre-tax intrinsic value (the difference between the market price of the Company’s stock on the
last trading day of the period and the exercise price, multiplied by the number of in-the-money options) that would have been received
by the option holder had all option holders exercised their options at quarter-end. The intrinsic value amount changes with changes
in the fair market value of the Company’s stock.



The following table summarizes information
about stock options outstanding at June 30, 2013:



|             |      |  |        |  |   |                                              |  |   | Options Outstanding                         |  |  | Options Exercisable |    
|------------ | ---- |  | ------ |  | - | -------------------------------------------- |  | - | ------------------------------------------- |  |  | ------------------- | ---
|Price Ranges |      |  | Shares |  |   | Weighted- Average Remaining Contractual Term |  |   | Weighted- Average Exercise Price  Per Share |  |  | Shares              |    
|             |      |  |        |  |   |                                              |  |   | (in thousands)                              |  |  | (in years)          |    
|$            | 0.76 |  |        |  | - |                                              |  | $ | 1.13                                        |  |  |                     | 39 
|             | 1.38 |  |        |  | - |                                              |  |   | 1.88                                        |  |  |                     | 137
|             | 2.70 |  |        |  | - |                                              |  |   | 3.88                                        |  |  |                     | 6  
|             |      |  |        |  |   |                                              |  |   |                                             |  |  |                     | 182



Stock Awards



The Company did not issue restricted stock
during the three and six months ended June 30, 2013 and 2012.



Employee Stock Purchase Plan



On July 14, 2009, the 2009 Employee
Stock Purchase Plan (the “2009 ESPP”) was approved by the shareholders and authorized to issue up to 500,000 shares
of Common Stock to employees. Substantially all employees may purchase the Company’s common stock through payroll deductions
at 85 percent of the lower of the fair market value at the beginning or end of the offering period. Each offering and purchase
period is six months. ESPP contributions are limited to a maximum of 15 percent of an employee’s eligible compensation,
and ESPP participants are limited to purchasing a maximum of 5,000 shares per purchase period. Share-based compensation expense
for the 2009 ESPP was insignificant in 2013 and 2012. As of June 30, 2013, 84,000 shares have been issued under the 2009 Plan.
Following the February 15, 2013 purchase, the ESPP was suspended pending a review by the Company’s Board of Directors of
all equity incentive arrangements.



18







Share-Based Compensation Valuation Assumptions



We estimate the fair value of each option
award on the date of grant using the Black-Scholes option valuation model. Our assumptions about stock-price volatility are based
on the actual volatility of our publically traded stock. The risk-free interest rate for periods within the contractual life of
the award is based on the U.S. Treasury yield curve in effect at the time of the grant. We estimate the expected term based upon
the historical exercise activity.



No options were granted in the first half
of 2013. The weighted average assumptions used in the Black-Scholes option valuation model and the weighted average grant date
fair value per share for employee stock options granted in the three and six months ended June 30, 2012 were as follows:



|                                       |  | Three Months Ended June 30, |     |  | Six Months Ended June 30, |  
|-------------------------------------- |  | --------------------------- | --- |  | ------------------------- | -
|                                       |  | 2013                        |     |  | 2012                      |  
|Volatility                             |  |                             | n/a |  |                           |  
|Risk-free interest rate                |  |                             | n/a |  |                           |  
|Expected term (years)                  |  |                             | n/a |  |                           |  
|Expected dividend yield                |  |                             | n/a |  |                           |  
|Weighted average grant date fair value |  |                             | n/a |  |                           | $



Share-based compensation expense recognized
in the Consolidated Statements of Operations is based on awards ultimately expected to vest and has been reduced for estimated
forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates.



Exercise of Employee and Director Stock Options and Purchase
Plans



There were no options exercised in both
the three and six months ended June 30, 2013, and no options and 2,000 options exercised in the three and six months ended June
30, 2012, respectively. The aggregate intrinsic value of options exercised and the total cash received as a result of exercises
under all share-based compensation arrangements was insignificant for each of the three and six months ended June 30, 2012. The
Company issues new shares of common stock upon exercise of stock options. No income tax benefits have been realized from exercised
stock options.



Repurchase of Equity Securities by the Company



In May 2012, the Company's
Board of Directors authorized the repurchase of up to $1.0 million of the Company's common shares. Under the program, the Company
may purchase its common shares from time to time in the open market or in privately negotiated transactions.



Approximately
20,000 shares were purchased during the second quarter of 2013 at approximately $0.65 per share under the program and recorded
as Treasury Stock at cost totaling approximately $13,000.00 dollars. Approximately 56,000 shares
were purchased at approximately $0.85 per share under the program in the year ended December 31, 2012, and recorded as Treasury
Stock at cost totaling approximately $48,000.00 dollars. There were no shares repurchased in
the first quarter of 2013.



19







10. Fair Value Measurements



Fair Value of Financial Assets



The Company’s financial assets measured
at fair value on a recurring basis subject to disclosure requirements at June 30, 2013, and December 31, 2012 were as follows (in
thousands):



|                                              |  | Balance at 
    June 30, 2013 |        |  | Quoted
    Prices  in Active Markets for Identical Assets (Level 1) |   |       | Significant Other Observable Inputs (Level 2) |  |   | Significant Unobserved Inputs (Level 3) | 
|--------------------------------------------- |  | ----------------------------- | ------ |  | ------------------------------------------------------------------- | - | ----- | --------------------------------------------- |  | - | --------------------------------------- | 
|Cash equivalents:                             |  |                               |        |  |                                                                     |   |       |                                               |  |   |                                         | 
|Money market mutual funds                     |  | $                             | 2,297  |  |                                                                     | $ | 2,297 |                                               |  | $ | -                                       | 
|Certificates of deposit                       |  |                               | -      |  |                                                                     |   | -     |                                               |  |   | -                                       | 
|Commercial paper                              |  |                               | 4,700  |  |                                                                     |   | -     |                                               |  |   | 4,700                                   | 
|Total cash equivalents                        |  |                               | 6,997  |  |                                                                     |   | 2,297 |                                               |  |   | 4,700                                   | 
|Short-term investments:                       |  |                               |        |  |                                                                     |   |       |                                               |  |   |                                         | 
|Certificates of deposit                       |  |                               | 1,200  |  |                                                                     |   | -     |                                               |  |   | 1,200                                   | 
|Corporate bonds                               |  |                               | 510    |  |                                                                     |   | -     |                                               |  |   | 510                                     | 
|Commercial paper                              |  |                               | 1,250  |  |                                                                     |   | -     |                                               |  |   | 1,250                                   | 
|Total short-term investments                  |  |                               | 2,960  |  |                                                                     |   | -     |                                               |  |   | 2,960                                   | 
|Long-term investments:                        |  |                               |        |  |                                                                     |   |       |                                               |  |   |                                         | 
|Collateralized debt securities                |  |                               | 1,991  |  |                                                                     |   | -     |                                               |  |   | -                                       | 
|Total long-term investments                   |  |                               | 1,991  |  |                                                                     |   | -     |                                               |  |   | -                                       | 
|Total financial assets measured at fair value |  | $                             | 11,948 |  |                                                                     | $ | 2,297 |                                               |  | $ | 7,660                                   | 



|                                              |  | Balance at 
    December 31, 
2012 |        |  | Quoted
    Prices  in Active Markets for Identical Assets (Level 1) |   |     | Significant Other Observable Inputs (Level 2) |  |   | Significant Unobserved Inputs (Level 3) | 
|--------------------------------------------- |  | ---------------------------------- | ------ |  | ------------------------------------------------------------------- | - | --- | --------------------------------------------- |  | - | --------------------------------------- | 
|Cash equivalents:                             |  |                                    |        |  |                                                                     |   |     |                                               |  |   |                                         | 
|Money market mutual funds                     |  | $                                  | 249    |  |                                                                     | $ | 249 |                                               |  | $ | -                                       | 
|Certificates of deposit                       |  |                                    | 500    |  |                                                                     |   | -   |                                               |  |   | 500                                     | 
|Commercial paper                              |  |                                    | 4,400  |  |                                                                     |   | -   |                                               |  |   | 4,400                                   | 
|Total cash equivalents                        |  |                                    | 5,149  |  |                                                                     |   | 249 |                                               |  |   | 4,900                                   | 
|Short-term investments:                       |  |                                    |        |  |                                                                     |   |     |                                               |  |   |                                         | 
|Certificates of deposit                       |  |                                    | 3,301  |  |                                                                     |   | -   |                                               |  |   | 3,301                                   | 
|Corporate bonds                               |  |                                    | 1,258  |  |                                                                     |   | -   |                                               |  |   | 1,258                                   | 
|Commercial paper                              |  |                                    | 4,947  |  |                                                                     |   | -   |                                               |  |   | 4,947                                   | 
|Total short-term investments                  |  |                                    | 9,506  |  |                                                                     |   | -   |                                               |  |   | 9,506                                   | 
|Total financial assets measured at fair value |  | $                                  | 14,655 |  |                                                                     | $ | 249 |                                               |  | $ | 14,406                                  | 



The Company held no Level 3 investments
at December 31, 2012.



At December 31, 2012, the Company used
Level 3 inputs to value certain long-lived assets. See Note 1, Impairment of Long-Lived Assets, for detail.



Investments



For investments that have quoted market
prices in active markets, the Company uses the quoted market prices as fair value and includes these prices in the amounts disclosed
in Level 1 of the hierarchy. The Company receives the quoted market prices from a third party, nationally recognized pricing service
(“pricing service”). When quoted market prices are unavailable, the Company utilizes a pricing service to determine
a single estimate of fair value, which is mainly for its fixed maturity investments. The fair value estimates provided from this
pricing service are included in the amount disclosed in Level 2 of the hierarchy. The Company bases all of its estimates of fair
value for assets on the bid price as it represents what a third party market participant would be willing to pay in an arm’s
length transaction.



20







The Company validates the prices received
from the pricing service using various methods including, applicability of Federal Deposit Insurance Corporation or other national
government insurance or guarantees, comparison of proceeds received on individual investments subsequent to reporting date, prices
received from publicly available sources, and review of transaction volume data to confirm the presence of active markets. The
Company does not adjust the prices received from the pricing service unless such prices are determined to be inconsistent. At June
30, 2013 and December 31, 2012, the Company did not adjust prices received from the pricing service.



On June 1, 2013 the Company invested $2.0
million in a fully collateralized fund, the Bayberry Consumer Finance Fund IV, with a maturity date of September 30, 2014.  The
payment terms allow for principal and interest payments to be received on a monthly basis determined by the investee taking in
to consideration the available cash and certain waterfall requirements.  The return on investment was 1.38% as of June 30,
2013.  As of June 30, 2013, the Company has received $9,000.00 in principal payments and $28,000.00 in interest payments.
 The principal amount outstanding (the amortized cost basis) at June 30, 2013 is $1,990,700.  For investments held by
Company where the intent and the ability is to hold to maturity, the investments are recorded at amortized cost, reduced for non-temporary
losses that are charged to earnings.  The Company has the ability and the intent to hold this investment to maturity.  No
non-temporary losses were recognized by the Company as of and for the periods since the date of investment.  The aggregate
fair value of the investment is $2.0 million, as of June 30, 2013.



Trade accounts receivable, net:
The carrying value reported in the Consolidated Balance Sheets approximates fair value and is net of allowances for doubtful accounts
and returns which estimate customer non-performance risk.



Trade accounts payable and accrued liabilities:
The carrying value reported in the Consolidated Balance Sheets for these items approximates their fair value, which is the likely
amount that the liability with short settlement periods would be transferred to a market participant with a similar credit standing
as the Company.



11. Related Party Transactions



Michael Onghai was paid $23,000.00 and
$40,000.00 in the three and six months ended June 30, 2013, in connection with his services as the Company’s Chief Executive
Officer.



Dr. Jean-Yves Dexmier earned fees totaling
zero and $36,000.00, respectively, in the three and six months ended June 30, 2013 and $123,000 and $246,000 in the three and six
months ended June 30, 2012, respectively, in connection with his services as the Company’s Chief Executive Officer and Board
member.



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



Forward-Looking Statements



The following discussion should be read
in conjunction with the Unaudited Consolidated Financial Statements and the Notes to those statements, which appear elsewhere in
this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words
such as “believes,” “intends,” “expects,” “anticipates,” “plans,” “may,”
“will” and similar expressions to identify forward-looking statements. Discussions containing forward-looking statements
may be found in the material set forth under “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and in other sections of this report. All forward-looking statements, including, but not limited to, projections,
expectations or estimates concerning our business, including demand for our products and services, mix of revenue sources, ability
to control and/or reduce operating expenses, anticipated gross margins and operating results, cost savings, product development
efforts, general outlook of our business and industry, future profits or losses, competitive position, share-based compensation,
adequate liquidity to fund our operations and meet our other cash requirements, are inherently uncertain as they are based on our
expectations and assumptions concerning future events. These forward-looking statements are subject to numerous known and unknown
risks and uncertainties. You should not place undue reliance on these forward-looking statements. Our actual results could differ
materially from those anticipated in the forward-looking statements for many reasons, including but not limited to, the possibility
that we may fail to maintain or grow our listings advertiser base and/or distribution network, that existing and potential distribution
partners may opt to work with, or favor the products of, competitors if our competitors offer more favorable products or pricing
terms, that we may be unable to grow our online search advertising revenue and/or find alternative sources of revenue, that we
may be unable to attain or maintain customer acceptance of our publisher solutions products, that changes in the distribution network
composition may lead to decreases in query volumes, that we may be unable to maintain or improve our query volume, match rate,
number of paid clicks, average revenue per click, conversion rate or other ad network metrics, that we may be unable to achieve
or maintain profitability, that we may be unable to retain our existing credit facilities or obtain new credit facilities, that
we may be unable to attract and retain key personnel, that we may have unexpected increases in costs and expenses, that we may
be unable to remain listed on the NASDAQ Stock Market, or that one or more of the other risks described elsewhere in this report
may occur.



21







All forward-looking statements in this
report are made as of the date hereof, based on information available to us as of the date hereof, and except as required by applicable
law; we assume no obligation to update any forward-looking statements.



Critical Accounting Policies and Estimates



The discussion and analysis of our financial
condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure
of assets and liabilities. On an on-going basis, we evaluate our critical accounting policies and estimates. We base our estimates
on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting
policies and estimates are discussed in our Annual Report on Form 10-K for the year ended December 31, 2012. As of June 30, 2013,
there had been no material changes to our critical accounting policies and estimates.



Business Overview



LookSmart, Ltd. (“LookSmart”
or the “Company”) is a search and display advertising network solutions company that provides relevant solutions for
search and display advertising customers. LookSmart was organized in 1996 and is incorporated in the State of Delaware.



LookSmart operates in a large online advertising
ecosystem serving ads that target user queries on partner sites.



LookSmart offers search advertising customers
targeted search via a monitored search advertising distribution network using the Company’s “AdCenter” platform
technology. The Company’s search advertising network includes publishers and search advertising customers, including intermediaries
and direct advertising customers and their agencies as well as self-service customers in the United States and certain other countries.



LookSmart also offers advertisers the ability
to buy graphical display advertising. LookSmart’s trading desk personnel utilize DSP technology and licensed data from third
party providers to buy targeted advertising on a real-time bidded basis. By leveraging our extensive historical search marketing
network data along with performance data from a conversion pixel, LookSmart constructs models of the highest performing audiences,
and targets them via exchange inventory. LookSmart offers its trading desk as a managed service.



Our largest category of customers is Intermediaries,
the majority of which sell into the affiliate networks of the large search engine providers. Another category of customers is Direct
Advertisers and their agencies whose objective is to obtain conversions or sales from the clicks, while others want unique page
views. The last category of customers is Self-Service advertisers that sign-up online and pay by credit card.



In addition, LookSmart offers publishers
licensed private-label search advertiser network solutions based on its AdCenter platform technology (“Publisher Solutions”).
Publisher Solutions consist of hosted auction-based ad serving with an ad backfill capability that allows publishers and portals
to manage their advertiser relationships, distribution channels and accounts.



Our future success
is substantially dependent on the performance of our senior management and key technical and sales personnel, and our continuing
ability to attract and retain highly qualified technical and managerial staff. As of June 30, 2013, we had 16 employees. The Company
has and will continue to use contractors in certain critical functional areas while a comprehensive hiring plan is developed and
implemented.



The following developments, explained in
greater detail in Results of Operations, had a significant impact on our business and economic performance in the first half of
2013:



| | · | Decrease in revenue across all categories of customers, including a substantial decrease in Intermediary.
| | - | ---------------------------------------------------------------------------------------------------------

| | · | Significant employee departures across all functional areas.
| | - | ------------------------------------------------------------

| | · | Costs association with the tender offer by PEEK Investments.
| | - | ------------------------------------------------------------



22







Results of Operations



Overview of the Three and Six Months Ended June 30, 2013
and 2012



The following tables set forth selected
information concerning our results of operations for the periods indicated (in thousands):



|                                             |  | Three Months Ended June 30, |       
|-------------------------------------------- |  | --------------------------- | ------
|                                             |  | 2013                        |       
|Revenue                                      |  | $                           | 1,548 
|Cost of revenue                              |  |                             | 983   
|Gross profit                                 |  |                             | 565   
|Operating expenses:                          |  |                             |       
|Sales and marketing                          |  |                             | 115   
|Product development and technical operations |  |                             | 713   
|General and administrative                   |  |                             | 778   
|Restructuring charge                         |  |                             | 7     
|Total operating expenses                     |  |                             | 1,613 
|Income loss from operations                  |  |                             | (1,048
|Non-operating income (expense), net          |  |                             | 35    
|Loss from operations before income taxes     |  |                             | (1,013
|Income tax expense                           |  |                             | -     
|Net loss                                     |  | $                           | (1,013



|                                                    |  | Six Months Ended June 30, |       
|--------------------------------------------------- |  | ------------------------- | ------
|                                                    |  | 2013                      |       
|Revenue                                             |  | $                         | 3,546 
|Cost of revenue                                     |  |                           | 2,358 
|Gross profit                                        |  |                           | 1,188 
|Operating expenses:                                 |  |                           |       
|Sales and marketing                                 |  |                           | 286   
|Product development and technical operations        |  |                           | 1,400 
|General and administrative                          |  |                           | 1,991 
|Restructuring charge                                |  |                           | 22    
|Total operating expenses                            |  |                           | 3,699 
|Loss from operations                                |  |                           | (2,511
|Non-operating income (expense), net                 |  |                           | 41    
|Loss from continuing operations before income taxes |  |                           | (2,470
|Income tax expense                                  |  |                           | -     
|Net loss                                            |  | $                         | (2,470



Revenue



Revenue is derived from two service offerings
or “products” of LookSmart Ltd. (the “Company”): Advertiser Networks and Publisher Solutions. Total revenue
and revenue from Advertiser Networks and Publisher Solutions for the three and six months ended June 30, 2013, and 2012, was as
follows (in thousands):



23







|                    |  | Three Months Ended June 30, |      
|------------------- |  | --------------------------- | -----
|                    |  | 2013                        |      
|Advertiser Networks |  | $                           | 1,299
|Publisher Solutions |  |                             | 249  
|Total revenue       |  | $                           | 1,548



|                    |  | Six Months Ended June 30, |      
|------------------- |  | ------------------------- | -----
|                    |  | 2013                      |      
|Advertiser Networks |  | $                         | 3,041
|Publisher Solutions |  |                           | 505  
|Total revenue       |  | $                         | 3,546



Advertiser Networks



The decrease in Advertiser Networks revenue
for the three and six months ended June 30, 2013, as compared to the same periods in 2012 is the result of a reduction in revenues
from all categories, Intermediaries, Direct Advertisers and Self Service Advertisers. The most substantial decrease was in the
Intermediary category that was the result of a loss of a number of customers due to revenue chargebacks by large search engine
providers that resulted in many of these former customers scaling back operations or exiting the business. Comparative revenue
from Direct Advertisers was also down substantially from 2012 due in large part to an absence of Company sales personnel during
the first half of 2013. We expect that in the near future advertiser network revenue will generally remain at levels realized in
the first half of 2013.



Publisher Solutions



Publisher Solutions revenues were lower
in the three and six months ended June 30, 2013, compared to the same period in 2012 generally due to volume reductions by licensees.
We expect that in the near future publisher solutions revenue will generally remain at levels realized in the first half of 2013.



Cost of Revenue and Gross Profit



Cost of revenue is primarily TAC (costs
paid to our distribution network partners). Other costs include data center rent and power usage and credit card fees.



Cost of revenue for the three and six months
ended June 30, 2013 and 2012 were as follows (in thousands):



|                                                                      |  | Three Months Ended June 30, |    
|--------------------------------------------------------------------- |  | --------------------------- | ---
|                                                                      |  | 2013                        |    
|Traffic acquisition costs                                             |  | $                           | 573
|Other costs                                                           |  |                             | 410
|Total cost of revenue                                                 |  | $                           | 983
|                                                                      |  |                             |    
|Traffic acquisition costs as percentage of Advertiser Network revenue |  |                             |    



24







|                                                                      |  | Six Months Ended June 30, |      
|--------------------------------------------------------------------- |  | ------------------------- | -----
|                                                                      |  | 2013                      |      
|Traffic acquisition costs                                             |  | $                         | 1,585
|Other costs                                                           |  |                           | 773  
|Total cost of revenue                                                 |  | $                         | 2,358
|                                                                      |  |                           |      
|Traffic acquisition costs as percentage of Advertiser Network revenue |  |                           |      



TAC as a percent of Advertisers Network
revenue decreased in the three and six months ended June 30, 2013, when compared to the three and six months ended June 30, 2012.
This decrease is due to lower TAC on Intermediary business in 2013 as compared to 2012.



Operating Expenses



Operating expenses for the three and six
months ended June 30, 2013, as compared to the same period in 2012, decreased by $2.0 million and $3.8 million, respectively. Operating
expense for the six months ended June 30, 2013 included $0.5 million related to the tender offer by PEEK. Excluding the effect
of this charge, operating expenses decreased by $4.3 million in the six months ended June 30, 2013, compared to the six months
ended June 30, 2012. Contributing factors included a substantial decrease in headcount, a substantial decrease in depreciation
expense, the sublease of the Company’s former corporate offices in August of 2012 and general cost containment efforts in
all functional areas.



Operating expenses consist of sales and
marketing, product development and technical operations, general and administrative, and restructuring charges for the three and
six months ended June 30, 2013, and 2012, and were as follows (in thousands):



|                                             |  | Three Months Ended June 30, |      
|-------------------------------------------- |  | --------------------------- | -----
|                                             |  | 2013                        |      
|Sales and marketing                          |  | $                           | 115  
|Product development and technical operations |  |                             | 713  
|General and administrative                   |  |                             | 778  
|Restructuring charge                         |  |                             | 7    
|Total operating expenses                     |  | $                           | 1,613



|                                             |  | Six Months Ended June 30, |      
|-------------------------------------------- |  | ------------------------- | -----
|                                             |  | 2013                      |      
|Sales and marketing                          |  | $                         | 286  
|Product development and technical operations |  |                           | 1,400
|General and administrative                   |  |                           | 1,991
|Restructuring charge                         |  |                           | 22   
|Total operating expenses                     |  | $                         | 3,699



Sales and Marketing



Sales and marketing expenses include salaries,
commissions, share-based compensation and other costs of employment for our sales force, sales administration and customer service
staff and marketing personnel, overhead, facilities and allocation of depreciation. Sales and marketing expenses also include the
costs of advertising, trade shows, public relations activities and various other activities supporting our customer acquisition
effort.



The decrease in sales and marketing expenses
for the three and six months ended June 30, 2013, reflects a substantial reduction in headcount and an almost complete absence
of sales and marketing program expenses in 2013. The Company is developing plans for sales and marketing and higher expenses in
the future are expected in this functional area.



25







Product Development and Technical Operations



Product development and technical operations
expense includes all costs related to the continued operations, development and enhancement of our core technology product, the
AdCenter platform. The AdCenter is used to operate both our own Advertiser Network and other publishers’ client networks,
and is licensed to publishers to operate their own network. These costs include salaries and associated costs of employment, including
share-based compensation, overhead, and facilities. Costs related to the development of software for internal use in the business,
including salaries and associated costs of employment are capitalized after certain milestones have been achieved and amortized
over a three year period once the project is placed in service. Software licensing and computer equipment depreciation related
to supporting product development and technical operations functions are also included in product development and technical operations
expense.



At December 31, 2012, the Company determined
that continuing losses associated with the use of long-lived assets and a projection of associated future cash flows required the
adjustment of long-lived assets to fair market value at December 31, 2012. The lower projected operating results reflect changes
in assumptions related to revenue growth rates, market trends, business mix, cost structure, and other expectations about the anticipated
short-term and long-term operating results. Accordingly, long-lived assets including capitalized software, computer equipment,
furniture and fixtures, software and leasehold improvements, with a recorded net book value of $2.7 million, were reduced to fair
market value of $0.4 million at December 31, 2012. As a consequence of this impairment, depreciation expense in the first half
of 2013 was substantially lower than in the comparable 2012 period.



Capitalized software development costs
include the costs to develop software for internal use, excluding costs associated with research, training and testing. There were
no capitalized software development costs in the first half of 2013.



Product development and technical operations
and capitalized software development costs for the three and six months ended June 30, 2013, and 2012, were as follows (in thousands):



|                                                           |  | Three Months Ended June 30, |    
|---------------------------------------------------------- |  | --------------------------- | ---
|                                                           |  | 2013                        |    
|Product development and technical operations costs         |  | $                           | 713
|Capitalized software development costs                     |  |                             | -  
|Total product development and technical operations expense |  | $                           | 713



|                                                           |  | Six Months Ended June 30, |      
|---------------------------------------------------------- |  | ------------------------- | -----
|                                                           |  | 2013                      |      
|Product development and technical operations costs         |  | $                         | 1,400
|Capitalized software development costs                     |  |                           | -    
|Total product development and technical operations expense |  | $                         | 1,400



The decrease in product development and
technical operations expense, net of capitalized software development costs for the three and six months ended June 30, 2013, is
primarily due to the substantial reduction in headcount and lower depreciation expense. The Company is developing plans for product
development and technical operations and higher expenses in the future are expected in this functional area.



General and Administrative



General and administrative expenses include
personnel cost, legal, insurance, tax and accounting, consulting, professional services fees and the provision for, and reductions
of, the allowance for doubtful trade receivables. Operating expense for the six months ended June 30, 2013, included $0.5 million
related to the tender offer by PEEK.



The decrease in general and administrative
expenses for the three and six months ended June 30, 2013, is due to decreased headcount and general cost containment efforts.
We do not expect substantial future increases in general and administrative expense.



26







Other Items



The tables below set forth other continuing
operations data for the three and six months ended June 30, 2013, and 2012 (in thousands):



|                                          |  | Three Months Ended June 30, |   
|----------------------------------------- |  | --------------------------- | --
|                                          |  | 2013                        |   
|Non-operating income (expense), net       |  |                             |   
|Interest income                           |  | $                           | 33
|Interest expense                          |  |                             | - 
|Other income, net                         |  |                             | 2 
|Total non-operating income (expense), net |  | $                           | 35
|                                          |  |                             |   
|Income tax expense                        |  | $                           | - 



|                                          |  | Six Months Ended June 30, |   
|----------------------------------------- |  | ------------------------- | --
|                                          |  | 2013                      |   
|Non-operating income (expense), net       |  |                           |   
|Interest income                           |  | $                         | 41
|Interest expense                          |  |                           | (9
|Other income (expense), net               |  |                           | 9 
|Total non-operating income (expense), net |  | $                         | 41
|                                          |  |                           |   
|Income tax expense                        |  | $                         | - 



Interest Income and Expense



Interest income, increased 57% and 0% in
the three and six months ended June 30, 2013 from the three and six months ended June 30, 2012. This increase was primarily due
to investment in higher yield collateralized debt obligations.



Interest expense, primarily consisting
of interest paid on capital leases, decreased during the three and six months ended June 30, 2013, as compared to the three and
six months ended June 30, 2012. This decrease was primarily due to a reduction in capital lease obligations, of which the final
leases were retired in the first quarter of 3013.



Liquidity and Capital Resources



The decrease in cash and cash equivalents
is as follows for the six months ended June 30, 2013, and 2012 (in thousands):



|                                                             |  | Six Months Ended June 30, |       
|------------------------------------------------------------ |  | ------------------------- | ------
|                                                             |  | 2013                      |       
|Net cash used in operating activities                        |  | $                         | (2,850
|Net cash provided by (used in) investing activities          |  |                           | 4,534 
|Net cash used in financing activities                        |  |                           | (122  
|Effect of exchange rate changes on cash and cash equivalents |  |                           | (11   
|Increase (decrease) in cash and cash equivalents             |  | $                         | 1,551 



Cash, cash equivalents and short- and long-term
investment balances were as follows as of June 30, 2013, and December 31, 2012 (in thousands):



|                          |  | June 30, |        |   | December 31, |   |        |        | 
|------------------------- |  | -------- | ------ | - | ------------ | - | ------ | ------ | 
|                          |  | 2013     |        |   | 2012         |   |        | Change | 
|Cash and cash equivalents |  | $        | 7,903  |   |              | $ | 6,352  |        | 
|Short-term investments    |  |          | 2,960  |   |              |   | 9,506  |        | 
|Long-term investments     |  |          | 1,991  |   |              |   | -      |        | 
|Total                     |  | $        | 12,854 |   |              | $ | 15,858 |        | 
|% of total assets         |  |          | 89     | % |              |   | 84     | %      | 
|Total assets              |  | $        | 14,476 |   |              | $ | 18,865 |        | 



27







At June 30, 2013, we had $12.9 million
of cash, cash equivalents and short- and long-term marketable investments. Cash equivalents and short- and long-term marketable
investments are comprised of highly liquid debt instruments of the U.S. government, commercial paper, time deposits, money market
mutual funds, U.S. corporate securities and collateralized debt obligations. We actively monitor the depository institutions that
hold our cash and cash equivalents and the institutions of whose debt instruments we hold. Our investment policy, which is reviewed
annually by our Board of Directors, primarily emphasizes safety of principal while secondarily on maximizing yield on those funds.
We can provide no assurances that access to our invested cash and cash equivalents will not be impacted by adverse conditions in
the financial markets. These balances may exceed the Federal Deposit Insurance Corporation insurance limits. While we monitor the
cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the
underlying financial institutions fail or could be subject to other adverse conditions in the financial markets. See Note 2 to
the Unaudited Consolidated Financial Statements, “Cash and Available for Sale Securities,” which describes further
the composition of our cash, cash equivalents and short- and long-term investments.



Cash, cash equivalents and short- and long-term
investments decreased $3.0 million to $12.9 million at June 30, 2013, from $15.9 million at December 31, 2012, primarily due to
operating losses, principal payments on capital leases, and decreased accounts payable.



Our primary source of liquidity is our
cash, cash equivalents, and short- and long-term investments. Our current primary use of cash is to fund operating losses and investment
in software development.  We believe that our existing cash, cash equivalents, and short- and long-term investments will be
sufficient to satisfy our current anticipated cash requirements through at least the next 12 months. Our liquidity could be negatively
affected by a decrease in demand for our services beyond the current quarter, and changes in customer buying behavior. Also, if
the banking system or the financial markets continue to remain volatile, our investment portfolio may be impacted and the values
and liquidity of our investments could be adversely affected. In addition, we may seek to raise additional capital through public
or private debt or equity financings in order to fund our operations and capital expenditures, take advantage of favorable business
opportunities, develop and upgrade our technology infrastructure, develop new product and service offerings, take advantage of
favorable conditions in capital markets or respond to competitive pressures. In addition, unanticipated developments in the short
term requiring cash payments, including the acquisition of businesses with negative cash flows, may necessitate additional financing.
We cannot be assured that additional financing will be available on terms favorable to us, or at all. If we issue additional equity
or convertible debt securities, our existing stockholders may experience substantialdilution.



Operating Activities



Cash used in operating activities in the
six months ended June 30, 2013, consisted of our net loss adjusted for certain non-cash items, including depreciation, amortization,
provision for doubtful accounts, and share-based compensation expense, as well as the effect of changes in working capital and
other activities. Cash used in operations in the first half of 2013 was $2.9 million and consisted of a net loss of $2.5 million,
adjustments for non-cash items of $0.4 million and cash used by working capital and other activities of $0.8 million. Adjustments
for non-cash items primarily consisted of $0.1 million of depreciation and amortization expense on property and equipment, $0.2
million in bad debt expense and $0.03 million of share-based compensation expense. In addition, changes in working capital activities
primarily consisted of a $1.7 million net decrease in accounts payable and accrued liabilities, combined with a decrease of $1.0
million in accounts receivable. The decrease in accounts payable and accrued liabilities was primarily due to decreased TAC and
operating expenses. The decrease in accounts receivable is primarily attributed to a decrease in invoiced customer revenue.



Cash used in operating activities in the six months ended June
30, 2012, consisted of our net loss adjusted for certain non-cash items, including depreciation, amortization, provision for doubtful
accounts, and share-based compensation expense, as well as the effect of changes in working capital and other activities. Cash
used in operations in the first half of 2012 was $3.2 million and consisted of a net loss of $4.5 million, adjustments for non-cash
items of $1.5 million and cash used by working capital and other activities of $0.2 million. Adjustments for non-cash items primarily
consisted of $1.1 million of depreciation and amortization expense on property and equipment and internally developed software,
$0.3 million bad debt expense and $0.1 million of share-based compensation expense. In addition, changes in working capital activities
primarily consisted of a $0.1 million net decrease in accounts payable and accrued liabilities, combined with a decrease of $0.2
million in accounts receivable. The decrease in accounts payable and accrued liabilities was primarily due to reduced TAC and operating
expenses. The decrease in accounts receivable is primarily attributed to a decrease in invoiced customer revenue.



Investing Activities



Cash provided by investing activities in
the first half of 2013 of $4.5 million was attributed to $4.5million net purchase of investments.



28







Cash used in investing activities in the
first half of 2012 of $2.9 million was primarily attributed to $1.9 million net purchase of investments. Capital expenditures in
the first half of 2012 consisted of $0.4 million for equipment acquired during the period and an investment of $0.6 million in
internally developed software related to our AdCenter platform technology.



Financing Activities



Cash used in financing activities in the
first half of 2013 of $0.1 million is primarily attributed to scheduled capital lease payments.



Cash used in financing activities in the
first half of 2012 of $0.3 million is primarily attributed to scheduled capital lease payments.



Credit Arrangements



We have an outstanding standby letter of
credit (“SBLC”) issued by City National Bank (“CNB”) of approximately $0.2 million at June 30, 2013, related
to security of our corporate office lease, which is secured by a restricted money market account.



We had a master equipment lease agreement
with CNB for an original amount of up to $5.0 million for the purchase of computer equipment. The lease expired on April 30,
2010, at which time the Company had drawn down approximately $4.9 million of the available lease line of credit. As of June 30,
2013, all equipment leases have been paid in full.



The agreements with CNB, originally consisting
of an outstanding standby letter of credit (“SBLC”) and a master equipment lease agreement, contained cross-default
provisions, whereby a default under one is deemed a default for the other, and was secured by a general lien on all assets of the
Company. As of June 30, 2013, all remaining equipment leases were paid in full and the SBLC was secured by the restricted money
market account. As of December 31, 2012, the Company was not in default on either agreement with CNB.



Off-Balance Sheet Arrangements



We do not have any off-balance sheet arrangements
as defined in Regulation S-K Item 303(a)(4), investments in special-purpose entities or undisclosed borrowings or debt. Additionally,
we are not a party to any derivative contracts or synthetic leases.



Contractual Obligations and Commercial Commitments



In comparison with our Annual Report on
Form 10-K for the year ended December 31, 2012, we believe that there have been no material changes in contractual obligations
or commercial commitments outside the ordinary course of business, during the six months ended June 30, 2013.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------



Pursuant to Section 229.305(e) of Regulation
S-K, we are not required to provide information regarding quantitative and qualitative disclosures about market risk.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------



Evaluation of Disclosure Controls and Procedures



Our Chief Executive Officer and Principal
Accounting Officer are responsible for establishing and maintaining “disclosure controls and procedures” (as defined
in rules promulgated under the Securities Exchange Act of 1934, as amended) for our Company. Based on their evaluation as of the
end of the period covered by this report, our Chief Executive Officer and Principal Accounting Officer have concluded that our
disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in this Quarterly
Report on Form 10-Q is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and
Exchange Commission’s (“SEC”) rules and Form 10-Q, and (ii) is accumulated and communicated to the Company’s
management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions
regarding required disclosure.



Changes in Internal Controls



There were no changes in the Company’s
internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended June 30,
2013, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.



29







Limitations on the Effectiveness of Controls



Our management, including our Chief Executive
Officer and Principal Accounting Officer, does not expect that our disclosure controls and procedures or our internal controls
will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect
the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a Company have been detected. Our disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives, and the Chief Executive Officer and the Principal Accounting Officer have concluded
that these controls and procedures are effective at the “reasonable assurance” level.



30







PART II



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------



None.



|ITEM 1A. | RISK FACTORS
|-------- | ------------



Other than the risk factors below, there
have been no material changes to the risk factors as set forth in the Company’s Annual Report filed on Form 10-K for the
year ended December 31, 2012.



Our securities may be delisted.



The NASDAQ Stock Market (“NASDAQ”)
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. On May 29, 2013, NASDAQ notified LookSmart, Ltd. (the "Company") that: the
Company had not regained compliance with Listing Rule 5550(a)(2); the Company's common stock is subject to delisting from the Capital
Market; and, unless the Company requests an appeal of the delisting determination, trading of the Company's common stock will be
suspended at the opening of business on June 7, 2013. The Company requested an appeal of the determination and submitted a plan
to regain compliance with the applicable listing rules. The Company was notified that this plan was accepted by NASDAQ on July
22, 2013. The Company believes it will be able to regain compliance with the applicable listing rules by effecting a reverse stock
split. However, there can be no assurance that the Company will be able to regain compliance with the applicable listing rules
within the time frame provided or continue to comply with the applicable listing rules in the future, even if the reverse stock
split is effected.



Our Stockholder Rights Plan, provisions of Delaware corporate
law and provisions of our charter and bylaws may discourage a takeover attempt, which could adversely affect the value of our Common
Stock.



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
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, prohibiting certain business combinations with an interested stockholder, could discourage potential
acquisition proposals and could delay or prevent a change of control.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------



|Period                         |  | Total Number of
    Shares Purchased Under Publically Announced Programs |        |  | Average Price
     Paid per Share |   |      | Approximate Dollar
    Value of Shares that May Yet Be Purchased 
Under the Plans or Programs | 
|------------------------------ |  | ------------------------------------------------------------------------ | ------ |  | --------------------------------- | - | ---- | --------------------------------------------------------------------------------------------- | 
|April 1, 2013 - April 30, 2013 |  |                                                                          | -      |  |                                   | $ | -    |                                                                                               | 
|May 1, 2013 - May 31, 2013     |  |                                                                          | 12,435 |  |                                   |   | 0.64 |                                                                                               | 
|June 1, 2013 - June 30, 2013   |  |                                                                          | 7,434  |  |                                   |   | 0.68 |                                                                                               | 
|Total                          |  |                                                                          | 19,869 |  |                                   | $ | 0.65 |                                                                                               | 



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------



None.



|ITEM 4. | MINE SAFETY DISCLOSURE
|------- | ----------------------



Not applicable.



31







|ITEM 5. | OTHER INFORMATION
|------- | -----------------



None.



|ITEM 6. | EXHIBITS
|------- | --------



Please see the exhibit index following
the signature page of this report.



32







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.



LOOKSMART, LTD.



Dated: August 14, 2013



|By: |  | /s/    Lori
        House                      
|--- |  | -----------------------------------------------
|    |  | Lori House
        Principal Accounting Officer



33







EXHIBIT INDEX



Exhibits



|Number    |  | Description of Document                                                                                                                                                                                                             
|--------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |  |                                                                                                                                                                                                                                     
|3.1       |  | Registrant’s Certificate of Incorporation (including Certificate of Designation of Series A Participating Preferred Stock) (Filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 23, 2012).
|          |  |                                                                                                                                                                                                                                     
|3.2       |  | Bylaws (Filed with the Company’s Quarterly Report on Form 10-Q (File No. 000-26357) filed with the SEC on August 14, 2000).                                                                                                         
|          |  |                                                                                                                                                                                                                                     
|4.1       |  | Form of Specimen Stock Certificate (Filed with the Company’s Quarterly Report on Form 10-Q (File No. 000-26357) filed with the SEC on November 14, 2005).                                                                           
|          |  |                                                                                                                                                                                                                                     
|4.2       |  | Rights Agreement dated as of August 23, 2012 among LookSmart, Ltd. and Computershare Trust Company, N.A. (Filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 23, 2012).                  
|          |  |                                                                                                                                                                                                                                     
|4.3       |  | Form of Rights Certificate (Filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on August 23, 2012).                                                                                                
|          |  |                                                                                                                                                                                                                                     
|31.1*     |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                 
|          |  |                                                                                                                                                                                                                                     
|31.2*     |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                 
|          |  |                                                                                                                                                                                                                                     
|32.1*     |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                     
|          |  |                                                                                                                                                                                                                                     
|101.INS** |  | XBRL Instance Document                                                                                                                                                                                                              
|          |  |                                                                                                                                                                                                                                     
|101.SCH** |  | XBRL Taxonomy Extension Schema                                                                                                                                                                                                      
|          |  |                                                                                                                                                                                                                                     
|101.CAL** |  | XBRL Taxonomy Extension Calculation Linkbase                                                                                                                                                                                        
|          |  |                                                                                                                                                                                                                                     
|101.LAB** |  | XBRL Taxonomy Extension Label Linkbase                                                                                                                                                                                              
|          |  |                                                                                                                                                                                                                                     
|101.PRE** |  | XBRL Taxonomy Extension Presentation Linkbase                                                                                                                                                                                       










| | (*) | Filed herewith
| | --- | --------------

| | (**) | Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating
to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of
the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly
amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements.
In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or a part of
a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not
filed for purposes of Section 18 of the Exchange Act of 1934, as amended, and otherwise is not subject to liability under
these sections and shall not be incorporated by reference into any registration statement or other document filed under the Securities
Act of 1933, as amended, except as expressly set forth by specific reference in such filing.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



34