<PAGE>

________________________________________________________________________________

                    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 March 31, 2001

                                       OR

    [_]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
                              Exchange Act of 1934

             For the Transition Period from ________ to __________.

                       Commission File Number: 000-26357

                               _________________

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


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



                               625 Second Street
                        San Francisco, California 94107
             (Address of Principal Executive Offices and Zip Code)

                                 (415) 348-7000
              (Registrant's Telephone Number, Including Area Code)

                              ____________________

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

        As of April 30, 2001, there were 91,815,850 shares of the registrant's
common stock outstanding.
--------------------------------------------------------------------------------
<PAGE>

                                   FORM 10-Q

                                     INDEX

                                                                          Page
                                                                          ----

PART I  FINANCIAL INFORMATION

ITEM 1:  Condensed Consolidated Financial Statements (unaudited)

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

         Condensed Consolidated Statements of Operations and
         Comprehensive Loss for the three months ended
         March 31, 2000 and 2001.........................................   4

         Condensed Consolidated Statements of Cash Flows for the three
         months ended March 31, 2000 and 2001............................   6

         Notes to Condensed Consolidated Financial Statements............   7

ITEM 2:  Management's Discussion and Analysis of Financial Condition
         and Results of Operations.......................................  11

         Factors Affecting Operating Results.............................  16

ITEM 3:  Quantitative and Qualitative Disclosures About Market Risk......  26

PART II  OTHER INFORMATION

ITEM 2:  Changes in Securities and Use of Proceeds.......................  26

ITEM 6:  Exhibits and Reports on Form 8-K................................  26

ITEM 7:  Signatures......................................................  28

                                       2
<PAGE>

                       PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                      LOOKSMART, LTD. AND SUBSIDIARIES
                    CONDENSED CONSOLIDATED BALANCE SHEETS
                                (Unaudited)
                               (In Thousands)

                                               December 31,    March 31,
                                                   2000          2001
                                                   ----          ----

               ASSETS
Current assets:
 Cash and cash equivalents..................     $  52,617    $  46,746
 Restricted Cash............................        43,297       43,298
 Short-term investments.....................         2,979            0
 Trade accounts receivable, net.............        18,307        7,642
 Accounts receivable from related parties...         3,585        3,581
 Prepaid Expenses...........................         7,718        3,683
 Other current assets.......................         1,963        4,532
                                                 ---------    ---------

   Total current assets.....................       130,466      109,482

Property and equipment, net.................        13,259       12,783
Goodwill and intangible assets, net.........        31,895       24,452
Security Deposits...........................         2,902        2,897
Long Term Investments.......................         1,759          183
Other assets................................         2,115          327
                                                 ---------    ---------
Total assets................................     $ 182,396    $ 150,124
                                                 =========    =========

     LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
 Trade accounts payable.....................     $   7,414    $   2,056
 Other accrued liabilities..................        21,800       17,942
 Deferred revenue...........................        13,622       11,580
                                                 ---------    ---------
    Total current liabilities...............        42,836       31,578

Credit facility joint venture partner.......        50,154       50,383
Other liabilities...........................        10,184       12,326
                                                 ---------    ---------

    Total liabilities.......................       103,174       94,287

Stockholders' equity:
Capital stock...............................            92           92
Warrants....................................           913          913
Additional paid-in capital..................       234,539      234,544
Deferred stock compensation and other.......        (5,797)      (4,631)
Accumulated deficit.........................      (150,525)    (175,081)
                                                 ---------    ---------

 Total stockholders' equity.................        79,222       55,837
                                                 ---------    ---------

 Total liabilities and stockholders' equity.     $ 182,396    $ 150,124
                                                 =========    =========

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

                                       3
<PAGE>

                        LOOKSMART, LTD. AND SUBSIDIARIES

     CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                                 (Unaudited)
                  (In Thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                                            Three Months
                                                                           Ended March 31,
                                                                        ---------------------
                                                                          2000         2001
                                                                        --------     --------
<S>                                                                     <C>          <C>
Revenues:
  Listings..........................................................    $    631     $  6,422
  Advertising and syndication.......................................      12,266        8,869
  Licensing.........................................................       5,367        5,125
  Ecommerce.........................................................       3,236        7,971
                                                                        --------     --------
    Total Revenues..................................................      21,500       28,387

Cost of Revenues:
  Listings..........................................................           0        1,246
  Advertising and syndication.......................................         953        1,317
  Ecommerce.........................................................       1,888        5,009
                                                                        --------     --------
    Total Cost of Revenues..........................................       2,841        7,572

Gross Profit........................................................      18,659       20,815

Operating Expenses:
Sales & marketing (includes amortization of deferred stock
 compensation of $486 and $580 for the three months ended
 March 31, 2000 and 2001, respectively..............................      17,203       17,333
Product development (includes amortization of deferred stock
 compensation of $300 and $304 for the three months ended
 March 31, 2000 and 2001, respectively..............................       8,909        8,898
General and administrative (includes amortization of deferred
 stock compensation of $468 and $231 for the three months ended
 March 31, 2000 and 2001, respectively..............................       3,334        3,333
Amortization of goodwill and intangibles ...........................       1,945        2,457
Other Non-Recurring Charges.........................................           0        9,434
                                                                        --------     --------

Total operating expenses............................................      31,391       41,455
                                                                        --------     --------

Loss from operations................................................     (12,732)     (20,640)

Non-operating income (expense):
  Interest income (expense), net....................................         382       (1,473)
  Other income, net.................................................           0          502
  Share of joint venture loss.......................................      (1,574)      (2,920)
                                                                        --------     --------

  Loss before income taxes..........................................     (13,924)     (24,531)

Income Tax Expense..................................................          47           32
Minority Interest...................................................        (188)          (6)
                                                                        --------     --------

Net Loss............................................................     (13,783)     (24,557)
</TABLE>

                                       4
<PAGE>

<TABLE>
<S>                                                                     <C>          <C>
Other comprehensive income (loss):
  Change in unrealized gain on securities during the period.........           8          130
  Change in foreign currency translation adjustment during the
   period...........................................................         (52)        (155)
                                                                        --------     --------
  Comprehensive Loss................................................    $(13,827)    $(24,582)
                                                                        ========     ========

Basic and diluted net loss per share................................    $  (0.16)    $  (0.27)
                                                                        ========     ========

Weighted average shares outstanding used in per share calculation...      86,676       91,213
                                                                        ========     ========
</TABLE>

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

                                       5
<PAGE>

                        LOOKSMART, LTD. AND SUBSIDIARIES

               CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (Unaudited)
                               (In Thousands)
<TABLE>
<CAPTION>
                                                                                        Three Months
                                                                                       Ended March 31,
                                                                                   -----------------------
                                                                                     2000           2001
                                                                                   --------       --------
<S>                                                                                <C>            <C>
Cash flows from operating activities:
 Net loss.................................................................         $(13,783)      $(24,557)
 Adjustments to reconcile net loss to cash used in operating activities:
  Share of joint venture loss.............................................            1,574          2,920
  Depreciation and amortization...........................................            2,882          4,164
  Write off of Goodwill...................................................                0          6,014
  Other non-cash charge...................................................                0            205
  Amortization of deferred stock compensation.............................            1,254          1,115
  Loss on foreign currency transactions...................................                0             14
  Gain on Sale of Investments.............................................                0           (472)

  Changes in operating assets and liabilities:
   Trade accounts receivable..............................................           (3,673)         8,184
   Prepaid expenses.......................................................           (4,008)         4,035
   Other assets...........................................................           (1,785)           (13)
   Trade accounts payable.................................................           (1,720)        (5,358)
   Other accrued liabilities and payables.................................            3,180           (804)
   Deferred revenues......................................................           (2,621)        (2,042)
   Income Taxes Payable...................................................                            (394)
   Minority interest......................................................             (188)            (6)
                                                                                   --------       --------

    Net cash used in operating activities.................................          (18,888)        (6,995)
                                                                                   --------       --------

Cash flows provided (used) by investing activities:

  Purchase of long-term investments.......................................                0           (321)
  Proceeds from sale of short-term investments............................           15,030          2,978
  Proceeds from sale of long-term investments.............................                0            858
  Funding to joint venture................................................                0         (1,000)
  Purchase of property and equipment......................................           (1,854)          (958)
                                                                                   --------       --------

    Net cash provided (used) by investing activities......................           13,176          1,557

Cash flows from financing activities:
  Proceeds from note......................................................              472              0
  Repayment on notes......................................................               (7)            (8)
  Repayments on equipment lease...........................................             (109)          (275)
  Proceeds from issuance of common stock..................................            1,089              5
                                                                                   --------       --------

    Net cash provided by (used for) financing activities..................            1,445           (278)
Effect of exchange rate changes on cash...................................              (52)          (155)
                                                                                   --------       --------

Increase (decrease) in cash and cash equivalents..........................           (4,319)        (5,871)
Cash and cash equivalents, beginning of period............................           75,971         52,617
                                                                                   --------       --------

Cash and cash equivalents, end of period..................................         $ 71,652       $ 46,746
                                                                                   ========       ========
</TABLE>

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

                                       6
<PAGE>

                        LOOKSMART, LTD. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (unaudited)

1. Summary of Significant Accounting Policies

Nature of Business and Principles of Consolidation

LookSmart creates qualified leads for online and offline businesses by
offering its distribution partners and consumers comprehensive Internet search
infrastructure services. LookSmart distributes its proprietary directories to
a large number of Internet users through strategic partners, including
portals, Internet service providers and media companies. In this way, customer
listings and search targeted advertisements are distributed to a large,
qualified audience.

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

Revenue Recognition

The Company generates revenues from listings, advertising and syndication,
licensing and ecommerce activities. Listings revenues are derived from express
listings fees and subsite listings. Express listings fees result from the
expedited review of customers' web sites. The Company recognizes as revenue a
one time review fee upon completion of the review. Subsite listings involve
payment for placement of multiple URLs within the Company's directory.
Typically subsite contracts have two components, upfront and maintenance fees
as well as a cost-per-click (CPC), or performance element. The Company
recognizes the CPC element as earned. The upfront and maintenance fees are
recognized ratably over the term of the contract, generally 12 to 18 months.

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

Revenues also include barter transactions which are the exchange of advertising
space on the Company's websites for advertising space on other websites. In
accordance with EITF No. 99-17, "Accounting for Advertising Barter
Transactions", these transactions are recorded at the fair value of similar
advertisement for which cash was received. For the three months ended March
31, 2000 and 2001 the Company recognized $206,000 and $350,000, respectively,
in revenue and expenses for barter transactions.

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

The Company's ecommerce revenues are generated by the sale of merchandise and
the design, construction and hosting of commercial websites. In accordance with
EITF Issue No. 99-19, "Reporting Gross Revenue vs. Net", revenue from the sale
of merchandise is reported on a gross basis as the Company acts as the principal
in the transaction with associated product costs and shipping and handling costs
reported as cost of revenues. For further information, See Note 9.

Recently Issued Accounting Pronouncements

In September 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 140, "Accounting for the Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" (FAS 140.)
FAS 140 becomes

                                       7
<PAGE>

effective for quarters after March 31, 2001. The Company does not anticipate
that FAS 140 will have a material effect on the consolidated financial
statements.

Reclassifications

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

2. Unaudited Interim Financial Information

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

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

3. Other Nonrecurring Charges

Other non-recurring charges include a $6,014,000 write-off of goodwill and
capitalized software related to the Inside The Web and LookSmart Live! services
which LookSmart is no longer offering, and a $1,264,000 write-off of prepaid
advertising expenses for the termination of long-term advertising contracts.

The one-time charges in the first quarter also include $2,156,000 in severance
costs related to a workforce reduction which occurred in January 2001.

4. Net Loss Per Share:

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

                                                         Three Months
                                                        Ended March 31,
                                                        ---------------
                                                         2000      2001
                                                         ----      ----
                                                           (unaudited)
 Numerator--Basic and diluted:
  Net loss.........................................    $(13,783) $(24,557)
                                                       ========  ========

 Denominator--Basic and diluted:
  Weighted average common shares outstanding.......      86,676    91,213
                                                       ========  ========

  Basic and diluted loss per share.................    $  (0.16) $  (0.27)
                                                       ========  ========

For all periods, common equivalent shares are not included in the computation of
diluted loss per share because they are antidilutive. Common stock equivalents
relating to preferred stock, stock options and warrants to purchase common and
preferred shares are as follows (in thousands):

                                       8
<PAGE>

                                     Three Months
                                    Ended March 31,
                                    ---------------
Common stock equivalents             2000     2001
------------------------            ------   ------
                                      (unaudited)
    Preferred stock.
    Options...................      11,254   13,975

    Warrants..................       2,062    2,008
                                    ------   ------
    Total dilutive shares.....      13,316   15,983
                                    ======   ======

5. Related Party Transactions

The Company has a distribution agreement with Guthy-Renker Corporation (GRC),
one of the Company's stockholders. At March 31, 2001, the Company had a
receivable of $1,100,000 from GRC arising from transactions under the
distribution agreement.  In addition, during the first quarter of 2001, the
Company paid GRC $68,400 for rent and administrative support.

The company receives advertising revenue from QSound Labs, Inc. The Company
has an equity investment in QSound as a result of the sale of certain assets
and liabilities related to its Choicemall property to QSound in May 2000.
Total revenue received from QSound for the quarter ending March 31, 2001 was
$130,000.

The Company receives licensing revenues from the BT LookSmart joint venture for
the licensing of LookSmart database content. Revenues from the BT LookSmart
joint venture amounted to $0 and $42,000 for the three months ended March 31,
2000 and 2001, respectively. As of March 31, 2001 the Company had an accounts
receivable from the BT LookSmart joint venture in the amount of $2.5 million.

During the quarter ended March 31, 2001, the Company paid $167,000 to Macquarie
Bank Limited, one of the Company's stockholders, for financial consulting
services.

In January 2001, the Company entered into a severance agreement and mutual
release with its former Senior Vice President, Global Sales, providing for:
(i) continued payment of base salary through April 1, 2001, (ii) payment of a
lump sum amount of $56,250, and (iii) continued vesting of stock options
through April 1, 2001. The officer's employment with the Company ended in
January 2001.

In January 2001, the Company entered into a severance agreement and mutual
release with its former Senior Vice President, Business Development, providing
for: (i) continued payment of base salary through April 1, 2001, (ii) payment
of a lump sum amount of $63,935, (iii) continued vesting of stock options
through April 1, 2001, and (iv) continuation of benefits through April 1, 2001
and reimbursement for COBRA costs for three months thereafter. The officer's
employment with the Company ended in January 2001.

In March 2001, the Company entered into an agreement with its former Chief
Financial Officer, providing for the acceleration of vesting of 187,500 stock
options in connection with his employment with the Company through March 31,
2001. The officer's employment with the Company ended on March 31, 2001.

6. Segment Information

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

                                       9
<PAGE>

                                         December 31,   March 31,
                                            2000          2001
                                           -------      -------
                                                (unaudited)
    Listings..........................     $ 2,806      $ 3,329
    Advertising and syndication.......      19,260        9,265
    Licensing.........................         424          519
    Ecommerce.........................         989        1,135
                                           -------      -------
    Total.............................      23,479       14,248
    Allowance for doubtful accounts...      (4,195)      (3,025)
                                           -------      -------
    Accounts receivable, net..........     $19,284      $11,223
                                           =======      =======

The segmented Ecommerce accounts receivable balances above include receivables
from Guthy Renker, a related party, in the amount of $977,000 and $1.1 million
at December 31, 2000 and March 31, 2001, respectively.

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

                                          December 31,  March 31,
                                             2000         2001
                                           -------      -------
                                                (unaudited)
    Listings..........................     $   309      $ 2,867
    Advertising and syndication.......         253          173
    Licensing.........................      13,060        8,540
                                           -------      -------
    Total.............................     $13,622      $11,580
                                           =======      =======

7. Stock Option Plan

During the three months ended March 31, 2001, the Company granted 10,439,425
stock options at the then current fair market value of its underlying common
stock. During such period employees exercised an aggregate of 306,580 options,
and 9,688,874 options were cancelled. Total outstanding stock options were
13,974,925 as of March 31, 2001.

8.  Option Repricing

On February 20, 2001, the Company offered to its employees, consultants and
directors the right to cancel certain outstanding stock options with a strike
price greater than $2.50 and receive new options with an exercise price of
$2.50, the fair market value of the stock on February 20, 2001. Options to
purchase a total of approximately 7,213,599 shares were canceled and 5,410,864
new options were granted. The new options vest at the same rate they would
have vested under previous option plans and expire on December 31, 2005. The
Company is accounting for these repriced stock options using variable
accounting. For the three months ended March 31, 2001, there was no additional
compensation charge relating to the repricing. Depending upon movements in the
market value of the Company's common stock, this accounting treatment may
result in significant non-cash compensation charges in future periods.

9. Subsequent Events

In April 2001, the Company modified its distribution agreement with Guthy-Renker
Corporation to provide that the Company will no longer maintain inventory of
Guthy-Renker products and will act as an agent in sales of Guthy-Renker
products. As a result of these modifications, the Company will report
associated revenues on a net basis. The Company also entered into an agreement
with Guthy-Renker to provide advertising services for its products.

                                       10
<PAGE>

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

  The following discussion should be read in conjunction with the 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 that reflect our plans, estimates and beliefs, including
without limitation forward-looking statements regarding anticipated revenue
growth, trends in costs of revenues and operating expenses, international
expansion and introduction of additional services, the adequacy of our capital
reserves and our future need for additional capital. Our actual results could
differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed below and elsewhere in this report, particularly in
the section entitled "Factors Affecting Operating Results".

Overview

  LookSmart is a global leader in Web directories, helping online and offline
businesses find qualified leads on the Internet through search. LookSmart has
built 32 Web directories and 24 wireless directories, spanning 27 countries and
13 languages. These directories include more than 2.5 million URLs aggregated by
human editors and classified appropriately within the directories. LookSmart
directories are distributed through portals, search engines, Internet service
providers, media companies, and wireless providers. By providing its directories
through a worldwide network of partners, LookSmart is focused on enabling
businesses to access qualified customers at the very moment they are searching
for products, services and information.

Revenues and Cost of Revenues

  Listings. The Company's listings revenues are derived from its Subsite and
Express Listings products. Express Listings revenues include fees from the
expedited written review of customer URLs. Subsite Listings revenues include
"cost-per-click" arrangements on those URLs, setup fees, and periodic
maintenance fees. Listings revenues also include partner commissions derived
from the Company's Affiliates program. Revenues associated with listings
contracts are recognized once collectibility is established, as delivery of
services occur (as specified under the contracts), once all performance
obligations have been satisfied and when no refund obligations exist. Any
upfront fees collected are recognized over the expected life of the relationship
with the customer. We expect Listings revenues to continue to grow as a
proportion of our overall revenues.

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

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

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

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

  The principal components of cost of advertising and syndication revenues are
personnel costs of our in-house advertising operations employees, equipment

                                       11
<PAGE>

depreciation, other expenses relating to hosting advertising operations and
agency commissions paid to outside advertising sales organizations.

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

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

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

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

  LookSmart has renegotiated its contract with Guthy-Renker Corporation, which
supplies a majority of the products offered for sale through LookSmart's
ecommerce channels. As this relationship evolves into an advertising and
listings partnership (resulting in increased revenues in those segments) and
focuses less on the sale of merchandise, LookSmart will no longer assume
inventory risk on Guthy-Renker products. As a result, effective April 1, 2001,
Ecommerce revenues and Ecommerce cost of revenues are expected to decline
significantly as LookSmart will now record only the commissions from the sales
instead of revenues generated from the initial sale. As a result of these
changes, the Company expects that its gross revenues will decline but its
earnings per share will not be materially affected in fiscal 2001.

Operating Expenses

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

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

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

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

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<PAGE>

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

  We expect sales and marketing costs and product development costs to decrease
as a result of the restructuring of our distribution agreements and the
reduction in staff.

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

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

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

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

Results of Operations

Revenues

  Listings.  Listings revenue was $6.4 million in the quarter ended March 31,
2001, an increase of 918% compared to $0.6 million for the quarter ended March
31, 2000. The increase is a result of the growth in our distribution network
and our increased sales and marketing efforts promoting our Express and
Subsite Listings products.

  Advertising and syndication.  Advertising and syndication revenues were $8.9
million in the quarter ended March 31, 2001, a decrease of 28% from the $12.3
million recognized in the quarter ended March 31, 2000. The decrease in
advertising and syndication revenues is attributable to the downturn in the
online advertising market resulting in reduced demand and prices for these
products.

  Licensing.  Licensing revenue decreased by 5% to $5.1 million in the quarter
ended March 31, 2001, compared to $5.4 million in the quarter ended March 31,
2000. The decrease in licensing revenue is attributable to a decline in the
number of paid URL reviews that LookSmart produced and the timing of delivery
of such URLs.

  Ecommerce.  Ecommerce revenues for the quarter ended March 31, 2001 were $8.0
million, an increase of 146% over the $3.2 million recognized in the quarter
ended March 31, 2000. This increase is predominantly due to intensified
branding and website exposure from a variety of new media sources, including
listings in the LookSmart directory.

Cost of Revenues

  Listings.  Listings cost of revenues was $1.2 million, or 19% of listings
revenues, in the quarter ended March 31, 2001. There was no listings cost of
revenues in the quarter ended March 31, 2000, as we did not incur distribution
costs while the listings products were being developed.

                                       13
<PAGE>

  Advertising and syndication. Advertising and syndication cost of revenues
was $1.3 million, or 15% of advertising and syndication revenues, in the
quarter ended March 31, 2001, an increase of 38% from the $1.0 million, or 8% of
advertising and syndication revenues, recognized in the quarter ended March 31,
2000. The increase in advertising and syndication cost of revenues is primarily
attributable to the increase in the costs of our in-house advertising operations
employees and related expenses.

  Ecommerce. Ecommerce cost of revenues for the quarter ended March 31, 2001
was $5.0 million, or 63% of ecommerce revenues, an increase of 165% over $1.9
million, or 49% of ecommerce revenues, in the quarter ended March 31, 2000.
This increase is a result of the growth in revenues in the ecommerce segment and
the associated merchandise costs paid to Guthy-Renker and other suppliers for
merchandise sold online. The decreased gross margin resulted from increased
sales volume of lower margin merchandise.

Operating Expenses

  Sales and Marketing.  Including charges for amortization of unearned
compensation, sales and marketing expenses increased 1% to $17.3 million in the
quarter ended March 31, 2001 from $17.2 million in the quarter ended March 31,
2000. As a percentage of revenues, sales and marketing expenses decreased to 61%
in the quarter ended March 31, 2001 from 80% in the quarter ended March 31,
2000. The absolute increase is driven by the growing number of listings-related
partner payments made offset by an overall reduction in the amount spent to
market the Company's products and services.

  Product Development.  Including charges for amortization of unearned
compensation, product development expenses remained flat at $8.9 million in the
quarters ended March 31, 2001 and 2000, reflecting an increase in product-
related licensing costs offset by a reduction in editorial and other product-
related staff. As a percentage of revenues, product development expenses
decreased to 31% of revenues in the quarter ended March 31, 2001 from 41% of
revenues in the quarter ended March 31, 2000.

  General and Administrative.  Including charges for amortization of unearned
compensation, general and administrative expenses remained flat at $3.3 million
in the quarters ended March 31, 2001 and 2000. As a percentage of revenue,
general and administrative expenses decreased to 12% in the quarter ended March
31, 2001 from 16% in the quarter ended March 31, 2000.

  Other Nonrecurring Charges.  In January 2001, LookSmart announced a
restructuring of its management and operations. The costs associated with these
activities resulted in a one-time charge of $9.4 million in the quarter ended
March 31, 2001. This included charges related to the exit from non-core
businesses, such as Inside The Web and LookSmart Live! ($6.0 million in goodwill
and capitalized development costs), the termination of certain PBS-related
marketing contracts ($1.3 million in prepaid advertising), and a reduction of
staff by 172 employees ($2.2 million in severance and related employee
payments). As a percentage of revenues, other nonrecurring charges were 33%.

  Amortization of Goodwill and Intangibles.  We are amortizing goodwill and
intangibles as a result of the purchase of intellectual property at our
inception in 1996, the BeSeen.com acquisition in October 1998, the Guthy-Renker
Internet asset purchase in April 1999, the ITW NewCorp asset purchase in June
1999, the Futurecorp investments in December 1999 and in July 2000, and the
Zeal Media, Inc. acquisition made in October 2000. Amortization of these assets
increased 26% to $2.4 million in the quarter ended March 31, 2001 from $1.9
million in the quarter ended March 31, 2000. The dollar increase was due to the
additional investment in Futurecorp and acquisition of Zeal Media, Inc. made
after March 31, 2000.

  Other Operating Income (Expense).  Other operating income (expense)
primarily includes realized gains (losses) on investments and foreign exchange
gains (losses) arising from the change in the value of foreign currencies,
primarily the Australian dollar, relative to the United States dollar. We
recorded other operating income of $500,000 in the quarter ended March 31, 2001
primarily from realized gains on sales of marketable securities. No other
operating income (expense) was recorded in the quarter ended March 31, 2000.

  Interest Income (Expense), Net.  Net interest income (expense) includes
interest expense on our debt and capital lease obligations, net of interest
income from our cash and cash equivalents and investments. We recorded net
interest expense of $1.5 million in the quarter ended March 31, 2001 compared to
net interest income of $400,000 in the quarter ended March 31, 2000. The change
from net interest income to net interest expense between the two periods is
primarily the result of interest expense related to the Company's $50.0 million
convertible credit facility with British Telecom established in March 2000.

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<PAGE>

  Share of Joint Venture Income (Expense).  Share of Joint Venture Income
(Expense) includes LookSmart's 50% share of the income (expenses) of BT
LookSmart. LookSmart recorded $2.9 million of expense in the quarter ended March
31, 2001 compared to $1.6 million recorded during the quarter ended March 31,
2000. This increase is related to the overall larger cost base of the BT
LookSmart joint venture as it grows its organization and expands into new
regions.

Income Taxes

  We recorded income tax expense of $32,000 in the quarter ended March 31, 2001
compared to $47,000 in the quarter ended March 31, 2000. Income tax expense is
primarily associated with our Australian operations.

Joint Venture

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

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

Liquidity and Capital Resources

  LookSmart invests cash pending use predominantly in investment grade debt
instruments with maturities of less than one year, with the intent to make such
funds available for operating purposes.  As of March 31, 2001, LookSmart had
$46.7 million of unrestricted cash and cash equivalents and $43.3 million of
restricted cash and short-term investments.

  LookSmart has incurred losses and consumed cash each year since inception.
Operating activities used $7.0 million of cash in the first quarter of 2001
compared to $18.9 million in the first quarter of 2000. Net cash used in
operations for the first quarter of 2001 resulted primarily from the net losses
for the period offset by a decrease of $8.2 million in accounts receivable, a
write off of $6.0 million of goodwill, $4.2 million of amortization and
depreciation, and a decrease of $4.0 million in prepaid expenses.

  Net cash provided by investing activities was $1.6 million in the first
quarter of 2001 as compared to $13.2 million in the first quarter of 2000.
Investment activity in each of the periods consisted of purchases and sales of
investments and fixed assets. In the first quarter of 2001, we sold $3.8 million
worth of investments compared with $15.0 million in the first quarter of 2000.
In the first quarter of 2001, we provided $1.0 million of funding to BT
LookSmart, and purchased $958,000 worth of equipment and $322,000 of long-term
investment.

  Net cash used in financing activities was $278,000 in the first quarter of
2001. In the first quarter of 2000, financing activities had provided $1.4
million, primarily due to $1.1 million in proceeds from the issuance of common
stock. The consumption of financing cash in the first quarter of 2001 was
mainly due to an equipment lease repayment of $275,000.

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

  Management believes that our current cash balance is sufficient to meet our
operating requirements and funding commitments to BT LookSmart until at least
March 31, 2002.  We may need to seek additional financing to fund further
expansion. We cannot guarantee that such financing will be available on
reasonable terms. If we raise funds through the issuance of equity or

                                       15
<PAGE>

convertible debt securities, our existing stockholders will experience dilution
of their holdings.


                      FACTORS AFFECTING OPERATING RESULTS


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

  We have incurred net losses since our inception, including net losses of
approximately $12.9 million in 1998, $64.7 million in 1999 and $62.6 million in
2000. As of March 31, 2001, we had an accumulated deficit of approximately
$175.1 million. We expect to have net losses and negative cash flow for the
foreseeable future. The size of these net losses will depend, in part, on our
ability to grow our revenues, capitalize on new sources of revenue and contain
our expenses. We expect to spend significant amounts to:

  .   maintain and expand our network of distribution partners;

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

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

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

  .   acquire complementary technologies and businesses.

  In the first quarter of 2001, we announced steps to narrow our losses,
including management restructuring and a reduction in staff. Although these
steps are intended to reduce our quarterly operating expenses in the future, we
cannot guarantee that these steps will achieve the expected reduction in
operating expenses. Because our operating expenses are likely to continue to
exceed our revenues in the near term, we will need to generate significant
additional revenues to achieve operating profitability. Even if we do achieve
operating profitability, we may not be able to maintain or increase our
operating profitability on a quarterly or annual basis.

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

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

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

  .   the demand for our Internet search services;

  .   the demand for Internet advertising and changes in the advertising rates
      we charge;

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

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

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

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

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

  .   the timing of our delivery of URLs under our contract with Microsoft. We
      recognize quarterly revenues under this contract based on the number of
      URLs added to our database during the quarter relative to the total number
      of URLs we are required

                                       16
<PAGE>

      to add to our database during the relevant six-month period. As a result,
      to the extent that we satisfy our database update obligations unevenly,
      the revenues we recognize under this contract may be skewed on a quarter-
      to-quarter basis.

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

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

  Although we believe that our working capital will provide adequate liquidity
to fund our operations and meet our other cash requirements until at least March
31, 2002, unanticipated developments in the short term, such as the entry into
agreements which require large cash payments, further deterioration of the
online advertising market or the acquisition of businesses with negative cash
flows, may necessitate additional financing. In any case, we may seek to raise
additional funds through public or private debt or equity financings in order
to:

  .   fund our operations and capital expenditures;

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

  .   develop and upgrade our technology infrastructure;

  .   reduce outstanding debt;

  .   develop new product and service offerings;

  .   take advantage of favorable conditions in capital markets; or

  .   respond to competitive pressures.

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

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

  For the quarter ended March 31, 2001, advertising and syndication revenues
accounted for 31% of our total revenues, as compared to 57% of our total
revenues in the quarter ended March 31, 2000. We expect that revenues from
advertising and syndication will continue to represent a significant portion
of our total revenues for the foreseeable future. Our advertising and
syndication revenues decreased $6.9 million sequentially in the first quarter
of 2001 and may continue to decrease due to weakness in the online advertising
market, reductions in online advertising expenditures by Internet companies
and downward pressure on advertising rates industry-wide.

  We compete with traditional media such as television, radio and print, as well
as online advertisers and high-traffic websites, for a share of advertisers'
total advertising expenditures. We have experienced, and may continue to
experience, downward pressure on advertising prices in the industry due to the
increasing amount of advertising inventory becoming available on the Internet.
As the Internet evolves, advertisers may find Internet advertising to be a less
effective means of promoting their products or services relative to traditional
advertising media and may reduce or eliminate their expenditures on Internet
advertising. Many potential advertisers and advertising agencies have only
limited experience advertising on the Internet and have not devoted a
significant portion of their advertising expenditures to Internet advertising.
Acceptance of the Internet among advertisers will depend, to a large extent, on
the perceived effectiveness of Internet advertising and the continued growth of
commercial usage of the Internet.

                                       17
<PAGE>

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

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

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

  We derive a significant amount of our revenues under an agreement with
Microsoft Corporation, and either party may terminate the agreement for any
reason on six months' notice. For the quarter ended March 31, 2001, revenues
from Microsoft under this agreement accounted for $4.6 million or 16.4% of our
total revenues. The cash payments we receive for each six-month period under
this agreement are subject to full or partial refund if we fail to provide the
stated number of URLs during that period. After the agreement is terminated,
Microsoft has the right to continue to use the content we delivered during the
term of the agreement. Microsoft also has the right to sublicense these rights
to others, both during and for up to two years after the term of the agreement.

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

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

  .   profitably establish and expand our new product offerings, particularly
      Express Listings and Subsite Listings;

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

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

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

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

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

  .   we will recognize 50% of the net loss from the joint venture as non-
      operating expense on our statement of operations. For the quarter ended
      March 31, 2001, our share of the joint venture's net loss was $2.9
      million. We expect the venture to incur significant losses and require
      capital expenditures for the foreseeable future. We cannot project when
      BT LookSmart will generate cash for us or become profitable, if at all;

  .   we were initially obligated under the joint venture documents to make
      funding contributions of up to $108 million over the first three years of
      BT LookSmart's operation. While the budget for the joint venture will be
      determined by the joint venture's board of directors, we expect that our
      financial contributions in 2001 will not exceed our financial
      contributions in

                                       18
<PAGE>

      2000 of $12.7 million. If we are unable to meet our financing obligations,
      our equity ownership of the joint venture will be proportionately reduced;

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

  .   the joint venture may fail to offer locally-relevant search products and
      services, which would prevent it from aggregating a large base of Internet
      traffic;

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

  .   the joint venture may be unable to aggregate a large amount of Internet
      traffic and generate advertising and other revenue streams from that
      traffic;

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

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

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

  We expect to continue to derive a significant portion of our revenues from the
sale of advertising and listings to Internet companies. Many of these companies
have limited operating histories and are operating at a loss. Moreover, many of
these companies have limited cash reserves and limited access to additional
capital. We have in some cases experienced difficulties collecting outstanding
accounts receivable and, as a result, our reserve for doubtful accounts
receivable as of March 31, 2001 was $3.0 million, compared to $1.7 million as of
March 31, 2000. We may continue to have these difficulties in the future. If
any significant part of our customer base experiences commercial difficulties or
is unable or unwilling to pay our advertising or listing fees for any reason,
our business will suffer.

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

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

We face risks related to expanding into new services and businesses,
particularly our Listings business

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

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

                                       19
<PAGE>

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

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

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

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

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

  .   quarterly fluctuations in our operating results;

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

  .   changes in ratings or financial estimates by securities analysts;

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

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

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

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

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

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

  .   customization of our directory for syndication with particular partners;

  .   substantially increased traffic using our directory; and

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

                                       20
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

  To date, the Internet search infrastructure market has been characterized by
intense competition for consumer traffic. This has resulted in the payment of
consumer referral fees by us and others to frequently-used websites, such as
portals and ISPs. If these

                                       21
<PAGE>

companies fail to provide these referrals, or the market for these referrals
becomes more competitive so that the cost of referrals increases, our business
and potential profitability could be harmed.

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

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

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

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

  .   InfoSpace's acquisition of Go2Net;

  .   The Walt Disney Company's (Go Network) acquisition of a significant stake
      in Infoseek Corporation and recently announced agreement with GoTo.com,
      Inc. regarding the use of GoTo's search results on the Go Network portal;

  .   CMGI's acquisition of an interest in AltaVista; and

  .   Yahoo, Inc.'s acquisition of Geocities and strategic partnership with
      Google.

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

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

  A key component of our strategy is to expand our operations into selected
international markets, both through BT LookSmart in Europe and Asia and through
our direct offerings of search and navigation services in Australia, Canada and
selected countries in Latin America. To date, we have limited experience in
syndicating localized versions of our service offerings in international
markets, and we may be unable to execute our business model in these markets. In
addition, most foreign markets have lower levels of Internet usage and online
advertising than the United States. In pursuing our international expansion
strategy, we face several additional risks, including:

  .   lower per capita Internet usage and online shopping rates in many
      countries abroad, due to a variety of causes such as lower disposable
      incomes, lack of telecommunications and computer infrastructure and
      questions regarding adequate on-line security for e-commerce transactions;

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

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

                                       22
<PAGE>

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

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

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

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

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

  .   foreign currency fluctuations.

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

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

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

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

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

  Our success also depends on our ability to identify, attract, retain and
motivate highly skilled administrative, technical, editorial, finance and
marketing personnel. For example, Ned Brody, our Chief Financial Officer,
resigned effective as of March 31, 2001. Although we have appointed an interim
Chief Financial Officer, we have not yet identified a permanent successor to Mr.
Brody and it may take additional time to appoint a new Chief Financial Officer.
Competition for such personnel, particularly in the San Francisco Bay area, is
intense, and we cannot assure you that we will be able to retain our key
employees or that we can identify, attract and retain highly skilled personnel
in the future.

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

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

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

  We make information available to end users on our search infrastructure
services, both on our website and our distribution affiliates' websites. We also
provide our distribution affiliates with custom-developed software and software
developed by others as

                                       23
<PAGE>

part of our service offerings. Although we do not believe that our website
content and services infringe any proprietary rights of others, we cannot assure
you that others will not assert claims against us in the future or that these
claims will not be successful. We or our distribution affiliates could be
subject to claims for defamation, invasion of privacy, negligence, copyright or
trademark infringement, breach of contract or other theories based on the nature
and content of our information and services. These types of claims have been
brought, sometimes successfully, against online service providers in the past.
In addition, we are obligated under some agreements to indemnify other parties
as a result of claims that we infringe on the proprietary rights of others.

  Even if such claims do not result in liability to us or our distribution
affiliates, we could incur significant costs and diversion of management time in
investigating and defending against them. Our insurance may not cover claims of
this type, may not be adequate to cover all costs incurred in defense of these
claims, and may not indemnify us for all liability we incur.

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

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

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

  .   actual or perceived lack of security of information;

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

  .   inconsistent quality of service;

  .   governmental regulation, such as tax or privacy laws;

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

  .   uncertainty regarding intellectual property ownership; and

  .   lack of appropriate communications equipment.

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

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

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

  As is typical with most websites, our website places information, known as
cookies, on a user's hard drive, generally without the user's knowledge or
consent. This technology enables website operators to target specific users with
a particular advertisement and to limit the number of times a user is shown a
particular advertisement. Although some Internet browsers allow users to modify
their

                                       24
<PAGE>

browser settings to remove cookies at any time or to prevent cookies from being
stored on their hard drives, many consumers are not aware of or technically
proficient enough to customize these options. In addition, some Internet
commentators, privacy advocates and governmental bodies have suggested limiting
or eliminating the use of cookies. If this technology is reduced or limited, the
Internet may become less attractive to advertisers and sponsors, which could
result in a decline in our revenues.

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

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

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

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

  The market price of our common stock could decline as a result of sales of
substantial amounts of our common stock in the public market, or the perception
that such sales could occur. As of April 30, 2001, approximately 50.9 million
shares of common stock were held by non-affiliates and approximately 40.9
million shares were held by affiliates, all of which are currently available for
resale in the public market without registration, subject to compliance with
Rule 144 under the Securities Act. Moreover, as of April 30, 2001, the holders
of up to 42.2 million shares of common stock and warrants to purchase up to
approximately 2.1 million shares of common stock had rights to require us to
register those shares under the Securities Act.

  In addition, the Chess Depository Interests, or CDIs, which are publicly
traded on the Australian Stock Exchange under the symbol "LOK", are exchangeable
into shares of LookSmart common stock at a ratio of 20 CDIs per share of common
stock. Holders of CDIs may decide to exchange their CDIs for shares of LookSmart
common stock at any time. In that event, the exchanged shares of common stock
may be immediately available for resale at the option of the holders in the
Nasdaq National Market, which could depress the Nasdaq market price of LookSmart
common stock. As of April 30, 2001, the CDIs registered for trading on the
Australian Stock Exchange were exchangeable into an aggregate of approximately
18.1 million shares of common stock.

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

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

  As of April 30, 2001, our executive officers, directors and significant
stockholders and the funds for whom they act as general partner, collectively
owned approximately 44.5% of the outstanding shares of LookSmart common stock.
If these stockholders choose to act or vote together, they will have the power
to influence matters requiring stockholder approval, including the election of
our directors, amendments to our charter and approval of significant corporate
transactions, including mergers or asset sales. This concentration of ownership
may have the effect of discouraging others from making a tender offer or bid to
acquire LookSmart at a price per share that is above the then-current market
price.

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

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

                                       25
<PAGE>

with Section 203 of the Delaware General Corporation Law, could discourage
potential acquisition proposals and could delay or prevent a change of control.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Interest Rate Risk. The Company's exposure to market risk for interest rate
changes relates primarily to its short-term investments of restricted cash.
The Company had no derivative financial instruments as of March 31, 2001 or
2000. The Company invests in debt instruments of high-quality corporate
issuers with original maturities greater than three months and current
maturities less than twelve months. The amount of credit exposure to any one
issue and issuer is limited.

     Foreign Currency Risk. International revenues from the Company's foreign
subsidiaries were less than 10% of total revenues in the quarters ended March
31, 2001 and 2000, and were derived entirely from our Australian operations. The
Company's international business is subject to risks typical of an international
business, including but not limited to differing economic conditions, changes in
political climate, differing tax structures, other regulations and restrictions
and foreign exchange rate volatility, particularly the exchange rate between the
Australian dollar and the United States dollar. The effect of foreign exchange
rate fluctuations on the Company for quarters ended March 31, 2001 and 2000 were
not material.


                           PART II. OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

(d) Use of Proceeds.

     On August 20, 1999, the Securities and Exchange Commission declared
effective our registration statement on Form S-1 (File No. 333-80581)
registering the initial public offering of 8,855,000 shares of our common stock
at an offering price of $12.00 per share. The initial public offering was
managed by Goldman, Sachs & Co., BancBoston Robertson Stephens and Hambrecht &
Quist. Gross proceeds of the offering, including the underwriters' exercise of
the over-allotment option, were approximately $106.3 million. Net proceeds to
LookSmart for the offering, after deducting commissions, fees and expenses
related to the offering, were approximately $96.9 million. As of March 31, 2001,
a portion of the net proceeds had been used for general corporate purposes,
including working capital, marketing and promotional activities, expanded
operations, new product development and increased personnel. The remaining
proceeds were invested in short-term investments in order to meet anticipated
cash needs for future working capital.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(1)  Exhibits.

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                                            DESCRIPTION OF DOCUMENT
---------------  -------------------------------------------------------------------------------------------------------
<S>              <C>
        3.1(1)   Restated Certificate of Incorporation
        3.2(1)   Bylaws
        4.1(2)   Form of Specimen Stock Certificate
        4.2(1)   Second Amended and Restated Investor Rights Agreement dated March 24, 1999
       10.1(1)   Form of Indemnification Agreement entered into between the Registrant and each of its directors
                 and officers
       10.2(1)   Amended and Restated 1998 Stock Plan
       10.3(1)   1999 Employee Stock Purchase Plan
       10.4+(1)  License and Update Agreement with Microsoft Corporation
       10.5+(1)  Asset Purchase Agreement with Guthy-Renker Internet LLC
       10.6+(1)  Development Agreement with Cox Interactive Media, Inc.
       10.7+(1)  Premier Positions on US Search Pages with Netscape Communications Corporation
       10.8+(2)  1999-2000 U.S. Net Search Premier Provider Agreement with Netscape Communications Corporation
       10.9+(1)  PBS Group Sponsorship Agreements
</TABLE>

                                       26
<PAGE>

<TABLE>
<CAPTION>
<S>              <C>
      10.10(1)   Lease Agreement with 487 Bryant Street, LLC for property located at 487 Bryant Street, San
                 Francisco, California, dated May 4, 1998
      10.11(1)   Sublease Agreement with Jaran, Inc. for property located at 275 Brannan Street, San Francisco,
                 California, dated April 30, 1999
      10.12(1)   Lease Agreement with Rosenberg SOMA Investments III, LLC for property located at 625 Second
                 Street, San Francisco, California, dated May 5, 1999
      10.13(1)   Consent to Sublease Agreement with Ninety Park Property LLC, and First Manhattan Consulting Group
                 Inc. for property located at 90 Park Avenue, New York, New York, dated October 22, 1998
      10.14(1)   Lease Agreement with Euro Asia Properties Pty Ltd for property located at Level 5, 388 Lonsdale
                 Street, Melbourne, Australia, dated September 1, 1998
      10.15(1)   Lease Agreement with Tonicalon Pty Limited for property located at Level 3, 68 Alfred Street,
                 Milsons Point, Sydney, Australia, dated June 1, 1999
      10.16(1)   Summary Plan Description of 401(k) Plan
      10.17+(3)  Joint Venture Agreement between the Registrant, Transceptgate Ltd., BT LookSmart Ltd., LookSmart
                 (Barbados), Inc. and British Telecommunications Plc dated February 15, 2000
      10.18+(3)  Joint Venture Know How Technology and Database License Agreement between the Registrant, BT
                 LookSmart Ltd., and LookSmart (Barbados), Inc. dated February 15, 2000
      10.19(3)   Loan Letter Agreement between the Registrant and Transceptgate Ltd. dated February 15, 2000
      10.20++    Restated and Final Tagging and Marketing Agreement with Guthy-Renker Corporation dated August 9,
                 1999
      10.21 (4)  Employment Agreement with Kevin Berk dated September 29, 2000
      10.22 (4)  Employment Agreement with Brian Goler dated September 29, 2000
      10.23      Separation Agreement and General Release between the Company and Brian Cowley, dated as of
                 January 29, 2001
      10.24      Separation Agreement and General Release between the Company and Chris Tucher, dated as of
                 January 29, 2001
      10.25      Agreement between the Company and Ned Brody, dated as of January 25, 2001
      21.1(1)    List of Subsidiaries
      24.1       Power of Attorney (contained in the signature page to this Quarterly Report)
</TABLE>
-------------
(1)   Filed in connection with the Company's Registration Statement on Form S-1
      (File No. 333-80581) filed with the SEC on June 14, 1999.
(2)   Filed in connection with the Company's Amendment No. 1 to the Registration
      Statement on Form S-1 (File No. 333-80581) filed with the SEC on July 27,
      1999.
(3)   Filed in connection with the Company's Annual Report on Form 10-K filed
      with the SEC on March 30, 2000.
(4)   Filed in connection with the Company's Annual Report on Form 10-K filed
      with the SEC on March 16, 2001.
(+)   Confidential treatment has been granted with respect to portions of the
      exhibit.
(++)  Confidential treatment has been requested with respect to portions of the
      exhibit.

(2) Current Reports on Form 8-K.

      The Company filed Current Reports on Form 8-K on January 22, 2001, January
26, 2001, February 21, 2001 and April 27, 2001.

                                       27
<PAGE>

                                   SIGNATURES

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

Date:   May 15, 2001             LOOKSMART, LTD.

                                 By: /s/ Martha Clark
                                    -----------------

                                 Martha Clark
                                 Interim Chief Financial Officer
                                 (Principal Financial Officer)

                                 By: /s/ Robert Mally
                                    -----------------

                                 Robert Mally
                                 Vice President of Finance and Controller
                                 (Principal Accounting Officer)

                                       28