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U.S. SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, DC 20549





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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, 2002  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





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LOOKSMART, LTD.


(Exact Name of Registrant as Specified in its Charter)





Delaware (State or other jurisdiction of Incorporation or organization)

13-3904355 (I.R.S. Employer 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, 2002, there were 98,619,027 shares of the registrants common stock outstanding.





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##### Table of Contents




FORM 10-Q





INDEX





PagePART I    FINANCIAL INFORMATIONITEM 1:

Condensed Consolidated Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of December 31, 2001 and March 31, 2002

3Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2001 and 2002

4Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and 2002

5Notes to Condensed Consolidated Financial Statements

6ITEM 2:

Managements Discussion and Analysis of Financial Condition and Results of Operations

10Factors Affecting Operating Results

18ITEM 3:

Quantitative and Qualitative Disclosures About Market Risk

27PART II    OTHER INFORMATIONITEM 1:

Legal Proceedings

28ITEM 6:

Exhibits and Reports on Form 8-K

28ITEM 7:

Signature

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PART I  FINANCIAL INFORMATION





ITEM 1.

FINANCIAL STATEMENTS





LOOKSMART, LTD. AND SUBSIDIARIES





CONDENSED CONSOLIDATED BALANCE SHEETS


(In Thousands)





December 31, 2001


March 31, 2002(audited)


(unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
29,766


$
42,513Restricted cash


3,728



3,418Short-term investments


14,346



3,672Trade accounts receivable, net


9,294



7,882Accounts receivable from related parties


906



988Prepaid expenses


2,144



1,902Other current assets


617



789Total current assets


60,801



61,164Property and equipment, net


10,272



8,936Goodwill and intangible assets, net


9,969



9,793Security deposits


2,878



2,733Long term investments


1,447



370Other assets


735



964Total assets

$
86,102


$
83,960LIABILITIES & STOCKHOLDERS EQUITYCurrent liabilities:Trade accounts payable

$
2,323


$
1,145Other accrued liabilities


14,647



13,744Deferred revenue


9,152



7,696Current portion of long-term debt






36,657Total current liabilities


26,122



59,242Long term debt


35,777



862Other liabilities


559



Total liabilities


62,458



60,104Stockholders equity:Common stock, $.001 par value; Authorized: 200,000 at December 31, 2001 and March 31, 2002; issued and outstanding: 93,004 and
94,307 at December 31, 2001 and March 31, 2002


93



94Additional paid-in capital


234,841



240,403Other deficit


(1,198
)


(1,482
)Accumulated deficit


(210,092
)


(215,159
)Total stockholders equity


23,644



23,856Total liabilities and stockholders equity

$
86,102


$
83,960





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




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LOOKSMART, LTD. AND SUBSIDIARIES





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS


(unaudited)


(In Thousands)





Three Months Ended March 31,2001


2002Revenues:Listings

$
6,422


$
13,426Advertising


8,515



2,573Licensing


5,125



3,709Ecommerce


7,971



342Total revenues


28,033



20,050Cost of revenues:Listings


1,246



3,682Advertising


1,343



1,374Ecommerce


5,009



63Total cost of revenues


7,598



5,119Gross profit


20,435



14,931Operating expenses:Sales and marketing (includes stock compensation of $580 and $1,042 in the three months ended March 31, 2001 and 2002,
respectively)


17,268



7,182Product development (includes stock compensation of $304 and $1,212 in the three months ended March 31, 2001 and 2002,
respectively)


9,105



7,017General and administrative (includes stock compensation of $231 and $603 in the three months ended March 31, 2001 and 2002,
respectively)


3,157



2,696Amortization of goodwill


1,843



Asset impairment and restructuring charges


9,434



Total operating expenses


40,807



16,895Loss from operations


(20,372
)


(1,964
)Non-operating income (expenses):Interest and other non-operating income (expense), net


(971
)


(1,337
)Share of joint venture loss


(2,920
)


(1,077
)Loss from continuing operations before income taxes


(24,263
)


(4,378
)Income tax expense


(32
)


(14
)Loss from continuing operations


(24,295
)


(4,392
)Loss from discontinued operations, net of taxes


(262
)


(972
)Net loss


(24,557
)


(5,364
)Other comprehensive income (loss):Change in foreign currency translation adjustment during the period


(155
)


201Change in unrealized gains/(losses) during the period


130



1Comprehensive loss

$
(24,582
)

$
(5,162
)Basic and diluted net loss per share:Loss from continuing operations

($
0.27
)

($
0.05
)Loss from discontinued operations

($
0.00
)

($
0.01
)Net loss

($
0.27
)

($
0.06
)Weighted average shares outstanding used in per share calculation


91,213



93,408





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




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LOOKSMART, LTD. AND SUBSIDIARIES





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)


(In
Thousands)





Three Months Ended March 31,2001


2002Cash flows from operating activities:Net loss

$
(24,557
)

$
(5,364
)Adjustments to reconcile net loss to cash used in operating activities:Share of joint venture loss


2,920



1,077Depreciation and amortization


4,164



1,820Impairment of goodwill


6,014



Loss from discontinued operations, net of taxes






972Non-cash charges


205



58Stock compensation


1,115



2,900Loss on foreign currency transactions


14



Net (gains) losses from the sales of assets


(472
)


157Changes in operating assets and liabilities:Trade accounts receivable


8,184



951Prepaid expenses


4,035



247Other assets


(13
)


(445
)Trade accounts payable


(5,358
)


(1,055
)Other liabilities


(1,198
)


1,496Deferred revenue


(2,042
)


(1,414
)Minority interest


(6
)


Net cash (used in) provided by operating activities


(6,995
)


1,400Cash flows from investing activities:Purchase of investments


(321
)


Proceeds from sale and maturity of investments


3,836



10,674Proceeds from sale of property & equipment






94Funding to joint venture and subsidiaries


(1,000
)


(266
)Purchase of property and equipment


(958
)


(521
)Restricted cash






310Net cash provided by investing activities


1,557



10,291Cash flows from financing activities:Repayment on notes


(8
)


(304
)Repayments on equipment lease


(275
)


(150
)Proceeds from issuance of common stock


5



1,309Net cash provided by (used in) financing activities


(278
)


855Effect of exchange rate changes on cash


(155
)


201Increase (decrease) in cash and cash equivalents


(5,871
)


12,747Cash and cash equivalents, beginning of period


52,617



29,766Cash and cash equivalents, end of period

$
46,746


$
42,513





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




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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 is a leading global provider of Internet search-targeted marketing
solutions for online business. Through LookSmarts LookListings products, medium and large businesses pay for their web sites to be included in LookSmarts broadly distributed web directory, and can pay additional fees to be featured
prominently in the search results of the directory. Through LookSmarts LookListings Small Business, small businesses pay to be included in our directory and can obtain customized marketing services geared toward their particular marketing
needs.





The consolidated financial statements include the accounts of the Company and its subsidiaries: LookSmart 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, over which the Company does not exert any significant influence, are accounted for by the cost
method.





Revenue Recognition





The Company generates revenues from listings, advertising, licensing and ecommerce activities. Revenues associated with listings products generally are recognized once collectibility is established, as delivery of
services occurs, once all performance obligations have been satisfied and when no refund obligations exist. In some cases, there is also an upfront and maintenance fee, which is recognized ratably over the longer of the term of the contract or the
expected relationship with the customer.





Advertising revenues are recognized as impressions or clicks 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.





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





The
Companys ecommerce revenues are generated by the sale of merchandise. In accordance with EITF Issue No. 99-19, Reporting Gross Revenue vs. Net, revenue from the sale of merchandise is reported on a gross basis if the Company acts
as the principal and on a net basis for transactions in which the Company acts as an agent. Revenue is recognized at the time goods are shipped.





For the purpose of determining when to recognize revenue in any of our segments, the time of delivery of the applicable services or merchandise is readily determinable. However, determination of collectibility of
payments requires significant judgment on the part of management and includes performing credit evaluations of customers. The Company recognizes revenues once collectibility is established and maintains a reserve for doubtful accounts receivable
based upon expected collectibility, which reflects managements judgment based on this ongoing credit evaluation. In addition, the Company provides a reserve against revenue for estimated credits resulting from billing adjustments.




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LOOKSMART, LTD. AND SUBSIDIARIES





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Expense Recognition





Generally, all costs are expensed as incurred. However, product development costs, including research and development, have been capitalized 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 No. 98-1, Accounting for the Cost of Computer Software Developed or Obtained for Internal Use (SOP
98-1).





Recently Issued Accounting Pronouncements





Business Combinations and Goodwill and Other Intangible Assets





On January 1, 2002, the Company adopted Statement No. 141, Business Combinations (SFAS No. 141), and Statement No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). SFAS No. 141 revises
the accounting treatment for business combinations, requiring the use of purchase accounting and prohibiting the use of the pooling-of-interests method for all business combinations initiated after June 30, 2001, and broadens the criteria for
recording intangible assets separate from goodwill for all business combinations completed after June 30, 2001. SFAS No. 142 revises the accounting for goodwill and other intangible assets by not allowing the amortization of goodwill and
establishing accounting for the impairment of goodwill and other intangible assets. Under SFAS No. 142, the Company ceased amortizing goodwill. Additionally, the Company reassessed the expected useful lives of existing intangible assets. This did
not result in any significant changes to the useful lives. The Company reported the following (in thousands):





December 31, 2001

March 31, 2002(unaudited)Goodwill

$
11,546

$
11,546Less accumulated amortization


2,694


2,694Goodwill, net


8,852


8,852Intangible assets


1,935


1,935Less accumulated amortization


818


994Intangible assets, net

$
1,117

$
941





Amortization expense was $2.1 million for the three months ended March 31, 2001
and $0.2 million for the three months ended March 31, 2002.





The Company will perform the first step of the required SFAS No.
142 impairment tests as of January 1, 2002. This first step requires the Company to compare the carrying value of any reporting unit that has goodwill to the estimated fair value of the reporting unit. A reporting unit is one of the Companys
operating segments or a discrete component of that segment. If the current fair value is less than the carrying value, then the Company will perform the second step of the impairment test. This second step requires the Company to measure the excess
of the recorded goodwill over the current value of the goodwill, and to record any excess as an impairment.





The Company is in
the process of completing step one of the impairment test and plans to complete the entire process during the second quarter of 2002.




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LOOKSMART, LTD. AND SUBSIDIARIES





NOTES TO CONDENSED FINANCIAL STATEMENTS(Continued)







The reconciliation of net income to adjusted net income as if there had been no
goodwill amortization in any period presented, for the three months ended March 31, 2001 and 2002, is as follows (in thousands, except per share amounts):





March 31,2001


2002(unaudited)Reported net loss

$
(24,557
)

$
(5,364
)Goodwill amortization


1,843



Adjusted net loss

$
(22,714
)

$
(5,364
)Reported basic and diluted earnings per share:Net loss

$
(0.27
)

$
(0.05
)Goodwill amortization


0.02



0.00Adjusted net loss

$
(0.25
)

$
(0.05
)





Accounting for Consideration Given by a Vendor to a Customer





In November 2001, the FASB Emerging Issues Task Force reached consensus on Issue 01-9, Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors Products) (EITF 01-9). The issue provides guidance on accounting for certain payments made by a vendor of goods and services to a customer. Under
certain conditions, amounts paid to customers are required to be shown as a reduction in the corresponding revenues recorded from those customers, rather than be shown as expenses in the income statement. EITF 01-9 is generally effective for fiscal
years or interim periods beginning after December 15, 2001. The Company has adopted the provisions of EITF 01-09, which did not have a significant impact on the financial statements.





Reclassifications





Certain reclassifications have been
made to prior period consolidated financial statements to conform to the current presentation of discontinued operations.





2.    Unaudited Interim Financial Information





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





Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commissions
rules and regulations. These unaudited interim condensed consolidated financial statements should be read in conjunction with LookSmarts audited financial statements and notes for the year ended December 31, 2001, as included in
LookSmarts Annual Report to Shareholders on Form 10-K, as filed with the Securities and Exchange Commission.





3.    Loss
from Discontinued Operations





In the first quarter of 2002, the Company transferred its 52.8% ownership interest in its
consolidated subsidiary, Futurecorp, to the minority shareholders. The Company paid Futurecorp AU$90,000 (approximately U.S.$47,000) and issued to Futurecorp 16,437 shares of LookSmart common stock in connection with the transfer. As required by
SFAS No. 144, the Company reported the results of operations of this component as a loss from discontinued operations of $972,000, which included a $1,035,000 loss on disposal. Revenue and pretax net income reported in discontinued operations for
the quarter ended March 31, 2002 were $642,000 and $63,000, respectively.




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LOOKSMART, LTD. AND SUBSIDIARIES





NOTES TO CONDENSED FINANCIAL STATEMENTS(Continued)







4.    Asset Impairment and Restructuring Charges





In January 2001, the Company announced a restructuring of its management and operations. The costs associated with these activities resulted in an
impairment and restructuring charge related to LookSmarts exit from non-core businesses, such as Inside The Web and LookSmart Live!, the amendment of certain marketing agreements, and a reduction of staff by 172 employees. The restructuring
resulted in a one-time charge of $9,434,000 during the first quarter of 2001. The Company had no asset impairment and restructuring charges in the first quarter of 2002.





5.    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 31,2001


2002(unaudited)NumeratorBasic and diluted:Loss from continuing operations

$
(24,295
)

$
(4,392
)Loss from discontinued operations


(262
)


(972
)Net loss

$
(24,557
)

$
(5,364
)DenominatorBasic and diluted:Weighted average common shares outstanding


91,213



93,408Basic and diluted loss per share:Loss from continuing operations

$
(0.27
)

$
(0.05
)Loss from discontinued operations

$
(0.00
)

$
(0.01
)Basic and diluted loss per share

$
(0.27
)

$
(0.06
)





Options and warrants to purchase common and preferred shares are not included in
the diluted loss per share calculations as their effect is antidilutive for all periods. The dilutive securities included common stock equivalents relating to stock options and warrants to purchase common shares and were as follows (in thousands):





As of March 31,2001

2002(unaudited)Options

13,975

15,674Warrants

2,008

2,437Total dilutive shares

15,983

18,111





6.    Related Party Transactions





The Company has a distribution agreement with Guthy-Renker Corporation (GRC), one of the Companys stockholders. At March 31, 2002, the Company had
a receivable of $319,000 from GRC arising from transactions under the distribution agreement. In addition, during the first quarter of 2002, the Company earned $894,000 in revenue from GRC and paid GRC $13,000 for marketing and administrative
support. The distribution agreement with GRC was terminated pursuant to its terms on April 2, 2002.





7.    Segment Information





The Company operates in four segments: listings, advertising, 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, 2001 and March 31, 2002, accounts receivable by segment were
as follows (in thousands):




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LOOKSMART, LTD. AND SUBSIDIARIES





NOTES TO CONDENSED FINANCIAL STATEMENTS(Continued)







December 31, 2001


March 31, 2002(audited)


(unaudited)Listings

$
7,336


$
8,687Advertising


4,956



2,891Licensing


99



94Ecommerce


12



12Total


12,403



11,684Allowance for doubtful accounts


(3,109
)


(3,802
)Accounts receivable, net

$
9,294


$
7,882





As of December 31, 2001 and March 31, 2002 deferred revenue by segment was as
follows (in thousands):





December 31, 2001

March 31, 2002(audited)

(unaudited)Listings

$
329

$
200Advertising


330


212Licensing


8,493


7,284Total

$
9,152

$
7,696





8.    Stock Option Plan





During the three months ended March 31, 2002, the Company granted 1,931,500 stock options at the then current fair market value of its underlying common stock. During such period
employees exercised an aggregate of 1,363,880 options, and 675,573 options were cancelled. Total outstanding stock options were 15,674,378 as of March 31, 2002.





9.    Acquisition of License





On February 28, 2002, the Company exercised an option to
convert a technology license from Viator Ventures, Inc. from a non-exclusive license to an exclusive license. In connection with the exercise of the option, the Company issued 300,000 shares of common stock and paid $200,000 to Viator Ventures. The
license is classified as property and equipment on the balance sheet and has an estimated useful life of three years.





10.    Subsequent Event





On April 2, 2002, the closing of the Companys acquisition of
WiseNut, Inc. occurred pursuant to the merger agreement executed by the parties on March 7, 2002. As a result of the acquisition, the Company issued 3,835,387 shares of its common stock in exchange for all of the outstanding stock of WiseNut and
reserved 295,921 shares for issuance upon exercise of assumed WiseNut stock options.





ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





Cautionary Note Regarding Forward-Looking Statements





The following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements 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, introduction of additional services, the extent of our distribution network, 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 Factors Affecting Operating Results. Except as
may be required by applicable law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The following discussion should be read in conjunction
with the condensed consolidated financial statements and the notes to those statements, which appear elsewhere in this Form 10-Q.




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Overview





LookSmart is a global leader in search-targeted marketing, helping online and offline businesses find qualified leads on the Internet through search. LookSmart has built 33 directories
spanning 27 countries or regions, including those directories which are owned by BT LookSmart. These directories include more than 2.9 million high-quality web site listings aggregated by editors and categorized within the directories. LookSmart
directories are distributed through its network of leading Internet portals, ISPs and Internet media companies. By providing its directories through a network of partners, LookSmart enables businesses to gain access to qualified customers at the
moment that they are searching for relevant products, services and information.





Revenues and Cost of Revenues





Listings.    The Companys listings revenues are derived from LookListings and Small
Business fees and affiliate partner commissions. LookListings fees result from placement of URLs using the Companys Featured Listings, Directory Listings or Index Listings products. Small Business fees result from a one-time review of
customers web sites and provision of customized features for their listings. Affiliate partner commissions are derived from the Companys affiliates program, in which vendors pay the Company for referral of Internet traffic to their web
sites.





The Companys costs of listings revenue are the distribution fees paid to partners based on LookListings
cost-per-click revenues when there is no LookSmart branding or other direct sales and marketing efforts associated with the generation of these clicks and revenues. We expect payments to our distribution partners to increase as we expand
our business.





We expect listings revenues to continue to grow in total and as a proportion of our overall revenues as search
targeted marketing continues to be recognized as a highly effective marketing tool. However, as described in the Factors Affecting Operating Results, listings revenues may fluctuate due to various factors.





At the beginning of the second quarter of 2002, LookSmart released Small Business Listings as part of the LookListings Small Business product suite.
This new product couples a one-time review fee with a continuing cost per click fee. The review fee will be recognized ratably over the clients estimated life in the directory, while cost per click fees will be recognized as
delivered. Because revenues will be recognized on an on-going basis rather than up front due to the Companys continuing obligation under the contract, the Company anticipates Small Business revenues to decline during the products initial
months but to then grow as new customers join the base of existing customers.





Advertising.    The
Companys advertising revenues are typically derived from two to four month agreements requiring the Company to serve a minimum number of advertising impressions or clicks 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 the associated 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.





The principal components of
cost of advertising revenues are personnel costs of our in-house advertising employees, equipment depreciation, other expenses relating to hosting advertising operations and agency commissions paid to outside advertising agencies. Our costs of
advertising revenues are generally fixed, at least in the short term, and cannot be expected to follow short-term fluctuations in advertising revenues. To the extent that advertising costs do not coincide with changes in advertising revenues,
fluctuations from this revenue source will have a disproportionate impact on net income or loss.





Advertising revenues, both in
absolute terms and relative to total revenues, have declined over the past year. We expect this trend to continue as marketers shift to more targeted marketing and advertising approaches, as described in the discussion of listings revenues.





Licensing.    We license our database content to some of our partners, predominantly Microsoft. 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.




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##### Table of Contents




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 if the Company acts as the principal in the
transactions. Associated direct product costs are reported as cost of revenues. The Company expects a decline in future ecommerce revenue and expenses due to the decision to exit this segment of the business effective April, 2002.





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 primarily consist of payments to distribution partners for directing online users to the LookSmart directories and referring Small Business customers.
Distribution costs can fluctuate significantly from period to period depending on the rates and other contract terms and volume. Further, distribution costs as a percentage of revenues can vary significantly depending on the structure of the payment
arrangements between LookSmart and its distribution partners. We expect payments to our distribution partners to increase as we expand our distribution.





Sales and marketing expenses also include salaries and associated costs of employment for the Companys sales force, sales administration and customer service staff; overhead; facilities; allocation of
depreciation; amortization of unearned compensation; and provisions for doubtful trade receivables. Sales and marketing expenses also include the costs of advertising, trade shows and public relations activities. Due to the one-time nature of most
of these advertising expenditures, we expect that sales and marketing expenses will continue to fluctuate from period to period.





Product Development.    Product development costs include all costs related to development and engineering of new products and continued development of our editorial databases. These costs include salaries and
associated costs of employment, overhead, facilities and amortization of unearned compensation. Costs related to the development of software for internal use in the business, including salaries and associated costs of employment, are capitalized as
required by generally accepted accounting principles. Software licensing and computer equipment depreciation related to supporting product development functions are also included in product development expenses. Product development costs are
relatively fixed in the short term, but are expected to increase in the future as the Company continues to invest in this area.





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, allocation of depreciation and amortization of unearned compensation. General and administrative expenses include related consulting and professional service fees that will vary significantly
over time.





Amortization of Goodwill.    In accordance with SFAS No. 142 (See Note 1Recently
Issued Accounting Pronouncements in the Notes to Consolidated Financial Statements which appear in Item 1 in this Form 10-Q), commencing January 1, 2002 the Company ceased amortizing goodwill.





Asset Impairment and Restructuring Charges.    In January 2001, LookSmart announced a restructuring of its management and operations. The costs associated
with these activities resulted in an impairment and restructuring charge related to LookSmarts exit from non-core businesses, such as Inside The Web and LookSmart Live!, the amendment of certain marketing agreements, and a reduction of staff
by 172 employees. The Company had no asset impairment and restructuring charges in the first quarter of 2002.





Income
Taxes.Although we are not yet profitable on a consolidated basis, tax charges are incurred in connection with our operations in foreign jurisdictions.




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Critical Accounting Policies





The financial condition and results of operations of the Company are based upon certain critical accounting policies, which include estimates, assumptions, and judgment on the part of
management. The following discussion highlights those policies and the underlying estimates and assumptions, which management considers critical to an understanding of the financial information in this report. See Note 1Summary of Significant
Accounting Policies in the Notes to Consolidated Financial Statements which appear in Item 1 in this Form 10-Q for additional information about these and other accounting policies used in the preparation of the financial statements included in this
Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2001.





Investments.The Company accounts for investments in securities under Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS No.
115), and management has determined that all investments should be classified as available-for-sale. Except for declines in fair value that are not considered temporary, net unrealized gains or losses on these investments are reported as
a component of comprehensive income (loss) in stockholders equity, net of tax. Management reviews the estimated fair value of the securities quarterly. The determination of whether the decline in the fair value of a security is other than
temporary and therefore should be recognized as a loss requires judgment based on an evaluation of the company that issued the security as well as market conditions.





Internal Use Software and Web Site Development Costs.    The Company accounts for internal use software in accordance with American Institute of Certified
Public Accountants (AICPA) Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP 98-1). In accordance with the capitalization criteria of SOP 98-1, the Company has
capitalized external direct costs of materials and services consumed in developing and obtaining internal-use computer software and the payroll and payroll-related costs for employees who are directly associated with and who devote time to the
internal-use computer software project.





The Company capitalizes certain costs incurred in the development of its web sites in
accordance with Emerging Issues Task Force (EITF) Issue No. 00-02 Consensus, Accounting for Web Site Development Costs. These are costs incurred during the infrastructure, graphics and content development stages.





Management judgment is required in determining the point at which various projects enter the stages at which costs may be capitalized, in assessing the
ongoing value of the capitalized costs, and determining the estimated useful lives over which the costs are amortized.





Goodwill and Intangible Assets.    We have recorded goodwill and intangible assets in connection with our business acquisitions. Management judgment is required in the assessment of the related useful lives, and
the fair value and recoverability of these assets. Historically, there have been no circumstances that resulted in revised assumptions or impairment charges. The majority of intangible assets are amortized over five years, the period of expected
benefit. Valuation of intangible assets is reassessed periodically to conform to changes in managements estimates of future performance giving consideration to existing and anticipated competitive and economic conditions. Goodwill is reviewed
for impairment at least annually. The Company does not expect a goodwill impairment charge in the current year as a result of the initial review of goodwill. Cash flow forecasts used in evaluation of goodwill and intangibles are based on trends of
historical performance and managements estimate of future performance.





Asset
Impairment.    SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, requires recognition of impairment of long-lived assets in the event the net book value of such assets exceeds the
future undiscounted cash flows attributable to such assets. In such circumstances, the amount of impairment is measured as the difference between the estimated fair market value of the asset and its carrying amount. The estimate of fair market value
of the assets includes assumptions and estimates on the part of management as to the nature and amount of cash flows as well as the appropriate discount rate to use in discounting the cash flows.





Stock-Based Compensation.    The Company accounts for stock-based employee compensation arrangements in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, (APB No. 25) and related interpretations and complies with the disclosure provisions of SFAS No. 123, Accounting for Stock-based Compensation. The disclosure
provisions of SFAS No. 123 require judgments made by management as to the expected lives of the outstanding options. Management has based the estimated useful life of the options on historical option exercise patterns. If the estimated life of the
options increases, the valuation of the options will increase as well. As the market price of the Companys common stock increases, the Company will incur compensation charges in connection with variable stock options.




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Revenue Recognition.    The Company generates revenues from
listings, advertising, licensing and ecommerce activities. Revenues associated with listings products generally are recognized once collectibility is established, as delivery of services occurs, once all performance obligations have been satisfied
and when no refund obligations exist. In some cases, there is also an upfront and maintenance fee, which is recognized ratably over the longer of the term of the contract or the expected relationship with the customer.





Early in the second quarter of 2002, LookSmart released Small Business Listings as part of the LookListings Small Business product suite. This new
product couples a one-time review fee with a continuing cost per click fee. The review fee will be recognized ratably over the estimated life of the customer. This estimate will be reviewed and adjusted as the Small Business Listing
customer base matures. Cost per click fees will be recognized as delivered. Because revenues will be recognized on an on-going basis rather than up front due to the Companys continuing obligation under the contract, the Company anticipates
Small Business revenues to decline during the products initial months but to then grow as new customers join the base of existing customers.





Advertising revenues are recognized as impressions or clicks 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.





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





The Companys ecommerce revenues are generated by the sale of merchandise. In accordance
with EITF Issue No. 99-19, Reporting Gross Revenue vs. Net, revenue from the sale of merchandise is reported on a gross basis if the Company acts as the principal and on a net basis for transactions in which the Company acts as an agent.
Revenue is recognized at the time goods are shipped.





For the purpose of determining when to recognize revenue in any of our
segments, the time of delivery of the services or merchandise is readily determinable. However, determination of collectibility of payments requires significant judgment on the part of management and includes performing credit evaluations of
customers. The Company recognizes revenues once collectibility is established and maintains a reserve for doubtful accounts receivable based upon expected collectibility, which reflects managements judgment based on this ongoing credit
evaluation. In addition, the Company provides a revenue reserve for estimated billing adjustments.





Results of Operations





Revenues





Listings.    Listings revenue was $13.4 million for the quarter ended March 31, 2002, representing a 109% increase over revenue of $6.4 million for the first quarter of 2001. The growth is due to the successful
enhancement of our LookListings suite of products, continuing increases in our distribution network, and our sales and marketing efforts to promote these new products. Listings revenue accounted for 67% of total revenues in the first quarter of
2002, an increase from 23% in the corresponding period in 2001, and represented the largest revenue segment for LookSmart for the last four consecutive quarters.





Advertising.    Advertising revenue was $2.6 million for the quarter ended March 31, 2002, representing a 70% decrease from revenue of $8.5 million for the
first quarter of 2001. The decrease in advertising revenues is attributable to the downturn in the online advertising market and reduced demand and prices for these products.





Licensing.Licensing revenue was $3.7 million for the quarter ended March 31, 2002, representing a 28% decrease from revenue of $5.1 million for the first
quarter of 2001. The decrease in licensing revenue is attributable primarily to an unusually high number of expedited links ordered by Microsoft in 2000. In late 2001, deliveries to Microsoft returned to normal levels. The decline was also caused by
the timing of delivery of URLs under our agreement with Microsoft.




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Ecommerce.    Ecommerce revenue was $0.3 million for the quarter
ended March 31, 2002, representing a 96% decrease from revenue of $8.0 million for the first quarter of 2001. The decrease is the result of the Companys decision to exit the ecommerce line of business.





Cost of Revenues





Listings.    Listings cost of revenues was $3.7 million for the quarter ended March 31, 2002, representing a 196% increase over cost of revenue of $1.2 million for the first quarter of 2001. The increase in
listings cost of revenues is primarily attributable to the growth in partner distribution expenses for the listings products. The costs have increased as the listings business matured and became an ongoing activity. Listings costs are generally
variable as a result of variations in the amount of revenue shared with distribution partners under each agreement.





Advertising.    Advertising cost of revenues was $1.4 million for the quarter ended March 31, 2002, representing a 2% increase from cost of revenue of $1.3 million for the first quarter of 2001. The decrease in
advertising cost of revenues is primarily attributable to the decline in the commission expense associated with the resale of advertising. However, because most of our costs of advertising revenues are generally fixed in the short-term, they cannot
be expected to follow declines in advertising revenue.





Ecommerce.    Ecommerce cost of revenues was
$0.1 million for the quarter ended March 31, 2002, representing a 99% decrease from cost of revenue of $5.0 million for the first quarter of 2001. The decrease is the result of the Companys decision to exit the ecommerce line of business.





Operating Expenses





Sales and Marketing.    Including charges for amortization of unearned compensation and depreciation, sales and marketing expenses changed as follows (dollar figures are in thousands):





Three Months Ended March 31


% change2001


2002(unaudited)Amortization of deferred stock compensation

$
580


$
267


(54
%)Stock compensation related to variable options






775


100
%Other sales and marketing expense


16,688



6,140


(63
%)Total Sales and Marketing Expense

$
17,268


$
7,182


(58
%)As % of Revenue


62
%


36
%





The decline in quarterly expense as well as expense as a percentage of revenues
was driven primarily by an overall decrease in distribution costs, termination of advertising distribution agreements, a reduction in employee-related expenses resulting from the January 2001 restructuring, and reduced corporate marketing and
branding-related spending. In the short term, we anticipate that expenses in this area will begin to increase in future quarters as the Company expands its distribution network. In addition, due to the increase in the market price of the
Companys stock at the end of the first quarter of 2002, the Company incurred additional stock compensation expense in connection with variable accounting for repriced stock options. This cost will continue to fluctuate as the market price of
the Companys stock increases or decreases.




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Product Development.    Including charges for amortization of
unearned compensation and depreciation, product development expenses changed as follows (dollar figures are in thousands):





Three Months Ended March 31


% change2001


2002(unaudited)Amortization of deferred stock compensation

$
304


$
244


(20
%)Stock compensation related to variable options






968


100
%Other product development expense


8,801



5,805


(34
%)Total Product Development Expense

$
9,105


$
7,017


(23
%)As % of Revenue


32
%


35
%





The decrease in quarterly expenses was driven by the overall decrease in
employee-related expenses resulting from the January 2001 restructuring. The increase in expense as a percentage of revenues resulted from a larger decline in total revenues for the year relative to LookSmarts continued investment in product
development activities. In the last half of 2001, the Company invested in licensing the technology and hiring the senior management team of Primary Knowledge, an online marketing business intelligence firm. This investment will enhance the
Companys ability to track and report to its customers the effectiveness of its advertising and listings products. In addition, due to the increase in the market price of the Companys stock at the end of the first quarter of 2002, the
Company incurred additional stock compensation expense in connection with variable accounting for repriced stock options. This cost will continue to fluctuate as the market price of the Companys stock increases or decreases. We expect product
development costs to increase as a result of the Wisenut acquisition completed in April 2002.





General and
Administrative.    Including charges for amortization of unearned compensation and depreciation, general and administrative expenses changed as follows (dollar figures are in thousands):





Three Months Ended March 31


% change2001


2002(unaudited)Amortization of deferred stock compensation

$
231


$
42


(81
%)Stock compensation related to variable options






561


100
%Other general and administrative expense


2,926



2,093


(28
%)Total General and Administrative Expense

$
3,157


$
2,696


(15
%)As % of Revenue


11
%


13
%





The decrease in quarterly expenses was driven by the overall decrease in
employee-related expenses resulting from the January 2001 restructuring and continuing cost management. The increase in general and administrative expense as a percentage of revenues resulted from a larger decline in total revenues in each period in
proportion to the relatively fixed nature of general and administrative costs required to support the organization. We anticipate general and administrative expenses to increase somewhat in constant dollars but remain relatively flat as a percentage
of revenue as we expand our distribution partner network. In addition, due to the increase in the market price of the Companys stock at the end of the first quarter of 2002, the Company incurred additional stock compensation expense in
connection with variable accounting for repriced stock options. This cost will continue to fluctuate as the market price of the Companys stock increases or decreases.





Amortization of Goodwill.    In accordance with the adoption of SFAS No. 142 (See Note 1Recently Issued Accounting Pronouncements in the Notes to
Consolidated Financial Statements which appear in Item 1 in this Form 10-Q), the Company no longer amortizes goodwill.





Asset Impairment and Restructuring Charges.    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! (write-off of $6.0 million in goodwill and
capitalized development costs), the termination of certain marketing contracts (write-off of $1.2 million in prepaid advertising), and a reduction of staff by 172 employees ($2.2 million in severance and related employee payments). Asset impairment
and restructuring charges for the quarter ended March 31, 2001 represented 34% of revenues. LookSmart incurred no asset impairment and restructuring Charges in the quarter ended March 31, 2002.




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Interest and Other Non-Operating Expense.    Interest and other
non-operating expense primarily includes interest expense on our debt and capital lease obligations, net of interest income from our cash, cash equivalents and investments, realized gains or 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.





Interest and other non-operating expense increased by 38% to $1.3 million in the quarter ended March 31, 2002 compared to $1.0 million in the same period of 2001. The quarterly increase resulted from reduced interest income caused by lower
overall rates and lower cash and investment balances.





Share of Joint Venture Income (Expense), Net.    Share of Joint Venture Income (Expense), Net includes LookSmarts 50% share of the loss of BT LookSmart. LookSmart recorded $1.1 million of expense for the
quarter ended March 31, 2002, a decrease in expense of 63% compared to $2.9 million recorded during the first three months of 2001. The decrease is a result of BT LookSmarts combined revenue growth and reduced expenses.





Income Taxes





We recorded income tax
expense of $14,000 in the quarter ended March 31, 2002, compared to expense of $32,000 in the quarter ended March 31, 2001. Income tax expense is primarily associated with our Australian operations.





Loss from Discontinued Operations





In the first
quarter of 2002, the Company transferred its 52.8% ownership interest in its consolidated subsidiary, Futurecorp, to the minority shareholders. The Company paid Futurecorp AU$90,000 (approximately U.S.$47,000) and issued Futurecorp 16,437 shares of
LookSmart common stock in connection with the transfer. As required by SFAS No. 144, the Company reported the results of operations of this component as a loss from discontinued operations of $972,000, which includes a $1,035,000 loss on disposal,
in the first quarter of 2002. Revenue and pretax net income reported in discontinued operations for the quarter ended March 31, 2002 were $642,000 and $63,000, respectively. Loss from discontinued operations was $262,000 in the first quarter of
2001.





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. In December of 2001, the joint venture agreement was amended to allow either party to the joint venture to exercise a call option (the Call), which would require the other party to
sell its share of the joint venture for cash to the party initiating the Call. The purchase price would be based upon the fair market value of the joint venture at the time of the Call. The agreement provides a process for either party to outbid the
other in subsequent Calls, until a sale is concluded. The Call becomes effective in September 2002. The agreement was also amended to transfer ownership of the intellectual property rights in the local databases from LookSmart (Barbados), Inc. to
the joint venture, effective December 2001.





The joint venture agreement requires that LookSmart and BT provide funding equally
for the operations of the joint venture. Under the terms of the agreement, BT extended to LookSmart 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. In
December 2001, LookSmart renegotiated the loan and restructured the $50.0 million outstanding loan and $19.5 million of accrued interest, repaying $35.0 million of the total outstanding. The new credit facility of $35.0 million bears interest of 15%
per annum. The credit facility and accrued interest are due in full by March 2003, or earlier if the BT LookSmart joint venture is dissolved. In the event of default, BT may take ownership of the Companys share of the joint venture, but has no
other recourse against the Company.





Liquidity and Capital Resources





LookSmart invests cash pending use 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, 2002, LookSmart had $46.1 million of




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unrestricted cash, cash equivalents and short-term investments and $3.4 million of restricted cash. Restricted cash is only available for investment in BT
LookSmart ($3.0 million) and as support for a letter of credit ($0.4 million) related to a loan to purchase insurance.





LookSmart has incurred losses and consumed cash each year since inception. Operating activities provided $1.4 million of cash for the quarter ended March 31, 2002 compared to operating cash use of $7.0 million in the same period in 2001.
The improvement in cash provided by operating activities is primarily attributable to lower operating expenses caused by lower distribution costs, reduced employee-related expenses resulting from the January 2001 company-wide restructuring, and
continuing cost management.





Net cash provided by investing activities was $10.3 million for the quarter ended March 31, 2002,
compared to $1.6 million in the same period in 2001. During the quarter ended March 31, 2002, investment activity consisted primarily of the rollover of investments into shorter term maturities classified as cash equivalents due to the prevailing
interest rate environment.





Net cash provided by financing activities was $0.9 million for the quarter ended March 31, 2002,
compared to cash used of $0.3 million in the same period in 2001.





On February 28, 2002, the Company exercised an option to
convert a technology license from Viator Ventures, Inc. from a non-exclusive license to an exclusive license. In connection with the exercise of the option, the Company issued 300,000 shares of its common stock and paid $200,000 to Viator Ventures.
The license is classified as property and equipment on the balance sheet and has an estimated useful life of three years.





Our
capital requirements depend on numerous business factors, including our staffing and product development needs, the funding needs of our strategic alliances and distribution agreements and the pace at which we pursue overseas expansion of our
business. We have experienced a substantial increase in expenditures since inception driven by growth in the size and nature of our operations. We will continue to evaluate acquisitions and strategic investments in strategic and 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.





The Companys contractual obligations at
March 31, 2002 and the effect such obligations are expected to have on its liquidity and cash flow in future periods have not changed materially since December 31, 2001.





Management believes that the Companys current cash balance is sufficient to meet operating requirements and funding commitments to BT LookSmart for the foreseeable future. However,
we expect that we may need to seek additional financing to fund further expansion. We cannot assure you that such financing will be available on reasonable terms. If we raise funds through the issuance of equity or convertible debt securities, our
existing stockholders will experience dilution of their holdings.





Recently Issued Accounting Pronouncements





See Note 1 in the Notes to the Condensed Consolidated Financial Statements.





FACTORS AFFECTING OPERATING RESULTS





You should carefully consider the risks described below before
making an investment decision regarding our common stock. If any of the following risks actually occurs, our business, financial condition and results of operations could be harmed. In that case, the trading price of our common stock could decline
and you could lose all or part of your investment.





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





We have incurred net losses from inception to date, including net losses of approximately $59.6 million in 2001, $62.6 million in 2000 and $64.7 million
in 1999. As of March 31, 2002, we had an accumulated deficit of approximately




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$215.2 million. We may continue to have net losses in future quarters, depending on our ability to contain expenses,
grow revenues and capitalize on new sources of revenue. We expect to spend significant amounts to:





| |  |  | maintain and expand our network of distribution partners;
| | - |  | ---------------------------------------------------------




| |  |  | continue to develop and expand our databases of Internet listings, both in the U.S. and abroad;
| | - |  | -----------------------------------------------------------------------------------------------




| |  |  | develop new products and enhance the functionality of our search and LookListings services;
| | - |  | -------------------------------------------------------------------------------------------




| |  |  | develop our international business, particularly through our BT LookSmart joint venture with British Telecommunications; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------




| |  |  | acquire complementary technologies and businesses.
| | - |  | --------------------------------------------------




Because of the foregoing factors, and others outlined in this report, we may be unable to achieve 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 revenues and operating results may fluctuate significantly from quarter to quarter as a result of a variety of factors, including:





| |  |  | the number of search queries on our and our distribution partners web sites;
| | - |  | -----------------------------------------------------------------------------




| |  |  | the cost per click we receive from advertisers;
| | - |  | -----------------------------------------------




| |  |  | the demand for, and prevailing prices of, Internet advertising and marketing services;
| | - |  | --------------------------------------------------------------------------------------




| |  |  | the timing of revenue recognition under our listings, licensing and advertising contracts;
| | - |  | ------------------------------------------------------------------------------------------




| |  |  | the timing of our entry into and termination of new contracts for licensing and advertising;
| | - |  | --------------------------------------------------------------------------------------------




| |  |  | 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; and
| | - |  | -----------------------------------------------------




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




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





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 for the foreseeable future, unanticipated developments in the short term, such as the entry into




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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. We may seek to raise additional capital through public or private debt or equity financings in order to:





| |  |  | fund our operations and capital expenditures;
| | - |  | ---------------------------------------------




| |  |  | take advantage of favorable business opportunities, 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 historically 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 growth prospects depend on the
success of our listings business





To increase our revenues and reach profitability, we will need to continue expanding our
listings business, particularly our Directory Listings, Index Listings, Featured Listings and Small Business Listings. Listings accounted for $13.4 million or 67.0% of our revenues in the quarter ended March 31, 2002. Our success will depend upon
the extent to which advertisers choose to use our listings products. Some of these products, particularly Small Business Listings, are in their early stages and we cannot accurately 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
product offerings, or customers may not adopt our new products at projected rates. For these and other reasons, these initiatives may not generate sufficient revenues to reach our profitability goals. If we are unable to generate significant
additional revenues from our listings business, our results of operations and financial condition will suffer.





Although we
expect our listings revenues to continue to increase as an absolute number and a percentage of total revenues, this may not be the case due to continued weakness in the online advertising market, reductions in advertising expenditures by online
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 web sites, for a share of businesses total advertising
expenditures. We have experienced, and may continue to experience, downward pressure on advertising prices in the industry due to cost-cutting efforts by businesses and the increasing amount of advertising inventory becoming available on the
Internet. As the Internet evolves, advertisers may find search-targeted marketing to be a less effective means of promoting their products or services relative to other advertising media and may reduce or eliminate their expenditures on
search-targeted marketing. 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 search-targeted marketing.
Acceptance of the search-targeted marketing among advertisers will depend, to a large extent, on its perceived effectiveness and the continued growth of commercial usage of the Internet.





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 our licensing and distribution agreement with Microsoft Corporation. If part or all of this agreement is terminated, our
revenues and results of operations could decline




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significantly. Either party may terminate the licensing portion of the agreement for any reason on six months notice, and either party may terminate the
distribution portion of the agreement on three months notice.





For the quarter ended March 31, 2002, revenues from
Microsoft under the licensing portion of the agreement accounted for $3.7 million or 18.5% 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 listings 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 compete in the relatively new and rapidly evolving search-targeted marketing market, which presents
many uncertainties that could require us to further refine or change our business model. 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. Our success will depend on many factors, including our ability to:





| |  |  | profitably establish and expand our listings product offerings;
| | - |  | ---------------------------------------------------------------




| |  |  | compete with our competitors, many of whom have greater capital or technical resources, larger distribution networks or user bases, longer operating histories and greater brand
recognition than we have; and some of whom operate fully commercial search services that do not expend resources on non-commercial listings;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | expand and maintain our network of distribution relationships, thereby increasing the amount of traffic using our databases; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------




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




We compete with companies that provide pay-for-placement listings, targeted advertising, search and directory services, search algorithms and other forms of Internet advertising. As we
expand the scope of our Internet services, we will compete directly with a greater number of targeted marketing providers and other web search companies across a wide range of different online services. To date, the search-targeted marketing market
has been characterized by intense competition for consumer traffic. This has resulted in the payment of user traffic fees by us and others to frequently-used web sites, portals and internet service providers, or ISPs. If these companies fail to
provide search traffic to us, or the cost of search traffic increases, our business and financial results would be harmed.





BT LookSmart may not ever
become profitable and we may lose our joint venture interest if we fail to repay our loan from British Telecommunications





We face many risks associated with our joint venture with British Telecommunications, 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, 2002, our share of the
joint ventures net loss was $1.1 million. We expect the venture to incur significant losses and require capital expenditures for the foreseeable future. We cannot project when BT LookSmart will achieve positive cash flow or profitability, if
at all;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | while the budget for the joint venture will be determined by the joint ventures board of directors, we project that our financial contributions in 2002 will be
approximately $3.0 million. However, there can be no assurance in this regard. If we are unable to meet our financing obligations, our equity ownership of the joint venture will be proportionately reduced;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the joint venture faces competition in markets abroad from a range of competitors, including AOL Time Warner, Deutsche Telecom, France Telecom, Overture Services, Terra Lycos,
Scandinavian Online, Sonera Plaza, Tele Denmark, UK Plus, Yahoo!, and other search-targeted marketing, media, telecommunications and portal
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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companies, many of which have greater capital resources, customer agreements and local experience in these markets;





| |  |  | the joint venture may fail to offer locally-relevant and popular web directories, which could result in narrower adoption of the directories and lower growth in search queries;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the joint venture faces risks associated with conducting operations in many different countries, such as currency fluctuations, government and legal restrictions, privacy and
tax laws, cultural or technical incompatibilities and economic or political instability;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the joint venture may be unable to generate sufficient advertising and listings revenue to reach operating profitability;
| | - |  | -------------------------------------------------------------------------------------------------------------------------




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




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




Under our restructured loan arrangement with British Telecommunications, our outstanding
indebtedness will be due and payable in full in March 2003. Although we believe that we will have cash at that time which exceeds the amount of the loan, this may not be the case if our future revenues do not meet expectations, if we fail to achieve
operating profitability or if we incur unforeseen expenses. If we do not repay the loan in full or in part, British Telecommunications may exercise its contractual right to take some or all of our equity stake in the BT LookSmart joint venture.





Some of our customers are emerging Internet companies that represent credit risks





We expect to continue to derive a significant portion of our revenues from the sale of listings and advertising to Internet companies. Many of these companies have gone out of business,
have limited operating histories or 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 allowance for doubtful accounts receivable as of March 31, 2002 was $3.8 million, or 32.5% of our accounts receivable. We may continue to have these difficulties in the future. If a significant part of our customer
base experiences financial difficulties or is unable or unwilling to pay our search-targeted marketing fees for any reason, our business will suffer.





Our success depends on maintaining and expanding our distribution network of web sites using our directory





Our
success depends on our ability to distribute our directories through a network of portals, ISPs, and media companies. Revenues are generated from clickthroughs that users make on advertisers listings, and generally, the more traffic from our
distribution network, the greater number of clickthroughs we will generate. We have invested, and will continue to invest, a significant amount of our human and capital resources to expand this network. However, we face competition with other
search-targeted marketing providers to sign agreements with major portals, ISPs and other traffic sources. We cannot assure you that we will successfully maintain and expand the distribution network 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.





If we
acquire businesses, we will need to expend resources and management time to integration efforts; acquisitions will likely also dilute our existing stockholders





If we are presented with appropriate opportunities, we intend to make 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




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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. We may also be required to amortize significant amounts of intangible assets or record impairment of goodwill 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
Internet companies have been extremely volatile. Our stock price may decline, and you may not be able to sell your shares for a profit, as a result of a number of factors 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;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------




| |  |  | the sales of substantial amounts of our common stock in the public market by participants in our pre-IPO equity financings or owners of businesses we have acquired, or the
perception that such sales could occur;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the exchange by CDI holders of CDIs for shares of common stock and resale of such shares in the Nasdaq National Market (as of April 30, 2002, the CDIs registered for trading on
the Australian Stock Exchange were exchangeable into an aggregate of approximately 18.9 million shares of common stock); or
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | conditions or trends in the Internet that suggest a decline in rates of growth 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 merits of the case or 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 directories, and we also use proprietary and licensed software to search the database,
distribute the directories and serve advertising to associated web pages. Any of these software systems 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 web site or the web sites of our distribution partners:





| |  |  | substantial increases in editorial activity or the number of listings in our directory;
| | - |  | ---------------------------------------------------------------------------------------




| |  |  | customization of our directory for distribution with particular partners;
| | - |  | -------------------------------------------------------------------------




| |  |  | substantial increases in the number of search queries to our database; or
| | - |  | -------------------------------------------------------------------------




| |  |  | the addition of new products, features or changes in our directory structure.
| | - |  | -----------------------------------------------------------------------------



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If we fail to address these issues in a timely manner, we may lose the confidence of
advertisers and partners, our revenues may decline and our business could 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 likely suffer.





The performance of our operating
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 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.





We have agreements with Savvis Communications, Inc. and AboveNet Communications, Inc. to house our networking and web serving hardware equipment. Our networking hardware infrastructure 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 Savvis and AboveNet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 Savvis nor AboveNet 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 in the event of a catastrophic loss of our primary systems. 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 a catastrophic system failure.





Recent acquisitions and strategic alliances involving our competitors could hinder the expansion of our distribution network or present competitive challenges





A number of significant acquisitions and other alliances have been completed or announced in the search-targeted marketing business involving some of our competitors, including:





| |  |  | the search listings partnerships between Overture Services, Inc. and each of Yahoo!, Terra Lycos, Microsofts MSN, AltaVista and United Online;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the search listings partnerships between Google, Inc. and each of Earthlink, Yahoo! and AOL Time Warner, Inc.; and
| | - |  | ------------------------------------------------------------------------------------------------------------------




| |  |  | Primedia, Inc.s acquisition of About.com (including the Sprinks pay-for-placement search listings service).
| | - |  | ------------------------------------------------------------------------------------------------------------




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 web sites 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





An important 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 and Canada. 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:




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| |  |  | lower per capita Internet usage and online shopping rates in many countries abroad, due to a variety of factors, which may prevent us from building search queries, clicks and
advertising revenues in those countries;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | earlier-stage Internet advertising markets in foreign markets, which may make it more difficult to build a sufficient customer and revenue base for our international
directories;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | competition in international markets from a broad range of competitors, including United States and foreign search engines, ISPs and portals, many of which have greater
financial resources and local experience than we have;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




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




| |  |  | 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 economic and currency fluctuations.
| | - |  | -------------------------------------------




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





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. The loss of the services of Mr. Thornley, 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. 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 claims related to our listings, and these claims may be costly to resolve





We make listings information and links
available to end users of our search services, both on our web site and our distribution partners web sites. Although we do not believe that the listings in our database or the services we offer violate any 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 partners could be subject to claims for defamation, invasion of privacy, trademark infringement, product liability,
breach of contract, unfair advertising or other theories based on our listings 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 our partners as a result of claims that our listings or services infringe on the rights of others. Regardless of whether such claims result in liability to us or our distribution partners, we could incur significant costs and
diversion of management time in investigating and defending against them. Our insurance may not adequately cover claims of this type, if at all.




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





Our business is dependent upon continued growth in the use of the Internet as a medium for search-targeted marketing, advertising and commercial
transactions. Internet usage for these purposes may not grow at projected rates for various reasons, such as:





| |  |  | 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;
| | - |  | --------------------------------




| |  |  | government regulation, such as tax or privacy laws;
| | - |  | ---------------------------------------------------




| |  |  | deteriorating economic conditions in target markets and reduced disposable income among Internet users;
| | - |  | -------------------------------------------------------------------------------------------------------




| |  |  | uncertainty regarding intellectual property ownership and rights on the Internet; and
| | - |  | -------------------------------------------------------------------------------------




| |  |  | lack of appropriate communications equipment.
| | - |  | ---------------------------------------------




If these factors negatively affect the growth in the commercial 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 investigated some Internet companies, and lawsuits have been filed against some Internet companies, regarding their use of personal information. 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 laws or court judgments, in the United States or abroad, regarding the use of personal information are introduced or if any agency chooses to investigate our privacy
practices.





As is typical with most web sites, our web site places information, known as cookies, on a users hard drive,
generally without the users knowledge or consent. This technology enables web site operators to target specific users with a particular advertisement and to limit the number of times a user is shown a particular advertisement. Although some
Internet browsers allow users to modify their browser settings to remove cookies at any time or to prevent cookies from being stored on their hard drives, many consumers are not aware of this option or are not knowledgeable enough to use this
option. Some 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 or advertisers retain information about our users. If others were able to
penetrate the network security of these user databases and access or misappropriate this information, we and our partners or advertisers could be subject to liability. These claims may 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 commercial use of the Internet 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 or our advertisers to additional state sales, income and other taxes. We cannot
predict the effect of current attempts to impose




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sales, income or other taxes on commerce over the Internet. However, new or revised taxes and, in particular, sales
taxes, would likely increase the cost of doing business online and decrease the attractiveness of advertising and selling goods and services over the Internet. Any of these events could have an adverse effect on our business and results of
operations.





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





As of March 31, 2002, our executive officers, directors and significant stockholders collectively owned
approximately 29.2% of the outstanding shares of LookSmart common stock. If these stockholders choose to act or vote together, they could 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.





Provisions of Delaware corporate 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 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. The Company had no derivative financial instruments as of March 31, 2002 or December 31, 2001. The Company invests its excess cash 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, issuer and type of instrument is limited.





Foreign Currency Risk.International revenues from the Companys foreign subsidiaries were less than 10% of total
revenues in the quarter ended March 31, 2002 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, partially the exchange rate between the Australian dollar and the United States dollar. The effect
of foreign exchange rate fluctuations on the Company in the quarter ended March 31, 2002 was not material.




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PART II.    OTHER INFORMATION





ITEM 1.

LEGAL PROCEEDINGS





On May 9, 2002, Legal Staffing Partners, Inc., an express listing customer, filed
a proposed class action lawsuit in Superior Court in San Francisco County. The complaint alleges breach of contract, unfair business practices and false advertising in connection with the launch of the Companys new Small Business Listings
product announced on April 10, 2002. The complaint seeks restitution, unspecified compensatory damages, injunctive relief and attorneys fees. LookSmart believes that the allegations against it are without merit and intends to contest the
allegations vigorously.





ITEM 6.

EXHIBITS AND REPORTS ON FORM 8-K





(1)  Exhibits.





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





(2)  Current Reports on Form 8-K.





The
Company filed Current Reports on Form 8-K on March 15, 2002 and April 30, 2002.




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SIGNATURE





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





Date: May 15, 2002



LOOKSMART, LTD.By:

/s/    DIANNE DUBOISDianne Dubois, Chief Financial
Officer (Principal Financial and Accounting Officer)




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EXHIBIT INDEX





Exhibit Number

Description of Document3.1(1)

Restated Certificate of Incorporation3.2(1)

Bylaws4.1(2)

Form of Specimen Stock Certificate4.2(1)

Second Amended and Restated Investor Rights Agreement dated March 24, 199910.1(1)

Form of Indemnification Agreement entered into between the Registrant and each of its directors and officers10.2(1)

Amended and Restated 1998 Stock Plan10.3(1)

1999 Employee Stock Purchase Plan10.4+(1)

License and Update Agreement with Microsoft Corporation10.5+(1)

Asset Purchase Agreement with Guthy-Renker Internet LLC10.6+(1)

Development Agreement with Cox Interactive Media, Inc.10.7+(1)

Premier Positions on US Search Pages with Netscape Communications Corporation10.8+(2)

1999-2000 U.S. Net Search Premier Provider Agreement with Netscape Communications Corporation10.9+(1)

PBS Group Sponsorship Agreements10.10(1)

Lease Agreement with 487 Bryant Street, LLC for property located at 487 Bryant Street, San Francisco, California, dated May 4,
199810.11(1)

Sublease Agreement with Jaran, Inc. for property located at 275 Brannan Street, San Francisco, California, dated April 30,
199910.12(1)

Lease Agreement with Rosenberg SOMA Investments III, LLC for property located at 625 Second Street, San Francisco, California,
dated May 5, 199910.13(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, 199810.14(1)

Lease Agreement with Euro Asia Properties Pty Ltd for property located at Level 5, 388 Lonsdale Street, Melbourne, Australia,
dated September 1, 199810.15(1)

Lease Agreement with Tonicalon Pty Limited for property located at Level 3, 68 Alfred Street, Milsons Point, Sydney, Australia,
dated June 1, 199910.16(1)

Summary Plan Description of 401(k) Plan




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10.17+(3)

Joint Venture Agreement between the Registrant, Transceptgate Ltd., BT LookSmart Ltd., LookSmart (Barbados), Inc. and British
Telecommunications Plc dated February 15, 200010.18+(3)

Joint Venture Know How Technology and Database License Agreement between the Registrant, BT LookSmart Ltd., and LookSmart
(Barbados), Inc. dated February 15, 200010.19(3)

Loan Letter Agreement between the Registrant and Transceptgate Ltd. dated February 15, 200010.20+(4)

Restated and Final Tagging and Marketing Agreement with Guthy-Renker Corporation dated August 9, 199910.21(4)

Employment Agreement with Kevin Berk dated September 29, 200010.22(4)

Employment Agreement with Brian Goler dated September 29, 200010.23(5)

Loan Facility Agreement between Transceptgate Limited, LookSmart, Ltd. and LookSmart (Barbados) Inc., dated December 7,
2001.21.1(1)

List of Subsidiaries


---

|(1) |  | Filed in connection with the Companys Registration Statement on Form S-1 (File No. 333-80581) filed with the SEC on June 14, 1999.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------

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

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

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

|(5) |  | Filed in connection with the Companys Current Report on Form 8-K filed with the SEC on December 19, 2001.
|--- |  | ----------------------------------------------------------------------------------------------------------

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



31