<PAGE>

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                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC 20549

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

                                   FORM 10-Q

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

         For the Quarterly Period Ended March 31, 2000

                                      OR

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

         For the Transition Period from                to
                       .

                       Commission File Number: 000-26357

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

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

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

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

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

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

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

   As of May 10, 2000, there were 89,208,340 shares of the registrant's common
stock outstanding.

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<PAGE>

                                   FORM 10-Q

                                     INDEX

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

 ITEM 1: Condensed Consolidated Financial Statements (unaudited)

         Condensed Consolidated Balance Sheets as of December 31, 1999
         and March 31, 2000.............................................     3

         Condensed Consolidated Statements of Operations for the three
          months ended March 31, 1999 and 2000..........................     4

         Condensed Consolidated Statements of Cash Flows for the three
          months ended March 31, 1999 and 2000..........................     5

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

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

 ITEM 3: Quantitative and Qualitative Disclosures About Market Risk.....    24

 PART II OTHER INFORMATION

 ITEM 1: Legal Proceedings..............................................    25

 ITEM 2: Changes in Securities and Use of Proceeds......................    25

 ITEM 3: Defaults Upon Senior Securities................................    25

 ITEM 4: Submission of Matters to a Vote of Security Holders............    25

 ITEM 5: Other Information..............................................    26

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

 ITEM 7: Signatures.....................................................    27
</TABLE>

                                       2
<PAGE>

                        PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                        LOOKSMART, LTD. AND SUBSIDIARIES

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                        December 31,  March 31,
                                                            1999        2000
                                                        ------------ -----------
                                                                     (unaudited)
<S>                                                     <C>          <C>
                        ASSETS
Current assets:
  Cash and cash equivalents............................   $ 75,971    $  71,652
  Restricted cash......................................         --       50,000
  Short term investments...............................     28,038       13,008
  Trade accounts receivable, net.......................      8,039       12,064
  Accounts receivable from related parties.............        980        3,329
  Other current assets.................................      4,675        7,617
                                                          --------    ---------
    Total current assets...............................    117,703      157,670
Property and equipment, net............................     11,595       12,512
Goodwill and intangible assets, net....................     29,301       27,364
Other assets...........................................      2,920        3,070
                                                          --------    ---------
Total assets...........................................   $161,519    $ 200,616
                                                          ========    =========

          LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilites:
  Trade accounts payable...............................   $  4,002    $   2,282
  Other accrued liabilities............................     12,915       16,118
  Deferred revenue.....................................     16,705       16,828
  Income taxes payable.................................        650          465
  Capital lease obligations--current portion...........        743          731
                                                          --------    ---------
    Total current liabilities..........................     35,015       36,424

Deferred revenue.......................................      4,919        2,175
Capital lease obligations..............................      1,423        1,326
Credit facility--joint venture partner.................         --       50,000
Minority interest......................................        610          422
Note payable...........................................         --          465
Other liabilities......................................         --        1,736
                                                          --------    ---------
    Total liabilities..................................     41,967       92,548

Stockholders' equity:
Capital stock..........................................         86           89
Additional paid-in capital.............................    211,305      214,212
Deferred stock compensation and other..................     (3,904)      (4,515)
Accumulated deficit....................................    (87,935)    (101,718)
                                                          --------    ---------
    Total stockholders' equity.........................    119,552      108,068
                                                          --------    ---------
    Total liabilities and stockholders' equity.........   $161,519    $ 200,616
                                                          ========    =========
</TABLE>

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

                                       3
<PAGE>

                        LOOKSMART, LTD. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                               Three Months
                                                             Ended March 31,
                                                             -----------------
                                                              1999      2000
                                                             -------  --------
                                                                (unaudited)
<S>                                                          <C>      <C>
Revenues:
  Advertising and syndication............................... $ 2,191  $ 12,266
  Licensing.................................................   4,389     5,367
  Ecommerce/distribution....................................      --     3,867
                                                             -------  --------
    Total revenues..........................................   6,580    21,500

Cost of revenues:
  Advertising and syndication...............................     318       953
  Ecommerce/distribution....................................      --     1,888
                                                             -------  --------
    Total cost of revenues..................................     318     2,841
                                                             -------  --------
Gross profit................................................   6,262    18,659

Operating expenses:
  Sales and marketing (exclusive of deferred stock
   compensation of 186 and 486 in the three months ended
   March 31, 1999 and 2000, respectively)...................   6,422    16,717
  Product development (exclusive of deferred stock
   compensation of 376 and 300 in the three months ended
   March 31, 1999 and 2000, respectively)...................   3,884     8,609
  General and administrative (exclusive of deferred stock
   compensation of 227 and 468 in the three months ended
   March 31, 1999 and 2000, respectively)...................   1,615     2,866
  Amortization of goodwill and intangibles..................     395     1,945
  Amortization of deferred stock compensation...............     789     1,254
                                                             -------  --------
    Total operating expenses................................  13,105    31,391
                                                             -------  --------
    Loss from operations....................................  (6,843)  (12,732)

Non-operating income (expense):
    Interest income, net....................................      19       382
    Share of joint venture loss.............................      --    (1,574)
                                                             -------  --------
    Loss before income taxes................................  (6,824)  (13,924)
Income taxes................................................      52        47
Minority interest...........................................      --      (188)
                                                             -------  --------
    Net loss................................................  (6,876)  (13,783)

Other comprehensive income (loss):
  Change in unrealized loss on securities during the
   period...................................................      --         8
  Change in foreign currency translation adjustment during
   the period...............................................       7       (52)
                                                             -------  --------
    Comprehensive loss...................................... $(6,869) $(13,827)
                                                             =======  ========
Basic and diluted net loss per share........................ $ (0.35) $  (0.16)
                                                             =======  ========
Weighted average shares outstanding used in per share
 calculation................................................  19,459    86,676
                                                             =======  ========
</TABLE>

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

                                       4
<PAGE>

                        LOOKSMART, LTD. AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                               Three Months
                                                              Ended March 31,
                                                             ------------------
                                                               1999      2000
                                                             --------  --------
                                                                (unaudited)
<S>                                                          <C>       <C>
Cash flows from operating activities:
  Net loss.................................................  $ (6,876) $(13,783)
  Adjustments to reconcile net loss to cash used in
   operating activities:
    Depreciation and amortization..........................       632     2,882
    Amortization of deferred stock compensation............       789     1,254
    Changes in operating assets and liabilities:
      Trade accounts receivable............................   (13,651)   (3,673)
      Other assets.........................................      (243)   (5,793)
      Trade accounts payable...............................       183    (1,720)
      Other accrued liabilities and payables...............     1,073     4,754
      Deferred revenues....................................    14,255    (2,621)
      Minority interest....................................        --      (188)
                                                             --------  --------
        Net cash used in operating activities..............    (3,838)  (18,888)
                                                             --------  --------

Cash flows provided (used) by investing activities:
  Proceeds from sale of short-term investments.............        --    15,030
  Purchase of property and equipment.......................    (1,783)   (1,854)
                                                             --------  --------
        Net cash provided (used) by investing activities...    (1,783)   13,176

Cash flows from financing activities:
  Proceeds from note.......................................        --       472
  Repayment on note........................................        --        (7)
  Repayments on equipment lease............................        --      (109)
  Proceeds from joint venture partner credit facility......        --    50,000
  Proceeds from issuance of preferred stock, net...........    60,542        --
  Proceeds from issuance of common stock...................        --     1,089
                                                             --------  --------
        Net cash provided by financing activities..........    60,542    51,445
Effect of exchange rate changes on cash....................         7       (52)
                                                             --------  --------
Increase in cash and cash equivalents and restricted cash..    54,928    45,681
Cash and cash equivalents, beginning of period.............     3,501    75,971
                                                             --------  --------
Cash and cash equivalents and restricted cash, end of
 period....................................................  $ 58,429  $121,652
                                                             ========  ========
</TABLE>

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

                                       5
<PAGE>

                        LOOKSMART, LTD. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (unaudited)

1. Summary of Significant Accounting Policies

 Nature of Business and Principles of Consolidation

   LookSmart offers its business partners and consumers comprehensive Internet
search infrastructure services. LookSmart distributes its proprietary directory
to a large number of Internet users through LookSmart owned web properties, as
well as its strategic partners, including portals, Internet service providers
and media companies.

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

 Recently Issued Accounting Pronouncements

   In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). SAB 101 becomes effective for the second quarter of the year ending
December 31, 2000. The Company is in the process of determining the impact, if
any, that adoption of SAB 101 will have on the consolidated financial
statements.

   In December 1999, the Emerging Issues Task Force issued EITF No. 99-17,
"Accounting for Advertising Barter Transactions" (EITF 99-17). EITF 99-17 is
effective for years ended December 31, 2000. The Company believes that the
adoption of EITF 99-17 will not have a material effect on its consolidated
financial statements.

   In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" (Interpretation 44). Interpretation 44 is effective July 1, 2000.
The Company believes that the adoption of Interpretation 44 will not have a
material effect on its consolidated financial statements.

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 presentation 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. It is suggested that these unaudited
interim condensed consolidated financial statements be read in conjunction with
LookSmart's audited financial statements and notes thereto for the year ended
December 31, 1999 as included in LookSmart's Annual Report to Shareholders on
Form 10-K, as filed with the Securities and Exchange Commission.

3. Restricted Cash

   On February 15, 2000, the Company drew down $50.0 million from the British
Telecommunications credit facility. In accordance with the BT LookSmart joint
venture agreement, draw downs on the credit facility may

                                       6
<PAGE>

                        LOOKSMART LTD. AND SUBSIDIARIES

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

be used only for the purpose of funding the BT LookSmart joint venture. As of
March 31, 2000, cash drawn down on this credit facility has been classified as
restricted cash on the balance sheet (see Note 9).

3. Net Loss Per Share:

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

<TABLE>
<CAPTION>
                                                               Three Months
                                                             Ended March 31,
                                                             -----------------
                                                              1999      2000
                                                             -------  --------
                                                               (unaudited)
     <S>                                                     <C>      <C>
     Numerator--Basic and diluted:
       Net loss............................................. $(6,876) $(13,783)
                                                             =======  ========
     Denominator--Basic and diluted:
       Weighted average common shares outstanding...........  19,459    86,676
                                                             =======  ========
       Basic and diluted loss per share..................... $ (0.35) $  (0.16)
                                                             =======  ========
     Pro forma net loss per share:
       Weighted average common sthares outstanding..........  59,851
                                                             =======
       Basic and diluted loss per share..................... $ (0.11)
                                                             =======
</TABLE>

   The pro forma net loss per share calculation assumes the conversion of all
preferred stock into common shares and the exercise of all warrants which
expired upon the Company's initial public offering that were outstanding as of
March 31, 1999.

   Basic loss per share is computed using the weighted average number of common
shares outstanding during the period. Diluted loss per share is computed using
the weighted average number of common and common equivalent shares outstanding
during the period, if dilutive. Common equivalent shares consist of the
incremental common shares issuable upon conversion of the convertible preferred
stock and shares issuable upon the exercise of stock options and warrants. For
all periods, common equivalent shares are not included in the computation of
diluted loss per share because they are antidilutive. Common stock equivalents
relating to preferred stock, stock options and warrants to purchase common and
preferred shares are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                   Three Months
                                                                       Ended
                                                                     March 31,
                                                                   -------------
     Weighted average common stock equivalents                      1999   2000
     -----------------------------------------                     ------ ------
                                                                    (unaudited)
     <S>                                                           <C>    <C>
     Preferred stock.............................................. 40,188     --
     Options...................................................... 12,346 11,254
     Warrants..................................................... 15,455  2,062
                                                                   ------ ------
     Total dilutive shares........................................ 67,989 13,316
                                                                   ====== ======
</TABLE>

4. Related Party Transactions

   The Company has a distribution agreement with Guthy Renker Corporation
(GRC), one of the Company's stockholders. At March 31, 2000, the Company had a
receivable of $628,000 from GRC arising from transactions under the
distribution agreement.

                                       7
<PAGE>

                        LOOKSMART LTD. AND SUBSIDIARIES

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


   The Company receives licensing revenues from Cox Interactive Media, Inc., a
stockholder of the Company, for the design and licensing of LookSmart database
content used on Cox Interactive websites. Revenues from Cox Interactive Media,
Inc. amounted to $11,000 and $10,000 for the three months ended March 31, 1999
and 2000, respectively.

   The Company receives licensing revenues from the BT LookSmart joint venture
for the licensing of LookSmart database content. Revenues from the BT
LookSmart joint venture amounted to $0 and $125,000 for the three months ended
March 31, 1999 and 2000, respectively. As of March 31, 2000 the Company had a
related party receivable of $2.7 million from the BT LookSmart joint venture.
This receivable represents reimburseable costs incurred by the Company on
behalf of the BT LookSmart joint venture and has been recorded as other
current assets in the balance sheet as of March 31, 2000.

5. Segment Information

   The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in the fiscal year ended December 31,
1998. SFAS 131 establishes standards for reporting information regarding
operating segments in annual financial statements and requires selected
information for those segments to be presented in interim financial reports
issued to stockholders. SFAS 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company operates in three segments: advertising and syndication, licensing
and ecommerce/distribution. In the Condensed Consolidated Statements of
Operations and Comprehensive Loss, the Company reports revenue and cost of
revenues along these three 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, 1999 and March 31, 2000, accounts
receivable by segments are as follows (in thousands):

<TABLE>
<CAPTION>
                                                          December 31, March 31,
                                                              1999       2000
                                                          ------------ ---------
                                                               (unaudited)
     <S>                                                  <C>          <C>
     Advertising and syndication.........................    $8,368     $13,091
     Licensing...........................................       269         614
     Ecommerce/distribution..............................       992         640
                                                             ------     -------
     Total...............................................     9,629      14,345
     Allowance for doubtful accounts.....................     (610)      (1,653)
                                                             ------     -------
     Accounts receivable, net............................    $9,019     $12,692
                                                             ======     =======
</TABLE>

   As of March 31, 2000, accounts receivable from related parties includes a
$2.7 million receivable from BT which has not been allocated to the Company's
segments.

   As of December 31, 1999 and March 31, 2000, deferred revenue by segments
are as follows (in thousands):

<TABLE>
<CAPTION>
                                                          December 31, March 31,
                                                              1999       2000
                                                          ------------ ---------
                                                               (unaudited)
     <S>                                                  <C>          <C>
     Advertising and syndication.........................   $   239     $   397
     Licensing...........................................    18,597      16,068
     Ecommerce/distribution..............................     2,788       2,538
                                                            -------     -------
     Total...............................................   $21,624     $19,003
                                                            =======     =======
</TABLE>

                                       8
<PAGE>

                        LOOKSMART LTD. AND SUBSIDIARIES

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


8. Stock Option Plan

   During the three months ended March 31, 2000, the Company granted 2,045,000
stock options at the then current fair market value. During such period
employees exercised an aggregate 1,833,986 options, and 442,500 options were
cancelled. Total outstanding stock options were 11,254,217 as of March 31,
2000.

9. British Telecommunications 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 will provide localized directory
services in Europe and Asia. The Company accounts for its investment in the
joint venture using the equity method of accounting. The Company's share of the
joint venture's net income or loss is reported as non-operating income or
expense.

   The agreement establishing the joint venture requires that LookSmart
contribute up to $108.0 million in cash through March 2003. Under the
agreement, BT extended a $50.0 million unsecured credit facility with interest
at 20% per annum. LookSmart drew down $50.0 million from the credit facility in
February 2000. Draw downs on the credit facility, including accrued interest,
are convertible into LookSmart common stock at $35.00 per share at BT's
discretion. The fair market value of LookSmart common stock on the commitment
date was $32.875. The credit facility is due in full by February 2003, unless
converted to LookSmart common stock prior to that time.

10. Listing on the Australian Stock Exchange

   On February 25, 2000, the Company completed the listing of approximately 90
million Chess Depository Interests, or CDIs, on the Australian Stock Exchange,
or ASX, under the trading symbol "LOK". The listing was completed in order to
enable investors that are required to invest only in ASX-listed companies to
acquire an equity interest in LookSmart. All of the shares of LookSmart common
stock exchangeable for the CDIs were offered by selling stockholders. The
Company did not issue any new securities in connection with, or receive any
proceeds from, the issuance of the CDIs. Each CDI is exchangeable into 0.05
shares of LookSmart common stock at the option of the holder.

11. Note Payable

   In January 2000 the Company issued an unsecured promissory note in the
principal amount of $472,000 to its landlord. The note bears interest at 9% per
annum and is payable in equal monthly installments over a term of 10 years.

                                       9
<PAGE>

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

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

Overview

   LookSmart is a leading global Internet search infrastructure company. We
have built a robust suite of scalable, customizable and high-quality search
products and have distributed these products, in varying forms, to our network
of approximately 100,000 partners and affiliates worldwide. First and foremost,
we build our search solutions to provide our partners' Internet users with a
fast, effective and high-quality environment to find the most relevant results.
Second, we craft our search solutions to maximize the generation of revenue for
our partners. Third, because of the scale of our distributed search solution
network, we are able to drive significant amounts of traffic to various
destinations throughout the Internet. Finally, we build private-label search
solutions for our partners that are highly customized and deeply integrated to
meet each of our partners' specific goals. Because our search solutions
leverage our existing Internet directory, we are able to deploy our search
solutions in a cost-effective and scalable manner.

Results of Operations

Revenues

   Advertising and Syndication. Advertising and syndication revenues were $12.3
million for the quarter ended March 31, 2000, an increase of 460% over revenues
of $2.2 million for the quarter ended March 31, 1999. The increase was due
primarily to the increasing number of advertisers purchasing space on the
Company's and its affiliates' web pages, increased traffic resulting from
increased branding and new syndication deals, as well as higher effective
yields resulting from better inventory management and increased targeting of
advertising sales.

   Licensing. Licensing revenues were $5.4 million for the quarter ended March
31, 2000, an increase of 22% over revenues of $4.4 million for the quarter
ended March 31, 1999. The increase is due primarily to the addition of new
licensing customers, including Excite @Home and the BT LookSmart joint venture.

   Ecommerce/distribution. The Company initiated its ecommerce activities in
April 1999. Ecommerce revenues were $3.9 million for the quarter ended March
31, 2000. The Company did not have ecommerce revenues in the quarter ended
March 31, 1999.

   International revenues accounted for less than 10% of net revenues during
the quarters ended March 31, 2000 and 1999. Barter revenues also represented
less than 10% of net revenues during those periods.

Cost of Revenues

   Advertising and Syndication. Advertising and syndication cost of revenues
were $953,000, or 8% of advertising and syndication revenues for the quarter
ended March 31, 2000, as compared to $318,000, or 15% of advertising and
syndication revenues for the quarter ended March 31, 1999. During the period
from March 31, 1999 to March 31, 2000, we invested in technology infrastructure
and hired advertising operations personnel to improve the advertisement serving
process and monetize our traffic more effectively. The salaries

                                       10
<PAGE>

and benefits costs of additional employees in advertising operations as well
depreciation on ad serving capital expenditures have contributed to the
absolute dollar increase in advertising and syndication cost of revenues.

   Ecommerce/distribution. Ecommerce cost of revenues were $1.9 million, or 49%
of ecommerce revenues, for the quarter ended March 31, 2000. The Company did
not have ecommerce cost of revenues in the quarter ended March 31, 1999.
Ecommerce cost of revenues are attributable primarily to merchandise costs.

Operating Expenses

   Sales and Marketing. Sales and marketing expense was $16.7 million for the
quarter ended March 31, 2000, or 78% of total revenues, as compared to $6.4
million, or 98% of total revenues, for the quarter ended March 31, 1999. The
dollar increase in sales and marketing expenses is attributable to a number of
factors. Distribution costs increased approximately $6.1 million for the
quarter ended March 31, 2000 compared to the same period in 1999, primarily due
to our distribution and syndication agreement entered into in April 1999 with
NetZero and an increase in payments to media portal partners. Marketing costs
increased approximately $1.6 million for the quarter ended March 31, 2000
compared to the same period in 1999, primarily due to our PBS sponsorship deal
and increased agency fees.

   Product Development. Product development expense was $8.6 million for the
quarter ended March 31, 2000, or 40% of total revenues, as compared to $3.9
million, or 59% of total revenues, for the quarter ended March 31, 1999. The
increase is primarily due to increases of $1.4 million in product engineering
costs, $1.1 million in LookSmart Live costs, $500,000 in editorial costs,
$400,000 in engineering costs and $600,000 in product development costs. These
cost increases are attributable to the significant increase in personnel needed
to support our efforts to expand our database page-server and advertising
technologies.

   General and Administrative. General and administrative expense was $2.9
million for the quarter ended March 31, 2000, or 13% of total revenues, as
compared to $1.6 million, or 25% of total revenues, for the quarter ended March
31, 1999. The increase consists of overall salaries increases in finance, human
resources and facilities aggregate as well as increased professional services
costs. The Company's rapid growth necessitated the increase in these expenses.

   Amortization of Goodwill and Intangibles. Amortization of goodwill and
intangibles expense was $1.9 million for the quarter ended March 31, 2000, or
9% of total revenues, as compared to $395,000, or 6% of total revenues, for the
quarter ended March 31, 1999. Goodwill and intangibles are the result of the
purchase of intellectual property at our inception in 1996, the BeSeen.com
acquisition in October 1998, the Guthy-Renker Internet and ITW NewCorp asset
purchase transactions in April 1999 and June 1999, and the Futurecorp stock
purchase transaction in December 1999. The dollar increase was due primarily to
the fact that the quarter ended March 31, 2000 includes the impact of the
Guthy-Renker Internet, ITW NewCorp and Futurecorp purchase transactions.

   Amortization of Deferred Stock Compensation. Amortization of deferred stock
compensation expense was $1.3 million for the quarter ended March 31, 2000, or
6% of total revenues, as compared to $789,000, or 12% of total revenues, for
the quarter ended March 31, 1999. These amounts were booked in connection with
the grant of stock options to employees and represent the difference between
the deemed fair value of the common stock subject to the options at the dates
of grant and the exercise price of the related options.

   Non-operating Income (Expense). The Company had net non-operating expense of
$1.2 million for the quarter ended March 31, 2000, as compared to net non-
operating income of $19,000 for the quarter ended March 31, 1999. We recognized
a $1.6 million loss as our 50% share of the BT LookSmart loss for the quarter
ended March 31, 2000. BT LookSmart initiated operations in February 2000. For
the quarter ended March 31, 2000, we had $1.2 million in interest income from
our cash and equivalents and short-term investments. Interest income was offset
by interest expense of $833,000 on our debt and capital lease obligations.


                                       11
<PAGE>

Income Taxes

   Income tax expense was $47,000 for the quarter ended March 31, 2000 compared
to $52,000 for the same period in 1999. Income tax expense is primarily
associated with our Australian operations.

Liquidity and Capital Resources

   LookSmart invests excess cash predominantly in debt instruments that are
highly liquid, of high-quality investment grade, and have maturities of less
than one year with the intent to make such funds available for operating
purposes. At March 31, 2000, the Company had cash and cash equivalents,
restricted cash and short-term investments totaling $134.7 million. Of this
amount, $50.0 million constitutes restricted cash under the BT LookSmart joint
venture agreement and is reserved exclusively for the purpose of funding the
BT LookSmart joint venture.

   As of March 31, 2000, we had working capital of $121.2 million. Current
assets included $121.7 million in cash and cash equivalents and $13.0 in short-
term investments. Current liabilities included $16.8 million in deferred
revenues. Deferred revenues primarily reflect cash receipts in excess of the
revenues earned under our agreement with Microsoft.

   Our operations used cash of $18.9 million and $3.8 million for the quarters
ended March 31, 2000 and 1999, respectively. Net cash used in operations for
the quarter ended March 31, 2000 resulted primarily from the net losses for the
period and increases in prepaid expenses related to our Netscape and NetZero
distribution agreements, accounts receivable and other assets; and decreases in
trade accounts payable and deferred revenues partially offset by increases in
accrued liabilities.

   Our investing activities provided cash of $13.1 for the quarter ended March
31, 2000 and used cash of $1.8 million for the same quarter in 1999. Investing
activity in each of the periods reflects purchases of fixed assets. The net
cash provided by investing activities in the quarter ended March 31, 2000, is
primarily the result of liquidating $15.0 million in short-term investments
during the quarter.

   Our financing activities provided cash of $51.4 million and $60.5 million
for the quarters ended March 31, 2000 and 1999, respectively. In February 2000,
we drew down $50.0 million on the BT line of credit, as explained below. In
February and March 1999, we received cash proceeds of $500,000 and
$60.0 million from the issuance of Series A and Series C convertible preferred
stock, respectively.

   In February 2000, LookSmart entered into a joint venture agreement with BT.
LookSmart and BT have an equal equity interest in the joint venture, BT
LookSmart, which will provide localized directory services in Europe and Asia.
We account for our investment in the joint venture using the equity method of
accounting. Our share of the joint venture's net income or loss is reported as
non-operating income or expense. The Company anticipates that the joint venture
will require significant cash contributions and will incur losses for the
foreseeable future. The agreement establishing the joint venture requires that
LookSmart commit up to $108.0 million in cash through March 2003. Under the
terms of the agreement, BT extended a $50.0 million credit facility with
interest at 20% per annum. We drew down $50.0 million from the credit facility
in February 2000. Outstanding principal and accrued interest on the credit
facility are convertible into LookSmart common stock at $35.00 per share at
BT's discretion.

   Our capital requirements depend on numerous factors, including our ability
to generate revenues, product development needs, hiring requirements, ability
to form alliances with strategic partners, market acceptance of our services,
and the amount of resources we invest in directory content, site development,
sales and marketing promotions. We have experienced a substantial increase in
expenditures since inception consistent with growth in operations and staffing.
We anticipate that this will continue for the foreseeable future. Additionally,
we plan to expand our sales and marketing programs, conduct more aggressive
brand promotions and continue to evaluate possible investments in complementary
businesses and technologies.


                                       12
<PAGE>

   Management believes that our current cash balance is sufficient to meet the
Company's operating requirements for at least the next 12 months. The Company
expects that it will need to seek additional financing if investment plans for
our business change. We cannot assure you that such financing will be available
on reasonable terms when and if required. If we raise additional funds through
the issuance of equity or convertible debt securities, our existing
stockholders will experience dilution of their holdings.

Year 2000 Risks

   We have not experienced any immediately adverse impact from the transition
to the Year 2000 on January 1, 2000. However, we cannot guarantee that we, our
suppliers and customers have not been or will not be affected in a manner that
is not yet apparent. In addition, certain computer programs that were date
sensitive to the Year 2000 may not process the Year 2000 as a leap year and any
consequential effects may remain unknown until later.

                      Factors Affecting Operating Results

   You should carefully consider the risks described below before making an
investment decision. If any of the following risks actually occur, our
business, financial condition or 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 expect to continue to incur net losses

   We have incurred net losses since our inception, including net losses of
approximately $12.9 million and $64.7 million for the years ended December 31,
1998 and 1999 and $13.8 million for the quarter ended March 31, 2000. As of
March 31, 2000, we had an accumulated deficit of approximately $101.7 million.
We expect to have increasing net losses and negative cash flow for the
foreseeable future. The size of these net losses will depend, in part, on our
ability to grow our revenues and capitalize on new sources of revenue and on
the level of our expenses. We expect to spend significant amounts to:

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

  . maintain and expand our network of strategic distribution partners;

  . fund new product development and enhance the functionality of our search
    and navigation services; and

  . acquire complementary technologies and businesses.

   As a result, we expect that our operating expenses and non-operating losses
will increase significantly in the near term and, consequently, we will need to
generate significant additional revenues to achieve profitability. Even if we
do achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis.

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

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

  . the level of user traffic on our and our affiliates' websites and our
    ability to monetize that traffic in any given quarter;

  . the demand for our Internet search and navigation services;

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

                                       13
<PAGE>

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

  . the level and timing of our entry into new contracts for Internet
    infrastructure building, database licensing and syndication;

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

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

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

  . the timing of our delivery of URLs under the Microsoft contract. We
    recognize quarterly revenues under this contract based on the number of
    URLs added to our database during the quarter relative to the total
    number of URLs we are required to add to our database during the relevant
    six-month period. As a result, to the extent that we satisfy our database
    update obligations unevenly, the revenues we recognize 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, including
costs related to acquisitions and integration of technologies or businesses.

   Due to the above factors, we believe that period-to-period comparisons of
our operating results are not necessarily meaningful. You should not rely on
period-to-period comparisons 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 at least the
next 12 months, unanticipated developments in the short term, such as the
acquisition of businesses with high negative cash flows, may also require
additional financing. In any case, we may seek to raise additional funds
through public or private debt or equity financings in order to:

  . fund our operations and capital expenditures;

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

  . develop and upgrade our technology infrastructure;

  . reduce outstanding debt;

  . develop new product and service offerings;

  . take advantage of favorable conditions in capital markets; or

  . respond to competitive pressures.

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

                                       14
<PAGE>

Our business prospects depend on the use of the Internet as an advertising
medium and our ability to generate advertising revenues

   For the quarter ended March 31, 2000, advertising and syndication revenues
accounted for 57% of our total revenues, as compared to 33% of our total
revenues in the quarter ended March 31, 1999. We expect that revenues from
advertising and syndication will continue to represent a significant portion of
our total revenues for the foreseeable future. Many potential advertisers and
advertising agencies have only limited experience advertising on the Internet
and have not devoted a significant portion of their advertising expenditures to
Internet advertising. We expect downward pressure on advertising prices in the
industry generally due to the increasing amount of advertising inventory
becoming available on the Internet. As the Internet evolves, advertisers may
find Internet advertising to be a less effective means of promoting their
products or services relative to traditional advertising media and may not
continue to spend money on Internet advertising. Acceptance of the Internet
among advertisers will depend, to a large extent, on the level of Internet
usage by consumers and upon growth in the commercial usage of the Internet.

   In addition, advertising on the Internet is at an earlier stage of
development in international markets compared to the United States. We intend
to expand our overseas operations and will therefore be subject to the greater
uncertainties associated with our reliance on advertising revenues from
international operations.

   In addition, our ability to earn advertising revenues depends on the number
of advertising impressions per search and the number of clickthroughs. We
believe category searches generally result in a greater number of advertising
impressions per search and a higher number of clickthroughs than keyword
searches. Accordingly, if we are unable to implement category-based search
broadly across our network of affiliates, or if users decide to use keyword
searches more frequently than category searches, our advertising revenues could
decline.

   Intense competition for advertising revenues exists among high-traffic
websites, which results in significant price competition. Currently, there are
a variety of pricing models for selling advertising on the Internet. Several of
the most widely used pricing models are based on the number of impressions or
clickthroughs, the duration over which the advertisement is displayed or the
number of keywords to which the advertisement will be linked. It is difficult
to predict which pricing model, if any, will emerge as the industry standard.
This uncertainty makes it difficult to project our future advertising rates and
revenues that we may generate from advertising. In addition, our advertising
revenues will depend on our ability to achieve, measure and demonstrate to
advertisers the breadth of the traffic base using our search service and the
value of our targeted advertising. Filter software programs that limit or
prevent advertising from being displayed on a user's computer are available. It
is unclear whether this type of software will become widely accepted, but if it
does, it would negatively affect Internet- based advertising.

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

   Since January 1, 1998, our workforce has grown substantially, from 55
employees to approximately 600 employees on March 31, 2000. In addition, many
members of our management team have only recently started in their current
positions, including our Senior Vice President, Engineering and Chief Financial
Officer. We also need to hire employees to fill several key positions,
including Senior Vice President, Marketing and Vice President, International.
Implementation of our growth strategy requires that we hire additional highly
qualified personnel in the near term, particularly in our engineering,
administration, product development and sales operations.

   Our growth has placed, and will continue to place, a significant strain on
our management, our engineering and product development staff, and our internal
accounting, operational and administrative systems. To manage future growth, we
must continue to improve these systems and expand, train, retain and manage our
employee base. If our systems, procedures and controls are inadequate to
support our operations, our expansion could be slowed. We cannot assure you
that we will be able to manage our growth effectively, and any failure to do so
could harm our business.


                                       15
<PAGE>

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

   We derive a significant amount of our revenues under an agreement with
Microsoft Corporation, and after June 5, 2000, either party may terminate the
agreement for any reason on six months' notice. For the quarter ended March 31,
2000, revenues from Microsoft under this agreement accounted for $4.9 million
or 23% of our total revenues. The cash payments we receive for each six-month
period under this agreement are subject to full or partial refund if we fail to
provide the stated number of URLs during that period. Microsoft has the right
to use our database during the term of the agreement and, after the agreement
is terminated, 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.
Microsoft may not sublicense its rights to a specified group of companies,
which includes some of our competitors.

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

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

  . expand and maintain our network of distribution relationships, thereby
    increasing the amount of traffic to Internet properties using our search
    services;

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

  . profitably establish and expand our service offerings, including express
    listings, sub-site listings and LookSmart Live!

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

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

   We face many risks associated with the BT LookSmart joint venture:

  . we will recognize 50% of the net income or loss from the joint venture as
    non-operating income or expense on our statement of operations. In the
    early years of operation we expect the venture to incur significant
    losses and require large capital expenditures. As a result, LookSmart's
    earnings will be adversely impacted. We cannot project when BT LookSmart
    will reach cash flow break-even or become profitable, if at all.

  . we may be unable to raise funds to meet our financing obligations, in
    which case our equity ownership of the joint venture will be
    proportionately reduced;

  . the joint venture will face competition in international markets from a
    range of competitors, including Yahoo!, Microsoft Network, Alta Vista, UK
    Plus, France Telecom, Deutsche Telecom, Tele Denmark, Scandinavian
    Online, Sonera Plaza and other American and foreign search engines,
    content aggregators and portals, some of which have greater capital
    resources and local experience in these markets;

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

                                       16
<PAGE>

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

  . the joint venture's success will depend on its ability to aggregate a
    large amount of Internet traffic and monetize that traffic through
    advertising and other revenue streams;

  . 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 offers its search and navigation services; and

  . we have not previously worked with British Telecommunications and may be
    unable to forge an effective working relationship in the joint venture
    due to differences in business goals, assessment of and appetite for risk
    or other factors.

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

   Our success depends on our ability to expand the network of affiliates using
our directory and search services. We have invested, and will continue to
invest, a significant amount of our human and capital resources to expand this
network. However, we cannot assure you that this strategy will be successful or
that we will continue to grow and expand the traffic through the network of
websites using our Internet infrastructure services. If we are unsuccessful in
doing so, the reach of our search services, and consequently our ability to
generate advertising revenues, will be seriously harmed. In that event, our
business prospects and results of operations may deteriorate.

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

   If we are presented with appropriate opportunities, we intend to make
additional acquisitions of, or significant investments in, complementary
companies, products 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. In particular, it may be
difficult to retain key management and technical personnel of the acquired
company during the transition period following an acquisition. Geographic
distances between LookSmart and its acquired businesses may require some
employees to relocate. For these reasons, we may not be successful in
integrating any acquired businesses or technologies and may not achieve
anticipated revenue and cost benefits.

   Acquisitions 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 goodwill or other intangible assets
in connection with future acquisitions, which would adversely affect our
operating results.

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

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

  . demands on our software and infrastructure systems resulting from
    substantial increases in editorial activity or the number of URLs in our
    directory;

  . customization of the database for syndication;


                                       17
<PAGE>

  . substantially increased traffic; and

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

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

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

   Any system failure, including network, software or hardware failure, whether
caused by us, a third party service provider or hackers, 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 and brand name. In addition, our users and
customers depend on ISPs, online service providers and other website operators
for access to the LookSmart directories. These service providers have
experienced significant outages in the past and could experience outages,
delays and other operating difficulties in the future.

   In February 1999, we entered into an agreement with GlobalCenter, Inc. to
house our hardware equipment at their facilities in Santa Clara, California. We
do not presently maintain fully redundant systems at separate locations, so our
operations depend on GlobalCenter's ability to protect the systems in its data
center from earthquake, fire, power loss, water damage, telecommunications
failure, hackers, vandalism and similar events. Although GlobalCenter provides
comprehensive facilities management services, GlobalCenter does not guarantee
that our Internet access will be uninterrupted, error-free or secure. We have
not developed a disaster recovery plan to respond to system failures. Although
we maintain property insurance for our equipment and business interruption
insurance, we cannot guarantee that our insurance will be adequate to
compensate us for all losses that may occur as a result of any system failure.

We face risks related to expanding into new services and business areas,
including LookSmart Live! and ecommerce distribution

   To increase our revenues, we will need to expand our operations by promoting
new or complementary products and services and by expanding into new business
areas. We are continuing to develop and implement various ecommerce services,
including express listing services, sub-site listing services and ecommerce
solutions for businesses. These products and services will require both
modification of existing software and systems and the creation or acquisition
of new software and systems. We may lack the managerial, editorial and
technical resources necessary to expand our service offerings. These
initiatives may not generate sufficient revenues to offset their cost. In
addition, as we continue to expand our offerings in these and other markets, we
will require significant additional managerial and financial resources that may
strain our existing resources.

   For example, one of our new business areas, LookSmart Live!, is capital and
human resource intensive, and may be difficult to scale quickly and profitably.
If we are unable for any reason to expand the service in line with consumer
demand, our reputation and business could suffer. In the first quarter of 2000,
the LookSmart Live! service generated no revenues and had $1.1 million in
operating expenses. If we are unable to monetize the traffic generated from
this service, it may not become profitable and may harm our results of
operations and financial condition.

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

   We compete in the Internet search infrastructure market, which is relatively
new and highly competitive. We expect competition to intensify as the market
evolves. Many of our competitors have longer operating histories, larger user
bases, longer relationships with consumers, greater brand recognition and
significantly

                                       18
<PAGE>

greater financial, technical and marketing resources than we do. As a result of
their greater resources, our competitors may be in a position to respond more
quickly to new or emerging technologies and changes in consumer requirements
and to develop and promote their products and services more effectively than we
do.

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

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

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

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

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

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

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

Recent acquisitions and strategic alliances involving our competitors could
reduce traffic to our and our affiliates' websites

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

  . CMGI's acquisition of an interest in Alta Vista;

  . America OnLine's acquisition of Netscape Communications Corporation and
    proposed acquisition of Time Warner, Inc.;

  . The Walt Disney Company's acquisition of an interest in Infoseek
    Corporation;

  . NBCi's formation from Snap, XOOM.com, NBC.com, NBC Interactive
    Neighborhood, AccessHollywood.com, VideoSeeker and a 10% equity stake in
    CNBC.com;

  . Yahoo, Inc.'s acquisition of Geocities;

  . @Home Network's acquisition of Excite, Inc.; and

  . Ask Jeeves' acquisition of Direct Hit Corporation.

   Although the effect of these acquisitions and strategic alliances on our
business cannot be predicted with certainty, these transactions could provide
our competitors with significant opportunities to increase traffic on their
websites and expand their service offerings, which could drive down traffic for
our network. In addition, these transactions align some of our competitors with
companies, including television networks, that are significantly larger and
have substantially greater marketing and technical resources and name
recognition than

                                       19
<PAGE>

LookSmart. As a result, these competitors may be in a position to respond more
quickly to new or emerging technologies and changes in consumer requirements
and to develop and promote their products and services more effectively than we
do.

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

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

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

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

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

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

  . our potential inability to aggregate a large amount of Internet traffic
    and find and develop relationships with international advertising and
    distribution partners;

  . difficulties in recruiting qualified and knowledgeable staff and in
    building locally relevant products and services, which could prevent us
    from aggregating a large user base;

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

  . foreign currency fluctuations.

   Our failure to address these risks 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, and Tracey Ellery, our President. Mr. Thornley and Ms.
Ellery are husband and wife. The loss of the services of either of these
individuals, or the services of other key employees, could adversely affect our
business. LookSmart does not have employment agreements with Mr. Thornley and
Ms. Ellery, and they do not have stock options or restricted stock subject to
vesting based on continued employment.

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

                                       20
<PAGE>

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

   We expect to derive an increasingly significant portion of our revenues from
the sale of advertising to other Internet companies. Many of these companies
have limited operating histories, are operating at a loss, have limited cash
reserves and have limited access to capital. As a result, we increased our
reserves for doubtful accounts in the first quarter of 2000 by $1.0 million to
offset the risk of future defaults on our accounts receivable. If any
significant part of our customer base experiences financial difficulties, is
not commercially successful, or is unable to pay our advertising fees for any
reason, our business will suffer.

Our results will be negatively affected if we fail to adapt to rapid
technological change and evolving industry standards

   To be successful, we must adapt to rapidly changing Internet technologies
and evolving industry standards. The introduction of new technologies,
including new or superior Internet search methods, or the emergence of new
industry standards and practices could render our systems and proprietary
software obsolete or require us to make significant unanticipated investments
to adapt to these changes. We must also enhance our existing service offerings
and introduce new products and services to address the changing needs and
demands of Internet users and our customers. If we are unable to respond to any
of these developments on a timely and cost-effective basis, our business will
be adversely affected.

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

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

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

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

   Our business is substantially dependent upon continued growth in the use of
the Internet as a medium for obtaining information and engaging in commercial
transactions. Internet usage may decline and ecommerce may be inhibited for
various reasons, including:

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

  . actual or perceived lack of security of information;

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

  . inconsistent quality of service;

  . governmental regulation, such as tax or privacy laws;

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<PAGE>

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

  . uncertainty regarding intellectual property ownership; and

  . lack of appropriate communications equipment.

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

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

   Internet user privacy has become an issue both in the United States and
abroad. The Federal Trade Commission and government agencies in some states and
countries have been investigating some Internet companies, and lawsuits have
been filed against some Internet companies, regarding their use of personal
information. Any regulations imposed to protect the privacy of Internet users
may affect the way in which we currently collect and use personal information.

   The European Union has adopted a directive that imposes restrictions on the
collection and use of personal data, guaranteeing citizens of European Union
member states various rights, including the right of access to their data, the
right to know where the data originated and the right to recourse in the event
of unlawful processing. We cannot assure you that this directive will not
adversely affect our activities, or the activities of BT LookSmart, in European
Union member states.

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

   We retain information about our users. If others were able to penetrate our
network security and gain access to, or in some other way misappropriate, our
users' information, we could be subject to liability. These claims could result
in litigation, our involvement in which, regardless of the outcome, could
require us to expend significant time and financial resources. We could incur
additional expenses if new regulations regarding the use of personal
information are introduced or if any regulator chooses to investigate our
privacy practices.

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

   Tax authorities on the international, federal, state and local levels are
currently reviewing the appropriate tax treatment of companies engaged in
Internet commerce. New or revised state tax regulations may subject us to
additional state sales, income and other taxes. We cannot predict the effect of
current attempts to impose sales, income or other taxes on commerce over the
Internet. However, new or revised taxes and, in particular,

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<PAGE>

sales taxes, would likely increase our cost of doing business and decrease the
attractiveness of advertising and selling goods and services over the Internet.
These events would likely have an adverse effect on our business and results of
operations.

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

   The market price of our common stock could decline as a result of sales of
substantial amounts of our common stock in the public market, or the perception
that such sales could occur. As of April 15, 2000, approximately 35.8 million
shares of common stock were held by non-affiliates and approximately 53.3
million shares were held by affiliates, all of which are currently available
for resale in the public market without registration, subject to compliance
with Rule 144 under the Securities Act. Moreover, as of April 15, 2000, the
holders of up to 42.2 million shares of common stock and warrants to purchase
approximately 2.1 million shares of common stock had rights to require us to
register those shares under the Securities Act.

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

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

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

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

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

  . actual or anticipated quarterly fluctuations in our operating results;

  . changes in financial estimates by securities analysts;

  . announcements of technological innovations or new products or services by
    us or our competitors; 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
outcome.

Government regulation and legal uncertainties could decrease demand for our
services or increase our cost of doing business

   Any new law or regulation pertaining to the Internet, or the application or
interpretation of existing laws, could decrease demand for our services, or
increase our cost of doing business, or both. Currently, there are a number of
laws and regulations that pertain to communications or commerce on the
Internet, and it is likely

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<PAGE>

that the number of such laws and regulations will increase. These laws or
regulations may relate to liability for information transmitted over the
Internet, online content regulation, user privacy or the quality of products or
services provided over the Internet. Moreover, the applicability to the
Internet of existing laws governing intellectual property ownership and
infringement, copyright, trademark and trade secret is uncertain and
developing.

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

   As of April 15, 2000, our executive officers, directors and significant
stockholders and the funds for whom they act as general partner, collectively
owned approximately 59% of the outstanding shares of our common stock. If these
stockholders choose to act or vote together, they will have the power to
control matters requiring stockholder approval, including the election of our
directors, amendments to our certificate of incorporation and approval of
significant corporate transactions, including mergers or sales of all of our
assets. This concentration of ownership may have the effect of discouraging
others from making a tender offer or bid to acquire LookSmart at a price per
share that is above the then-current market price.

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

   Our charter and bylaws and provisions of Delaware law may deter or prevent a
takeover attempt, including an attempt that might result in a premium over the
market price for our common stock. Our board of directors has the authority to
issue shares of preferred stock and to determine the price, rights, preferences
and restrictions, including voting rights, of those shares without any further
vote or action by the stockholders. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of our outstanding voting stock. In
addition, our charter and bylaws provide for a classified board of directors.
These provisions, along 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, 2000 or 1999. The Company
invests in debt instruments of high-quality corporate issuers with original
maturities greater than three months and current maturities less than twelve
months. The amount of credit exposure to any one issue and issuer is limited.

   Foreign Currency Risk. International revenues from the Company's foreign
subsidiaries were less than 10% of total revenues in the quarters ended March
31, 2000 and 1999, 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 for quarters
ended March 31, 2000 and 1999 were not material.


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                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

   On October 5, 1998, Hollinger Digital, Inc. filed a complaint against us in
New York Supreme Court (Case No. 604797/98). The complaint alleged that we
breached an agreement to sell 3,059,798 shares of our Series C preferred stock
(representing approximately 15% of our fully vested capitalization at the time
of the alleged breach) to Hollinger for $2.33 per share. The complaint also
asserted claims for promissory and equitable estoppel and sought specific
performance of the proposed terms of the alleged Series C transaction, which
included a right to pro rata participation in future financings prior to our
initial public offering. On the same day it filed its complaint, Hollinger
sought preliminary injunctive relief to prevent us from taking any action that
would interfere with Hollinger's alleged right to purchase the Series C
preferred stock. The Court denied Hollinger's motion for preliminary
injunction. On December 1, 1998, we filed a motion to dismiss Hollinger's
complaint. On March 17, 1999, the Court issued an order granting our motion and
dismissed Hollinger's complaint with prejudice. On May 4, 1999, Hollinger filed
a Notice of Appeal. The Appellate Division heard oral argument on the matter on
November 16, 1999, and affirmed the lower court's ruling on December 9, 1999.
The period for appeal of the Appellate Division's ruling expired on April 30,
2000 with no further appeal by Hollinger.

   We are not a party to any other material legal proceedings.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

   (a) Changes in Securities

   On February 15, 2000, LookSmart signed the Joint Venture Agreement with
British Telecommunications Plc, Transceptgate Ltd., LookSmart (Barbados), Inc.
and BT LookSmart, Ltd., which provided for, among other things, the extension
of a credit facility by British Telecommunications to LookSmart in the amount
of up to $50.0 million with interest at a rate of 20% per annum. On February
15, 2000, LookSmart drew down the full $50.0 million of the credit facility.
Pursuant to the loan documents, the outstanding principal and accrued interest
are convertible at any time at BT's discretion into LookSmart common stock at a
conversion price of $35.00 per share. As of March 31, 2000, the outstanding
principal and accrued interest was convertible into approximately 1,464,286
shares of LookSmart common stock.

   (b) Use of Proceeds

   On August 20, 1999, the Securities and Exchange Commission declared
effective our registration statement on Form S-1 (File No. 333-80581)
registering the initial public offering of 8,855,000 shares of our common stock
at an offering price of $12.00 per share. The initial public offering was
managed by Goldman, Sachs & Co., BancBoston Robertson Stephens and Hambrecht &
Quist. Gross proceeds of the offering, including the underwriters' exercise of
the over-allotment option, were approximately $106.3 million. Net proceeds to
LookSmart for the offering, after deducting commissions, fees and expenses
related to the offering, were approximately $96.9 million. As of March 31,
2000, a portion of the net proceeds had been used for general corporate
purposes, including working capital, marketing and promotional activities,
expanded operations, new product development and increased personnel. The
remaining proceeds were invested in short-term investments in order to meet
anticipated cash needs for future working capital.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

   None.

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

   None.

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ITEM 5. OTHER INFORMATION

   None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

   Exhibit 27.1 Financial Data Schedule

   The Company filed no Current Reports on Form 8-K during the quarter ended
March 31, 2000.

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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, 2000                      LOOKSMART, LTD.

                                        By: /s/ Ned Brody
                                          -------------------------------------
                                              Ned Brody
                                              Chief Financial Officer
                                              (Principal Financial and
                                               Accounting Officer)

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