<PAGE>

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



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

               FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
                                      OR

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

        FOR THE TRANSITION PERIOD FROM ______________ TO ______________

                       COMMISSION FILE NUMBER: 000-26357

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

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

                               487 Bryant Street
                     San Francisco, California  94107-1316
             (Address of Principal Executive Officer and Zip Code)

                                (415) 597-4850
             (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 [_] No [X]

     As of November 10, 1999, there were 85,550,215 shares of the registrant's
common stock outstanding.

                                       1
<PAGE>

                                   FORM 10-Q

Index

<TABLE>
<CAPTION>
PART I  FINANCIAL INFORMATION
<C>      <S>                                                                        <C>
ITEM 1:  Condensed Consolidated Financial Statements (unaudited)

         Condensed Consolidated Balance Sheets as of December 31, 1998 and
         September 30, 1999.....................................................     3

         Condensed Consolidated Statements of Operations for the three and nine
         months ended September 30, 1998 and 1999...............................     4

         Condensed Consolidated Statements of Cash Flows for the nine months
         ended September 30, 1998 and 1999......................................     5

         Notes to Condensed Consolidated Financial Statements...................   6-8

ITEM 2:  Management's Discussion and Analysis of Financial Condition and
         Results of Operations..................................................  9-17

ITEM 3:  Quantitative and Qualitative Disclosures About Market Risk.............    18

PART II  OTHER INFORMATION

ITEM 1:  Legal Proceedings......................................................    18

ITEM 2:  Changes in Securities and Use of Proceeds..............................    18

ITEM 3:  Defaults Upon Senior Securities........................................    18

ITEM 4:  Submission of Matters to a Vote of Security Holders....................    19

ITEM 5:  Other Information......................................................    19

ITEM 6:  Exhibits and Reports on Form 8-K.......................................    19

ITEM 7:  Signatures.............................................................    19
</TABLE>
                                       2
<PAGE>
PART I -- FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                 December 31,    September 30,
                                                                     1998             1999
                                                                 ------------    -------------
                                                                                  (unaudited)
<S>                                                              <C>             <C>
                      Assets
Current assets:
   Cash and equivalents                                            $    3,501       $   96,357
   Short term investments                                                   -           20,078
   Accounts receivable, net                                             2,895            5,798
   Prepaid distribution costs                                             546            5,151
   Prepaid expenses                                                       245            6,050
   Other assets                                                            61              746
                                                                   ----------       ----------
     Total current assets                                               7,248          134,180

Property and equipment, net                                             1,979            8,542
Goodwill and intangibles, net                                           4,744           27,700
Other assets                                                              119            2,614
                                                                   ----------       ----------
Total assets                                                       $   14,090       $  173,036
                                                                   ==========       ==========

       Liabilities and Stockholders' Equity (Deficit)
Current liabilites
   Accounts payable                                                $    1,325       $    3,635
   Accrued liabilities                                                  2,873            6,134
   Income taxes payable                                                   323              212
   Capital lease obligation - current portion                               -              147
   Deferred revenue                                                     9,234           16,744
                                                                   ----------       ----------
     Total current liabilities                                         13,755           26,872

Deferred revenue                                                           96            7,220
Capital lease obligation                                                    -              299
Note payable to former stockholder                                      1,500                -
                                                                   ----------       ----------
     Total liabilities                                                 15,351           34,391

Stockholders' equity (deficit):
Capital stock                                                              45               85
Additional paid-in capital                                             21,928          211,208
Warrants                                                                1,408            2,735
Unearned compensation                                                  (1,315)          (8,698)
Cumulative translation adjustments                                        (55)             (30)
Accumulated deficit                                                   (23,272)         (66,655)
                                                                   ----------       ----------
     Total stockholders' equity (deficit)                              (1,261)         138,645

                                                                   ----------       ----------
     Total liabilities and stockholders' equity (deficit)          $   14,090       $  173,036
                                                                   ==========       ==========
</TABLE>

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

                                       3
<PAGE>

                                LOOKSMART, LTD.
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                   (In thousands, except per share amounts)


<TABLE>
<CAPTION>
                                                      Three Months Ended             Nine Months Ended
                                                         September 30,                  September 30,
                                                   -------------------------     --------------------------
                                                       1998         1999             1998          1999
                                                   -----------   -----------     -----------    -----------
                                                   (unaudited)   (unaudited)     (unaudited)    (unaudited)
<S>                                                <C>           <C>             <C>            <C>
Revenues:

  Advertising and syndication                        $   1,359     $   6,258       $   3,179     $   11,882
  Licensing                                                364         4,601             389         14,227
  Ecommerce                                                  -         2,422               -          4,242
                                                     ---------     ---------       ---------     ----------
       Total revenues                                    1,723        13,281           3,568         30,351

Cost of revenues:

  Advertising and syndication                              226         1,009             721          1,757
  Ecommerce                                                  -         1,339               -          2,469
                                                     ---------     ---------       ---------     ----------
       Total cost of revenues                              226         2,348             721          4,226
                                                     ---------     ---------       ---------     ----------

Gross profit                                             1,497        10,933           2,847         26,125
                                                     ---------     ---------       ---------     ----------

Operating expenses:
  Sales and marketing                                    3,317        17,173           6,402         34,331
  Product development                                    1,186         8,655           2,330         18,222
  General and administrative                               671         2,414           1,557          6,080
  Amortization of goodwill and intangibles                 103         1,806             308          3,724
  Amortization of unearned compensation                     19         5,830              19          8,624
                                                     ---------     ---------       ---------     ----------
       Total operating expenses                          5,296        35,878          10,616         70,981
                                                     ---------     ---------       ---------     ----------

       Loss from operations                             (3,799)      (24,945)         (7,769)       (44,856)
Non-operating income (expenses), net                        (2)          936            (569)         1,525
                                                     ---------     ---------       ---------     ----------

       Loss before income taxes                         (3,801)      (24,009)         (8,338)       (43,331)
Income taxes                                               (18)            -             (94)           (52)
                                                     ---------     ---------       ---------     ----------

       Net loss                                         (3,819)      (24,009)         (8,432)       (43,383)
Other comprehensive income
  Change in foreign currency translation adjustment
     during the period                                     (13)           (1)             25            (30)
                                                     ---------     ---------       ---------     ----------

     Comprehensive loss                              $  (3,832)    $ (24,010)      $  (8,407)    $  (43,413)
                                                     =========     =========       =========     ==========

Basic and diluted net loss per share                 $   (0.20)    $   (0.45)      $   (0.45)    $    (1.36)
                                                     =========     =========       =========     ==========

Weighted average shares outstanding
   used in per share calculation                        19,123        53,270          18,592         31,842
                                                     =========     =========       =========     ==========
</TABLE>

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

                                       4
<PAGE>

                                LOOKSMART, LTD.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In Thousands)


<TABLE>
<CAPTION>
                                                                       Nine months ended
                                                                          September 30,
                                                                   --------------------------
                                                                       1998          1999
                                                                   -----------    -----------
                                                                   (unaudited)    (unaudited)
<S>                                                                <C>            <C>
Cash flows from operating activities:
   Net loss                                                         $   (8,432)   $   (43,383)
   Adjustments to reconcile net loss to cash used in
     operating activities:
       Depreciation and amortization                                       561          5,137
       Amortization of unearned compensation costs                          19          8,624
       Warrants and other non-cash charges                                 384              -
       Changes in operating assets and liabilities
         Accounts receivable                                            (1,068)        (2,903)
         Prepaid expenses                                                 (963)       (10,410)
         Other assets                                                     (349)        (3,180)
         Accounts payable                                                1,437          2,310
         Accrued liabilities and other                                     205          3,261
         Income taxes payable                                               69           (111)
         Deferred revenue                                                5,055         13,911
                                                                    ----------    -----------
            Net cash used in operating activities                       (3,082)       (26,744)
                                                                    ----------    -----------

Cash flows used in investing activities:
   Purchase of Guthy Renker Internet                                         -         (5,160)
   Purchase of ITW NewCorp, Inc                                              -         (5,171)
   Purchase of short term investments                                        -        (20,078)
   Capital expenditures                                                   (640)        (7,429)
                                                                    ----------    -----------
     Net cash used in investing activities                                (640)       (37,838)

Cash flows from financing activities:
   Cash paid for issuance costs                                           (263)             -
   Proceeds from notes                                                   2,875              -
   Repayment of notes                                                     (250)        (1,500)
   Proceeds from issuance of preferred stock                             5,500         60,887
   Proceeds from conversion of warrants to common stock                      -          1,321
   Proceeds from issuance of common stock                                   13         96,705
                                                                    ----------    -----------
     Net cash provided by financing activities                           7,875        157,413
   Effect of exchange rate changes on cash                                 (26)            25
                                                                    ----------    -----------
   Increase in cash and cash equivalents                                 4,127         92,856
   Cash and cash equivalents, beginning of period                           48          3,501
                                                                    ----------    -----------
   Cash and cash equivalents, end of period                         $    4,175    $    96,357
                                                                    ==========    ===========
</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

LookSmart is a global on-line navigation company. The LookSmart directory
contains a collection of highly specific unique uniform resource locators (URLs)
organized by categories and presented in an easy-to-navigate format.

Short-Term Investments.

The Company accounts for short-term investments under Statement of Financial
Accounting Standards No. 115 (SFAS 115), Accounting for Certain Investments in
Debt and Equity Securities.  SFAS 115 requires the classification of investments
in debt and equity securities with readily determined fair values as "held-to-
maturity," "available-for-sale," or "trading."  The Company invests its excess
cash in debt instruments of the U.S. Government and its agencies, and in high-
quality corporate issuers. All highly liquid instruments with original
maturities greater than three months and current maturities less than twelve
months from the balance sheet date are considered short-term investments.  These
securities are classified as available-for-sale and carried at fair value, based
on quoted market prices.  Net unrealized gains or losses, if material, on these
investments are reported as a component of comprehensive income (loss) in
stockholders' equity, net of tax.

2. Initial Public Offering (IPO)

     On August 19, 1999, LookSmart completed its IPO which resulted in the
issuance of 8,855,000 shares of common stock which included 1,155,000 shares in
connection with the exercise of the underwriters' over-allotment option. All
shares were issued at an offering price of $12.00 per share.  In addition, upon
the closing of the IPO, 7,852,614, 14,327,725, 12,083,529 and 6,000,000 shares
of Series A, B, C and 1 Junior convertible preferred stock, respectively,
converted into 40,263,868 shares of common stock. Net proceeds from the offering
after underwriting discounts and commissions and offering expenses of $9.6
million were approximately $96.6 million.

3.  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 the 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, 1998 as included in LookSmart's Registration Statement on Form S-1
(Registration No. 333-80581), including the related prospectus dated August 19,
1999, as filed with the Securities and Exchange Commission.


                                       6
<PAGE>
                       LOOKSMART, LTD. AND SUBSIDIARIES

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                  (unaudited)

4. Net Loss Per Share:

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

<TABLE>
<CAPTION>
                                             Three Months          Nine Months
                                         Ended September 30,   Ended September 30,
                                         -------------------  --------------------
                                           1998       1999       1998      1999
                                         --------  ---------  ---------  ---------
                                            (unaudited)            (unaudited)
<S>                                      <C>       <C>        <C>        <C>
Numerator-Basic and diluted:
  Net loss......................         $(3,819)  $(24,009)  $(8,432)    $(43,383)
Denominator-Basic and diluted:
  Weighted average common
   shares outstanding...........          19,123     53,270    18,592       31,842
Basic and diluted loss per
 share..........................         $ (0.20)  $  (0.45)  $ (0.45)    $  (1.36)
</TABLE>

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. Weighted average common
stock equivalents relating to preferred stock, stock options and warrants to
purchase common and preferred shares (as calculated using the treasury method)
are as follows (in thousands):

<TABLE>
<CAPTION>
                                             Three Months          Nine Months
                                         Ended September 30,   Ended September 30,
     Weighted average common stock       -------------------  --------------------
              equivalents                  1998       1999       1998      1999
     -----------------------------       --------  ---------  ---------  ---------
                                            (unaudited)            (unaudited)
     <S>                                 <C>       <C>        <C>        <C>
     Preferred stock.................     16,522     22,565      8,751     30,276
     Options.........................      3,885     10,677      3,594     10,092
     Warrants........................      9,366      8,035      9,318     12,754
                                          ------     ------     ------     ------
     Total dilutive shares...........     29,773     41,277     21,663     53,122
                                          ======     ======     ======     ======
</TABLE>

5.  Related Party Transactions

At September 30, 1999, the Company held a note receivable of $43,000 from a
shareholder and former employee of the Company. The promissory note was issued
to him in August 1999 for the purpose of exercising his option grant. This note,
which bears interest at 10% per annum, is due in full plus interest at the
earlier of the time at which he sells the related shares or March 1, 2000. The
note principal and interest are collateralized by the shareholder's personal
real estate.

The Company has a distribution agreement with Guthy Renker Corporation (GRC),
one of the Company's shareholders. At September 30, 1999, the Company had a
receivable of $415,000 from GRC arising from transactions in the normal course
of business under the distribution agreement.

6. Non-cash Compensation

In August 1999, LookSmart recorded a non-cash charge of $3.7 million for the
accelerated vesting of stock options for certain employees upon termination of
their employment with the Company.  Such amount has been recorded as a non-cash
compensation expense in LookSmart's statement of operations for the three and
nine months ended September 30, 1999 and additional paid in capital.

                                       7
<PAGE>
                       LOOKSMART, LTD. AND SUBSIDIARIES

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                  (unaudited)

7. 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 derives its revenues from
three areas: advertising and syndication, licensing and ecommerce.  The Company
reports revenue and cost of revenues along these three segments based on the
different services provided by each.  With the exception of accounts receivable,
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, 1998 and September 30, 1999, accounts
receivables by segments are as follows (in thousands):

<TABLE>
<CAPTION>
                                      December 31,   September 30,
                                          1998            1999
                                      -------------  --------------
                                       (unaudited)    (unaudited)
   <S>                                <C>            <C>
   Advertising and syndication              $3,022          $5,943
   Licensing                                    --             167
   Ecommerce                                    --               7
                                            ------          ------
   Total                                     3,022           6,117
   Allowance for doubtful accounts            (127)           (319)
                                            ------          ------
   Accounts receivable, net                 $2,895          $5,798
                                            ======          ======
</TABLE>

8.  Stock Option Plan

During the three months ended September 30, 1999, the Company granted 667,250
stock options.  During such period employees exercised an aggregate 694,959
options, and 1,032,750 options were cancelled.  Total outstanding stock options
were 11,056,014 as of September 30, 1999.

9.  1999 Employee Stock Purchase Plan

In June 1999, the Board of Directors adopted the 1999 Employee Stock Purchase
Plan, which was approved by the stockholders in July 1999. A total of 750,000
shares of common stock have been reserved for issuance under the 1999 Purchase
Plan, plus annual increases on January 1 of each year, beginning in 2000, equal
to the lesser of 1 million shares; 3% of the outstanding shares on January 1; or
an amount determined by the Board of Directors. As of September 30, 1999, no
shares have been issued under the 1999 Purchase Plan.

10.  Subsequent Events

In November 1999, the Company entered into an agreement with British Telecom
(BT) to form a Joint Venture (JV). The partners of the JV will have an equal
equity interest. The JV will provide Internet access and localized directory
services in Europe and Asia. The Company intends to account for its investment
in the JV using the equity method and to present its share of JV earnings or
losses as non-operating income or expense.



                                       8
<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 prospectus, particularly in "Factors Affecting Operating Results".

Overview

  LookSmart is a global on-line navigation provider that has assembled what it
believes to be the largest collection of high quality, granular content on the
Internet. The LookSmart directory contains over 1.3 million unique URLs in over
100,000 categories, organized in an easy-to-navigate format. We distribute our
proprietary directory to a large number of Internet users through LookSmart-
owned Internet properties and through our strategic alliances. Our Internet
properties, including looksmart.com, primarily target a focused demographic of
female household purchase decision-makers and generate advertising and ecommerce
revenues. We broaden the reach of the LookSmart directory through syndication
and licensing. We currently provide our directory to leading Internet portals,
such as The Microsoft Network, Netscape Netcenter, Excite@Home and Alta Vista,
and to 280 ISPs, including IBM.net and NetZero. In addition, users can access
our content and services through a network of over 600,000 website affiliates.

In December 1998, we entered into a five-year contract with Microsoft. Under
this agreement, we license our database to Microsoft, and we are obligated to
increase the number of unique URLs included in our database every six months by
pre-defined amounts.  Microsoft makes licensing payments on a fixed schedule.
Generally, the difference between any cash received under the contract and
revenues recognized is carried as deferred revenue. At September 30, 1999,
deferred revenues associated with the Microsoft contract was $20.8 million.

Results of Operations

Revenues

  Advertising and Syndication.

  Advertising and syndication revenues were $6.3 million and $11.9 million for
the three and nine month periods ended September 30, 1999, respectively, which
represent increases of 360% and 274% when compared with the corresponding
periods in 1998. The increases were due primarily to the increasing number of
advertisers purchasing space on the Company's Web pages, increased traffic,
higher effective yields, better inventory management and new syndication
agreements.

  Licensing.

  Licensing revenues were $4.6 million and $14.2 million for the three and
nine month periods ended September 30, 1999, respectively, as compared with
$364,000 and $389,000 for the corresponding periods in 1998. The increases were
principally due to revenues earned under the Microsoft contract, which the
Company entered into in December 1998.

  Ecommerce.

  The Company initiated its ecommerce activities in April 1999. Ecommerce
revenues were $2.4 million and $4.2 million for the three and nine month periods
ended September 30, 1999, respectively. The Company did not have ecommerce
revenues in the corresponding periods in 1998.

International revenues accounted for less than 10% of net revenues during the
three and nine months ended September 30, 1999 and 1998.  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 $1.0 million and $1.8
million, or 16% and 15% of advertising and syndication revenues for the three
and nine month periods ended September 30, 1999, respectively, as compared to
$226,000 and $721,000, or 17% and 23% of advertising and syndication revenues,
for the corresponding periods in 1998. We have invested in technology
infrastructure and have hired advertising operations personnel to manage the
monetization and ad serving process. The salaries and benefits costs of
additional employees in advertising operations as well depreciation on capital
expenditures have contributed to the absolute dollar increase in advertising and
syndication cost of revenues.

  Ecommerce.

  Ecommerce cost of revenues were $1.4 million and $2.5 million, or 55% and 58%
of ecommerce revenues, for the three and nine month periods ended September 30,
1999, respectively. The Company did not have ecommerce cost of revenues

                                       9
<PAGE>

in the corresponding periods in 1998. Ecommerce cost of revenues are
attributable primarily to product costs paid as a result of merchandise
acquisition costs.

Operating Expenses

  Sales and Marketing.

  Sales and marketing expense was $17.2 million for the quarter ended September
30, 1999, or 129% of total revenues, as compared to $3.3 million, or 193% of
total revenues, for the quarter ended September 30, 1998. For the nine months
ended September 30, 1999, sales and marketing expenses were $34.3million, or
113% of total revenues, as compared to $6.4 million, or 179% of total revenues,
for the nine months ended September 30, 1998.

The dollar increase in sales and marketing expenses is attributable to a number
of factors. Distribution costs increased approximately $8.9 million for the nine
months ended September 30, 1999 as compared to the same period in 1998 as the
result of our distribution and syndication agreements entered into in May 1998
and April 1999, with Netscape and NetZero, respectively, and the growth of our
ISP partner program. Ecommerce marketing costs for the nine months ended
September 30, 1999 were $4.5 million. In the second half of 1998, the Company
established an advertising sales staff, resulting in an increase in sales and
marketing expense of approximately $2.7 million for the nine months ended
September 30, 1999 as compared to the same period in 1998. Additionally our
industry brand marketing campaign, which focused on syndication affiliates and
the advertising trade, and our consumer brand marketing campaign launched in the
1999, resulted in an increase in marketing expense of approximately $5.6 million
for the nine months ended September 30, 1999 as compared to the same period in
1998.

  Product Development.

  Product development expense was $8.7 million for the quarter ended September
30, 1999, or 65% of total revenues, as compared to $1.2 million, or 69% of total
revenues for the quarter ended September 30, 1998. For the nine months ended
September 30, 1999, product development expense was $18.2 million, or 60% of
total revenues, as compared to $2.3 million, or 65% of total revenues, for the
nine months ended September 30, 1998. The increase for the nine months ended
September 30, 1999 versus the same period in 1998, is primarily composed of an
editorial costs increase of $6.7 million, an engineering costs increase of $6.7
million and a product design costs increase of $2.5 million. These cost
increases are primarily due to a significant increase in personnel necessary to
support our efforts to expand our database page-server and advertising
technologies.

  General and Administrative.

  General and administrative expense was $2.4 million for the quarter ended
September 30, 1999, or 18% of total revenues as compared to $671,000, or 39% of
total revenues for the quarter ended September 30, 1998. For the nine months
ended September 30, 1999, general and administrative expense was $6.1 million,
or 20% of total revenues as compared to $1.6 million, or 44% of total revenues
for the nine months ended September 30, 1998. The increase for the nine months
ended September 30, 1999 versus the same period in 1998, consists of finance,
human resources and facilities aggregate salaries increases of $2.1 million and
a professional services costs increase of $1.4 million. The Company's rapid
growth necessitated the increase in these expenses.

  Amortization of Goodwill and Intangibles.

  Amortization of goodwill and intangibles expense was $1.8 million for the
quarter ended September 30, 1999, or 14% of total revenues as compared to
$103,000, or 6% of total revenues for the quarter ended September 30, 1998. For
the nine months ended September 30, 1999, amortization of goodwill and
intangibles expense was $3.7 million, or 12% of total revenues as compared to
$308,000, or 9% of total revenues for the nine months ended September 30, 1998.
Goodwill and intangibles are the result of the purchase of intellectual property
at our inception in 1996, the BeSeen.com acquisition in October 1998 and the
Guthy- Renker Internet and ITW NewCorp asset purchase transactions in April 1999
and June 1999. The dollar increase was due primarily to the fact that 1999
included the impact of the BeSeen.com acquisition and the Guthy-Renker Internet
and ITW NewCorp asset purchase transactions.

  Amortization of Unearned Compensation.

  Amortization of unearned compensation expense was $5.8 million for the
quarter ended September 30, 1999, or 44% of total revenues as compared to
$19,000, or 1% of total revenues for the quarter ended September 30, 1998. For
the nine months ended September 30, 1999, Amortization of unearned compensation
expense was $8.6 million, or 28% of total revenues as compared to $19,000, or 1%
of total revenues for the nine months ended September 30, 1998. We began
recording unearned compensation in the second half of 1998. In August 1999,
LookSmart recorded a non-cash charge of $3.7 million for the accelerated vesting
of stock options for certain employees upon termination of their employment with
the Company.

                                       10
<PAGE>

  Non-operating Income (Expense), Net.

  Non-operating income (expense), net was $936,000 for the quarter ended
September 30, 1999, as compared to $(2,000) for the quarter ended September 30,
1998. For the nine month periods ended September 30, 1999, non-operating income
(expense), net was $1.5 million as compared to $(569,000) for the nine months
ended September 30, 1998. Non-operating income (expense), net includes interest
expense on our debt and capital lease obligations, net of interest income from
our cash and equivalents and short-term investments. We recorded net interest
income of $1.5 million for the nine months ended September 30, 1999 compared to
net interest expense of $470,000 for the same period in 1998. The change from
net interest expense to net interest income between the two periods is primarily
the result of larger cash balances on hand during the nine months ended
September 30, 1999 as a result of the initial public offering in August 1999.

Income Taxes

  We recorded no tax expense for the quarter ended September 30, 1999 compared
to $18,000 for the same period in 1998.  We recorded income tax expense of
$52,000 for the nine months ended September 30, 1999, compared to $94,000 for
the same period in 1998. 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 September 30, 1999, the Company had cash and cash equivalents and
short-term investments totaling $116.4 million compared to $3.5 million at
December 31, 1998.

  As of September 30, 1999, we had working capital of $107.3 million. Current
assets included $96.4 million in cash and cash equivalents and $20.1 in short-
term investments.  Current liabilities included $16.7 million in deferred
revenues. Deferred revenues primarily reflects receipts in excess of the
revenues earned under our agreement with Microsoft. The Company's accounts
receivable balances have grown approximately proportionate to the growth in
revenues.

  Our operations used cash of $3.1 million and $26.7 million for the nine months
ended September 30, 1998 and 1999.  Net cash used in operations for the nine
months ended September 30, 1998 and 1999 resulted primarily from the net losses
for the periods and increases in prepaid expenses related to our Netscape and
NetZero distribution agreements, accounts receivable, and other assets partially
offset by increases in accrued liabilities and deferred revenues related to our
agreement with Microsoft.

  Our investing activities used cash of $640,000 and $37.8 million for the nine
months ended September 30, 1998 and 1999. Investing activity in each of the
periods reflects purchases of fixed assets, and in 1999, includes the Guthy-
Renker Internet and ITW NewCorp asset purchase transactions, as well as the
purchase of short-term investments. We plan to consolidate our four San
Francisco offices into one facility in the fourth quarter of 1999, and will
incur substantial leasehold improvement and other fixed asset outlays of
approximately $2.0 million net of landlord allowances related to the occupancy
of the new facility. We have entered into a lease on that facility under which
we will be required to make aggregate rent payments of approximately $44.0
million over the ten year term of the lease. Management intends to sublease the
space the Company currently occupies through the terms of the existing leases
and to sublease a portion of the new facility. Management believes that the
current rental market in San Francisco for commercial office space will allow us
to recover our obligations under our existing leases and to recover the cost of
space in our new facilities for which we will seek sub-tenants.

  Our financing activities provided cash of $7.9 million and $157.4 million for
the nine months ended September 30, 1998 and 1999.  In 1998, we received cash
proceeds of $5.5 million from the issuance of Series B convertible preferred
stock. In March and April of 1999, we received cash proceeds of $60.3 million
from the issuance of Series C convertible preferred stock.  In August 1999, we
received net cash proceeds of $96.6 million from issuance of common stock
through our initial public offering.

  In November 1999, the Company entered into an agreement with British Telecom
(BT) to form a Joint Venture (JV). The partners of the JV will have an equal
equity interest. The JV will provide Internet access and localized directory
services in Europe and Asia. The Company intends to account for its investment
in the JV using the equity method and to present its share of JV earnings or
losses as non-operating income or expense. The Company anticipates that the JV
will require significant cash contributions and that the JV will incur losses
for the foreseeable future.

  Our capital requirements depend on numerous factors, including our product
development needs, our hiring requirements, our ability to form alliances with
strategic partners, market acceptance of LookSmart services, the amount of
resources we invest in directory content, site development, sales and marketing
and brand 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.

                                       11
<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 Readiness Disclosure

  Year 2000 Assessment and LookSmart's State of Readiness. In 1999, we initiated
a Year 2000 assessment and planning effort to review both our relevant
operating, financial and administrative information technology, or IT, and non-
IT systems. We also formed our Y2K Committee to plan for and supervise the
remediation of those systems where necessary. We have retained outside
consultants to assist us in the Y2K Committee's review of our systems and
planning for remediation efforts. Due to the absence of "legacy" systems and the
age and architecture of the LookSmart production environment, the Company has
determined that there is little remediation exposure. We have conducted tests
and expect to conduct additional tests of our systems as part of our Year 2000
efforts. The Company has determined that our non-IT exposure will be addressed
by December 31, 1999.

  LookSmart will develop contingency plans for critical individual information
technology systems to address Year 2000 risks as a complementary part of our
Year 2000 program. We have identified all of our critical hardware and software
systems and have received confirmations from the providers of these systems that
they are Year 2000 compliant.  Our Year 2000 assessment and contingency planning
effort is divided into four phases as illustrated by the following table:

            Year 2000 Tasks and Milestone Status--Relevant Systems

<TABLE>
<CAPTION>
 Milestone Task                                        Status or Estimated Completion Date
--------------------------------------------------------------------------------------------------
<S>                                                    <C>
  Discovery Phase I                                    Completed June 4, 1999
 .  PC Desktop/Workstation System Inventory and
      Identification
--------------------------------------------------------------------------------------------------
 Y2K Compliance Review--Phase I                        Completed July 30, 1999
 .  Status Assessment and Action Plan
--------------------------------------------------------------------------------------------------
 Y2K Compliance Review--Phase II                       Completed September 13, 1999
 Y2K Detail Compliance Review
 Y2K Compliance Strategy
--------------------------------------------------------------------------------------------------
 Y2K Compliance Review--Phase III                      Substantially complete as of November 15,
 .  Remediation                                           1999
  . Internal Systems (scan, modify,                    Final completion scheduled for November 19,
    component test)                                    1999
  . External Systems (install, apply
    upgrades/patches component test)
 .  Y2K Compliance
  . Confirmation or Compliance test (end to
    end Y2K rollover and leap year tests)
 .  Test results signoff and Test Summary
   package
</TABLE>

  State of Readiness of Our Vendors' and Suppliers' Systems. Our main external
supplier is our internet service provider, Frontier.  We have received written
assurance from Frontier stating that its systems are Year 2000 compliant.  We
have communicated with other significant suppliers and vendors to determine the
extent to which they are vulnerable to Year 2000 issues. We have acquired Year
2000 readiness statements from a majority of our significant suppliers and
vendors.

                                       12
<PAGE>

                     Estimated Year 2000 Compliance Costs
                                (in thousands)

<TABLE>
<CAPTION>
                                   Replacement  Remediate  Auditing and    Total
                                     Systems     Software  Verification  Costs (1)
                                   -----------  ---------  ------------  ---------
   <S>                             <C>          <C>        <C>           <C>
   Total estimated cost..........          $15        $30        $185       $230
   Spent as of October 29, 1999..           15         --         185        200
                                           ---        ---        ----       ----
   Remaining budget..............          $ 0        $30        $  0       $ 30
                                           ===        ===        ====       ====
</TABLE>

(1) These costs, if higher than anticipated, could have a material adverse
effect on our business, results of operations and financial condition.

                                       13
<PAGE>

FACTORS AFFECTING OPERATING RESULTS

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

  We have incurred net losses since our inception, including a net loss of
approximately $43.4 million for the nine months ended September 30, 1999. As of
September 30, 1999, we had an accumulated deficit of approximately $66.9
million. We expect to have increasing net losses and negative cash flow for
approximately two years. The size of these net losses will depend, in part, on
the rate of growth in our advertising, syndication and licensing revenues and on
the level of our expenses. We expect to spend significant amounts to build our
brand awareness through marketing and promotion, develop our international
business, fund new product development and enhance the content and features of
our website. As a result, we expect that our operating expenses 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.

A failure to manage and integrate businesses we acquire and alliances we form
could divert management's attention and harm our operations, and acquisitions
may result in dilution to our existing stockholders

  If we are presented with appropriate opportunities, we intend to form
alliances and make additional acquisitions of, or significant investments in,
complementary companies, products or technologies to increase our technological
capabilities and expand our service offerings. Acquisitions and alliances may
divert the attention of management from the day-to-day operations of LookSmart.
In addition, integration of recently formed alliances, or acquired companies and
future alliances or acquisitions into LookSmart could be expensive, time
consuming and may strain our resources. In particular, retaining key management
and technical personnel during the transition period following an alliance or
acquisition may be difficult. For these reasons, we may not be successful in
integrating any alliance, acquired businesses or technologies and may not
achieve anticipated revenues 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.

The Company expects that it will need additional capital in the future to
support our growth and such additional financing may not be available to us

  Although we believe that our current cash and short-term investments of $116.4
million, will provide adequate liquidity to fund our operations and meet our
other cash requirements for at least 12 months, developments in the short-term
may require additional financing. The Company expects that it will seek to raise
additional funds through public or private debt or equity financings in order to
take advantage of favorable business opportunities, including geographic
expansion or acquisitions of complementary businesses or technologies, develop
and upgrade our technology infrastructure, develop new service offerings, or
respond to competitive pressures.  We cannot assure you that any additional
financing we will need will be available on terms favorable to us, or at all.


We derive a significant amount of our revenues from Microsoft, and if our
relationship with Microsoft suffers, our business could be harmed.

  We derive a significant amount of our revenues under an agreement with
Microsoft Corporation, and after June 8, 2000, either party may terminate the
agreement for any reason on six months' notice. In December 1998, we entered
into the agreement with Microsoft for the licensing of our database content,
including regular database updates. For the nine months ended September 30,
1999, revenues from Microsoft under this agreement accounted for 46% of our
total revenues. A portion of the revenues we receive under this agreement is
subject to refund if we fail to provide the stated number of URLs. 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

                                       14
<PAGE>

sublicense these rights to others, both during and for up to two years after the
term. Microsoft may not sublicense its rights to a specified group of
companies, which we believe represents most of our key competitors.

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

  We were formed in July 1996 and launched looksmart.com 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 may be beyond our control. In addition, we compete
in the relatively new and rapidly evolving Internet navigation market, which
presents many uncertainties that could require us to further refine or change
our business model. Many of our customers are emerging Internet companies that
have limited operating histories, are operating at a loss and have limited
access to capital. If our customer base experiences financial difficulties or
fails to experience commercial success, our business will suffer.

  Our success will depend on many factors, including our ability to build and
maintain brand awareness, increase the amount of traffic to looksmart.com,
increase the recognition of the LookSmart brand, establish and maintain
syndication and licensing relationships without jeopardizing the LookSmart
brand, attract and retain a large number of advertisers from a variety of
industries and expand our service offerings, including Internet commerce and
LookSmart Live!SM.  Our failure to succeed in one or more of these areas may
harm our business, results of operations and financial condition.

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.

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

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

  The barriers to entry into some segments of the Internet navigation market are
relatively low. As a result, new market entrants pose a threat to our business.
We do not own any patented technology that precludes or inhibits competitors
from entering the Internet navigation 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 services that enable
online ecommerce capabilities. As we expand the scope of our Internet services,
we will compete directly with a greater number of websites 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;

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

 .  database vendors that offer information search and retrieval
    capabilities with their core database products;

                                       15
<PAGE>

 .  Internet-based email and instant messaging services.

  To date, the Internet navigation market has been characterized by competition
for consumer traffic. One aspect of this competition has been the payment of
consumer referral fees to Internet browser companies and other 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
navigation companies are required to pay more for these referrals, our business
and profitability could be harmed.


The success of our business will depend, in part, on our ability to sell
advertising on our looksmart.com website and on the ability of our affiliates to
generate traffic.

  For the nine month periods ended September 30, 1999 and 1998, advertising and
syndication revenues accounted for 39.1% and 89.1% of our total revenues. We
expect that revenues from advertising and syndication will continue to represent
a significant portion of our total revenues for the foreseeable future. Our
ability to generate advertising revenues will depend on a number of factors,
including:

 .  the development of the Internet as an advertising medium;

 .  our ability to generate independent traffic, particularly to our
    looksmart.com website;

 .  our ability to effectively manage our advertising inventory,
    particularly our category-based advertising inventory; and

 .  our ability to achieve, measure and demonstrate to advertisers the
    unique user demographic characteristics of visitors to our website.

  In addition, our ability to earn advertising revenues depends on the number of
advertising impressions per search and the number of clickthroughs. Because we
believe category searches result in a greater number of advertising impressions
per search and a higher number of clickthroughs than are characteristic of
keyword searches, if users decide to use keyword searches more frequently than
category searches, our advertising revenues could decline.

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, including Europe, Australia, Asia and Latin America. To
date, we have limited experience in developing and 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, international
markets have experienced lower levels of Internet usage and advertising compared
to the United States. In pursuing our international expansion strategy, we face
several additional risks, including:

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

 .  ability to partner with organizations that have branding and traffic in
    international markets;

 .  difficulties in staffing and managing international operations;

 .  unexpected changes and differences in regulatory requirements,
    particularly as applied to Internet services;

                                       16
<PAGE>

  .  export controls relating to encryption technology;

  .  foreign currency fluctuations;

  .  potentially adverse tax consequences; and

  .  ability to find and develop relationships with international partners.

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

Our quarterly revenues and operating results may fluctuate due to the timing of
delivery of URLs under our Microsoft contract and other factors, which may
negatively affect our stock price

  The terms of our agreement with Microsoft Corporation could cause our
quarterly revenues and operating results to fluctuate significantly. Under this
agreement, we license our database to Microsoft and we are obligated to increase
the number of unique URLs included in our database every six months by pre-
defined amounts. Microsoft has the right to determine the criteria for a portion
of these URLs. We recognize quarterly revenues under this agreement 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 quarterly operating results may also fluctuate significantly as a result
of a variety of other factors that could affect our revenues or expenses in any
particular quarter. These factors include:

 .  the level of user traffic on our website and the demand for our Internet
    navigation services;

 .  costs related to acquisitions and integration of technologies or
    businesses.

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

 .  the level and timing of our licensing and syndication activities;

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

 .  technical difficulties and systems downtime or failures;


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 state tax regulations may subject us to additional state
sales, income and other taxes. A recently passed federal law places a temporary
moratorium on certain types of taxation on Internet companies. We cannot predict
the effect of current attempts to impose sales, income or other taxes on
commerce over the Internet; although, if imposed, such taxes would likely
increase our cost of doing business and may adversely affect our business and
results of operations.

                                       17
<PAGE>

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 investment. The Company had no
derivative financial instruments as of September 30, 1999 or December 31, 1998.
The Company invests its excess cash in debt instruments of the U.S. Government
and its agencies, and in high-quality corporate issuers with original maturities
greater than three months and current maturities less than twelve months.  The
amount of credit exposure to any one issue, issuer and type of instrument is
limited. The Company does not expect any material loss with respect to its
short-term investments.

Foreign Currency Risk.  International revenues from the Company's foreign
subsidiaries were less than 10% of total revenues.  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.  The effect of foreign exchange rate fluctuations on
the Company in the three and nine month periods ended September 30, 1999 were
not material.

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 alleges 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
asserts claims for promissory and equitable estoppel and seeks 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. We believe that Hollinger's complaint is without merit and we will
continue to vigorously defend the lawsuit. If we are required to issue shares of
our capital stock in connection with Hollinger's claims, however, our investors
will suffer dilution.

   Except for the Hollinger litigation, we are not a party to any material legal
proceedings.


ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

   (a)  Changes in Securities:

   NONE

   (b)  Use of Proceeds

On August 20, 1999, LookSmart consummated the initial public offering of
8,855,000 shares of its common stock.  Net proceeds to LookSmart for the
offering were approximately $96.6 million.  As of September 30, 1999, the
Company had not used any of the proceeds from the offering.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

NONE

                                       18
<PAGE>

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

NONE

ITEM 5. OTHER INFORMATION

NONE

ITEM 6. EXHIBITS AND REPORT ON FORM 8-K

Exhibit 27.1  Financial Data Schedule

ITEM 7. SIGNATURES

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

Date:  November 15, 1999           LOOKSMART, LTD.


                                   By: /s/ Patricia Cole

                                   ______________________________________
                                   Patricia Cole
                                   Chief Financial Officer
                                   (Principal Financial and Accounting Officer)

                                       19