UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549  Form 10-Q (Mark
One) xQuarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934for the quarterly period ended
March 31, 2001. Or oTransition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934             for the Transition
Period from ___________ to _________. COMMISSION FILE
NUMBER 000-29927 IMPROVENET, INC. (Exact name of registrant as
specified in its charter) Delaware
  77-0452868(State or other jurisdiction of
  incorporation or organization)
  (I.R.S.
  Employer Identification Number)
 720 Bay Road, Suite
200 Redwood City, CA 94063-2469(Address of
principal executive offices) (650) 701-8000(Registrant's
telephone number, including area code)  Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YESxNOo The number of shares outstanding of
the registrant's common stock, $.001 par value, was 18,181,237 as of April 30,
2001   ImproveNet, Inc.

Form 10-Q

For the Quarter
Ended March 31, 2001

Index

PART I  FINANCIAL
INFORMATION

Item 1   Financial
Statements:

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

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

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

Notes
to Condensed Consolidated Financial Statements

Item
2   Management's
Discussion and Analysis of Financial Condition and Results of Operations

Item
3   Quantitative
and Qualitative Disclosures About Market Risk

PART II  OTHER
INFORMATION

Item 1   Legal Proceedings

Item
2   Changes
in Securities and Use of Proceeds

Item 3   Defaults upon Senior Securities

Item
4   Submission of Matters to a Vote of
Security Holders

Item 5   Other Information

Item 6   Exhibits
and Reports on Form 8-K

SIGNATURES

PART IFINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

IMPROVENET, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS(in thousands, except pershare amounts)

MARCH 31,
  2001
  DECEMBER 31,
  2000(UNAUDITED)AssetsCurrent assets:Cash and cash equivalents
  $22,083
  $31,565Accounts receivable, net of allowances
  of $1,632 in 2001 and $1,525 in 2000
  2,597
  2,309Prepaid expenses
  1,586
  2,289Total current assets
  26,266
  36,163Property and equipment, net
  3,159
  4,261Other assets
  1,373
  1,292Total assets
  $30,798
  $41,716Liabilities &
  Stockholders' EquityCurrent
  liabilities:Accounts payable
  $2,130
  $2,796Accrued liabilities
  2,812
  3,970Accrual for restructuring
  1,222
  -Deferred revenue
  147
  249Total current liabilities
  6,311
  7,015Long-term liabilities
  108
  99Total liabilities
  6,419
  7,114Stockholders'
  equityCommon
  stock, $0.001 par value:Authorized: 100,000,000 sharesIssued and outstanding: 18,181 shares
  in 2001 and 18,016 shares in 2000
  18
  18Additional
  paid-in capital
  146,266
  146,334Unearned
  stock-based compensation
  (10,363)
  (11,999)Accumulated
  deficit
  (111,542)
  (99,751)Total stockholders' equity
  24,379
  34,602Total liabilities and
  stockholders' equity
  $30,798
  $41,716The accompanying notes are an integral part
of these condensed consolidated financial statements.

IMPROVENET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share data)THREE MONTHS ENDED 
  MARCH 31,2001
  2000(UNAUDITED)
  (UNAUDITED)RevenuesService revenues
  $1,138
  $782Marketing revenues
  473
  510Total revenues
  1,611
  1,292Cost
  of revenuesCost of service revenues (excludes
  stock-based compensation of $125 in 2001 and $244 in 2000)
  1,277
  1,007Cost of marketing revenues (excludes
  stock-based compensation of $51 in 2001 and $88 in 2000)
  136
  47Total cost of revenues
  1,413
  1,054Gross
  profit
  198
  238Operating
  expenses:Sales & marketing (excludes
  stock-based compensation of $1,090 in 2001 and $1,872 in 2000)
  6,381
  10,464Product development (excludes
  stock-based compensation of $0 in 2001 and $46 in 2000)
  1,057
  1,240General & administrative (excludes
  stock-based compensation of $143 in 2001 and $461 in 2000)
  1,566
  1,584Stock-based compensation
  1,409
  2,711Restructuring charge
  1,992
  -Total operating expenses
  12,405
  15,999Operating
  loss
  (12,207)
  (15,761)Interest
  income
  416
  395Net
  loss
  $(11,791)
  $(15,366)Basic
  & diluted net loss per share
  $(0.67)
  $(3.42)Weighted
  average shares used in calculating basic and diluted net loss per share
  17,672
  4,491

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

IMPROVENET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)

THREE MONTHS ENDED MARCH 31,2001
  2000(UNAUDITED)
  (UNAUDITED)Cash flows from operating activities:Net
  loss
  $(11,791)
  $(15,366)Adjustments
  to reconcile net loss to net cash used in operating activities:Depreciation and amortization
  409
  230Restructuring charges
  1,992
  -Allowance for doubtful
  accounts
  107
  76Amortization of stock based
  compensation
  1,409
  2,711Warrant charges amortized
  84
  84Notes receivable from related
  party
  (60)
  -Net
  change in operating assets and liabilities:Accounts receivable
  (395)
  (837)Prepaid expenses
  703
  (2,418)Other assets
  (1)
  308Accounts payable and accrued liabilities
  (1,824)
  1,025Deferred revenue
  (102)
  59Other long-term liabilities
  -
  9Net cash used in
  operating activities
  (9,469)
  (14,119)Cash flows from investing activities:Purchase of property and
  equipment
  (38)
  (1,268)Restricted cash
  (60)
  -Net cash used in
  investing activities
  (98)
  (1,268)Cash flows from financing activities:Proceeds from issuance of
  common stock, net of offering costs
  -
  39,075Proceeds from exercise of
  stock options
  76
  35Payment of long-term debt
  9
  -Net cash provided
  by financing activities
  85
  39,110Net (decrease) increase in cash and cash equivalents
  (9,482)
  23,723Cash and cash equivalents, beginning of period
  31,565
  45,291Cash and cash equivalents, end of period
  $22,083
  $69,014The accompanying notes are an integral part of
these condensed consolidated financial statements.

IMPROVENET, INC.

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

1.  FORMATION AND
BUSINESS OF THE COMPANY

Nature of
the business

ImproveNet,
Inc. ("ImproveNet" or the "Company") (formerly
Netelligence, Inc.) was incorporated in California in January 1996 and
reincorporated in Delaware in September 1998. The Company is a source for home
improvement information and services on the Internet. Through its ImproveNet.com
and ImproveNetPro.com Web sites, matching services and targeted advertising,
the Company is creating a national marketplace for home improvement products
and services in which homeowners, service providers and suppliers of home
improvement products and related services benefit from an organized and
efficient online flow of information and communication. The Company generates
quality job leads for architects, designers and contractors, or service
providers, from interested homeowners within their geographic area using its
proprietary matching service. The Company's online features are complemented by
personal assistance from a professional staff of personal project advisors and
regional and area managers who offer support throughout each phase of the home
improvement process.

Basis of
Presentation

The
accompanying interim condensed consolidated financial statements as of March
31, 2001 and for the three months ended March 31, 2001 and 2000 are unaudited.
The unaudited interim condensed consolidated financial statements have been
prepared on the same basis as the annual condensed consolidated financial
statements and, in the opinion of management, reflect all adjustments, which
are of a normal recurring nature, necessary to present fairly the Company's
financial position as of March 31, 2001, results of operations for the three
months ended March 31, 2001 and 2000, and cash flows for the three months ended
March 31, 2001 and 2000. The Company's results for an interim period are not
necessarily indicative of the results that may be expected for the year.

Although
the Company believes that all adjustments necessary for a fair presentation of
the interim periods presented are included and that the disclosures are
adequate, these condensed consolidated financial statements and notes thereto
are unaudited and should be read in conjunction with the audited condensed
consolidated financial statements and notes thereto for the year ended December
31, 2000 included in the Company's Form 10-K filed on April 10, 2001 with the
Securities and Exchange Commission. The balance sheet at December 31, 2000 has
been derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles in the United
States of America. Such disclosures are contained in our annual report on Form
10-K.

The
Company has completed several rounds of private equity financing and raised, in
its initial public offering, approximately $39.7 million, net of issuance cost,
in March 2000. However, the Company has incurred substantial negative cash
flows from operations in every fiscal period since inception. For the year
ended December 31, 2000, the Company incurred a loss from operations of
approximately $57.8 million and negative cash flows from operations of $49.3
million. As of March 31, 2001 the Company had an accumulated deficit of
approximately $111.5 million. 
Management expects operating losses and negative cash flows to continue
for the foreseeable future.

The
Company expects that losses will decrease from fiscal year 2000 levels due to
new sales initiatives and operational cost efficiencies, through decreased
marketing expenditure and reductions in headcount. Operational cost efficiency
restructuring has already been initiated - the Company reduced headcount by 7%
in July 2000 and further reduced headcount by 25% in March 2001. If working
capital decreases significantly the Company could further reduce expenses. The
Company has $22.1 million of cash and cash equivalents at March 31, 2001.
Failure to generate sufficient revenues, raise additional capital or reduce
certain operational discretionary spending could have a material adverse effect
on the Company's ability to continue as a going concern and to achieve its
intended business objectives.

2.  NET LOSS PER SHARE

Basic
net loss per share is calculated by dividing net loss by the average number of
outstanding shares during the period. Diluted net loss per share is calculated
by adjusting the average number of outstanding shares assuming conversion of
all potentially dilutive stock options and warrants under the treasury stock
method. For all periods presented, potentially dilutive convertible preferred
stock, stock options and warrants were excluded from the calculation of diluted
net loss per share, as their effect would have been anti-dilutive.

Options to purchase approximately 0.9
million shares and warrants to purchase approximately 1.3 million shares were
outstanding as of March 31, 2001.

A reconciliation of the numerator and denominator
used in the calculation of the basic and diluted net loss per share follows:
(in thousands, except per share amounts):

Three
  Months Ended March 312001
  2000NumeratorNet loss attributable to
  stockholders
  $(11,791)
  $(15,366)DenominatorWeighted average shares
  18,181
  5,038Weighted average shares
  subject to repurchase
  (509)
  (547)Denominator for basic and
  diluted calculation
  17,672
  4,491Basic and diluted net
  loss per common share
  $(0.67)
  $(3.42)3.  Multi-Year Commercial Contracts

The
Company has entered into multi-year commercial marketing contracts, some of
which are with related parties. These commercial contracts generally provide
marketing services that include a mix of banners and button advertising,
SmartLeads and other marketing services, including FIND-A-CONTRACTOR or POWERED
BY IMPROVENET, plus a continuous presence, as defined, on the Company's Web
sites for a fixed annual fee. These commercial contracts are for periods
ranging between 2 and 12 years, including renewal options. These commercial
contracts also include cooperative marketing arrangements under which the
Company is obligated to fund, as defined, co-operative marketing expenditures
on television and in the print media, with or on behalf of the commercial
party. Most commercial contracts provide for the Company to spend 50% to 100%
of the fees the Company expects to receive. In return, the Company expects to
receive significant marketing benefits including better advertising rates,
stronger brand recognition, and access to customer databases, direct mail
inserts and marketing resources - all designed to generate more traffic to its
sites and jobs to its proprietary matching services.

As
the Company does not have an established historical practice of selling
advertising for cash for similar multi-year commercial contracts, the Company
has not assigned any value to the exchange of services or barter element of
these transactions and accordingly, the Company has not recorded either revenue
or sales and marketing expense for the barter element. However, some of these
multi-year commercial contracts do generate an overall net cash component to
the Company, and in these cases, the Company has recorded revenue based on the
cash received or receivable under the contract, net of the obligation, if any,
to reimburse the commercial party for the cooperative marketing and other
marketing services. These revenues are recognized over the term of the commercial
contract once marketing and other services have been delivered to the
commercial party and collection of the resulting net receivable is deemed
probable.

Furthermore,
in connection with certain of these multi-year commercial contracts, the
Company also issued warrants to purchase shares of the Company's common stock
to the commercial parties. These warrants have been valued by the Company using
the Black Scholes option pricing model. As the fair value of these warrants
represent an additional rebate on the revenue otherwise recorded under the
contracts, the amortization of the warrants is further netted against this
revenue over the term of the respective commercial contract. To the extent that
there is insufficient revenues, the remaining amortization of warrant
stock-based compensation is expensed and characterized as sales and marketing
expense.

As a result, for the three months ended
March 31, 2001, the Company has not recognized revenue of $403,000 which
represents $84,000 of warrant stock-based compensation amortization and
$319,000 for the barter element amounts of these commercial contracts. For the
three months ended March 31, 2000, the Company has not recognized revenue of
approximately $700,000 which represents $84,000 of warrant stock-based compensation
amortization and approximately $616,000 for the barter element amounts of these
commercial contracts.

4.  Segment
Information

The Company currently operates in a
single business segment as there is only one measurement of profitability for
its operations.  Through March 31, 2001,
foreign operations have not been significant in either revenues or investments
in long-lived assets.

A summary of the Companys revenue by
service offerings is as follows (in thousands):

Three
  Months Ended March 312001
  2000Service revenues:Lead fees
  $336
  $268Win fees
  704
  347Other fees
  98
  167Total service revenues
  1,138
  782Marketing revenue
  473
  510Total service and
  marketing revenues
  $1,611
  $1,292For the three month periods ended March
31, 2001 and 2000, no customers represented over 10% of service or marketing
revenues.

5.  Comprehensive Loss

The
Company follows SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. There was no difference between the
Company's net loss and its comprehensive loss for any of the periods presented
in the accompanying condensed consolidated statements of operations.

Recent Accounting Pronouncements

In
June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." In June 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities: Deferral of the effective date
of FASB Statement No. 133. An amendment of FASB Statement 133, SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000 and requires that all
derivative instruments be recorded on the balance sheet at fair value. Changes
in the fair value of derivatives are recorded each period in current earnings
or other comprehensive income, depending on whether a derivative is designated
as part of a hedge transaction and the type of hedge transaction. We do not
expect the adoption of FAS No. 133 to have a material impact on our financial
position or results of operations.

In
December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB"). No. 101, "Revenue Recognition
in Financial Statements." SAB 101 discusses certain generally accepted
accounting principles regarding revenue recognition in financial statements,
including the specification of certain criteria that should be met before
revenue is recognized. These criteria include: persuasive evidence that a
arrangement exists, delivery has occurred or services have been rendered, the
sellers price to the buyer is fixed or determinable, and collectibility is
reasonably assured. In March 2000, the SEC issued SAB No. 101A,
"Amendment: Revenue Recognition in Financial Statements," and SAB No.
101B, "Second Amendment: Revenue Recognition in Financial
Statements," to defer for the effective date of implementation of SAB No.
101 until no later than the fourth fiscal quarter of fiscal years beginning
after December 15, 1999, with earlier application encouraged. We adopted SAB
No. 101, as amended, in the quarter ended December 31, 2000. The adoption of SAB
No. 101, as amended, has not had a material effect on our financial position or
results of operations.

6.  RELATED PARTY
TRANSACTIONS

Notes
Receivable from Officer

In
May 1999, the Company entered into an employment related promissory note
agreement with its Chairman and Chief Executive Officer, Ronald B. Cooper,
whereby the Company agreed to loan the officer up to $500,000. The full amount
was loaned in August 1999. The note accrues interest at 5.25% per annum and is
due and payable on the earlier of April 1, 2002 or within 90 days after the
voluntary termination of the officer's employment or the termination of the
officer's employment for cause. The note is collateralized by the officer's
shares of stock and options to purchase shares of stock. In April 2000, the
Company loaned its Chairman and Chief Executive Officer $1.0 million accruing
interest at a rate of 6.46% per annum and repayable on the earlier of April 30,
2002 or when the borrower is able to collateralize or borrow on margin using
his Company stock. Both loans are collateralized by the stock owned by the
borrower. In accordance with FAS 114 "Accounting by Creditors for
Impairment of a Loan", these notes receivable are valued at the market
value of the stock held as collateral. At March 31, 2001, the value of the
stock held increased by $60,000.

7.  RESTRUCTURING
ACCRUAL

The restructuring charges were determined
based on formal plans approved by the Company's management using the best
information available to it at the time. The amounts the Company may ultimately
incur may change as the restructuring initiative is executed.

The activity impacting the accrual for
restructuring charges during 2001 are summarized in the table below:

(in thousands)
  Balance
  at December 31, 2000
  Charges
  to Operations in three months ended March 31, 2001
  Charges
  Utilized in three months ended March 31, 2001
  Balance
  at 
  March, 31, 2001Facilities
  $-
  $593
  $-
  $593Workforce reductions
  -
  629
  -
  629Asset write-downs
  -
  770
  -
  770Total
  -
  $1,992
  -
  $1,992

60 employees were terminated as part of
the restructure as of April 1, 2001. 
These employees were primarily sales and administrative staff.  No termination benefits have been charged
against the liability as the termination occurred post quarter end.

The March 31, 2001 accrual for
restructuring and merger-related charges is classified within the balance sheet
as follows:

(in
  thousands)Accrual for
  restructuring charges
  $1,222Property, plant and
  equipment, net
  770$1,992ITEM 2. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF
OPERATIONS

The
following discussion and analysis should be read with our condensed
consolidated financial statements and notes included elsewhere in this Report
on Form 10-Q. The discussion in this Report on Form 10-Q contains
forward-looking statements that involve risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. The
cautionary statements made in this Report on Form 10-Q should be read as
applying to all related forward-looking statements wherever they appear in this
Report on Form 10-Q. Our actual results could differ materially from those
discussed here. Factors that could cause or contribute to these differences
include those discussed in "Business Risks" below as well as those
discussed elsewhere.

OVERVIEW

Our
business started in January 1996 as a regional contractor matching service, and
we spent most of 1996 and 1997 building our service provider database,
developing new services and technology, recruiting personnel and raising
capital. We launched our Web site and homeowner/service provider matching
service on a national scale in August 1997. In December 1998, we began selling
Web site advertising, including SmartLeads services, a way for suppliers of
home improvement products to send targeted messages about their products,
including product promotions, to homeowners at the time of purchase, as well as
to our network of service providers. In March 1999, we began to hire our new
senior management team, including our chief executive officer. In April 1999,
we introduced Powered by ImproveNet, a service that allows third parties to
offer the ImproveNet matching services and content on their Web sites, for
national suppliers of home improvement and repair products. We completed the
acquisition of two regional contractor referral companies, Contractor Referral
Service, LLC and The J.L. Price Corporation, in September and November 1999,
these entities were integrated into our operations during the course of
calendar year 2000. In November 1999, we launched our customized Web site, www.
ImproveNetPro.com, for our network of service providers. In March 2000, we
completed our IPO.  From January through
June 2000 we spent substantial amounts primarily on marketing and other
marketing related activities, as well as the development and expansion of our
service and operations infrastructure. In July 2000 we had a reduction in
force, reducing our staff by approximately 7%. Additionally, in March 2001 we
restructured our operations, resulting in a staff reduction of 25% and we
intend closing our main facility in Redwood City, California. During the final
two quarters of the year 2000 our operating expenses (including cost of
revenues) decreased by 22% in the third quarter and another 16% in the fourth
quarter, but excluding the non-cash write-down of notes receivable. We expect
operating expenses to decline for the entire calendar year 2001 as compared to
calendar year 2000.

We
generate substantially all of our revenues from service provider referral
services, marketing partnership packages and advertisements placed on our Web
site. We generate service revenues primarily in the form of lead fees and win
fees from our service providers and, to a much lesser extent, other fees for
the enrollment of service providers and premium service fees from homeowners.
We generate marketing revenues from the sale of banner, button and other
advertising on our Web sites, and from the sale to suppliers of SmartLeads
generated from the traffic of homeowners visiting our Web sites and from the
sale of Find-A-Contractor or Powered by ImproveNet products in commercial
agreements. Our marketing revenues generally come from suppliers of home
improvement products.

Commencing
in September 1999, we entered into multi-year commercial contracts, some of
which are with related parties. These commercial contracts generally provide
for a fixed annual fee, an advertising or branding package that includes a mix
of buttons, banners, SmartLeads and other marketing or branding services,
including Find-A-Contractor or Powered by ImproveNet, plus a continuous
presence on our Web sites.

RESULTS OF OPERATIONS

REVENUES

Our
revenues increased to $1.6 million for the three months ended March 31, 2001
from $1.3 million for the three months ended March 31, 2000, an increase of
$319,000 or 25%.

The
increase in revenues was attributable to increased service revenues achieved by
increased visitors to the ImproveNet site, an increase in the number of job
submissions, improved match rate and the continued building of a network of
service providers.  The increase was
partially offset by a decrease in marketing revenues.

The
following table and discussion highlights our revenues for the three months
ended March 31, 2001 and 2000 (in thousands):

Three Months Ended
  March 31,2001
  2000
  % ChangeRevenues:Service Revenue
  $1,138
  $782
  46%Marketing
  Revenue
  473
  510
  (7%)Total
  Revenue
  $1,611
  $1,292
  25%Service
Revenues

Service
revenues increased to $1.1 million for the three months ended March 31, 2001
from $782,000 for the three months ended March 31, 2000, an increase of
$356,000 or 46%.

In
calendar year 2000, and for calendar year 2001 through March 21, 2001, the win
fees that we charged to our service providers depend on project size and range
from 2% to 10% of the estimated cost of the job, up to a maximum of $995 per
job. Effective March 22, 2001, the win fees we charge our service providers
depend on project size and range from 1% to 10% of the estimated cost of the
job, without a maximum per job. Effective March 22, 2001, we also reduced lead
fees by 20%.   The lead fee had been
standardized at $10 a lead for all jobs in November 1999.  Other fees include an enrollment fee of $90
that we charge each new service provider who passes our quality screens to join
our national network.  In calendar year
2000 and prior, we often discounted or waived the enrollment fee.

Lead
fee revenues are recognized at the time the service providers and the homeowner
are first matched, while win fee revenues are recognized at the time the
service provider or the homeowner notifies us that a job has been sold. For
both lead fees and win fees, the recognition of revenues coincides with the
service providers' obligation to pay us. The following table details the
components of service revenues, based on a percentage of service revenues:

Three Months Ended
  March 31,2001
  2000%
  %Lead
  Fees
  30
  34Win
  Fees
  62
  44Other
  Fees
  8
  22Total
  Service Revenue
  100
  100The
revenues we generate from lead and win fees are largely a function of:

            the
number of job submissions;
            the effectiveness in finding
a service provider or match for each job submission;
            the success of the service
provider to win a job; and
            the amount we charge the
service provider for a lead or a win.

The following table provides information
on some of our key business metrics (numbers in thousands):

Key
  Metrics
  Three Months Ended
  March 31,2001
  2000Job
  submissions
  35.4
  29.5Matched
  jobs
  23.8
  18.1Won
  jobs
  2.5
  1.8Matched
  jobs as a % of job submissions
  67.2%
  61.4%Won
  jobs as a % of job submissions
  7.1%
  6.1%Revenues
from new service provider enrollment fees are recognized as revenue ratably
over the expected period they participate in our contractor matching service,
which is initially estimated to be one year. Revenues from premium service fees
to homeowners are recognized at the time the service is provided.

Marketing
Revenues

Marketing
revenues decreased to $473,000 for the three months ended March 31, 2001 from
$510,000 for the three months ended March 31, 2000, a decrease of $37,000 or
8%.

We
generate marketing revenues from the sale of banner, button and other
advertising on our Web sites, and from the sale to suppliers of SmartLeads
generated from the traffic of homeowners visiting our Web sites and from the
sale of Find-A-Contractor or Powered by ImproveNet products in commercial
agreement products and services. Our marketing revenues generally come from
suppliers of home improvement products.

Revenues
from banner, button and other branding are largely a function of:

            the
number of Web pages that we serve;
            the percentage of those pages
on which we are able to sell advertisements; and
            the amount we charge per
advertisement.

Advertisers
pay us to display their banner, button and other advertisements on the Web
pages we serve when a user is visiting our Web sites. Our marketing revenues
historically have been derived from short-term advertising contracts based on
either a guaranteed minimum number of impressions or a fixed fee per thousand
impressions. We anticipate that these advertising revenues will remain flat or
decline during 2001 as advertisers demand better monetary terms for the same
number of impressions or more impressions for the same dollar amounts.

Cash
Advertising

Cash
advertising revenues generally are derived from short-term advertising
contracts in which we typically guarantee that a minimum number of impressions will
be delivered to our Web site visitors over a specified period of time for a
fixed fee. Cash advertising revenues from banner, button and other Web site
advertisements are recognized at the lesser of the amount recorded ratably over
the period in which the advertising is delivered or the percentage of
guaranteed impressions delivered.

SmartLeads
are also paid for in cash and revenues are recognized when the SmartLeads have
been delivered to the customer. Cash advertising is recognized when we have
delivered the advertising, evidence of an agreement is in place and fees are
fixed, determinable and collectible. Cash advertising decreased to $48,000 for
the three months ended March 31, 2001 from $205,000 for the three months ended
March 31, 2000, a decrease of $157,000 or 77%. 
This decline is reflective of the slowdown in internet advertising
spending.

Barter
Advertising

Barter
advertising comes from multi-year commercial contracts. Barter advertising is
recognized in accordance with EITF No. 99-17, "Accounting for Advertising
Barter Transactions", which we adopted in 1999. Under EITF No. 99-17, we
record advertising transactions at fair value only when we have an established
historical practice of selling similar advertising for cash. The characteristics
of the advertising that must be similar include the duration of the display of
the advertising, the prominence and positioning of the advertising, the
intended audience, the timing of the advertising and its circulation.

For
the three months ended March 31, 2001, we did not recognize revenue of $403,000
which represents $84,000 of warrant stock-based compensation amortization, and
$319,000 for the barter element amounts of these commercial contracts. For the
three months ended March 31, 2000, the Company did not recognize revenue of
approximately $700,000 which represents $84,000 of warrant stock-based
compensation amortization, and $616,000 for the barter element amounts of these
commercial contracts.

Multi-year
Commercial Contracts

Commencing
September 1999, we entered into multi-year commercial contracts, some of which
are with related parties. These commercial contracts generally provide for a
fixed annual fee, an advertising or branding package that includes a mix of
buttons, banners, SmartLeads and other marketing or branding services,
including Find-A-Contractor or Powered by ImproveNet, plus a continuous
presence, on our Web sites. These commercial contracts are for periods ranging
between 2 and 12 years, including renewal options. These commercial contracts
also include cooperative marketing arrangements under which we are obligated to
fund co-operative branding expenditures on television and in the print media,
with or on behalf of the commercial party. Most commercial contracts provide
for us to spend 50% to 100% of the fees that we expect to receive. In return,
we expect to receive significant marketing and branding benefits including
better advertising rates, stronger brand recognition, and access to customer
databases, direct mail inserts and marketing resources - all designed to
generate more traffic to sites and jobs to proprietary matching services.

We
do not have an established historical practice of selling advertising for cash
for similar multi-year commercial contracts, we have not assigned any value to
the exchange of services or barter element of these transactions and
accordingly, we have not recorded either revenue or sales and branding expense
for the barter element. However, some of these multi-year commercial contracts
do generate an overall net cash component, and in these cases we have recorded
revenue based on the cash received or receivable under the contract, net of the
obligation, if any, to reimburse the commercial party for the cooperative
branding and other marketing services. These revenues are recognized over the
term of the commercial contract once advertising and other services have been
delivered to the commercial party and collection of the resulting net
receivable is deemed probable. Revenue from multi-year commercial contracts,
net of warrant charges, totaled $425,000 for the three months ended March 31,
2001, and $305,000 for the three months ended March 31, 2000.

Furthermore,
in connection with certain of these multi-year commercial contracts, we issued
warrants to purchase shares of our common stock to the commercial parties.
These warrants have been valued by us using the Black Scholes option pricing
model. As the fair value of these warrants represent an additional rebate on
the revenue otherwise recorded under the contracts, the amortization of the
warrants is further netted against this revenue over the term of the respective
commercial contract. To the extent that there is insufficient revenues, the
remaining amortization of warrant stock-based compensation is expensed and
characterized as sales and branding expense.

Total
revenues may be analyzed as follows (in thousands):

Three Months Ended
  March 31,2001
  2000Service
  revenues
  $1,138
  $782Marketing
  revenues
  876
  1,210Less:
  Amounts invoiced and accrued under multi-year commercial contracts with
  related parties
  (319)
  (616)Less:
  Amortization of warrant stock-based compensation
  (84)
  (84)Total
  marketing revenues
  473
  510Total
  revenues
  $1,611
  $1,292OPERATING EXPENSES

Cost of Revenues

Our
cost of revenues increased to $1.4 million for the three months ended March 31,
2001 from $1.1 million for the three months ended March 31, 2000, an increase
of $359,000 or 34%.

Cost
of revenues consists of payroll and related costs and occupancy,
telecommunications and other administrative costs for our project services
group, which is responsible for all phases of our proprietary matching services
and includes our project advisors. In addition, cost of revenues includes an
allocation of direct Web site operations costs, consisting of payroll and
related costs, data transmission costs and equipment depreciation. We
anticipate that our cost of revenues will remain constant or decline during the
remainder of 2001, as compared to year 2000 as we plan to leverage our existing
infrastructure.

Cost of
Service Revenues

Our
cost of service revenues increased to $1.3 million for the three months ended
March 31, 2001 from $1.0 million for the three months ended March 31, 2000, an
increase of $270,000 or 27%.

The
increase in cost of service revenues is largely attributable to our investment
in the expansion and staffing of our project services infrastructure to support
volume increases in traffic and jobs to our site. In addition, the increase in
cost of service revenues was a result of facilities and office expenses related
to the full build-out, started in the first quarter of 2000 and completed in
July 2000, of our second support center located in Camarillo, California.

Cost of
Marketing Revenues

Our
cost of marketing revenues increased to $136,000 for the three months ended
March 31, 2001 from $47,000 for the three months ended March 31, 2000, an
increase of $89,000 or 189%.

Cost
of marketing revenue includes an allocation of direct Web site operations
costs, consisting of payroll and related costs, data transmission costs and
equipment depreciation. The increase in cost of marketing revenue was primarily
attributable to the growth in staffing, services and equipment required to
maintain the Web site operations.

Sales and
Marketing

Our
sales and marketing expense decreased to $6.4 million for the three months
ended March 31, 2001 from $10.5 million for the three months ended March 31,
2000, a decrease of $4.1 million or 39%.

Our
sales and marketing expense includes all of our online and offline direct
marketing and advertising, public relations and trade show expenses. Sales and
marketing expenses also include payroll and related costs, support staff
expenses, travel costs and other general expenses of our marketing,
professional services and partnership services departments.

The
decrease in sales and marketing expenses was primarily attributable to a
decline in online and offline brand advertising.

At
the end of June 2000, we redirected our sales and marketing resources by
executing more projects internally and negotiating or transitioning new or
existing agreements from a high fixed cost formula to a variable
performance-based formula keyed to won jobs. We significantly decreased sales
and marketing expenses in the fourth quarter of 2000 and fully anticipate that
these expenses will decline during 2001, as compared to year 2000 as we plan to
leverage our existing infrastructure and to continue the process of negotiating
or transitioning agreements from a high fixed cost formula to a variable
performance-based formula keyed to won jobs.

Product
Development

Our product development expenses
decreased to $1.1 million for the three months ended March 31, 2001 from $1.2
million for the three months ended March 31, 2000, a decrease of $83,000 or
15%.

Our
product development costs include the payroll and related costs of our
editorial and technology staff, fees for contract content providers, other
costs of Web site design and new technologies required to enhance the
performance of our Web sites.

The
decrease in product development expenses were primarily attributable to
decreased payroll and related costs and decreased usage of contract content
providers. A major portion of product development costs for the first half of
2000 was attributable to a major new product and service that has been
terminated. We expect a decline in our product development expenses during
2001, as compared to year 2000 due to the termination of the previously
mentioned new product and service initiative and that we have completed most of
our major development efforts.

General and
Administrative

Our
general and administrative expenses were nearly identical at $1.6 million for
the three months ended March 31, 2000 and 2001.

Our
general and administrative expenses include payroll and related costs and
travel, recruiting, professional and advisory services and other general
expenses for our executive, finance and human resource departments.

Stock-based
Compensation

Our
stock-based compensation expenses decreased to $1.4 million for the three
months ended March 31, 2001 from $2.7 million for the three months ended March
31, 2000, a decrease of $1.3 million or 48%.

In
connection with certain employee and non-employee stock option grants during
1998 and 1999, we recorded unearned stock-based compensation totaling $13.8
million, which is being amortized over the vesting periods of the related
options, generally four years using the method set out in FASB Interpretation
No. 28 ("FIN 28"). Under the FIN 28 method, each vested tranche of
options is accounted for as a separate option grant awarded for past services.
Accordingly, the compensation expense is recognized over the period during
which the services have been provided. This method results in higher
compensation expense in the earlier vesting periods of the related options.
Stock based compensation charges associated with employees who terminate their
employment with us and have unvested options are reversed.

Interest
Income

Our
interest income increased to $416,000 for the three months ended March 31, 2001
from $395,000 for the three months ended March 31, 2000, an increase of $21,000
or 5%.

The
increase in interest income is attributable to an increase in our average
invested cash balances. We expect a decline in our interest income during the
remainder of 2001 due to the expected decline in our cash and cash equivalents
balances during the year 2001.

Income Taxes

We
have recorded a 100% valuation allowance against our net deferred tax assets,
which arose primarily as a result of our aggregate operating losses. The
valuation allowance will remain at this level until such time as we believe
that the realization of the net deferred tax assets is more likely than not.
Accordingly, our results of operations do not reflect any tax benefits for our
reported losses.

LIQUIDITY AND
CAPITAL RESOURCES

Cash
and cash equivalents totaled $22.1 million at March 31, 2001 a decrease of $9.5
million or 30% from $31.6 million at December 31, 2000. Most of the decrease
primarily came from the $9.5 million cash used in operating activities which
largely reflected our net loss for the period.

Since
our inception, we have primarily financed our operations through private sales
of our convertible preferred stock and common stock. In March 2000, we closed
our initial public offering that generated net cash proceeds of approximately
$39.7 million. Our primary capital needs have been to fund our operating
losses; the prepayment of our large media purchases and to make capital
expenditures.

Net
cash used in operating activities was $9.5 million in the three months  ended March 31, 2001, a decrease of $4.6
million from $14.2 million for the three months ended March 31, 2000, primarily
due to decrease in our net loss as a result of our restructuring late 2000 and
2001, where operating expenditures reduced significantly.

Net
cash used in investing activities was $98,000, a decrease of $1.2 million from
$1.3 million in the periods ended March 31, 2001 and 2000 due to the focus of
the business in restructuring operations in 2001, and necessary decreases in
capital expenditures.  Net cash used in
investing activities was a result of purchase of property and equipment related
to upgrading the leased facilities at our Oddstad Road facility in Redwood
City, which will be our headquarters location during the second quarter of
2001.

Net
cash provided by financing activities has decreased by $39 million from $39
million to $82,000 in the periods ended March 31, 2000 and 2001 due to the
issuance of common stock in the period ended March 31, 2000.

Our
capital requirements depend on numerous factors, including the success of our
strategies for generating revenues and the amount of resources we devote to
operating activities, including sales, marketing and brand promotion and
investments in our technology. Our expenditures have substantially increased
since inception as our operations and staff have grown. Based on the
realignment of our resources, we expect a decrease in most of our operating
expenses categories detailed above for the year 2001 as compared to year 2000.
Additionally, we expect our capital expenditures for 2001 to decrease
significantly. We do expect to experience ongoing operating losses for the
foreseeable future. We currently anticipate that our operating expenses,
primarily sales and marketing expenditures, and payroll and related costs will
constitute a significant use of our current cash resources.

Our
limited operating history and operating losses have limited our ability to
obtain vendor credit or extended payment terms and bank financing on favorable
terms; accordingly, we depend on our cash and cash equivalent balances to fund
our operations.

We
currently believe that our available cash resources will be sufficient to meet
our anticipated needs for operations and capital expenditures.  We will strive to make ongoing realignments,
as required, to achieve positive cash flow with our existing cash resources. We
restructured our operations and we have reduced our headcount during the year
ended December 31, 2000 and also in the quarter ended March 31, 2001, as well
as subsequent to the quarter end. We are additionally decreasing our marketing
expenditures to assist us in maintaining our available cash resources. We may
need to raise additional funds, however, in order to fund more rapid expansion,
to develop new or enhance existing services, to respond to competitive
pressures or to acquire complementary businesses, services or technologies. If
we raise additional funds by selling equity securities, the percentage
ownership of our stockholders will be reduced. We cannot be sure that
additional financing will be available on terms favorable to us, or at all. If
adequate funds are not available on acceptable terms, our ability to fund
expansion, react to competitive pressures, or take advantage of unanticipated
opportunities would be substantially limited. If this occurred, our business
would be significantly harmed. We will continue to evaluate our needs for funds
based on our assessment of access to public or private capital markets and the
timing of our need for funds. Although we have no present intention to conduct
additional public equity offerings, we may seek to raise these additional funds
through private or public debt or equity financings.

RISK FACTORS THAY MAY AFFECT OUR RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

This document contains certain
forward-looking statements. These statements relate to future events or our
future financial performance. In some cases, you can identify forward-looking
statements by terminology such as "anticipates', "believes",
"continue", "could", "estimates",
"expects", "intends", "plans", "potential",
"predicts", "should" or "will" or the negative of
these terms or other comparable terminology which are intended to identify
certain of these forward-looking statements. The cautionary statements made in
this document should be read as being applicable to all related forward-looking
statements wherever they appear in this document. The Company's actual results
could differ materially from those discussed in this document. Factors that
could cause or contribute to such differences include those discussed below, as
well as those discussed in the Company's Annual Report on Form 10-K.

We have large accumulated losses, we expect future losses,
and we may not achieve or maintain profitability.

We
have incurred substantial losses and used substantial cash to support our
operations as we have expanded our sales and marketing programs, funded the
development of our services, promoted our Web sites and matching service and
expanded our operations infrastructure. As of March 31, 2001, our accumulated
loss was approximately $111.5 million. We expect our expenditures on sales and
marketing activities, support field services and the development of new
products, services and technologies to continue at a reduced rate, as we
restructured our business in March 2001. This restructuring included headcount
reductions of approximately 25%. We will continue to lose money unless we
significantly increase our revenues. We cannot predict when, if ever, we will
operate profitably.

We are an early stage company and we have recently
restructured our business to offer new services. As a result, we have a limited
history, which makes it difficult to evaluate our business.

We
were incorporated in January 1996; however, we did not begin offering home
improvement services on the Internet until August 1997. In December 1998, we
began selling Web site advertising. Until March 1999, we focused primarily on
building our network of service providers and refining our matching services
processes. In March 1999, we hired our Chief Executive Officer and commenced
recruiting our senior management. In April 1999, we introduced Powered by
ImproveNet, a service that allows third parties to offer the ImproveNet
matching services and content on their Web sites, for national suppliers of
home improvement and repair products. In November 1999, we launched our
customized Web site for service providers. We completed the acquisition of two
regional contractor referral companies, Contractor Referral Service, LLC and
The J.L. Price Corporation, in September and November 1999. We experienced
reductions in force in July 2000. In the second half of 2000 we significantly
reduced our marketing expenditures. In March 2001, we announced the
restructuring. On April 1, 2001, we had a reduction in force of approximately
60 people. As a result, we have a limited history upon which you can evaluate
our business and the performance of our senior management team. Furthermore,
even if our business is successful, we may change our business to enter into
new business areas, including areas in which we do not have extensive
experience.

If we are unable to maintain our Nasdaq National Market
listing, the liquidity of our common stock would be seriously limited.

On
January 4, 2001, we received a Nasdaq Staff Determination indicating that we
have failed to comply with the minimum bid price requirement for continued
listing, and are subject to delisting from the Nasdaq National Market. We are
scheduled for a hearing before the Nasdaq Qualifications Panel on May 24, 2001,
to review the staff determination. We can not assure you that Nasdaq
Qualification Panel will decide to allow us to remain listed or that our
actions will prevent the delisting of our common stock. We will not be notified
until the Nasdaq Qualification Panel makes a formal decision. Until then, our
shares will continue to trade on the Nasdaq National Market. In the event our
shares are delisted from the Nasdaq National Market, we will attempt to have
our common stock traded on the NASD over-the-counter Bulletin Board. If our
common stock is delisted, it would seriously limit the liquidity of our common
stock and limit our potential to raise future capital through the sale of our
common stock, which could seriously harm our business.

Our financial results will be affected by seasonality and
cyclical fluctuations in the home improvement industry.

Our
limited operating history and rapid growth make it difficult to assess the
impact of seasonal factors on our business. However, our business is dependent
upon the home improvement industry. As a result, we expect that our revenues
may be lower during the first and fourth quarters since more homeowners commit
to home improvement projects during the spring and summer months. Being
dependent on the home improvement industry exposes us to cyclical movements in
the economy in general, especially as they relate to consumers willingness to
make large expenditures that are mostly discretionary. Our limited operating
history and the state of the economy for most of our existence make it
difficult to assess the impact of cyclical factors on our business.

Failure to raise additional capital or generate the
significant capital necessary to expand our operations and invest in new
products and services could reduce our ability to compete and result in lower
revenues.

If
we are unable to generate sufficient cash flows from operations to meet our
anticipated needs for working capital and capital expenditures, we will need to
raise additional funds to fund brand promotions, develop new or enhanced
services or respond to competitive pressures. We cannot be certain that we will
be able to obtain additional financing on favorable terms, or at all. If we
need additional capital and cannot raise it on acceptable terms, we may not be
able, among other things, to:

 develop or enhance our services;

 develop or acquire new technologies,
products or businesses;

 expand operations in the United States
or internationally;

 hire, train and retain employees; or

 respond to competitive pressures or
unanticipated capital requirements.

Our
failure to do any of these things could result in lower revenues and could harm
our business or cause us to discontinue operations.

In
addition, we may seek to raise additional funds, finance acquisitions or
develop commercial relationships by issuing equity or convertible debt
securities, which would reduce the percentage ownership of existing
stockholders. Furthermore, any new securities could have rights, preferences or
privileges senior to those of our common stock.

Our market is competitive and we may suffer price reductions,
be unable to attract homeowners to our Web site, be unable to maintain our
service provider network or enter into new multi-year commercial contracts if
we do not compete effectively.

The
market for our services is intensely competitive, evolving and subject to rapid
technological change. To remain competitive, we must continue to enhance and
improve the ease of use, responsiveness, functionality and features of our
online and offline services in order to attract homeowners to our Web site and
maintain our service provider network. We expect the intensity of competition
to increase in the future. Increased competition may result in changes in our
pricing model, fewer homeowners visiting our Web site, service providers
leaving our network, less marketing revenue, reduced gross margins and loss of
market share, any one of which could significantly reduce our future
profitability. In addition, technological barriers to entry are relatively low.
As a result, current competitors, including local referral businesses and
online referral companies including ServiceMagic.com, iMandi, repairnet,
OurHouse.com, Handyman Online, Bid Express, Contractor.com and Remodel.com, a
part of the Homestore.com family of sites and potential competitors such as The
Home Depot, Lowe's and Sears Roebuck & Company have launched Web sites
similar to ours that could gain broader market acceptance based on content,
products and services.

Some
of our competitors have more resources and broader and deeper customer access
than we do. In addition, many of these competitors have or can readily obtain
extensive knowledge of the home improvement industry. Our competitors may be
able to respond more quickly than we can to new technologies or changes in
Internet user preferences and devote greater resources than we can to the
development, promotion and sale of their services. We may not be able to
maintain our competitive position against current and future competitors,
especially those with significantly greater resources and brand recognition.

Homeowners and service providers may be reluctant to accept
an Internet-based service provider matching service.

Currently
most homeowners use traditional means including word-of-mouth referrals, Yellow
Pages and local contractor matching services to obtain service providers for
their home improvement projects. In addition, many service providers do not use
the Internet for business purposes and may be reluctant to become part of a
network of service providers on an Internet-based service provider matching
service. If homeowners do not use our matching service or service providers do
not join our network, we will not be able to generate significant revenues from
either services or branding, or be able to enter into new multi-year commercial
contracts.

If we do not attract and retain a network of high quality
service providers, our business could be harmed.

We
expect to derive the majority of our revenues from our network of service
providers in the form of payments for each homeowner referral that we provide
to them and for each home improvement project that they win. Our business is
highly dependent on homeowners' use of our Web site to find service providers
for their home improvement projects so that service providers will achieve a
satisfactory return on their participation in the ImproveNet program.

A
key element of the growth of our business is the pace at which service
providers adopt the ImproveNet matching process. This adoption includes
responding to homeowner inquiries within 72 hours, providing a competitive,
firm quote to homeowners quickly, and paying the service fees to ImproveNet. We
devote significant effort and resources to screening and supporting
participating service providers and to developing programs that monitor service
providers' job wins and that collect service fees from service providers for
these wins. Our inability to screen and support service providers effectively,
or the failure of our service providers to respond professionally and in a
timely manner to homeowner inquiries, could result in low homeowner
satisfaction and harm our business. In addition, the failure of our service
providers to win home improvement projects, report their wins to us, or pay us
service fees could harm our business.

We
must actively recruit new service providers and retain and motivate our current
service providers to ensure that we continually have adequate coverage. We
believe that service providers in the home improvement industry suffer from a
relatively high failure or turnover rate which makes it difficult for us to retain
service providers. Accordingly, we expect that not all of our service providers
will remain active participants in our network. If we are unable to achieve low
turnover among our network of service providers our business could be harmed.

If homeowners fail to report, and service providers fail to
report and to pay to us win fees, directly or indirectly, our business would be
harmed.

Our
service providers are responsible for paying us a win fee for each job that
they obtain from us. We ask service providers not to pass on the cost of the
win fee to the homeowner. However, we do not currently provide any guarantee to
the homeowner that our service providers have not raised their rates to cover
the win fee nor do we audit or plan to audit our service providers to confirm
that they have not raised their rates. Homeowners may believe that they are
indirectly paying us our win fee through the higher rates of service providers
and, therefore, choose to select service providers through word-of-mouth
referrals, Yellow Pages, local contractor matching services or other means
rather than using our matching service. If homeowners choose not to use our
service, we will lose service revenues and visitors to our Web sites and our
business will be harmed.

We
depend on our service providers to report that they have won a job and pay us
our win fee. We rely on personal relationships with our service providers and
the incentive to receive future leads from us to encourage service providers to
report wins and pay win fees. Currently, we do not have a control or an
oversight mechanism in place with either service providers or homeowners to
ensure that they report wins and pay win fees. If service providers do not
report wins or pay us win fees, we will lose service revenues and our business
will be harmed.

We depend on third-party relationships to attract visitors to
our Web sites.

We
have entered into multi-year commercial contracts with suppliers of home
improvement products and services to generate revenues and increase the number
of visitors to our Web sites. Under these contracts, suppliers have placed
links to our Web site from their Web sites to allow their customers to visit
our Web site if the customers are interested in obtaining home improvement
information or searching for a service provider. We believe that increasing the
number of visitors to our Web sites will increase the number of job
submissions. We cannot assure you that these contracts will lead to increased
visits to our Web sites or that increased visits to our Web sites will result
in increased job submissions. If we do not maintain our existing multi-year
commercial contracts on terms as favorable as currently in effect or if we are
not able to establish new contracts on commercially reasonable terms, our business
could be harmed.

Companies
that we may pursue for a multi-year commercial contract may offer services
competitive with suppliers with which we currently have multi-year contracts.
As a result, these suppliers may be reluctant to enter into multi-year
commercial contracts with us.

We
purchase preferential advertising placement on high-traffic Web sites. We
believe these Web sites can help us to increase the number of visitors to
ImproveNet.com. For example, in 1999 and 2000, approximately 20% and 11%, of
our Web site traffic originated from AltaVista, America Online, Excite@Home,
Lycos, Microsoft HomeAdvisor and Yahoo! There is intense competition for
preferential placements on these Web sites. If we lose our relationships with
any one of these Web sites, the traffic on ImproveNet.com may decrease and we
may not be able to enter into commercially reasonable contracts with
replacement high-traffic Web sites, if at all.

We depend on third-party relationships to provide software
tools and infrastructure.

We
integrate third-party software into our service offerings on our Web sites. We
would be harmed if the providers from which we license software ceased to
deliver and support reliable products, to enhance their current products, or to
respond to emerging industry standards. In addition, third-party software may
not continue to be available to us on commercially reasonable terms or at all.
The loss of, or inability to maintain or obtain, this software could limit the
features available on our Web sites, which could harm our business.

If we fail to attract and retain qualified personnel, our
ability to compete could be harmed.

We
depend on the continued service of our key technical, sales and senior
management personnel. In particular, the loss of the services of Ronald B.
Cooper, our President and Chief Executive Officer, or other senior management
personnel, individually or as a group, could cause us to incur increased
operating expenses and divert other senior management time in searching for
their replacements. We do not have employment agreements with any employee,
except Mr. Cooper, and we do not maintain any key person life insurance
policies for any of our key employees, except for Mr. Cooper. The loss of any
of our key technical, sales or senior management personnel could harm our
business.

In
addition, we must attract, retain and motivate highly skilled employees. We
face significant competition for individuals with the skills required to
develop, market and support our services. We may not be able to recruit and
retain sufficient numbers of highly skilled employees, and as a result our
business could suffer.

If we fail to adequately protect our proprietary rights, we
could lose these rights and our business could be harmed.

We
depend upon our ability to develop and protect our intellectual property
rights, including our databases of homeowners and service providers and our
internally-developed matching criteria and algorithms, to distinguish our
services from our competitors' services. We rely on a combination of copyright,
trademark and trade secret laws, as well as confidentiality agreements and
licensing arrangements, to establish and protect our proprietary rights. We
have no issued patents. Our databases are protected by trade secret laws and
our matching service is protected primarily by trade secret and copyright laws.
Existing laws afford only limited protection of intellectual property rights.
Attempts could be made to copy or reverse engineer aspects of our processes or
services or to obtain and use information that we regard as proprietary.
Accordingly, we may not be able to protect our intellectual property rights
against unauthorized third-party copying or use. Furthermore, policing the
unauthorized use of our intellectual property is difficult, and expensive
litigation may be necessary in the future to enforce our intellectual property
rights. The use by others of our proprietary rights could harm our business.

Our services could infringe the intellectual property rights
of others causing costly litigation and the loss of significant rights.

Third
parties could claim that we have infringed their intellectual property rights
by claiming that our matching service infringes their patents, trade secrets or
copyrights. In the ordinary course of business, we have received, and may
receive in the future, notices from third parties claiming infringement of
their proprietary rights. In addition, providers of goods and services over the
Internet are increasingly subject to claims that they infringe patents that
cover basic elements of electronic commerce. The resolution of any claims could
be time-consuming, result in costly litigation, delay or prevent us from
offering our services or require us to enter into royalty or licensing
agreements, any of which could harm our business. In the event an infringement
claim against us is successful and we cannot obtain a license on acceptable
terms, license a substitute technology or redesign our services, our business
would be harmed. Furthermore, former employers or our current and future
employees may assert that our employees have improperly disclosed to us or are
using confidential or proprietary information in our business.

If we experience system failures, our reputation would be
harmed and users might seek alternative service providers, causing us to lose
revenues.

We
depend on the efficient and uninterrupted operation of our computer and
communications hardware and software systems. Substantially all of our computer
hardware for operating our Web sites is currently located at Qwest
Communications in Sunnyvale, California, with backups located at our facility
in Redwood City, California. These systems and operations are vulnerable to
damage or interruption from earthquakes, floods, fires, power loss, telecommunication
failures and similar events. They are also subject to break-ins, sabotage,
intentional acts of vandalism and similar misconduct. We do not have fully
redundant systems, a formal disaster recovery plan or alternative providers of
hosting services, and we do not carry business interruption insurance to
compensate us for losses that could occur. Despite any precautions we may take,
the occurrence of a natural disaster or other unanticipated problems either at
Qwest or at our facility could result in interruptions in our services. Any
damage to or failure of our systems could result in interruptions in our
service. In addition to placing an increased burden on our engineering staff,
any system failure could create user questions and complaints that must be
responded to by our customer support personnel. The system failures of various
third-party Internet service providers, online service providers and other Web
site operators could result in interruptions in our service to those users who
require the services of these third-party providers and operators to access our
Web sites. These interruptions could reduce our revenues and profits, and our
future revenues and profits will be harmed if our users believe that our system
is unreliable. Since we have been keeping logs of our Web sites, our
ImproveNet.com Web site has been unintentionally interrupted for periods
ranging from two minutes to one hour, the latter prior to February 2000. On one
occasion, prior to February 2000, some users experienced interruptions in part
of our service for a period of 48 hours.

We rely on a continuous power supply to conduct our business,
and California's current energy crisis could disrupt our operations and
increase our expenses.

California
is in the midst of an energy crisis that could disrupt our operations and
increase our expenses. In the event of acute power shortages, which occur when
power reserves for the State of California fall below 1.5%, California has on
occasion implemented, and is likely in the future to continue to implement,
rolling blackouts throughout the state. If blackouts interrupt the power supply
of our hosting provider, we would be subject to reduced access to our Web
sites. Additionally, we currently do not have backup generators or alternate sources
of power in the event of a blackout, and our current insurance does not provide
coverage for any damages we or our customers may suffer as a result of any
interruption in our power supply or that of our hosting provider. If blackouts
interrupt our power supply, we would be temporarily unable to continue
operations at our facilities. This could damage our reputation, harm our
ability to retain existing customers and to obtain new customers, and could
result in lost revenue, any of which could substantially harm our business and
results of operations.

We may have capacity restraints that could limit the growth
of or reduce our revenues.

The
satisfactory performance, reliability and availability of our Web sites,
processing systems and network infrastructure are critical to our reputation
and our ability to attract and retain large numbers of users. If the volume of
traffic, including at peak times, on our Web sites increases, we will need to
expand and upgrade our technology, transaction processing systems and network
infrastructure. We may not be able to accurately project the rate or timing of
these increases, if any, in the use of our services or to expand or upgrade our
systems and infrastructure in a timely manner to accommodate these increases.

We
use internally developed systems for operating our services and processing our
transactions, including billing and collections processing. We must continually
improve these systems in order to accommodate the level of use of our Web
sites. In addition, if we add new features and functionality to our services,
we could be required to develop or license additional technologies. Our
inability to add additional software and hardware or upgrade our technology,
transaction processing systems or network infrastructure could cause
unanticipated system disruptions, slower response times, degradation in levels
of customer support, impaired quality of the users' experience, delays in
accounts receivable collection or losses of recorded financial information. Our
failure to provide new features or functionality also could result in these
consequences. The required hardware may not be readily available or affordable
and we may be unable to effectively upgrade and/or expand our systems in a
timely manner or to integrate smoothly any newly developed or purchased
technologies with our existing systems. These difficulties could harm or limit
our ability to expand our business.

We could be held liable for products and services referred by
means of our Web site.

We
could be subject to claims relating to products and services that we refer
through our Web site. Homeowners may bring claims against us for referring
service providers who may have, among other things, provided them with poor
workmanship or caused bodily injury or damage to property. Our existing
insurance coverage may not cover all potential claims, may not adequately cover
all costs incurred in defense of potential claims, may not indemnify us for all
liability that may be imposed or may not be renewable in future periods or
renewable on terms and conditions satisfactory to us. In addition, claims, with
or without merit, would result in diversion of our financial resources and
management resources.

We depend on the increasing use of the Internet. If the use
of the Internet does not grow, our revenues may not grow and could decline and
our business could be harmed.

We
depend on increased acceptance and use of the Internet. In particular, our
matching service depends upon service providers being willing to use the Internet
to find jobs through our service. We believe that service providers generally
have not traditionally used computers or the Internet to operate their
businesses. Demand and market acceptance for recently introduced products and
services over the Internet are subject to a high level of uncertainty. As a
result, acceptance and use of the Internet may not develop or a sufficiently
broad base of users may not adopt or continue to use the Internet as a medium
of commerce.

The Internet is characterized by rapidly changing
technologies, frequent new product and service introductions and evolving
industry standards.

To
succeed, we will need to adapt effectively to rapidly changing technologies and
continually improve the performance features and reliability of our services.
We could incur substantial costs in modifying our products, services or
infrastructure to adapt to these changes, and we may also lose customers and
revenues if our services fail to adapt to the rapid changes characteristic of
the Internet.

Conversely,
if the Internet experiences increased growth in number of users, frequency of
use and bandwidth requirements, the Internet infrastructure may be unable to
support the demands placed on it. The success of our business will rely on the
Internet providing a convenient means of interaction and commerce. Our business
depends on the ability of users to access information without significant
delays or aggravation.

Future government regulations and legal uncertainties
pertaining to the Internet could decrease the demand for our services or
increase the cost of doing business.

There
is, and will likely continue to be, an increasing number of laws and
regulations pertaining to the Internet. These laws and regulations may relate
to liability for information retrieved from or transmitted over the Internet,
online content, user privacy, taxes or the quality of services. Any new law or
regulation pertaining to the Internet, or the adverse application or
interpretation of existing laws, could decrease the demand for our services or
increase our cost of doing business.

We
are not certain how our business may be affected by the application of existing
laws governing issues such as property ownership, copyrights, encryption and
other intellectual property issues, taxation, libel, obscenity and export or
import matters. The vast majority of these laws was adopted prior to the advent
of the Internet. As a result, they do not contemplate or address the unique
issues created by the Internet and related technologies. Changes in laws
intended to address these issues could create uncertainty for or adversely
affect companies doing business on the Internet. This could reduce demand for
our services or increase the cost of doing business.

Legislative and regulatory initiatives regarding the
collection and use of our users' personal information may result in liability
and expenses.

Current
computing and Internet technology allows us to collect personal information
about our users. In the past, the Federal Trade Commission has investigated
companies that have sold personal information to third parties without
permission or in violation of a stated privacy policy. Currently, we collect
personal information only with the users' consent and under our privacy policy.
If we begin collecting or selling personal information without permission or in
violation of our privacy policy, we could face potential liability for
compiling and providing information to third parties.

The imposition of additional state and local taxes on
Internet-based transactions would increase our cost of doing business and harm
our ability to become profitable.

We
file state tax returns as required by law based on principles applicable to
traditional businesses. However, one or more states could seek to impose additional
income tax obligations or sales and use tax collection obligations on
out-of-state companies such as ours that engage in or facilitate Internet-based
commerce. A number of proposals have been made at state and local levels that
could impose taxes on the sale of products and services through the Internet or
the income derived from those sales. These proposals, if adopted, could
substantially impair the growth of Internet-based commerce and harm our ability
to become profitable.

United
States federal law limits the ability of the states to impose taxes on
Internet-based transactions. Until October 21, 2001, state and local taxes on
Internet-based commerce that are discriminatory against Internet access are
prohibited, unless the taxes were generally imposed and actually enforced
before October 1, 1998. It is possible that this tax moratorium will not be
renewed by October 21, 2001 or at all. Failure to renew this legislation would
allow various states to impose taxes on Internet-based commerce. The imposition
of state and local taxes could harm our ability to become profitable.

ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

The
primary objective of ImproveNet's investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, we maintain our portfolio of cash
and cash equivalents in a variety of securities, including both government and
corporate obligations and money market funds.

Our
exposure to market risk for changes in interest rates relates primarily to
increases or decreases in the amount of interest income we earn on our
investment portfolio and on increases or decreases in the amount of interest
expense we must pay with respect to any outstanding debt instruments. We
mitigate default risk by investing in only high credit quality securities that
we believe to be low risk and by positioning our portfolio to respond
appropriately to a significant reduction in a credit rating of any investment
issuer or guarantor.

We
do not hold derivative financial instruments as of March 31, 2001, and have
never held such instruments in the past. In addition, we had no debt
instruments outstanding as of March 31, 2001. We currently transact all of our
revenues, which are all traded in the United States in U.S. dollars.

PART II. OTHER INFORMATION

Item 1.  Legal
Proceedings

From
time to time, we may be involved in litigation relating to claims arising out
of our operations. As of the date of this filing, we are not engaged in any
material legal proceedings.

Item 2.  Changes In Securities and Use of Proceeds

On
March 15, 2000, we commenced the initial public offering of 2,760,000 shares of
common stock, par value $.001 per share, at a price of $16.00 per share in firm
commitment underwritten public offering. The offering was effected pursuant to
a Registration Statement on Form S-1 (Registration Nos. 333-92873 and
333-32618), which the United States Securities and Exchange Commission declared
effective on March 15, 2000. Credit Suisse First Boston, Robertson Stephens and
E*Offering were the lead underwriters for the offering.

Of
the $44.2 million in aggregate proceeds we raised in the offering, $3.1 million
was paid to underwriters in connection with the underwriting discount, and
approximately $1.4 million was paid by us in connection with offering expenses,
printing fees, filing fees, legal fees and accounting fees.

Prior
to the public offering, we had cash and cash equivalents of $45.3 million at
December 31, 1999.  As of March 31,
2000, we had cash and cash equivalents of $69.0 million, inclusive of the
proceeds of the offering.

Since
March 31, 2000, we have used the proceeds of the offering and proceeds from
prior private offerings of approximately $44.6 million for operating
activities, and approximately $3.6 million for capital expenditures, offset by
cash generated from financing activities. 
As of March 31, 2001, we have cash of approximately $22.1 million for
operating activities, capital expenditures, as well as for other corporate
purposes.

Item 3.  Defaults Upon Senior Securities

None

Item 4.  Submission of Matters to a Vote of Security
Holders

No
matters were submitted to a vote of security holders during the first quarter of
our fiscal year ended December 31, 2001.

Item 5.  Other
Information

On
March 29,2001 ImproveNet announced the Boards approval of a stock repurchase
plan. The plan allows for the purchase of up to $2 million in common
stocks.  To date, no purchase have been
made.

Item 6.  Exhibits and Reports on Form 8-K

(a)         Exhibits

Exhibit
  Number
  Description of
  Document3.1**
  Form of Third Amended
  and Restated Certificate of Incorporation of the Registrant.3.2**
  Fourth Amended and
  Restated Certificate of Incorporation of the Registrant.3.3**
  Bylaws of the
  Registrant.3.4**
  Amended and Restated
  Bylaws of the Registrant.4.1**
  Specimen Stock
  Certificate.4.2**
  Reference is made to
  Exhibits 3.1, 3.2, 3.3 and 3.4 hereof.10.1**
  Amended and Restated
  1996 Stock Option Plan.10.2**
  Form of 1999 Equity
  Incentive Plan.10.3**
  Form of 1999 Employee
  Stock Purchase Plan.10.4**
  Commercial Office
  Lease by and between Florcor I Limited Partnership and the Registrant.10.5**
  Commercial Office
  Lease by and between Chestnut Bay LLC and the Registrant.10.6**
  Employment agreement
  by and between the Registrant and Ronald Cooper.10.16**
  Internet-based Service
  Agreement between the Registrant and Owens Corning dated October 1, 1999.10.17**
  Collaboration
  Agreement between the Registrant and E.I. du Pont de Nemours and Company
  dated December 3, 1999.10.18**
  Internet Development,
  Marketing and Distribution Agreement between the Registrant and General
  Electric Appliances dated September 10, 1999.10.19**
  Relationship Agreement
  between the Registrant and Microsoft HomeAdvisor dated December 7, 1999.10.20**
  Agreement between the
  Registrant and CompleteHome Operations, Inc. dated December 13, 1999.10.21**
  Form of 1996 Stock
  Option Plan Grant Notice.10.22**
  Form of 1999 Equity
  Incentive Plan Stock Option Agreement.10.34**
  Promissory Note and
  Stock Pledge Agreement between ImproveNet, Inc. and Ronald B. Cooper dated
  April 14, 200010.35**
  Commercial Office Lease
  by and between Bennett Center, LLC and the Registrant





**         Previously
Filed

(b)        No
reports on Form 8-K were filed with the Securities and Exchange Commission
during the three months ended March 31, 2001.

Signatures

Pursuant
to the requirements of the Securities and Exchange Act of 1934, the Registrant
has duly caused this report to be signed, May 14, 2001 on its behalf by the
undersigned duly authorized.

IMPROVENET,
  INC.(Registrant)By:/s/
  Ronald CooperRonald
  CooperChairman,
  CEO & PresidentBy:/s/
  Michael CribbinMichael
  CribbinVP
  of Finance(Principal
  Accounting & Financial Officer)Date: May 14, 2001