<PAGE>


                                 UNITED STATES
                     SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C. 20549

                                 -----------

                                  FORM 10-Q


            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000

                        COMMISSION FILE NUMBER 000-29927


                                IMPROVENET, INC.
            (Exact name of registrant as specified in its charter)

           DELAWARE                                          77-0452868
-------------------------------                        ----------------------
(STATE OR OTHER JURISDICTION OF                           (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION)                         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.

                            YES X  (1)        NO
                               --------         ------


      The number of shares outstanding of the registrant's common stock,
             $.001 par value, was 16,712,211 as of July 31, 2000


                                       1


<PAGE>


                               IMPROVENET, INC.

                                  FORM 10-Q
                      FOR THE QUARTER ENDED JUNE 30, 2000



                                     INDEX
<TABLE>
<CAPTION>
                                                                                                                     PAGE
                                                                                                                     ----
<S>                                                                                                                  <C>
PART I        FINANCIAL INFORMATION

   Item 1     Financial Statements:

              Condensed Consolidated Balance Sheets as of June 30, 2000
              and December 31, 1999...................................................................................3

              Condensed Consolidated Statements of Operations for the three
              and six months ended June 30, 2000 and 1999.............................................................4

              Condensed Consolidated Statements of Cash Flows for the
              six months ended June 30, 2000 and 1999.................................................................5

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

   Item 2     Management's Discussion and Analysis of Financial
              Condition and Results of Operations....................................................................12

   Item 3     Quanitative and Qualitative Disclosures About Market Risk..............................................30


PART II       OTHER INFORMATION

   Item 2     Changes in Securities and Use of Proceeds..............................................................31

   Item 6     Exhibits and Reports on Form 8-K.......................................................................31


SIGNATURES...........................................................................................................32
</TABLE>

                                                                             2


<PAGE>


PartI -  FINANCIAL INFORMATION
Item 1.  FINANCIAL STATEMENTS

                                IMPROVENET, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
               ($ in thousands, except share and per share amounts)

<TABLE>
<CAPTION>
                                                                           JUNE 30,            DECEMBER 31,
                                                                             2000                  1999
                                                                      -------------------   -------------------
                               ASSETS                                      (UNAUDITED)
<S>                                                                   <C>                   <C>
Current assets:
   Cash and cash equivalents                                                     $54,369               $45,291
   Accounts receivable, net                                                        2,375                 1,023
   Prepaid expenses and other current assets                                       3,009                 1,141
                                                                      -------------------   -------------------
      Total current assets                                                        59,753                47,455
Property and equipment, net                                                        3,904                 1,970
Note receivable, related party                                                     1,458                   250
Other assets                                                                       1,238                 1,867
                                                                      -------------------   -------------------
      Total assets                                                               $66,353               $51,542
                                                                      ===================   ===================


                LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable and accrued liabilities                                      $11,009                $7,472
   Deferred revenue                                                                  260                    92
                                                                      -------------------   -------------------
      Total current liabilities                                                   11,269                 7,564
Other long-term liabilities                                                           66                   116
                                                                      -------------------   -------------------
      Total liabilities                                                           11,335                 7,680
                                                                      -------------------   -------------------



STOCKHOLDERS' EQUITY
Convertible preferred stock, $0.001 par value:
   Authorized: 12,482,935 shares
   Issued and outstanding: none in 2000, 11,382,694 shares in 1999                    --                    12
Common stock, $0.001 par value:
   Authorized: 34,000,000 shares
   Issued and outstanding: 16,712,524 shares in 2000 and 2,336,616
      shares in 1999                                                                  17                     2
Additional paid-in capital                                                       146,856               108,656
Notes receivable from stockholders                                                  (578)                 (633)
Unearned stock-based compensation                                                (16,418)              (22,208)
Accumulated deficit                                                              (74,859)              (41,967)
                                                                      -------------------   -------------------
      Total stockholders' equity                                                  55,018                43,862
                                                                      -------------------   -------------------
      Total liabilities and stockholders' equity                                 $66,353               $51,542
                                                                      ===================   ===================

</TABLE>

                             See accompanying notes.

                                                                             3


<PAGE>


                                IMPROVENET, INC.
                  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    ($ in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                   Three months ended June 30,   Six months ended June 30,
                                                                   --------------------------  -----------------------------
                                                                       2000          1999          2000             1999
                                                                   ------------  ------------  ------------    -------------
                                                                                         (unaudited)
<S>                                                                <C>           <C>           <C>             <C>

Revenues:
   Service revenues                                                      $1,273         $251         $2,055           $407
   Branding revenues                                                        746          175          1,256            298
                                                                   -------------  -----------  -------------   ------------
      Total revenues                                                      2,019          426          3,311            705
Cost of revenues:
   Cost of service revenues (excludes stock-based compensation of
      $113, $102, $357 and $128)                                          1,309          261          2,316            453
   Cost of branding revenues (excludes stock-based compensation
      of $69, $13, $157 and $28)                                            128           88            175            149
                                                                   -------------  -----------  -------------   ------------
      Total cost of revenues                                              1,437          349          2,491            602
                                                                   -------------  -----------  -------------   ------------
Gross profit                                                                582           77            820            103
Operating expenses:
   Sales and branding (excludes stock-based compensation of
      $1,286, $157, $3,158 and $242)                                     12,496        3,748         22,960          5,493
   Product development (excludes stock-based compensation of
      $(96), $5, $(50) and $11)                                           1,904          120          3,144            266
   General and administrative (excludes stock-based compensation
      of $378, $632, $839 and $966)                                       2,788          475          4,372            772
   Stock-based compensation                                               1,750          909          4,461          1,375
                                                                   -------------  -----------  -------------   ------------
      Total operating expenses                                           18,938        5,252         34,937          7,906
                                                                   -------------  -----------  -------------   ------------
Loss from operations                                                    (18,356)      (5,175)       (34,117)        (7,803)
Interest and other income (expense), net                                    830          184          1,225            186
                                                                   -------------  -----------  -------------   ------------
Net loss                                                                (17,526)      (4,991)       (32,892)        (7,617)
Accretion of mandatorily redeemable convertible preferred stock              --           --             --           (239)
                                                                   -------------  -----------  -------------   ------------
   Net loss attributable to common stockholders                        $(17,526)     $(4,991)      $(32,892)       $(7,856)
                                                                   =============  ===========  =============   ============

Basic and diluted net loss per common share                              ($1.08)      ($3.40)        ($3.17)        ($5.47)
                                                                   =============  ===========  =============   ============

Shares used in calculating basic and diluted net loss per common
   share                                                                 16,284        1,467         10,388          1,437
                                                                   =============  ===========  =============   ============

Pro forma basic and diluted net loss per common share                    ($1.08)      ($0.61)        ($2.19)        ($1.19)
                                                                   =============  ===========  =============   ============

Shares used in calculating pro forma basic and diluted net loss
   per common share                                                      16,284        8,150         15,016          6,398
                                                                   =============  ===========  =============   ============

</TABLE>

                           See accompanying notes.

                                                                            4


<PAGE>


                                IMPROVENET, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                               ($ in thousands)

<TABLE>
<CAPTION>
                                                                                             SIX MONTHS ENDED JUNE 30,
                                                                                           -------------------------------
                                                                                                2000            1999
                                                                                           ---------------  --------------
                                                                                                     (UNAUDITED)
<S>                                                                                        <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                                                      $(32,892)        $(7,617)
   Adjustments to reconcile net loss to net cash used in operating activities:
      Depreciation and amortization                                                                   610              37
      Allowance for doubtful accounts                                                                 244              45
      Amortization of stock-based compensation                                                      4,629           1,375
   Changes in operating assets and liabilities:
      Accounts receivable                                                                          (1,596)           (234)
      Prepaid expenses and other current assets                                                    (1,913)           (465)
      Other assets                                                                                    238              45
      Accounts payable and accrued liabilities                                                      3,537           1,781
      Deferred revenue                                                                                168              --
      Other long-term liabilities                                                                     (50)             --
                                                                                           ---------------  --------------
        Net cash used in operating activities                                                     (27,025)         (5,033)
                                                                                           ---------------  --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of property and equipment                                                             (2,313)           (104)
   Restricted cash                                                                                     (3)           (400)
   Issuance of note receivable to related party                                                    (1,000)           (250)
                                                                                           ---------------  --------------
        Net cash used in investing activities                                                      (3,316)           (754)
                                                                                           ---------------  --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from the issuance of common stock, net of offering costs                              39,075              --
    Proceeds from the issuance of preferred stock, net                                                 --          22,050
    Proceeds from exercise of stock options                                                           344              25
    Principal payments under lines of credit                                                           --            (307)
                                                                                           ---------------  --------------
        Net cash provided by financing activities                                                  39,419          21,768
                                                                                           ---------------  --------------
Net increase in cash and cash equivalents                                                           9,078          15,981
Cash and cash equivalents, beginning of period                                                     45,291           1,676
                                                                                           ---------------  --------------
Cash and cash equivalents, end of period                                                          $54,369         $17,657
                                                                                           ===============  ==============

</TABLE>

                                   See accompanying notes.

                                                                             5

<PAGE>


                                IMPROVENET, INC.
               NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.       FORMATION AND BUSINESS OF THE COMPANY

         ImproveNet, Inc. (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.

         During 1998, the Company emerged from the development stage. Although
no longer in the development stage, the Company continues to be subject to risks
and challenges similar to other companies in a comparable stage of development.
These risks include, but are not limited to, dependence on key individuals,
successful development, marketing and branding of products and services, the
ability to obtain adequate financing to support growth, and competition from
larger companies with greater financial, technical, management and marketing
resources.

         On March 15, 2000, the Company completed the initial public offering
("IPO") of its common stock. Pursuant to this offering, a total of 2,760,000
shares of common stock were sold at the IPO price of $16.00 per share,
generating total net proceeds of approximately $39.1 million. Upon completion of
the Company's IPO, all outstanding convertible preferred stock was converted
into common stock on a share for share basis. Additionally, warrants to purchase
convertible preferred stock were converted to warrants to purchase an equivalent
number of shares of the Company's common stock.


2.       BASIS OF PRESENTATION

         The accompanying interim condensed consolidated financial statements as
of June 30, 2000 and for the three and six months ended June 30, 2000 and 1999
are unaudited. The unaudited interim condensed consolidated financial statements
have been prepared on the same basis as the annual 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 June 30, 2000, results of operations for the three and
six months ended June 30, 2000 and 1999, and cash flows for the six months ended
June 30, 2000 and 1999. 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
consolidated financial statements and notes thereto for the year ended December
31, 1999 included in the Company's Prospectus filed with the Securities and
Exchange Commission on March 15, 2000.


                                                                    6


<PAGE>


                                IMPROVENET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         NET LOSS PER COMMON SHARE

         Basic net loss per common share is computed by dividing the net loss
attributable to common stockholders for the period by the weighted average
number of common shares outstanding during the period. Diluted net loss per
common share is computed by dividing the net loss attributable to common
stockholders for the period by the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares,
composed of common shares issuable upon the exercise of stock options and
warrants and upon conversion of convertible preferred stock, are included in the
diluted net loss per common share calculation to the extent these shares are
dilutive. A reconciliation of the numerator and denominator used in the
calculation of basic and diluted net loss per common share follows ($ and share
amounts in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                    Three Months Ended June 30,       Six Months Ended June 30,
                                                --------------------------------  ------------------------------
                                                     2000             1999             2000            1999
                                                ----------------  --------------  ---------------  -------------
<S>                                             <C>               <C>             <C>              <C>
Numerator
   Net loss attributable to common stockholders        $(17,526)        $(4,991)        $(32,892)       $(7,856)
                                                ----------------  --------------  ---------------  -------------

Denominator
   Weighted average common shares                        16,725           1,467           10,882          1,437
   Weighted average unvested common shares
      subject to repurchase                                (441)             --             (494)            --
                                                ----------------  --------------  ---------------  -------------
   Denominator for basic and diluted
      calculation                                        16,284           1,467           10,388          1,437
                                                ----------------  --------------  ---------------  -------------
   Basic and diluted net loss per common
          share                                          $(1.08)         $(3.40)          $(3.17)        $(5.47)
                                                ================  ==============  ===============  =============


Proforma net loss per share has been computed as described above except that it
assumes the conversion of preferred stock outstanding into common stock from the
date of original issuance. A reconciliation of the numerator and denominator
used in the calculation of basic and diluted pro forma net loss per common share
follows ($ and share amounts in thousands, except per share amounts):

</TABLE>


<TABLE>
<CAPTION>
                                                      Three Months Ended June 30,       Six Months Ended June 30,
                                                  --------------------------------  ------------------------------
                                                       2000             1999             2000            1999
                                                  ----------------  --------------  ---------------  -------------
<S>                                               <C>               <C>             <C>              <C>
Numerator
   Net loss                                              $(17,526)        $(4,991)        $(32,892)       $(7,617)
                                                  ----------------  --------------  ---------------  -------------

Denominator
   Weighted average common shares                          16,725           1,467           10,882          1,437
   Adjustment to reflect the assumed conversion
      of preferred stock                                       --           6,683            4,628          4,961
   Weighted average unvested common shares
      subject to repurchase                                  (441)             --             (494)            --
                                                  ----------------  --------------  ---------------  -------------
   Denominator for proforma basic and diluted
      calculation                                          16,284           8,150           15,016          6,398
                                                  ----------------  --------------  ---------------  -------------
   Basic and diluted pro forma net loss per
      common share                                         $(1.08)         $(0.61)          $(2.19)        $(1.19)
                                                  ================  ==============  ===============  =============
</TABLE>

Options and warrants to purchase approximately 2.2 million and approximately
1.6 million shares were outstanding as of June 30, 2000 respectively.

                                                                             7

<PAGE>


                                IMPROVENET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


3.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         MULTI-YEAR COMMERCIAL CONTRACTS

         Commencing in September 1999, the Company has 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, as
defined, on the Company's 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 the Company is obligated to fund, as defined, co-operative branding
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 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 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 branding 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 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.

         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 branding
expense.

         As a result, for the three months ended June 30, 2000, the Company has
not recognized revenue of $719,000 which represents $84,000 of warrant
stock-based compensation amortization and $635,000 for the barter element
amounts of these commercial contracts. For the six months ended June 30, 2000,
the Company has not recognized revenue of approximately $1.4 million which
represents $168,000 of warrant stock-based compensation amortization and
approximately $1.2 million for the barter element amounts of these commercial
contracts.


                                                                            8


<PAGE>



                                IMPROVENET, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


3.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


         Revenues may be analyzed as follows ($ in thousands):

<TABLE>
<CAPTION>
                                                                      THREE MONTHS ENDED JUNE 30,       SIX MONTHS ENDED JUNE 30,
                                                                    ---------------------------------  -----------------------------
                                                                         2000              1999            2000            1999
                                                                    ----------------  ---------------  --------------  -------------
<S>                                                                 <C>               <C>              <C>             <C>
Service revenues                                                             $1,273             $251          $2,055           $407
Amounts invoiced under branding and multi-year commercial
   contracts                                                                  1,465              175           2,675            298
                                                                    ----------------  ---------------  --------------  -------------
                                                                             $2,738              426           4,730            705
Amounts invoiced and accrued under multi-year commercial
   contracts with related parties                                              (635)              --          (1,251)            --
Amortization of warrant stock-based compensation                                (84)              --            (168)            --
                                                                    ----------------  ---------------  --------------  -------------
Revenues                                                                     $2,019             $426          $3,311           $705
                                                                    ================  ===============  ==============  =============
</TABLE>

         Revenues are reported in the statements of operations net of the
amounts invoiced and accrued under the multi-year commercial contracts with
related parties as follows ($ in thousands):

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED JUNE 30,         SIX MONTHS ENDED JUNE 30,
                                                        --------------------------------  --------------------------------
                                                              2000             1999              2000             1999
                                                        --------------- ----------------  ---------------   --------------
<S>                                                     <C>             <C>               <C>               <C>
     Service revenues                                            $1,273             $251          $ 2,055             $407
     Branding revenues                                              746              175            1,256              298
                                                        --------------- ----------------  ---------------   --------------
        Total revenues                                           $2,019             $426           $3,311             $705
                                                        =============== ================  ===============   ==============
</TABLE>

4.       STOCK-BASED COMPENSATION

         In connection with the granting of stock options to our employees
and certain non-employees, we have recorded stock-based compensation which is
included as a component of stockholders' equity and is being amortized by
charges to operations over the vesting period of the related options on an
accelerated basis. The amortization of the remaining deferred stock-based
compensation at June 30, 2000 will result in additional charges to operations
through the year ended December 31, 2003. Future compensation charges would
be reduced if any employee terminates employment prior to the expiration of
the option vesting period. During the quarter ended June 30, 2000, certain
employees terminated their employment with the Company. As a result, $569,000
of previously recognized stock-based compensation expense associated with
unvested options was reversed. Additionally, the unamortized portion of the
deferred stock-based compensation charges relating to these terminated
employees in the amount of $593,000 was reversed, with a corresponding
adjustment to additional paid-in-capital. The amortization of stock-based
compensation is classified as a separate component of operating expenses in
the Company's statement of operations.

                                                                            9


<PAGE>

                               IMPROVENET, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5.       RELATED PARTY TRANSACTIONS

         In April 2000, the Company advanced, pursuant to a loan agreement,
$1.0 million to Ronald B. Cooper, chairman and chief executive officer. The
loan is collateralized pursuant to a pledge agreement for all shares Mr.
Cooper currently holds or acquires in the future pursuant to stock option
agreements. The loan bears interest at a rate of 6.46% per annum and is due
no later than April 30, 2001.

6.       RECENT ACCOUNTING PRONOUNCEMENTS

         In June 1998, SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging
activities related to those instruments, as well as other hedging activities.
The Company does not currently hold any derivative instruments and does not
engage in hedging activities. The Company will be required to adopt SFAS No.
133 for the year ending December 31, 2001. Management does not expects that
the adoption of SFAS No. 133 will have a material impact on the Company's
financial position, results of operations or cash flows.

         In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition" ("SAB 101"). SAB 101 provides the SEC Staff's views in
applying generally accepted accounting principles to selected revenue
recognition issues. The guidance in SAB 101 must be implemented by the
Company during its fourth fiscal quarter of fiscal 2000. The Company believes
it is in compliance with the guidelines provided in SAB 101, and thus,
management believes that the adoption of SAB 101 will not significantly
affect its results of operations.

         In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, and Interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of Opinion No. 25 for (a) the definition of
employee for purpose of applying Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequences of various modifications to the terms of a previously
fixed stock option award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1,
2000, but certain conclusions cover specific events that occur after either
December 15, 1988, or January 12, 2000. The adoption of certain provisions of
FIN 44 prior to June 30, 2000 did not have a material impact on the financial
statements. Management does not expect that the adoption of the remaining
provisions will have a material effect on the financial statements.

         In March 2000, the Emerging Issues Task Force issued No. 00-02
"Accounting for Web Site Development Costs" ("EITF 00 -02"). EITF 00-02 is
effective for all fiscal quarters beginning after June 30, 2000. EITF 00-02
discusses the capitalization criteria regarding web site development costs.
The Company will adopt EITF 00-02 in its quarter ending September 30, 2000
and does not expect such adoption to have a significant impact on the
Company's results of operations, financial position or cash flows.

                                                                            10


<PAGE>


                                IMPROVENET, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


6.       RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

         In May 2000, the Emerging Issues Task Force released Issue No. 00-14
"Accounting for Certain Sales Incentives" ("EITF 00-14"), which provides
guidance on the accounting for certain sales incentives offered by companies
to their customers such as discounts, coupons, rebates and products or
services. EITF 00-14 is effective for all fiscal quarters beginning after May
18, 2000 and addresses the recognition, measurement and income statement
classification for sales incentives offered voluntarily by a vendor without
charge to customers that can be used in, or that are exercisable by a
customer as a result of a single exchange transaction. The provisions of EITF
00-14 will require the Company to classify free product and service
incentives delivered to customers at the time of sale as cost of sales in its
consolidated statement of operations. Management does not believe the
adoption of EITF 00-14 will have a significant impact on the Company's
results of operations, financial position or cash flows.

                                                                            11


<PAGE>


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

OVERVIEW

         ImproveNet, Inc. is a source for home improvement information and
services on the Internet. Through our IMPROVENET.COM and IMPROVENETPRO.COM Web
sites, matching services and targeted advertising, we are 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. We generate quality job leads for architects, designers and
contractors, or service providers, from interested homeowners within their
geographic area, using our proprietary matching service. Our online features are
complemented by personal assistance from professional staff of personal project
advisors and regional and area managers who offer support throughout each phase
of the home improvement process.

         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, respectively. In
November 1999, we launched our customized Web site, WWW.IMPROVENETPRO.COM, for
our network of service providers.

REVENUES

         We generate substantially all of our revenues from service provider
referral services and branding advertisements placed on our Web site. The
following table and discussion highlights our revenues for the three and six
months ended June 30, 2000 and 1999 ($ in thousands):

<TABLE>
<CAPTION>

                                        THREE MONTHS ENDED                                SIX MONTHS ENDED
                                             JUNE 30,                                         JUNE 30,
                            --------------------------------------------    ---------------------------------------------
                                    2000                    1999                    2000                    1999
                            ---------------------    -------------------    ---------------------    --------------------
<S>                         <C>         <C>           <C>      <C>           <C>        <C>           <C>        <C>
Revenues:

Service Revenue               $1,273         63%       $251         59%       $2,055         62%        $407         58%
Branding Revenue                 746         37%        175         41%        1,256         38%         298         42%
                            ---------    --------    -------    --------    ---------    --------    --------    --------

Total Revenue                 $2,019        100%       $426        100%       $3,311        100%        $705        100%
                            =========    ========    =======    ========    =========    ========    ========    ========

</TABLE>

                                                                          12


<PAGE>


         SERVICE REVENUES

         We generate service revenues primarily in the form of lead fees and win
fees from our service providers and, to a much lesser extent, in the form of
enrollment fees from service providers and premium service fees from homeowners.
The following table details the components of service revenues, based on a
percentage of service revenues:

<TABLE>
<CAPTION>
                                              THREE MONTHS ENDED                    SIX MONTHS ENDED
                                                   JUNE 30,                             JUNE 30,
                                       ---------------------------------    ---------------------------------
                                           2000              1999                2000               1999
                                       -------------    ----------------    ---------------    --------------
<S>                                    <C>              <C>                 <C>                <C>
Lead Fees                                        29%                 43%                31%               44%
Win Fees                                         68                  49                 65                48
Enrollment Fees                                   3                   5                  4                 6
Premium Service Fees                             --                   3                 --                 2
                                       -------------    ----------------    ---------------    --------------
Total Service Revenues                         100%                100%               100%              100%
                                       =============    ================    ===============    ==============
</TABLE>

From inception through October 1999, we charged to our service providers lead
fees ranging from $6 to $10 per lead. In November 1999, we standardized our lead
fees at $10 per lead for all jobs. The win fees that we charge 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. We charge each new service provider
who passes our quality screens an enrollment fee of $90 to join our national
network; however, in the past we have often discounted or waived this fee. Our
revenue from premium service fees, consisting of fees charged to homeowners for
bid and contract assessment services and legal/credit reports on contractors
outside the ImproveNet database, has also been negligible.

         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 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
(#'s in thousands):

<TABLE>
<CAPTION>
                                        Three months ended          Six months ended
                                             June 30,                    June 30,
                                    -------------------------   -------------------------
          Key Metric                     2000         1999          2000          1999
----------------------------        ------------- -----------   ------------    ---------
<S>                                 <C>           <C>           <C>             <C>
Job submissions                              35           36             65           54
Matched jobs                                 27           10             45           17
Matched jobs as a % of job
   submissions                               77%          28%            70%          31%
Won jobs                                    3.4          0.7            5.2          1.1
Won jobs as a % of matched
   jobs                                      13%           7%            12%           7%
Won jobs as a % of job
   submissions                               10%           2%             8%           2%
</TABLE>

                                                                            13


<PAGE>


         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 between one and two years.
Revenues from premium service fees to homeowners are recognized at the time the
service is provided.

BRANDING  REVENUES

         We generate branding 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 branding revenues generally come from
suppliers of home improvement products.

         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 branding 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. 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.

Currently branding revenues are comprised of:

         - advertising paid for in cash; and

         - advertising paid for by way of barter.

     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. For the three months ended June 30, 2000 and 1999,
cash advertising totaled $212,000 and $120,000 and accounted for approximately
11% and 28% of our total revenues for those same periods, respectively. For the
six months ended June 30, 2000 and 1999, cash advertising totaled $417,000 and
$178,000 and accounted for approximately 13% and 25% of our total revenues for
those same periods, respectively.

     BARTER ADVERTISING. Barter advertising comes from two distinct contractual
sources: short-term barter advertising similar in nature to our cash advertising
contracts and 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.

     SHORT-TERM BARTER ADVERTISING. Short-term barter advertising results from
the exchange of advertising space on our Web site for reciprocal advertising
space on Web sites of third parties. Branding revenues and sales and branding
expenses arising from these transactions are recorded at fair value as we have
an established historical practice of receiving cash for similar short-term
advertising. In 1999, we engaged in short-term barter advertising and recorded
revenues of $55,000 and $120,000 for the three and six months ended June 30,
1999, respectively, which represented approximately 13% and 17% of our total
revenues for those same periods, respectively. Sales and branding expenses
arising from these barter transactions are


                                                                            14


<PAGE>


recognized when the advertisements are delivered on the reciprocal Web site,
which is typically the same period in which advertisements are delivered on our
Web site. We did not engage in any short-term barter advertising during the
three and six months ended June 30, 2000.

     MULTI-YEAR COMMERCIAL CONTRACTS.

     Commencing in September 1999, the Company has 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, as defined, on the Company's 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 the Company is obligated to
fund, as defined, co-operative branding 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 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 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 branding 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 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.

         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 branding
expense.

      As a result, for the three months ended June 30, 2000, we have not
recognized revenue of $719,000 which represents $84,000 of warrant stock-based
compensation amortization, and $635,000 for the barter element of these
commercial contracts. For the six months ended June 30, 2000, we have not
recognized revenue of approximately $1.4 million which represents $168,000 of
warrant stock-based compensation amortization, and approximately $1.2 million
for the barter element of these commercial contracts.

NET LOSSES

         We have incurred substantial losses and negative cash flows from
operations since inception as we have spent substantial amounts primarily on
branding and other marketing activities, and developing and expanding our
services and our operations infrastructure. As of June 30, 2000, we had an
accumulated deficit of approximately $74.9 million. We intend to continue to
invest substantial amounts in branding and marketing activities, and in the
development and acquisition of new content on our Web site, as well as new
products and technologies; however, we expect the ratio of expenditures to
revenues to decrease. We will continue to lose money unless we significantly
increase our revenues, and we cannot predict with certainty when, if ever, we
will operate profitably.


                                                                            15


<PAGE>


RESULTS OF OPERATIONS

THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999

         Revenues

         Revenues increased to approximately $2.0 million for the three months
ended June 30, 2000 from $426,000 for the three months ended June 30, 1999, an
increase of approximately $1.6 million or 374%. Revenues increased to
approximately $3.3 million for the six months ended June 30, 2000 from $705,000
in the comparable period in 1999, an increase of approximately $2.6 million or
370%. For the three months ended June 30, 2000, service revenues increased to
approximately $1.3 million from $251,000, an increase of approximately $1.0
million or 407% over the three months ended June 30, 1999. For the six months
ended June 30, 2000, service revenues increased to approximately $2.1 million
from $407,000, an increase of approximately $1.7 million or 405% over the six
months ended June 30, 1999. The increase in service revenue is primarily due to
an increased number of visitors to our Web sites, increased job submissions and
improvement in the number of jobs matched as a percentage of total job
submissions and in the number of jobs won as a percentage of jobs matched, or
our match and win rates, respectively, which led to increased lead and win fee
revenues. Revenues from new service provider enrollment fees and fees charged to
homeowners for premium services were not significant in either period.

         Branding revenues for the three months ended June 30, 2000 increased to
$746,000 from $175,000, an increase of $571,000 or 326% over the three months
ended June 30, 1999. Our branding revenues for the three months ended June 30,
2000 include amounts invoiced under advertising arrangements of approximately
$1.5 million less $719,000 for amounts invoiced and accrued under commercial
contracts with related parties and amortization of warrant stock-based
compensation.

         Branding revenues for the six months ended June 30, 2000 increased to
approximately $1.3 million from $298,000, an increase of approximately $1.0
million or 321% over the six months ended June 30, 1999. Our advertising
revenues for the six months ended June 30, 2000 include amounts invoiced under
advertising arrangements of approximately $2.7 million less approximately $1.4
million for amounts invoiced and accrued under commercial contracts with related
parties and amortization of warrant stock-based compensation.

         There were no adjustments to advertising revenues for the first and
second quarters of 1999.

         Revenues may be analyzed as follows ($ in thousands):

<TABLE>
<CAPTION>
                                                                      THREE MONTHS ENDED JUNE 30,       SIX MONTHS ENDED JUNE 30,
                                                                     ------------------------------   ------------------------------
                                                                          2000            1999             2000           1999
                                                                     ---------------  -------------   ---------------  ------------
<S>                                                                  <C>              <C>             <C>              <C>
Service revenues                                                             $1,273           $251            $2,055        $407
Amounts invoiced under branding and multi-year commercial
   contracts                                                                  1,465            175             2,675         298
                                                                     ---------------  -------------   ---------------  ----------
                                                                             $2,738            426             4,730         705
Amounts invoiced and accrued under multi-year commercial
   contracts with related parties                                              (635)            --            (1,251)         --

Amortization of warrant stock-based compensation                                (84)            --              (168)         --
                                                                     ---------------  -------------   ---------------  ----------
Revenues                                                                     $2,019           $426            $3,311        $705
                                                                     ===============  =============   ===============  ==========


</TABLE>

                                                                            16


<PAGE>


         OPERATING EXPENSES

         COST OF REVENUES. Cost of revenues increased to approximately $1.4
million or 71% of total revenues for the three months ended June 30, 2000,
compared to $349,000 or 82% of total revenues for the three months ended June
30, 1999. Cost of revenues increased by approximately $1.9 million, or 314%, to
approximately $2.5 million or 75% of total revenues in the six months ended June
30, 2000, compared to $602,000 or 85% of total revenues for the six months ended
June 30, 1999.

         Cost of service revenues consists of payroll and related costs and
occupancy, telecommunications and other administrative costs for our project
service group, which is responsible for all phases of our proprietary matching
services and includes our project advisors. In addition, cost of service
revenues includes an allocation of direct Web site operations costs, consisting
of payroll and related costs, data transmission costs and equipment
depreciation. Cost of service revenues was approximately $1.3 million or 65% of
total revenues and $261,000 or 61% of total revenues for the three months ended
June 30, 2000 and 1999, respectively. Cost of service revenues was approximately
$2.3 million or 70% of total revenues and $453,000 or 64% of total revenues for
the six months ended June 30, 2000 and 1999, respectively. This represents an
increase of approximately $1.0 million and approximately $1.9 million or 402%
and 411% over the three and six months ended June 30, 1999, respectively. The
increase in cost of service revenues is attributable to our investment in the
expansion and staffing of our project services infrastructure in advance of our
large investments to drive volume increases in traffic and jobs to our site. The
increase in cost of service revenues included payroll and related costs,
including recruiting, commensurate with the increase in the number of personal
project advisors, which increased from 12 at June 30, 1999 to 50 at June 30,
2000. In addition, the increase in cost of service revenues included 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 branding revenues includes an allocation of direct Web site
operations costs, consisting of payroll and related costs, data transmission
costs and equipment depreciation. Cost of branding revenues were $128,000 or 6%
of total revenues and $88,000 or 21% of total revenues for the three months
ended June 30, 2000 and 1999, respectively. Cost of branding revenues were
$175,000 or 5% of total revenues and $149,000 or 21% of total revenues for the
six months ended June 30, 2000 and 1999, respectively. This represents an
increase of $40,000 and $26,000 or 45% and 17% over the three and six months
ended June 30, 1999, respectively. These increases in cost of branding revenues
were primarily attributable to the substantial growth in total revenues without
a corresponding increase in direct Web site operations cost.

         SALES AND BRANDING. Our sales and branding expenses include all of our
online and offline direct advertising, public relations and trade show expenses.
Sales and branding 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. Sales and branding
expenses were approximately $12.5 million or 619% of total revenues and
approximately $3.7 million or 880% of total revenues for the three months ended
June 30, 2000 and 1999, respectively. Sales and branding expenses were
approximately $23.0 million or 693% of total revenues and approximately $5.5
million or 779% of total revenues for the six months ended June 30, 2000 and
1999, respectively.

         Our direct branding expenses, primarily offline and online advertising
expenses were approximately $3.0 million or 149% of total revenues and
approximately $2.6 million or 610% of total revenues for the three months ended
June 30, 2000 and 1999, respectively. Our direct branding expenses, primarily
offline and online advertising expenses were approximately $7.2 million or 217%
of total revenues and approximately $3.4 million or 482% of total revenues for
the six months ended June 30, 2000 and 1999, respectively. At the end of June
2000, the Company realigned its sales and branding resources by taking on more
projects internally and negotiating or transitioning its new or existing
agreements with partners from a high fixed cost formula to a variable
performance-based formula keyed to won jobs.


                                                                            17


<PAGE>


         Our investment in our professional services infrastructure were
approximately $5.6 million or 277% and $393,000 or 92% of total revenues for the
three months ended June 30, 2000 and 1999, respectively. Our investment in our
professional services infrastructure were approximately $9.6 million or 290% and
$593,000 or 84% of total revenues for the six months ended June 30, 2000 and
1999, respectively. Our professional service expenses included payroll and
related costs, travel and other support costs including an increased level of
travel and related expenses in both the first and second quarters of 2000,
related to market campaigns which is not expect to recur in future periods. We
completed in the second quarter 2000, our full deployment of our professional
services group which now includes a presence in 72 of 75 major markets. The
number of associates in our professional services group increased from 6 at June
30, 1999 to 143 at June 30, 2000.

         Our partnership services group and all other general sales and branding
expenses were approximately $3.9 million or 193% of total revenues and $707,000
or 166% of total revenues for the three months ended June 30, 2000 and 1999,
respectively. Our partnership services group and all other general sales and
branding expenses were approximately $6.2 million or 307% of total revenues and
approximately $1.5 million or 213% of total revenues for the six months ended
June 30, 2000 and 1999, respectively.

         PRODUCT DEVELOPMENT. Our product development costs include the payroll
and related costs of our editorial and technology staffs, fees for contract
content providers, and other costs of Web site design and new technologies
required to enhance the performance of our Web sites. Product development
expenses were approximately $1.9 million or 94% of total revenues and $120,000
or 28% of total revenues for the three months ended June 30, 2000 and 1999,
respectively. Product development expenses were approximately $3.1 million or
95% of total revenues and $266,000 or 38% of total revenues for the six months
ended June 30, 2000 and 1999, respectively. This represents an increase of
approximately $1.8 million and approximately $2.9 million or 1487% and 1082%
over the three and six months ended June 30, 1999, respectively. The increases
in product development expenses were primarily attributable to increased payroll
and related costs, recruiting and contract content providers. The increases were
incurred in order to expand our infrastructure of engineers and editorial staff
to design, test and implement expanded content, including management of content,
and tools, for example, estimators, visualizers, calculators, as well as the
development of new product and services. The increase in product development
costs for the second quarter of 2000 compared to the first quarter of 2000 was
almost entirely attributable to a major new product and service, started in the
first quarter of 2000, which has been put on indefinite hold until such time as
the Company's core businesses are generating positive cash flow.

         GENERAL AND ADMINISTRATIVE. 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. General and administrative expenses were
approximately $2.8 million and $475,000 or 138% and 112% of total revenues for
the three months ended June 30, 2000 and 1999, respectively. General and
administrative expenses were approximately $4.4 million and $772,000 or 132% and
110% of total revenues for the six months ended June 30, 2000 and 1999,
respectively. This represents an increase of approximately $2.3 million and
approximately $3.6 million or 487% and 466% of total revenues in the three and
six months ended June 30, 2000, respectively, compared to the three and six
months ended June 30, 1999, respectively. The increases in general and
administrative expenses are primarily attributable to salary and related
expenses and our aggressive recruiting initiatives through the end of June 2000
for additional personnel hired to support the growth of our businesses, as well
as activities as a public company. The increase in general and administrative
expenses for the second quarter of 2000 compared to the first quarter of 2000
includes special charges related to the separation of certain associates as part
of our initiative to realign our resources in order to accelerate the
achievement of positive cash flow and profitability. We do not expect that in
future periods we will be recruiting at our historical rate as we have completed
our base level of departmental staffing.

       STOCK-BASED COMPENSATION. Stock-based compensation consists of
expenses associated with the issuance of stock options and warrants.
Stock-based compensation charges were approximately $1.8 million or 87% of
total revenues and $909,000 or 213% of total revenues for the three months
ended June 30, 2000 and 1999, respectively. Stock-based compensation charges
were approximately $4.5 million or 135% of total revenues and approximately
$1.4 million or 195% of total revenues for the six months

                                                                            18


<PAGE>


ended June 30, 2000 and 1999, respectively. This represents an increase of
$841,000 and approximately $3.1 million or 93% and 224% over the three and
six months ended June 30, 1999, respectively. During the quarter ended June
30, 2000, certain employees terminated their employment with the Company. As
a result, approximately $569,000 of previously recognized stock-based
compensation expense associated with unvested options was reversed.
Additionally, the unamortized portion of the deferred stock-based
compensation charges relating to these terminated employees in the amount of
$593,000 was reversed, with a corresponding adjustment to additional
paid-in-capital. The amortization of stock-based compensation is classified
as a separate component of operating expenses in the Company's statement of
operations.

         INTEREST AND OTHER INCOME (EXPENSE), NET

         Interest and other income (expense), net increased to $830,000 in the
three months ended June 30, 2000 from $184,000 for the three months ended June
30, 1999. Interest and other income (expense), net increased to $1.2 million in
the six months ended June 30, 2000 from $186,000 for the six months ended June
30, 1999. The increase in net interest income is attributable to an increase in
our average invested cash balance as a result of the sale of our preferred stock
in March 1999, September 1999 and December 1999, as well as to the net proceeds
received from our initial public offering in March 2000, and to a lesser extent,
the increase in yields on our invested cash balances.

         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

         Our primary capital needs have been to fund our operating losses,
prepay our large media purchases and make capital expenditures. Since our
inception, we have primarily financed our operations through private sales of
our convertible preferred stock, convertible notes and common stock. On March
21, 2000, we closed our initial public offering that generated net cash proceeds
of approximately $39.1 million.

         Net cash used for operations was approximately $27 million for the six
months ended June 30, 2000, compared to $5.0 million for the six months ended
June 30, 1999. The increase in net cash used in operating activities was
primarily due to an increase in our net loss after adding back noncash
stock-based compensation and other charges and an increase in accounts
receivable and prepaid expense and other assets partially offset by increase in
accounts payable and accrued expenses.

         Net cash used for investing activities was approximately $3.3 million
for the six months ended June 30, 2000, compared to $754,000 for the six months
ended June 30, 1999. The increase in net cash used in investing activities was a
result of an increase in the purchase of property and equipment related to new
leased facilities, increased personnel and hardware to support, monitor and
control increased traffic and jobs. In addition, the Company provided a loan
collateralized by common stock of the Company to the chairman and chief
executive officer, in the amount of $1.0 million.

         Net cash provided by financing activities increased to approximately
$39.4 million for the six months ended June 30, 2000, compared to approximately
$21.8 million for the six months ended June 30, 1999. The increase was primarily
due to the receipt of approximately $39.1 million of net proceeds from our
initial public offering in March 2000 compared to approximately $22.1 million of
net proceeds from the issuance of convertible preferred stock in March 1999,
which was used, among other things, to repay $300,000 outstanding under the line
of credit.


                                                                            19


<PAGE>


         Our capital requirements depend on numerous factors, including the
success of our strategies for generating revenues and the amount of resources we
devote to investments in our technology, sales, marketing and brand promotion.
Our expenditures have substantially increased since inception as our operations
and staff has grown and we anticipate based on your recent realignment of
resources that our quarterly expenditures will begin to moderate and should
decrease from current levels experienced in the second quarter of 2000. In
addition, we will continue to evaluate possible investments in businesses,
products and technologies complementary to our existing business. Our capital
expenditures for 2000 are currently estimated to be approximately $3.3 million,
including leasehold improvements for the build-out and furnishing of our
Camarillo, California support center. At June 30, 2000, we had approximately
$54.4 million in available cash resources.

         We currently anticipate that our available cash resources will be
sufficient to meet our anticipated needs for working capital and capital
expenditures for at least the next 12 months. 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 and our stockholders may experience additional dilution. 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.

         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 expect to experience ongoing operating losses for the foreseeable
future. We currently anticipate that our operating expenses, primarily sales and
branding expenditures, and payroll and related costs will constitute a material
use of future cash resources. We anticipate that our current cash and cash
equivalent balances will be adequate to meet our foreseeable working capital and
operating expense requirements for at least the next 12 months and will strive
to make ongoing realignments, if required, to achieve positive cash flow with
our existing cash resources. We do not currently have any plans for a follow-on
public offering nor do we have any predetermined future share price thresholds
that would cause us, based on share price alone, to initiate a follow-on public
offering. 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.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

         In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. We do not
currently hold any derivative instruments and do not engage in hedging
activities. We will be required to adopt SFAS No. 133 for the year ending
December 31, 2001. We expect the adoption of SFAS No. 133 will not have a
material impact on our financial position, results of operations or cash flows.

         In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition" ("SAB 101"). SAB 101 provides the SEC Staff's views in
applying generally accepted accounting principles to selected revenue
recognition issues. The guidance in SAB 101 must be implemented during our
fourth fiscal quarter of fiscal 2000. We believe we are in compliance with the
guidelines provided in SAB 101, and thus, we believe that the adoption of SAB
101 will not significantly affect our results of operations.


                                                                            20


<PAGE>


         In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, and Interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of Opinion No. 25 for (a) the definition of employee
for purpose of applying Opinion No. 25, (b) the criteria for determining whether
a plan qualifies as a noncompensatory plan, (c) the accounting consequences of
various modifications to the terms of a previously fixed stock option award, and
(d) the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1988, or January 12, 2000.
The adoption of certain provisions of FIN 44 prior to June 30, 2000 did not have
a material impact on the financial statements. We do not expect that the
adoption of the remaining provisions will have a material effect on our
financial statements.

         In March 2000, the Emerging Issues Task Force issued No. 00-02
"Accounting for Web Site Development Costs" ("EITF 00-02"). EITF 00-02 is
effective for all fiscal quarters beginning after June 30, 2000. EITF 00-02
discusses the capitalization criteria regarding web site development costs.
We will adopt EITF 00-02 in our quarter ending September 30, 2000 and do not
expect such adoption to have a significant impact on our results of
operations, financial position or cash flows.

         In May 2000, the Emerging Issues Task Force released Issue No. 00-14
"Accounting for Certain Sales Incentives" ("EITF 00-14"), which provides
guidance on the accounting for certain sales incentives offered by companies to
their customers such as discounts, coupons, rebates and products or services.
EITF 00-14 is effective for all fiscal quarters beginning after May 18, 2000 and
addresses the recognition, measurement and income statement classification for
sales incentives offered voluntarily by a vendor without charge to customers
that can be used in, or that are exercisable by a customer as a result of a
single exchange transaction. The provisions of EITF 00-14 will require us to
classify free product and service incentives delivered to customers at the time
of sale as cost of sales in our consolidated statement of operations. We do not
believe the adoption of EITF 00-14 will have a significant impact on our results
of operations, financial position or cash flows.


                                                                            21


<PAGE>


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 PROSPECTUS
DATED MARCH 15, 2000.

RISKS RELATED TO OUR BUSINESS

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 branding programs,
funded the development of our services, promoted our Web sites and matching
service and expanded our operations infrastructure. As of June 30, 2000, our
accumulated loss was approximately $74.9 million. We expect our expenditures on
sales and branding activities, support field services and the development of new
products, services and technologies to continue to increase. 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 WITH A NEW SENIOR MANAGEMENT TEAM AND WE HAVE
RECENTLY EXPANDED 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 new chief executive
officer and commenced recruiting our senior management team, including our
senior vice president, partnership services; our senior vice president,
engineering and development, and chief technology officer; our senior vice
president, professional services; our senior vice president and chief financial
officer; our vice president, editorial; our vice president, strategic planning,
acquisitions and international; and our vice president, human resources. 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, respectively. 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.


                                                                            22


<PAGE>


OUR FINANCIAL RESULTS WILL BE AFFECTED BY FLUCTUATIONS IN THE HOME IMPROVEMENT
INDUSTRY AND SEASONALITY.

         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. We are
currently unable to assess the effect of seasonality in the home improvement
industry on our business.

OUR MARKET IS BECOMING MORE 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 branding 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, such as local referral businesses and online
referral companies such as ServiceMagic.com, iMandi, iCastle, repairnet,
HomesSpud, OurHouse.com, Handyman Online, Bid Express and Contractor.com and
potential competitors such as The Home Depot, Lowe's and Sears Roebuck & Company
could launch Web sites similar to ours that gain broader market acceptance based
on content, products and services. Remodel.com, a part of the HomeStore.com
family of sites, offers a matching service.

         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, especially offline home
improvement retail store chains such as The Home Depot, Lowe's and Sears Roebuck
& Company.

OUR FAILURE TO DEVELOP BRAND RECOGNITION COULD LIMIT OR REDUCE THE DEMAND FOR
OUR SERVICES AND RESULT IN A COMPLETE LOSS OF THE ANTICIPATED BENEFITS FROM
SIGNIFICANT MARKETING EXPENDITURES.

         We believe that continuing to strengthen our brand will be critical to
increasing demand for, and achieving widespread acceptance of, our matching
services, generating additional homeowner traffic, and entering into new
multi-year commercial contracts. Some of our competitors and potential
competitors have better name recognition and powerful brands. Promoting and
positioning our brand will depend largely on the success of our marketing
efforts, our ability to deliver features on our Web site that are engaging to
our users, and our ability to provide high quality matching services and
support. To promote our brand, we will need to increase our marketing budget and
otherwise increase our financial commitment to creating and maintaining brand
loyalty among users. We expect to spend between $25 million and $30 million in
2000 on sales and marketing programs and we expect our marketing expenditures to
increase in the future. Brand promotion activities may not yield increased
homeowner traffic, additional multi-year commercial contracts or increased
revenues and, even if they do, any increased revenues may not offset the
expenses we incur in building and maintaining our brand. If we fail to develop
sufficient brand recognition, our ability to generate branding revenues and
service revenues may be harmed.


                                                                            23


<PAGE>


IF WE FAIL TO MANAGE OUR GROWTH, OUR ABILITY TO MARKET, SELL AND DEVELOP OUR
SERVICES COULD BE HARMED.

         Our growth has placed and will continue to place a significant strain
on our management systems and resources, and we may be unable to effectively
manage our growth in the future. We must plan and manage our growth effectively
to offer our services and achieve revenue growth and profitability in a rapidly
evolving market. We continue to increase the scope of our operations and have
added a number of employees recently, including employees in key management and
branding positions. We grew from 16 employees as of December 31, 1997 to 303 as
of June 30, 2000. For us to effectively manage our growth, we must continue to:

         - improve our operational, financial and management systems and
           controls;

         - install new management and information systems and controls;

         - hire, train and motivate our workforce.

         Failure to manage our growth effectively would hinder our ability to
develop, market and sell our services and therefore harm our business.

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. For the
three and six months ended June 30, 2000, we derived approximately 63% and 62%
of our total revenues, respectively, from our network of service providers in
the form of lead fees and win fees. 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
national 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.


                                                                            24


<PAGE>



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 recently 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 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 in the first six months of 2000,
approximately 19% and 8%, respectively, of our Web site traffic originated from
AltaVista, America Online, Excite@Home, Lycos, Microsoft HomeAdvisor,
Quicken.com 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.


                                                                            25


<PAGE>


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 and Robert L. Stevens. 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 of 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.


                                                                            26


<PAGE>


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 Exodus
Communications in Santa Clara, 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 Exodus 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 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.


                                                                            27


<PAGE>


SUBSTANTIAL SALES OF OUR COMMON STOCK BY OUR STOCKHOLDERS COULD DEPRESS OUR
STOCK PRICE.

         If our stockholders sell substantial amounts of our common stock in the
public market, the market price of our common stock would likely fall.
Substantially all of our stockholders who purchased shares of our stock prior to
March 15, 2000, are subject to agreements with the underwriters of our initial
public offering that restrict their ability to transfer their stock for 180 days
from March 15, 2000 without the prior written consent of Credit Suisse First
Boston Corporation. However, Credit Suisse First Boston Corporation may, in its
sole discretion, release all or any portion of the common stock form the
restrictions of these agreements.

RISKS RELATED TO OUR INDUSTRY

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 THE HOME IMPROVEMENT INDUSTRY DECLINES, OUR REVENUES COULD DECLINE AND OUR
BUSINESS COULD BE HARMED.

         Our business is dependent on the economic strength of the home
improvement industry. The home improvement industry is cyclical, with the number
of home improvement projects affected by national and global economic forces,
primarily fluctuations in interest rates and employment levels. We believe that
our future performance will be affected by the cyclical nature of the home
improvement industry and, as a result, be adversely affected from time to time
by industry downturns.

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.


                                                                            28


<PAGE>


         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 user's 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.


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<PAGE>


ITEM 3.       QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

         Our exposure to market risk for changes in interest rates relates
primarily to increases or decreases in the amount of interest income we can 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.
The risk associated with fluctuating interest expense is limited, however, to
those debt instruments and credit facilities that are tied to market rates. We
had no debt instruments outstanding as of June 30, 2000. We do not plan to use
derivative financial instruments in our investment portfolio. We plan to ensure
the safety and preservation of our invested principal funds by limiting default
risk, market risk and reinvestment risk. We plan to mitigate default risk by
investing in high-credit quality securities.


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<PAGE>


PART II.  OTHER INFORMATION

ITEM 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS

     On March 15, 2000, the Company commenced the initial public offering of
2,760,000 shares of its 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 raised by the Company in the
offering, (i) $3.1 million was paid to underwriters in connection with the
underwriting discount, and (ii) approximately $2.0 million was paid by the
Company in connection with offering expenses, printing fees, filing fees,
legal fees and accounting fees.

     The Company expects to use the proceeds of the offering for operating
activities, including approximately $20 million to expand our sales and
branding programs and to expand our field support organization, approximately
$3.5 million for capital expenditures and the balance for other general
corporate purposes, including general and administrative operations and
potential acquisitions. As of June 30, 2000, the Company has utilized
approximately $19.0 million of proceeds of the offering for operating
activities, capital expenditures, as well as for other general corporate
purposes.

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K



(a)      Exhibits

         27.1     Financial Data Schedule

(b)      No reports on Form 8-K were filed with the Securities and Exchange
         Commission during the three months ended June 30, 2000.


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<PAGE>


SIGNATURES

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







                                       IMPROVENET, INC.
                                       (Registrant)




                                       By: /s/  RICHARD G. REECE
                                       ---------------------------------------
                                       Richard G. Reece
                                       Senior Vice President and Chief Financial
                                       Officer (Principal accounting and
                                       financial officer)



Date:    August 11, 2000


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