----

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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington,D.C. 20549**

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**Form 10-Q**

**(MarkOne)**
| **x**  | **Quarterly Report  Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|--------|----------------------------------------------------------------------------------------------|
|   | **for the quarterly  period ended June 30, 2001.**                                           |

**Or**
| **o**  | **Transition Report  Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|--------|-----------------------------------------------------------------------------------------------|
|   | **for the Transition  Period from ___________ to _________.**                                 |

**COMMISSION FILE NUMBER 000-29927**

**IMPROVENET, INC.**(Exact name of registrant as specified inits charter)
| **Delaware**                                                         | **77-0452868**                           |
|----------------------------------------------------------------------|------------------------------------------|
| ****                                                            | ****                                |
|  (State or other jurisdiction  ofincorporation or organization) | (I.R.S. Employer  Identification Number) |

**1286 Oddstad Drive, Redwood City, CA 94063**(Address of principal executive offices)

**(650) 701-8000**(Registrant's telephone number, includingarea code)

Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.

YES  x   NO  o

The number of shares outstanding of theregistrant's common stock, $.001 par value, was 17,788,869 as of July 31, 2001

----

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**ImproveNet, Inc.**

**Form 10-Q**

**For the Quarter Ended June 30, 2001**

**Index**
| PART  I  FINANCIAL INFORMATION |                                                                                                        |
|-------------------------------------|-------------------------------------------------------------------------------------------------------------|
|                                |                                                                                                        |
| Item 1                              | Financial  Statements:                                                                                      |   |
|                                |                                                                                                        |   |
|                                | Condensed  Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000                            |   |
|                                |                                                                                                        |   |
|                                | Condensed  Consolidated Statements of Operations for the three and six months ended June  30, 2001 and 2000 |   |
|                                |                                                                                                        |   |
|                                | Condensed  Consolidated Statements of Cash Flows for the six months ended June 30, 2001  and 2000           |   |
|                                |                                                                                                        |   |
|                                | Notes  to Condensed Consolidated Financial Statements                                                       |   |
|                                |                                                                                                        |   |
| Item  2                             | Management's  Discussion and Analysis of Financial Condition and Results of Operations                      |   |
|                                |                                                                                                        |   |
| Item  3                             | Quantitative  and Qualitative Disclosures About Market Risk                                                 |   |
|                                |                                                                                                        |   |
| PART II  OTHER INFORMATION     |                                                                                                        |
|                                |                                                                                                        |
| Item 1                              | Legal Proceedings                                                                                           |   |
|                                |                                                                                                        |   |
| Item  2                             | Changes  in Securities and Use of Proceeds                                                                  |   |
|                                |                                                                                                        |   |
| Item 3                              | Defaults upon  Senior Securities                                                                            |   |
|                                |                                                                                                        |   |
| Item  4                             | Submission  of Matters to a Vote of Security Holders                                                        |   |
|                                |                                                                                                        |   |
| Item 5                              | Other Information                                                                                           |   |
|                                |                                                                                                        |   |
| Item 6                              | Exhibits and  Reports on Form 8-K                                                                           |   |
|                                |                                                                                                        |   |
| SIGNATURES                          |                                                                                                        |   |

 

 

PART I - FINANCIAL INFORMATION

ITEM1 . FINANCIAL STATEMENTS

**IMPROVENET, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(In thousands, except per shareamounts)**

|                                             | **JUNE 30,**                                                             |   | **DECEMBER 31,** |       |
|--------------------------------------------------|--------------------------------------------------------------------------|--------|------------------|------------|
|                                             | **2001**                                                                 |   | **2000**         | ** ** |
|                                             | ****                                                                |   | ****        |       |
|                                             | **(UNAUDITED)**                                                          |   |             |       |
|                                             |                                                                     |   |             |       |
|                                             |                                                                     |   |             |       |
|                                             |                                                                     |   |             |       |
| **Assets**                                       |                                                                     |   |             |       |
|                                             |                                                                     |   |             |       |
| Current  assets:                                 |                                                                     |   |             |       |
|                                             |                                                                     |   |             |       |
|                                             | Cash  and cash equivalents                                               | $      | 16,954           |       | $ | 31,565 |   |
|                                             |                                                                     |   |             |       |
|                                             | Accounts  receivable net                                                 | 2,557  |             | 2,309      |   |
|                                             |                                                                     |   |             |       |
|                                             | Prepaid  expenses                                                        | 1,051  |             | 2,289      |   |
|                                             |                                                                     |   |             |       |
|                                             |                                                                     |   |             |       |
|                                             |                                                                     |   |             |       |
|                                             |                                                                     |   |             |       |
|                                             | Total  current assets                                                    | 20,562 |             | 36,163     |   |
|                                             |                                                                     |   |             |       |
|                                             | Property  and equipment, net                                             | 2,997  |             | 4,261      |   |
|                                             |                                                                     |   |             |       |
|                                             | Other  assets                                                            | 1,333  |             | 1,292      |   |
|                                             |                                                                     |   |             |       |
|                                             |                                                                     |   |             |       |
|                                             |                                                                     |   |             |       |
|                                             |                                                                     |   |             |       |
|                                             | Total  assets                                                            | $      | 24,892           |       | $ | 41,716 |   |
|                                             |                                                                     |   |             |       |
|                                             |                                                                     |   |             |       |
|                                             |                                                                     |   |             |       |
| **Liabilities &  Stockholders' Equity**      |                                                                     |   |             |       |
|                                             |                                                                     |   |             |       |
| Current  liabilities:                            |                                                                     |   |             |       |
|                                             |                                                                     |   |             |       |
|                                             | Accounts  payable                                                        | $      | 1,776            |       | $ | 2,796 |   |
|                                             |                                                                     |   |             |       |
|                                             | Accrued  liabilities                                                     | 3,011  |             | 3,970      |   |
|                                             |                                                                     |   |             |       |
|                                             | Accrual  for restructuring                                               | 825    |             | -          |   |
|                                             |                                                                     |   |             |       |
|                                             | Deferred  revenue                                                        | 219    |             | 249        |   |
|                                             |                                                                     |   |             |       |
|                                             |                                                                     |   |             |       |
|                                             | Total  current liabilities                                               | 5,831  |             | 7,015      |   |
|                                             |                                                                     |   |             |       |
|                                             | Long-term  liabilities                                                   | 116    |             | 99         |   |
|                                             |                                                                     |   |             |       |
|                                             |                                                                     |   |             |       |
|                                             |                                                                     |   |             |       |
|                                             |                                                                     |   |             |       |
|                                             | Total  liabilities                                                       | 5,947  |             | 7,114      |   |
|                                             |                                                                     |   |             |       |
|                                             |                                                                     |   |             |       |
| Stockholders'  equity                            |                                                                     |   |             |       |
|                                             |                                                                     |   |             |       |
| Common  stock, $0.001 par value:                 |                                                                     |   |             |       |
|                                             |                                                                     |   |             |       |
|                                             | Authorized:  100,000 shares                                              |   |             |       |   |
|                                             |                                                                     |   |             |       |
|                                             | Issued  and outstanding: 17,789 shares in 2001 and 18,016 shares in 2000 | 18     |        | 18         |      |
|                                             |                                                                     |   |             |       |
| Treasury  stock 139 shares in 2001, none in 2000 | (56                                                                      | )      | -                |       |
|                                             |                                                                     |   |             |       |
| Additional  paid-in capital                      | 145,692                                                                  |   | 146,334          |       |
|                                             |                                                                     |   |             |       |
| Unearned  stock-based compensation               | (8,504                                                                   | )      | (11,999          | )          |
|                                             |                                                                     |   |             |       |
| Accumulated  deficit                             | (118,205                                                                 | )      | (99,751          | )          |
|                                             |                                                                     |   |             |       |
|                                             |                                                                     |   |             |       |
|                                             | Total  stockholders' equity                                              | 18,945 |             | 34,602     |   |
|                                             |                                                                     |   |             |       |
|                                             |                                                                     |   |             |       |
|                                             | Total  liabilities and stockholders' equity                              | $      | 24,892           |       | $ | 41,716 |   |
|                                             |                                                                     |   |             |       |
|                                             |                                                                     |   |             |       |
|                                                  |                                                                          |        |                  |            |  |  |  |  |

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

 

 

**IMPROVENET, INC.**

**CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(In thousands, except per sharedata)**

 

|                                                                              | **THREE MONTHS ENDED  JUNE 30,**                                                                                       |   | **SIX MONTHS ENDED  JUNE 30,** |   |
|-----------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                              |                                                                                                                   |   |
|                                                                              |                                                                                                                   |   |
|                                                                              |                                                                                                                   |   |                           |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              | **2001**                                                                                                               |   | **2000**                       |   | **2001** |   | **2000** | ** ** |
|                                                                              | ****                                                                                                              |   | ****                      |   | ****  |   | ****  |   |
|                                                                              | **(UNAUDITED)**                                                                                                        |   | **(UNAUDITED)**                |   | **(UNAUDITED)** |   | **(UNAUDITED)** |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
| Revenues                                                                          |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              | Service  revenues                                                                                                      | $      | 1,827                          |   | $ | 1,273 |   | $ | 2,965 |   | $ | 2,055 |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              | Marketing  revenues                                                                                                    | 372    |                           | 746    |   | 845 |   | 1,256 |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              | Total  revenues                                                                                                        | 2,199  |                           | 2,019  |   | 3,810 |   | 3,311 |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
| Cost  of revenues                                                                 |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              | Cost  of service revenues (excludes stock-based compensation of $86 and $211 in  2001 and $113 and $357 in 2000)       | 1,111  |                           | 1,309  |   | 2,388 |   | 2,316 |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              | Cost  of marketing revenues (excludes stock-based compensation of $32 and $83 in  2001 and $69 and $157 in 2000)       | 90     |                           | 128    |   | 226 |   | 175 |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              | Total  cost of revenues                                                                                                | 1,201  |                           | 1,437  |   | 2,614 |   | 2,491 |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
| Gross  profit                                                                     | 998                                                                                                                    |   | 582                            |   | 1,196 |   | 820 |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
| Operating  expenses:                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              | Sales  & marketing (excludes stock-based compensation of $1,053 and $2,143 in  2001 and $1,286 and $3,158 in 2000) | 4,514  |                           | 12,496 |   | 10,895 |   | 22,960 |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |
|                                                                              | Product  development (excludes stock-based compensation of $0 and $0 in 2001 and $(96)  and $(5) in 2000)              | 939    |                           | 1,904  |   | 1,996 |   | 3,144 |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |
|                                                                              | General  & administrative (excludes stock-based compensation of $28 and $171 in  2001 and $378 and $839 in 2000)   | 1,060  |                           | 2,788  |   | 2,626 |   | 4,372 |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              | Stock-based  compensation                                                                                              | 1,199  |                           | 1,750  |   | 2,608 |   | 4,461 |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              | Restructuring  Charge                                                                                                  | 181    |                           | -      |   | 2,173 |   | - |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              | Total  operating expenses                                                                                              | 7,893  |                           | 18,938 |   | 20,298 |   | 34,937 |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
| Operating  loss                                                                   | (6,895                                                                                                                 | )      | (18,356                        | )      | (19,102 | ) | (34,117 | ) |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
| Interest  income                                                                  | 231                                                                                                                    |   | 830                            |   | 647 |   | 1,225 |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
| Net  loss                                                                         | $                                                                                                                      | (6,664 | )                              | $      | (17,526 | ) | $ | (18,455 | ) | $ | (32,892 | ) |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
| Basic  & diluted net loss per share                                           | $                                                                                                                      | (0.38  | )                              | $      | (1.08 | ) | $ | (1.05 | ) | $ | (3.17 | ) |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
| Weighted  average shares used in calculating basic and diluted net loss per share |                                                                                                                   |   |                           |   |   |   |   |   |
| 17,585                                                                            |                                                                                                                   | 16,284 |                           | 17,613 |   | 10,388 |   |
|                                                                              |                                                                                                                   |   |                           |   |   |   |   |   |
|                                                                                   |                                                                                                                        |        |                                |        |  |  |  |  |  |  |  |  |  |  |  |

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

 

**IMPROVENET, INC.**

**CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(In thousands)**

|                                                     | **SIX MONTHS ENDED  JUNE 30,**                         |    |
|----------------------------------------------------------|--------------------------------------------------------|---------|
|                                                     |                                                   |
|                                                     | ** **                                             |
|                                                     | ****                                              |    |
|                                                     |                                                   |    |   |   |
|                                                     | **2001**                                               |    | **2000** | ** ** |
|                                                     | ****                                              |    | ****  |   |
|                                                     | **(UNAUDITED)**                                        |    | **(UNAUDITED)** |   |
|                                                     |                                                   |    |   |   |
|                                                     |                                                   |    |   |   |
| **Cash flows from operating activities:**                |                                                   |    |   |   |
| Net  loss                                                | $                                                      | (18,455 | ) | $ | (32,892 | ) |
| Adjustments  to reconcile net loss to net cash used in   |                                                   |    |   |   |
|                                                     | operating  activities:                                 |    |   |   |   |
|                                                     | Depreciation  and amortization                         | 756     |   | 610 |   |
|                                                     | Loss  on disposal of property                          | 5       |   | - |   |
|                                                     | Restructuring  charges net of cash expenditures        |    |   |   |   |
|                                                     | Reduction  in force                                    | 218     |   | - |   |
|                                                     | Facilities  exit costs                                 | 607     |   | - |   |
|                                                     | Asset  write-downs                                     | 770     |   | - |   |
|                                                     | Allowance  for doubtful accounts                       | 132     |   | 244 |   |
|                                                     | Amortization  of stock based compensation              | 2,608   |   | 4,545 |   |
|                                                     | Warrant  charges amortized                             | 169     |   | 84 |   |
|                                                     |                                                   |    |   |   |   |
|                                                     | Notes  receivable from related party                   | (60     | ) | - |   |
| Net  change in operating assets and liabilities:         |                                                   |    |   |   |
|                                                     | Accounts  receivable                                   | (381    | ) | (1,596 | ) |
|                                                     | Prepaid  expenses                                      | 1,238   |   | (1,913 | ) |
|                                                     | Other  assets                                          | 2       |   | 238 |   |
|                                                     | Accounts  payable and accrued liabilities              | (1,979  | ) | 3,537 |   |
|                                                     | Deferred  revenue                                      | (30     | ) | 168 |   |
|                                                     | Other  long-term liabilities                           | 17      |   | (50 | ) |
|                                                     |                                                   |    |   |   |
|                                                     |                                                   |    |   |   |
|                                                     |                                                   |    |   |   |
|                                                     | Net  cash used in operating activities                 | (14,383 | ) | (27,025 | ) |
|                                                     |                                                   |    |   |   |
|                                                     |                                                   |    |   |   |
| **Cash flows from investing activities:**                |                                                   |    |   |   |
|                                                     | Purchase  of property and equipment                    | (187    | ) | (2,313 | ) |
|                                                     | Restricted  cash                                       | (61     | ) | (3 | ) |
|                                                     | Issuance  of note receivable to related party          | -       |   | (1,000 | ) |
|                                                     |                                                   |    |   |   |
|                                                     |                                                   |    |   |   |
|                                                     | Net  cash used in investing activities                 | (248    | ) | (3,316 | ) |
|                                                     |                                                   |    |   |   |
|                                                     |                                                   |    |   |   |
|                                                     |                                                   |    |   |   |
|                                                     |                                                   |    |   |   |
| **Cash flows from financing activities:**                |                                                   |    |   |   |
|                                                     | Proceeds  from issuance of common stock, net of        |    |   |   |   |
|                                                     | offering  costs                                        | -       |   | 39,075 |   |
|                                                     | Proceeds  from exercise of stock options/warrants/ESPP | 76      |   | 344 |   |
|                                                     | Payment  for treasury stock purchase                   | (56     | ) | - |   |
|                                                     |                                                        |    |  |   |
|                                                     | Net  cash provided by financing activities             | 20      |   | 39,419 |   |
|                                                     |                                                        |    |  |   |
|                                                     |                                                   |    |   |   |
|                                                     |                                                   |    |   |   |
| **Net (decrease) increase in cash and cash equivalents** | (14,611                                                | )       | 9,078 |   |
|                                                     |                                                   |    |   |   |
|                                                     |                                                   |    |   |   |
| **Cash and cash equivalents, beginning of period**       | 31,565                                                 |    | 45,291 |   |
|                                                     |                                                   |    |   |   |
|                                                     |                                                   |    |   |   |
|                                                     |                                                   |    |   |   |
| **Cash and cash equivalents, end of period**             | $                                                      | 16,954  |   | $ | 54,369 |   |
|                                                     |                                                   |    |   |   |
|                                                          |                                                        |         |  |  |  |  |  |  |  |

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

**IMPROVENET,INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**1.  Formation and Business of the Company**

             ***Nature of the business***

             ImproveNet,Inc. ("ImproveNet" or the "Company") (formerlyNetelligence, Inc.) was incorporated in California in January 1996 andreincorporated in Delaware in September 1998. The Company is a source for homeimprovement information and services on the Internet. Through itsImproveNet.com and ImproveNetPro.com Web sites, matching services and targetedadvertising, the Company is creating a national marketplace for homeimprovement products and services in which homeowners, service providers andsuppliers of home improvement products and related services benefit from anorganized and efficient online flow of information and communication. TheCompany generates quality job leads for architects, designers and contractors,or service providers, from interested homeowners within their geographic areausing its proprietary matching service. The Company's online features arecomplemented by personal assistance from a professional staff of personal projectadvisors and regional and area managers who offer support throughout each phaseof the home improvement process.

             ***Basis of Presentation***

             Theaccompanying interim condensed consolidated financial statements as of June 30,2001 and for the three and six months ended June 30, 2001 and 2000 areunaudited. The unaudited interim condensed consolidated financial statementshave been prepared on the same basis as the annual condensed consolidatedfinancial statements and, in the opinion of management, reflect alladjustments, which are of a normal recurring nature, necessary to presentfairly the Company's financial position as of June 30, 2001, results ofoperations for the three and six months ended June 30, 2001 and 2000, and cashflows for the six months ended June 30, 2001 and 2000. The Company's resultsfor an interim period are not necessarily indicative of the results that may beexpected for the year.

             Althoughthe Company believes that all adjustments necessary for a fair presentation ofthe interim periods presented are included and that the disclosures areadequate, these condensed consolidated financial statements and notes theretoare unaudited and should be read in conjunction with the audited condensedconsolidated financial statements and notes thereto for the year ended December31, 2000 included in the Company's Form 10-K filed on April 10, 2001 with theSecurities and Exchange Commission. The balance sheet at December 31, 2000 hasbeen derived from audited financial statements, but does not include alldisclosures required by generally accepted accounting principles in the UnitedStates of America. Such disclosures are contained in the Company’s annualreport on Form 10-K.

             TheCompany has completed several rounds of private equity financing and raised, inits initial public offering, approximately $39.7 million, net of issuance cost,in March 2000. However, the Company has incurred substantial negative cashflows from operations in every fiscal period since inception. For the yearended December 31, 2000, the Company incurred a loss from operations ofapproximately $57.8 million and negative cash flows from operations of $49.3million. As of June 30, 2001 the Company had an accumulated deficit ofapproximately $118.2 million. Management expects operating losses and negative cash flows to continuefor the foreseeable future.

             TheCompany expects that losses will decrease from fiscal year 2000 levels due tonew sales initiatives and operational cost efficiencies, through decreasedmarketing expenditure and reduced headcount levels. Operational cost efficiencyrestructuring has already been initiated - the Company reduced headcount by 7%in July 2000 and further reduced headcount by 25% in March 2001. If workingcapital decreases significantly the Company could further reduce expenses. TheCompany had $17 million of cash and cash equivalents at June 30, 2001. Failureto generate sufficient revenues, raise additional capital or reduce  operational discretionary spending couldhave a material adverse effect on the Company's ability to continue as a goingconcern and to achieve its intended business objectives.

**2.  Net Loss Per Share**

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

             Optionsto purchase approximately 1 million shares (2.2 million at June 30, 2000) andwarrants to purchase approximately 1.3 million shares (1.6 million at June 30,2000) were outstanding as of June 30, 2001.

             Areconciliation of the numerator and denominator used in the calculation of thebasic and diluted net loss per share follows: (in thousands, except per shareamounts):

|                                  | Three Months Ended June 30,               |   | Six Months Ended June 30, |   |
|---------------------------------------|------------------------------------------------|--------|--------------------------------|--------|
|                                  |                                           |   |
|                                  |                                           |   |
|                                  |                                           |   |                           |   |
|                                  | 2001                                           |   | 2000                           |   | 2001 |   | 2000 |   |
|                                  |                                           |   |                           |   |   |   |   |   |
|                                  |                                           |   |                           |   |   |   |   |   |
| Numerator                             |                                           |   |                           |   |   |   |   |   |
|                                  |                                           |   |                           |   |   |   |   |   |
|                                  | Net  loss attributable to stockholders         | $      | (6,664                         | )      | $ | (17,526 | ) | $ | (18,455 | ) | $ | (32,892 | ) |
|                                  |                                           |   |                           |   |   |   |   |   |
|                                  |                                           |   |                           |   |   |   |   |   |
| Denominator                           |                                           |   |                           |   |   |   |   |   |
|                                  | Weighted  average shares                       | 17,912 |                           | 16,725 |   | 18,128 |   | 10,882 |   |
|                                  |                                           |   |                           |   |   |   |   |   |
|                                  | Weighted  average shares subject to repurchase | (327   | )                              | (441   | ) | (515 | ) | (494 | ) |
|                                  |                                           |   |                           |   |   |   |   |   |
|                                  |                                           |   |                           |   |   |   |   |   |
|                                  |                                           |   |                           |   |   |   |   |   |
|                                  | Denominator  for basic and diluted calculation | 17,585 |                           | 16,284 |   | 17,613 |   | 10,388 |   |
|                                  |                                           |   |                           |   |   |   |   |   |
|                                  |                                           |   |                           |   |   |   |   |   |
|                                  |                                           |   |                           |   |   |   |   |   |
| Basic  and diluted net loss per share | $                                              | (0.38  | )                              | $      | (1.08 | ) | $ | (1.05 | ) | $ | (3.17 | ) |
|                                  |                                           |   |                           |   |   |   |   |   |
|                                  |                                           |   |                           |   |   |   |   |   |

 

**3.  Multi-Year Commercial Contracts**

             TheCompany has entered into multi-year commercial marketing contracts, some ofwhich are with related parties. These commercial contracts generally providemarketing services that include a mix of banners and button advertising,SmartLeads and other marketing services, including FIND-A-CONTRACTOR or POWEREDBY IMPROVENET, plus a continuous presence, as defined, on the Company's Websites for a fixed annual fee. These commercial contracts are for periodsranging between 2 and 12 years, including renewal options. These commercialcontracts also include cooperative marketing arrangements under which theCompany is obligated to fund, as defined, co-operative marketing expenditureson television and in the print media, with or on behalf of the commercialparty. 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 toreceive significant marketing benefits including better advertising rates,stronger brand recognition, and access to customer databases, direct mailinserts and marketing resources - all designed to generate more traffic to theCompany’s sites and jobs to its proprietary matching services.

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

             Furthermore,in connection with certain of these multi-year commercial contracts, theCompany also issued warrants to purchase shares of the Company's common stockto the commercial parties. These warrants have been valued by the Company usingthe Black Scholes option pricing model. As the fair value of these warrantsrepresent an additional rebate on the revenue otherwise recorded under thecontracts, the amortization of the warrants is further netted against thisrevenue over the term of the respective commercial contract. To the extent thatthere are insufficient revenues, the remaining amortization of warrantstock-based compensation is expensed and characterized as sales and marketingexpense.

             Asa result, for the three months ended June 30, 2001, the Company did notrecognize revenue of $474,000 which represents $84,000 of warrant stock-basedcompensation amortization and $390,000 for the barter element amounts of thesecommercial contracts. For the three months ended June 30, 2000, the Company didnot recognize revenue of approximately $719,000 which represents $84,000 ofwarrant stock-based compensation amortization and approximately $635,000 forthe barter element amounts of these commercial contracts. Additionally, for thesix months ended June 30, 2001, the Company did not recognize revenue of  $887,000 which represents $169,000 ofwarrant stock-based compensation amortization and approximately $708,000 forthe barter element amounts of these commercial contracts. For the six monthsended June 30, 2000, the Company did not recognize revenue of approximately$1.42 million which represents $168,000 of warrant stock-based compensationamortization and approximately $1.25 million for the barter element amounts ofthese commercial contracts.

**4.  Segment Information**

             TheCompany currently operates in a single business segment as there is only onemeasurement of profitability for its operations.  Through June 30, 2001, foreign operations have not beensignificant in either revenues or investments in long-lived assets.

A summary of the Company’s revenue byservice offerings is as follows (in thousands):

|                                  | Three Months Ended June 30, |   | Six Months Ended June 30, |   |
|---------------------------------------|----------------------------------|--------|--------------------------------|--------|
|                                  |                             |   |
|                                  |                             |   |                           |   |
|                                  | 2001                             |   | 2000                           |   | 2001 |   | 2000 |   |
|                                  |                             |   |                           |   |   |   |   |   |
|                                  |                             |   |                           |   |   |   |   |   |
|                                  |                             |   |                           |   |   |   |   |   |
|                                  |                             |   |                           |   |   |   |   |   |
| Service  revenues:                    |                             |   |                           |   |   |   |   |   |
|                                  |                             |   |                           |   |   |   |   |   |
|                                  |                             |   |                           |   |   |   |   |   |
|                                  | Lead  fees                       | $      | 348                            |   | $ | 369 |   | $ | 811 |   | $ | 637 |   |
|                                  | Win  fees                        | 1,401  |                           | 866    |   | 1,978 |   | 1,336 |   |
|                                  | Other  fees                      | 78     |                           | 38     |   | 176 |   | 82 |   |
|                                  |                             |   |                           |   |   |   |   |   |
|                                  |                             |   |                           |   |   |   |   |   |
| Total  service revenues               | 1,827                            |   | 1,273                          |   | 2,965 |   | 2,055 |   |
| Marketing  revenue                    | 372                              |   | 746                            |   | 845 |   | 1,256 |   |
|                                  |                             |   |                           |   |   |   |   |   |
|                                  |                             |   |                           |   |   |   |   |   |
| Total  service and marketing revenues | $                                | 2,199  |                           | $      | 2,019 |   | $ | 3,810 |   | $ | 3,311 |   |
|                                  |                             |   |                           |   |   |   |   |   |

 

For the three and six month periods endedJune 30, 2001 and 2000, no customers represented over 10% of service ormarketing revenues.

**5.  Comprehensive Loss**

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

**RecentAccounting Pronouncements**

             In July 2001 the FinancialAccounting Standards Board (FASB) issued SFAS No. 141 "BusinessCombinations" and SFAS No. 142 "Goodwill and Other IntangibleAssets." SFAS No. 141 requires business combinations initiated after June30, 2001 to be accounted for using the purchase method of accounting, andbroadens the criteria for recording intangible assets separate from goodwill.Recorded goodwill and intangibles will be evaluated against this new criteriaand may result in certain intangibles being subsumed into goodwill, oralternatively, amounts initially recorded as goodwill may be separatelyidentified and recognized apart from goodwill. SFAS No. 142 requires the use of a nonamortization approach to accountfor purchased goodwill and certain intangibles. Under a nonamortizationapproach, goodwill and certain intangibles will not be amortized into resultsof operations, but instead would be reviewed for impairment and written downand charged to results of operations only in the periods in which the recordedvalue of goodwill and certain intangibles is more than its fair value. Theprovisions of each statement which apply to goodwill and intangible assetsacquired prior to June 30, 2001 will be adopted by the Company on January 1,2002.   The Company is currently assessingthe impact of FAS 141 and 142 on its financial statements.

**6.  Related Party Transactions**

***Notes Receivable from Officer***

             InMay 1999, the Company entered into an employment related promissory noteagreement with its Chairman and Chief Executive Officer, Ronald B. Cooper,whereby the Company agreed to loan the officer up to $500,000. The full amountwas loaned in August 1999. The note accrues interest at 5.25% per annum and isdue and payable on the earlier of April 1, 2002 or within 90 days after thevoluntary termination of the officer's employment or the termination of theofficer's employment for cause. The note is collateralized by the officer'sshares of stock and options to purchase shares of stock. In April 2000, theCompany loaned its Chairman and Chief Executive Officer $1.0 million accruinginterest at a rate of 6.46% per annum and repayable on the earlier of April 30,2002 or when the borrower is able to collateralize or borrow on margin usinghis Company stock. Both loans are collateralized by the stock owned by theborrower. In accordance with FAS 114 "Accounting by Creditors forImpairment of a Loan", these notes receivable are valued at the marketvalue of the stock held as collateral.

**7.  Restructuring Accrual**

             In March 2001 the Company announceda restructuring plan to reduce costs and improve  productivity which resulted in a restructuring charge in thefirst quarter of 2001 of $1,992,000 and $181,000 in the second quarter.

             Of the total restructuring charge,$629,000 relates to employee termination benefits.  The company terminated approximately 55 employees as at April 1,2001.  At the end of the second quarter$411,000 of the termination benefits had been paid with the remainder relatingto senior personnel who have deferred termination benefits spread over a sixmonth period.  This resulted in aremaining liability of $218,000 at June 30, 2001 which is expected to be fullyutilized in the third quarter.

             The Company has downsized itsfacilities in Northern California in order to increase efficiencies.  The restructuring charge of $774,000 in thefirst quarter and $181,000 in the second quarter relate to exit facility costsand the calculation is based on current market conditions with this amountbeing reviewed by management on a quarterly basis.  After subtracting rental payments made during the quarter of$167,000 the balance at the end of the second quarter is $607,000.

             Under the plan the company took acharge in the first quarter of $770,000, net of salvage value, for thewrite-down of assets included in property, plant and equipment.  These assets primarily included officefurniture and equipment .

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

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

|                  | Balance at December 31, 2000 |   | Charges to Operations in three months ended  March 31, 2001 |   | Charges Utilized in three months ended March  31, 2001 |   | Balance   at March 31, 2001 |   | Charges to Operations in three months ended  June 30, 2001 |   | Charges Utilized in three months ended June  30, 2001 |   | Balance at June 30, 2001 |   |
|-----------------------|------------------------------|--------|-------------------------------------------------------------|--------|--------------------------------------------------------|--------|----------------------------------|--------|------------------------------------------------------------|--------|-------------------------------------------------------|--------|------------------------------------|--------|
|                  |                         |   |                                                        |   |                                                   |   |
|                  |                         |   |                                                        |   |                                                   |   |
|                  |                         |   |                                                        |   |                                                   |   |
|                  |                         |   |                                                        |   |                                                   |   |
| (In  thousands)       |                         |   |                                                        |   |                                                   |   |                             |   |                                                       |   |                                                  |   |                               |   |
|                  |                         |   |                                                        |   |                                                   |   |                             |   |                                                       |   |                                                  |   |                               |   |
|                  |                         |   |                                                        |   |                                                   |   |                             |   |                                                       |   |                                                  |   |                               |   |
| Facilities            | $                            | -      |                                                        | $      | 593                                                    |   | $                                | -      |                                                       | $      | 593                                                   |   | $                                  | 181    |   | $ | 167 |   | $ | 607 |   |
| Workforce  reductions | -                            |   | 629                                                         |   | -                                                      |   | 629                              |   | -                                                          |   | 411                                                   |   | 218                                |   |
| Asset  write-downs    | -                            |   | 770                                                         |   | -                                                      |   | 770                              |   | -                                                          |   | 770                                                   |   | -                                  |   |
|                  |                         |   |                                                        |   |                                                   |   |                             |   |                                                       |   |                                                  |   |                               |   |
|                  |                         |   |                                                        |   |                                                   |   |                             |   |                                                       |   |                                                  |   |                               |   |
| Total                 | $                            | -      |                                                        | $      | 1,992                                                  |   | $                                | -      |                                                       | $      | 1,992                                                 |   | $                                  | 181    |   | $ | 1,348 |   | $ | 825 |   |
|                  |                         |   |                                                        |   |                                                   |   |                             |   |                                                       |   |                                                  |   |                               |   |
|                  |                         |   |                                                        |   |                                                   |   |                             |   |                                                       |   |                                                  |   |                               |   |

 

**ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS****OF OPERATIONS**

             Thefollowing discussion and analysis should be read with our condensedconsolidated financial statements and notes included elsewhere in this Reporton Form 10-Q. The discussion in this Report on Form 10-Q containsforward-looking statements that involve risks and uncertainties, such asstatements of our plans, objectives, expectations and intentions. Thecautionary statements made in this Report on Form 10-Q should be read asapplying to all related forward-looking statements wherever they appear in thisReport on Form 10-Q. Our actual results could differ materially from thosediscussed here. Factors that could cause or contribute to these differencesinclude those discussed in "Business Risks" below as well as thosediscussed elsewhere.

**OVERVIEW**

             Ourbusiness started in January 1996 as a regional contractor matching service, andwe spent most of 1996 and 1997 building our service provider database, developingnew services and technology, recruiting personnel and raising capital. Welaunched our Web site and homeowner/service provider matching service on anational scale in August 1997. In December 1998, we began selling Web siteadvertising, including SmartLeads services, a way for suppliers of homeimprovement products to send targeted messages about their products, includingproduct promotions, to homeowners at the time of purchase, as well as to ournetwork of service providers. In March 1999, we began to hire our new seniormanagement team, including our chief executive officer. In April 1999, weintroduced Powered by ImproveNet, a service that allows third parties to offerthe ImproveNet matching services and content on their Web sites, for nationalsuppliers of home improvement and repair products. We completed the acquisitionof two regional contractor referral companies, Contractor Referral Service, LLCand The J.L. Price Corporation, in September and November 1999, these entitieswere integrated into our operations during the course of calendar year 2000. InNovember 1999, we launched our customized Web site, www. ImproveNetPro.com, forour network of service providers. In March 2000, we completed our IPO.  From January through June 2000 we spentsubstantial amounts primarily on marketing and other marketing relatedactivities, as well as the development and expansion of our service andoperations infrastructure. In July 2000 we had a reduction in force, reducingour staff by approximately 7%. Additionally, in March 2001 we restructured ouroperations, resulting in a staff reduction of 25% and we closed our largestfacility in Redwood City, California. We expect operating expenses to declinefor the entire calendar year 2001 as compared to calendar year 2000.

             Wegenerate substantially all of our revenues from service provider referralservices, marketing packages and advertisements placed on our Web site. Wegenerate service revenues primarily in the form of lead fees and win fees fromour service providers and, to a much lesser extent, other fees for theenrollment of service providers and premium service fees from homeowners. Wegenerate marketing revenues from the sale of banner, button and otheradvertising on our Web sites, and from the sale to suppliers of SmartLeadsgenerated from the traffic of homeowners visiting our Web sites and from thesale of Find-A-Contractor or Powered by ImproveNet products in commercialagreements. Our marketing revenues generally come from suppliers of home improvementproducts.

             Commencingin September 1999, we entered into multi-year commercial contracts, some ofwhich are with related parties. These commercial contracts generally providefor a fixed annual fee, an advertising or branding package that includes a mixof buttons, banners, SmartLeads and other marketing or branding services,including Find-A-Contractor or Powered by ImproveNet, plus a continuouspresence on our Web sites.

**RESULTSOF OPERATIONS**

***REVENUES***

             Ourrevenues increased to approximately $2.2 million for the three months endedJune 30, 2001 from approximately $2 million for the three months ended June 30,2000, an increase of $180,000 or 9%. For the six months ended June 30, 2001,revenues increased to approximately $3.8 million as compared to approximately$3.3 million for the six months ended June 30, 2000, an increase of $499,000 or15%.

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

          Thefollowing table and discussion highlights our revenues for the three and sixmonths ended June 30, 2001 and 2000 (in thousands):

|               | Three Months Ended June 30, |   | Six Months Ended June 30, |   |
|--------------------|----------------------------------|--------|--------------------------------|--------|
|               |                             |   |
|               |                             |   |                           |   |
|               | 2001                             |   | 2000                           |   | % Change |   | 2001 |   | 2000 |   | % Change |   |
|               |                             |   |                           |   |   |   |   |   |   |   |   |   |
| Revenues:          |                             |   |                           |   |   |   |   |   |   |   |   |   |
|               |                             |   |                           |   |   |   |   |   |   |   |   |   |
|               |                             |   |                           |   |   |   |   |   |   |   |   |   |
| Service  revenue   | $                                | 1,827  |                           | $      | 1,273 |   | 44 | % | $ | 2,965 |   | $ | 2,055 |   | 44 | % |
| Marketing  revenue | 372                              |   | 746                            |   | -50 | % | 845 |   | 1,256 |   | -33 | % |
|               |                             |   |                           |   |   |   |   |   |   |   |   |   |
|               |                             |   |                           |   |   |   |   |   |   |   |   |   |
| Total  revenues    | $                                | 2,199  |                           | $      | 2,019 |   | 9 | % | $ | 3,810 |   | $ | 3,311 |   | 15 | % |
|               |                             |   |                           |   |   |   |   |   |   |   |   |   |
|               |                             |   |                           |   |   |   |   |   |   |   |   |   |

*** ***

***Service Revenues***

             Servicerevenues increased to approximately $1.8 million for the three months endedJune 30, 2001 from approximately $1.3 million for the three months ended June30, 2000, an increase of $554,000 or 44%. For the six months ended June 30,2001, revenues increased to approximately $3 million as compared toapproximately $2.1 million for the six months ended June 30, 2000, an increaseof $910,000 or 44%.

             ThroughMarch 21, 2001, we charged our service providers a win fee of 2% to 10% of theestimated cost of a job, up to a maximum of $995 per job.  Since March 22, 2001, we have charged 1% to10% of the estimated cost of a job, without a maximum win fee per job. EffectiveMarch 22, 2001, we also reduced lead fees by 20% to $8 from $10 a lead forall.  Other fees include an enrollmentfee of $90 that we charge each new service provider who passes our qualityscreens to join our national network. Prior to 2001, we often discounted or waived the enrollment fee.

             Leadfee revenues are recognized at the time the service providers and the homeownerare first matched, while win fee revenues are recognized at the time theservice provider or the homeowner notifies us that a job has been sold. Forboth lead fees and win fees, the recognition of revenues coincides with theservice providers' obligation to pay us. Revenues from new service providerenrollment fees are recognized as revenue ratably over the expected period theyparticipate in our contractor matching service, which is initially estimated tobe one year. Revenues from premium service fees to homeowners are recognized atthe time the service is provided. The following table details the components ofservice revenues, based on a percentage of service revenues:

|                   | Three Months Ended June 30, |   | Six Months Ended June 30, |   |
|------------------------|----------------------------------|--------|--------------------------------|--------|
|                   |                             |   |
|                   |                             |   |                           |   |
|                   | 2001                             |   | 2000                           |   | 2001 |   | 2000 |   |
|                   |                             |   |                           |   |   |   |   |   |
|                   | %                                |   | %                              |   | % |   | % |   |
|                   |                             |   |                           |   |   |   |   |   |
|                   |                             |   |                           |   |   |   |   |   |
| Lead  Fees             | 19                               |   | 29                             |   | 27 |   | 31 |   |
| Win  Fees              | 77                               |   | 68                             |   | 67 |   | 65 |   |
| Other  Fees            | 4                                |   | 3                              |   | 6 |   | 4 |   |
|                   |                             |   |                           |   |   |   |   |   |
|                   |                             |   |                           |   |   |   |   |   |
|                   |                             |   |                           |   |   |   |   |   |
| Total  Service Revenue | 100                              |   | 100                            |   | 100 |   | 100 |   |
|                   |                             |   |                           |   |   |   |   |   |

          Therevenues we generate from lead and win fees are largely a function of:

•            thenumber of job submissions;•            the effectiveness in findinga service provider or match for each job submission;•            the success of the serviceprovider to win a job; and•            the amount we charge theservice provider for a lead or a win.

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

** **

|                                    | Three Months Ended June 30, |   | Six Months Ended June 30, |   |
|-----------------------------------------|----------------------------------|--------|--------------------------------|--------|
| Key  Metrics                            |                             |   |
|                                    |                             |   |                           |   |
|                                    | 2001                             |   | 2000                           |   | 2001 |   | 2000 |   |
|                                    |                             |   |                           |   |   |   |   |   |
|                                    |                             |   |                           |   |   |   |   |   |
| Job  submissions                        | 31.3                             |   | 35.0                           |   | 69.9 |   | 65.0 |   |
| Matched  jobs                           | 20.5                             |   | 27.0                           |   | 45.7 |   | 45.0 |   |
| Won  jobs                               | 3.2                              |   | 3.0                            |   | 6.0 |   | 5.2 |   |
|                                    |                             |   |                           |   |   |   |   |   |
| Matched  jobs as a % of job submissions | 65.4                             | %      | 77.0                           | %      | 65.3 | % | 70.0 | % |
|                                    |                             |   |                           |   |   |   |   |   |
| Won  jobs as a % of job submissions     | 10.3                             |   | 10.0                           | %      | 8.6 | % | 8.0 | % |
|                                    |                             |   |                           |   |   |   |   |   |

 

 

***Marketing Revenues***

             Marketingrevenues decreased to $372,000 for the three months ended June 30, 2001 from$746,000 for the three months ended June 30, 2000, a decrease of $374,000 or50%. For the six months ended June 30, 2001, revenues decreased to $845,000 ascompared to $1.3 million for the six months ended June 30, 2000, a decrease of$411,000 or 33%.

             Wegenerate marketing revenues from the sale of banner, button and otheradvertising on our Web sites, and from the sale to suppliers of SmartLeadsgenerated from the traffic of homeowners visiting our Web sites and from thesale of Find-A-Contractor or Powered by ImproveNet products in commercialagreement products and services. In the 2ndquarter of 2001, we launched our Pro Partners contract and marketing program,in which we provide sales and marketing services to our network of serviceproviders for which we are paid a fee based upon their purchases. Our marketingrevenues generally come from suppliers of home improvement products.

             Weanticipate that advertising revenues will remain flat or decline during 2001 asinternet advertising spending slows and advertisers demand better monetaryterms for the same number of impressions or more impressions for the samedollar amounts. We anticipate that revenues from the Pro Partners contract andmarketing program will provide significant additional revenue during theremainder of 2001.

## ***Cash Advertising***

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

             SmartLeadsare also paid for in cash and revenues are recognized when the SmartLeads havebeen delivered to the customer. Cash advertising is recognized when we havedelivered the advertising, evidence of an agreement is in place and fees arefixed, determinable and collectible. Cash advertising decreased to $42,000 forthe three months ended June 30, 2001 from $212,000 for the three months endedJune 30, 2000, a decrease of $170,000 or 81%. For the six months ended June 30,2001, cash advertising decreased to $90,000 as compared to $417,000 for the sixmonths ended June 30, 2000, a decrease of $327,000 or 79%. This decline isreflective of the slowdown in internet advertising spending.

***Barter Advertising***

             Barteradvertising comes from multi-year commercial contracts. Barter advertising isrecognized in accordance with EITF No. 99-17, "Accounting for AdvertisingBarter Transactions", which we adopted in 1999. Under EITF No. 99-17, werecord advertising transactions at fair value only when we have an establishedhistorical practice of selling similar advertising for cash. Thecharacteristics of the advertising that must be similar include the duration ofthe display of the advertising, the prominence and positioning of theadvertising, the intended audience, the timing of the advertising and itscirculation.

             Forthe three months ended June 30, 2001, we did not recognize revenue of $474,000which represents $84,000 of warrant stock-based compensation amortization, and$390,000 for the barter element amounts of these commercial contracts. For thethree months ended June 30, 2000, the Company did not recognize revenue ofapproximately $719,000 which represents $84,000 of warrant stock-basedcompensation amortization, and $635,000 for the barter element amounts of thesecommercial contracts. Additionally, for the six months ended June 30, 2001, theCompany did not recognize revenue of $877,000 which represents $169,000 of warrant stock-based compensationamortization and approximately $708,000 for the barter element amounts of thesecommercial contracts. For the six months ended June 30, 2000, the Company didnot recognize revenue of approximately $1.42 million which represents $168,000of warrant stock-based compensation amortization and approximately $1.25million for the barter element amounts of these commercial contracts.

***Multi-year Commercial Contracts***

             CommencingSeptember 1999, we entered into multi-year commercial contracts, some of whichare with related parties. These commercial contracts generally provide for afixed annual fee, an advertising or branding package that includes a mix ofbuttons, banners, SmartLeads and other marketing or branding services,including Find-A-Contractor or Powered by ImproveNet, plus a continuouspresence, on our Web sites. These commercial contracts are for periods rangingbetween 2 and 12 years, including renewal options. These commercial contractsalso include cooperative marketing arrangements under which we are obligated tofund co-operative branding expenditures on television and in the print media,with or on behalf of the commercial party. Most commercial contracts providefor us to spend 50% to 100% of the fees that we expect to receive. In return,we expect to receive significant marketing and branding benefits includingbetter advertising rates, stronger brand recognition, and access to customerdatabases, direct mail inserts and marketing resources - all designed togenerate more traffic to sites and jobs to proprietary matching services.

          Wedo not have an established historical practice of selling advertising for cashfor similar multi-year commercial contracts, we have not assigned any value tothe exchange of services or barter element of these transactions andaccordingly, we have not recorded either revenue or sales and branding expensefor the barter element. However, some of these multi-year commercial contractsdo generate an overall net cash component, and in these cases we have recordedrevenue based on the cash received or receivable under the contract, net of theobligation, if any, to reimburse the commercial party for the cooperativebranding and other marketing services. These revenues are recognized over theterm of the commercial contract once advertising and other services have beendelivered to the commercial party and collection of the resulting netreceivable is deemed probable. Revenue from multi-year commercial contracts,net of warrant charges, totaled $324,000 for the three months ended June 30,2001, and $449,000 for the three months ended June 30, 2000. For six monthsended June 30, 2001 and 2000, revenue from multi-year commercial contracts, netof warrant charges, totaled $749,000 and for the six months ended June 30, 2000revenue totaled $670,000.

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

             Totalrevenues may be analyzed as follows (in thousands):

|                      | Three Months Ended June 30,                                                          |   | Six Months Ended June 30, |   |
|---------------------------|-------------------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                      |                                                                                      |   |
|                      |                                                                                      |   |                           |   |
|                      | 2001                                                                                      |   | 2000                           |   | 2001 |   | 2000 |   |
|                      |                                                                                      |   |                           |   |   |   |   |   |
|                      |                                                                                      |   |                           |   |   |   |   |   |
| Service  revenues         | $                                                                                         | 1,827  |                           | $      | 1,273 |   | $ | 2,965 |   | $ | 2,055 |   |
|                      |                                                                                      |   |                           |   |   |   |   |   |
|                      |                                                                                      |   |                           |   |   |   |   |   |
| Marketing  revenues       | 846                                                                                       |   | 1,465                          |   | 1,722 |   | 2,675 |   |
|                      |                                                                                      |   |                           |   |   |   |   |   |
|                      |                                                                                      |   |                           |   |   |   |   |   |
| Less:                     | Amounts  invoiced and accrued under multi-year commercial contracts with related  parties | (390   | )                              | (635   | ) | (708 | ) | (1251 | ) |
|                      |                                                                                      |   |                           |   |   |   |   |   |
|                      |                                                                                      |   |                           |   |   |   |   |   |
| Less:                     | Amortization  of warrant stock-based compensation                                         | (84    | )                              | (84    | ) | (169 | ) | (168 | ) |
|                      |                                                                                      |   |                           |   |   |   |   |   |
|                      |                                                                                      |   |                           |   |   |   |   |   |
| Total  marketing revenues | 372                                                                                       |   | 746                            |   | 845 |   | 1,256 |   |
|                      |                                                                                      |   |                           |   |   |   |   |   |
|                      |                                                                                      |   |                           |   |   |   |   |   |
| Total  revenues           | $                                                                                         | 2,199  |                           | $      | 2,019 |   | $ | 3,810 |   | $ | 3,311 |   |
|                      |                                                                                      |   |                           |   |   |   |   |   |
|                      |                                                                                      |   |                           |   |   |   |   |   |

 

**OPERATINGEXPENSES**

***Cost of Revenues***

             Ourtotal cost of revenues decreased to approximately $1.2 million for the threemonths ended June 30, 2001 from approximately $1.4 million for the three monthsended June 30, 2000, a decrease of $236,000 or 16%. For the six months endedJune 30, 2001, cost of revenues increased to approximately $2.61 million ascompared to approximately $2.49 million for the six months ended June 30, 2000,an increase of $123,000 or 5%.

             Ourcost of service revenues decreased to approximately $1.1 million for the threemonths ended June 30, 2001 from approximately $1.3 million for the three monthsended June 30, 2000, a decrease of $198,000 or 15%. For the six months endedJune 30, 2001, cost of service revenues increased to approximately $2.4 millionas compared to approximately $2.3 million for the six months ended June 30,2000, an increase of $72,000 or 3%.

             Ourcost of marketing revenues decreased to $90,000 for the three months ended June30, 2001 from $128,000 for the three months ended June 30, 2000, a decrease of$38,000 or 30%. For the six months ended June 30, 2001, cost of marketingrevenues increased to $226,000 as compared to $175,000 for the six months endedJune 30, 2000, an increase of $51,000 or 29%.

             Totalcost of revenues consists of payroll and related costs and occupancy,telecommunications and other administrative costs for our project servicesgroup, which is responsible for all phases of our proprietary matching servicesand includes our project advisors. In addition, cost of revenues includes anallocation of direct Web site operations costs, consisting of payroll andrelated costs, data transmission costs and equipment depreciation. The decreasein the cost of revenues is a result of the restructuring in the first quarterof 2001, which reduced payroll and related costs, facilities and related costs,as well as the leveraging of our infrastructure against increased revenues. Weanticipate that our cost of revenues will remain constant or decline during theremainder of 2001, as compared to year 2000 as we plan to leverage our existinginfrastructure.

***Sales and Marketing***

             Oursales and marketing expense decreased to $4.5 million for the three monthsended June 30, 2001 from $12.5 million for the three months ended June 30,2000, a decrease of $8.0 million or 64%. For the six months ended June 30,2001, sales and marketing expense decreased to $10.9 million as compared to$23.0 million for the six months ended June 30, 2000, a decrease of $12.1million or 53%.

             Oursales and marketing expense includes all of our online and offline directmarketing and advertising, public relations and trade show expenses. Sales andmarketing expenses also include payroll and related costs, travel costs andother general expenses of our marketing, professional services and partnershipservices departments.

             Thedecrease in sales and marketing expenses was primarily attributable to:

|   | · | Renegotiating  or transitioning new or existing agreements from a high fixed cost formula to  a variable performance - based formula keyed to won jobs. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | · | Reduced  online and offline brand advertising spending                                                                                                  |
|   | · | Reduced  staffing-related expenses as a result of our restructuring during the first  quarter.                                                          |

             Wefully anticipate that these expenses will decline during 2001, as compared toyear 2000 as we plan to leverage our existing infrastructure and to continuethe process of negotiating or transitioning agreements from a high fixed costformula to a variable performance-based formula keyed to won jobs.

***Product Development***

             Ourproduct development expenses decreased to $939,000 for the three months endedJune 30, 2001 from $1.9 million for the three months ended June 30, 2000, adecrease of $965,000 or 51%. For the six months ended June 30, 2001, productdevelopment expenses decreased to $2 million as compared to $3.1 million forthe six months ended June 30, 2000, a decrease of $1.1 million or 37%.

             Ourproduct development costs include the payroll and related costs of oureditorial and technology staff, fees for contract content providers, othercosts of Web site design and new technologies required to enhance theperformance of our Web sites.

             Thedecrease in product development expenses were primarily attributable todecreased payroll and related costs and decreased usage of contract contentproviders. A major portion of product development costs for the first half of2000 was attributable to a major new product and service that has beenterminated. We expect a decline in our product development expenses during2001, as compared to year 2000 due to the termination of the previouslymentioned new product and service initiative and completion of most of ourmajor development efforts.

 

***General and Administrative***

             Ourgeneral and administrative expenses decreased to $1.1 million for the threemonths ended June 30, 2001 from $2.8 million for the three months ended June30, 2000, a decrease of $1.7 million or 62%. For the six months ended June 30,2001, general and administrative expenses decreased to $2.6 million as comparedto $4.4 million for the six months ended June 30, 2000, a decrease of $1.7million or 40%. The decrease in general and administrative expense is a resultof restructuring in the first quarter of 2001.

             Ourgeneral and administrative expenses include payroll and related costs andtravel, recruiting, professional and advisory services and other generalexpenses for our executive, finance and human resource departments.

***Restructuring costs***

             The Company announced a majorrestructuring to improve operating efficiencies and support new revenue growthinitiatives to drive profitability in March 2001 and as such the charge for$629,000 of reduction in workforce costs, $593,000 of facility costs and  $770,000 related to asset write-downs wasincurred in the first quarter.

             The company restructuring includesthe creation of a new inside sales organization that will provide ongoingsupport for Improvenet's contractor network. The inside sales team will workalongside of ImproveNet's Personal Project Advisors at ImproveNet's supportcenters in Ft. Lauderdale, Fla., and Camarillo, Calif., where the Advisorsassist homeowners who submit jobs through ImproveNet's more than 370 partnersand affiliates.

             During the second quarter $578,000of costs were charged against the restructuring accrual of which $411,000related to employee termination costs and the remainder to exit facilitiescosts.

             An additional $181,000restructuring charge was incurred in the quarter which related to facility exitcosts in Northern California.  Due tothe current volatility of the office leasing industry management are reviewingthese costs on a quarterly basis.

***Stock-based Compensation***

             Ourstock-based compensation expenses decreased to $1.2 million for the three monthsended June 30, 2001 from $1.8 million for the three months ended June 30, 2000,a decrease of $551,000 or 31%. For the six months ended June 30, 2001, stockbased compensation expenses decreased to $2.6 million as compared to $4.5million for the six months ended June 30, 2000, a decrease of $1.9 million or42%.

             Inconnection with certain employee and non-employee stock option grants during1998 and 1999, we recorded unearned stock-based compensation totaling $13.8million, which is being amortized over the vesting periods of the relatedoptions, generally four years using the method set out in FASB InterpretationNo. 28 ("FIN 28"). Under the FIN 28 method, each vested tranche ofoptions is accounted for as a separate option grant awarded for past services.Accordingly, the compensation expense is recognized over the period duringwhich the services have been provided. This method results in highercompensation expense in the earlier vesting periods of the related options.Stock based compensation charges associated with employees who terminate theiremployment with us and have unvested options are reversed.

***Interest Income***

             Ourinterest income decreased  to $231,000for the three months ended June 30, 2001 from $830,000 for the three monthsended June 30, 2000, a decrease of $599,000 or 72%. For the six months endedJune 30, 2001, interest income decreased to $647,000 as compared to $1.2million for the six months ended June 30, 2000, a decrease of $578,000 or 47%.

             Thedecrease in interest income is attributable to a decrease in our averageinvested cash balances. We expect a decline in our interest income during theremainder of 2001 due to the expected decline in our cash and cash equivalentsbalances during the year 2001.

***Income Taxes***

             Wehave recorded a 100% valuation allowance against our net deferred tax assets,which arose primarily as a result of our aggregate operating losses. Thevaluation allowance will remain at this level until such time as we believethat 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 ourreported losses.

***LIQUIDITY AND CAPITAL RESOURCES***

             Cashand cash equivalents totaled $17.0 million at June 30, 2001 a decrease of $14.6million or 47% from $31.6 million at December 31, 2000. Most of the decreaseprimarily came from the $14.4 million cash used in operating activities whichlargely reflected our net loss for the period.

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

             Netcash in operating activities was $14.4 million in the six months ended June 30,2001, a decrease of $12.6 million from $27 million for the six months endedJune 30, 2000, primarily due to decrease in our net loss after adding backnoncash stock-based compensation and other charges and an overall decrease inaccounts receivable and prepaid expenses partially offset by a decrease inaccounts payable and accrued liabilities.

             Aresult of our restructuring in late 2000 and the first Quarter or 2001, was asignificant decrease in the payroll expense and associated cash paid incomparison to the first six months of 2000 as a result of the decrease inaverage headcount in the period from 276 in 2000 to 228 in 2001.  In addition in the second quarter of 2001additional resources have been focused on cash collections procedures in orderto improve the company's working capital management.

             Netcash used in investing activities was $248,000, a decrease of $3.1 million from$3.3 million in the periods ended June 30, 2001 and 2000 due to the focus ofthe business in restructuring operations in 2001, and necessary decreases incapital expenditures. Net cash used in investing activities was a result ofpurchase of property and equipment related to upgrading the leased facilitiesat our Oddstad Drive location in Redwood City.

             Netcash provided by financing activities has decreased by $39.4 million from $39.4million to $20,000 in the periods ended June 30, 2000 and 2001 due to theissuance of common stock in the period ended March 31, 2000.

             Ourcapital requirements depend on numerous factors, including the success of ourstrategies for generating revenues and the amount of resources we devote tooperating activities, including sales, marketing and brand promotion andinvestments in our technology. Our expenditures have substantially increasedsince inception as our operations and staff have grown. Based on therealignment of our resources, we expect a decrease in most of our operatingexpenses categories detailed above for 2001 as compared to 2000. Additionally,we expect our capital expenditures for 2001 to decrease significantly. We doexpect to experience ongoing operating losses for the foreseeable future. Wecurrently anticipate that our operating expenses, primarily sales and marketingexpenditures, and payroll and related costs will constitute a significant useof our current cash resources.

             Ourlimited operating history and operating losses have limited our ability toobtain vendor credit or extended payment terms and bank financing on favorableterms; accordingly, we depend on our cash and cash equivalent balances to fundour operations.

             Wecurrently believe that our available cash resources will be sufficient to meetour anticipated needs for operations and capital expenditures.  We will strive to make ongoing realignments,as required, to achieve positive cash flow with our existing cash resources. Werestructured our operations and we have reduced our headcount during the yearended December 31, 2000 and also in the quarter ended March 31, 2001, as wellas subsequent to the quarter end. We are additionally decreasing our marketingexpenditures to assist us in maintaining our available cash resources. We mayneed to raise additional funds, however, in order to fund more rapid expansion,to develop new or enhance existing services, to respond to competitivepressures or to acquire complementary businesses, services or technologies. Ifwe raise additional funds by selling equity securities, the percentageownership of our stockholders will be reduced. We cannot be sure thatadditional financing will be available on terms favorable to us, or at all. Ifadequate funds are not available on acceptable terms, our ability to fundexpansion, react to competitive pressures, or take advantage of unanticipatedopportunities would be substantially limited. If this occurred, our businesswould be significantly harmed. We will continue to evaluate our needs for fundsbased on our assessment of access to public or private capital markets and thetiming of our need for funds. Although we have no present intention to conductadditional public equity offerings, we may seek to raise these additional fundsthrough private or public debt or equity financings.

**RISKFACTORS THAY MAY AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION**

             Thisdocument contains certain forward-looking statements. These statements relateto future events or our future financial performance. In some cases, you canidentify 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 terminologywhich are intended to identify certain of these forward-looking statements. Thecautionary statements made in this document should be read as being applicableto all related forward-looking statements wherever they appear in thisdocument. The Company's actual results could differ materially from thosediscussed in this document. Factors that could cause or contribute to suchdifferences include those discussed below, as well as those discussed in theCompany's Annual Report on Form 10-K.

**We havelarge accumulated losses, we expect future losses, and we may not achieve ormaintain profitability.**

             Wehave incurred substantial losses and used substantial cash to support ouroperations as we have expanded our sales and marketing programs, funded thedevelopment of our services, promoted our Web sites and matching service andexpanded our operations infrastructure. As of June 30, 2001, our accumulatedloss was approximately $118.2 million. We expect our expenditures on sales andmarketing activities, support field services and the development of newproducts, services and technologies to continue at a reduced rate, as werestructured our business in March 2001. We will continue to lose money unlesswe significantly increase our revenues. We cannot predict when, if ever, wewill operate profitably.

**We arean early stage company and we have recently restructured our business to offernew services. As a result, we have a limited history, which makes it difficultto evaluate our business.**

             Wewere incorporated in January 1996; however, we did not begin offering homeimprovement services on the Internet until August 1997. In December 1998, webegan selling Web site advertising. Until March 1999, we focused primarily onbuilding our network of service providers and refining our matching servicesprocesses. In March 1999, we hired our Chief Executive Officer and commencedrecruiting our senior management. In April 1999, we introduced Powered byImproveNet, a service that allows third parties to offer the ImproveNetmatching services and content on their Web sites, for national suppliers ofhome improvement and repair products. In November 1999, we launched ourcustomized Web site for service providers. We completed the acquisition of tworegional contractor referral companies, Contractor Referral Service, LLC andThe J.L. Price Corporation, in September and November 1999. We experiencedreductions in force in July 2000. In the second half of 2000 we significantlyreduced our marketing expenditures. On April 1, 2001, we implemented arestructuring that included a reduction in force of approximately 60 people. Asa result, we have a limited history upon which you can evaluate our businessand the performance of our senior management team. Furthermore, even if ourbusiness is successful, we may change our business to enter into new businessareas, including areas in which we do not have extensive experience.

**Becausewe are no longer listed on the Nasdaq National Market, the liquidity of ourcommon stock may be seriously limited.**

             OnJune 29, 2001, we received a Nasdaq Qualification Panel Decision indicatingthat we have failed to comply with the minimum bid price requirement forcontinued listing, and were delisted from the Nasdaq National Market. Our stockis currently being traded on the NASDAQ over-the-counter bulletin board,however, we believe that our liquidity will be significantly lower than when itwas on the NASDAQ National Market.

**Failureto raise additional capital or generate the significant capital necessary toexpand our operations and invest in new products and services could reduce ourability to compete and result in lower revenues.**

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

• develop or enhance our services;

• develop or acquire new technologies,products or businesses;

• expand operations in the United Statesor internationally;

• hire, train and retain employees; or

• respond to competitive pressures orunanticipated capital requirements.

             Ourfailure to do any of these things could result in lower revenues and could harmour business or cause us to discontinue operations.

             Inaddition, we may seek to raise additional funds, finance acquisitions ordevelop commercial relationships by issuing equity or convertible debtsecurities, which would reduce the percentage ownership of existingstockholders. Furthermore, any new securities could have rights, preferences orprivileges senior to those of our common stock.

**Ourfinancial results will be affected by seasonality and cyclical fluctuations inthe home improvement industry.**

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

**Ourmarket is competitive and we may suffer price reductions, be unable to attracthomeowners to our Web site, be unable to maintain our service provider networkor enter into new multi-year commercial contracts if we do not competeeffectively.**

             Themarket for our services is intensely competitive, evolving and subject to rapidtechnological change. To remain competitive, we must continue to enhance andimprove the ease of use, responsiveness, functionality and features of ouronline and offline services in order to attract homeowners to our Web site andmaintain our service provider network. We expect the intensity of competitionto increase in the future. Increased competition may result in changes in ourpricing model, fewer homeowners visiting our Web site, service providersleaving our network, less marketing revenue, reduced gross margins and loss ofmarket share, any one of which could significantly reduce our futureprofitability. In addition, technological barriers to entry are relatively low.As a result, current competitors, including local referral businesses andonline referral companies including ServiceMagic.com, OurHouse.com, BidExpress, and Remodel.com, a part of the Homestore.com family of sites andpotential competitors such as The Home Depot and Lowe's have launched Web sitessimilar to ours that could gain broader market acceptance based on content,products and services.

             Someof our competitors have more resources and broader and deeper customer accessthan we do. In addition, many of these competitors have or can readily obtainextensive knowledge of the home improvement industry. Our competitors may beable to respond more quickly than we can to new technologies or changes inInternet user preferences and devote greater resources than we can to thedevelopment, promotion and sale of their services. We may not be able tomaintain our competitive position against current and future competitors,especially those with significantly greater resources and brand recognition.

**Homeownersand service providers may be reluctant to accept an Internet-based serviceprovider matching service.**

             Currentlymost homeowners use traditional means including word-of-mouth referrals, YellowPages and local contractor matching services to obtain service providers fortheir home improvement projects. In addition, many service providers do not usethe Internet for business purposes and may be reluctant to become part of anetwork of service providers on an Internet-based service provider matchingservice. If homeowners do not use our matching service or service providers donot join our network, we will not be able to generate significant revenues fromeither services or branding, or be able to enter into new multi-year commercialcontracts.

**If wedo not attract and retain a network of high quality service providers, ourbusiness could be harmed.**

             Weexpect to derive the majority of our revenues from our network of serviceproviders in the form of payments for each homeowner referral that we provideto them and for each home improvement project that they win. Our business ishighly dependent on homeowners' use of our Web site to find service providersfor their home improvement projects so that service providers will achieve asatisfactory return on their participation in the ImproveNet program.

             Akey element of the growth of our business is the pace at which serviceproviders adopt the ImproveNet matching process. This adoption includesresponding to homeowner inquiries on a timely basis, providing a competitive,firm quote to homeowners quickly, and paying the service fees to ImproveNet. Wedevote significant effort and resources to screening and supportingparticipating service providers and to developing programs that monitor serviceproviders' job wins and that collect service fees from service providers forthese wins. Our inability to screen and support service providers effectively,or the failure of our service providers to respond professionally and in atimely manner to homeowner inquiries, could result in low homeownersatisfaction and harm our business. In addition, the failure of our serviceproviders to win home improvement projects, report their wins to us, or pay usservice fees could harm our business.

             Wemust actively recruit new service providers and retain and motivate our currentservice providers to ensure that we continually have adequate coverage. Webelieve that service providers in the home improvement industry suffer from arelatively high failure or turnover rate which makes it difficult for us to retainservice providers. Accordingly, we expect that not all of our service providerswill remain active participants in our network. If we are unable to achieve lowturnover among our network of service providers our business could be harmed.

**Ifhomeowners fail to report, and service providers fail to report and to pay tous win fees, directly or indirectly, our business would be harmed.**

             Ourservice providers are responsible for paying us a win fee for each job thatthey obtain from us. We ask service providers not to pass on the cost of thewin fee to the homeowner. However, we do not currently provide any guarantee tothe homeowner that our service providers have not raised their rates to coverthe win fee nor do we audit or plan to audit our service providers to confirmthat they have not raised their rates. Homeowners may believe that they areindirectly paying us our win fee through the higher rates of service providersand, therefore, choose to select service providers through word-of-mouthreferrals, Yellow Pages, local contractor matching services or other meansrather than using our matching service. If homeowners choose not to use ourservice, we will lose service revenues and visitors to our Web sites and ourbusiness will be harmed.

             Wedepend on our service providers and homeowners to report that they have won ajob and pay us our win fee. We rely on personal relationships with our serviceproviders and the incentive to receive future leads from us to encourageservice providers to report wins and pay win fees. If service providers do notreport wins or pay us win fees, we will lose service revenues and our businesswill be harmed.

**Wedepend on third-party relationships to attract visitors to our Web sites.**

             Wehave entered into multi-year commercial contracts with suppliers of homeimprovement products and services to generate revenues and increase the numberof visitors to our Web sites. Under these contracts, suppliers have placedlinks to our Web site from their Web sites to allow their customers to visitour Web site if the customers are interested in obtaining home improvementinformation or searching for a service provider. We believe that increasing thenumber of visitors to our Web sites will increase the number of jobsubmissions. We cannot assure you that these contracts will lead to increasedvisits to our Web sites or that increased visits to our Web sites will resultin increased job submissions. If we do not maintain our existing multi-yearcommercial contracts on terms as favorable as currently in effect or if we arenot able to establish new contracts on commercially reasonable terms, ourbusiness could be harmed.

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

**Wedepend on third-party relationships to provide software tools andinfrastructure.**

             Weintegrate third-party software into our service offerings on our Web sites. Wewould be harmed if the providers from which we license software ceased todeliver and support reliable products, to enhance their current products, or torespond to emerging industry standards. In addition, third-party software maynot 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 thefeatures available on our Web sites, which could harm our business.

**If wefail to attract and retain qualified personnel, our ability to compete could beharmed.**

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

             Inaddition, we must attract, retain and motivate highly skilled employees. Weface significant competition for individuals with the skills required todevelop, market and support our services. We may not be able to recruit andretain sufficient numbers of highly skilled employees, and as a result ourbusiness could suffer.

**If wefail to adequately protect our proprietary rights, we could lose these rightsand our business could be harmed.**

             Wedepend upon our ability to develop and protect our intellectual propertyrights, including our databases of homeowners and service providers and ourinternally-developed matching criteria and algorithms, to distinguish ourservices from our competitors' services. We rely on a combination of copyright,trademark and trade secret laws, as well as confidentiality agreements andlicensing arrangements, to establish and protect our proprietary rights. Wehave no issued patents. Our databases are protected by trade secret laws andour 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 orservices or to obtain and use information that we regard as proprietary.Accordingly, we may not be able to protect our intellectual property rightsagainst unauthorized third-party copying or use. Furthermore, policing theunauthorized use of our intellectual property is difficult, and expensivelitigation may be necessary in the future to enforce our intellectual propertyrights. The use by others of our proprietary rights could harm our business.

**Ourservices could infringe the intellectual property rights of others causingcostly litigation and the loss of significant rights.**

             Thirdparties could claim that we have infringed their intellectual property rightsby claiming that our matching service infringes their patents, trade secrets orcopyrights. In the ordinary course of business, we have received, and mayreceive in the future, notices from third parties claiming infringement oftheir proprietary rights. In addition, providers of goods and services over theInternet are increasingly subject to claims that they infringe patents thatcover basic elements of electronic commerce. The resolution of any claims couldbe time-consuming, result in costly litigation, delay or prevent us fromoffering our services or require us to enter into royalty or licensingagreements, any of which could harm our business. In the event an infringementclaim against us is successful and we cannot obtain a license on acceptableterms, license a substitute technology or redesign our services, our businesswould be harmed. Furthermore, former employers or our current and futureemployees may assert that our employees have improperly disclosed to us or areusing confidential or proprietary information in our business.

**If weexperience system failures, our reputation would be harmed and users might seekalternative service providers, causing us to lose revenues.**

             Wedepend on the efficient and uninterrupted operation of our computer andcommunications hardware and software systems. Substantially all of our computerhardware for operating our Web sites is currently located at Qwest Communicationsin Sunnyvale, California, with backups located at our facility in Redwood City,California. These systems and operations are vulnerable to damage orinterruption from earthquakes, floods, fires, power loss, telecommunicationfailures and similar events. They are also subject to break-ins, sabotage,intentional acts of vandalism and similar misconduct. We do not have fullyredundant systems, a formal disaster recovery plan or alternative providers ofhosting services, and we do not carry business interruption insurance tocompensate us for losses that could occur. Despite any precautions we may take,the occurrence of a natural disaster or other unanticipated problems either atQwest or at our facility could result in interruptions in our services. Anydamage to or failure of our systems could result in interruptions in ourservice. In addition to placing an increased burden on our engineering staff,any system failure could create user questions and complaints that must beresponded to by our customer support personnel. The system failures of variousthird-party Internet service providers, online service providers and other Website operators could result in interruptions in our service to those users whorequire the services of these third-party providers and operators to access ourWeb sites. These interruptions could reduce our revenues and profits, and ourfuture revenues and profits will be harmed if our users believe that our systemis unreliable. Since we have been keeping logs of our Web sites, ourImproveNet.com Web site has been unintentionally interrupted for periodsranging from two minutes to one hour, the latter prior to February 2000. On oneoccasion, prior to February 2000, some users experienced interruptions in partof our service for a period of 48 hours.

**We relyon a continuous power supply to conduct our business, and California's currentenergy crisis could disrupt our operations and increase our expenses.**

             Californiais in the midst of an energy crisis that could disrupt our operations andincrease our expenses. In the event of acute power shortages, which occur whenpower reserves for the State of California fall below 1.5%, California has onoccasion implemented, and is likely in the future to continue to implement,rolling blackouts throughout the state. If blackouts interrupt the power supplyof our hosting provider, we would be subject to reduced access to our Websites. Additionally, we currently do not have backup generators or alternatesources of power in the event of a blackout, and our current insurance does notprovide coverage for any damages we or our customers may suffer as a result ofany interruption in our power supply or that of our hosting provider. Ifblackouts interrupt our power supply, we would be temporarily unable tocontinue operations at our facilities. This could damage our reputation, harmour ability to retain existing customers and to obtain new customers, and couldresult in lost revenue, any of which could substantially harm our business andresults of operations.

**We mayhave capacity restraints that could limit the growth of or reduce our revenues.**

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

             Weuse internally developed systems for operating our services and processing ourtransactions, including billing and collections processing. We must continuallyimprove these systems in order to accommodate the level of use of our Websites. In addition, if we add new features and functionality to our services,we could be required to develop or license additional technologies. Ourinability to add additional software and hardware or upgrade our technology,transaction processing systems or network infrastructure could causeunanticipated system disruptions, slower response times, degradation in levelsof customer support, impaired quality of the users' experience, delays inaccounts receivable collection or losses of recorded financial information. Ourfailure to provide new features or functionality also could result in theseconsequences. The required hardware may not be readily available or affordableand we may be unable to effectively upgrade and/or expand our systems in atimely manner or to integrate smoothly any newly developed or purchasedtechnologies with our existing systems. These difficulties could harm or limitour ability to expand our business.

**Wecould be held liable for products and services referred by means of our Website.**

             Wecould be subject to claims relating to products and services that we referthrough our Web site. Homeowners may bring claims against us for referringservice providers who may have, among other things, provided them with poorworkmanship or caused bodily injury or damage to property. Our existing insurancecoverage may not cover all potential claims, may not adequately cover all costsincurred in defense of potential claims, may not indemnify us for all liabilitythat may be imposed or may not be renewable in future periods or renewable onterms and conditions satisfactory to us. In addition, claims, with or withoutmerit, would result in diversion of our financial resources and managementresources.

**Wedepend on the increasing use of the Internet. If the use of the Internet doesnot grow, our revenues may not grow and could decline and our business could beharmed.**

             Wedepend on increased acceptance and use of the Internet. In particular, ourmatching service depends upon service providers being willing to use theInternet to find jobs through our service. We believe that service providersgenerally have not traditionally used computers or the Internet to operatetheir businesses. Demand and market acceptance for recently introduced productsand services over the Internet are subject to a high level of uncertainty. As aresult, acceptance and use of the Internet may not develop or a sufficientlybroad base of users may not adopt or continue to use the Internet as a mediumof commerce.

**TheInternet is characterized by rapidly changing technologies, frequent newproduct and service introductions and evolving industry standards.**

             Tosucceed, we will need to adapt effectively to rapidly changing technologies andcontinually improve the performance features and reliability of our services.We could incur substantial costs in modifying our products, services orinfrastructure to adapt to these changes, and we may also lose customers andrevenues if our services fail to adapt to the rapid changes characteristic ofthe Internet.

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

**Futuregovernment regulations and legal uncertainties pertaining to the Internet coulddecrease the demand for our services or increase the cost of doing business.**

             Thereis, and will likely continue to be, an increasing number of laws andregulations pertaining to the Internet. These laws and regulations may relateto liability for information retrieved from or transmitted over the Internet,online content, user privacy, taxes or the quality of services. Any new law orregulation pertaining to the Internet, or the adverse application orinterpretation of existing laws, could decrease the demand for our services orincrease our cost of doing business.

             Weare not certain how our business may be affected by the application of existinglaws governing issues such as property ownership, copyrights, encryption andother intellectual property issues, taxation, libel, obscenity and export orimport matters. The vast majority of these laws was adopted prior to the adventof the Internet. As a result, they do not contemplate or address the uniqueissues created by the Internet and related technologies. Changes in lawsintended to address these issues could create uncertainty for or adverselyaffect companies doing business on the Internet. This could reduce demand forour services or increase the cost of doing business.

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

             Currentcomputing and Internet technology allows us to collect personal informationabout our users. In the past, the Federal Trade Commission has investigatedcompanies that have sold personal information to third parties withoutpermission or in violation of a stated privacy policy. Currently, we collectpersonal information only with the users' consent and under our privacy policy.If we begin collecting or selling personal information without permission or inviolation of our privacy policy, we could face potential liability forcompiling and providing information to third parties.

**Theimposition of additional state and local taxes on Internet-based transactionswould increase our cost of doing business and harm our ability to becomeprofitable.**

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

             UnitedStates federal law limits the ability of the states to impose taxes onInternet-based transactions. Until October 21, 2001, state and local taxes onInternet-based commerce that are discriminatory against Internet access areprohibited, unless the taxes were generally imposed and actually enforcedbefore October 1, 1998. It is possible that this tax moratorium will not berenewed by October 21, 2001 or at all. Failure to renew this legislation wouldallow various states to impose taxes on Internet-based commerce. The impositionof state and local taxes could harm our ability to become profitable.

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

**InterestRate Risk**

             Theprimary objective of ImproveNet's investment activities is to preserveprincipal while at the same time maximizing yields without significantlyincreasing risk. To achieve this objective, we maintain our portfolio of cashand cash equivalents in a variety of securities, including both government andcorporate obligations and money market funds.

             Ourexposure to market risk for changes in interest rates relates primarily toincreases or decreases in the amount of interest income we earn on ourinvestment portfolio and on increases or decreases in the amount of interestexpense we must pay with respect to any outstanding debt instruments. Wemitigate default risk by investing in only high credit quality securities thatwe believe to be low risk and by positioning our portfolio to respondappropriately to a significant reduction in a credit rating of any investmentissuer or guarantor.

             Wedo not hold derivative financial instruments as of June 30, 2001, and havenever held such instruments in the past. In addition, we had no debtinstruments outstanding as of June 30, 2001. We currently transact all of ourrevenues, which are all traded in the United States in U.S. dollars.

**PART II. OTHER INFORMATION**

**Item 1.  LegalProceedings**

             Fromtime to time, we may be involved in litigation relating to claims arising outof our operations. As of the date of this filing, we are not engaged in anymaterial legal proceedings.

**Item 2.  Changes InSecurities and Use of Proceeds**

             OnMarch 15, 2000, we commenced the initial public offering of 2,760,000 shares ofcommon stock, par value $.001 per share, at a price of $16.00 per share in firmcommitment underwritten public offering. The offering was effected pursuant toa Registration Statement on Form S-1 (Registration Nos. 333-92873 and333-32618), which the United States Securities and Exchange Commission declaredeffective on March 15, 2000. Credit Suisse First Boston, Robertson Stephens andE*Offering were the lead underwriters for the offering.

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

             Priorto the public offering, we had cash and cash equivalents of $45.3 million atDecember 31, 1999.  As of June 30, 2000,we had cash and cash equivalents of $54.4 million, inclusive of the proceeds ofthe offering.

             SinceJune 30, 2000, we have used the proceeds of the offering and proceeds fromprior private offerings of approximately $36.6 million for operatingactivities, and approximately $1.7 million for capital expenditures, offset bycash generated from financing activities. As of June 30, 2001, we have cash of approximately $17 million foroperating activities, capital expenditures, as well as for other corporatepurposes.

**Item3.  Defaults Upon Senior Securities**

             None

**Item 4.  Submission ofMatters to a Vote of Security Holders**

             TheCompany's annual meeting of stockholders was held on May 31, 2001 (the"Annual Meeting"). The following matters were considered and votedupon at the Annual Meeting:

| (a) | The  election of three directors, Andrew Anker, Alex Knight and Robert L. Stevens  to hold office until the 2004 annual meeting of stockholders. The votes cast  and withheld for such nominees were as follows: |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|              | Votes  For |   | Votes  Withheld |   |
|-------------------|------------|--------|-----------------|--------|
|              |            |   |                 |   |
| Andrew Anker      | 9,140,098  |   | 20,761          |   |
| Alex Knight       | 9,140,098  |   | 20,761          |   |
| Robert L. Stevens | 9,105,098  |   | 55,761          |   |

 

| (b) | To  ratify the selection of PricewaterhouseCoopers LLP as independent accountants  of the Company for the year ended December 31, 2001. Share voting: |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| For             | 9,122,671 |   |
|-----------------|-----------|--------|
| Against         | 9,000     |   |
| Withheld        | 29,188    |   |
| Broker non-vote | –    |   |

             Basedon these voting results, each of the directors nominated was elected and thesecond matter was approved.

**Item 5.  Other Information**

             Due to regulatory requirementsassociated with being delisted, our repurchase program has been suspended.

**Item6.  Exhibits and Reports on Form 8-K**

(a)         Exhibits

| Exhibit Number |   | Description of  Document                                                     |
|----------------|--------|------------------------------------------------------------------------------|
|           |   |                                                                         |
| 3.2**          |   | Fourth Amended and  Restated Certificate of Incorporation of the Registrant. |
| 3.4**          |   | Amended and Restated  Bylaws of the Registrant.                              |

----

**         Previously Filed(b)        A current report on 8k wasfiled with the commission on July 9, 2001, regarding ImproveNet's delistingfrom the Nasdaq National Market.Signatures
             Pursuantto the requirements of the Securities and Exchange Act of 1934, the Registranthas duly caused this report to be signed, August 14, 2001 on its behalf by theundersigned duly authorized.
 IMPROVENET,  INC. (Registrant)       By:/s/  Ronald Cooper   Ronald  Cooper Chairman,  CEO & President
Date: August 14, 2001