<PAGE>

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

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

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

                                   FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

  For the fiscal year ended December 31, 2000

                                      OR

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

  For the transition period from         to

                         Commission File No. 000-26357

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

                                LOOKSMART, LTD.
            (Exact name of Registrant as specified in its charter)

<TABLE>
<S>                            <C>                            <C>
           Delaware                         7373                        13-3904355
 (State or other jurisdiction   (Primary Standard Industrial         (I.R.S. Employer
     of incorporation or            Identification No.)             Identification No.)
        organization)
</TABLE>

                  625 Second Street, San Francisco, CA 94107
                                (415) 348-7000
  (Address, including zip code, and telephone number, including area code, of
                   Registrant's principal executive offices)


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

          Securities registered pursuant to Section 12(b) of the Act:

                                     None

          Securities registered pursuant to Section 12(g) of the Act:

                    Common Stock, par value $.001 per share

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

   Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]

   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]

   The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of common stock on March 1, 2001,
was approximately $105,646,810.07. Shares of voting stock held by each officer
and director and by each person who owns 5% or more of the outstanding voting
stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes. As of March 1, 2001, 91,717,869 shares of
the registrant's common stock were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

   The information called for by Part III of this Form 10-K is incorporated by
reference to the definitive proxy statement for the annual meeting of
stockholders of the company which will be filed no later than 120 days after
December 31, 2000.

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>

                               TABLE OF CONTENTS

                                     PART I

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
 <C>      <S>                                                             <C>
 ITEM 1.  BUSINESS......................................................    3

 ITEM 2.  PROPERTIES....................................................   23

 ITEM 3.  LEGAL PROCEEDINGS.............................................   23

 ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........   23

                                    PART II

 ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
           STOCKHOLDER MATTERS..........................................   24

 ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA..........................   26

 ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
           AND RESULTS OF OPERATIONS....................................   27

 ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....   38

 ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................   39

 ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL
           DISCLOSURE...................................................   62

                                   PART III

 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............   63

 ITEM 11. EXECUTIVE COMPENSATION........................................   63

 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
           MANAGEMENT...................................................   63

 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................   63

                                    PART IV

 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
           FORM 8-K.....................................................   63
</TABLE>

                                       2
<PAGE>

                                    PART I

   This Annual Report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. Discussions containing forward-looking
statements may be found in the material set forth under "Business,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in other sections of the report. We use words such as
"believes", "intends", "expects", "anticipates", "plans", "may", "will" and
similar expressions to identify forward-looking statements. You should not
place undue reliance on these forward-looking statements. Our actual results
could differ materially from those anticipated in the forward-looking
statements for many reasons, including the risks described below in the
section entitled "Risk Factors" and elsewhere in this report.

ITEM 1. BUSINESS

Overview

   LookSmart is a leading global Internet search infrastructure company.
LookSmart creates highly targeted online marketing products for its customers
by matching the users' need for relevant search results with the online
marketer's need for effective targeting. LookSmart creates a range of
directory listings and search targeted advertising products that are
distributed through its search infrastructure platform through leading
Internet portals, ISPs and media companies. By enabling online marketers to
reach millions of users in a highly targeted search context, LookSmart helps
its customers to maximize the conversion of advertising into sales and thereby
provides its customers with an effective complement to or substitution for
their other online and offline methods of acquiring customers.

   Our domestic network of search partners and affiliates includes:

  .  Internet portals such as Microsoft's MSN, Excite@Home and AltaVista;

  .  media companies such as AOL Time Warner, Sony, Cox Interactive Media and
     MacroMedia/Shockwave;

  .  Internet services providers, or ISPs, such as Juno, Prodigy, Qwest and
     RoadRunner; and

  .  thousands of personal and small business websites.

   BT LookSmart, our joint venture with British Telecommunications, is
primarily responsible for the expansion of our international network of
partners and country-specific search directories in Europe and Asia, except
for China and Australia. We also maintain the www.looksmart.com website,
primarily as a showcase for our search products and as a destination for users
who wish to search directly with LookSmart.

   Our search solutions consist of a robust suite of search products. At the
core of our search solutions are high-quality directories and search-specific
content. Through the use of technology and human editors, we have assembled
what we believe to be one of the largest directories of high-quality, and
search-specific content on the Internet. Our directories have approximately
2.6 million links to, and reviews of, high-quality websites organized into
approximately 250,000 categories. We exclude hate and pornographic web sites
from our directory. Internet users can search our directories by browsing
through categories and subcategories or by searching by keyword.

Industry Background

   The emergence and wide acceptance of the Internet has fundamentally changed
how millions of people and businesses worldwide find information, communicate
and purchase goods and services. We believe that the number of Internet users
worldwide, and the number of unique web pages in existence worldwide, will
continue to increase at a rapid rate. Major factors driving this growth in
Internet usage and content include the increasing familiarity with and
acceptance of the Internet by businesses and consumers, the growing number of
personal computers in homes and offices, the ease, speed and lower cost of
Internet access, the digitization of information and improvements in network
infrastructure. These factors make the Internet accessible to inexperienced
users

                                       3
<PAGE>

as well as the technologically sophisticated. The growth in the number of
Internet users has also led to the emergence of the Internet as a powerful
advertising and commerce medium.

 The Search Challenge

   The massive volume and growth of content on the Internet has created the
need for an organizing layer that can successfully match end users with
content providers. This organizational challenge, which we call the "search
challenge", has led to the development of several Internet services, including
directories and search engines, designed to help users locate information.
These services also seek to enable content providers, including website
owners, Internet communities, advertisers and sellers of goods and services,
to reach their target audiences.

   We believe that most Internet organization efforts to date have failed to
fully meet this challenge. Traditional Internet directories often lack focused
and relevant category structures, have limited content and contain many links
to "dead", outdated or irrelevant websites. Search engines, which use software
to locate websites based on user-entered keywords, often generate large sets
of results but typically cannot determine website quality. Moreover, search
engines often have limited capacity to determine the relevance of websites to
a query, have poor "ranking algorithms" to order results, do not contain
recently published websites and fail to respond to "dynamic" or frequently
changing material. We believe Internet users are demanding smarter search
capabilities and better organized content that will allow them to find highly
specialized and local content.

 The Search Infrastructure Challenge

   We believe that the ability to search is critical to most Internet users'
ability to use the Internet productively and effectively. To provide a
satisfying user experience, many portals, ISPs, media companies and other
website operators have recognized the need to provide sophisticated search
functionality on their websites. We believe that as these companies invest
more heavily in adding content and functionality to their websites, they will
have relatively fewer resources to devote to creating and maintaining relevant
and focused directory and search services. At the same time, the complexity
and resources needed to provide superior directory and search capabilities are
increasing. Specialized expertise is needed to organize the growing amount and
specificity of content available on the Internet. Search technologies are
becoming increasingly sophisticated, because of the need to integrate internal
company data, information from across the company's website properties and
data from external Internet websites into search results. Therefore, the
editorial and technical demands for companies to maintain high-quality
directories and advanced search functionality has grown significantly. As a
result, many large companies, portals and websites are finding it more
effective and efficient to outsource their Internet search and directory
infrastructure.

 The Advertising Challenge

   The rapid emergence of Internet advertising and commerce has created new
challenges for businesses seeking to advertise and sell their products and
services online. As businesses try to attract qualified people to their
websites through online advertising, they need to find a means of both
attracting a large volume of traffic to their websites and targeting their
advertising message according to individual users' interests. However, the
ability to effectively target an advertising message to Internet users
requires specialized capabilities. Therefore, expanding website traffic and
developing targeting capabilities is a key element of the online advertising
challenge.

   In addition, many traditional companies have little understanding of, or
experience in, monetizing their website traffic through advertising. Finding
firms who wish to advertise on a company's website, selling effective
advertising products to them, serving the advertisements and billing the
clients requires an overhead investment that can discourage website owners
from conducting these tasks themselves. Online companies can derive
significant benefits from outsourcing this function to a specialized service
in order to monetize their traffic and maximize their advertising revenues.

                                       4
<PAGE>

The LookSmart Solution

   Our search solutions enable our partners and affiliates to achieve their
objectives of providing a superior user experience and maximizing the revenues
from their website traffic. We have assembled what we believe to be one of the
largest directories of high-quality content on the Internet, organized in a
categorical, easy-to-search directory format. We have also developed and
partnered with technology leaders to develop flexible search capabilities that
can be customized to our partners' specifications. In developing this full set
of search solutions, we believe we are creating a highly scalable asset that
can be distributed to a large number of Internet users through our network of
distribution partners. In the process, we seek to address the challenges faced
by users, content providers, advertisers and vendors.

 Our Search Solution

   We provide web directories that enable users to find useful information
quickly. Our services allow users to choose between browsing the directory
through an intuitive category search path and entering keywords in a search
box.

   Comprehensive Content. Our directories currently contain approximately 2.6
million unique URLs in 250,000 categories. We have developed locally relevant
and culturally sensitive Internet directories for Canada, Australia, Brazil,
Mexico and other countries in the western hemisphere, as well as over 70 local
areas in the United States. We have also developed narrowband directories for
19 countries and wireless directories for 17 countries in Europe and Asia,
which we have licensed to BT LookSmart, our joint venture with British
Telecommunications. BT LookSmart offers these and other directory services for
countries in Europe and Asia, aside from China and Australia.

   High-Quality Content. We focus on including only authoritative, up-to-date,
categorized content in our directories. Our team of approximately 250 editors
includes taxonomists, copy editors, subject specialists, maintenance editors
and generalist editors. Our editors use proprietary and licensed software
products that help them find, categorize, index and rate high-quality
websites. They also review the directory regularly to check whether websites
are active and still relevant. Additionally, they exclude hate and
pornographic websites from our directories.

   Easy-to-Navigate Content. LookSmart's directories are organized to provide
relevant search results for both category-based and keyword search. Our
navigation interface allows a user to follow a search path into sub-categories
and sub-sub-categories visually on the screen, enabling the user to see not
only which path was chosen, but also those which were not. We believe that
this is a critical element in the trial and error process that most users
undertake to find material. Our keyword search brings users directly to
website results. All of our navigation results include a brief review of each
website to help guide users.

 Our Search Infrastructure Solution

   Our ability to categorize and organize highly specific content from the
Internet and to integrate it with internal and company-specific information
allows us to offer a variety of Internet infrastructure solutions to our
business partners. We have developed technology and partnered with technology
providers to offer customized versions of our directory and customized search
algorithms to our affiliates. Our ability to tailor search solutions according
to the specifications of our partners is an important part of the value
proposition of our solutions. We work with our partners to customize our
directories to meet the particular needs of their website strategy and core
audience.

   Our search infrastructure solutions offer three principal benefits to our
partners. First, we provide our partners with customized, private label search
functionality, thereby enabling them to save the resources and expertise that
would be necessary to develop and maintain a comprehensive Internet directory
and search technology. Second, inclusion in our network enables our partners
to gain exposure to a large number of Internet users and advertisers. Third,
we build our search solutions to maximize the generation of revenue for our
partners.

                                       5
<PAGE>

 Our Advertising Solution

   We launched www.looksmart.com, the showcase site for our LookSmart
directory database, in October 1996. We leverage our database by licensing and
distributing our search solutions to leading Internet portals, ISPs, media
companies and other websites, including AltaVista, AOL Time Warner, CNN, Cox
Interactive Media, Excite@Home, InfoSpace, Inktomi, iWon, Juno, Microsoft's
MSN, Netscape Netcenter, Prodigy, Road Runner and Qwest. As a result of our
substantial Internet user base, we are able to offer advertisers the
opportunity to reach Internet users on a broad scale.

   In addition, we offer both traditional, targeted graphical advertising
products and new paid listings products. The listings products allow
advertisers to have their URL links appear as search results on many of
LookSmart's Internet portal and ISP partners' search results. We believe that
our listings products are effective both in terms of user click-through and
conversions to sale, resulting in lower customer acquisition costs for
advertisers.

The LookSmart Directories

   LookSmart has 32 directories for 27 countries around the world, including
those which are licensed to BT LookSmart for distribution in Europe and Asia.
In addition, we have 24 wireless directories for 19 countries around the
world. Through an arrangement with Genie, an affiliate of British
Telecommunications, the wireless directories are offered to British
Telecommunications' wireless customers in Europe and Asia.

   Our editorial teams, located in Amsterdam, Berlin, Copenhagen, London,
Melbourne, Montreal, Paris, Tokyo and San Francisco, use proprietary and
licensed software that enables them to find, review, describe and categorize
websites and to check whether websites are active and available. The systems
we have developed enable our editors to perform five core processes:

 Find the Content

   Our editors use a range of automated search technologies, other websites,
website submissions from website owners/builders, off-line data sources and
other methodologies to find the content our users may require. In October
2000, we completed the acquisition of Zeal Media, Inc., a community-based web
directory provider. Once the integration of Zeal Media's technology and
systems is completed, the acquisition will provide LookSmart with an
additional means of finding relevant content.

 Select the Content

   In finding content, our editors encounter material that is unlikely to be
useful to our users. For example, a user searching through traditional
Internet directories for material on surgery for breast cancer is likely to
come across material related to cosmetic surgery, pornographic material, or
material from sources with limited medical authority. Our editors select and
place content for each of approximately 250,000 categories according to
standards that our taxonomy team maintains. Also, the editors organize the
websites to enable the user to find the most generally useful or authoritative
source first and view the more specialized or marginal sources later.

 Organize the Content

   Our team of full-time taxonomists create and frequently modify our category
taxonomy to ensure that it is logical, current and intuitive.

 Describe the Content

   The end product that users typically seek from a search service is a list
of website links. Our editors facilitate the search process by providing
succinct descriptions of approximately 20 words for every listed website to
assist users in determining which websites contain content most relevant to
their search.


                                       6
<PAGE>

 Maintain the Content

   Our editors regularly review user requests and content availability to add
new categories and new websites for existing categories. We also use a
combination of software and editorial intervention to minimize inactive links
in the database. Websites in each category are reviewed according to a
schedule that is appropriate to the subject matter. For example, we update our
collection of material related to the current news much more frequently than
we update our material on historical subjects.

LookSmart Products and Services

 Listings

   In 2000, listings revenues were $10.3 million, or 9.1%, of our total
revenues. Our listings revenues derive from two products: Express Listings and
Subsite Listings. Express Listings, launched in the first quarter of 2000,
involve a one-time fee paid by owners of websites for the expedited review of
their website and, if the website meets LookSmart's editorial guidelines,
inclusion of the website in the appropriate categories in LookSmart's
directories. As of December 31, 2000, LookSmart's directories included over
22,000 individual listings which were submitted by Express Listings customers.

   Subsite Listings, launched in the third quarter of 2000, involve the
payment by website owners of a one-time review fee and periodic cost-per-click
and maintenance payments for the inclusion of subsites in the appropriate
categories in LookSmart's directories. As of December 31, 2000, LookSmart's
directories included over 24,000 individual listings for subsite customers,
including Amazon.com, CNET's mySimon, DealTime, eBay and VerticalNet.

   Listings revenues also include revenues derived from our affiliate program,
under which we receive payments for the referral of traffic to affiliate
vendors.

 Advertising/Syndication

   In 2000, advertising/syndication revenues were $64.7 million, or 57.4%, of
our total revenues. In connection with providing search functionality to our
partners, we often place, sell and serve the advertising on our partners'
search results pages. In many cases we offer a complete search solution where
we create a unique HTML environment for the client's search feature, host the
service, sell advertising on those pages and share advertising revenue with
the client. We believe that three factors drive advertising business to
LookSmart:

  .  we deliver highly targeted advertising based on the specific content on
     the page;

  .  we create a quality environment with all sites selected by expert web
     editors and exclude all hate and pornography; and

  .  advertisers are attracted to the scale we have achieved through our
     distribution network of search solutions customers.

   Our advertising sales were handled through Softbank Interactive Marketing
until October 1997 and by DoubleClick, Inc. from October 1997 through mid-
1998. In an effort to maintain stronger relationships and loyalties with our
advertisers and to reduce advertising sales costs as a percentage of revenues,
in mid-1998 we created our own sales organization, which now consists of a
national sales team of approximately 41 people located in San Francisco, New
York, Los Angeles and Detroit.

   Some of the businesses that advertised on our website or the websites of
our distribution affiliates recently include: Amazon.com, AutoWeb, BizRate,
DealTime, eBay, Gateway, General Motors, LowestFare, Microsoft, SBC, Staples,
VerticalNet and Wells Fargo.

                                       7
<PAGE>

 Licensing

   In 2000, licensing revenues were $19.6 million, or 17.4%, of our total
revenues. We receive revenue from licensing and customizing our directories
based on the specifications and needs of our customers. Our licensing
customers include Microsoft and Excite@Home. In addition, we have built 27
country-specific databases and established partnerships abroad, such as our
partnership with British Telecommunications to form BT LookSmart, an equally-
owned joint venture which provides search and directory services in Europe and
Asia.

 Ecommerce

   In 2000, ecommerce revenues were $18.1 million, or 16.0%, of our total
revenues. Our "Buy It On The Web" shopping website promotes and sells a range
of consumer products, including the "As Seen on TV" product line promoted by
our partner Guthy-Renker Corporation. In 2000, substantially all of our
ecommerce revenues were derived from sales of Guthy-Renker products. Under our
agreement with Guthy-Renker, our exclusive right to the online sales of Guthy-
Renker products expires in April 2002.

International Operations

   LookSmart seeks to expand its business operations in countries where use of
the Internet as a commercial medium has grown sufficiently to support our
business model. We believe that as the Internet continues to be adopted as a
primary means of communication and commerce, worldwide demand will continue to
grow for web directories. Central to our international efforts is our ability
to tailor our directories for individual markets in order to create a more
locally relevant, culturally sensitive offering. We currently have editorial
teams located in Amsterdam, Berlin, Copenhagen, London, Melbourne, Montreal,
Paris, Tokyo and San Francisco.

   BT LookSmart, our joint venture with British Telecommunications, maintains
local country-specific directories and provides search solutions for selected
countries in Europe and Asia. BT LookSmart provides web directories in a
number of countries across Europe and Asia. In 2000, BT LookSmart's total
revenues were $3.2 million and it had a net loss of $21.9 million.

Network of Distributors and Affiliates

   We have actively pursued relationships with portals, ISPs, media companies
and other websites and regard these relationships as key drivers of growth in
traffic and revenue. These relationships include the following:

 AltaVista

   In July 2000, we entered into a two-year agreement with AltaVista Company,
under which we provide our directory and related services to AltaVista for use
by AltaVista on its portal services.

 BT LookSmart

   In February 2000, LookSmart and British Telecommunications established a
joint venture, BT LookSmart, which offers web directories for selected
countries in Europe and Asia. BT LookSmart offers web and wireless directories
for 18 countries, including the United Kingdom, France, Germany, Japan and
Korea. BT LookSmart intends to expand these existing directories and build new
ones for selected countries in Europe and Asia. The joint venture plans to
offer its services to British Telecommunications' established base of Internet
wireline and wireless customers in Europe and Asia.

 Cox Interactive Media

   We have a strategic alliance with Cox Interactive Media relating to local
websites, local navigation services and local content. Our United States
directory is prominently placed on all 23 of Cox's local city sites, such as

                                       8
<PAGE>

www.accessatlanta.com. Cox Interactive Media, using its own editorial staff,
provides the local content for over 70 city markets for our United States
directory database using a licensed copy of our proprietary Editorial Support
System.

 Excite@Home

   In June 1999, we entered into a three-year licensing agreement with
Excite@Home Corporation under which Excite@Home licensed our directory
databases for use on the www.excite.com website and other properties. Under
the agreement, we update the database periodically.

 Inktomi

   In November 1999, we entered into an agreement with Inktomi Corp. to co-
bundle our search technologies for offerings to portals. In December 2000, we
amended the agreement to provide for the inclusion of the LookSmart directory
in Inktomi's search index and to provide for sharing of revenues derived from
Inktomi's distribution of Subsite Listings.

 Microsoft

   In December 1998, we entered into a five-year licensing agreement with
Microsoft Corporation under which Microsoft licensed our directory database
for use on the www.msn.com website and other properties. The agreement is
terminable by either party at any time on six months' notice. Under the
agreement, we provide Microsoft with custom-tailored Internet directory
content according to Microsoft's requests in six-month increments.

 Netscape

   In June 2000, we renewed our agreement with Netscape Communications
Corporation for one year. Under this agreement, Netscape directs user search
traffic to LookSmart for a fixed cost per thousand referrals.

 Prodigy

   In July 2000, we entered into a three-year agreement with Prodigy
Communications Corporation, which was subsequently acquired by SBC
Communications, Inc. Under this arrangement, Prodigy directs user search
traffic to LookSmart for a fixed cost per thousand impressions.

 Time Warner

   In January 2000, we entered into an agreement with Time Warner, Inc., which
was subsequently acquired by America Online, Inc. Under the agreement, we
syndicate our search service across Time Warner's Internet properties
including www.CNN.com, www.CNNfn.com, CNNSI, www.warnerbros.com (Warner
Bros.), www.Entertaindom.com and www.EW.com (Entertainment Weekly).

Competition

   We compete in markets that are new, intensely competitive, highly
fragmented and rapidly changing. We compete on the basis of several factors,
including the targetability of our advertising, the performance of our
marketing services and the quality of our directory content. In the licensing
and syndication market, there are additional factors such as scalability,
price, and relevance of results. The number of companies and websites
competing for users, Internet advertisers' and ecommerce marketers' spending
has increased significantly. With no substantial barriers to entry in these
markets, we expect this competition to continue to increase. Competition may
also increase as a result of industry consolidation.

                                       9
<PAGE>

   We face direct competition from companies that provide several types of
Internet services, as illustrated in the following table.

<TABLE>
<CAPTION>
          Category                           Focus                    Example Competitors
          --------                           -----                    -------------------
 <C>                         <C>                                   <S>
 Internet content retrieval  Internet search, content              AOL Time Warner, Yahoo!,
                             aggregation and content licensing     Netscape Open Directory,
                                                                   Inktomi, Google, Ask
                                                                   Jeeves, AltaVista, Terra
                                                                   Lycos, NBCi, GoTo.com

 Internet advertising and    Demographically targeted and          Internet advertising
 marketing                   content-targeted advertising          networks like
                                                                   DoubleClick and 24/7
                                                                   Media; Internet
                                                                   navigation firms with
                                                                   similar content
                                                                   targeting capabilities
                                                                   like AOL Time Warner,
                                                                   Yahoo!, and Terra Lycos

 Search solution outsourcing Outsourcers of Internet search        Inktomi, Google,
                             solutions, Internet portal or website Netscape Open Directory,
                             enhancement content                   Ask Jeeves, GoTo.com
</TABLE>

Technology

   One of our principal assets is our internally-developed and licensed
software for creating and distributing the LookSmart directory and search
solutions. In addition, we use a variety of hardware and communications
technologies to distribute and maintain our business.

 Editorial Support System

   We have developed a proprietary software application, the Editorial Support
System, used by our editors to discover, edit, and categorize websites into
the LookSmart database. This system undergoes frequent revision and upgrade
and over 200 editors can use the application simultaneously. In addition to
the Editorial Support System, we have developed several proprietary algorithms
which enable us to extract data from the database, publish this data in
various editions of the directory and perform routine maintenance on the
database, such as dead link checking.

   The Editorial Support System also provides various statistical and
reporting functions, including editorial productivity levels, and identifies
trends in user preferences. The system includes capabilities for some Asian
characters and languages.

 Taxonomy and Search

   We publish our data in a proprietary and unique set of categories in a
specific taxonomy. This taxonomy has approximately 250,000 categories. We have
developed proprietary search technology to search this database and return
relevant answers to users. In addition, by integrating keyword search software
from Fast Search and Transfer into our systems, we can create custom search
solutions for our partners' data and content. Through our partnership with
Inktomi, our partners can create and manage customized directories, utilizing
the breadth, depth and ongoing development of LookSmart's core directories.

 Server Architecture

   We believe we have developed a proprietary, dynamic and scalable server
software architecture that allows us to support our ISP partners by serving
custom versions of the ISP's home page or any other page on the ISP's website
as part of our distribution of directory content. In January 1999, we signed a
license agreement with Engage Technologies to license their Accipiter
advertising server technology. We converted our advertising serving
functionality from an internal proprietary application to the Accipiter
technology effective in March 1999.

                                      10
<PAGE>

 Exodus and Savvis

   In February 1999, we signed an agreement with GlobalCenter, Inc. to provide
co-location, Internet connectivity, and maintenance of our hardware equipment
at GlobalCenter's facilities in Santa Clara, California. GlobalCenter has
since been acquired by Exodus Communications, Inc. Exodus provides
comprehensive facilities management services, including human and technical
monitoring of all production servers, 24 hours per day, seven days per week.
In December 2000, we entered into an agreement with Savvis Communications,
Inc. to house additional networking and web serving hardware.

Marketing

   Marketing activities are important in our efforts to build traffic and
attract additional advertisers, syndication affiliates and ecommerce partners.
We have initiated a multi-tiered marketing strategy to support activities
related to key aspects of our business model. We have identified the following
primary targets for our marketing programs:

  .  the advertising trade, including advertising agency media planners who
     plan and buy online advertising for their clients;

  .  business partners, including leading ISPs, media companies, portals and
     other websites, that use LookSmart on a branded, co-branded or unbranded
     basis to enhance the search experience of their customers; and

  .  Ecommerce websites and online marketers of products and services that
     seek to be reviewed and included in LookSmart's database of URLs in
     order to gain online reach through our partner network.

Employees

   We had approximately 690 employees as of December 31, 2000. However, in
January 2001, we implemented a restructuring plan that resulted in staff
reductions of 172 employees. We have never had a work stoppage, and none of
our United States employees is represented by a labor union. We consider our
relations with our employees to be good.

                                      11
<PAGE>

                                 RISK FACTORS

   You should carefully consider the risks described below before making a
decision to invest in our stock. If any of the following risks actually
occurs, our business, financial condition or results of operations could be
harmed. In that case, the trading price of our common stock could decline, and
you could lose part or all of your investment.

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

   We have incurred net losses since our inception, including net losses of
approximately $12.9 million in 1998, $64.7 million in 1999 and $62.6 million
in 2000. As of December 31, 2000, we had an accumulated deficit of
approximately $150.5 million. We expect to have net losses and negative cash
flow for the foreseeable future. The size of these net losses will depend, in
part, on our ability to grow our revenues, capitalize on new sources of
revenue and contain our expenses. We expect to spend significant amounts to:

  .  maintain and expand our network of distribution partners;

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

  .  continue to develop and expand directories of Internet listings, both in
     the U.S. and abroad;

  .  develop new products and enhance the functionality of our search and
     directory listings services; and

  .  acquire complementary technologies and businesses.

   We recently announced steps to narrow our losses, including management
restructuring and a reduction in staff. Although these steps are intended to
reduce our quarterly operating expenses in the future, we cannot guarantee
that these steps will achieve the expected reduction in operating expenses.
Because our operating expenses are likely to continue to exceed our revenues
in the near term, we will need to generate significant additional revenues to
achieve operating profitability. Even if we do achieve operating
profitability, we may not be able to maintain or increase our operating
profitability on a quarterly or annual basis.

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

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

  .  the level of user traffic on our and our distribution partners' websites
     and our ability to derive revenue from that traffic in any given
     quarter;

  .  the demand for our Internet search services;

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

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

  .  the timing of our entry into and magnitude of new contracts for
     advertising, licensing and syndication;

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

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

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

                                      12
<PAGE>

  .  the timing of our delivery of URLs under our contract with Microsoft. We
     recognize quarterly revenues under this contract based on the number of
     URLs added to our database during the quarter relative to the total
     number of URLs we are required to add to our database during the
     relevant six-month period. As a result, to the extent that we satisfy
     our database update obligations unevenly, the revenues we recognize
     under this contract may be skewed on a quarter-to-quarter basis.

   Our expense levels are based in part on expectations of future revenues
and, to a large extent, are fixed. We may be unable to adjust spending quickly
enough to compensate for any unexpected revenue shortfall. Our operating
results may vary as a result of changes in our expenses and costs.

   Due to the above factors, we believe that period-to-period comparisons of
our operating results are not necessarily meaningful, and you should not rely
on them as indicators of our future performance. If our operating results in
any future period fall below the expectations of securities analysts and
investors, the market price of our securities would likely decline.

We may need additional capital in the future to support our growth and
additional financing may not be available to us

   Although we believe that our working capital will provide adequate
liquidity to fund our operations and meet our other cash requirements until at
least the end of 2001, unanticipated developments in the short term, such as
the entry into agreements which require large cash payments, further
deterioration of the online advertising market or the acquisition of
businesses with negative cash flows, may necessitate additional financing. In
any case, we may seek to raise additional funds through public or private debt
or equity financings in order to:

  .  fund our operations and capital expenditures;

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

  .  develop and upgrade our technology infrastructure;

  .  reduce outstanding debt;

  .  develop new product and service offerings;

  .  take advantage of favorable conditions in capital markets; or

  .  respond to competitive pressures.

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

Our business prospects depend on the continued growth of Internet advertising
and our ability to generate advertising revenues

   For the year ended December 31, 2000, advertising/syndication revenues
accounted for 57.4% of our total revenues, as compared to 45.2% of our total
revenues in the year ended December 31, 1999. We expect that revenues from
advertising/syndication will continue to represent a significant portion of
our total revenues for the foreseeable future. Our advertising/syndication
revenues decreased in the fourth quarter of 2000 and may continue to decrease
due to weakness in the online advertising market, reductions in online
advertising expenditures by Internet companies and downward pressure on
advertising rates industry-wide.

                                      13
<PAGE>

   We compete with traditional media such as television, radio and print, as
well as online advertisers and high-traffic websites, for a share of
advertisers' total advertising expenditures. We have experienced, and may
continue to experience, downward pressure on advertising prices in the
industry due to the increasing amount of advertising inventory becoming
available on the Internet. As the Internet evolves, advertisers may find
Internet advertising to be a less effective means of promoting their products
or services relative to traditional advertising media and may reduce or
eliminate their expenditures on Internet advertising. Many potential
advertisers and advertising agencies have only limited experience advertising
on the Internet and have not devoted a significant portion of their
advertising expenditures to Internet advertising. Acceptance of the Internet
among advertisers will depend, to a large extent, on the perceived
effectiveness of Internet advertising and the continued growth of commercial
usage of the Internet.

   Currently, there are a variety of pricing models for selling advertising on
the Internet, including models based on the number of impressions delivered,
the number of click-throughs by users, the duration over which the
advertisement is displayed or the number of keywords to which the
advertisement is linked. It is difficult to predict which pricing model, if
any, will emerge as the industry standard. This uncertainty makes it difficult
to project our future advertising rates and revenues that we may generate from
advertising. In some cases, we share advertising revenue with our network
partners based on the number of users directed to advertisements or third
party web sites. A decrease in advertising sold or advertising rates or an
increase in revenue sharing obligations could adversely affect our operating
results. In addition, our ability to earn advertising revenues depends on the
number of advertising impressions per search and the number of click-throughs.

   In addition, our advertising revenues will depend on our ability to
achieve, measure and demonstrate to advertisers the breadth of the traffic
base using our search service and the value of our targeted advertising.
Filter software programs that limit or prevent advertising from being
displayed on a user's computer are available. It is unclear whether this type
of software will become widely accepted, but if it does, it would negatively
affect Internet-based advertising.

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

   We derive a significant amount of our revenues under an agreement with
Microsoft Corporation, and either party may terminate the agreement for any
reason on six months' notice. For the year ended December 31, 2000, revenues
from Microsoft under this agreement accounted for $17.2 million or 15% of our
total revenues. The cash payments we receive for each six-month period under
this agreement are subject to full or partial refund if we fail to provide the
stated number of URLs during that period. After the agreement is terminated,
Microsoft has the right to continue to use the content we delivered during the
term of the agreement. Microsoft also has the right to sublicense these rights
to others, both during and for up to two years after the term of the
agreement.

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

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

  .  profitably establish and expand our new product offerings, particularly
     Express Listings and Subsite Listings;

  .  expand and maintain our network of distribution relationships, thereby
     increasing the amount of traffic using our web directory; and

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

                                      14
<PAGE>

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

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

   Our success will depend in part upon the success of BT LookSmart, our joint
venture with British Telecommunications. We face many risks associated with BT
LookSmart, such as:

  .  we will recognize 50% of the net loss from the joint venture as non-
     operating expense on our statement of operations. For the year ended
     December 31, 2000, our share of the joint venture's revenues were $3.2
     million and a net loss of $21.9 million. We expect the venture to incur
     significant losses and require large capital expenditures for the
     foreseeable future. We cannot project when BT LookSmart will generate
     cash for us or become profitable, if at all;

  .  we were initially obligated under the joint venture documents to make
     funding contributions of up to $108 million over the first three years
     of BT LookSmart's operation. While the budget for the joint venture will
     be determined by the joint venture's board of directors, we expect that
     our financial contributions in 2001 will not exceed our financial
     contributions in 2000 of $12.7 million. If we are unable to meet our
     financing obligations, our equity ownership of the joint venture will be
     proportionately reduced;

  .  the joint venture will face competition in international markets from a
     range of competitors, including AOL Time Warner, Deutsche Telecom,
     France Telecom, GoTo, Lycos, Scandinavian Online, Sonera Plaza, Tele
     Denmark, UK Plus, Yahoo!, and other search infrastructure, media,
     telecommunications and portal companies, many of which have greater
     capital resources and local experience in these markets;

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

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

  .  the joint venture may be unable to aggregate a large amount of Internet
     traffic and generate advertising and other revenue streams from that
     traffic;

  .  the joint venture may fail to establish an effective management team and
     hire experienced and qualified personnel in each of the countries in
     which it competes;

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

  .  on November 9, 2000, British Telecommunications announced that it would
     split its business into at least two separate companies. We cannot
     predict what, if any, impact this split will have on the joint venture.

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

   We expect to continue to derive a significant portion of our revenues from
the sale of advertising and listings to Internet companies. Many of these
companies have limited operating histories and are operating at a loss.
Moreover, many of these companies have limited cash reserves and limited
access to additional capital. We have in some cases experienced difficulties
collecting outstanding accounts receivable and, as a result, our reserve for
doubtful accounts receivable as of December 31, 2000 was $4.2 million, an
increase of $3.6 million over December 31, 1999. This increase represents an
increase in the percentage of our total accounts receivable classified as
doubtful accounts compared to the comparable percentage at December 31, 1999.
We may continue

                                      15
<PAGE>

to have these difficulties in the future. If any significant part of our
customer base experiences commercial difficulties or is unable or unwilling to
pay our advertising or listing fees for any reason, our business will suffer.

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

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

We face risks related to expanding into new services and businesses,
particularly our Listings business

   To increase our revenues, we will need to expand into new service and
business areas. In this regard, we have expanded our business to include
Express Listing and Subsite Listing services. Our success will depend upon the
extent to which businesses choose to use our Express Listing and Subsite
Listing products. These products are in early stages and we cannot predict
whether they will meet projected levels of revenues in future quarters. Also,
these products will require both modification of existing software and systems
and the creation or acquisition of new software and systems. We may lack the
managerial, editorial and technical resources necessary to expand our service
offerings. For these and other reasons, these initiatives may not generate
sufficient revenues to offset their costs. If we are unable to generate
significant additional revenues from our new business areas, they may harm our
results of operations and financial condition.

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

   If we are presented with appropriate opportunities, we intend to make
additional acquisitions of, or significant investments in, complementary
companies or technologies to increase our technological capabilities and
expand our service offerings. Acquisitions may divert the attention of
management from the day-to-day operations of LookSmart. In addition,
integration of acquired companies into LookSmart could be expensive, time
consuming and strain our managerial resources. It may be difficult to retain
key management and technical personnel of the acquired company during the
transition period following an acquisition. We may not be successful in
integrating any acquired businesses or technologies and these transactions may
not achieve anticipated business benefits.

   Acquisitions or other strategic transactions may also result in dilution to
our existing stockholders if we issue additional equity securities and may
increase our debt. For example, as a result of our acquisition of Zeal Media,
Inc. on October 27, 2000, we issued or reserved for issuance 1,363,419 shares
of our common stock, which diluted existing stockholders. We may also be
required to amortize significant amounts of goodwill or other intangible
assets in connection with future acquisitions, which would adversely affect
our operating results.

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

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

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


                                      16
<PAGE>

  .  quarterly fluctuations in our operating results;

  .  our potential failure to meet analyst expectations on a quarterly basis;

  .  changes in ratings or financial estimates by securities analysts;

  .  announcements of technological innovations, partnerships, acquisitions
     or new products or services by us or our competitors; or

  .  conditions or trends in the Internet that suggest a continuing decline
     in the growth rates of advertising-based Internet companies.

   In the past, securities class action litigation has often been instituted
after periods of volatility in the market price of a company's securities. A
securities class action suit against us could result in substantial costs and
the diversion of management's attention and resources, regardless of the
outcome.

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

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

  .  substantial increases in editorial activity or the number of URLs in our
     directory;

  .  customization of our directory for syndication with particular partners;

  .  substantially increased traffic using our directory; and

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

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

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

   Any system failure, including network, software or hardware failure,
whether caused by us, a third party service provider, unauthorized intruders
and hackers, or natural disasters, that causes an interruption in our service
or a decrease in the responsiveness of the web pages that we serve could
result in reduced user traffic, a decline in revenues and damage to our
reputation. Our users, partners and customers depend on Internet service
providers, or ISPs, online service providers and other third parties for
access to the LookSmart directories. These service providers have experienced
significant outages in the past and could experience outages, delays and other
operating difficulties in the future.

   In February 1999, we entered into an agreement with GlobalCenter, Inc. (now
Exodus Communications, Inc.) to house our networking and web serving hardware
equipment at their facilities in Sunnyvale, California. In December 2000, we
entered into an agreement with Savvis Communications, Inc. to house additional
networking and web serving hardware. Our networking hardware is now fully
redundant at separate locations. However, we do not presently maintain fully
redundant web serving systems at both locations, so our operations depend on
each of Exodus' and Savvis's ability to protect the systems in its data center
from system failures, earthquake, fire, power loss, water damage,
telecommunications failure, hackers, vandalism and similar events. Neither
Exodus nor Savvis guarantees that our Internet access will be uninterrupted,
error-free or secure. We have deployed intrusion detection and firewall
hardware at each facility to thwart hacker attacks. We have not

                                      17
<PAGE>

developed a disaster recovery plan to respond to system failures. Although we
maintain property insurance and business interruption insurance, we cannot
guarantee that our insurance will be adequate to compensate us for all losses
that may occur as a result of any system failure.

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

   We compete in the Internet search infrastructure market, which is
relatively new and highly competitive. We expect competition to intensify as
this market evolves. Many of our competitors have longer operating histories,
larger user bases, longer relationships with consumers, greater brand
recognition and significantly greater financial, technical and marketing
resources than we do. As a result of their greater resources, our competitors
may be in a position to respond more quickly to new or emerging technologies
and changes in consumer requirements and to develop and promote their products
and services more effectively than we do.

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

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

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

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

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

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

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

Recent acquisitions and strategic alliances involving our competitors could
reduce traffic on our network

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

  .  America OnLine's acquisitions of Netscape Communications Corporation and
     AOL Time Warner, Inc. and strategic partnership with GoTo.com, Inc.;

  .  Primedia, Inc.'s acquisition of About.com, Inc.;

  .  Terra Networks, S.A.'s acquisition of Lycos, Inc.;

  .  InfoSpace's acquisition of Go2Net;

  .  The Walt Disney Company's (Go Network) acquisition of a significant
     stake in Infoseek Corporation and recently announced agreement with
     GoTo.com, Inc. regarding the use of GoTo's search results on the Go
     Network portal;

                                      18
<PAGE>

  .  CMGI's acquisition of an interest in AltaVista;

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

  .  Yahoo, Inc.'s acquisition of Geocities and strategic partnership with
     Google;

  .  Inktomi's acquisition of Ultraseek from the Go Network;

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

  .  Ask Jeeves' acquisition of Direct Hit Corporation.

   Although we cannot predict the effect of these transactions and agreements
on our business with certainty, these transactions could provide our
competitors with significant opportunities to increase traffic on their
websites and expand their service offerings, which could drive down traffic
for our network. In addition, these transactions align some of our competitors
with companies, including television networks, that are significantly larger
and have substantially greater capital, brand, marketing and technical
resources than LookSmart. As a result, these competitors may be able to
respond more quickly to new technologies and changes in consumer requirements
and to develop and promote their products and services more effectively than
we can.

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

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

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

  .  less-developed Internet advertising markets in foreign markets, which
     may make it more difficult to generate revenue from the traffic on our
     international directories;

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

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

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

  .  our potential inability to aggregate a large amount of Internet traffic
     and find and develop relationships with advertisers;

  .  difficulties in recruiting qualified and knowledgeable staff and in
     building locally relevant products and services;

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

  .  foreign currency fluctuations.

                                      19
<PAGE>

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

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

   Our workforce has grown from 55 employees on January 1, 1998 to
approximately 690 employees worldwide on December 31, 2000. However, in
January 2001, we implemented a restructuring plan that resulted in staff
reductions of 172 employees. In addition, many members of our management team
have only recently started in their current positions. Implementation of our
growth strategy requires that we hire additional highly qualified personnel,
particularly in our engineering, international, product development and sales
operations.

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

Our future success depends on our ability to attract and retain key personnel

   Our future success depends, in part, on the continued service of our key
management personnel, particularly Evan Thornley, our Chairman and Chief
Executive Officer, and Tracey Ellery, our President. Mr. Thornley and Ms.
Ellery are husband and wife. The loss of the services of either of these
individuals, or the services of other key employees, could adversely affect
our business. LookSmart does not have employment agreements with Mr. Thornley
and Ms. Ellery, and they do not have stock options or restricted stock subject
to vesting based on continued employment.

   Our success also depends on our ability to identify, attract, retain and
motivate highly skilled administrative, technical, editorial, finance and
marketing personnel. In particular, Ned Brody, our Chief Financial Officer,
has tendered his resignation from the Company effective as of March 31, 2001.
We have not yet identified a successor to Mr. Brody and it may take a long
time to successfully recruit a new Chief Financial Officer. Competition for
such personnel, particularly in the San Francisco Bay area, is intense, and we
cannot assure you that we will be able to retain our key employees or that we
can identify, attract and retain highly skilled personnel in the future.

If we become subject to unfair hiring claims, we could be prevented from
hiring needed personnel, incur liability for damages and incur substantial
costs in defending ourselves

   Companies in our industry whose employees accept positions with competitors
frequently claim that these competitors have engaged in unfair hiring
practices or that the employment of these persons would involve the disclosure
or use of trade secrets. These claims could prevent us from hiring personnel
or cause us to incur liability for damages. We could also incur substantial
costs in defending ourselves or our employees against these claims, regardless
of their merits. Defending ourselves from these claims could also divert the
attention of our management away from our operations.

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

   We make information available to end users on our search infrastructure
services, both on our website and our distribution affiliates' websites. We
also provide our distribution affiliates with custom-developed software and
software developed by others as part of our service offerings. Although we do
not believe that our website content and services infringe any proprietary
rights of others, we cannot assure you that others will not assert claims
against us in the future or that these claims will not be successful. We or
our distribution affiliates could

                                      20
<PAGE>

be subject to claims for defamation, invasion of privacy, negligence,
copyright or trademark infringement, breach of contract or other theories
based on the nature and content of our information and services. These types
of claims have been brought, sometimes successfully, against online service
providers in the past. In addition, we are obligated under some agreements to
indemnify other parties as a result of claims that we infringe on the
proprietary rights of others.

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

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

   Our business is substantially dependent upon continued growth in the use of
the Internet as a medium for advertising, obtaining information and commercial
transactions. Internet usage and e-commerce may not grow at projected rates
for various reasons, including:

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

  .  actual or perceived lack of security of information;

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

  .  inconsistent quality of service;

  .  governmental regulation, such as tax or privacy laws;

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

  .  uncertainty regarding intellectual property ownership; and

  .  lack of appropriate communications equipment.

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

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

   Internet user privacy has become an issue both in the United States and
abroad. The Federal Trade Commission and government agencies in some states
and countries have been investigating some Internet companies, and lawsuits
have been filed against some Internet companies, regarding their use of
personal information. The European Union has adopted a directive that imposes
restrictions on the collection and use of personal data, guaranteeing citizens
of European Union member states various rights, including the right of access
to their data, the right to know where the data originated and the right to
recourse in the event of unlawful processing. Any laws imposed to protect the
privacy of Internet users may affect the way in which we collect and use
personal information. We could incur additional expenses if new regulations or
court judgments regarding the use of personal information are introduced or if
any regulator chooses to investigate our privacy practices.


                                      21
<PAGE>

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

   We and some of our partners retain information about our users. If others
were able to penetrate our network security and gain access to, or in some
other way misappropriate, our users' information, we could be subject to
liability. These claims could result in litigation, our involvement in which,
regardless of the outcome, could require us to expend significant time and
financial resources.

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

   Tax authorities at the international, federal, state and local levels are
currently reviewing the appropriate tax treatment of companies engaged in
Internet commerce. New or revised state tax regulations may subject us to
additional state sales, income and other taxes. We cannot predict the effect
of current attempts to impose sales, income or other taxes on commerce over
the Internet. However, new or revised taxes and, in particular, sales taxes,
would likely increase our cost of doing business and decrease the
attractiveness of advertising and selling goods and services over the
Internet. Any of these events would likely have an adverse effect on our
business and results of operations.

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

   The market price of our common stock could decline as a result of sales of
substantial amounts of our common stock in the public market, or the
perception that such sales could occur. As of December 31, 2000, approximately
43.5 million shares of common stock were held by non-affiliates and
approximately 48.1 million shares were held by affiliates, all of which are
currently available for resale in the public market without registration,
subject to compliance with Rule 144 under the Securities Act. Moreover, as of
December 31, 2000, the holders of up to 42.2 million shares of common stock
and warrants to purchase up to approximately 2.1 million shares of common
stock had rights to require us to register those shares under the Securities
Act.

   In addition, the Chess Depository Interests, or CDIs, which are publicly
traded on the Australian Stock Exchange under the symbol "LOK", are
exchangeable into shares of LookSmart common stock at a ratio of 20 CDIs per
share of common stock. Holders of CDIs may decide to exchange their CDIs for
shares of LookSmart common stock at any time. In that event, the exchanged
shares of common stock may be immediately available for resale at the option
of the holders in the Nasdaq National Market, which could depress the Nasdaq
market price of LookSmart common stock. As of December 31, 2000, the CDIs
registered for trading on the Australian Stock Exchange were exchangeable into
an aggregate of approximately 15.6 million shares of common stock.

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

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

   As of December 31, 2000, our executive officers, directors and significant
stockholders and the funds for whom they act as general partner, collectively
owned approximately 48% of the outstanding shares of LookSmart

                                      22
<PAGE>

common stock. If these stockholders choose to act or vote together, they will
have the power to influence matters requiring stockholder approval, including
the election of our directors, amendments to our charter and approval of
significant corporate transactions, including mergers or asset sales. This
concentration of ownership may have the effect of discouraging others from
making a tender offer or bid to acquire LookSmart at a price per share that is
above the then-current market price.

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

   Our charter and bylaws and provisions of Delaware law may deter or prevent
a takeover attempt, including an attempt that might result in a premium over
the market price for our common stock. Our board of directors has the
authority to issue shares of preferred stock and to determine the price,
rights, preferences and restrictions, including voting rights, of those shares
without any further vote or action by the stockholders. The issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of our
outstanding voting stock. In addition, our charter and bylaws provide for a
classified board of directors. These provisions, along with Section 203 of the
Delaware General Corporation Law, could discourage potential acquisition
proposals and could delay or prevent a change of control.

ITEM 2. PROPERTIES

   Our headquarters are located in 137,000 square feet of leased office space
in San Francisco, California. The lease term for this office space extends to
October 15, 2009. The lease provides us with an option to renew the lease for
two additional five-year periods after the initial lease term of ten years
expires. In January 2000, we subleased approximately 43,000 square feet of
space at our headquarters facility to third parties for a term of one year. In
January 2001, we extended one of these subleases for 30,000 square feet of
space in this facility until December 2001. The rent received on the sublease
is in excess of our obligation under the original lease.

   We lease a number of smaller facilities in New York, Los Angeles,
Melbourne, Sydney, Montreal, Copenhagen, Amsterdam, Paris, Berlin and Tokyo.
These facilities have various lease terms extending as far as May 2005.

ITEM 3. LEGAL PROCEEDINGS

   In August 2000, the Federal Trade Commission began an inquiry into our
information collection practices on our Inside the Web website. Inside the
Web, or ITW, is a general audience website that hosts free message boards
created by third parties. The inquiry focused on whether we have complied with
the requirements of the Children's Online Privacy Protection Act in
maintaining areas of the ITW site that were allegedly directed to children. In
March 2001, LookSmart and the FTC resolved the matter and executed a consent
decree which requires us to place additional notices on our web properties
regarding online privacy and to pay civil monetary penalties of $35,000. In
March 2001, we voluntarily ceased operating the ITW site as a part of the
corporate restructuring announced in January 2001.

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

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

   No matters were submitted to a vote of security holders during the fourth
quarter of 2000.

                                      23
<PAGE>

                                    PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
        MATTERS

   LookSmart, Ltd. common stock is quoted on the Nasdaq National Market under
the symbol "LOOK" and Chess Depository Interests, or CDIs, each of which is
exchangeable for 1/20th of a share of common stock, are quoted on the
Australian Stock Exchange under the symbol "LOK." The following table sets
forth the range of high and low sales prices of the common stock for each
period indicated:

<TABLE>
<CAPTION>
                                                                   HIGH   LOW
                                                                  ------ ------
   <S>                                                            <C>    <C>
   Fiscal 1999:
     Third quarter (from August 20) ............................. $40.50 $16.25
     Fourth quarter ............................................. $42.06 $24.38
   Fiscal 2000:
     First quarter .............................................. $72.00 $26.56
     Second quarter ............................................. $45.94 $12.50
     Third quarter .............................................. $25.50 $11.13
     Fourth quarter ............................................. $11.38 $ 1.72
</TABLE>

   LookSmart had approximately 704 holders of record of common stock as of
December 31, 2000. We have not declared or paid any cash dividends on the
common stock and presently intend to retain our future earnings, if any, to
fund the development and growth of our business and, therefore, do not
anticipate paying any cash dividends in the foreseeable future.

Report of Offering of Securities and Use of Proceeds Therefrom

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

Recent Sales of Unregistered Securities

   Since our incorporation in July 1996, we have sold and issued the following
unregistered securities:

     (1) On July 24, 1996, we issued 119,640,000 shares of common stock to
  two founding stockholders for an aggregate consideration of $19,940.

     (2) On September 22, 1997, we repurchased 101,640,000 shares of our
  common stock from one founding stockholder for the aggregate repurchase
  price of $16,940 in exchange for the issuance of a warrant to purchase
  9,000,000 shares of common stock and a promissory note in the aggregate
  amount of $1,500,000. The warrant has an exercise price of $0.00017 per
  share.

     (3) On January 5, 1998, we issued a warrant for 1,500,000 shares of
  series A preferred stock to a bank in connection with a line of credit
  agreement for an aggregate purchase price of $534,400.

     (4) On February 1, 1998, we issued to one investor a convertible
  promissory note in the aggregate amount of $250,000, mandatorily redeemable
  for series A preferred stock.

                                      24
<PAGE>

     (5) On February 5, 1998, we issued to two investors convertible
  promissory notes in the aggregate amount of $250,000, mandatorily
  redeemable for series A preferred stock.

     (6) On March 7, 1998, we issued to one investor a convertible promissory
  note in the aggregate amount of $50,000, mandatorily redeemable for series
  A preferred stock.

     (7) On March 12, 1998, we issued to one investor a convertible
  promissory note in the aggregate amount of $75,000, mandatorily redeemable
  for series A preferred stock.

     (8) On March 26, 1998, we issued a warrant for 1,010,412 shares of
  series A preferred stock to one investor for an aggregate purchase price of
  $359,976.12.

     (9) On March 27, 1998, we issued to one investor a convertible
  promissory note in the aggregate amount of $1,500,000, mandatorily
  redeemable for series A preferred stock.

     (10) On April 6, 1998, we issued to one investor a warrant for 336,804
  shares for an aggregate purchase price of $56,134 and a convertible
  promissory note in the aggregate amount of $500,000, both for series A
  preferred stock.

     (11) On May 6, 1998, we issued 1,057,500 shares of common stock to one
  director for an aggregate consideration of $8,906.25.

     (12) On May 7, 1998, we issued 6,352,614 shares of series A preferred
  stock to seven investors for an aggregate consideration of $2,287,493.39,
  we issued 14,327,748 shares of series B preferred stock to one investor for
  an aggregate consideration of $6,004,997.98, and we issued a warrant to
  purchase 1,500,000 shares of common stock to one investor for an aggregate
  purchase price of $3,750,000 and warrants to purchase an aggregate of
  3,024,924 shares of series A preferred stock to two investors for an
  aggregate of $1,267,846.48.

     (13) On September 10, 1998, we issued a warrant to purchase 480,000
  shares of common stock to one investor for an aggregate purchase price of
  $200,800.

     (14) On October 23, 1998, we issued 6,000,000 shares of Series 1 Junior
  Preferred to seven investors for an aggregate of $2,900,000 in connection
  with the acquisition of BeSeen.com, Inc. as a wholly-owned subsidiary.

     (15) On March 24, 1999, we issued 12,007,590 shares of series C
  preferred stock to 45 investors for an aggregate of $60,037,950, and a
  warrant to purchase 439,999 shares of series C preferred stock to one
  investor for an aggregate purchase price of $2,199,997.50.

     (16) On April 9, 1999, we issued 2,550,000 shares of common stock to one
  investor for the aggregate consideration of $6,375,000 in connection with
  an asset purchase.

     (17) On April 26, 1999, we issued 75,939 shares of series C preferred
  stock to 14 investors for an aggregate of $379,695.

     (18) On June 9, 1999, we issued warrants to purchase an aggregate of
  540,000 shares of common stock to four investors for an aggregate
  consideration of $675,000 in connection with an asset purchase.

     (19) On December 30, 1999, we committed to issue up to 71,870 shares of
  common stock to four investors in connection with a purchase of securities
  in Futurecorp International Pty Ltd.

     (20) On October 27, 2000, in connection with the acquisition of Zeal
  Media, Inc., we issued 1,097,284 shares of common stock and reserved
  266,135 shares for issuance upon exercise of assumed options and warrants.

     (21) From our incorporation to March 1, 2001, we issued options to
  purchase an aggregate of 25,156,339 shares of common stock with exercise
  prices ranging from $0.00953 to $68.4375 per share. From our incorporation
  to March 1, 2001, options to purchase 6,175,273 shares of common stock have
  been exercised for an aggregate consideration of $3,130,794.

                                      25
<PAGE>

     (22) From our incorporation to March 1, 2001, we issued warrants to
  purchase an aggregate of 17,832,140 shares of preferred and common stock
  with exercise prices ranging from $0.00017 to $7.50 per share. From our
  incorporation to March 1, 2001, warrants to purchase 15,816,508 shares of
  preferred and common stock have been exercised for an aggregate
  consideration of $2,521,906.

   There were no underwriters employed in connection with any of the foregoing
transactions.

   The issuances of securities described in (1)-(13), (16)-(20) and (22) were
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2), Regulation D and/or Regulation S of the Securities Act as
transactions by an issuer not involving a public offering or the offer and
sale of securities to non-U.S. investors. The issuance of securities described
in (14) and (15) were deemed to be exempt from registration in reliance on
Sections 4(2) and 4(6) of the Securities Act. The issuances of securities
described in (21) were deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) or Rule 701 promulgated thereunder
as transactions pursuant to compensatory benefit plans and contracts relating
to compensation. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and other
instruments issued in such transactions. All recipients either received
adequate information about the Registrant or had access, through employment or
other relationships, to such information.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

   The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes to those
statements and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this report.

<TABLE>
<CAPTION>
                           Period from
                          July 19, 1996                      Year Ended
                          (Inception) to ---------------------------------------------------
                           December 31,  December 31, December 31, December 31, December 31,
                               1996          1997         1998         1999         2000
                          -------------- ------------ ------------ ------------ ------------
                                       (in thousands, except per share amounts)
<S>                       <C>            <C>          <C>          <C>          <C>
Statements of Operations
 Data:
  Net revenues..........     $      3      $   949      $  8,785     $ 48,865     $112,622
  Gross profit..........          (87)         519         7,199       41,947       94,965
  Total operating
   expenses.............        2,739        7,848        19,097      109,065      143,201
  Net income (loss).....       (2,900)      (7,514)      (12,858)     (64,663)     (62,590)
  Net income (loss) per
   share--basic and
   diluted..............     $  (0.03)     $ (0.08)     $  (0.68)    $  (1.42)    $  (0.70)
  Shares used in per
   share calculation--
   basic and diluted....      115,947       91,589        18,790       45,518       89,111
</TABLE>

<TABLE>
<CAPTION>
                         December 31, December 31, December 31, December 31, December 31,
                             1996         1997         1998         1999         2000
                         ------------ ------------ ------------ ------------ ------------
<S>                      <C>          <C>          <C>          <C>          <C>
Balance Sheet Data:
  Working capital
   (deficit)............    $ (429)     $(1,125)     $(6,507)     $ 82,688     $ 87,630
  Total assets..........     2,825        2,275       14,090       161,519      182,396
  Long-term debt and
   capital lease
   obligations, net of
   current portion......       --         1,500        1,500         1,423       51,214
  Total stockholders'
   equity (deficit).....    $2,091      $  (453)     $(1,261)     $119,552     $ 79,222
</TABLE>



                                      26
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

   The following discussion should be read in conjunction with the
consolidated financial statements and the notes to those statements which
appear elsewhere in this Annual Report on Form 10-K. The following discussion
contains forward-looking statements that reflect our plans, estimates and
beliefs, including without limitation forward-looking statements regarding
anticipated revenue growth, trends in costs of revenues and operating
expenses, international expansion and introduction of additional services, the
adequacy of our capital reserves and our future need for additional capital.
Our actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below and
elsewhere in this report, particularly in "Business--Risk Factors".

Overview

   LookSmart was formed in July 1996 as a Delaware corporation under the name
of NetGet Ltd. to acquire the business and associated intellectual property of
HomeBase Directories Pty Ltd., an Australian company founded by Evan Thornley
and Tracey Ellery in October 1995. At that time, The Reader's Digest
Association purchased approximately 85% of our outstanding common stock, an
investment it held until October 1997 when it exchanged this stock for
warrants to purchase nine million shares of our common stock and a $1.5
million promissory note. We changed our name to LookSmart, Ltd. in October
1996. In July 1997, we relocated our headquarters from Australia to San
Francisco, California.

   Prior to July 1997, revenues from our business were insignificant and we
primarily focused on investing in editorial resources and building our web
directory. Until October 1997, our cash requirements were satisfied primarily
by The Reader's Digest Association and, to a lesser extent, from advertising
revenues from sales made through outside sales forces. Our advertising
revenues continued to increase during the fourth quarter of 1997 and the first
quarter of 1998.

   In May 1998, we raised a total of approximately $8.3 million in our Series
A and Series B preferred stock financings and established our relationship
with Cox Interactive Media to develop web directories for key local United
States markets. This infusion of capital allowed us to significantly increase
the resources devoted to editorial and product development, establish our own
advertising sales force and significantly strengthen our management team.

   In May 1998, we entered into a one-year traffic contract with Netscape,
which has been renewed through June 30, 2001. Under this arrangement, Netscape
periodically directs user search traffic to LookSmart for a fixed cost per
thousand referrals.

   In October 1998, we acquired BeSeen.com, Inc., a leading provider of tools
to webmasters, for 6 million shares of our Series 1 Junior preferred stock.
The primary purpose of this transaction was to generate traffic and website
relationships for LookSmart to increase advertising sales.

   In December 1998, we entered into a five-year contract with Microsoft.
Under this agreement, we license our database to Microsoft, and we are
obligated to increase the number of unique URLs included in our database every
six months by pre-defined amounts. Microsoft has the right to determine the
criteria for a portion of these URLs. Microsoft paid us an initial non-
refundable license fee and committed to a fixed schedule of additional
payments for updates. A portion of each update payment is subject to refund if
we fail to provide the contractually required number of URLs. The difference
between any cash received under the contract and revenues recognized to date
is recorded as deferred revenue. At December 31, 2000, deferred revenue
associated with the Microsoft contract was $10.1 million. Either party may
terminate the agreement for any reason on six months' notice.

   The terms of our agreement with Microsoft could cause our quarterly
licensing revenues and operating results to fluctuate significantly. We
recognize quarterly revenues under this agreement based on the number of

                                      27
<PAGE>

URLs added to our database during the quarter relative to the total number of
URLs we are required to add to our database during the relevant six-month
contractual measurement period. As a result, to the extent that we satisfy our
database update obligations unevenly, the revenues we recognize may be skewed
on a quarter-to-quarter basis. Because the six-month contractual measurement
periods end on June 4 and December 4 of each year, our second and fourth
quarters may include revenues from more than one six-month contractual
measurement period. This may result in additional quarter-to-quarter
fluctuations in revenues.

   In March 1999, we raised approximately $60.3 million in our Series C
preferred stock financing. The proceeds from this financing were used to
increase working capital, to fund operating losses and to enter into strategic
relationships and acquisitions.

   In April 1999, as part of a strategic alliance between our two companies,
we acquired certain lines of business and other rights from Guthy-Renker
Internet, LLC for $5.0 million in cash and 2.55 million shares of LookSmart
common stock. We also earn revenues from Guthy-Renker Corporation's "As Seen
on TV" products that are sold online and promoted through television
infomercials. We are entitled to place LookSmart advertising on Guthy-Renker
Corporation infomercials. Our contractual right to be the exclusive online
distributor of Guthy-Renker products will expire in April 2002.

   In June 1999, we acquired substantially all of the assets of ITW NewCorp,
Inc., in exchange for $5.0 million in cash and warrants to purchase 420,000
shares of LookSmart common stock. Through this asset purchase, we obtained
Internet bulletin board services that generate advertising revenue. As part of
the restructuring announced in January 2001, we discontinued this business in
March 2001. As a result, in the first quarter of 2001 we will incur a charge
of approximately $6.0 million associated with the writeoff of goodwill.

   In June 1999, we entered into five agreements with three PBS-related
entities under which we agreed to sponsor five programs on PBS. The agreements
vary in duration from three to five years. In September 2000 and December
2000, we amended two of the agreements to reduce their duration from three to
two years. At December 31, 2000, LookSmart was committed to pay a total of
$5.1 million for the remainder of the contract periods if all five agreements
remain effective throughout their current terms. These payments will be
recorded as sales and marketing expense, and generally will be spread equally
over the terms of the contracts. The PBS-related entities have agreed to
promote LookSmart on their respective websites. Specifically, the arrangement
provides that LookSmart's website is provided a direct link to the PBS website
www.pbs.org. The agreements do not guarantee LookSmart a minimum number of
impressions.

   In June 1999, we entered into a three-year licensing agreement with
Excite@Home. Under this agreement, we license our database to Excite@Home.

   In August 1999, we completed our initial public offering of 8,855,000
shares of common stock, including 1,155,000 shares issued in connection with
the exercise of the underwriters' over-allotment option. All shares were
issued at an offering price of $12.00 per share. Net proceeds from the
offering, after underwriting discounts and commissions and offering expenses
of $9.3 million, were approximately $96.9 million.

   In November 1999, we entered into an agreement with Inktomi Corp. to co-
bundle our search technologies for offerings to Internet portals. In December
2000, we amended this agreement to provide for the inclusion of the LookSmart
directory in Inktomi's search index and to provide for sharing of revenues
derived from Inktomi's distribution of Subsite Listings.

   In December 1999, we acquired stock which controls 52% of the outstanding
voting rights of Futurecorp International Pty Ltd., an Australian privately
held company, for $1,840,000 in cash and 71,870 shares of our common stock.
This transaction was accounted for as a purchase. Futurecorp's results of
operations subsequent to the closing of the transaction have been consolidated
with ours. Through this business, we provide web-based communication
applications and community building solutions focused primarily in Australia.
In July 2000, we exercised our option to purchase additional shares, bringing
our ownership of the company to approximately 53%.

                                      28
<PAGE>

   In March 2000, we entered into a three-year agreement with Prodigy
Communications Corporation, which was subsequently acquired by SBC
Communications, Inc. Under this agreement, Prodigy directs user search traffic
to LookSmart for a fixed cost per thousand impressions.

   In March 2000, we entered into a two-year agreement with Go2Net, Inc.,
which was subsequently acquired by InfoSpace, Inc. Under this agreement,
Go2Net directs user search traffic to LookSmart for a fixed cost per referral.

   In May 2000, we entered into a two-year agreement with Juno Online
Services, Inc. Under this arrangement, Juno directs user search traffic to
LookSmart for a fixed cost per referral.

   In July 2000, we entered into a two-year agreement with AltaVista Company.
Under this agreement, AltaVista directs user search traffic to LookSmart for a
fixed cost per thousand impressions and refers potential customers to
LookSmart's listings services for a share of the resulting revenue.

   In October 2000, we completed the acquisition of Zeal Media, Inc., a
provider of community-based directories. At the closing, we issued 1,097,284
shares of our common stock, assumed options and warrants to purchase an
additional 266,135 shares of our common stock, and paid $660,144.11 of
outstanding debt.

   In January 2001, we announced a restructuring of our management and
operations, including the exit from non-core businesses, such as ITW and
LookSmart Live!, the reorganization of eleven operating groups into four
operating groups, and the reduction of staff by 172 employees. Management
estimates that the total savings from the restructuring is approximately $44.0
million on an annualized basis, and will result in a substantial one-time
charge in the first quarter of 2001.

Revenues and Cost of Revenues

   LookSmart is principally organized in four operating segments:
advertising/syndication; licensing; ecommerce and listings.

   Advertising/Syndication. LookSmart provides a high quality environment for
advertisers to promote their products and services. We generally provide
advertisers with one to three month agreements to serve a minimum number of
banner (or other advertising format) impressions over the term of the
agreement. We offer advertisers the ability to specify the category of traffic
for their advertisements, and we are able to charge premiums on some
categories based on advertisers' perceptions of economic value. This value is
derived from the location of the advertisement on the page, the demographics
of the users who view the page, and the size of the audience requesting the
page.

   We expect advertising revenues to continue to account for a significant
portion of our revenues for the foreseeable future. Our ability to maintain
current levels of advertising revenues will depend on our ability to attract
new advertisers as well as re-sign or replace existing advertisers as their
contracts expire. We are currently experiencing and expect continued downward
pressure on advertising prices in the industry generally due to the decline in
advertising expenditures among Internet companies and the increasing amount of
advertising inventory coming onto the Internet from other sources. Therefore,
we expect that any future increases in advertising revenues will depend on our
ability to effectively manage our advertising inventory by leveraging our
targeted category-based model to charge premium rates, and on our ability to
grow the inventory availability by increasing traffic to Internet properties
using our search solutions.

   In our limited operating history, we have experienced seasonality in
advertising revenues with typically weaker demand from advertisers in the
first and third calendar quarters. We expect that advertising revenues will
continue to be seasonal. In particular, the rate of growth, if any, between
the last quarter of one year and the first quarter of the next year tends to
be less than the rate of growth experienced between other consecutive
quarters. This is due in part to the fact that the fourth quarter contains
increased advertising spending in anticipation of the holiday season.

                                      29
<PAGE>

   Because advertising revenues represent a significant portion of our total
revenues, fluctuations in advertising revenues due to pricing pressures, our
ability to collect from our customers, the timing or cancellation of
contracts, inventory management, seasonality, site down time or other factors
can be expected to have a significant effect on our overall operating results.
However, our costs are substantially fixed, at least in the short term, and
cannot be expected to track fluctuations in advertising revenues. To the
extent that costs do not track changes in advertising revenues, fluctuations
from this revenue source will have a disproportionately large impact on net
income or loss.

   Revenues associated with advertising contracts are recognized once
collectibility is established, as delivery occurs (as specified under the
contracts), once all performance obligations have been satisfied and when no
refund obligations exist. Barter does not represent a significant component of
our total revenues.

   We generate revenues from syndication agreements by sharing with our
syndication partners advertising sales revenue associated with traffic
referred from the partners to LookSmart. We generally receive the gross
revenues from the advertiser, and then forward a portion of these revenues to
the syndication partner. We work with our Internet Service Provider, or ISP,
and Internet portal partners to "co-brand", or create partner-specific home
pages which have the "look and feel" a partner desires and which provide the
ISP or Internet portal subscriber with fully-functional access to the
LookSmart database. In these cases, LookSmart derives the advertising sales
revenues from the traffic generated by the ISP or Internet portal partner and
compensates the partner, typically on a per impression or per referral basis,
for this traffic.

   The principal components of cost of advertising and syndication revenues
are personnel costs of our in-house advertising operations employees,
equipment depreciation, other expenses relating to hosting advertising
operations and agency commissions paid to outside advertising sales
organizations.

   Licensing. We license our database content to some of our partners,
including Microsoft, BT LookSmart (our joint venture with British
Telecommunications), Inktomi, and Excite@Home. Revenues associated with
licensing contracts are recognized as delivery occurs, as specified under the
contracts, and after all performance obligations have been satisfied and no
refund obligation exists. We expect licensing revenues to fluctuate from
period to period because these revenues are dependent upon the particular
terms of our licensing arrangements and the expiration, renewal and addition
of agreements with current and future partners. We do not anticipate recurring
cost of licensing revenues in connection with our licensing activities; the
cost of developing URL databases is included in product development.

   Ecommerce. The Company's ecommerce revenue is generated primarily by the
sale of merchandise through online stores such as BuyItOnTheWeb (a wholly
owned business unit of LookSmart). Revenue from the sale of merchandise is
reported on a gross basis (net of provisions for returns and refunds). Revenue
is recognized at the time goods are shipped. Associated direct product costs,
including shipping and handling, are reported as cost of revenues. We expect
that ecommerce revenue will represent a larger percentage of total revenues in
2001 than in 2000. Also, under our agreement with Guthy-Renker Corporation,
our primary supplier of ecommerce merchandise, we expect that our ecommerce
marketing costs will increase in the second quarter of 2001.

   Listings. The Company's listings revenues are derived from its Subsite and
Express Listings products, which include fees from the expedited written
review of customer URLs, "cost-per-click" arrangements on those URLs, setup
fees, and periodic maintenance fees. Listings revenue also includes partner
commissions derived from our affiliates program. Revenues associated with
listings contracts are recognized once collectibility is reasonably assured,
as delivery of services occurs (as specified under the contracts), once all
performance obligations have been satisfied and when no refund obligation
exists. Any upfront fees collected are recognized over the expected life of
the relationship with the customer. The Company's costs of listings revenue
are primarily the distribution fees paid to partners on subsite and affiliates
"cost-per-click" revenues.

Operating Expenses

   We do not track operating expenses by reportable segment, but treat these
as shared overhead of our four reportable segments.

                                      30
<PAGE>

   Sales and Marketing. Sales and marketing expenses include payments to
syndication partners who are Internet portals, ISP partners and other traffic
providers for directing online users to the LookSmart database. Traffic
payments may exhibit significant fluctuations from period to period depending
on the contracts in effect, volume of traffic going to the partner sites and
the contracted rates. Further, traffic payments as a percentage of revenues
may vary significantly depending on the structure of the payment arrangements
between us and our affiliates. When a traffic arrangement is structured so
that we collect the gross advertising revenues and forward a portion to our
partner, we record as revenues the entire amount of the gross advertising
revenues, and the portion forwarded to the partner is recorded as sales and
marketing expense. Sales and marketing costs also include the payments made to
partners associated with Express Listings. We expect these costs to increase
as we expand our distribution of this product. We expect our revenue sharing
payments to our affiliate and distribution partners to increase as we expand
our distribution. On the other hand, we expect our traffic payments for our
higher cost distribution agreements to decrease over time as we renegotiate or
terminate these agreements.

   From April 1999 through October 1999, our sales and marketing expenses
included the cost of website development seminars which focused on selling web
pages and offering related services. Sales and marketing expenses also include
the costs of advertising, trade shows and public relations activities. Due to
the one-time nature of these expenditures, sales and marketing expenses will
be subject to significant fluctuations from period to period.

   Sales and marketing costs also include amortization of related unearned
compensation, salaries and associated costs of employment, overhead and
facilities, as well as any bad debt expenses taken for uncollectible trade
receivables. Sales and marketing costs are expensed as incurred.

   Product Development. Product development costs, including research and
development costs, have been expensed as incurred, except to the extent that
costs for internal use software are required to be capitalized and amortized
under American Institute of Certified Public Accountants Statement of Position
98-1 (SOP 98-1). During 1999, we capitalized $443,000 and during 2000, we
capitalized $1.7 million of internal use software costs. We are amortizing
these costs over two years. Amortization relating to internal use software was
$84,000 in 1999 and $654,000 in 2000. Product development expenses include the
editorial development costs of building our content database and engineering
costs of maintaining and improving the development environment, including our
proprietary Editorial Support System software. These costs include
amortization of unearned compensation, salaries and associated costs of
employment, overhead and facilities. Software licensing and computer equipment
depreciation related to supporting product development functions are also
included in product development expenses. These costs are relatively fixed in
the short term.

   General and Administrative. General and administrative expenses include
overhead costs such as executive management, human resources, finance, legal,
investor relations and facilities personnel. These costs include amortization
of unearned compensation, salaries and associated costs of employment,
overhead and facilities. General and administrative expenses include related
consulting and professional service fees which are subject to significant
variability over time.

   Amortization of Goodwill and Intangibles. In connection with the October
1998, April 1999, June 1999, and December 1999 acquisitions of, or asset
purchases from, BeSeen.com, Guthy-Renker Internet, ITW NewCorp, and
Futurecorp, we recorded goodwill and intangible assets of $3.9 million, $17.2
million, $9.3 million and $3.8 million, respectively. These amounts are being
amortized over periods from one to five years. During 2000, we recorded
additional goodwill and intangible assets of $12.1 million in connection with
the acquisition of Zeal Media, Inc. In July 2000, we recorded goodwill and
intangible assets of $549,000, in connection with our acquisition of
additional ownership interests in Futurecorp.

   We amortized an aggregate of $7.5 million of goodwill and intangible assets
in 2000, and we anticipate amortizing $9.8 million in 2001, $9.0 million in
2002, $7.5 million in 2003, $3.6 million in 2004, and $1.9 million in 2005 in
connection with these transactions. Part of our growth strategy is to make
additional acquisitions as we identify attractive opportunities. As a result,
we expect additional amortization of goodwill

                                      31
<PAGE>

and intangibles to occur in future periods. In addition, in May 2000, we
recorded a reduction in goodwill of $4.6 million related to the sale of certain
assets and liabilities of Choicemall to QSound Labs, Inc.

   Income Taxes. Although we are not yet profitable on a consolidated basis,
tax charges will be incurred in connection with our operations in foreign
jurisdictions. We expect that foreign taxes will become more significant with
continued expansion of our overseas business.

Results of Operations

   The following table sets forth, for the periods indicated, line items from
LookSmart's consolidated statements of operations as percentages of revenues:

<TABLE>
<CAPTION>
                                                Year Ended December 31,
                                                -----------------------------
                                                 1998       1999       2000
                                                --------   --------   -------
<S>                                             <C>        <C>        <C>
Revenues:
  Advertising and syndication..................       63%        45%       58%
  Licensing....................................       37         39        17
  Ecommerce....................................      --          16        16
  Listings.....................................      --         --          9
                                                --------   --------   -------
    Total revenues.............................      100        100       100
Cost of revenues:
  Advertising and syndication..................       12          6         5
  Licensing....................................        6        --        --
  Ecommerce....................................      --           8        10
  Listings.....................................      --         --          1
                                                --------   --------   -------
    Total cost of revenues.....................       18         14        16
                                                --------   --------   -------
    Gross profit...............................       82         86        84
Operating expenses:
  Sales and marketing..........................      126        127        76
  Product development..........................       54         64        32
  General and administrative...................       30         21        12
  Amortization of goodwill and intangibles.....        7         11         7
                                                --------   --------   -------
    Total operating expenses...................      217        223       127
                                                --------   --------   -------
Loss from operations...........................     (135)      (137)      (43)
Non-operating income (expense), net............      (10)         6       (13)
                                                --------   --------   -------
Loss before income taxes.......................     (145)      (131)      (56)
Income taxes...................................        1          1       --
                                                --------   --------   -------
Net loss.......................................     (146)%     (132)%     (56)%
                                                ========   ========   =======
</TABLE>

2000 Compared to 1999

Revenues

   Our net revenues increased 130% to $112.6 million in 2000 compared to $48.9
million in 1999. Advertising and syndication revenues increased to $64.7
million in 2000, an increase of 193% over the $22.1 million recognized in 1999.
This increase is attributable to increased traffic, better inventory
management, higher yields and new syndication agreements. Licensing revenue
increased to $19.6 million in 2000, an increase of 2% over the $19.3 million
recognized in 1999, primarily due to an amendment to the Microsoft agreement
providing for our delivery of additional URLs in the second half of 2000.
Ecommerce revenues were $18.1 million, an increase of 140% over the $7.5
million recognized in 1999. This increase is primarily due to the full-year
impact of selling

                                       32
<PAGE>

Guthy-Renker products and to intensified branding and website exposure of the
products from a variety of new media sources, including the LookSmart family
of partners and syndicates. In 2000, listings revenue was $10.3 million. There
was no listings revenue in 1999.

   As a percentage of total revenues, advertising and syndication revenues
increased to 58% in 2000 compared to 45% of total revenues in 1999. Licensing
revenues as a percentage of total revenues decreased to 17% in 2000 compared
to 39% of total revenues in 1999. In 2000, 16% of total revenues were
generated by ecommerce, compared to 16% of total revenues in 1999. In 2000, 9%
of total revenues were generated by listings revenues whereas there were no
listings revenues in 1999.

Cost of Revenues

   Cost of revenues increased 155% to $17.7 million in 2000 compared to $6.9
million in 1999. Of this increase, $10.8 million was attributable to ecommerce
product costs, paid to Guthy Renker and other suppliers, for merchandise sold
online. Cost of advertising and syndication revenue increased 93% to $5.5
million in 2000 from $2.9 million in 1999. This increase was the result of
increased depreciation on computer hardware and software capital expenditures,
increased salaries and benefits costs for additional employees in advertising
operations, and the increase in costs associated with the resale of unbranded
inventory on partner sites. Cost of listings revenue was $1.3 million in 2000.
There was no cost of listing revenues during 1999 as we recognized no listings
revenue until in January 2000.

   As a percentage of total revenues, total cost of revenues increased to 16%
in 2000 compared to 14% in 1999. As a percentage of advertising and
syndication revenues, cost of advertising and syndication revenues decreased
to 9% in 2000 compared to 13% in 1999. This decrease was primarily
attributable to economies of scale associated with higher traffic volume and
higher yields on saleable traffic. Cost of ecommerce revenues was 60% of
ecommerce revenues in 2000 compared to 54% in 1999, due primarily to the sale
of the Choicemall business, which yielded higher gross margins. Cost of
listings revenue was 12% of listings revenue during 2000. This revenue stream
did not exist in the prior year.

Operating Expenses

   Sales and Marketing. Including charges for amortization of unearned
compensation, sales and marketing expenses increased 39% to $85.8 million in
2000 from $61.9 million in 1999. As a percentage of revenues, sales and
marketing expenses decreased to 76% in 2000 from 127% in 1999. The dollar
increase in sales and marketing expense is primarily attributable to growing
distribution costs, including payments to Netzero, Netscape and AltaVista, as
well as other ISP's and Internet portals, and increased compensation expense
associated with the growth of the Company's sales force.

   Product Development. Including charges for amortization of unearned
compensation, product development expenses increased 17% to $36.7 million in
2000 from $31.4 million in 1999. As a percentage of revenues, product
development expenses decreased to 33% of revenues in 2000 from 64% of revenues
in 1999. The dollar increase in product development expenses is primarily due
to an increase in editorial, engineering and product design personnel to
support the expansion of our database and services as well as payments made to
providers of services which enhance the user experience within the LookSmart
environment.

   General and Administrative. Including charges for amortization of unearned
compensation, general and administrative expenses increased 28% to $13.3
million in 2000 from $10.3 million in 1999. As a percentage of revenue,
general and administrative expenses decreased to 12% in 2000 from 21% in 1999.
The dollar increase in general and administrative expenses is primarily due to
additional personnel in the finance, human resources and legal functions as
well as additional professional services costs incurred to support the growth
of the Company.

   Amortization of Goodwill and Intangibles. We are amortizing goodwill and
intangibles as a result of the purchase of intellectual property at our
inception in 1996, the BeSeen.com acquisition in October 1998, the

                                      33
<PAGE>

Guthy-Renker Internet asset purchase in April 1999, the ITW NewCorp asset
purchase in June 1999, the Futurecorp investment completed in December 1999
(and subsequent investment made in July 2000), and the Zeal Media, Inc.
acquisition made in November 2000. Amortization of these assets increased 38%
to $7.5 million in 2000 from $5.4 million in 1999. The dollar increase was due
to our additional investment in Futurecorp and our acquisition of Zeal Media
during 2000.

   Other Net Income (Expense). Other net income (expense) primarily includes
realized gains (losses) on investments and foreign exchange gains (losses)
arising from the change in the value of foreign currencies, primarily the
Australian dollar, relative to the United States dollar. We recorded other net
expenses of $1.8 million in 2000 compared to other net expenses of $8,000 in
1999. This increase was primarily driven by our recognizing non-temporary
declines in the value of our investments in marketable securities.

   Interest Income (Expense), Net. Net interest income (expense) includes
interest expense on our debt and capital lease obligations, net of interest
income from our cash and cash equivalents. We recorded net interest expense of
$2.0 million in 2000 compared to net interest income of $2.9 million in 1999.
The change from net interest income to net interest expense between the two
periods is primarily due to of accrued interest expense related to our $50.0
million credit facility with British Telecom established in March 2000.

   Share of Joint Venture Income (Expense). Share of Joint Venture Income
(Expense) includes LookSmart's 50% share of the income (expenses) of BT
LookSmart. LookSmart recorded a $10.9 million expense in 2000 in connection
with this joint venture. Since BT LookSmart initiated operations in February
2000, there was no related expense in 1999.

   Minority Interest. LookSmart recognized minority interest of $519,000 in
2000 related to LookSmart's controlling 52.8% investment in Futurecorp.

Income Taxes

   We recorded income tax expense of $163,000 in 2000, primarily associated
with our Australian operations, compared to $470,000 in 1999, also primarily
associated with our Australian operations.

1999 Compared to 1998

Revenues

   Our revenues increased 456% to $48.9 million in 1999 compared to $8.8
million in 1998. Advertising and syndication revenues increased to $22.1
million in 1999, an increase of 297% over the $5.6 million recognized in 1998.
This increase is attributable to increased traffic, better inventory
management, higher yields and new syndication agreements. Licensing revenue
increased to $19.3 million in 1999, an increase of 497% over the $3.2 million
recognized in 1998. This increase reflects the inclusion of a full year of
licensing revenues from our agreement with Microsoft Corporation in 1999. This
agreement was signed in December 1998. Ecommerce revenues were $7.5 million in
1999, whereas in 1998 there were no comparable revenues.

   As a percentage of total revenues, advertising and syndication decreased to
45% for 1999 compared to 63% of total revenues in 1998. Licensing revenues as a
percentage of total revenues increased slightly to 39% for 1999 compared to 37%
of total revenues in 1998. In 1999, 16% of total revenues were generated by
ecommerce revenues, whereas there were no ecommerce revenues in 1998.

Cost of Revenues

   Cost of revenues increased 336% to $6.9 million in 1999 compared to $1.6
million in 1998. Of this increase, $4.0 million was attributable to product
costs paid as a result of ecommerce merchandise sales which commenced in April
1999. There were no such costs for the comparable period in 1998. Cost of
advertising and syndication revenue increased 164% to $2.9 million in 1999 from
$1.1 million in 1998. This increase was the result of

                                       34
<PAGE>

increased depreciation on computer hardware and software capital expenditures,
as well as the increased salaries and benefits costs for additional employees
in advertising operations. Cost of licensing revenues was $500,000 for the
year ended December 31, 1998. This amount represents a one-time finder's fee
related to a licensing agreement. There was no cost of licensing revenues for
the comparable period in 1999.

   As a percentage of revenues, cost of revenues decreased to 14% in 1999
compared to 18% in 1998. As a percentage of advertising and syndication
revenues, cost of advertising and syndication revenues decreased to 13% in
1999 compared to 20% in 1998. This decrease was primarily attributable to
economies of scale associated with higher traffic volume and higher yields on
saleable traffic. Cost of ecommerce revenues was 54% of revenues in 1999.
During 1998, LookSmart incurred no ecommerce cost of revenues as this segment
did not exist.

Operating Expenses

   Sales and Marketing. Including charges for amortization of unearned
compensation, sales and marketing expense increased 462% to $61.9 million in
1999 from $11.0 million in 1998. As a percentage of revenues, sales and
marketing expenses increased to 127% in 1999 from 126% in 1998. The dollar
increase in sales and marketing expense was primarily attributable to our
branding campaign and our corporate PBS sponsorships and our increased
distribution costs as a result of the growth of our ISP partner program, the
impact of renewing our traffic agreement with Netscape and the cost associated
with our traffic agreement with NetZero. Other factors were the addition of an
internal sales staff in the second half of 1998 and the costs associated with
the seminar business acquired as part of the Guthy-Renker Internet, LLC asset
acquisition in April 1999. The use of seminars as a marketing tool was
discontinued in October 1999.

   Product Development. Including charges for amortization of unearned
compensation, product development expenses increased 548% to $31.4 million in
1999 from $4.9 million in 1998. As a percentage of revenues, product
development expenses were 64% in 1999 and 54% 1998. The dollar increase in
product development expenses was primarily due to a significant increase in
editorial, engineering and product design personnel to support our efforts to
expand our database and services offered both in the United States and
overseas. During 1999 we launched editorial operations in Montreal, Amsterdam
and Copenhagen.

   General and Administrative. Including charges for amortization of unearned
compensation, general and administrative expenses increased 293% to $10.3
million in 1999 from $2.6 million in 1998. As a percentage of revenue, general
and administrative expenses decreased to 21% in 1999 from 30% in 1998. The
dollar increase in general and administrative expenses is primarily due to
additional personnel in the finance, human resources and legal functions as
well as additional professional services costs incurred to support the growth
of the Company.

   Amortization of Goodwill and Intangibles. We are amortizing goodwill and
intangibles as a result of the purchase of intellectual property at our
inception in 1996, the BeSeen.com acquisition in October 1998, the Guthy-
Renker Internet asset purchase in April 1999 and the ITW NewCorp asset
purchase in June 1999. Amortization of these assets increased 800% to $5.4
million in 1999 from $605,000 in 1998. The dollar increase was due primarily
to the fact that 1999 included a full years impact of the BeSeen.com, Inc.
acquisition, as well as the Guthy-Renker Internet and ITW NewCorp asset
purchase transactions which occurred in 1999.

   Non-operating Income (Expense), Net. Net interest income (expense) includes
interest expense on our debt and capital lease obligations, net of interest
income from our cash and cash equivalents. We recorded net interest income of
$2.9 million 1999 compared to net interest expense of $675,000 in 1998. The
change from net interest expense to net interest income between the two
periods is primarily the result of having larger cash balances on hand in 1999
resulting from the sale of preferred stock in March and Initial Public
Offering proceeds in August.

   Other Net Income (Expense). Other net income (expense) primarily includes
foreign exchange gains and losses arising from the change in the value of
foreign currencies, primarily the Australian dollar, relative to the

                                      35
<PAGE>

United States dollar. We recorded other net expenses of $8,000 in 1999
compared to other net expenses of $139,000 in 1998.

Income Taxes

   We recorded income tax expenses of $470,000 in 1999, primarily associated
with our Australian operations, compared to $146,000 in 1998, also primarily
associated with our Australian operations.

Quarterly Results of Operations

   The following tables set forth certain unaudited statements of operations
data for the eight quarters ended December 31, 2000. This data has been
derived from the unaudited interim financial statements prepared on the same
basis as the audited consolidated financial statements contained in this
annual report, and, in the opinion of management, include all adjustments
consisting only of normal recurring adjustments that we consider necessary for
a fair presentation of such information when read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in
this annual report. The operating results for any quarter should not be
considered indicative of results of any future period.

<TABLE>
<CAPTION>
                                                   Three Months Ended
                         ------------------------------------------------------------------------------
                         Mar. 31,  June 30,   Sept.    Dec. 31,  Mar. 31,  June 30,   Sept.    Dec. 31,
                           1999      1999    30, 1999    1999      2000      2000    30, 2000    2000
                         --------  --------  --------  --------  --------  --------  --------  --------
                                                       (unaudited)
                                          (in thousands except per share data)
<S>                      <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
Revenues:
 Advertising and
  syndication........... $ 2,191   $  3,433  $  6,258  $ 10,194  $ 12,372  $ 17,582  $ 18,951  $ 15,776
 Licensing..............   4,389      5,237     4,601     5,028     5,367     4,396     6,371     3,484
 Ecommerce..............     --       1,820     2,422     3,292     3,130     3,711     4,755     6,466
 Listings...............     --         --        --        --        631     1,612     3,287     4,731
                         -------   --------  --------  --------  --------  --------  --------  --------
  Total revenues........   6,580     10,490    13,281    18,514    21,500    27,301    33,364    30,457
Cost of revenues:
 Advertising and
  syndication...........     318        430     1,009     1,113       953     1,134     1,433     2,027
 Ecommerce..............     --       1,130     1,339     1,579     1,888     2,277     2,851     3,826
 Listings...............     --         --        --        --        --        --        487       781
                         -------   --------  --------  --------  --------  --------  --------  --------
  Total cost of
   revenues.............     318      1,560     2,348     2,692     2,841     3,411     4,771     6,634
                         -------   --------  --------  --------  --------  --------  --------  --------
  Gross profit..........   6,262      8,930    10,933    15,822    18,659    23,890    28,593    23,823
Operating expenses:
 Sales and marketing....   6,777     11,638    20,112    24,994    17,280    19,770    23,632    25,118
 Product development....   4,121      6,285    10,404     8,744     8,986     9,562     9,119     8,991
 General and
  administrative........   1,812      2,552     3,556     2,629     3,180     3,363     3,176     3,536
 Amortization of
  goodwill and
  intangibles...........     395      1,523     1,806     1,718     1,945     1,831     1,612     2,100
                         -------   --------  --------  --------  --------  --------  --------  --------
  Total operating
   expenses.............  13,105     21,998    35,878    38,084    31,391    34,526    37,539    39,745
                         -------   --------  --------  --------  --------  --------  --------  --------
Loss from operations....  (6,843)   (13,068)  (24,945)  (22,262)  (12,732)  (10,636)   (8,946)  (15,922)
Non-operating income
 (expense), net.........      19        570       936     1,400    (1,004)   (2,184)   (3,928)   (7,075)
                         -------   --------  --------  --------  --------  --------  --------  --------
Loss before income
 taxes..................  (6,824)   (12,498)  (24,009)  (20,862)  (13,736)  (12,820)  (12,874)  (22,997)
Income taxes............      52        --        --        418        47        47        41        28
                         -------   --------  --------  --------  --------  --------  --------  --------
  Net loss.............. $(6,876)  $(12,498) $(24,009) $(21,280) $(13,783) $(12,867) $(12,915) $(23,025)
                         =======   ========  ========  ========  ========  ========  ========  ========
Basic and diluted net
 loss per share ........ $ (0.35)  $  (0.54) $  (0.45) $  (0.08) $  (0.16) $  (0.14) $  (0.14) $  (0.26)
                         =======   ========  ========  ========  ========  ========  ========  ========
</TABLE>

                                      36
<PAGE>

Joint Venture

   In February 2000, LookSmart entered into a joint venture agreement with
British Telecommunications (BT). LookSmart and BT have an equal equity
interest in the joint venture, BT LookSmart, which will provide localized
directory services in Europe and Asia. We account for our investment in the
joint venture using the equity method of accounting. Our share of the joint
venture's net income or loss is reported as non-operating income or expense.

Liquidity and Capital Resources

   LookSmart has incurred losses and consumed cash each year since inception.
Operating activities used $38.7 million of cash in 2000 compared to $36.7
million in 1999. The consumption of cash in operating activities was primarily
driven by: a net loss of $62.6 million in 2000 compared to $64.7 million in
1999; an increase of $10.6 million in accounts receivable, due to the
increased level of revenues; increases in prepaid expenses, inventory and
other assets of $9.3 million due to higher prepaid distribution marketing
costs, inventory balances and higher security deposits; and a decrease of $5.5
million in deferred revenues. Cash was provided by an increase in accounts
payable and accrued liabilities of $21.9 million and LookSmart's share of its
joint venture's loss of $10.9 million.

   In 2000 we purchased property and equipment of $6.6 million compared to
$11.7 million in 1999. The significantly lower level of expenditure in 2000
resulted from a reduction in the growth rate of our headcount in 2000 compared
to 1999. In 2000 the Company funded $12.7 million of its obligation to the
joint venture.

   Net cash provided by financing activities in 2000 was $54.0 million
compared to $160.6 million in 1999. The agreement establishing the joint
venture requires that LookSmart commit up to $108.0 million in cash through
March 2003. While the budget for the joint venture will be determined by the
joint venture's board of directors, we expect that our financial contributions
in 2001 will not exceed our financial contributions in 2000 of $12.7 million.
Under the terms of the agreement, BT extended a $50.0 million credit facility
with interest at 20% per annum. LookSmart borrowed $50.0 million from the
credit facility in February 2000. Our use of borrowed funds is restricted to
funding the joint venture. Debt and related interest on the credit facility
are convertible into LookSmart common stock at $35.00 per share at BT's
discretion.

   As of December 31, 2000, LookSmart had $98.9 million of cash, restricted
cash and short-term investments.

   Our capital requirements depend on numerous business facts including our
hiring and product development needs, the funding needs of strategic alliances
and distribution agreements and the pace at which we pursue overseas expansion
of our business. We have experienced a substantial increase in expenditures
since inception driven by growth in the size and nature of our operations. We
anticipate that this trend will continue for the foreseeable future. We will
continue to evaluate acquisitions and strategic investments in complementary
businesses both in the United States and internationally. These acquisitions
may require the use of cash and, to the extent that acquired interests have
not reached cash flow breakeven, we may need to fund the operations and
expansion of these acquired interests in addition to funding the growth of our
current business.

   Management believes that our current cash balance is sufficient to meet our
operating requirements and funding commitments to BT LookSmart until at least
the end of 2001. However, we expect that we will need to seek additional
financing to fund further expansion. We cannot assure you that such financing
will be available on reasonable terms. If we raise funds through the issuance
of equity or convertible debt securities, our existing stockholders will
experience dilution of their holdings.

Recently Issued Accounting Pronouncements

   In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for
transactions entered into after March 31, 2000 and requires that all
derivative instruments be recorded on the balance sheet at fair value. Changes
in the fair value are recorded in

                                      37
<PAGE>

current earnings or other comprehensive income. The Company has not held any
derivative instruments or participated in any hedging activities.

   In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities--a
replacement of FASB Statement No. 125" ("FAS 140"). FAS 140 revises the
standards for accounting for securitizations and other transfers of financial
assets and collateral. The accounting standards of FAS 140 are effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. The Company has not yet determined the impact,
if any, that the adoption of FAS 140 will have on the consolidated financial
statements.

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   Interest Rate Risk. LookSmart's exposure to market risk for interest rate
changes relates primarily to its short-term investments. We had no derivative
financial instruments as of December 31, 2000 or 1999. LookSmart invests its
excess cash in debt instruments of high-quality corporate issuers with
original maturities greater than three months and current maturities less than
twelve months. The amount of credit exposure to any one issue, issuer and type
of instrument is limited.

   Foreign Currency Risk. International revenues from our foreign subsidiaries
were less than 10% of total revenues in 2000 and were derived entirely from
our Australian operations. LookSmart's international business is subject to
risks typical of an international business, including but not limited to
differing economic conditions, changes in political climate, differing tax
structures, other regulations and restrictions and foreign exchange rate
volatility, partially the exchange rate between the Australian dollar and the
United States dollar. The effect of foreign exchange rate fluctuations on the
Company in 1998, 1999 and 2000 were not material.

                                      38
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                       INDEX TO THE FINANCIAL STATEMENTS

                        LOOKSMART, LTD. AND SUBSIDIARIES
                       CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Report of Independent Accountants........................................  40

Consolidated Balance Sheets at December 31, 1999 and 2000................  41

Consolidated Statements of Operations and Comprehensive Loss for the
 years ended December 31, 1998, 1999 and 2000............................  42

Consolidated Statements of Stockholders' Equity (Deficit) for the years
 ended December 31, 1998, 1999 and 2000..................................  43

Consolidated Statements of Cash Flows for the years ended December 31,
 1998, 1999 and 2000.....................................................  44

Notes to Consolidated Financial Statements...............................  45
</TABLE>

                                       39
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of LookSmart, Ltd. and
Subsidiaries:

   In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive loss, of
stockholders' equity (deficit) and of cash flows present fairly, in all
material respects, the financial position of LookSmart, Ltd. and Subsidiaries
(the Company) at December 31, 1999 and 2000, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

                                          /s/ PricewaterhouseCoopers LLP

San Francisco, California
January 24, 2001
except as to the first, second, and fourth paragraphs of Note 15,
which are as of February 20, 2001

                                      40
<PAGE>

                                LOOKSMART, LTD.

                          CONSOLIDATED BALANCE SHEETS
                   (In Thousands, except for per share data)

<TABLE>
<CAPTION>
                                                               December 31,
                                                            -------------------
                                                              1999      2000
                                                            --------  ---------
<S>                                                         <C>       <C>
                          ASSETS
                          ------

Current assets:
  Cash and cash equivalents...............................  $ 75,971  $  52,617
  Cash and cash equivalents (restricted)..................       --      43,297
  Short term investments..................................    28,038      2,979
  Trade accounts receivable, net of allowance for doubtful
   accounts of $610 and $4,195 at December 31, 1999 and
   2000...................................................     8,039     18,307
  Trade accounts receivable from related party............       980        977
  Due from related party..................................       --       2,608
  Prepaid distribution costs..............................     1,435      4,673
  Prepaid expenses........................................     2,275      3,045
  Inventory...............................................       --       1,534
  Other current assets....................................       965        429
                                                            --------  ---------
   Total current assets...................................   117,703    130,466
Property and equipment, net...............................    11,595     13,259
Security deposits.........................................     2,191      2,902
Goodwill and intangible assets, net of accumulated
 amortization of $6,661 and $14,146 at December 31, 1999
 and 2000.................................................    29,301     31,895
Investment in BT LookSmart joint venture..................       --       1,759
Other assets..............................................       729      2,115
                                                            --------  ---------
   Total assets...........................................  $161,519  $ 182,396
                                                            ========  =========

            LIABILITIES & STOCKHOLDERS' EQUITY
            ----------------------------------

Current liabilities:
  Trade accounts payable..................................  $  4,002  $   7,414
  Other accrued liabilities...............................    12,915     20,537
  Deferred revenue........................................    16,705     13,622
  Income taxes payable....................................       650        512
  Capital lease obligations--current portion..............       743        751
                                                            --------  ---------
   Total current liabilities..............................    35,015     42,836
Deferred revenue..........................................     4,919        --
Capital lease obligations.................................     1,423        778
Long term debt............................................       --      50,436
Accrued interest on long term debt........................       --       9,033
Minority interest.........................................       610         91
                                                            --------  ---------
   Total liabilities......................................    41,967    103,174
Commitments (Note 6)
Stockholders' equity:
  Convertible preferred stock, $0.001 par value;
   Authorized: 5,000 at December 31, 1999 and 2000; Issued
   and Outstanding: none at December 31, 1999 and 2000....       --         --
  Common stock, $.001 par value; Authorized: 200,000 at
   December 31, 1999 and 2000; Issued and Outstanding:
   86,267 and 91,569 at December 31, 1999 and 2000........        86         92
  Additional paid-in capital..............................   211,305    234,539
  Other equity (deficit)..................................    (3,904)    (4,884)
  Accumulated deficit.....................................   (87,935)  (150,525)
                                                            --------  ---------
   Total stockholders' equity.............................   119,552     79,222
                                                            --------  ---------
   Total liabilities and stockholders' equity.............  $161,519  $ 182,396
                                                            ========  =========
</TABLE>

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

                                       41
<PAGE>

                                LOOKSMART, LTD.

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

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                   ----------------------------
                                                     1998      1999      2000
                                                   --------  --------  --------
<S>                                                <C>       <C>       <C>
Revenues:
  Advertising/syndication......................... $  5,559  $ 22,076  $ 64,681
  Licensing.......................................    3,226    19,255    19,618
  Ecommerce.......................................      --      7,534    18,062
  Listings........................................      --        --     10,261
                                                   --------  --------  --------
    Total revenues................................    8,785    48,865   112,622
Cost of revenues:
  Advertising/syndication.........................    1,086     2,870     5,547
  Licensing.......................................      500       --        --
  Ecommerce.......................................      --      4,048    10,842
  Listings........................................      --        --      1,268
                                                   --------  --------  --------
    Total cost of revenues........................    1,586     6,918    17,657
                                                   --------  --------  --------
    Gross profit..................................    7,199    41,947    94,965
Operating expenses:
  Sales and marketing (inclusive of amortization
   of unearned compensation of $40, $2,781 and
   $1,453 in 1998, 1999 and 2000, respectively)...   11,015    61,863    85,800
  Product development (inclusive of amortization
   of unearned compensation of $86, $4,837 and
   $958 in 1998, 1999 and 2000, respectively).....    4,851    31,430    36,658
  General and administrative (inclusive of
   amortization of unearned compensation of $7,
   $2,248 and $1,034 in 1998, 1999 and 2000,
   respectively)..................................    2,626    10,330    13,255
  Amortization of goodwill and intangibles........      605     5,442     7,488
                                                   --------  --------  --------
    Total operating expenses......................   19,097   109,065   143,201
                                                   --------  --------  --------
Loss from operations..............................  (11,898)  (67,118)  (48,236)
Non-operating income (expense):
  Other income (expense), net.....................     (139)       (8)   (1,803)
  Interest income (expense), net..................     (675)    2,933    (1,963)
  Share of joint venture income (expense), net....      --        --    (10,944)
  Minority interest...............................      --        --        519
                                                   --------  --------  --------
Loss before income taxes..........................  (12,712)  (64,193)  (62,427)
Income taxes......................................      146       470       163
                                                   --------  --------  --------
Net loss..........................................  (12,858)  (64,663)  (62,590)
Other comprehensive income (loss):
  Change in unrealized loss on securities during
   the period.....................................      --        (77)     (255)
  Change in translation adjustment................      (16)       77      (185)
                                                   --------  --------  --------
Comprehensive loss................................ $(12,874) $(64,663) $(63,030)
                                                   ========  ========  ========
Basic and diluted loss per share.................. $  (0.68) $  (1.42) $  (0.70)
                                                   ========  ========  ========
Weighted average shares outstanding used in per
 share calculation................................   18,790    45,518    89,111
                                                   ========  ========  ========
</TABLE>

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

                                       42
<PAGE>

                                LOOKSMART, LTD.

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                 (In Thousands)

<TABLE>
<CAPTION>
                           Convertible
                            Preferred                                                         Total
                              Stock        Common Stock  Additional                       Stockholder's
                          ---------------  -------------  Paid-In    Other    Accumulated    Equity
                          Shares   Amount  Shares Amount  Capital    Equity     Deficit     (Deficit)
                          -------  ------  ------ ------ ---------- --------  ----------- -------------
<S>                       <C>      <C>     <C>    <C>    <C>        <C>       <C>         <C>
Balance at January 1,
 1998...................      --   $ --    18,000  $ 18   $  9,897  $     46   $ (10,414)   $   (453)
Common stock issued upon
 exercise of options....      --     --       402   --           5       --          --            5
Common stock issued for
 cash...................      --     --     1,057     1          8       --          --            9
Preferred stock issued
 for cash, conversion of
 notes, and as part of
 acquisitions, net of
 costs of $688..........   26,681     26      --    --      11,340       --          --       11,366
Issuance of warrants
 with preferred stock...      --     --       --    --        (770)      770         --          --
Issuance of warrants
 with debt..............      --     --       --    --         --        379         --          379
Issuance of warrants for
 services...............      --     --       --    --         --         31         --           31
Issuance of warrants
 with financing
 agreements.............      --     --       --    --         --        143         --          143
Unearned compensation...      --     --       --    --       1,448    (1,448)        --          --
Amortization of unearned
 compensation...........      --     --       --    --         --        133         --          133
Translation adjustment..      --     --       --    --         --        (16)        --          (16)
Net loss................      --     --       --    --         --        --      (12,858)    (12,858)
                          -------  -----   ------  ----   --------  --------   ---------    --------
Balance at December 31,
 1998...................   26,681     26   19,459    19     21,928        38     (23,272)     (1,261)
Preferred stock series A
 issued for cash........    1,500      2      --    --         531       --          --          533
Preferred stock series C
 issued for cash, net of
 costs of $29...........   12,083     12      --    --      60,332       --          --       60,344
Unearned Compensation...      --     --       --    --      15,135   (15,135)        --          --
Amortization of unearned
 compensation...........      --     --       --    --         --      9,866         --        9,866
Common stock issued as
 part of Guthy Renker
 Acquisition............      --     --     2,550     3     11,472       --          --       11,475
Issuance of warrants as
 part of ITW
 Acquisition............      --     --       --    --         --      4,263         --        4,263
Issuance of warrants
 with series C preferred
 stock..................      --     --       --    --      (1,443)    1,443         --          --
Common stock issued upon
 exercise of options....      --     --     2,616     3        179       --          --          182
Common stock issued as
 part of IPO, net of
 offering costs of
 $9,342.................      --     --     8,855     9     96,900       --          --       96,909
Preferred stock stock
 repurchased............     (555)    (1)     555     1        --        --          --          --
Conversion of preferred
 stock to common stock..  (39,709)   (39)  39,710    39        --        --          --          --
Common stock issued upon
 exercise of warrants...      --     --    12,465    12      5,687    (4,379)        --        1,320
Common stock issued for
 Employee Stock Purchase
 Plan...................      --     --        57   --         584       --          --          584
Unrealized loss on
 securities.............      --     --       --    --         --        (77)        --          (77)
Translation adjustment..      --     --       --    --         --         77         --           77
Net loss................      --     --       --    --         --        --      (64,663)    (64,663)
                          -------  -----   ------  ----   --------  --------   ---------    --------
Balance at December 31,
 1999...................      --     --    86,267    86    211,305    (3,904)    (87,935)    119,552
Common stock issued upon
 exercise of stock
 options................      --     --     2,911     3      2,737       --          --        2,740
Common stock issued for
 additional ownership of
 Futurecorp.............      --     --        57   --       2,383       --          --        2,383
Common stock issued for
 Zeal acquisition.......      --     --       579     1     15,926       --          --       15,927
Common stock issued upon
 exercise of warrants...      --     --     1,414     1      1,822    (1,822)        --            1
Common stock issued for
 Employee Stock Purchase
 Plan...................      --     --       341     1      1,953       --          --        1,954
Unearned compensation--
 Zeal acquisition.......      --     --       --    --         --     (3,764)        --       (3,764)
Amortization of unearned
 compensation...........      --     --       --    --         --      4,004         --        4,004
Recapture of unearned
 compensation upon
 terminations...........      --     --       --    --      (1,587)    1,042         --         (545)
Unrealized loss on
 securities.............      --     --       --    --         --       (255)        --         (255)
Translation adjustment..      --     --       --    --         --       (185)        --         (185)
Net loss................      --     --       --    --         --        --      (62,590)    (62,590)
                          -------  -----   ------  ----   --------  --------   ---------    --------
Balance at December 31,
 2000...................      --   $ --    91,569  $ 92   $234,539  $ (4,884)  $(150,525)   $ 79,222
                          =======  =====   ======  ====   ========  ========   =========    ========
</TABLE>

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

                                       43
<PAGE>

                                LOOKSMART, LTD.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                                  ----------------------------
                                                    1998      1999      2000
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Cash flows from operating activities:
  Net loss....................................... $(12,858) $(64,663) $(62,590)
  Adjustments to reconcile net loss to net cash
   used in operating activities:
    Share of joint venture loss..................      --        --     10,941
    Depreciation and amortization................      956     7,552    12,428
    Amortization of unearned compensation........      133     9,866     3,445
    Write-off of in-process research and
     development.................................      338       --        --
    Warrants and other non-cash charges..........      557       --      1,382
    Loss on disposition of equipment.............       12       259       --
    Changes in operating assets and liabilities,
     net of effects of acquisitions and
     disposals:
      Trade accounts receivable..................   (2,709)   (6,124)  (10,552)
      Prepaid expenses...........................     (781)   (2,919)   (4,008)
      Inventory..................................      --        --     (1,534)
      Other assets...............................     (170)   (3,375)   (3,805)
      Trade accounts payable.....................      834     2,677     3,412
      Other accrued liabilities and payables.....    2,431     8,411    18,467
      Deferred revenues..........................    9,330    11,571    (5,534)
      Minority interest..........................      --        --       (519)
                                                  --------  --------  --------
        Net cash used in operating activities....   (1,927)  (36,745)  (38,467)
                                                  --------  --------  --------
Cash flows from investing activities:
  Acquisitions...................................     (907)  (11,489)   (1,673)
  Purchase of short-term investments.............      --    (28,038)   (2,979)
  Proceeds from sale of short term investments...      --        --     28,566
  Funding to joint venture.......................      --        --    (12,700)
  Restricted cash................................      --        --    (43,297)
  Purchases of property and equipment............   (1,573)  (11,885)   (6,601)
                                                  --------  --------  --------
        Net cash used in investing activities....   (2,480)  (51,412)  (38,684)
                                                  --------  --------  --------
Cash flows from financing activities:
  Proceeds from notes............................    4,952       --        467
  Repayment of notes.............................   (2,327)   (1,500)      (31)
  Proceeds from credit facility..................      --        --     50,000
  Proceeds from issuance of preferred stock,
   net...........................................    5,237    60,887       --
  Proceeds from sale of equipment under sale
   lease-back agreement..........................      --      2,635       --
  Repayments on equipment lease..................      --       (469)     (637)
  Proceeds from exercise of common stock
   warrants......................................      --      1,321       --
  Net proceeds from issuance of common stock.....       14    97,676     4,183
                                                  --------  --------  --------
        Net cash provided by financing
         activities..............................    7,876   160,550    53,982
                                                  --------  --------  --------
Effect of exchange rate changes on cash..........      (16)       77      (185)
                                                  --------  --------  --------
Increase (decrease) in cash and cash
 equivalents.....................................    3,453    72,470   (23,354)
Cash and cash equivalents, beginning of period...       48     3,501    75,971
                                                  --------  --------  --------
Cash and cash equivalents, end of period......... $  3,501  $ 75,971  $ 52,617
                                                  ========  ========  ========
Supplemental disclosure of cash flow information
 (Note 13)
</TABLE>

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

                                       44
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies:

 Nature of Business and Principles of Consolidation

   LookSmart (the Company) offers its business partners and consumers
comprehensive Internet search infrastructure services. LookSmart distributes
its proprietary directory to a large number of Internet users through
LookSmart owned web properties, as well as through our strategic partners,
which include Internet portals, Internet service providers and media
companies. LookSmart also promotes and sells a range of consumer products,
including the "As Seen on TV" product line promoted by our partner Guthy-
Renker Corporation.

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

 Use of Estimates

   The financial statements have been prepared in conformity with accounting
principles generally accepted in the United States. This requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and revenues and expenses during the reporting period. Actual
results could differ from those estimates.

 Reclassifications

   Certain prior years' balances have been reclassified to conform with the
current year's presentation.

 Fair Value of Financial Instruments

   The Company's financial instruments, including cash and cash equivalents,
short-term investments, accounts receivable, accounts payable and capital
lease are carried at cost, which approximates fair value due to the relatively
short maturity of those instruments.

 Stock Splits

   On December 17, 1997, the Company authorized and implemented a one
thousand-for-one stock split. On March 23, 1999, the Company authorized and
implemented a four-for-one stock split. On July 23, 1999, the Company
authorized and implemented a three-for-two stock split. All share and per
share amounts have been retroactively restated to reflect the effect of the
stock splits.

 Foreign Currencies

   The balance sheets of the Company's foreign subsidiaries are translated
into United States dollars at year end rates of exchange. Revenues and
expenses are translated at average rates for the year. The resulting
translation adjustments are shown as a separate component of stockholders'
equity and as a component of comprehensive loss.

   Exchange gains and losses arising from transactions denominated in a
foreign currency other than the functional currency of the entity involved are
included in other expense. Such exchange gains (losses) amounted to
($119,000), $0, and $3,000 for years ended December 31, 1998, 1999 and 2000,
respectively. The Company has not entered into foreign currency forward
exchange contracts or any other derivative instruments.

                                      45
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Cash and Cash Equivalents

   Cash and cash equivalents are stated at cost. The Company considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents.

 Restricted Cash

   On February 15, 2000, the Company borrowed $50.0 million under a credit
facility made available by British Telecommunications (BT). In accordance with
BT LookSmart agreement, drawdowns on the credit facility may be used only for
the purpose of funding BT LookSmart. As of December 31, 2000, cash drawn down
on this credit facility has been classified as restricted cash on the balance
sheet and $6.7 million of the cash drawn down has been used to fund the joint
venture (see Note 12).

 Short-Term Investments

   The Company accounts for short-term investments under Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS 115). SFAS 115 requires the classification
of investments in debt and equity securities with readily determined fair
values as "held-to-maturity," "available-for-sale," or "trading." The Company
invests its excess cash in debt instruments of high-quality corporate issuers.
All highly liquid instruments with original maturities greater than three
months and current maturities less than twelve months from the balance sheet
date are considered short-term investments. These securities are classified as
available-for-sale and carried at fair value, based on quoted market prices.
Net unrealized gains or losses on these investments are reported, as a
component of comprehensive income (loss) in stockholders' equity, net of tax.
At December 31, 2000 the Company's short-term investments were composed of
commercial paper whose estimated fair value approximated cost. In addition the
Company has an investment in marketable equity securities acquired in
connection with the sale of its Choicemall property in May 2000 (Note 11).
These securities are classified as available for sale and are carried at the
lower of cost or market. The cost of the remaining shares held is $684,000 and
the estimated fair value is $332,000. In December 2000 the Company recorded a
$600,000 realized loss on its investment in commercial paper and a $625,000
loss on its investment in marketable equity securities to reflect an other
than temporary decline in the fair value of such securities.

   On December 22, 1999, the Company acquired 14.5% of the outstanding voting
stock of Dstore Pty Ltd, (Dstore) a privately held company, for $328,000. This
transaction was accounted for as an investment using the cost method of
accounting. In December 2000, Dstore was acquired by a third party. As
consideration LookSmart received an equity interest in the purchaser. In
connection with this transaction LookSmart recorded a realized loss on this
investment of approximately $236,000. The investment is stated at cost as of
December 31, 2000 and 1999.

 Inventory

   Inventories, consisting of products available for sale, are valued at the
lower of cost (first in, first out) or market.

 Property and Equipment

   Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets as follows:

<TABLE>
   <S>                                                             <C>
   Computer equipment............................................. 3 years
   Furniture and fixtures......................................... 5 years
   Software....................................................... 2 to 3 years
</TABLE>

                                      46
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Leasehold improvements are amortized on a straight line basis over the
shorter of their estimated useful lives or the lease term.

   When assets are retired or otherwise disposed of, the cost and accumulated
depreciation are removed from their respective accounts, and any gain or loss
on such sale or disposal is reflected in operating expenses. Maintenance and
repairs are charged to expense as incurred. Expenditures which substantially
increase an asset's useful life are capitalized.

 Internal Use Software and Web Site Development Costs

   The Company accounts for internal use software in accordance with American
Institute of Certified Public Accountants (AICPA) Statement of Position No.
98-1 (SOP 98-1), "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." In accordance with the capitalization criteria of
SOP 98-1 the Company has capitalized external direct costs of materials and
services consumed in developing and obtaining internal-use computer software
and the payroll and payroll-related costs for employees who are directly
associated with and who devote time to the internal-use computer software
project. The Company has capitalized software costs of $443,000 and $2.1
million with related accumulated amortization of $84,000, and $738,000 at
December 31, 1999 and 2000, respectively. Capitalized software is included in
other assets and is amortized over two years. The Company capitalizes certain
costs incurred in the development of its websites in accordance with Emerging
Issues Task Force (EITF) Issue No. 00-02 Consensus, "Accounting for Web Site
Development Costs." These are costs incurred during the infrastructure,
graphics and content development stages.

 Goodwill and Intangible Assets

   Goodwill and intangible assets consist of the excess of purchase price paid
over the fair market value of identified intangible and tangible net assets of
acquired companies. Goodwill and intangible assets are amortized using the
straight-line method over one to five years depending on the period of
expected benefit. The majority of goodwill and intangible assets are amortized
over five years, the period of expected benefit. Valuation of goodwill and
intangible assets is reassessed periodically to conform to changes in
management's estimates of future performance giving consideration to existing
and anticipated competitive and economic conditions. Cash flow forecasts used
in evaluation of goodwill and intangibles are based on trends of historical
performance and management's estimate of future performance.

 Asset Impairment

   Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
(SFAS No. 121), requires recognition of impairment of long-lived assets in the
event the net book value of such assets exceeds the future undiscounted cash
flows attributable to such assets. In such circumstances, the amount of
impairment would be measured as the difference between the estimated fair
market value of the asset and its carrying amount.

 Stock-Based Compensation

   The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25 (APB
No. 25), "Accounting for Stock Issued to Employees," and related
interpretations and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-based Compensation." Under APB No. 25, compensation cost
is recognized based on the difference, if any, on the date of grant between
the fair value of the Company's stock and the amount an employee must pay to
acquire the stock.


                                      47
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 Net Loss Per Share

   SFAS No. 128, "Earnings per Share," establishes standards for computing and
presenting earnings per share. Basic earnings per share is calculated using
the average shares of common stock outstanding. Diluted earnings per share is
calculated using the weighted average number of common and dilutive common
equivalent shares outstanding during the period, using either the as if
converted method for convertible preferred stock or the treasury stock method
for options and warrants.

 Revenue Recognition

   In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB 101). SAB 101 became effective for the fourth quarter of the year ending
December 31, 2000. The Company adopted SAB 101 which did not have a material
impact on its consolidated financial statements.

   The Company generates revenues from listings, advertising and syndication,
licensing and ecommerce activities. Listings revenues are derived from Express
Listings and Subsite Listings fees. Express Listings fees result from the
expedited review of customers web sites. If the submitted site is included in
the Company's directory, the Company recognizes as revenue a one time review
fee. Subsite Listings involve payment for placement of multiple URLs within
the Company's directory. Typically subsite contracts have two components,
upfront and maintenance fees as well as a cost-per-click (CPC), or performance
element. The company recognizes the CPC element as earned. The upfront and
maintenance fees are initially recorded as deferred revenue and recognized
ratably over the term of the contract, generally 12 to 18 months.

   Advertising and syndication revenues are derived from the sale of
advertisements on the websites of the Company and its syndication partners who
display LookSmart content. Advertising revenues are recognized ratably as
impressions are delivered over the period in which the advertisement is
displayed, provided that no significant Company obligations remain at the end
of a period and collection of the resulting receivable is reasonably assured.
Company obligations typically include guarantees of a minimum number of
"impressions," or times that an advertisement appears in pages viewed by users
of the Company's or its partners' online properties. To the extent minimum
guaranteed impressions are not met, the Company defers recognition of the
corresponding revenues until the remaining guaranteed impression levels are
achieved.

   Advertising and syndication revenues also include barter transactions which
are the exchange of advertising space on the Company's websites for
advertising space on other websites. These transactions are recorded in
accordance with the EITF Issue No. 99-17 Consensus, "Accounting for
Advertising Barter Transactions" at the fair value of similar advertisements
for which cash was received. For the years ended December 31, 1998, 1999 and
2000, the Company recognized $478,000, $257,000 and $1,912,000, respectively,
of revenue from barter transactions.

   Revenues associated with licensing contracts are recognized as delivery
occurs as specified under the contracts, all performance obligations have been
satisfied and no refund obligations exist. Payments from customers received in
advance of delivery are recorded as deferred revenues.

   The Company's ecommerce revenue is generated by the sale of merchandise and
the design, construction and hosting of commercial websites. In accordance
with the EITF Issue No. 99-19 Consensus, "Reporting Gross Revenue vs. Net",
revenue from the sale of merchandise is reported on a gross basis as the
Company acts as the principal in the transaction with associated product costs
and shipping and handling costs reported as cost of revenues. Revenue is
recognized at the time goods are shipped. Revenue from the design and
construction of websites is recognized when the website is delivered to the
customer, or when the Company's obligation terminates. Hosting revenues are
recognized in the period in which hosting occurs. The Company sold its design,
construction and hosting business to QSound in May of 2000. See Note 11 for
further discussion.

                                      48
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The Company entered into a five year, fixed-fee contract with Microsoft
Corporation in December 1998. Under the terms of this contract, the Company
has licensed its proprietary database and is obligated to add a certain number
of URLs ratably over the contract term. Microsoft may specify the content for
approximately half the required URL delivery. Through December 31, 2000, the
Company had met all URL delivery requirements under the contract. The Company
recognizes revenues under this contract ratably as access to URLs is delivered
and no further obligation for performance or refund exists. Under the terms of
the contract, beginning in June 2000 either party may terminate the agreement
for any reason on six months' notice.

   Under the contract, the Company received an up-front, nonrefundable fee of
$30.0 million and receives quarterly payments throughout the contract term.
Payments received in advance of performance under the contract are recorded as
deferred revenues. As of December 31, 2000, deferred revenue relating to the
Microsoft contract was $12.6 million.

 Advertising Costs

   Advertising costs are charged to sales and marketing expenses as incurred
and amounted to $256,000, $13.0 million, and $9.4 million for the years ended
December 31, 1998, 1999 and 2000, respectively.

 Product Development Costs

   Costs incurred in the classification and organization of listings within
the unique URL database and the development of new products and enhancements
to existing products are charged to expense as incurred. SFAS No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed," requires capitalization of certain software development costs
subsequent to the establishment of technological feasibility. Based upon the
Company's product development process, technological feasibility is
established upon completion of a working model. Costs incurred by the Company
between completion of the working model and the point at which the product is
ready for general release have been insignificant.

 Comprehensive Income

   The Company has adopted the accounting treatment prescribed by SFAS No.
130, "Comprehensive Income." The components of the Company's "Comprehensive
income (loss)" include no provision for United States income taxes.

 Concentration of Credit Risk and Business Risk

   The Company's short-term investments are managed by one institution.
Financial instruments which potentially subject the Company to concentrations
of credit risk consist primarily of accounts receivable. The Company maintains
a reserve for doubtful accounts receivable based upon expected collectibility
of accounts receivable. The Company has advertising contracts with a number of
early stage Internet companies that have suffered and may continue to suffer
cash flow problems.

   As of December 31, 1999, one receivable from a related party in our
ecommerce segment accounted for 11% of the total trade receivables.

   One customer in our licensing segment individually accounted for
approximately 32%, 39% and 15% of total revenues for the years ended December
31, 1998, 1999 and 2000, respectively.

   One customer in our advertising and syndication segment individually
accounted for approximately 22% of total revenues for the year ended December
31, 1998. We had no revenues from this customer for the years ended December
31, 1999 and 2000.

                                      49
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The Internet navigation market is highly competitive. The success of the
Company is dependent upon its ability to raise capital, generate traffic and
advertising revenues, and attract and retain key personnel. Factors that may
materially and adversely affect the Company's future operating results
include: demand for and market acceptance of the Company's products and
services; introduction of products and services or enhancements by the
Company; timely expansion of capacity constraints of software and
infrastructure; retention of key personnel; reliable continuity of operating
performance; identification and adoptions to rapidly changing Internet
technologies and evolving industry standards; conditions specific to the
Internet industry and other general economic factors; and new government
legislation and regulation.

 Segment Information

   The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which establishes standards for reporting
information regarding operating segments in annual financial statements and
requires selected information for those segments to be presented in interim
financial reports issued to stockholders. SFAS 131 also establishes standards
for related disclosures about products and services, geographic areas and
major customers. The Company operates in four segments: listings, advertising
and syndication, licensing and ecommerce. In the Consolidated Statements of
Operations and Comprehensive Loss, the Company reports revenue and cost of
revenues along these four segments based on the services currently provided by
each. With the exception of accounts receivable and deferred revenue,
information available to the chief operating decision makers of the Company
does not include allocations of assets and liabilities or operating costs to
the Company's segments. As of December 31, 1999 and 2000, accounts receivable
by segments are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                ---------------
                                                                 1999    2000
                                                                ------  -------
   <S>                                                          <C>     <C>
   Listings.................................................... $  --   $ 2,806
   Advertising/syndication.....................................  8,368   19,260
   Licensing...................................................    269      424
   Ecommerce...................................................    992      989
                                                                ------  -------
   Total.......................................................  9,629   23,479
   Allowance for doubtful accounts.............................   (610)  (4,195)
                                                                ------  -------
   Accounts receivable, net.................................... $9,019  $19,284
                                                                ======  =======
</TABLE>

   As of December 31, 2000, Due from Related Party includes a $2.6 million
receivable from BT LookSmart which has not been allocated to any of the
Company's segments.

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

<TABLE>
<CAPTION>
                                                                December 31,
                                                               ---------------
                                                                1999    2000
                                                               ------- -------
   <S>                                                         <C>     <C>
   Listings................................................... $   --  $   309
   Advertising/syndication....................................     239     253
   Licensing..................................................  18,597  13,060
   Ecommerce..................................................   2,788     --
                                                               ------- -------
   Total...................................................... $21,624 $13,622
                                                               ======= =======
</TABLE>


                                      50
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 Recently Issued Accounting Pronouncements

   In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for
transactions entered into after March 31, 2000 and requires that all
derivative instruments be recorded on the balance sheet at fair value. Changes
in the fair value are recorded in current earnings or other comprehensive
income. The Company has not held any derivative instruments or participated in
any hedging activities.

   In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities--a
replacement of FASB Statement No. 125" ("FAS 140"). FAS 140 revises the
standards for accounting for securitizations and other transfers of financial
assets and collateral. The accounting standards of FAS 140 are effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. The Company has not yet determined the impact,
if any, that the adoption of FAS 140 will have on the consolidated financial
statements.

2. Property and Equipment:

   Property and equipment consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                ---------------
                                                                 1999    2000
                                                                ------- -------
   <S>                                                          <C>     <C>
   Computer equipment.......................................... $ 9,332 $15,086
   Furniture and fixtures......................................   1,382   1,352
   Software....................................................     865   1,470
   Leasehold improvements......................................   2,751   3,022
                                                                ------- -------
                                                                 14,330  20,930
   Less accumulated depreciation and amortization..............   2,735   7,671
                                                                ------- -------
   Property and equipment, net................................. $11,595 $13,259
                                                                ======= =======
</TABLE>

   Cost related to assets under capital lease obligations at December 31, 2000
and 1999 was $2.6 million. Accumulated depreciation related to assets under
capital lease obligations at December 31, 2000 and 1999 was $1.1 million and
$272,000, respectively.

   Depreciation expense was $351,000, $2.1 million and $4.9 million for the
years ended December 31, 1998, 1999 and 2000, respectively.

3. Other Accrued Liabilities:

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                ---------------
                                                                 1999    2000
                                                                ------- -------
                                                                (in thousands)
   <S>                                                          <C>     <C>
   Accrued expenses and other current liabilities:
     Accrued compensation and related expenses................. $ 1,485 $ 1,457
     Accrued content, connect, and other costs.................   1,664  13,274
     Accrued sales and marketing related expenses..............   3,167     --
     Accrued professional service expenses.....................   1,366     298
     Payable to former shareholders of Futurecorp..............   1,958     --
     Other.....................................................   3,275   5,508
                                                                ------- -------
                                                                $12,915 $20,537
                                                                ======= =======
</TABLE>


                                      51
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

4. Notes Payable:

   In September 1997, the Company issued a note payable for $1.5 million to a
stockholder. Interest was charged at the rate of 10% per annum and was payable
quarterly starting September 30, 1998. The Company repaid the note in June
1999.

   From January to April 1998, the Company issued convertible promissory notes
in the principal amount of $2.9 million to investors of the Company. All notes
bore interest at 10% per annum and included an issuance of 2,510,412 Series A
preferred stock warrants (Note 7). In May 1998, in accordance with the terms
of these notes, outstanding principal of $2.1 million was converted into
Series A preferred stock; outstanding principal and interest of $505,000 was
converted into Series B preferred stock and outstanding principal of $250,000
was repaid to a note holder.

   In September 1998, the Company entered into a financing agreement with
Microsoft to borrow up to $11.9 million at an interest rate of 8% per annum.
In December 1998, pursuant to a licensing agreement with Microsoft, this note
was applied as an offset against the payments due under that license agreement
and was recorded as deferred revenue of $11.4 million on the Company's balance
sheet. Warrants to purchase 480,000 shares of common stock at an exercise
price of $0.6275 per share were issued in conjunction with the financing
agreement. These warrants expire in September 2003. The fair value of these
warrants was recorded as interest expense over the term the financing
agreement was effective.

   In January 2000, the Company issued an unsecured promissory note in the
principal amount of $472,000 to its landlord. The note bears interest at 9%
per annum and is payable in equal monthly installments over a term of 10
years. As of December 31, 2000 the balance of this note was $436,000.

   In February 2000, in connection with the joint venture agreement with
British Telecommunications (BT), BT extended and the Company borrowed the full
amount of a $50 million credit facility with interest at 20% per annum. Draw
downs on the credit facility, including accrued interest, are convertible into
common stock of the Company at $35.00 per share at BT's discretion. Proceeds
of this credit facility may only be used to fulfill the Company's obligations
to fund BT LookSmart. The credit facility is due in full by February 2003,
unless converted into LookSmart common stock prior to that time.

5. Income Taxes:

   The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards No. 109 (SFAS No.
109). Under this method, deferred tax liabilities and assets are determined
based on the difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse. Valuation allowances are established
when necessary to reduce deferred tax assets to the amounts expected to be
realized. The provision for income taxes of $146,000, $470,000 and $163,000
for the years ended December 31, 1998, 1999, and 2000 applies to the Company's
foreign subsidiaries.

                                      52
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The primary components of the net deferred tax asset are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                               December 31,
                                                             ------------------
                                                               1999      2000
                                                             --------  --------
   <S>                                                       <C>       <C>
   Deferred tax asset:
     Net operating losses................................... $ 26,950  $ 44,879
     Depreciation and amortization..........................      975     2,310
     Accrual and reserves...................................      624     2,128
     Compensation...........................................      517       543
                                                             --------  --------
       Total deferred tax assets............................   29,066    49,860
   Less: valuation allowance................................  (29,066)  (49,860)
                                                             --------  --------
                                                             $    --   $    --
                                                             ========  ========
</TABLE>

   As of December 31, 2000, the Company has net operating loss (NOL)
carryforwards of approximately of $116.0 million and $105.0 million for
federal and state tax purposes, respectively. Pursuant to the provisions of
Section 382 of the Internal Revenue Code, utilization of the NOLs is subject
to annual limitations through the year 2011 due to a greater than 50% change
in the ownership of the Company which occurred during fiscal years 1997 and
1998. These loss carryforwards expire from 2004 to 2020.

6. Commitments:

 Operating Leases and Advertising and Marketing Commitments

   The Company leases office space under non-cancelable operating leases which
expire at various dates through the year 2009. The Company has also entered
into non-cancelable advertising and marketing programs with contracts which
expire at various dates through the year 2004. In June 1999, the Company
entered into several advertising and marketing agreements.

   Future minimum payments under all operating leases and advertising and
marketing programs at December 31, 2000 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                 Advertising and
                                                       Operating    Marketing
                                                        Leases     Commitments
                                                       --------- ---------------
   <S>                                                 <C>       <C>
   Year ending December 31:
     2001.............................................  $ 5,261      $2,882
     2002.............................................    5,007       1,450
     2003.............................................    4,773       1,450
     2004.............................................    4,652         935
     2005.............................................    4,711         --
     Thereafter.......................................   18,446         --
                                                        -------      ------
       Total..........................................  $42,850      $6,717
                                                        =======      ======
</TABLE>

   Rent expense under all operating leases for the years ended December 31,
1998, 1999 and 2000 amounted to $508,000, $1.9 million, and $2.3 million,
respectively. Under the terms of the primary office lease agreement, the
Company has two consecutive options to extend the term, each for a five year
period.

 Capital Leases

   In February 1999, the Company entered into an agreement for the sale and
leaseback of certain of its computer equipment with a total commitment of $2.0
million which is accounted for as a capital lease. The

                                      53
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company has pledged as collateral certain computer equipment. At December 31,
2000 total credit remaining available to the Company under the agreement was
$300,000.

   In December 1999, the Company entered into an agreement for the sale and
leaseback of certain of its computer equipment. The Company has pledged as
collateral certain computer equipment. At December 31, 2000, the Company had
drawn down the entire $898,000 credit available under the terms of the
agreement.

   No gain or loss was recognized on these transactions. Depreciation on
properties sold and leased back has been reflected in accordance with the
Company's normal accounting practices.

   Future minimum lease payments under capital leases at December 31, 2000 are
as follows (in thousands):

<TABLE>
   <S>                                                                   <C>
   Year ending December 31,
     2001............................................................... $1,211
     2002...............................................................    614
                                                                         ------
   Total minimum lease payments.........................................  1,825
   Less: Interest.......................................................   (296)
                                                                         ------
   Present value of net minimum lease payments..........................  1,529
   Less current portion.................................................   (751)
                                                                         ------
   Capital lease obligation--long-term.................................. $  778
                                                                         ======
</TABLE>

7. Stockholders' Equity:

 Financings

   Through April of 1999, the Company issued series A, B, C, and 1 Junior
convertible preferred stock. Total cash proceeds from the issuance of
convertible preferred stock, net of $717,000 issuance costs, amounted to $66.1
million. The Series 1 Junior convertible preferred stock was issued as part of
the consideration for the acquisition of BeSeen.com, Inc. On August 19, 1999,
LookSmart completed its initial public offering of 8,855,000 shares of common
stock, including 1,155,000 shares issued in connection with the exercise of
the underwriters' over-allotment option. All shares were issued at an offering
price of $12.00 per share. Upon closing of the initial public offering,
39,708,978 shares of outstanding convertible preferred stock were converted
into common stock. Net proceeds from the offering after underwriting discounts
and commissions and offering expenses of $9.3 million were approximately $96.9
million.

 Convertible Preferred Stock

   The Company's charter authorizes the board of directors to issue up to
5,000,000 shares of $0.001 par value preferred stock. At December 31, 2000, no
shares of preferred stock were issued or outstanding.

 Treasury Stock

   In August 1999, the Company repurchased 554,913 shares of Series 1 Junior
preferred stock which have been recorded as treasury stock.

 Warrants

   From 1997 through 1999, the Company issued warrants to purchase 14,384,923
shares of common and preferred shares at exercise prices ranging from $0.00017
to 5.00 per share. All of these warrants were exercised

                                      54
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

in 1999. These warrants were issued in connection with preferred stock
issuances and acquisitions. The fair values of these warrants are recorded as
issuance costs or as part of the related acquisition purchase price.

   In 1998, the Company issued warrants to purchase 2,510,412 shares of Series
A preferred stock at $0.35625 per share in connection with the issuance of
convertible notes payable (Note 4). During 1998, 1,500,000 of these warrants
were exercised. The remaining warrants were exercised in 2000. The fair value
of the warrants was recorded as interest expense over the period the notes
were outstanding.

   In 1998, the Company issued a warrant to purchase 1,500,000 shares of
common stock at an exercise price of $2.50 per share as part of a strategic
alliance. The warrant is currently outstanding and expires in May 2003. The
exercise price exceeded the deemed fair value of the underlying stock at the
date of grant resulting in no impact on earnings.

   In 1998, the Company issued a warrant to purchase up to 480,000 shares of
common stock at an exercise price of $0.41833 per share in connection with a
financing agreement.

   In 1999, the Company issued a warrant to purchase 439,999 shares of Series
C preferred stock at an exercise price of $5.00 per share for services
provided in connection with the Series C financing. The fair value of the
warrants was recorded as issuance costs. The warrant was exercised in 2000.

   In 1999, the Company granted warrants to purchase 120,000 shares of common
stock at an exercise price of $1.25 per share to two individuals in connection
with their employment. As of December 31, 2000, 84,369 of these warrants had
been exercised. Of the remaining 35,631 warrants, 16,882 were vested, 14,061
were unvested and 4,688 expired during 2000. The warrants vest at a rate of
3,750 shares per month provided the individuals continue to be employees of
the Company. These warrants expire in June 2004. In 1999, the Company recorded
deferred compensation of $1,218,000 for the difference between the exercise
price and the fair market value of the underlying common stock at the date of
grant under APB No. 25.

   In 2000, warrants representing 1,497,280 shares of common stock were
exercised in cashless transactions, which resulted in the issuance of
1,413,786 new shares of common stock.

   As of December 31, 2000, there were outstanding warrants to purchase
2,010,943 shares of common stock, as follows:

<TABLE>
<CAPTION>
                                         Number of Exercise price
   Date of grant                         warrants    per share       Expires
   -------------                         --------- -------------- --------------
   <S>                                   <C>       <C>            <C>
   May 1998............................. 1,500,000     $2.50      May 2003
   September 1998.......................   480,000     $0.42      September 2003
   June 1999............................    30,943     $1.25      June 2004
</TABLE>

 Chess Depository Interests

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

 Stock Option Plans

   In December 1997, the Company approved the 1998 Stock Option Plan (the
Plan). In October 2000, the Company acquired Zeal Media, Inc. and assumed all
the stock options outstanding under the 1999 Zeal Media,

                                      55
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Inc. Stock Plan (the Zeal Plan). The Company has reserved 20,850,000 and
23,594,947 shares of common stock for issuance under the Plan and the Zeal
Plan at December 31, 1999 and December 31, 2000, respectively. Outstanding
stock options generally become exercisable over a four year period from the
grant date and have a term of ten years. Under the Plan, the Company may grant
incentive stock options, nonstatutory stock options and stock purchase rights
to employees, directors and consultants. For additional information about
stock options, see Note 15--Subsequent Events.

   As of December 31, 2000, 13,530,954 options were outstanding and 4,126,900
shares remained available for grant under the Company's plans. Stock option
activity under the plans during the periods indicated is as follows (in
thousands, except for per share data):

<TABLE>
<CAPTION>
                                                                        Weighted
                                                                        Average
                                                            Outstanding Exercise
                                                              Options    Price
                                                             Number of    Per
                                                              Shares     Share
                                                            ----------- --------
   <S>                                                      <C>         <C>
   Balance at January 1, 1998..............................    4,437    $0.0095
     Granted...............................................    5,514    $0.1620
     Canceled..............................................     (618)   $0.0246
     Exercised.............................................     (402)   $0.0095
                                                              ------
   Balance at December 31, 1998............................    8,931    $0.1026
     Granted...............................................    6,790    $8.5255
     Canceled..............................................   (1,611)   $1.1740
     Exercised.............................................   (2,624)   $0.0696
                                                              ------
   Balance at December 31, 1999............................   11,486    $4.9394
     Granted...............................................    8,260    $18.868
     Assumed...............................................      127    $ 3.652
     Exercised.............................................   (2,911)   $ 0.945
     Cancelled.............................................   (3,431)   $ 8.976
                                                              ------
   Balance at December 31, 2000............................   13,531    $13.264
                                                              ======
</TABLE>

   The Company accounts for employee stock options under APB No. 25 and
related Interpretations. For the years ended December 31, 1999 and 2000, the
Company recorded deferred compensation of $15.1 million and $1.0 million,
respectively, for stock option grants where the deemed fair value of the
option at grant date was in excess of the exercise price.

   The following table summarizes information about stock options outstanding
at December 31, 2000:

<TABLE>
<CAPTION>
                                       Options Outstanding          Options Exercisable
                              ------------------------------------- --------------------
                                Number                     Weighted   Number    Weighted
                              Outstanding Weighted Average Average  Exercisable Average
                                 as of       Remaining     Exercise    as of    Exercise
   Range of Exercise Prices    12/31/00   Contractual Life  Price    12/31/00    Price
   ------------------------   ----------- ---------------- -------- ----------- --------
   <S>                        <C>         <C>              <C>      <C>         <C>
   $ 0.0095-0.5000.........    2,830,438        7.49       $ 0.1366  1,219,537  $ 0.0845
     0.6030-6.1563.........    3,198,329        9.08         4.0818    679,241    3.0228
     6.6875-13.5000........    2,832,497        9.35         9.9272    398,619   10.3421
    15.5625-34.6250........    2,932,440        9.29        23.0301    627,310   24.5215
    39.0000-68.4375........    1,737,250        9.17        40.5119    173,476   40.2580
                              ----------                             ---------
   $ 0.0095-68.4375........   13,530,954        8.86       $13.2640  3,098,183  $ 9.2465
                              ==========                             =========
</TABLE>

                                      56
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   As of December 31, 1998 and 1999, there were 1,771,311 and 1,840,792
options exercisable, respectively.

   The following information concerning the Company's stock options plan is
provided in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation".

   The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted-
average assumptions:

<TABLE>
<CAPTION>
                                                               1998  1999  2000
                                                               ----  ----  ----
   <S>                                                         <C>   <C>   <C>
   Expected volatility........................................    0%  104%  132%
   Risk-free interest rate.................................... 5.18% 5.05% 5.50%
   Expected lives (years).....................................    5     5     5
   Expected dividend yield....................................  --    --    --
</TABLE>

   The weighted average fair value for options granted was $.30013, $7.819,
and $18.3144 for 1998, 1999 and 2000, respectively. The fair value of options
granted to independent contractors has been determined using the Black-Scholes
model with the same assumptions as options granted to employees and with a
volatility of 104%. The fair value of options granted to consultants is
recorded as consulting expense as services are provided.

   The pro forma net loss for the Company for 1998, 1999 and 2000 is as
follows (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                   1998      1999      2000
                                                 --------  --------  ---------
   <S>                                           <C>       <C>       <C>
   Net Loss
     As reported................................ $(12,858) $(64,663) $ (62,590)
     Pro forma.................................. $(12,933) $(70,588) $(107,809)
   Basic and Diluted net loss per share
     As reported................................ $  (0.68) $  (1.42) $   (0.70)
     Pro forma.................................. $  (0.69) $  (1.55) $   (1.21)
</TABLE>

 Employee Stock Purchase Plan

   In 1999, the shareholders approved the 1999 Employee Stock Purchase Plan. A
total of 750,000 shares of common stock have been reserved for issuance under
the Plan, plus annual increases on January 1 of each year, beginning in 2000.
As of December 31, 2000, 398,125 shares have been issued under the 1999
Purchase Plan.

8. Other Equity Items:

   Other equity items consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                               December 31,
                                                             -----------------
                                                               1999     2000
                                                             --------  -------
   <S>                                                       <C>       <C>
   Warrants ................................................ $  2,735  $   913
   Unearned Compensation ...................................   (6,584)  (5,301)
   Unrealized loss on securities ...........................      (77)    (333)
   Translation adjustments .................................       22     (163)
                                                             --------  -------
                                                             $(3,904)  $(4,884)
                                                             ========  =======
</TABLE>


                                      57
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

9. Net Loss Per Share:

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

<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                                 ----------------------------
                                                   1998      1999      2000
                                                 --------  --------  --------
   <S>                                           <C>       <C>       <C>
   Numerator--Basic and diluted:
     Net loss................................... $(12,858) $(64,663) $(62,590)
   Denominator--Basic and diluted:
     Weighted average common shares
      outstanding...............................   18,790    45,518    89,111
   Basic and diluted loss per share ............ $  (0.68) $  (1.42) $  (0.70)
</TABLE>

   Options and warrants to purchase common and preferred shares are not
included in the diluted loss per share calculations as their effect is
antidilutive for all periods. The dilutive securities included weighted
average common stock equivalents relating to preferred stock, stock options
and warrants to purchase common and preferred shares and are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                             As of December 31,
                                                            --------------------
                                                             1998   1999   2000
                                                            ------ ------ ------
   <S>                                                      <C>    <C>    <C>
   Preferred stock......................................... 26,681    --     --
   Options.................................................  8,931 11,486 13,531
   Warrants................................................ 16,515  3,072  2,011
                                                            ------ ------ ------
   Total dilutive shares................................... 52,127 14,558 15,542
                                                            ====== ====== ======
</TABLE>

10. Acquisitions:

   All of the transactions below were recorded using the purchase method of
accounting and the operating results of these acquisitions have been included
in the Company's results of operations since the date they were acquired. The
purchase prices have been allocated to assets acquired and liabilities assumed
based on the fair values on the acquisition dates.

   On October 23, 1998, the Company acquired all of the outstanding stock of
BeSeen.com, Inc. (BeSeen), a privately held company, for $907,000 cash,
including acquisition costs of $157,000, and the issuance of 6,000,000 shares
of Series 1 Junior preferred stock. At the acquisition date, the Series 1
Junior preferred stock was valued at $0.583 per share. The total purchase
price was $4.4 million, of which $3.9 million was allocated to goodwill and
intangible assets.

   On April 9, 1999, the Company acquired certain assets and liabilities of
Guthy-Renker Internet, LLC in exchange for $5.0 million cash and 2,550,000
shares of the Company's common stock. At the date of acquisition, the common
shares were valued at $4.50 each. The total purchase price of this transaction
was $17.3 million including direct costs and expenses related to the
acquisition, of which $17.2 million were allocated to goodwill and intangible
assets.

   On June 9, 1999, the Company acquired substantially all of the assets and
liabilities of ITW NewCorp, Inc. in exchange for $5 million cash and warrants
to purchase 420,000 shares of the Company's common stock at $1.25. At the date
of acquisition, the common shares were valued at $11.40 each. The total
purchase price of this transaction was $9.3 million, including direct costs
and expenses related to the acquisition, all of which were recorded as
goodwill.

                                      58
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   On December 30, 1999, the Company acquired stock which controlled 52% of
the outstanding voting rights of Futurecorp International Pty Ltd
(Futurecorp), a privately held company, for $1,840,000 cash and the committed
issuance of 71,870 shares of common stock. In July 2000, the Company
subscribed for an additional 70,324 shares in Futurecorp for $580,000 in cash.
In August 2000, the Company exercised an option to purchase an additional
125,446 shares of Futurecorp for $414,000 in cash and $276,000 of the
Company's common stock. The Company currently owns stock which controls 53% of
the outstanding voting rights of Futurecorp. The Company is entitled to
appoint two of the four Futurecorp directors, and through its appointed
directors controls four of the total six board votes. At the acquisition date,
the Company's common stock was valued at $27.25 per share. The total purchase
price of $5.1 million was allocated to goodwill and intangible assets.

   On October 27, 2000, the Company acquired Zeal Media, Inc., a community web
directory company located in the Los Angeles, California area. Under the terms
of the merger agreement, LookSmart reserved 1,363,419 shares of LookSmart
common stock for exchange of all outstanding shares of Zeal Media and for
issuance upon exercise of all outstanding options and warrants to purchase
Zeal Media stock. The purchase price of approximately $16.6 million was
allocated to goodwill and intangible assets of $12.1 million and deferred
compensation of $3.8 million. At the closing, LookSmart also repaid
outstanding debt owed by Zeal Media to bridge investors in the amount of
approximately $660,000.

 Pro Forma Disclosure of Significant Acquisitions (Unaudited)

   The following summary, prepared on a pro forma basis, combines the
consolidated results of operations of the Company as if BeSeen.com, GRI and
ITW had been purchased by the Company as of January 1, 1998, after including
the impact of certain adjustments, such as increased amortization expense due
to recording of intangible assets:

<TABLE>
<CAPTION>
                                                                Year Ended
                                                               December 31,
                                                             ------------------
                                                               1998      1999
                                                             --------  --------
                                                              (in thousands,
                                                             except per share
                                                                   data)
   <S>                                                       <C>       <C>
   Revenues................................................. $ 24,184  $ 52,592
   Net income...............................................  (15,601)  (66,514)
   Basic and diluted net income per share...................    (0.73)    (1.44)
</TABLE>

   The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition had been in effect for the entire period
presented and are not intended to be a projection of future results.

11. Investments:

   In May 2000 Looksmart contributed certain assets and liabilities related to
its Internet radio division to Redband Broadcasting, Inc. in exchange for
2,000,000 shares of Series A preferred stock. The investment is accounted for
under the equity method. Losses during 2000 have reduced the investment
balance to zero.

   In May 2000 Looksmart contributed certain assets and liabilities related to
its Choicemall property to QSound Labs, Inc. in exchange for 1,000,000 shares
of common stock. At the time of the transaction the shares were valued at
$2,094,000. In connection with this transaction the Company also applied $2.5
million of deferred revenue towards the purchase. Accordingly, goodwill
associated with our Choicemall property was reduced by a total of $4.6 million
as a result of this transaction.


                                      59
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

12. British Telecommunications Joint Venture:

   In February 2000, LookSmart entered into a joint venture agreement with
British Telecommunications (BT). LookSmart and BT have equal equity interests
in the joint venture, BT LookSmart, which will provide localized directory
services in Europe and Asia. The Company accounts for its investment in the
joint venture using the equity method of accounting. The Company's share of
the joint venture's net income or loss is reported as non-operating income or
expense.

   The agreement establishing the joint venture requires that both LookSmart
and BT contribute up to $108.0 million in cash through June 2003. Under the
agreement, BT extended a $50.0 million non-recourse credit facility accruing
interest compounded at 20% per annum. LookSmart drew down $50.0 million from
the credit facility in February 2000. Borrowings under the credit facility,
including accrued interest, are convertible into LookSmart common stock at
$35.00 per share at BT's discretion and are restricted to funding the joint
venture. The fair market value of LookSmart common stock on the commitment
date was $32.875. The credit facility is due in full by February 2003, unless
converted to LookSmart common stock prior to that time. LookSmart's total
funding to the joint venture as of December 31, 2000 was $12.7 million. If
LookSmart does not repay the facility when it becomes due, BT's sole recourse
is to convert its debt to LookSmart common stock or to accept a pro-rata
portion of LookSmart's interest in BT LookSmart.

   The following presents unaudited summary financial information for BT
LookSmart as of December 31, 2000 and for the period February 15, 2000
(inception) through December 31, 2000:

<TABLE>
<CAPTION>
                                                                   December 31,
                                                                       2000
                                                                  --------------
                                                                  (in thousands)
   <S>                                                            <C>
   Current assets................................................    $ 9,218
   Non-current assets............................................      3,308
                                                                     -------
   Total assets..................................................     12,526
                                                                     =======
   Current liabilities...........................................    $ 8,805
   Non-current liabilities.......................................        188
                                                                     -------
   Total liabilities.............................................      8,993
   Stockholders' equity..........................................      3,533
                                                                     -------
   Total liabilities and stockholders' equity....................    $12,526
                                                                     =======
</TABLE>

<TABLE>
<CAPTION>
                                                                     For the
                                                                    Year Ended
                                                                   December 31,
                                                                       2000
                                                                  --------------
                                                                  (in thousands)
   <S>                                                            <C>
   Revenues......................................................    $ 3,154
   Cost of revenues..............................................    $   259
   Loss from continuing operations...............................    $21,575
   Net loss......................................................    $21,889
</TABLE>

                                      60
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


13. Supplemental Disclosure of Cash Flow Information (in thousands):

<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                                        -----------------------
                                                         1998    1999    2000
                                                        ------- ------- -------
<S>                                                     <C>     <C>     <C>
Supplemental disclosure of cash flow information:
  Cash paid during the year for:
    Interest........................................... $   274 $   168 $   277
                                                        ======= ======= =======
    Income taxes.......................................     --  $   174 $   302
                                                        ======= ======= =======
  Noncash investing and financing activities:
    Conversion of notes payable to stock............... $ 2,630     --      --
                                                        ======= ======= =======
    Note payable converted to deferred revenue under
     license agreement................................. $11,385     --      --
                                                        ======= ======= =======
    Issuance of stock for acquisitions................. $ 3,663 $15,738 $16,202
                                                        ======= ======= =======
</TABLE>

14. Related Party Transactions:

   The Company receives licensing revenues from Cox Interactive Media, Inc., a
stockholder of the Company, for the design and licensing of LookSmart database
content used on Cox Interactive websites. Revenues from Cox Interactive Media,
Inc. amounted to $538,000, $55,000 and $38,000 for the years ended December
31, 1998, 1999 and 2000, respectively.

   The Company has a distribution agreement with Guthy-Renker Corporation
(GRC), one of the Company's stockholders. At December 31, 2000, the Company
had a receivable of $977,000 from GRC resulting from the distribution
agreement. Additionally, during 2000, the Company paid GRC $97,000 for rent
and administration support.

   During the year ended December 31, 2000, the Company paid $295,000 to
Macquarie Bank Limited, one of the Company's stockholders, for financial
consulting services.

   During the year ended December 31, 2000, the Company received $750,000 from
QSound Labs, Inc. for advertising sales as part of a two year agreement. This
agreement calls for QSound to purchase a total of $3.0 million of advertising.
The Company has an equity investment in QSound, as a result of the sale of
certain assets and liabilities related to its Choicemall property to QSound in
May 2000.

   During the year ended December 31, 2000, the Company received $1.5 million
from Redband Broadcasting for advertising sales. The Company is a minority
owner in Redband Broadcasting.

   The Company receives licensing revenues from BT LookSmart for the licensing
of LookSmart database content. Revenues from BT LookSmart were $875,000 for
the year ended December 31, 2000. As of December 31, 2000 the Company had a
related party receivable of $2.6 million from BT LookSmart. This receivable
represents reimbursable costs incurred by the Company on behalf of BT
LookSmart and has been recorded as an account receivable from a related party.

   The Company had an agreement with Shim & Sons Enterprises, Inc., which is
owned by an individual who is one of the Company's stockholders and an
employee. During 1999, the Company paid $108,000 to Shim & Sons Enterprises,
Inc.

                                      61
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


15. Subsequent Events:

 Tender Offer

   On February 20, 2001, the Company filed a Tender Offer Statement on
Schedule TO, announcing an offer to exchange certain eligible options
outstanding under the 1998 Stock Plan to purchase shares of common stock
having an exercise price per share of more than $2.50 (the Eligible Options).
The following classes of options are deemed not to be Eligible Options and
therefore cannot participate in the offer to exchange: (i) options granted on
April 20, 2000 at an exercise price of $43.00 per share, options granted on
May 11, 2000 at an exercise price of $18.75 per share and options granted on
October 25, 2000 at an exercise price of $6.16 per share (collectively, the
Special Options); (ii) options held by option holders who have not been
service providers of LookSmart or one of its subsidiaries from the date they
elect to exchange their Eligible Options until the date the offer to exchange
expires; and (iii) options with an exercise price of $2.50 or less.

   In exchange for the Eligible Options tendered by an option holder,
LookSmart will grant each option holder new options to purchase that number of
shares of common stock which is equal to the number of shares of common stock
subject to the Eligible Options that he or she elects to exchange and that
LookSmart accepts (New Options). The New Options will be issued under the
Option Plan and a new option agreement will be executed between LookSmart and
each option holder who accepts the offer to exchange. The terms and conditions
of the New Options will be the same as the terms and conditions of the
Eligible Options, except that: (1) the exercise price of the New Options will
be $2.50; (2) the New Options will have a term that expires at 12:00 midnight,
Pacific Standard Time, on December 31, 2005; and (3) all New Options will be
nonqualified stock options. Option holders who accept the offer to exchange
must do so with respect to all of their Eligible Options and, in addition,
will have all of their Special Options cancelled.

 Restructuring

   On January 11, 2001, the Company announced the layoffs of 172 employees and
restructuring of its management and operations from 11 operating groups into
four. The Company also announced its plans to exit non-core businesses. As
part of this restructuring, the Company discontinued its InsideTheWeb message
board and LookSmart Live! services.

 Resignation of Chief Financial Officer

   Ned Brody, our Chief Financial Officer, resigned from the Company effective
as of March 31, 2001, in order to pursue other interests. We have not yet
identified a successor to Mr. Brody and it may take a long time to
successfully recruit a new Chief Financial Officer. In the interim, our Vice
President of Finance and Administration, Martha Clark, will act as Chief
Financial Officer until a successor to Mr. Brody is successfully recruited.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE

   None.

                                      62
<PAGE>

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

   The information required by this item is incorporated herein by reference
to the Company's definitive proxy statement relating to the 2001 annual
meeting of stockholders (the "2001 Proxy Statement"), which the Company
intends to file with the Securities and Exchange Commission within 120 days of
the Company's fiscal year ended December 31, 2000.

ITEM 11. EXECUTIVE COMPENSATION

   The information required under this item may be found in the 2001 Proxy
Statement and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   The information required under this item may be found in the 2001 Proxy
Statement and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   The information required under this item may be found in the 2001 Proxy
Statement and is incorporated herein by reference.

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

  (a) The following documents are filed as part of this report:

  (1) Index to Financial Statements.

    Report of Independent Accountants

    Consolidated Balance Sheets at December 31, 1999 and 2000

    Consolidated Statements of Operations and Comprehensive Loss for the
    years ended December 31, 1998, 1999 and 2000

    Consolidated Statements of Stockholders' Equity (Deficit) for the years
    ended December 31, 1998, 1999 and 2000

    Consolidated Statements of Cash Flows for the years ended December 31,
    1998, 1999 and 2000

    Notes to Consolidated Financial Statements

  (2) Financial Statement Schedule

    Schedule II--Valuation and Qualifying Accounts

   All other schedules have been omitted because they are not applicable, not
required, or because the information required to be set forth therein is
included in the consolidated financial statements or in notes thereto.

  (b) Reports on Form 8-K

   The Company did not file any reports on Form 8-K during the three months
ended December 31, 2000.

                                      63
<PAGE>

  (c) Exhibits.

<TABLE>
<CAPTION>
  Exhibit
  Number                          Description of Document
  -------                         -----------------------
 <C>       <S>
  3.1*     Restated Certificate of Incorporation

  3.2*     Bylaws

  4.1**    Form of Specimen Stock Certificate

  4.2*     Second Amended and Restated Investor Rights Agreement dated March
            24, 1999

 10.1*     Form of Indemnification Agreement entered into between the
            Registrant and each of its directors and officers

 10.2*     Amended and Restated 1998 Stock Plan

 10.3*     1999 Employee Stock Purchase Plan

 10.4+*    License and Update Agreement with Microsoft Corporation

 10.5+*    Asset Purchase Agreement with Guthy-Renker Internet LLC

 10.6+*    Development Agreement with Cox Interactive Media, Inc.

 10.7+*    Premier Positions on US Search Pages with Netscape Communications
            Corporation

 10.8+**   1999-2000 U.S. Net Search Premier Provider Agreement with Netscape
            Communications Corporation

 10.9+*    PBS Group Sponsorship Agreements

 10.10*    Lease Agreement with 487 Bryant Street, LLC for property located at
            487 Bryant Street, San Francisco, California, dated May 4, 1998

 10.11*    Sublease Agreement with Jaran, Inc. for property located at 275
            Brannan Street, San Francisco, California, dated April 30, 1999

 10.12*    Lease Agreement with Rosenberg SOMA Investments III, LLC for
            property located at 625 Second Street, San Francisco, California,
            dated May 5, 1999

 10.13*    Consent to Sublease Agreement with Ninety Park Property LLC, and
            First Manhattan Consulting Group Inc. for property located at 90
            Park Avenue, New York, New York, dated October 22, 1998

 10.14*    Lease Agreement with Euro Asia Properties Pty Ltd for property
            located at Level 5, 388 Lonsdale Street, Melbourne, Australia,
            dated September 1, 1998

 10.15*    Lease Agreement with Tonicalon Pty Limited for property located at
            Level 3, 68 Alfred Street, Milsons Point, Sydney, Australia, dated
            June 1, 1999

 10.16*    Summary Plan Description of 401(k) Plan

 10.17+*** Joint Venture Agreement between the Registrant, Transceptgate Ltd.,
            BT LookSmart Ltd., LookSmart (Barbados), Inc. and British
            Telecommunications Plc dated February 15, 2000

 10.18+*** Joint Venture Know How Technology and Database License Agreement
            between the Registrant, BT LookSmart Ltd., and LookSmart
            (Barbados), Inc. dated February 15, 2000

 10.19***  Loan Letter Agreement between the Registrant and Transceptgate Ltd.
            dated February 15, 2000

 10.20++   Restated and Final Tagging and Marketing Agreement with Guthy-Renker
            Corporation dated August 9, 1999

 10.21     Employment Agreement with Kevin Berk dated September 29, 2000

 10.22     Employment Agreement with Brian Goler dated September 29, 2000

 21.1*     List of Subsidiaries

 23.1      Consent of PricewaterhouseCoopers LLP
</TABLE>

                                       64
<PAGE>


<TABLE>
 <C>  <S>
 24.1 Power of Attorney (contained in the signature page to this Annual Report)
</TABLE>
--------
(*)   Filed in connection with the Company's Registration Statement on Form S-1
      (File No. 333-80581) filed with the SEC on June 14, 1999.

(**)  Filed in connection with the Company's Amendment No. 1 to the
      Registration Statement on Form S-1 (File No. 333-80581) filed with the
      SEC on July 27, 1999.

(***) Filed in connection with the Company's Annual Report on Form 10-K filed
      with the SEC on March 30, 2000.

(+)   Confidential treatment has been granted with respect to portions of the
      exhibit.

(++)  Confidential treatment has been requested with respect to portions of the
      exhibit.

                                       65
<PAGE>

                     Report of Independent Accountants on
                         Financial Statement Schedules

To the Board of Directors and Stockholders of
LookSmart, Ltd. and Subsidiaries;

   Our audits of the consolidated financial statements referred to in our
report dated January 24, 2001, except as to the first, second, and fourth
paragraphs of Note 15, which are as of February 20, 2001, appearing in the
2000 Annual Report to Stockholders of LookSmart Ltd. and Subsidiaries in this
Annual Report on Form 10-K also included an audit of the financial statement
schedules listed in Item 14(a)(2) of this Form 10-K. In our opinion, these
financial statement schedules present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.

/s/ PricewaterhouseCoopers LLP

San Francisco, California
January 24, 2001

                                      66
<PAGE>

                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
                                 (In Thousands)

                        LOOKSMART, LTD. AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                  Charged
                                       Balance at to Costs            Balance at
                                       Beginning    and                 End of
Description                            of Period  Expenses Deductions   Period
-----------                            ---------- -------- ---------- ----------
<S>                                    <C>        <C>      <C>        <C>
Year ended December 31, 1998:
  Allowance for doubtful accounts.....  $   --    $   127   $   --     $   127
  Deferred tax valuation allowance....    4,177     4,657       --       8,834
                                        -------   -------   -------    -------
    Total.............................  $ 4,177   $ 4,784   $   --     $ 8,961
                                        =======   =======   =======    =======
Year ended December 31, 1999:
  Allowance for doubtful accounts.....  $   127   $ 1,171   $   688    $   610
  Deferred tax valuation allowance....    8,834    20,232       --      29,066
                                        -------   -------   -------    -------
    Total.............................  $ 8,961   $21,403   $   688    $29,676
                                        =======   =======   =======    =======
Year ended December 31, 2000:
  Allowance for doubtful accounts.....  $   610   $ 6,150   $ 2,565    $ 4,195
  Deferred tax valuation allowance....   29,066    20,794       --      49,860
                                        -------   -------   -------    -------
    Total.............................  $29,676   $26,944   $ 2,565    $54,055
                                        =======   =======   =======    =======
</TABLE>

                                       67
<PAGE>

                                  SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized in San Francisco, California, on
March 15, 2001:

                                          LOOKSMART, LTD.

                                                    /s/ Ned Brody
                                          By: _________________________________
                                           Ned Brody, Chief Financial Officer
                                              (Principal Financial Officer)

                               POWER OF ATTORNEY

   KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Martin Roberts and Evan Thornley,
jointly and severally, as his or her attorneys-in-fact, each with the full
power of substitution, for him or her, in any and all capacities, to sign any
amendment to this Annual Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting to said attorneys-in-fact, and
each of them, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in connection therewith, as fully
to all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact or any of them, or
their or his or her substitute or substitutes, may lawfully do or cause to be
done by virtue hereof. Pursuant to the requirements of the Securities Act of
1934, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
             Signature                           Title                  Date
             ---------                           -----                  ----


<S>                                  <C>                           <C>
        /s/ Evan Thornley            Chairman of the Board and     March 15, 2001
____________________________________  Chief Executive Officer
           Evan Thornley              (Principal Executive
                                      Officer)


          /s/ Ned Brody              Chief Financial Officer       March 15, 2001
____________________________________  (Principal Financial
             Ned Brody                Officer)


        /s/ Robert Mally             Vice President of Finance     March 15, 2001
____________________________________  and Senior Controller
            Robert Mally              (Principal Accounting
                                      Officer)


        /s/ Tracey Ellery            President and Director        March 15, 2001
____________________________________
           Tracey Ellery


      /s/ Anthony Castagna           Director                      March 15, 2001
____________________________________
          Anthony Castagna


     /s/ Mariann Byerwalter          Director                      March 15, 2001
____________________________________
         Mariann Byerwalter
</TABLE>

                                      68
<PAGE>

<TABLE>
<CAPTION>
             Signature                           Title                  Date
             ---------                           -----                  ----


<S>                                  <C>                           <C>
       /s/ James Tananbaum           Director                      March 15, 2001
____________________________________
          James Tananbaum


                                     Director                      March 15, 2001
____________________________________
            Robert Ryan


       /s/ Scott Whiteside           Director                      March 15, 2001
____________________________________
          Scott Whiteside
</TABLE>

                                       69
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
  Exhibit
  Number                          Description of Document
  -------                         -----------------------
 <C>       <S>
  3.1*     Restated Certificate of Incorporation

  3.2*     Bylaws

  4.1**    Form of Specimen Stock Certificate

  4.2*     Second Amended and Restated Investor Rights Agreement dated March
            24, 1999

 10.1*     Form of Indemnification Agreement entered into between the
            Registrant and each of its directors and officers

 10.2*     Amended and Restated 1998 Stock Plan

 10.3*     1999 Employee Stock Purchase Plan

 10.4+*    License and Update Agreement with Microsoft Corporation

 10.5+*    Asset Purchase Agreement with Guthy-Renker Internet LLC

 10.6+*    Development Agreement with Cox Interactive Media, Inc.

 10.7+*    Premier Positions on US Search Pages with Netscape Communications
            Corporation

 10.8+**   1999-2000 U.S. Net Search Premier Provider Agreement with Netscape
            Communications Corporation

 10.9+*    PBS Group Sponsorship Agreements

 10.10*    Lease Agreement with 487 Bryant Street, LLC for property located at
            487 Bryant Street, San Francisco, California, dated May 4, 1998

 10.11*    Sublease Agreement with Jaran, Inc. for property located at 275
            Brannan Street, San Francisco, California, dated April 30, 1999

 10.12*    Lease Agreement with Rosenberg SOMA Investments III, LLC for
            property located at 625 Second Street, San Francisco, California,
            dated May 5, 1999

 10.13*    Consent to Sublease Agreement with Ninety Park Property LLC, and
            First Manhattan Consulting Group Inc. for property located at 90
            Park Avenue, New York, New York, dated October 22, 1998

 10.14*    Lease Agreement with Euro Asia Properties Pty Ltd for property
            located at Level 5, 388 Lonsdale Street, Melbourne, Australia,
            dated September 1, 1998

 10.15*    Lease Agreement with Tonicalon Pty Limited for property located at
            Level 3, 68 Alfred Street, Milsons Point, Sydney, Australia, dated
            June 1, 1999

 10.16*    Summary Plan Description of 401(k) Plan

 10.17+*** Joint Venture Agreement between the Registrant, Transceptgate Ltd.,
            BT LookSmart Ltd., LookSmart (Barbados), Inc. and British
            Telecommunications Plc dated February 15, 2000

 10.18+*** Joint Venture Know How Technology and Database License Agreement
            between the Registrant, BT LookSmart Ltd., and LookSmart
            (Barbados), Inc. dated February 15, 2000

 10.19***  Loan Letter Agreement between the Registrant and Transceptgate Ltd.
            dated February 15, 2000

 10.20++   Restated and Final Tagging and Marketing Agreement with Guthy-Renker
            Corporation dated August 9, 1999

 10.21     Employment Agreement with Kevin Berk dated September 29, 2000

 10.22     Employment Agreement with Brian Goler dated September 29, 2000

 21.1*     List of Subsidiaries

 23.1      Consent of PricewaterhouseCoopers LLP
</TABLE>

                                       70
<PAGE>


<TABLE>
 <C>  <S>
 24.1 Power of Attorney (contained in the signature page to this Annual Report)
</TABLE>
--------
(*)   Filed in connection with the Company's Registration Statement on Form S-1
      (File No. 333-80581) filed with the SEC on June 14, 1999.

(**)  Filed in connection with the Company's Amendment No. 1 to the
      Registration Statement on Form S-1 (File No. 333-80581) filed with the
      SEC on July 27, 1999.

(***) Filed in connection with the Company's Annual Report on Form 10-K filed
      with the SEC on March 30, 2000.

(+)   Confidential treatment has been granted with respect to portions of the
      exhibit.

(++)  Confidential treatment has been requested with respect to portions of the
      exhibit.

                                       71