##### Table of Contents



---

---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



---

Form 10-Q





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

For the quarterly period ended September 30, 2001

Commission File Number 000-26365



---



OVERTURE SERVICES, INC.(Formerly GoTo.com, Inc.)(Exact name of Registrant as specified in its charter)

|                                                                       |  |                                                  
|---------------------------------------------------------------------- |  | -------------------------------------------------
|Delaware(State or other jurisdiction of
incorporation or organization) |  | 95-4652060(I.R.S. Employer
Identification Number)

74 North Pasadena Avenue 3rd Floor
Pasadena, California 91103(Address of principal executive offices)

Telephone: (626) 685-5600(Registrants telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes [X]  No [   ]

Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date.

57,272,035 shares of Common Stock,$0.0001 par value, as of September 30, 2001.




---

---





---

TABLE OF CONTENTS



|                             |                                                                                               |                                                      |  |  |  |  |  | 
|---------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I FINANCIAL INFORMATION
|                             | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                             |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                             |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                             |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                             |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                             | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                             | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II. OTHER INFORMATION  
|                             | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                             | ITEM 2. DIRECTOR AND OFFICER TRADING PLANS                                                   
|                             | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                  



---



##### Table of Contents



OVERTURE SERVICES, INC.

TABLE OF CONTENTS

|        |  |                                                                                                                 |  |         
|------- |  | --------------------------------------------------------------------------------------------------------------- |  | --------
|        |  |                                                                                                                 |  | PAGE NO.
|        |  |                                                                                                                 |  |         
|PART I  |  | FINANCIAL INFORMATION                                                                                           |  |         
|       
|Item 1. |  | Financial Statements:                                                                                           |  |         
|        |  | Condensed Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000                            |  | 3       
|        |  | Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 2001 and 2000 |  | 4       
|        |  | Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2001 and 2000           |  | 5       
|        |  | Notes to Condensed Consolidated Financial Statements                                                            |  | 6       
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                           |  | 9       
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risks                                                     |  | 23      
|       
|PART II |  | OTHER INFORMATION                                                                                               |  |         
|       
|Item 1. |  | Legal Proceedings                                                                                               |  | 23      
|Item 2. |  | Director and Officer Trading Plans                                                                              |  | 23      
|Item 6. |  | Exhibits and Reports on Form 8-K                                                                                |  | 24      

2



---



##### Table of Contents












PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

OVERTURE SERVICES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amount)

|                                           |                                              |                                                             |                                                                                                             |        |               |   |              |        |          |   | 
|------------------------------------------ | -------------------------------------------- | ----------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ------ | ------------- | - | ------------ | ------ | -------- | - | 
|                                           |                                              |                                                             |                                                                                                             |        | September 30, |   | December 31,
|                                           |                                              |                                                             |                                                                                                             |        | 2001          |   | 2000        
|                                           |                                              |                                                             |                                                                                                             |        |               |   |             
|                                           |                                              |                                                             |                                                                                                             |        | (unaudited)   |   |              |        |         
|ASSETS                                    
|Current assets:                            |                                              |                                                             |                                                                                                             |        |               |   |              |       
|                                           | Cash and cash equivalents                    |                                                             | $                                                                                                           | 71,998 |               |   | $            | 12,986 |         
|                                           | Short-term investments                       |                                                             |                                                                                                             | 34,820 |               |   |              | 41,694 |         
|                                           | Accounts receivable, net                     |                                                             |                                                                                                             | 7,882  |               |   |              | 5,365  |         
|                                           | Prepaid expenses and other                   |                                                             |                                                                                                             | 3,143  |               |   |              | 1,970  |         
|                                           | Prepaid marketing expenses                   |                                                             |                                                                                                             | 13,750 |               |   |              | 23,605 |         
|                                           |                                              |                                                             |                                                                                                             |        |               |   |              |       
|Total current assets                       |                                              |                                                             | 131,593                                                                                                     |        |               |   | 85,620       |       
|Property and equipment, net                |                                              |                                                             | 29,070                                                                                                      |        |               |   | 26,076       |       
|Intangible assets, net                     |                                              |                                                             | 2,333                                                                                                       |        |               |   | 3,234        |       
|Restricted investments                     |                                              |                                                             | 5,759                                                                                                       |        |               |   | 5,564        |       
|Long-term investments                      |                                              |                                                             | 24,394                                                                                                      |        |               |   | 293          |       
|Other assets                               |                                              |                                                             | 1,020                                                                                                       |        |               |   | 626          |       
|                                           |                                              |                                                             |                                                                                                             |        |               |   |              |       
|Total assets                               |                                              | $                                                           | 194,169                                                                                                     |        |               | $ | 121,413      |       
|                                           |                                              |                                                             |                                                                                                             |        |               |   |              |       
|                                          
|LIABILITIES AND STOCKHOLDERS EQUITY      
|Current liabilities:                       |                                              |                                                             |                                                                                                             |        |               |   |              |       
|                                           | Accounts payable                             |                                                             | $                                                                                                           | 27,551 |               |   | $            | 23,284 |         
|                                           | Accrued expenses                             |                                                             |                                                                                                             | 5,135  |               |   |              | 4,148  |         
|                                           | Deferred revenue                             |                                                             |                                                                                                             | 6,836  |               |   |              | 4,441  |         
|                                           | Current portion of capital lease obligations |                                                             |                                                                                                             | 174    |               |   |              | 791    |         
|                                           |                                              |                                                             |                                                                                                             |        |               |   |              |       
|Total current liabilities                  |                                              |                                                             | 39,696                                                                                                      |        |               |   | 32,664       |       
|Other long-term liabilities                |                                              |                                                             | 58                                                                                                          |        |               |   | 576          |       
|Long-term capital lease obligations        |                                              |                                                             |                                                                                                            |        |               |   | 78           |       
|                                          
|Stockholders equity:                      |                                              |                                                             |                                                                                                             |        |               |   |              |       
|                                           |                                              | Common Stock, $0.0001 par value,
200,000 shares authorized: |                                                                                                             |        |               |   |              |        |          |  
|                                           |                                              |                                                             | Shares issued and outstanding 57,272 and 52,566
for September 30, 2001 and December 31, 2000, respectively |        |               | 6 |              |        |          | 5 | 
|                                           |                                              | Additional paid-in capital                                  |                                                                                                             |        | 657,752       |   |              |        | 591,239  |  
|                                           |                                              | Deferred compensation, net                                  |                                                                                                             |        | (962          | ) |              |        | (1,128   | )
|                                           |                                              | Accumulated deficit                                         |                                                                                                             |        | (502,631      | ) |              |        | (502,026 | )
|                                           |                                              | Accumulated other comprehensive income                      |                                                                                                             |        | 250           |   |              |        | 5        |  
|                                           |                                              |                                                             |                                                                                                             |        |               |   |              |       
|Total stockholders equity                 |                                              |                                                             | 154,415                                                                                                     |        |               |   | 88,095       |       
|                                           |                                              |                                                             |                                                                                                             |        |               |   |              |       
|Total liabilities and stockholders equity |                                              | $                                                           | 194,169                                                                                                     |        |               | $ | 121,413      |       
|                                           |                                              |                                                             |                                                                                                             |        |               |   |              |       

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

3



---



##### Table of Contents






OVERTURE SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts; unaudited)

|                                                                                                              |                                                           |                                             |        |                    |     |                   |         |        |     |      |         |         |     |   |          |        |       | 
|------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------- | ------------------------------------------- | ------ | ------------------ | --- | ----------------- | ------- | ------ | --- | ---- | ------- | ------- | --- | - | -------- | ------ | ----- | 
|                                                                                                              |                                                           |                                             |        | Three Months Ended |     | Nine Months Ended
|                                                                                                              |                                                           |                                             |        | September 30,      |     | September 30,    
|                                                                                                              |                                                           |                                             |        |                    |     |                  
|                                                                                                              |                                                           |                                             |        | 2001               |     | 2000              |         | 2001   |     | 2000
|                                                                                                              |                                                           |                                             |        |                    |     |                   |         |        |     |     
|Revenue                                                                                                       |                                                           | $                                           | 72,523 |                    |     | $                 | 25,050  |        |     | $    | 186,945 |         |     | $ | 63,276   |       
|Cost of revenue (A)                                                                                           |                                                           |                                             | 6,050  |                    |     |                   | 3,310   |        |     |      | 15,920  |         |     |   | 8,728    |       
|                                                                                                              |                                                           |                                             |        |                    |     |                   |         |        |     |      |         |         |     |   |          |       
|Gross profit                                                                                                  |                                                           |                                             | 66,473 |                    |     |                   | 21,740  |        |     |      | 171,025 |         |     |   | 54,548   |       
|Operating expenses:                                                                                           |                                                           |                                             |        |                    |     |                   |         |        |     |      |         |         |     |   |          |       
|                                                                                                              | Marketing, sales and service (A)                          |                                             |        | 44,963             |     |                   |         | 21,185 |     |      |         | 130,176 |     |   |          | 55,766 |      
|                                                                                                              | General and administrative (A)                            |                                             |        | 10,769             |     |                   |         | 9,012  |     |      |         | 31,887  |     |   |          | 23,334 |      
|                                                                                                              | Product development (A)                                   |                                             |        | 2,768              |     |                   |         | 3,534  |     |      |         | 9,707   |     |   |          | 9,997  |      
|                                                                                                              | Amortization of deferred compensation (A)                 |                                             |        | 213                |     |                   |         | 311    |     |      |         | 651     |     |   |          | 1,111  |      
|                                                                                                              | Write-off of acquired in-process research
and development |                                             |        |                   |     |                   |         |       |     |      |         |        |     |   |          | 7,550  |      
|                                                                                                              | Amortization of intangible assets                         |                                             |        | 292                |     |                   |         | 35,401 |     |      |         | 901     |     |   |          | 79,933 |      
|                                                                                                              | Loss on closure of Overture Shopping                      |                                             |        |                   |     |                   |         |       |     |      |         | 1,499   |     |   |          |       |      
|                                                                                                              | Loss on disposition of Overture Auctions                  |                                             |        |                   |     |                   |         |       |     |      |         | 2,112   |     |   |          |       |      
|                                                                                                              |                                                           |                                             |        |                    |     |                   |         |        |     |      |         |         |     |   |          |       
|                                                                                                              |                                                           |                                             | 59,005 |                    |     |                   | 69,443  |        |     |      | 176,933 |         |     |   | 177,691  |       
|                                                                                                              |                                                           |                                             |        |                    |     |                   |         |        |     |      |         |         |     |   |          |       
|Income (loss) from operations                                                                                 |                                                           |                                             | 7,468  |                    |     |                   | (47,703 | )      |     |      | (5,908  | )       |     |   | (123,143 | )     
|Other income:                                                                                                 |                                                           |                                             |        |                    |     |                   |         |        |     |      |         |         |     |   |          |       
|                                                                                                              | Interest income, net                                      |                                             |        | 1,177              |     |                   |         | 1,592  |     |      |         | 2,965   |     |   |          | 4,650  |      
|                                                                                                              | Other income, net                                         |                                             |        | 479                |     |                   |         | 8      |     |      |         | 2,488   |     |   |          | 21,565 |      
|                                                                                                              |                                                           |                                             |        |                    |     |                   |         |        |     |      |         |         |     |   |          |       
|                                                                                                              |                                                           |                                             | 9,124  |                    |     |                   | (46,103 | )      |     |      | (455    | )       |     |   | (96,928  | )     
|Provision for income taxes                                                                                    |                                                           |                                             | 150    |                    |     |                   |        |        |     |      | 150     |         |     |   |         |       
|                                                                                                              |                                                           |                                             |        |                    |     |                   |         |        |     |      |         |         |     |   |          |       
|Net income (loss)                                                                                             |                                                           | $                                           | 8,974  |                    |     | $                 | (46,103 | )      |     | $    | (605    | )       |     | $ | (96,928  | )     
|                                                                                                              |                                                           |                                             |        |                    |     |                   |         |        |     |      |         |         |     |   |          |       
|Basic net income (loss) per share                                                                             |                                                           | $                                           | 0.16   |                    |     | $                 | (0.94   | )      |     | $    | (0.01   | )       |     | $ | (2.04    | )     
|                                                                                                              |                                                           |                                             |        |                    |     |                   |         |        |     |      |         |         |     |   |          |       
|Diluted net income (loss) per share                                                                           |                                                           | $                                           | 0.15   |                    |     | $                 | (0.94   | )      |     | $    | (0.01   | )       |     | $ | (2.04    | )     
|                                                                                                              |                                                           |                                             |        |                    |     |                   |         |        |     |      |         |         |     |   |          |       
|Weighted average shares used to compute
basic net income (loss) per share                                     |                                                           |                                             | 55,552 |                    |     |                   | 48,998  |        |     |      | 52,225  |         |     |   | 47,437   |       
|                                                                                                              |                                                           |                                             |        |                    |     |                   |         |        |     |      |         |         |     |   |          |       
|Weighted average shares used to compute
diluted net income (loss) per share                                   |                                                           |                                             | 58,324 |                    |     |                   | 48,998  |        |     |      | 54,292  |         |     |   | 47,437   |       
|                                                                                                              |                                                           |                                             |        |                    |     |                   |         |        |     |      |         |         |     |   |          |       
|(A)   If deferred compensation were allocated to
expense        categories, it would be allocated as follows:
|                                                                                                             
|Cost of revenue                                                                                               |                                                           | $                                           |       |                    |     | $                 | 1       |        |     | $    | 1       |         |     | $ | 4        |       
|Marketing, sales and service                                                                                  |                                                           |                                             | 35     |                    |     |                   | 67      |        |     |      | 125     |         |     |   | 318      |       
|General and administrative                                                                                    |                                                           |                                             | 169    |                    |     |                   | 224     |        |     |      | 505     |         |     |   | 733      |       
|Product development                                                                                           |                                                           |                                             | 9      |                    |     |                   | 19      |        |     |      | 20      |         |     |   | 56       |       
|                                                                                                              |                                                           |                                             |        |                    |     |                   |         |        |     |      |         |         |     |   |          |       
|                                                                                                              |                                                           | Total amortization of deferred compensation |        | $                  | 213 |                   |         | $      | 311 |      |         | $       | 651 |   |          | $      | 1,111 | 
|                                                                                                              |                                                           |                                             |        |                    |     |                   |         |        |     |      |         |         |     |   |          |       

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

4



---



##### Table of Contents






OVERTURE SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands; unaudited)

|                                                             |                                                                                           |                                       |         |                   |        |      |         |         |         |  
|------------------------------------------------------------ | ----------------------------------------------------------------------------------------- | ------------------------------------- | ------- | ----------------- | ------ | ---- | ------- | ------- | ------- | -
|                                                             |                                                                                           |                                       |         | Nine Months Ended
|                                                             |                                                                                           |                                       |         | September 30,    
|                                                             |                                                                                           |                                       |         |                  
|                                                             |                                                                                           |                                       |         | 2001              |        | 2000
|                                                             |                                                                                           |                                       |         |                   |        |     
|Cash Flows from Operating Activities:                        |                                                                                           |                                       |         |                   |        |      |         |        
|                                                             | Net loss                                                                                  |                                       | $       | (605              | )      |      | $       | (96,928 | )      
|                                                             | Adjustments to reconcile net loss to net cash
provided by
(used in) operating activities: |                                       |         |                   |        |      |         |         |        
|                                                             | Amortization of deferred stock option compensation                                        |                                       |         | 651               |        |      |         | 1,111   |        
|                                                             | Accretion of discounts from the purchase of
short-term and
long-term investments          |                                       |         | 72                |        |      |         | (1,137  | )      
|                                                             | Non-cash portion of closure and disposition charges                                       |                                       |         | 2,999             |        |      |         |        |        
|                                                             | Write-off of acquired in-process research
and development                                 |                                       |         |                  |        |      |         | 7,550   |        
|                                                             | Depreciation and amortization                                                             |                                       |         | 10,434            |        |      |         | 5,529   |        
|                                                             | Amortization of intangible assets                                                         |                                       |         | 901               |        |      |         | 79,933  |        
|                                                             | Changes in operating assets and liabilities:                                              |                                       |         |                   |        |      |         |         |        
|                                                             |                                                                                           | Accounts receivable                   |         |                   | (2,517 | )    |         |         | (903    | )
|                                                             |                                                                                           | Prepaid expenses and other            |         |                   | (1,268 | )    |         |         | (168    | )
|                                                             |                                                                                           | Prepaid marketing expenses            |         |                   | 9,855  |      |         |         | (15,327 | )
|                                                             |                                                                                           | Accounts payable and accrued expenses |         |                   | 4,183  |      |         |         | 3,505   |  
|                                                             |                                                                                           | Deferred revenues                     |         |                   | 2,569  |      |         |         | 1,098   |  
|                                                             |                                                                                           |                                       |         |                   |        |      |         |        
|Net cash provided by (used in) operating activities          |                                                                                           |                                       | 27,274  |                   |        |      | (15,737 | )      
|                                                            
|Cash Flows from Investing Activities:                        |                                                                                           |                                       |         |                   |        |      |         |        
|                                                             | Proceeds from (purchases of) short-term and long-term
investments, net                    |                                       |         | (17,300           | )      |      |         | 36,752  |        
|                                                             | Capital expenditures for property and equipment                                           |                                       |         | (15,438           | )      |      |         | (18,226 | )      
|                                                             | Net cash used in acquisition                                                              |                                       |         |                  |        |      |         | (863    | )      
|                                                             | Other assets                                                                              |                                       |         | (439              | )      |      |         | (542    | )      
|                                                             |                                                                                           |                                       |         |                   |        |      |         |        
|Net cash (used in) provided by investing activities          |                                                                                           |                                       | (33,177 | )                 |        |      | 17,121  |        
|                                                            
|Cash Flows from Financing Activities:                        |                                                                                           |                                       |         |                   |        |      |         |        
|                                                             | Proceeds from the issuance of common stock                                                |                                       |         | 65,531            |        |      |         | 2,654   |        
|                                                             | Repayments under lease line                                                               |                                       |         | (666              | )      |      |         | (520    | )      
|                                                             | Repayment of debt                                                                         |                                       |         |                  |        |      |         | (834    | )      
|                                                             |                                                                                           |                                       |         |                   |        |      |         |        
|Net cash provided by financing activities                    |                                                                                           |                                       | 64,865  |                   |        |      | 1,300   |        
|Effect of exchange rate changes on cash and cash
equivalents |                                                                                           |                                       | 50      |                   |        |      |        |        
|Net increase in cash and cash equivalents                    |                                                                                           |                                       | 59,012  |                   |        |      | 2,684   |        
|Cash and cash equivalents at beginning of period             |                                                                                           |                                       | 12,986  |                   |        |      | 11,914  |        
|                                                             |                                                                                           |                                       |         |                   |        |      |         |        
|Cash and cash equivalents at end of period                   |                                                                                           | $                                     | 71,998  |                   |        | $    | 14,598  |        
|                                                             |                                                                                           |                                       |         |                   |        |      |         |        

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

5



---



##### Table of Contents






OVERTURE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. THE COMPANY, BASIS OF PRESENTATION

Overture Services, Inc. (formerly GoTo.com, Inc.) (the Company or
Overture) is the leader in Pay-For-Performance search on the Internet. We
introduce consumers and businesses that search the Internet to advertisers who
bid for placement in our search results, which are ranked by the advertisers
bid price. Advertisers pay us only when consumers and businesses click through
to the advertisers search listings, so we refer to our service as
Pay-For-Performance search. We provide consumers and businesses with relevant
search results by charging advertisers for each paid introduction, or
click through, and by requiring advertisers to bid only on keywords that are
relevant to their offering. We distribute our search results to consumers and
businesses through our affiliates, a network of portals, Web browsers, Internet
service providers and other Web properties, as well as through our own Web
site. We believe our service offers advertisers a highly targeted, controllable
and cost-effective marketing solution and provides affiliates with incremental
revenue and a relevant search service.

The Company was incorporated on September 15, 1997 in the state of
Delaware and officially launched its services on June 1, 1998. In April 2001,
we entered into an agreement with a third-party, whereby we agreed to assign
our rights in the GoTo name to such third-party and to change our name by
October 15, 2001. On October 8, 2001, GoTo.com, Inc. changed its corporate name
to Overture Services, Inc. and changed its ticker symbol to OVER. The Company
operates in one reportable business segment. The preparation of financial
statements, in conformity with generally accepted accounting principles,
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities, and the reported amounts of revenues and expenses. Actual results
could differ materially from those estimates.

The accompanying unaudited condensed consolidated financial statements
have been prepared on the same basis as the annual financial statements and, in
the opinion of management, reflect all adjustments necessary to present fairly
the Companys financial position, results of operations and cash flows for the
periods shown. The adjustments include only normal recurring adjustments except
that the unaudited condensed consolidated financial statements also include the
following adjustments: the write-off during the three months ended March 31,
2000 of approximately $7.6 million of in-process research and development
associated with Overtures acquisition of Cadabra Inc. (Cadabra), which
Overture operated as GoTo Shopping and other income during the second
quarter of 2000 of approximately $21.5 million for the settlement of GoTos
trademark infringement lawsuit against The Walt Disney Company. The results of
operations for such periods are not necessarily indicative of the results
expected for a full year or for any future period.

These financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2000.

2. COMPREHENSIVE INCOME (LOSS)

The Company accounts for comprehensive income (loss) in accordance with
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income. SFAS 130 establishes standards for reporting
comprehensive income and its components in financial statements. Comprehensive
income, as defined therein, refers to revenues, expenses, gains and losses that
are not included in net income (loss) but rather are recorded directly in
stockholders equity. Total comprehensive income for the three and nine months
ended September 30, 2001 approximated net income.

3. EARNINGS (LOSS) PER SHARE COMPUTATION

Shares used in computing basic and diluted net income (loss) per share are
based on the weighted average shares outstanding in each period. Basic net
income (loss) per share is calculated by dividing net income (loss) by the
average number of outstanding shares during the period. Diluted net income
(loss) per share is calculated by adjusting the average number of outstanding
shares assuming conversion of all potentially dilutive stock options and
unvested stock under the treasury stock method. For the three months ended
September 30, 2000, and the nine months ended September 30, 2001 and 2000,
potentially dilutive stock options and unvested stock were excluded from the
calculation of diluted net loss per share as their effect would be
anti-dilutive.

6



---



##### Table of Contents



Options to purchase approximately 7.9 million and 15.9 million shares of
common stock were outstanding as of September 30, 2001 and 2000, respectively.
In addition, as of September 30, 2001, there were approximately 900,000 shares
of unvested common stock outstanding, which are subject to repurchase by
Overture.

4. LITIGATION

On November 3, 2000, Overture was served with a summons and complaint by
MercExchange, L.L.C., alleging patent infringement relating to Overtures
online auction service [(AuctionRover.com, Inc. (AuctionRover or GoTo
Auctions)] and shopping services (GoTo Shopping). On June 1, 2001, Overture
entered into a settlement agreement and release with MercExchange, under which
MercExchange agreed to dismiss the litigation in exchange for a cash payment,
the amount of which was paid from the escrow funds created in connection with
Overtures acquisitions of AuctionRover and Cadabra. In addition, legal fees
and other expenses paid by Overture to defend this litigation were reimbursed
to Overture from the escrow funds and were recorded in other income, net for
the three months ended June 30, 2001.

On June 19, 2001, InternetFuel.com, Inc. filed a complaint against
Overture in the Superior Court of the State of California for the County of Los
Angeles. The complaint alleges that Overture wrongfully terminated an agreement
pursuant to which InternetFuel participated in Overtures affiliate program.
The complaint also alleges libel for messages allegedly placed by Overture on
an Internet forum, and it contains claims of unfair business practices. The
complaint seeks, among other remedies, monetary damages for the value of the
terminated agreement and for alleged harm to InternetFuels reputation,
punitive and exemplary relief and an injunction against alleged unfair business
practices. Overture believes that it has meritorious defenses to the
allegations and intends to contest the allegations vigorously.

Several class action lawsuits have been filed in the United States
District Court, Southern District of New York against certain underwriters
involved in Overtures initial public offering, Overture and certain of
Overtures current directors and officers. The lawsuits allege, among other
things, violations of the Securities Act of 1933 and the Securities Exchange
Act of 1934 involving undisclosed compensation to the underwriters, improper
practices by the underwriters and seek unspecified damages. Overture believes
that it has meritorious defenses to the allegations and intends to contest the
allegations vigorously.

5. RELATED PARTY TRANSACTIONS

In January 2000, Overture entered into an arrangement to lease
approximately 58,000 square feet of office space from Bill Gross idealab!.
Overture is obligated to make total lease payments of approximately $7.1
million commencing on January 15, 2000 and terminating on October 31, 2004.
Total payments for the lease were approximately $1.5 million and $1.4 million
for the nine months ended September 30, 2001 and 2000, respectively. Management
believes these amounts were materially representative of the fair value of the
lease.

During the nine months ended September 30, 2001 and 2000, Overture
recorded approximately $501,000 and $330,000, respectively, of search listing
advertising revenue from Bill Gross idealab!. Management believes the amounts
paid by Bill Gross idealab! were materially representative of the fair value
of advertising services provided.

On March 3, 2000, Overture entered into a Stockholder Agreement with Bill
Gross idealab!, which provides, among other things, that Bill Gross idealab!
will not, and will cause its affiliates not to, directly or indirectly, except
with the prior written consent of our Board of Directors and, without
limitation, a majority of our directors who are not, and have not been for the
previous twelve months, affiliates of Bill Gross idealab! or any of its
affiliates or associates:



| |  |  | become a beneficial owner of 35% or more of the outstanding common
stock of Overture;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | transfer beneficial ownership of any common stock of Overture except
(A) pursuant to the terms of a merger, consolidation or liquidation of,
or tender offer or other business combination transaction with respect
to Overture, in each case approved by our Board of Directors and,
without limitation, by a majority of our directors who are not, and have
not been for the previous twelve months, affiliates of Bill Gross
idealab! or any of its affiliates or associates; (B) pro rata
distributions by certain of the affiliated venture funds of Bill Gross
idealab! of shares of common stock of Overture to their limited partners
consistent with past practice, or (C) other transfers to third parties,
provided that any such third party (together with any of its affiliates
and associates) would not, to the knowledge of Bill Gross idealab!
after inquiry, following the completion of such transfer, beneficially
own 15% or more of the outstanding common stock of Overture; or

7



---



##### Table of Contents





| |  |  | knowingly assist or advise, or knowingly provide or arrange financing
to facilitate, another person or entity, or group of persons or entities
acting in concert, to become the beneficial owner of 15% or more of the
outstanding common stock of Overture.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Stockholder Agreement also provides that, until March 3, 2002, so long
as Bill Gross idealab! is the beneficial owner of at least 20% of the
outstanding common stock of Overture, Overture will not, without the prior
written consent of Bill Gross idealab!, adopt a shareholder rights plan
(commonly referred to as a poison pill); provided, however, that if, in the
good faith judgment of Overtures Board, after consideration of its fiduciary
duties, adoption of such a shareholder rights plan would be in the best
interests of Overtures shareholders, Overture may adopt such a shareholder
rights plan without the consent of Bill Gross idealab! so long as the
percentage thresholds set forth in such plan are no more restrictive to Bill
Gross idealab! than the terms of the Stockholder Agreement. If Overture
adopts a shareholder rights plan, the Stockholder Agreement will terminate and
be of no further force or effect.

6. RESTRICTED INVESTMENTS

In August 2000, Overture entered into a 19-month agreement under which
America Online, Inc. (AOL) will display Overtures Pay-For-Performance search
listings on the search results page of AOL, AOL.com and Netscapes Netcenter.
The agreement calls for a guaranteed payment by Overture of $50 million over
the term of the agreement. As part of the guaranteed payment, Overture issued
to AOL a letter of credit for the benefit of AOL in the amount of $5 million.
In order to secure payment of the letter of credit, Overture holds
approximately $5.8 million on deposit with a bank, which funds are restricted
until the termination of the letter of credit in March 2002.

7. AFFILIATE COMMITMENTS

Overture is obligated to make guaranteed payments totaling approximately
$11.5 million, and $13.7 million for the remainder of 2001 and in 2002,
respectively, under contracts to provide search services to its affiliates.

8. LOSS ON CLOSURE OF GOTO SHOPPING AND DISPOSITION OF GOTO AUCTIONS

Overture operated a consumer-shopping site, GoTo Shopping, which began
operations in January 2000. On April 30, 2001, Overture closed the GoTo
Shopping operations and recorded a charge for restructuring and exit costs. The
charges included approximately $208,000 of cash termination benefits associated
with the involuntary termination of 21 GoTo Shopping employees. The
terminations of these positions, primarily in sales and service, and product
development functions, were completed by June 30, 2001. The charge, also
included approximately $486,000 for non-cash termination benefits, related to
the acceleration of options; approximately $256,000 for fixed asset
write-downs; approximately $485,000 for the remaining lease payments on a
facility lease which Overture has not been able to sub-lease which was accrued
as of June 30, 2001; and other exit costs of approximately $64,000. These costs
were included in the Loss on Closure of GoTo Shopping in the statement of
operations. Cash payments were funded from operations and did not have a
significant impact on Overtures liquidity.

Overture operated an auction service, GoTo Auctions, which began
operations in May 2000. On June 29, 2001, Overture completed a management
buyout of GoTo Auctions, whereby the operating management of GoTo Auctions
purchased GoTo Auctions assets from Overture. The newly formed company is
called ChannelAdvisor Corporation. Overture received a minority stake of
18.5% in this new corporation, whose goal is to provide online and offline
businesses with the ability to leverage online auctions as a channel of
distribution. In connection with the management buyout, Overture incurred
charges for the disposition of certain assets and exit costs. Included in the
exit costs were approximately $280,000 of cash termination benefits associated
with the involuntary termination of 31 GoTo Auction employees. The terminations
of these positions, primarily in sales and service, and product development
functions, were completed by June 30, 2001. The charge also included
approximately $1.8 million for fixed asset write-downs and $80,000 for other
exit costs. These costs were included in Loss on Disposition of GoTo Auctions
in the statement of operations. Cash payments were funded from operations and
did not have a significantly impact on Overtures liquidity.

9. FOLLOW-ON OFFERING

On July 5, 2001, Overture completed a follow-on offering of 3,750,000
primary shares of its common stock. Overtures sale of its shares raised net
proceeds of approximately $58.2 million for the company. In addition, as part
of the offering, Bill Gross idealab! sold 4,875,000 of its shares in Overture.

8



---



##### Table of Contents






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

THIS DOCUMENT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES INCLUDING STATEMENTS RELATED TO THE EXPECTED GROWTH OF OUR
AFFILIATE PROGRAM, THE AMOUNT OF TRAFFIC THAT WILL BE DIRECTED TO US FROM OUR
AFFILIATES IN THE FUTURE, THE TIMING AND AMOUNT OF ANY INCREASE IN OUR AVERAGE
MONTHLY PRICE PER PAID INTRODUCTION, THE TIMING AND AMOUNT OF OUR NUMBER OF
PAID INTRODUCTIONS, THE AMOUNT OF FUTURE ADVERTISER SPENDING WITH OVERTURE,
FLUCTUATION IN THE PRICE OF OUR COMMON STOCK, CHANGES IN OUR QUARTER-TO-QUARTER
FINANCIAL RESULTS AND THE LIKELIHOOD OF INCREASED COMPETITION. WE USE WORDS
SUCH AS ANTICIPATES, BELIEVES, PLANS, EXPECTS, FUTURE AND INTENDS
AND SIMILAR EXPRESSIONS TO IDENTIFY FORWARD-LOOKING STATEMENTS. YOU SHOULD NOT
PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH APPLY ONLY AS
OF THE DATE OF THIS DOCUMENT. OVERTURE UNDERTAKES NO OBLIGATION TO UPDATE
PUBLICLY OR REVISE ANY FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE IN OUR FORWARD-LOOKING STATEMENTS FOR MANY
REASONS, INCLUDING WITHOUT LIMITATION THE RISKS DESCRIBED IN RISKS THAT COULD
AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS, BELOW.

OVERVIEW

Overture is the leader in Pay-For-Performance search on the Internet. We
introduce consumers and businesses that search the Internet to advertisers who
bid for placement in our search results, which are ranked by the advertisers
bid price. Advertisers pay us only when consumers and businesses click through
to the advertisers search listings, so we refer to our service as
Pay-For-Performance search. We provide consumers and businesses with relevant
search results by charging advertisers for each paid introduction, or
click through, and by requiring advertisers to bid only on keywords that are
relevant to their offering. We distribute our search results to consumers and
businesses through our affiliates, a network of portals, Web browsers, Internet
service providers and other Web properties, as well as through our own Web
site. We believe our service offers advertisers a highly targeted, controllable
and cost-effective marketing solution and provides affiliates with incremental
revenue and a relevant search service.

Overture was incorporated in September 1997 and has approximately a
four-year operating history. We launched a proof-of-concept version of our
search service in the fiscal year ended December 31, 1997. Our
Pay-For-Performance service was announced in February 1998, and following
further proof-of-concept testing, was officially launched in June 1998.
Overture has devoted significant resources to launching and expanding its
search service, including developing an infrastructure and building a
management team. In April 2001, we entered into an agreement with a
third-party, whereby we agreed to assign our rights in the GoTo name to such
third-party and to change our name by October 15, 2001. On October 8, 2001,
GoTo.com Inc. changed its corporate name to Overture Services, Inc.
Overtures
losses for the nine months ended September 30, 2001 and the year ended December
31, 2000 were approximately $605,000 and $458.6 million, respectively.

The losses in 2000 include $432.4 million of non-cash charges, consisting
of $115.6 million of amortization of intangibles resulting from our
acquisitions of Cadabra, AuctionRover and the assets of SearchUP; a write-off
of approximately $7.6 million for acquired in-process research and development;
and a $309.3 million write-down of impaired goodwill associated with the
Cadabra and AuctionRover acquisitions. Through the acquisition of Cadabra in
January 2000, Overture operated a comparison-shopping site, GoTo Shopping. On
April 30, 2001, Overture closed its comparison-shopping site. Through the
acquisition of AuctionRover in May 2000, Overture operated an auction service,
GoTo Auctions. On June 29, 2001, Overture completed a management buyout of GoTo
Auctions, whereby the operating management of GoTo Auctions purchased GoTo
Auctions assets from Overture. The newly formed company is called
ChannelAdvisor Corporation. Overture retains a minority stake of 18.5% in
this new corporation, whose goal is to provide online and offline businesses
with the ability to leverage online auctions as a channel of distribution. In
connection with the disposition of GoTo Auctions and closure of GoTo Shopping
operations, Overture incurred one-time charges of approximately $2.1 million
and $1.5 million, respectively, in the three months ending June 30, 2001.

A significant component of our expenses consists of costs incurred to
attract consumers and businesses to our service through our affiliate network.
We expect to continue to rely upon these sources for the majority of searches
conducted on our service. Our future success is dependent upon increasing the
revenue we derive from this traffic.

9



---



##### Table of Contents



International Expansion

We launched our service in the United Kingdom in November 2000 and plan to
launch our German-speaking search service during the first half of 2002. We
expect our international expansion will require continued investment to build
internal infrastructure and grow our advertiser and affiliate bases overseas.

RESULTS OF OPERATIONS

Revenue.Revenue was approximately $72.5 million for the three months
ended September 30, 2001 compared to approximately $25.1 million for the three
months ended September 30, 2000. Revenue was approximately $186.9 million for
the nine months ended September 30, 2001 compared to approximately $63.3
million for the nine months ended September 30, 2000. The increase was the
result of continued growth of our search service and the corresponding
constituents, our advertisers and the number of consumers and businesses using
our services. The terrorist attacks on September 11, 2001 did not have a
significant impact on our expenses, but negatively impacted our revenue of
approximately $2.0 million to $4.0 million and net income of approximately $1.0
million. It is difficult to predict the impact the events of September 11,
2001 and the current challenging economic environment will have on our future
revenue. However, we do not anticipate our historical revenue growth rate,
expressed on a percentage basis, to continue.

Revenue is generated primarily through paid introductions, that is, the
number of clickthroughs that users make on advertisers search listings.
Revenue is recognized when earned based on clickthrough activity to the extent
that the advertiser has deposited sufficient funds with us or collection is
probable. Revenue also consists of banner advertising, which constituted less
than 5 percent of our revenue for the three months ended September 30, 2001.
Overture has no barter transactions. Banner advertisement revenue is recognized
when earned under the terms of the contractual arrangement with the advertiser
or advertising agency, provided that collection is probable.

The number of worldwide paid introductions for each of the last thirteen
fiscal quarters is as follows:

|                             |  |                      
|---------------------------- |  | ---------------------
|NUMBER OF PAID INTRODUCTIONS |  | FOR THE QUARTER ENDED
|                             |  |                      
|338 million                  |  | September 30, 2001   
|327 million                  |  | June 30, 2001        
|318 million                  |  | March 31, 2001       
|228 million                  |  | December 31, 2000    
|114 million                  |  | September 30, 2000   
|93 million                   |  | June 30, 2000        
|88 million                   |  | March 31, 2000       
|73 million                   |  | December 31, 1999    
|54 million                   |  | September 30, 1999   
|31 million                   |  | June 30, 1999        
|15 million                   |  | March 31, 1999       
|7 million                    |  | December 31, 1998    
|2 million                    |  | September 30, 1998   

The average price per paid introduction results from advertisers online
bidding for priority placement in the search results. The worldwide average
price per paid introduction for each of the last thirteen fiscal quarters is as
follows:

|                                    |  |                      
|----------------------------------- |  | ---------------------
|AVERAGE PRICE PER PAID INTRODUCTION |  | FOR THE QUARTER ENDED
|                                    |  |                      
|$0.21                               |  | September 30, 2001   
|0.19                                |  | June 30, 2001        
|0.16                                |  | March 31, 2001       
|0.17                                |  | December 31, 2000    
|0.21                                |  | September 30, 2000   
|0.21                                |  | June 30, 2000        
|0.19                                |  | March 31, 2000       
|0.17                                |  | December 31, 1999    
|0.14                                |  | September 30, 1999   
|0.11                                |  | June 30, 1999        
|0.08                                |  | March 31, 1999       
|0.05                                |  | December 31, 1998    
|0.03                                |  | September 30, 1998   

10



---



##### Table of Contents



We believe the slight increase in the worldwide number of paid
introductions from June 30, 2001 to September 30, 2001 was primarily due to
lower than anticipated effects of seasonality (typically lower Internet usage
from July to September) and better than expected performance from some of our
affiliates due to better implementations of our search results on their sites.
This increase was partially offset by the events of September 11, 2001 and the
current challenging economic conditions. Overture believes the number of paid
introductions in the fourth quarter of 2001 may not experience meaningful
growth despite a typically higher Internet usage period of October through
December. This is primarily due to a slight decrease in paid introductions
from the ongoing effects of the events of September 11, 2001 and the current
challenging economic environment. We believe that the worldwide average price
per paid introduction increased as a result of better commercial
implementations from some affiliates facilitating better leads to advertisers,
which in turn, has led to an increase in bidding behavior. In addition,
advertisers are increasing their budgets with Overture, as the average spend
per advertiser in the three months ended September 30, 2001 rose by 10% over
the previous three months and by 9% in the three months ended June 30, 2001
compared to the three months ended March 31, 2001. We cannot assure that the
average price per click will continue to increase, that it will not decrease
from historical levels or the rate of any increase.

We believe the quarterly number of paid introductions and average monthly
price per paid introduction listed above are not necessarily indicative of
future results. While we believe our average monthly price per paid
introduction will grow throughout this year; it is difficult to forecast this
growth, since advertisers, rather than Overture, determine the price paid for
each introduction. We do not anticipate our historical revenue growth rate,
expressed on a percentage basis, to continue. Our growth rate and results
depend on our ability to continue to increase the number of advertisers who use
our service, the amount our advertisers spend on our service and the number of
consumers and businesses who use our service. We anticipate these variables to
fluctuate, affecting our growth rate and results.

Our growth is dependent on obtaining additional traffic and increasing the
average price per paid introduction. During the three months ended September
30, 2001, approximately 30% of Overtures total traffic came from our portal
affiliates, including America Online, Inc. (AOL), AltaVista Company, Terra
Lycos, S.A., iwon and Infoseek Corporation (operator of go.com); approximately
30% came from browser affiliates, Microsofts Internet Explorer and Netscapes
browser product; approximately 35% of the total traffic came from other
affiliates; and less than 5% came directly to the Overture Web site. In August
2000, Overture and AOL entered into a 19-month distribution agreement under
which AOL displays Overtures listings on the search results pages of AOL,
AOL.com and Netscapes Netcenter. In November 2000, Overture and Terra Lycos
entered into a three-year distribution agreement under which Overtures
listings were added to Lycos.com and HotBot search results. In November 2000,
Overture and AltaVista entered into an 18-month distribution agreement under
which Overture provides AltaVistas search service users with
Overtures
listings on select search results pages of AltaVista. In January 2001, we
extended our existing agreement with Microsoft for an additional year, which
will allow for continued traffic from their Internet Explorer 4 and Internet
Explorer 5 browsers until January 2002. In June 2001, Overture entered into an
additional agreement with Microsoft, which expires on June 30, 2002, to include
the Overture search service on the Internet Explorer 4 and Internet Explorer 5
MSN Search Pane. In September 2001, we extended our existing Premier Provider
Agreement with Netscape. We must renew our affiliate agreements or replace any
lost traffic with other sources and grow our advertising base; otherwise, our
revenue may be materially, adversely affected.

Cost of Revenue.Cost of revenue consists primarily of costs associated
with serving our search results and maintaining our Web site, plus fees paid to
outside service providers that provide and manage the unpaid listings that we
distribute through some of our affiliates and on our Web site. Costs
associated with serving our search results and maintaining our Web site include
depreciation of Web site equipment, co-location charges for our Web site
equipment, software license fees and salaries of related personnel. Cost of
revenue was approximately $6.1 million for the three months ended September 30,
2001 compared to approximately $3.3 million for the three months ended
September 30, 2000. Cost of revenue was approximately $15.9 million for the
nine months ended September 30, 2001 compared to approximately $8.7 million for
the nine months ended September 30, 2000. The increase was primarily due to
increased database and hardware capacity requirements, an increase in the
number of personnel required to support our service and increased fees paid to
outside service providers. We anticipate cost of revenue to continue to
increase in absolute dollars as our traffic increases.

Marketing, Sales and Service.Marketing, sales and service expenses
consist primarily of our payments to affiliates and payroll and related
expenses for personnel engaged in marketing, sales and customer service
functions. Marketing sales and service expenses were approximately $45.0
million for the three months ended September 30, 2001 compared to approximately
$21.2 million for the three months ended September 30, 2000. Marketing, sales
and service expenses were approximately $130.2 million for the nine months
ended September 30, 2001 compared to approximately $55.8 million for the nine
months ended September 30, 2000. The increase was primarily due to an
increased number of affiliates and associated traffic directed from these
affiliates. We believe that continued investment in marketing, sales and
service and in the increased distribution of our search services, which
includes our agreements with AOL, AltaVista, Terra Lycos and MSN are critical
to attaining our strategic objectives and, as a result, expect these costs to
continue

11



---



##### Table of Contents



to increase in the future. In August 2000, Overture and AOL entered into a
19-month distribution agreement under which AOL displays Overture s listings
on the search results pages of AOL, AOL.com and Netscapes Netcenter. The
agreement calls for a guaranteed payment by Overture of $50 million over the
term of the agreement. In November 2000, Overture and Terra Lycos entered into
a three-year distribution agreement under which Overture s listings were added
to Lycos.com and HotBot search results. In November 2000, Overture and
AltaVista entered into an 18-month distribution agreement under which Overture
provides AltaVistas search service users with Overture s listings on select
search results pages of AltaVista. In January 2001, we extended our existing
agreement with Microsoft for an additional year, which will allow for continued
traffic from their Internet Explorer 4 and Internet Explorer 5 browsers until
January 2002. In June 2001, Overture entered into an additional agreement with
Microsoft, which expires on June 30, 2002, to include the Overture search
service on the Internet Explorer 4 and Internet Explorer 5 MSN Search Pane. In
September 2001, we extended our existing Premier Provider Agreement with
Netscape. Costs associated with payments to affiliates were approximately $38.6
million or 53% of revenue for the three months ended September 30, 2001
compared to approximately $15.0 million or 62% of revenue for the three months
ended September 30, 2000. Costs associated with payments to affiliates were
approximately $110.2 million or 59% of revenue for nine months ended September
30, 2001, compared to approximately $35.7 million or 56% of revenue for the
nine months ended September 30, 2000. We anticipate these costs will increase
in absolute dollars as traffic volume increases, but anticipate costs as a
percentage of revenue to be relatively constant.

General and Administrative.General and administrative expenses consist
primarily of payroll and related expenses for executive and administrative
personnel; facilities; professional services, including legal; and insurance
and other general corporate expenses. General and administrative expenses were
approximately $10.8 million for the three months ended September 30, 2001
compared to approximately $9.0 million for the three months ended September 30,
2000. General and administrative expenses were approximately $31.9 million for
the nine months ended September 30, 2001 compared to approximately $23.3
million for the nine months of September 30, 2000. The increase was primarily
the result of increased credit card processing fees, as a result of the
increased revenue through prepaid accounts. We expect general and
administrative expenses to be flat in the fourth quarter of 2001.

Product Development.Product development expenses consist primarily of
payroll and related expenses for personnel responsible for development of
features and functionality for our service, as well as costs incurred in the
preliminary project and post-implementation stage of computer software
developed for internal use. Product development expenses were approximately
$2.8 million for the three months ended September 30, 2001 compared to
approximately $3.5 million for the three months ended September 30, 2000.
Product development expenses were approximately $9.7 million for the nine
months ended September 30, 2001 compared to $10.0 million for the nine months
ended September 30, 2000. The decrease was primarily due to reduction in staff
from the closing of the GoTo Shopping and GoTo Auctions operations. We expect
product development expenses to be flat in the fourth quarter of 2001.

Amortization of Deferred Compensation.Certain stock options granted from
the inception of Overture through our initial public offering have been
considered to be compensatory for financial accounting purposes. Total
compensation resulting from these stock options amounted to approximately $7.8
million. This amount represents the difference between the exercise price of
the stock options and the deemed fair value of our common stock at the time of
the grants or issuances, adjusted for the return of unvested options or the
repurchase of restricted stock resulting from employee terminations.
Compensation associated with these stock options is amortized and expensed over
the applicable vesting periods using a graded methodology. Approximately
$213,000 and $311,000 were amortized and charged to operations for the three
months ended September 30, 2001 and 2000, respectively. Approximately $651,000
and $1.1 million were amortized and charged to operations for the nine months
ended September 30, 2001 and 2000, respectively.

Amortization of Intangible Assets.In October 2000, Overture acquired
substantially all the assets of SearchUP, Inc. for approximately $3.5 million.
Overture allocated the purchase price to intangible assets acquired based on
their estimated fair values as determined by Overture and is amortizing such
amounts on a straight-line basis over three years. Approximately $292,000 and
$35.4 million were amortized and charged to operations for the three months
ended September 30, 2001 and 2000, respectively. Approximately $900,000 and
$79.9 million were amortized and charged to operations for the nine months
ended September 30, 2001 and 2000, respectively. As a result of the complete
write-down of the remaining Cadabra and AuctionRover intangible assets in the
three months ended December 31, 2000, we expect the amortization of intangible
assets to remain constant at approximately $300,000 per quarter through 2003
due to the SearchUP acquisition, unless we incur charges associated with the
acquisition of additional businesses, assets or technologies.

Loss on Closure of GoTo Shopping. On April 30, 2001, Overture closed the
GoTo Shopping operations and recorded a charge for restructuring and exit
costs. The charges included approximately $208,000 of cash termination benefits
associated with the involuntary termination of 21 GoTo Shopping employees. The
terminations of these positions, primarily in sales and service and product
development functions were completed by June 30, 2001. The charge also included
approximately $486,000 for non-cash termination

12



---



##### Table of Contents



benefits, related to the acceleration of options; $256,000 for fixed asset
write-downs; approximately $485,000 for the remaining lease payments on a
facility lease which Overture has not been able to sub-lease which was accrued
as of June 30, 2001; and other exit costs of approximately $64,000. These costs
were included in the Loss on Closure of GoTo Shopping in the statement of
operations. Cash payments were funded from operations and did not have a
significant impact on Overtures liquidity.

Loss on Disposition of GoTo Auctions. On June 29, 2001, Overture
completed a management buyout of GoTo Auctions, whereby the operating
management of GoTo Auctions purchased GoTo Auctions assets from Overture. The
newly formed company is called ChannelAdvisor Corporation. Overture received
a minority stake of 18.5% in this new corporation, whose goal is to provide
online and offline businesses with the ability to leverage online auctions as a
channel of distribution. In connection with the management buyout, Overture
incurred charges for the disposition of certain assets and exit costs.
Included in the exit costs were approximately $280,000 of cash termination
benefits associated with the involuntary termination of 31 GoTo Auction
employees. The terminations of these positions, primarily in sales and service
and product development functions, and were completed by June 30, 2001. The
charge also included approximately $1.8 million for fixed asset write-downs and
$80,000 for other exit costs. These costs were included in Loss on Disposition
of GoTo Auctions in the statement of operations. Cash payments were funded from
operations and did not have a significantly impact on Overture s liquidity.

Other Income. Other income typically consists of returns on cash, cash
equivalents and short-term and long-term investments, net of interest expense
attributable to leased equipment and debt. Other income was approximately $1.7
million for the three months ended September 30, 2001 compared to approximately
$1.6 million for the three months ended September 30, 2000. Other income was
approximately $5.5 million for the nine months ended September 30, 2001
compared to approximately $26.2 million for the nine months ended September 30,
2000. In the nine months ended September 30, 2001, other income included
reimbursement for legal costs associated with the settlement of the
MercExchange litigation (see Note 4). Comparatively, in the nine months ended
September 30, 2000, other income included the settlement of litigation with The
Walt Disney Company.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities totaled approximately $26.6
million and net cash used in operating activities totaled approximately $15.7
million for the nine months ended September 30, 2001 and 2000, respectively.
The change was due primarily to reduced net loss and decreased prepaid
marketing expense, which was offset by decreased amortization of intangible
assets. Net cash used in investing activities totaled approximately $32.5
million and net cash provided by investing activities totaled approximately
$17.1 million for the nine months ended September 30, 2001 and 2000,
respectively. The change resulted primarily from proceeds of short-term and
long-term investments in the nine months ended September 30, 2000. Net cash
provided by financing activities totaled approximately $64.9 million and $1.3
million for the nine months ended September 30, 2001 and 2000, respectively.
The increase was due primarily to net proceeds of approximately $58.2 million
from our follow-on offering completed on July 5, 2001 and proceeds from the
exercise of stock options. We expect interest income to decrease as interest
rates for our investments, commercial paper and government securities, have
decreased.

Our principal sources of liquidity consisted of unrestricted cash, cash
equivalents and short-term and long-term investments of approximately $131.2
million as of September 30, 2001 and approximately $55.0 million as of December
31, 2000. We believe that our cash and liquid investment reserves are
sufficient to sustain operations through the foreseeable future. We are
obligated to make guaranteed payments totaling approximately $11.5 million, and
$13.7 million for the remainder of 2001 and in 2002, respectively, under
contracts to provide search services to our affiliates.

RISKS THAT COULD AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS

WE HAVE A LIMITED OPERATING HISTORY, SO WE CANNOT BE SURE THAT WE WILL BE
SUCCESSFUL IN IMPLEMENTING OUR BUSINESS STRATEGY

Overture was founded in September 1997, officially launched its service in
June 1998, and has a limited operating history. An investor in our common stock
must consider the risks and difficulties frequently encountered by companies in
new and rapidly evolving markets. These risks include our:



| |  |  | complete dependence on online advertising and consumer search
services with only limited market acceptance;
| | - |  | -----------------------------------------------------------------------------------------------------------

13



---



##### Table of Contents





| |  |  | need to continually develop and upgrade our infrastructure, including
internal controls, transaction processing systems, data storage and
retrieval systems and Web site;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | reliance on affiliates to direct consumers and businesses to our service to conduct searches;                                                                            
|
| |  |  | need to manage changing operations; and                                                                                                                                  
|
| |  |  | dependence upon and need to hire and retain key personnel.                                                                                                               

The Overture service may not retain its existing, or attract new,
advertisers, consumers and businesses, and affiliates, which are Web sites that
include Overtures Pay-For-Performance search services on their sites or that
direct consumer traffic to the Overture Web site. Overture may not achieve
additional revenues or improve operating margins in future periods. Overtures
services may not continue to achieve commercial acceptance and, if they do not,
our business, operating results and financial condition may be materially and
adversely affected.

OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS BECAUSE
OF MANY FACTORS, AND ANY OF THESE COULD ADVERSELY AFFECT OUR STOCK PRICE

We believe that quarter-to-quarter comparisons of our operating results
are not a good indication of our future performance. It is likely that, in some
future quarter, our operating results may be below the expectations of public
market analysts and investors and, as a result of these or other factors, the
price of our common stock may fall and/or significantly fluctuate. Our
operating results have varied widely in the past, and we expect that they will
continue to vary widely from quarter to quarter due to a number of factors,
including:



| |  |  | demand for our services by advertisers, consumers and businesses,
including the number of searches performed by consumers and businesses
and the rate at which they click through to paid search results;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | prices paid by advertisers using the Overture services, which are not
determined by Overture;                                                                                                            
|
| |  |  | our costs of attracting consumers and businesses to use Overtures
services, including costs of exposure on affiliate Web sites;                                                                         
|
| |  |  | decrease in traffic from our affiliates for any reason, including
loss of our agreements with affiliates or demand for the services of
affiliates;                                                       
|
| |  |  | costs related to agreements with affiliates;                                                                                                                                                             
|
| |  |  | ability to protect our business model from competitors;                                                                                                                                                  
|
| |  |  | the percentage of Overtures search listings that are bidded listings;                                                                                                                                   
|
| |  |  | our ability to significantly increase our affiliate programs;                                                                                                                                            
|
| |  |  | seasonal fluctuations in the use of our service, typical of our
industry, in which online traffic has typically been lower in the second
and third quarters of the calendar year;                        
|
| |  |  | the amount and timing of operating costs and capital expenditures relating to expansion of our operations;                                                                                               
|
| |  |  | costs and delays in introducing any new Overture services and improvements to existing services;                                                                                                         
|
| |  |  | our ability to successfully introduce new products or services;                                                                                                                                          
|
| |  |  | changes in the growth rate of Internet usage and acceptance by consumers of e-commerce;                                                                                                                  
|
| |  |  | technical difficulties, system failures or Internet downtime;                                                                                                                                            
|
| |  |  | government regulations related to the Internet;                                                                                                                                                          

14



---



##### Table of Contents





| |  |  | our ability to upgrade and develop our information technology systems and infrastructure;     
| | - |  | ----------------------------------------------------------------------------------------------
|
| |  |  | costs related to any acquisitions or dispositions of technologies or businesses; and          
|
| |  |  | general economic conditions, as well as those specific to the Internet and related industries.

As a result of our limited operating history, it is difficult to
accurately forecast our revenue, and we have limited meaningful historical
financial data upon which to base planned operating expenses. We plan to
significantly increase our operating expenses to expand our marketing and sales
operations and broaden our customer support capabilities. We base our current
and future expense levels on our operating plans and estimates of future
revenue. Other than a portion of our affiliate costs, our expenses are
relatively fixed. Revenue and operating results are difficult to forecast
because they generally depend upon the volume of the searches conducted on our
service, the amounts bid by advertisers for search listings on the service and
the number of advertisers that bid on the service, each of which we cannot
control directly. As a result, we may be unable to adjust our spending in a
timely manner to compensate for any unexpected revenue shortfall. We also may
be unable to increase our spending and expand our operations in a timely manner
to adequately meet user demand, to the extent such demand exceeds our
expectations.

WE DEPEND ON A LIMITED NUMBER OF SOURCES TO DIRECT CONSUMERS AND BUSINESSES TO
OUR SERVICE TO CONDUCT SEARCHES

The consumers and businesses who conduct searches on our service come
primarily from a limited number of sources. Our sources for consumers and
businesses conducting searches are members of our affiliate network, including
portals such as AOL, AltaVista, Terra Lycos, iwon and go.com; providers of
Internet browsers such as Microsoft Internet Explorer and Netscapes browser
product; aggregators of search offerings of various providers; Internet Service
Providers (ISPs) such as Earthlink, Inc.; and from Overtures Web site. In any
given month, we typically depend upon one or a few of these sources for a
significant amount of traffic and searches conducted on our service. Revenue is
generated from clickthroughs that users make on advertisers listings, and
generally, the more traffic from any given source, the greater number of
clickthroughs we will generate. Of Overtures total traffic, for the three
months ended September 30, 2001, approximately 30% came from our portal
affiliates, including AOL, AltaVista and Terra Lycos, iwon and go.com;
approximately 30% came from our browser affiliates, Microsofts Internet
Explorer and Netscapes browser product; approximately 35% came from other
affiliates; and less than 5% came directly to the Overture Web site. In January
2001, we extended our existing agreement with Microsoft for an additional year,
which will allow for continued traffic from their Internet Explorer 4 and
Internet Explorer 5 browsers until January 2002. In June 2001, Overture entered
into an additional agreement with Microsoft, which expires on June 30, 2002, to
include the Overture search service on the Internet Explorer 4 and Internet
Explorer 5 MSN Search Pane. In September 2001, we extended our existing
Premier Agreement with Netscape. We depend on each of our portal and browser
affiliates and the loss of any of these affiliates could harm our revenues and
business.

The amount of traffic from each of our affiliates has varied, and we
expect it will continue to vary, from quarter to quarter, sometimes
significantly, and in any single quarter we have been and could continue to be
significantly dependent on traffic from a single or limited number of portal or
browser affiliates. Certain of Overtures affiliate agreements do not require
the affiliate to display Overtures search results and may allow the affiliate
to stop displaying Overtures search results after a short notice period. If we
are unable to replace traffic from any portal or browser affiliate after
expiration of our contract with it or if an affiliate upon which we depend
stops displaying Overtures search results, it would seriously harm our
business, financial condition and results of operations, particularly if we are
significantly dependent on that affiliate at the time. Overtures agreements
with its affiliates vary in initial duration from three months to three years,
and depending on the agreement, may be terminable upon the occurrence of
certain events, including for our failure to meet certain service levels, for
general breaches of agreement terms, for changes in control or in some
instances, at will. We may not be successful in renewing any of these
agreements, or if they are renewed, any new agreement may not be on as
favorable terms. In addition, we may not be successful in entering into
distribution agreements with new affiliates on commercially acceptable terms.

OUR SUCCESS IS DEPENDENT UPON FURTHER DEVELOPING AND MAINTAINING THE AFFILIATE
NETWORK

We believe that our success in penetrating our target markets depends in
part on our ability to further develop and maintain relationships with
affiliates, which provide their users with Overture services on their sites or
direct their traffic to our Web site. We believe these relationships are
important to facilitate broad market acceptance of our services and enhance our
sales. Our ability to attract consumers to our services is dependent upon the
growth of our affiliate network, which is new and unproven. Our success depends
in part on the success of our affiliates and our relationships with our
affiliates. In addition, our affiliates may not regard us as

15



---



##### Table of Contents



significant for their own businesses. Therefore, they could reduce their
commitment to us or terminate their respective relationships with us, pursue
other partnerships or relationships, or attempt to develop or acquire products
or services that compete with our services. If we are unable to successfully
develop and maintain relationships with affiliates, our business, operating
results and financial condition will be materially and adversely affected.

OUR SUCCESS DEPENDS UPON ACHIEVING A LARGE AND ACTIVE BASE OF ADVERTISERS,
CONSUMERS AND BUSINESSES

Our ability to increase the volume of transactions on our service and the
amounts bid by our advertisers is dependent upon achieving market acceptance by
having more advertisers, consumers and businesses using our services. Most
potential advertisers have only limited experience advertising on the Internet
and have not devoted a significant portion of their advertising expenditures to
Internet advertising. Advertising through priority placement on our services in
particular has been introduced only recently, and we cannot predict the level
of its acceptance as an advertising medium. Our services may not achieve
significant acceptance by consumers and businesses. Among other things, because
our services prioritize search results based on advertising bids associated
with keywords rather than on algorithmic or other traditional search and
retrieval technologies, consumers and businesses may not use our service
because they perceive our results to be less objective than those provided by
traditional search methods. Failure to achieve and maintain a large and active
base of advertisers and of consumers and businesses could have a material
adverse effect on our business, operating results and financial condition.

A SIGNIFICANT PORTION OF OUR REVENUE IS CONCENTRATED AMONG A LIMITED NUMBER OF
ADVERTISERS

If our major advertisers were to substantially cut back their advertising
or stop using our services, our business would be seriously harmed. Although no
one advertiser accounts for a material portion of our revenue during any given
period, a majority of our total revenue is derived from a small proportion of
our advertisers. We believe that a substantial amount of revenue from
advertising sales in any given future period may come from a relatively small
number of advertisers. We do not have formal contractual relationships with
many of our advertisers, and when we do have contracts, all are terminable at
any time by the advertiser. As a result, our advertisers are not obligated to
purchase advertising from us in the future.

OUR INABILITY TO CONTINUE TO GROW AND MAINTAIN OUR ADVERTISER, CONSUMER AND
BUSINESS, AND AFFILIATE CONSTITUENCIES COULD ADVERSELY AFFECT OUR REVENUES AND
BUSINESS

Our growth depends, in part, on the maintenance of a critical mass of
advertisers, consumers and businesses, and affiliates, and the continued growth
of these constituencies, which encourages increased participation by each of
the constituencies. To the extent that we experience a decline in the growth or
number of any one constituency, the value of our service to one or more of our
other constituencies could be harmed, and our revenues or business could be
adversely affected. A continued decline could seriously harm our revenues and
business.

WE CANNOT ASSURE YOU WE WILL NOT INCUR NET LOSSES IN ANY PARTICULAR FUTURE
PERIOD

Prior to the three months ended September 30, 2001, we had a history of
losses and we cannot assure you we will not incur net losses again in any
particular future period. We incurred a net loss of approximately $605,000 and
$96.9 million for the nine months ended September 30, 2001 and 2000,
respectively, and as of September 30, 2001, we had an accumulated deficit of
approximately $502.6 million. Because our expense levels are relatively fixed
in the short term, if our revenues do not keep pace with our expense levels, we
may not sustain or increase profitability in any particular quarter or we may
incur losses again. We expect to continue to increase our marketing, sales and
service and general and administrative expenses and we cannot be certain that
revenue growth will continue. If our revenue does not continue, we may
experience a loss in one or more future periods and it may as a result cause
our stock price to decline. This may in turn impact our ability to implement
our business strategy.

OUR INDUSTRY IS HIGHLY COMPETITIVE, AND WE MAY NOT BE ABLE TO COMPETE
EFFECTIVELY

Overture competes with online services, other Web sites and advertising
networks such as DoubleClick Inc. and 24/7 Media, Inc., as well as traditional
offline media such as television, radio and print, for a share of advertisers
total advertising budgets. We believe that the number of companies selling
Web-based advertising and the available inventory of advertising space has
recently substantially increased. Accordingly, Overture may face increased
pricing pressure for the sale of advertisements and direct marketing
opportunities, which could have a material adverse effect on our business,
operating results and financial condition.

16



---



##### Table of Contents



Overture also competes with providers of Web directories, search, and
information services, all of which offer services competitive to Overture,
including, among others, AltaVista, Ask Jeeves, Inc., CNET, Inc., Excite@Home,
Inc. (including WebCrawler and Magellan), Google, Inc., Inktomi Corporation,
LookSmart, Ltd., Microsoft Corporation (LinkExchange, Inc. and msn.com), Terra
Lycos (including HotBot) and Yahoo!, Inc. In addition, FindWhat.com, Inc. and
PRIMEDIA, through its About.com Sprinks product, each offer a pay-per-click
advertising service. There are also other companies that offer directly
competing services. We have affiliate arrangements with companies that may be
considered potential competitors.

Many of these competitors, as well as potential entrants into our market,
have longer operating histories, larger customer or user bases, greater brand
recognition and significantly greater financial, marketing and other resources
than we do. Many of these current and potential competitors can devote
substantially greater resources to promotion and Web site and systems
development than we can. In addition, as the use of the Internet and other
online services increases, larger, well-established and well-financed entities
may continue to acquire, invest in or form joint ventures with providers of Web
directories, search and information services or advertising solutions, and
existing providers of Web directories, search and information services or
advertising solutions may continue to consolidate. In addition, providers of
Internet browsers and other Internet products and services who are affiliated
with providers of Web directories and information services in competition with
the Overture service may more tightly integrate these affiliated offerings into
their browsers or other products or services. Any of these trends would
increase the competition we face and could have a material adverse effect on
our business, operating results and financial condition.

WE ARE DEPENDENT UPON MAINTAINING AND EXPANDING OUR COMPUTER AND COMMUNICATIONS
SYSTEMS

Our failure to achieve or maintain high capacity data transmission without
system downtime and to achieve improvements to our transaction processing
systems, network infrastructure and accounting systems could have a material
adverse effect on our business, operating results and financial condition. Our
transaction processing systems are currently operating at a high capacity.
Should we add a significant amount of traffic in a short period of time, our
network infrastructure could be insufficient to support our growth, and we
could potentially experience system failures, which could harm our revenues,
and incur significant expenses to add capacity. We have experienced occasional
systems interruptions and infrastructure failures, which we believe could occur
from time to time.

WE FACE THE RISKS OF SYSTEM FAILURES

We currently do not have a comprehensive disaster recovery plan in effect
and do not have fully redundant systems for our services at an alternate site.
A disaster such as fire, flood, earthquake, power loss, telecommunications
failure, break-in, sabotage or a similar event could severely damage our
business and results of operations, because our services could be interrupted
for an indeterminate length of time. Our operations depend upon our ability to
maintain and protect our computer systems, which are located in Pasadena,
California and at other offsite locations. These offsite locations are managed
by third parties in California, Virginia, Washington and Ireland.

Any system failure, including network or hardware failure, that causes an
interruption in our service or our affiliates service or the security of any
other internet provider or a decrease in responsiveness could result in reduced
traffic and reduced revenue. Although we believe that our current back-up
methods are adequate, the back-up servers could fail or cause interruptions in
our service.

California and Washington sites exist on or near known earthquake fault
zones. The occurrence of a natural disaster or unanticipated problems at our
principal headquarters or at a third-party facility could cause interruptions
or delays in our business, limited loss of data or could render us unable to
provide some services. In addition, failure by the third-party facility to
provide the data communications capacity required by us, as a result of human
error, natural disaster or other operational disruptions, could cause
interruptions in our service. The occurrence of any or all of these events
could adversely affect our reputation, brand and business, which could have a
material adverse effect on our business, operating results and financial
condition.

CONTINUED ADOPTION OF THE INTERNET AS A METHOD OF CONDUCTING BUSINESS IS
NECESSARY FOR OUR FUTURE GROWTH

The failure of the Internet to continue to develop as a commercial and
business medium could have a material adverse effect on our business, operating
results and financial condition. The widespread acceptance and adoption of the
Internet by traditional businesses for conducting business and exchanging
information is likely only if the Internet provides these businesses with
greater efficiencies and improvements.

17



---



##### Table of Contents



FAILURE TO EXPAND INTERNET INFRASTRUCTURE COULD LIMIT OUR FUTURE GROWTH

The growth in Internet traffic has caused frequent periods of decreased
performance, and if Internet usage continues to grow rapidly, the Internets
infrastructure may not be able to support these demands, and its performance
and reliability may decline. Consequently, the emergence and growth of the
market for our services depend upon improvements being made to the entire
Internet, as well as to the individual networking infrastructures of our
advertisers, consumers and businesses, and affiliates to alleviate overloading
and congestion.

INCREASED SECURITY RISKS OF ONLINE COMMERCE MAY DETER FUTURE USE OF OUR
SERVICES

Concerns over the security of transactions conducted on the Internet and
the privacy of consumers may also inhibit the growth of the Internet and other
online services generally, and online commerce in particular. Our failure to
prevent security breaches could significantly harm our business and results of
operations. Anyone who is able to circumvent our security measures could
misappropriate proprietary information, cause interruptions in our operations
or damage our brand and reputation. We do not believe that our data
repositories, financial systems and other technology resources are completely
secure from security breaches or sabotage, and we occasionally experience
attempts at hacking or security breaches. We may be required to incur
significant costs to protect against security breaches or to alleviate problems
caused by breaches. Any well-publicized compromise of our security or the
security of any other Internet provider could deter people from using our
services or the Internet to conduct transactions that involve transmitting
confidential information or downloading sensitive materials, which would
adversely affect the business of our advertisers and, accordingly, our
business.

WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR OPERATIONS, AND
CALIFORNIAS RECENT ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE OUR
EXPENSES

California was in the midst of an energy crisis and if an energy crisis
were to reoccur, it could disrupt our operations and increase our expenses. In
the event of an acute power shortage, California has on some occasions
implemented, and may in the future continue to implement, rolling blackouts
throughout California. Our computer systems are supplied primary power by the
local power company. In addition, the systems are connected to battery backup
and diesel generators. These alternative sources of power are provided by our
hosting provider and are subject to their upkeep and maintenance. Our current
insurance does not provide coverage for any damages our customers or we may
suffer as a result of any interruption in our power supply. If blackouts
interrupt our third-party power supply, we would be temporarily unable to
continue operations at our affected facilities. Any such interruption in our
ability to continue operations at our affected facilities could damage our
reputation and could result in lost revenue, which could have a material
adverse effect on our business, operating results and financial condition.
Similar interruption to our affiliates services could also adversely impact
us.

WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS, AND ANY FAILURE TO
MANAGE THIS GROWTH COULD DAMAGE OUR BUSINESS

Our ability to successfully offer products and services and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. We have increased, and plan to continue to increase, the
scope of our operations. These expansion efforts could be expensive and put a
strain on management, and, if we do not manage growth properly, it could
adversely affect our business. We will need to expand our infrastructure, which
will include hiring certain key employees and continuing to increase our
headcount. Hiring key employees, in particular, has historically been
difficult, and we cannot assure you that we will be able to successfully
attract and retain a sufficient number of qualified personnel.

WE MAY BE UNABLE TO EXECUTE OUR BUSINESS MODEL IN INTERNATIONAL MARKETS

One component of our strategy is to expand our operations into selected
international markets. For example, we launched our service in the United
Kingdom in November 2000 and plan to launch our German-speaking search service
during the first quarter of 2002. To date, we have only operated
internationally in the United Kingdom, and we may be unable to execute our
business model in this market or new markets. Further, foreign providers of
competing online services may have a substantial advantage over us in
attracting users in their country due to earlier established businesses in that
country, greater knowledge with respect to the cultural differences of users
residing in that country and/or their focus on a single market. We expect to
continue to experience higher costs as a percentage of revenues in connection
with the development and maintenance of international online services.
International markets we have selected may not develop at a rate that supports
our level of investment. In particular, international markets typically have
been slower than domestic markets in adopting the Internet as an advertising
and commerce medium.

18



---



##### Table of Contents



In pursuing our international expansion strategy, we face several
additional risks, including:



| |  |  | lower per capita Internet usage 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 online security for e-commerce transactions;              
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | relatively small Internet markets in some countries, which may
prevent us from aggregating sufficient traffic and advertising revenues
and scaling our business model in those countries;                                                                                
|
| |  |  | our potential inability to aggregate a large amount of Internet
traffic and find and develop relationships with international
advertisers, consumers and businesses, and affiliates;                                                                                     
|
| |  |  | competition in international markets from a broad range of
competitors, including Yahoo, LookSmart, AltaVista, Espotting.com and
other United States and foreign search engines, content aggregators and
portals, some of which have greater local experience than we do;
|
| |  |  | difficulties in recruiting qualified and knowledgeable staff and in
building locally relevant products and services, which could prevent us
from aggregating a large advertiser base;                                                                                    
|
| |  |  | higher costs of doing business in foreign countries;                                                                                                                                                                                                                     
|
| |  |  | trade barriers and unexpected changes and differences in regulatory,
tax and legal requirements applicable to Internet services; and                                                                                                                                     
|
| |  |  | longer payment cycles and foreign currency fluctuations.                                                                                                                                                                                                                 

One or more of these factors could have a material adverse effect on our
future international operations and, consequently, on our business, operating
results and financial condition.

OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS,
AND THESE OFFICERS AND KEY PERSONNEL MAY NOT REMAIN WITH US IN THE FUTURE

Our future success depends upon the continued service of our executive
officers and other key technology, marketing, sales and support personnel. None
of our officers or key employees is bound by an employment agreement for any
specific term. If we lost the services of one or more of our key employees, or
if one or more of our executive officers or employees decided to join a
competitor or otherwise compete directly or indirectly with us, this could have
a material adverse effect on our business, operating results and financial
condition.

WE ARE EXPOSED TO RISKS ASSOCIATED WITH CREDIT CARD FRAUD, CREDIT PAYMENT AND
SUDDEN LOSS OF ADVERTISERS

We have suffered losses and may continue to suffer losses as a result of
orders placed with fraudulent credit card data, even though the associated
financial institution approved payment of the orders. Under current credit card
practices, a merchant is liable for fraudulent credit card transactions when,
as is the case with the transactions we process, that merchant does not obtain
a cardholders signature. A failure to adequately control fraudulent credit
card transactions would result in significantly higher credit card-related
costs and may ultimately result in advertisers inability to use credit cards
as a means of payment, which would have a material adverse effect on our
business, operating results and financial condition.

Some of our advertisers have limited operating histories, are operating at
a loss, have limited cash reserves or have limited access to capital. If an
advertiser experiences financial difficulties, the advertiser may stop
advertising suddenly. In addition, in some instances we extend credit to
advertisers who may default on their accounts receivable. If any significant
part of our advertiser base experiences financial difficulties, is not
commercially successful or is unable to pay our advertising fees for any other
reason, our business, operating results and financial condition will be
materially and adversely affected.

19



---



##### Table of Contents



WE FACE RISKS OF CLAIMS FROM THIRD PARTIES FOR INTELLECTUAL PROPERTY
INFRINGEMENT AND OTHER MATTERS THAT COULD ADVERSELY AFFECT OUR BUSINESS

Our services operate in part by making Internet services and content
available to our users. This creates the potential for claims to be made
against us, either directly or through contractual indemnification provisions
with third parties. These claims might, for example, be made for defamation,
negligence, copyright, trademark or patent infringement, personal injury,
invasion of privacy or other legal theories. Allegations are made against us
from time to time concerning these types of claims. For example, we are aware
that some companies have alleged to us and our competitors that the sale of
advertising relating to the use of search terms may constitute trademark
infringement. Although we deny such allegations, any claims could result in
costly litigation and be time consuming to defend, divert managements
attention and resources, cause delays in releasing new or upgrading existing
services or require us to enter into royalty or licensing agreements. Royalty
or licensing agreements, if required, may not be available on acceptable terms,
if at all. If a court were to determine that the sale of advertising related to
certain search terms constitutes trademark infringement; it could negatively
impact our revenues and business. There can be no assurance that our services
do not infringe the intellectual property rights of third parties. A successful
claim of infringement against us and our failure or inability to license the
infringed or similar technology could have a material adverse effect on our
business, operating results and financial condition.

WE MAY NOT BE ABLE TO PROTECT OUR INTERNET DOMAIN NAME OR INTELLECTUAL PROPERTY
RIGHTS UPON WHICH OUR BUSINESS RELIES

Our success and ability to compete also are substantially dependent upon
our internally developed technology and data resources, which we protect
through a combination of copyright, trade secret, patent and trademark law. We
may not adequately be able to protect our technology and data resources.

Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use our services,
technology and other intellectual property, and we cannot be certain that the
steps we have taken will prevent any misappropriation or confusion among
consumers and advertisers.

THE CHANGE OF OUR CORPORATE NAME AND NASDAQ SYMBOL COULD RESULT IN CONFUSION TO
CURRENT ADVERTISERS, CONSUMERS AND BUSINESSES, AFFILIATES AND INVESTORS AND
COULD DISRUPT OUR BUSINESS AND CAUSE OUR STOCK PRICE TO DECLINE

In October 2001, we changed our corporate name from GoTo.com, Inc. to
Overture Services, Inc. Our name change could cause the possible loss of public
recognition with our advertisers, consumers, businesses and affiliates, and
could have a material adverse effect on our business, operating results and
financial condition. In addition, we also changed our Nasdaq National Market
trading symbol from GOTO to OVER, which could result in confusion to
investors, which could harm the market price of the common stock.

WE MAY NEED ADDITIONAL CAPITAL, WHICH COULD DILUTE THE OWNERSHIP INTEREST OF
INVESTORS

We require substantial working capital to fund our business. If we raise
additional funds through the issuance of equity, equity-related or convertible
debt securities, these securities may have rights, preferences or privileges
senior to those of the rights of our common stock, and our stockholders may
experience additional dilution. We cannot be certain that additional financing
will be available to us on favorable terms when required, or at all. We
experienced negative cash flow from operations from our inception through the
first quarter of 2001, and we could experience negative cash flow from
operations in the future. We currently anticipate that our available funds will
be sufficient to meet our anticipated needs for working capital and capital
expenditure through the foreseeable future. However, we may choose to raise
additional funds in the future.

POTENTIAL ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS,
DILUTE STOCKHOLDER VALUE AND ADVERSELY AFFECT OUR OPERATING RESULTS

We may make investments in or acquire complementary products, technologies
and businesses. These acquisitions and investments could disrupt our ongoing
business, distract our management and employees and increase our expenses. If
we acquire a company, we could face difficulties in assimilating that companys
personnel and operations. In addition, the key personnel of the acquired
company may decide not to work for us. Acquisitions of additional services or
technologies also involve risks of incompatibility and the need for integration
into our existing services and marketing, sales and support efforts. If we
finance the acquisitions by issuing equity securities, this could dilute our
existing stockholders. Any amortization of intangible assets, or other

20



---



##### Table of Contents



charges resulting from the costs of these acquisitions could have a
material adverse effect on our business, operating results and financial
condition. In addition, we may pay more for an acquisition than an acquired
product, technology or business is ultimately worth. For example, we recently
ceased operations of GoTo Shopping, and we recently completed a management
buyout of the GoTo Auctions, whereby the operating management of GoTo Auctions
purchased GoTo Auctions assets from Overture. We have incurred charges
related to the impairment of the assets acquired in connection with our exit
from the auctions operations and comparison shopping operations, and incurred
approximately $2.1 million and $1.5 million in charges relating to our exit
from the GoTo Auctions and GoTo Shopping operations, respectively in the three
months ending June 30, 2001.

OUR MARKET MAY UNDERGO RAPID TECHNOLOGICAL CHANGE AND OUR FUTURE SUCCESS WILL
DEPEND ON OUR ABILITY TO MEET THE CHANGING NEEDS OF OUR INDUSTRY

If new industry standards and practices emerge in the Internet and online
advertising industry, our existing services, technology and systems may become
obsolete. Our future success will depend on our ability to:



| |  |  | license and internally develop leading technologies useful in our business;                                                                    
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | enhance our existing services;                                                                                                                 
|
| |  |  | develop new services and technologies that address the increasingly
sophisticated and varied needs of prospective consumers and businesses;
and
|
| |  |  | respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.                          

GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES MAY DAMAGE OUR BUSINESS

The laws and regulations applicable to the Internet and our services are
evolving and unclear and could damage our business. There are currently few
laws or regulations directly applicable to access to, or commerce on, the
Internet. Due to the increasing popularity and use of the Internet, it is
possible that Internet laws and regulations may be adopted, covering issues
such as user privacy, defamation, database protection, pricing, taxation,
content regulation, quality of products and services, and intellectual property
ownership and infringement. Such legislation could expose Overture to
substantial liability as well as dampen the growth in use of the Internet,
decrease the acceptance of the Internet as a communications and commercial
medium, or require Overture to incur significant expenses in complying with any
new regulations.

WE MAY INCUR LIABILITIES FOR THE ACTIVITIES OF USERS OF OUR SERVICE

The law relating to the liability of providers of online services for
activities of their users is currently unsettled and could damage our business.
We do not carry insurance that will indemnify us for liability for activities
of our users. Overture may not successfully avoid civil or criminal liability
for unlawful activities carried out by users of our service. The imposition
upon Overture of potential liability for unlawful activities of users of our
service could require us to implement measures to reduce our exposure to such
liability, which may require us, among other things, to spend substantial
resources or to discontinue certain service offerings. Any costs incurred as a
result of such liability or asserted liability could have a material adverse
effect on our business, operating results and financial condition.

OUR CHARTER DOCUMENTS AND CHANGE OF CONTROL SEVERANCE AGREEMENTS WITH OUR
MANAGEMENT WILL MAKE IT MORE DIFFICULT TO ACQUIRE US

Provisions of our certificate of incorporation and bylaws could make it
more difficult for a third party to acquire us, even if doing so would be
beneficial to our stockholders. For example, our board of directors is divided
into three classes, with one class being elected each year by our stockholders,
which generally makes it more difficult for stockholders to replace a majority
of directors and obtain control of our board. In addition, stockholder meetings
may be called only by our board of directors, the chairman of the board and the
president, advanced notice is required prior to stockholder proposals, and
stockholders may not act by written consent. Further, we have authorized
preferred stock that is undesignated, making it possible for the board of
directors to issue preferred stock with voting or other rights or preferences
that could impede the success of any attempt to change control of Overture.

21



---



##### Table of Contents



Delaware law also could make it more difficult for a third party to
acquire us. Specifically, Section 203 of the Delaware General Corporation Law
may have an anti-takeover effect with respect to transactions not approved in
advance by the board of directors, including discouraging attempts that might
result in a premium over the market price for the shares of common stock held
by our stockholders.

We have entered into change of control severance agreements with members
of our senior management and certain other key employees. These agreements
provide for certain benefits, including acceleration of option vesting, to
these persons if they are terminated other than for cause following an
acquisition of Overture. These agreements could make us less attractive to a
third party who may want to acquire us, because they will make any replacement
of management and other personnel more expensive.

Furthermore, in March 2000, we entered into a Stockholder Agreement with
Bill Gross idealab!, which limits Bill Gross idealab! and its affiliates
ability to beneficially own 35% or more of our outstanding common stock, to
transfer shares of our common stock or to knowingly assist or advise, or
knowingly provide or arrange financing to facilitate any other person or entity
to beneficially own 15% or more of our outstanding common stock.

WE CANNOT ASSURE YOU THAT OUR STOCK PRICE WILL NOT DECLINE OR WILL NOT BE
EXTREMELY VOLATILE

The price of our common stock may decline or may be extremely volatile.
Since our initial public offering in June 1999, the per share trading price of
our common stock has ranged from an intra-day high of $114.50 on November 15,
1999 to an intra-day low of $4.81 on December 21, 2000. In addition, an active
public market for Overtures common stock may not continue.

22



---



##### Table of Contents






ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Overture is exposed to the impact of interest rate changes and foreign
currency fluctuations:

Overtures exposure to market rate risk for changes in interest rates
relate primarily to Overtures investment portfolio. Overture has not used
derivative financial instruments in its investment portfolio. Overture invests
its excess cash in high quality credit instruments, which are spread over many
issuers. Overtures investments are principally confined to cash equivalents
and available-for-sale debt securities.

International revenues from Overtures foreign subsidiaries were less than
5% of total revenues in the three months ended September 30, 2001.
International sales are made from Overtures United Kingdom operations and are
denominated in the local currency.

Overture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.
Accordingly, the impact of changes in these or other factors could have a
material adverse effect on our business, operating results and financial
condition.

Overtures exposure to foreign exchange rate fluctuations arises in part
from intercompany accounts in which costs incurred in the United States are
charged to Overtures foreign sales subsidiaries. Overture is also exposed to
foreign exchange rate fluctuations as the financial results of foreign
subsidiaries are translated into U.S. dollars in consolidation. As exchange
rates vary, these results, when translated, may vary from expectations and
adversely impact overall expected profitability. The effect of foreign exchange
rate fluctuations on Overture in the three months ended September 30, 2001 was
not material.




PART II. OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

On June 19, 2001, InternetFuel.com, Inc. filed a complaint against
Overture in the Superior Court of the State of California for the County of Los
Angeles. The complaint alleges that Overture wrongfully terminated an agreement
pursuant to which InternetFuel participated in Overture s affiliate program.
The complaint also alleges libel for messages allegedly placed by Overture on
an Internet forum, and it contains claims of unfair business practices. The
complaint seeks, among other remedies, monetary damages for the value of the
terminated agreement and for alleged harm to InternetFuels reputation,
punitive and exemplary relief and an injunction against alleged unfair business
practices. Overture is currently investigating InternetFuel.coms allegations
and believes that it has meritorious defenses to the complaint. Overture
intends to contest the allegations vigorously.

Several class action lawsuits have been filed in the United States
District Court, Southern District of New York against certain underwriters
involved in Overtures initial public offering, Overture and certain of
Overtures current directors and officers. The lawsuits allege, among other
things, violations of the Securities Act of 1933 and the Securities Exchange
Act of 1934 involving undisclosed compensation to the underwriters, improper
practices by the underwriters and seek unspecified damages. Overture believes
that it has meritorious defenses to the allegations and intends to vigorously
defend against the actions.




ITEM 2. DIRECTOR AND OFFICER TRADING PLANS

Certain of our directors and officers have entered into trading plans
pursuant to Securities and Exchange Commission Rule 10b5-1 which provides for
purchases and/or sales of Overtures stock in accordance with formulas
contained in the plans.

23



---



##### Table of Contents






ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits.

None

(b)  Reports on Form 8-K.

The Company filed a Current Report on Form 8-K dated September 10, 2001 to
report under Item 5 thereof the Companys intent to change its corporate name
from GoTo.com, Inc. to Overture Services, Inc. and its Nasdaq stock market
ticket symbol from GOTO to OVER, both effective October 8, 2001.

The Company filed a Current Report on Form 8-K dated October 9, 2001 to
report under Item 5 thereof as of October 8, 2001, the Company changed its
corporate name from GoTo.com, Inc. to Overture Services, Inc. and its
Nasdaq stock market ticket symbol from GOTO to OVER.




SIGNATURES

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

|                       |                                                                                                              |                
|---------------------- | ------------------------------------------------------------------------------------------------------------ | ---------------
|Date: November 5, 2001 | OVERTURE SERVICES, INC.                                                                                     
|                      
|                       | By                                                                                                           | /s/ Todd Tappin
|                       |                                                                                                             
|                       | Todd Tappin
     Chief Financial Officer
     (Duly Authorized Officer and
     Principal Financial Officer)

24