INFOSPACE INC - 10-Q Quarterly Report

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange act).

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

See accompanying notes to unaudited condensed consolidated financial statements.

InfoSpace, Inc. (the Company or InfoSpace) develops and delivers an Internet platform of software and application services to a broad range of customers that span each of our Wireline, Merchant and Wireless business units.

The accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments that, in the opinion of management, are necessary to present fairly the financial information set forth herein. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Results of operations for the three month period ended March 31, 2003 are not necessarily indicative of future financial results. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts may differ, perhaps materially, from these financial estimates.

Investors should read these interim financial statements and related notes hereto in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2002. Certain prior period balances have been reclassified to conform with current period presentation.

The Company accounts for its stock-based compensation plans under the intrinsic value method, which follows the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. In accordance with APB Opinion No. 25, the Company does not record any expense when stock options are granted that are priced at the fair market value of the Company’s stock at the date of grant.

To estimate compensation expense which would be recognized under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-based Compensation, the Company uses the modified Black-Scholes option-pricing model with the following weighted-average assumptions for options granted:

Had compensation expense for the plans been determined based on the fair value of the options at the grant dates for awards under the plans consistent with SFAS No. 123, the Company’s net losses for the three months ended March 31, 2003 and 2002 would have been as follows (amounts in thousands, except per share data):

Effective July 1, 2001, the Company adopted certain provisions of SFAS No. 141, Business Combinations, and effective January 1, 2002, the Company adopted the full provisions of SFAS No. 141 and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets apart from goodwill. SFAS No. 142 prescribes an impairment test of goodwill, which the Company completed during the three months ended March 31, 2002 and determined that a portion of the value of its recorded goodwill was impaired as of January 1, 2002. Accordingly, the Company recorded a non-cash charge for the cumulative effect of change in accounting principle of $206.6 million as of January 1, 2002, as impairment of goodwill. This amount was determined based on an independent valuation of the Company’s business units as of January 1, 2002 using a combination of the Company’s quoted stock price and projections of future discounted cash flows for each business unit.

Other intangible assets are scheduled to be fully amortized by 2007 with corresponding amortization expense estimated to be $4.9 million, $3.1 million, $1.0 million, $328,000 and $55,000 for the remainder of 2003 and years 2004, 2005, 2006 and 2007, respectively.

Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common and potentially dilutive shares outstanding during the period. Potentially dilutive shares consist of the incremental common shares issuable upon conversion of the exercise of outstanding stock options and warrants (using the treasury stock method). Potentially dilutive shares are excluded from the computation of earnings per share if their effect is antidilutive. The Company had a net loss for all periods presented herein; therefore, none of the options and warrants outstanding during each of the periods presented were included in the computation of diluted loss per share, as they were antidilutive. Options, restricted stock and warrants to purchase a total of 6,217,011 shares of common stock were excluded from the calculation of diluted loss per share for the three months ended March 31, 2003. Options, restricted stock and warrants to purchase 6,912,909 shares were excluded from the calculations of diluted loss per share for the three months ended March 31, 2002.

The Company has invested in equity instruments of public and privately held technology companies for business and strategic purposes. The Company does not exercise significant influence over the operating or financial policies of any of these companies. These investments are recorded as long-term assets. As of March 31, 2003, the Company’s publicly-held and privately held investments were $5.3 million and $13.4 million, respectively. Gain (Loss) on investments for the three months ended March 31, 2003 and 2002 consists of the following (in thousands):

On March 31, 2003, the Company had $13.2 million recorded as a tax receivable due from the Federal government. In October 2000, a former officer of the Company exercised non-qualified stock options. The Company withheld and remitted to the Internal Revenue Service $12.6 million for federal income taxes based on the market price of the stock on the day of exercise and the Company also remitted the employer payroll tax of $620,000. Due to the affiliate lock-up period from a merger involving the Company, the former officer was restricted from transferring or selling the stock until February 2001. Treasury Regulations provide that the valuation for purposes of determining taxable income is not required until these restrictions have lapsed. The Company, therefore, returned the federal income tax withholding to the employee and filed an amendment to its payroll tax return to request the tax refund.

On June 19, 2001, a putative securities class action complaint entitled Horton v. InfoSpace, Inc., et al. was filed in the United States District Court for the Western District of Washington. The complaint alleges that the Company and its former chief executive officer made false and misleading statements about the Company’s business and prospects during the period between January 26, 2000 and January 30, 2001. The complaint alleges violations of the federal securities laws and does not specify the amount of damages sought. Subsequently, other similar complaints were filed. The Horton matter and the subsequent similar complaints have been consolidated into one matter, captioned In re InfoSpace, Inc. Securities Litigation. The Court has appointed lead plaintiffs and counsel, and a consolidated complaint was filed on January 22, 2002, which among other things, added the Company’s former chief financial officer as a defendant. On April 8, 2002, the Company filed a motion to dismiss the complaint for failure to state a claim. On April 30, 2002, the Court granted plaintiffs leave to amend the consolidated complaint to add Merrill Lynch & Co., Inc. and one of its analysts as defendants. The amended complaint was filed on May 9, 2002 and on July 2, 2002, the Company filed a new motion to dismiss the amended complaint for failure to state a claim. On October 11, 2002, the Multidistrict Litigation Panel issued an order transferring the case to the Southern District of New York for pre-trial proceedings to be consolidated with the other various claims pending against Merrill Lynch. On December 2, 2002, the Company moved to have the case severed from the proceedings in the Southern District of New York and transferred back to the Western District of Washington. The plaintiffs opposed that motion. On March 25, 2003, the Court granted the Company’s motion to sever and transfer the case back to the Western District of Washington. The Company believes that it has meritorious defenses to plaintiffs’ claims, but litigation is inherently uncertain and the Company may not prevail in this matter.

On March 19, 2001, a purported shareholder derivative complaint entitled Youtz v. Jain, et al. was filed in the Superior Court of Washington for King County. The complaint has been amended four times thus far and has been renamed Dreiling v. Jain, et al. The named defendants include certain current and former officers and directors of the Company and entities related to several of the individual defendants. The Company is named as a “nominal defendant.” The complaint alleges that certain defendants breached their fiduciary duties to InfoSpace, and that certain defendants were unjustly enriched by engaging in insider trading, and also alleges that certain defendants breached their fiduciary duties in connection with the Go2Net Inc,., Prio, Inc, and INEX Corporation mergers. Various equitable remedies are requested in the complaint, including disgorgement, restitution, accounting and imposition of a constructive trust. The complaint also seeks monetary damages. As stated, the complaint is derivative in nature and does not seek monetary damages from, or the imposition of equitable remedies on, the Company. The Company has entered into indemnification agreements in the ordinary course of business with officers and directors and may be obligated throughout the pendency of this action to advance payment of legal fees and costs incurred by the defendant current and former officers and directors pursuant to the Company’s obligations under the indemnification agreements and applicable Delaware law. The special litigation committee of the Company’s Board of Directors (SLC), with the assistance of independent legal counsel, has conducted an investigation relating to the complaint allegations, and on March 22, 2002 filed a motion to terminate this derivative action. Plaintiff opposed the SLC’s motion and a hearing on the motion occurred on November 15, 2002. On December 6, 2002, the court issued to the SLC and plaintiff a sealed letter ruling relating to the motion to terminate. Plaintiff subsequently filed, under seal, a motion for reconsideration, which is pending. In addition, the SLC and plaintiff each filed, under seal, proposed orders on the motion to terminate. To date, however, the court has not entered an order on the motion.

On March 10, 2003, the Company filed a lawsuit in the Superior Court of the State of Washington (King County) entitled InfoSpace Inc. v. Naveen Jain, et al. The complaint names as defendants Jain, the Company’s former chief executive officer and chairman; Kevin Marcus, the Company’s former chief software architect; and the company they co-founded, Intelius Inc. The complaint alleges that the defendants breached their fiduciary and contractual duties owed to the Company, wrongfully interfered with the Company’s contractual relationships and have misappropriated InfoSpace’s trade secrets and confidential information in order to unfairly compete with the Company. Among other things, the complaint alleges that the defendants used their knowledge of the Company’s intellectual property and trade secrets to replicate core software and offer services on behalf of Intelius that are directly competitive with the Company’s products. The complaint asserts a number of claims, including breaches of fiduciary duty and contract, conversion, tortious interference, unfair competition, misappropriation of trade secrets, and civil conspiracy. The Company seeks injunctive relief and monetary damages in an amount to be proven at trial. The Company intends to vigorously prosecute this matter. On April 3, 2003, the Court commenced a hearing on the Company’s motion for a preliminary injunction against Jain, Marcus and Intelius. A decision on the Company’s motion is pending. On March 24, 2003, Intelius filed its answer to the Company’s complaint underlying the motion for a preliminary injunction, denying the Company’s claims and asserting various counterclaims against the Company including breach of fiduciary duty, defamation and unfair competition. The Company believes that it has meritorious defenses to these claims, but litigation is inherently uncertain and the Company may not prevail in this matter.

In September of 2000, Go2Net sued FreeYellow.com, Inc., a Florida corporation, and John Molino, FreeYellow’s sole shareholder, in the Superior Court of Washington for King County seeking to rescind its acquisition of FreeYellow that closed in October of 1999, and in the alternative, seeking damages. Molino denied the allegations, and asserted a counterclaim for breach of the merger agreement. In October 2000, Go2Net was acquired by and became a wholly owned subsidiary of InfoSpace. On August 6, 2001, Go2Net amended the complaint to add a claim against FreeYellow and Molino under the Securities Act of Washington (“WSA”). The trial for this case commenced on August 7, 2002; on August 30, 2002, the jury returned a verdict in favor of Go2Net on its WSA claim. On January 3, 2003, the judge entered a judgment pursuant to which Mr. Molino owes Go2Net $1.2 million plus interest at 12% per annum from December 31, 2002. Molino is seeking an appeal of the judgment.

Two of nine founding shareholders and three other shareholders of Authorize.Net Corporation, a subsidiary acquired through the Company’s merger with Go2Net, filed a lawsuit on May 2, 2000 in Utah State Court. This action was brought to reallocate amongst the founding shareholders of Authorize.Net the consideration received in the acquisition of Authorize.Net by Go2Net. The plaintiffs allege that the then corporate officers of Authorize.Net fraudulently obtained a percentage of Authorize.Net shares greater than what was anticipated by the founding shareholders, and are making claims under the Utah Uniform Securities Act as well as claims of fraud, negligent misrepresentation, breach of fiduciary duty, conflict of interest, breach of contract and related claims. Plaintiffs seek compensatory and punitive damages in the amount of $200 million,

rescission of certain transactions in Authorize.Net securities, and declaratory and injunctive relief. The plaintiffs subsequently amended the claim to name Authorize.Net as a defendant with regard to the claims under the Utah Uniform Securities Act and have asserted related claims against Go2Net. Authorize.Net updated and re-filed its prior motion for summary judgment seeking dismissal of all claims against it. Authorize.Net previously asserted counterclaims against the plaintiffs on which plaintiffs also have now filed for summary judgment. The Company believes Authorize.Net and Go2Net have meritorious defenses to these claims, but litigation is inherently uncertain and they may not prevail in this matter.

On December 5, 2001, a complaint entitled The boxLot Company v. InfoSpace, Inc., et. al. was filed in the Superior Court of California for San Diego County. The complaint names as defendants the Company and certain of the Company’s current and former directors, alleges violations of state law in connection with the asset purchase transaction between the Company and The boxLot Company in December of 2000 and seeks monetary damages in the amount of $100 million. Plaintiffs filed an amended complaint on February 15, 2002. Plaintiffs subsequently dropped without prejudice three of the defendants, who are current or former directors of InfoSpace, from the action. Discovery is ongoing. The Company believes it has meritorious defenses to these claims but litigation is inherently uncertain and the Company may not prevail in this matter.

On March 3, 2003, a complaint entitled Microcell Capital II Inc., et. al. v. InfoSpace.com, Inc, et. al. was filed in the Delaware Court of Chancery for New Castle County. The complaint names as defendants the Company and certain of the Company’s current and former officers and directors. It asserts various claims for alleged violations of state law in connection with the Company’s purchase of stock of Saraide and alleged events thereafter. The complaint purports to style these claims both as direct claims on behalf of the plaintiffs, and in the alternative as purported derivative claims on behalf of Saraide. The complaint seeks both equitable relief and monetary damages in an unspecified amount. The Company believes that it has meritorious defenses to these claims, but litigation is inherently uncertain and the Company may not prevail in this matter.

In addition, from time to time the Company is subject to various other legal proceedings that arise in the ordinary course of business. Although the Company cannot predict the outcomes of these proceedings with certainty, the Company’s management does not believe that the disposition of these ordinary course matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows.

The Company recently reached a settlement agreement with the Internal Revenue Service regarding the audit of our payroll tax returns for the year 2000. The audit included a review of tax withholding on stock options exercised by certain former employees. Pursuant to the settlement agreement, the Company will pay $4.0 million, including interest and penalties, and is relieved of any further withholding tax liability with respect to those certain former employees. This amount was recorded in Other Charges on the Company’s unaudited condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2003.

The Company has pledged a portion of its cash and cash equivalents as collateral for standby letters of credit and a bank guaranty for certain of its property leases. On March 31, 2003, the total amount of collateral pledged under these agreements was approximately $6.5 million.

At March 31, 2003, the Company was holding funds in the amount of approximately $4.0 million for and on behalf of merchants utilizing the Company’s electronic check (“eCheck”) application services, in anticipation of funding under contractual terms and in some cases as a risk reserve. These funds are presented as Cash held for merchants and Funds due to merchants on the Company’s unaudited condensed consolidated balance sheets. In addition, in the event of default by merchants and also to cover the seven-day settlement period for eCheck.Net transactions, InfoSpace has guaranteed up to $6.0 million of monthly ACH processing volume for eCheck.Net transactions to the originating depository financial institutions.

Revenues earned from companies in which the Company owns stock are considered related party revenues, including independent agreements entered into during the current year with companies that InfoSpace or Go2Net invested in during prior years. From time to time, in the normal course of business, the Company has entered into agreements to provide various promotional services for companies in which the Company previously made an investment. Since 2001, the Company has made no new investments in public or private companies, and has not entered into any significant new contracts with companies in which it owns stock. For the three months ended March 31, 2003, related party revenue was $169,000 compared to $607,000 for the three months ended March 31, 2002.

The Company discontinued its in-country operations in Australia in the three months ended March 31, 2003. A restructuring charge of $167,000 was recorded in the three months ended March 31, 2003 primarily relating to the realized loss on foreign currency fluctuations due to the closure of the Australia operations. This amount was previously classified in accumulated other comprehensive income on the Company’s unaudited condensed consolidated balance sheet.

As of March 31, 2003, the accrued liability associated with restructuring related charges was $227,000 and consisted of the following (in thousands):

All reserve amounts are expected to be paid during 2003 and are included in accrued expenses and other current liabilities.

As part of the process of redefining its focus on core business areas, the Company announced a workforce reduction of approximately 115 positions during April 2003. The Company expects to record a corresponding restructuring charge of approximately $3 million in the three months ended June 30, 2003 related to this reduction of its workforce.

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for the way that companies report information about operating business units in annual financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers.

During the first quarter of 2002, the Company began presenting information internally to its chief operating decision maker in three reportable business units representing the Company’s three business units: Wireline, Merchant and Wireless. The Company’s business units are also its operating segments in accordance with SFAS No. 131.

The Company measures the results of its reportable business units based on operating income or loss before depreciation, stock-based compensation expense, amortization and impairment of goodwill and other intangible assets, restructuring charges, other charges, gains and losses on equity investments and the cumulative effect of changes in accounting principle, referred to as Business unit income (loss) from operations. Certain indirect expenses are allocated to the reportable business units based on internal usage measurements. The Company does not allocate certain indirect general and administrative expenses, income taxes or interest income to the reportable business units.

The Company is in the process of completing an in-depth review of its operating segments and expects to begin presenting different segment information internally to its chief operating decision maker in the quarter ending June 30, 2003. The Company expects that the new segments will be Search & Directory, Authorize.net payment gateway, Wireless, and Enterprise Solutions. Assuming the Company finalizes its segments prior to June 30, 2003, they plan to present segment information based on these reporting units in the three months ending June 30, 2003 quarterly filing. It is not yet determinable whether it is practicable to present comparable historical results of operations for periods prior to the three months ended June 30, 2003.

Information on reportable business units and a reconciliation to consolidated net loss for the three months ended March 31, 2003 and 2002 are presented below (in thousands). The Company does not account for, and does not report to management, its assets (other than goodwill and other intangible assets for SFAS No. 142 reporting purposes) or capital expenditures by business unit.

In November 2002, the FASB issued FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Interpretation elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under the guarantee and must disclose that information in its interim and annual financial statements. The provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor’s obligations does not apply to product warranties or to guarantees accounted for as derivatives. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The Company’s disclosure of guarantees is included in Note 7 of the Notes to Condensed, Consolidated Financial Statements. Adoption of the recognition and measurement provisions of FIN 45 did not have a material impact on the Company’s financial statements.

In November 2002, the EITF reached a consensus on EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. This Issue addresses certain aspects of the accounting by a company for arrangements under which it will perform multiple revenue-generating activities. In applying this Issue, generally, separate contracts with the same customer that are entered into at or near the same time are presumed to have been negotiated as a package and should, therefore, be evaluated as a single contractual arrangement. This Issue also addresses how contract consideration should be measured and allocated to the separate deliverables in the arrangement. This Issue is applicable to revenue arrangements entered into beginning in 2004. The Company is in the process of evaluating the impact of the Issue.

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

You should read the following discussion and analysis in conjunction with our Condensed Consolidated Financial Statements and Notes thereto included elsewhere in this report. In addition to historical information, the following discussion contains certain forward-looking statements that involve known and unknown risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. You should read the cautionary statements made in this report as being applicable to all related forward-looking statements wherever they appear in this report. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and in the section entitled “Factors Affecting Our Operating Results, Business Prospects and Market Price of Stock” and in our reports filed with the Securities and Exchange Commission including our annual report on Form 10-K for the year ended December 31, 2002. You should not place undue reliance on these forward-looking statements, which reflect only our opinion as of the date of this report.

InfoSpace, Inc. develops and delivers an Internet platform of software and application services to a broad range of customers that span each of our Wireline, Merchant and Wireless business units. Many of our products and application services are offered to our customers who, in turn, offer these products and application services to their customers as their own solutions. We provide our services across multiple platforms, including PCs and non-PC devices.

InfoSpace was founded in 1996. We are incorporated in the state of Delaware. Our principal corporate offices are located in Bellevue, Washington. We completed our initial public offering on December 15, 1998 and our common stock is listed on the Nasdaq National Market under the symbol “INSP.”

During the period from our inception through December 31, 1996, we had insignificant revenues and were primarily engaged in the development of technology for the aggregation, integration and distribution of Internet content. In 1997, we expanded our operations, adding business development and sales personnel in order to capitalize on the opportunity to generate Internet advertising revenues. We began generating significant revenues in 1997 with our wireline services. Revenues in 1998 were also primarily generated through our wireline services and we started distributing our services on wireless platforms. Throughout 1999-2002, we expanded and enhanced our products and application services through both internal development and acquisitions, and focused on deploying our Internet software and application services to merchants and on wireless platforms.

Based upon an in-depth and ongoing internal review of our operations, we have begun to take steps to streamline operations and narrow our focus to three core businesses: Search and Directory, Authorize.Net payment gateway and Wireless. We believe these businesses, which in the first quarter of 2003 generated approximately $32.7 million of revenue, have the greatest potential for long-term growth and profitability. Businesses falling outside of these areas have been consolidated into a single operating unit, called Enterprise Solutions. This business unit is

being positioned for future disposition or exit. In the first quarter of this year, these businesses generated approximately $3.9 million in revenue. Revenue from the Enterprise Solutions unit will likely decline throughout the year as we exit or dispose of the businesses within the unit.

We expect to change our segment reporting going forward to better reflect the performance of our reorganized company. Beginning in the second quarter of 2003, we expect the new segments to be: Search & Directory, Authorize.Net, Wireless, and Enterprise Solutions. As a result of our narrowed business focus and the exiting of certain businesses, current and past financial performance may not be indicative of future financial performance. Given this change in our organizational structure, comparable historical results of operations for periods prior to and including to the three months ended March 31, 2003 may not be presented in future periods, as we are not certain whether it is practicable to obtain the comparable historical information.

As part of the process of redefining our focus on these core business areas, we announced a workforce reduction of approximately 115 positions in April 2003. We expect to record a corresponding restructuring charge of approximately $3 million in the three months ended June 30, 2003 related to this reduction of our workforce. Depending on the outcome of business dispositions and potential further refinements and changes to our business strategy, we may also incur additional restructuring costs in the future.

In addition, we have announced several changes to our board of directors. George Tronsrue and Vanessa Wittman recently joined our board of directors, and Naveen Jain recently resigned from our board of directors.

Company Internet Site and Availability of SEC Filings. Our corporate Internet site is www.infospaceinc.com. We make available on that site our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, as well as any amendments to those filings, and other filings we make electronically with the U.S. Securities and Exchange Commission. The filings can be found in the Investor Relations section of our site, and are available free of charge. Information on our Internet site is not part of the Form 10-K. In addition to our Web site, the SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding us and other issuers that file electronically with the SEC.

For information about our business units, please see Item 1 “Business” of our Form 10-K for the year ended December 31, 2002.

The “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as disclosures included elsewhere in this Form 10-Q, are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingencies.

The U.S. Securities and Exchange Commission has defined a company’s most critical accounting policies as the ones that are the most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. On an ongoing basis, we evaluate the estimates used, including those related to impairment of goodwill and other intangible assets, useful lives of other intangible assets, other-than-temporary impairment of investments and accrued contingencies. We base our estimates on historical experience, current conditions and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources as well as identifying and assessing our accounting treatment with respect to commitments and contingencies. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions. We believe the following critical accounting policies involve the more significant judgments and estimates used in the preparation of our consolidated financial statements. We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information see Item 8 of Part II “Financial Statements and Supplementary Data—Note 1: Summary of Significant Accounting Policies” of our Annual Report on Form 10-K.

Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets, requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests in certain circumstances. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit. As of March 31, 2003 we have approximately $97.8 million of goodwill on our balance sheet, which primarily relates to our merchant business unit. Changes in our reporting units and dispositions of products in the enterprise solutions group could result in future impairment charges to goodwill and other intangible assets.

We have invested in equity securities of public and private companies for business and strategic purposes. As of March 31, 2003, the carrying value of our publicly-held and privately-held investments in equity securities was $5.3 million and $13.4 million, respectively. SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 59, Accounting for Noncurrent Marketable Equity Securities, provide guidance on determining when an investment is other-than-temporarily impaired. The determination as to whether a decline in the fair value of a publicly-held security is other-than-temporary requires a considerable amount of judgment. However, determining whether other-than-temporary declines in the fair values of investments in the equity securities of private companies have occurred requires an even higher level of judgment due to the

absence of an observable market price for the investment. We regularly review the status of our private company investees to determine whether such a decline has occurred. However, this determination involves various assumptions about the investee companies’ business prospects in addition to an understanding of their capital structure and financing developments. To the extent the companies in which we have invested experience significant business difficulties in the future, we may record additional impairment charges beyond those incurred to date.

We periodically evaluate whether the declines in fair value of our investments are other-than-temporary. This evaluation consists of a review by members of management in finance and accounting. For investments in companies with publicly quoted market prices, we compare the market price to the investment’s carrying value and, if the quoted market price is less than the investment’s accounting basis for an extended period of time, generally six months, we then consider additional factors to determine whether the decline in fair value is other-than-temporary. These include the financial condition, results of operations and operating trends for each of the companies, as well as publicly available information regarding the investee companies, including reports from investment analysts. We also consider our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value, specific adverse conditions causing a decline in fair value of a particular investment, conditions in an industry or geographic area, seasonal factors, recent exercise prices of option grants and, if applicable, whether dividends have been reduced or eliminated, or scheduled interest payments on debt securities have not been made. For investments in private companies with no quoted market price, we consider similar qualitative factors and also consider the implied value from any recent rounds of financing completed by the investee as well as market prices of comparable public companies if available. We obtain periodic financial statements from the private company investees to assist us in reviewing relevant financial data and to assist us in determining whether such data may indicate other-than-temporary declines in fair value below the investment’s carrying value.

We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. SFAS No. 5, Accounting for Contingencies, requires that an estimated loss from a loss contingency should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred. We evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial position or our results of operations. See Note 7 to our condensed consolidated financial statements for further information regarding contingencies.

We have incurred losses since our inception and, as of March 31, 2003, had an accumulated deficit of approximately $1.3 billion, which includes impairment and amortization of intangible assets of approximately $884 million. For the three months ended March 31, 2003, our net loss was $1.3 million, including an other charge of $4.0 million for settlement of an IRS audit,

amortization of intangible assets of $1.6 million and a $413,000 gain on investments. For the three months ended March 31, 2002, our net loss was $240.5 million, including $206.6 million for the cumulative effect of a change in accounting principle, amortization of other intangible assets of $5.9 million and a $16.9 million loss on equity investments.

Revenues. Revenues are derived from our products and application services, which are delivered to end-users on wireline, wireless and broadband platforms and to merchants principally via merchant aggregators including merchant banks. Under many of our agreements we earn revenue from a combination of our products and application services.

Revenues for Wireline were $16.5 million in the three months ended March 31, 2003 compared to $14.4 million in the three months ended March 31, 2002. The increase in total Wireline revenue for the three months ended March 31, 2003, reflects increased revenue from our search products due largely to the addition of a key partner in September 2002.

Revenues for Merchant were $14.0 million in the three months ended March 31, 2003 compared to $12.1 million in the three months ended March 31, 2002. The growth in Merchant revenue for the three months ended March 31, 2003, is primarily due to growth in our Authorize.Net payment gateway business and increased revenue from our yellow page directory services.

Revenues for Wireless were $6.1 million in the three months ended March 31, 2003 compared to $6.6 million in the three months ended March 31, 2002. The decrease in wireless revenue for the three months ended March 31, 2003, primarily relates to the loss of a key customer in 2002 and continued industry pricing pressure. Additionally, we currently have a month-to-month contract with one of our key Wireless customers, which, if terminated, could result in reduced Wireless revenues in future periods.

From time to time, we have made investments in private and public companies for business and strategic purposes. In the normal course of business, we have entered into separate agreements to provide various promotional and other services for some of these companies. Revenues earned from companies in which we own stock are considered related party revenue, including independent service agreements entered into during the current year with companies we or Go2Net invested in during prior years. We made no new investments in public or private companies for business and strategic purposes since 2001, and have not entered into any significant new agreements with companies in which we own stock since 2001. This, along with

the completion of agreements entered into in prior years, contributed to a substantial decline in related party revenues in 2003 and 2002 compared to prior years. We expect our related party revenue to continue to decrease in 2003 as additional agreements from prior years are fully amortized. We recognize revenue from our agreements with related parties on the same basis as we recognize revenue from similar agreements with unrelated parties. Related party revenue (all of which pertain to our Wireline business) was $169,000 for the three months ended March 31, 2003 compared to $607,000 for the three months ended March 31, 2002. Included in the related party revenues are approximately $134,000 and $514,000 of warrant revenue (as described below) in the three months ended March 31, 2003 and 2002, respectively.

We hold warrants and stock in public and privately held companies for business and strategic purposes. Some warrants and stock were received in connection with business agreements whereby we provide our products and services to the issuers. Some of these agreements contain provisions that require us to meet specific performance criteria in order for the stock or warrants to vest. When we meet our performance obligations we record revenue equal to the fair value of the stock or warrant. If no future performance is required, we recognize the revenue on a straight-line basis over the contract term. Fair values are determined based on values negotiated by third party investors or independent appraisal. We have entered into no new agreements since 2001 whereby we received warrants as compensation, but we continued providing services for such agreements entered into during prior years. We recorded revenue in the amount of $135,000 for vesting in stock and warrants in the three months ended March 31, 2003 compared to $754,000 in the three months ended March 31, 2002. We expect warrant revenue in 2003 will decrease from the amount of warrant revenue recorded for 2002 as agreements from prior years are fully amortized.

Cost of Revenues. Cost of revenues consists of expenses associated with the delivery, maintenance and support of our products and application services, including personnel expenses, communication costs such as high-speed Internet access, server equipment depreciation, and content license fees.

The absolute dollar decrease of cost of revenues for the three months ended March 31, 2003 was primarily attributable to decreased salaries and benefits resulting from our reduction of workforce in 2002 and also a reduction in depreciation expense. In the near term, the majority of our expenses in cost of revenues are fixed.

Product Development Expenses. Product development expenses consist principally of personnel costs for research, development, support and ongoing enhancements of the software, application services and solutions we deliver to our customers.

The absolute dollar decrease for the three months ended March 31, 2003 was primarily attributable to a decrease in salaries and benefits resulting from our reduction of workforce in 2002. Generally, product development costs are not consistent with changes in revenue as they represent key infrastructure costs to develop and enhance service offerings and are not directly associated with current period revenue. We believe that continued significant investments in technology are necessary to remain competitive.

Sales, General and Administrative Expenses. Sales, general and administrative expenses consist primarily of salaries and related benefits for sales and administrative personnel, carriage fees, professional service fees, occupancy and general office expenses, business development and management travel expenses and advertising and promotion expenses.

The absolute dollar decrease for the three months ended March 31, 2003 is attributable to $1.5 million of acquisition costs related to the GiantBear asset purchase in the three months ended March 31, 2002, reduced salaries and benefits from our reduction of workforce in 2002 and reduced legal expenses. We expect sales, general and administrative expenses to remain consistent in absolute dollars in the second quarter of 2003 as compared with the first quarter of 2003.

Amortization of other intangible assets. Amortization of definite-lived intangible assets includes amortization of core technology, customer lists and other intangibles. Amortization of intangible assets totaled $1.6 million during the three months ended March 31, 2003, compared to $5.9 million in the three months ended March 31, 2002. The absolute dollar decrease during the three months ended March 31, 2003 is attributable to a lower balance of other intangible assets in 2003 due to impairment charges in the third and fourth quarters of 2002. Other intangible assets are expected to be fully amortized by 2007 with corresponding amortization expense estimated to be $4.9 million for the remainder of 2003, $3.1 million for 2004, $1.0 million for 2005, $328,000 for 2006 and $55,000 for 2007.

Other charges. Other charges consist of one-time costs and/or charges that are not directly associated with other operating expense classifications. We recently reached a settlement agreement with the Internal Revenue Service regarding the audit of our payroll tax returns for the year 2000. The audit included a review of tax withholding on stock options exercised by certain former employees. Pursuant to the settlement agreement, we will pay $4.0 million, including interest and penalties, and be relieved of any further withholding tax liability with respect to those certain former employees. Other charges for the three months ended March 31, 2002 consist of a $50,000 reduction of the estimated liability for settlement of a litigation matter.

Restructuring charges. In March 2003, we discontinued our in-country operations in Australia and recorded a charge of $167,000 primarily relating to the realized loss on foreign currency fluctuations due to the closure of those operations. This amount was previously classified in accumulated other comprehensive income on our condensed consolidated balance sheet.

In addition, as part of the process of redefining our focus on these core business areas, we announced a workforce reduction of approximately 115 positions in April 2003. We expect to record a corresponding restructuring charge of approximately $3 million in the three months ended June 30, 2003 related to this reduction of our workforce. Depending on the outcome of business dispositions and potential further refinements and changes to our business strategy, we may incur additional restructuring costs in the future.

Gain (loss) on Equity Investments. Gain (loss) on equity investments consists of gains and losses from changes in the fair value of derivative instruments held, realized gains and losses on equity investments and impairment on equity investments.

Realized gains and losses on equity investments: During the three months ended March 31, 2003, we recognized gains on the sale of equity investments of approximately $252,000. No equity investments were sold during the three months ended March 31, 2002.

Changes in fair values of derivative instruments held: We hold warrants to purchase stock in other companies, which qualify as derivative instruments. For the three months ended March 31, 2003, we recognized a $483,000 gain from the net increase in fair value of these warrants compared to a $1.2 million loss for the three months ended March 31, 2002.

Impairment on equity investments: We determined that the decline in value was other-than-temporary for one of our equity investments during the three months ended March 31, 2003. For the three months ended March 31, 2003, we recorded impairment charges of $322,000, compared to $15.7 million for the three months ended March 31, 2002.

Other Income, Net. Other income, net consists primarily of interest income and totaled $1.2 million during the three months ended March 31, 2003 compared to $2.1 million in the three months ended March 31, 2002. The decrease for the three months ended March 31, 2003 was due mainly to lower interest rates received on our investments.

We continue to expect lower yields on our invested balances and expect our total interest income to be lower in 2003 compared to 2002.

Income Tax Expense. We have recorded income tax expense of approximately $70,000 for the three months ended March 31, 2003 and $144,000 for the three months ended March 31, 2002. We expect to continue to record a tax provision for income generated from our international operations and do not anticipate recording a U.S. federal tax provision for the remainder of 2003.

Cumulative Effect of Changes in Accounting Principle. Effective July 1, 2001, we adopted certain provisions of SFAS No. 141, Business Combinations, and effective January 1, 2002, we adopted the full provisions of SFAS No. 141 and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets apart from goodwill.

SFAS No. 142 requires that purchased goodwill and certain indefinite-lived intangibles no longer be amortized into results of operations, but instead be tested for impairment at least annually. We evaluated our other intangible assets, which include core technology, customer lists and other, and determined that substantially all such assets have definite lives. As of March 31, 2003, the amount of intangible assets (comprised of domain name and trademark intangibles) that have been determined to have indefinite lives, and therefore not subject to amortization, is $252,000. This amount is included in goodwill on our unaudited condensed consolidated balance sheet as of March 31, 2003 and 2002.

SFAS No. 142 prescribes an impairment testing of goodwill, which we completed during the three months ended March 31, 2002 and determined that the value of our recorded goodwill was impaired as of January 1, 2002. Accordingly, we recorded a non-cash charge for the cumulative effect of change in accounting principle of $206.6 million as of January 1, 2002, as impairment of goodwill. This amount was determined based on independent valuations of our reporting units as of January 1, 2002 using a combination of our quoted stock price and projections of future discounted cash flows for each reporting unit.

We evaluated our goodwill for impairment during the three months ended December 31, 2002, and determined that the remaining value of the goodwill associated with the wireless business unit had been fully impaired. Accordingly, we recorded a non-cash charge for the impairment of goodwill of approximately $56.1 million. This amount was determined based on an independent valuation of our reporting units using a combination of our quoted stock price and projections of future discounted cash flows for each reporting unit. As required by SFAS No. 142, we will test our goodwill balance for impairment and may incur an impairment charge during 2003. The amount of such charge is currently indeterminable.

As of March 31, 2003, we had cash and marketable investments of $287.9 million, consisting of cash and cash equivalents of $159.4 million and short-term investments available-for-sale of $124.0 million, long-term investments available-for-sale of $525,000 and $4.0 million of cash held on behalf of Authorize.Net merchants. We invest our excess cash in high quality marketable investments. These investments include securities issued by U.S. government agencies, certificates of deposit, money market funds, and taxable municipal bonds.

The following are our contractual commitments associated with our operating lease obligations and marketing agreements (in thousands):

We have pledged a portion of our cash and cash equivalents as collateral for standby letters of credit and bank guaranty for certain of our property leases and banking arrangements. At March 31, 2003, the total amount of collateral pledged under these agreements was approximately $6.5 million. The change in the total amount of collateral pledged under these agreements was as follows (in thousands):

At March 31, 2003 we were holding funds in the amount of approximately $4.0 million for and on behalf of merchants utilizing our eCheck application services, in anticipation of funding under contractual terms and in some cases as a risk reserve. These funds are included in both cash held for merchants and funds due to merchants on our unaudited condensed consolidated balance sheet. On average, eCheck funds are held for seven business days or longer depending on the merchant agreement. In addition, in the event of default by merchants and also to cover the seven-day settlement period for eCheck.Net transactions, InfoSpace has guaranteed up to $6.0 million of monthly ACH processing volume for eCheck.Net transactions to the originating depository financial institutions.

Net cash provided (used) in operating activities consists of net loss offset by certain adjustments not affecting current-period cash flows, and the effect of changes in working capital. Adjustments to net loss to determine cash flows from operations include depreciation and amortization, losses on equity investments, impairment of intangible assets and charges for the cumulative effect of a change in accounting principles. Net cash provided by operating activities totaled $4.8 million for the three months ended March 31, 2003. Net cash provided by operating activities in the three months ended March 31, 2003, consisted of our net loss of $1.3 million offset by changes in working capital of $1.2 million and adjustments not affecting cash flows of $4.9 million.

Net cash used by operating activities was $13.0 million for the three months ended March 31, 2002. The use of cash in operating activities for the three months ended March 31, 2002, consisted of our net loss of $240.5 million and $9.6 million of changes in working capital offset by adjustments not affecting cash flows of $237.1 million. Adjustments not affecting cash flows during the three months ended March 31, 2002, included a $206.6 million non-cash charge for the cumulative effect of adopting SFAS No. 142 and $16.9 million loss on equity investments.

Net cash provided by investing activities totaled $21.4 million for the three months ended March 31, 2003. We sold $14.7 million of short-term and long-term investments and also sold equity investments of approximately $7.8 million. We used $1.0 million to purchase fixed assets, primarily capitalized equipment. We also used approximately $270,000 in business acquisition costs for the final payment for of certain assets acquired from eCash Technologies in 2002.

Net cash used by investing activities totaled $10.0 million for the three months ended March 31, 2002. The key components of the net cash used for the three months ended March 31, 2002 were $33.2 million invested in short-term investments with a maturity of 365 days or less, $2.4 million in purchases of fixed assets and $2.5 million in business acquisition costs for the purchase of certain assets from eCash technologies. Offsetting these amounts was $28.1 million of long-term investment maturities.

Net cash provided by financing activities in the three months ended March 31, 2003 was $564,000 compared to $596,000 in the three months ended March 31, 2002. Cash proceeds from financing activities resulted from the exercise of stock options and from sales of shares through our employee stock purchase plan.

We believe that existing cash balances, cash equivalents and cash generated from operations will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. However, the underlying assumed levels of revenues and expenses may not prove to be accurate. Our anticipated cash needs exclude any payments to settle pending or future litigation matters. In addition, we evaluate acquisitions of businesses, products or technologies that complement its business from time to time. Any such transactions, if consummated, may use a portion of our working capital. We may seek additional funding through public or private financings or other arrangements prior to such time. Adequate funds may not be available when needed or may not be available on favorable terms. If we raise additional funds by issuing equity securities, dilution to existing stockholders will result. If funding is insufficient at any time in the future, we may be unable to develop or enhance our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could harm our business.

We have a history of losses and expect to continue to incur operating losses, and we may not achieve profitability under generally accepted accounting principles (GAAP) or be able to sustain profitability under GAAP.

We have incurred net losses from our inception through March 31, 2003. As of March 31, 2003, we had an accumulated deficit of approximately $1.3 billion. We have not achieved profitability under GAAP and we expect to continue to incur operating losses in the future. These losses may be higher than our current losses from operations. Many of our operating expenses are fixed in the short term. We may in the future incur losses from the impairment of goodwill or other intangible assets, or from the impairment of the value of private and public companies that we have invested in. We must therefore generate revenues sufficient to offset these expenses in order for us to become profitable under GAAP. If we do achieve profitability, we may not be able to sustain it.

Our revenues are dependent on our relationships with companies who distribute our products and application services.

We provide many of our products and application services to our customers, who in turn offer them to their customers. We rely on our relationships with distribution partners, including Web portals, merchant banks and financial institutions and wireless carriers, for distribution or usage of our products and application services. In particular, certain of these agreements with our distribution partners will come up for renewal or expire during 2003. We currently have a month-to-month contract with one of our key wireless customers. We cannot assure you that such arrangements will not be terminated or that such arrangements will be renewed upon expiration of their terms. We cannot guarantee that new contracts, if any, which replace terminated contracts will be on terms as favorable to us as the prior arrangements. In particular, we are currently experiencing industry pricing pressure in our wireless business. Additionally, we cannot assure you that these relationships will be profitable or result in benefits to us that outweigh the costs of the relationships.

Our financial results are likely to continue to fluctuate, which could cause our stock price to be volatile or decline.

Our financial results have varied on a quarterly basis and are likely to fluctuate in the future. These fluctuations could cause our stock price to be volatile or decline. Several factors could cause our quarterly results to fluctuate materially, including:

For these reasons, you should not rely on period-to-period comparisons of our financial results to forecast our future performance. Furthermore, our fluctuating operating results may fall below the expectations of securities analysts or investors, which would cause the trading price of our stock to decline.

A substantial portion of our revenues is attributable to a small number of customers and partners, the loss of any one of which would harm our financial results.

We derive a substantial portion of our revenues from a small number of customers. We expect that this concentration will continue in the foreseeable future. Our top ten customers and partners represented 62% of our revenues for the first quarter of 2003. Overture, Verizon Information Services and Google each accounted for more than 10% of our revenues in the three months ended March 31, 2003. If we lose any of these customers or partners, or if any of these customers or partners are unable or unwilling to pay us amounts that they owe us, our financial results could materially suffer.

Our future earnings could continue to be negatively affected by significant charges resulting from the impairment in the value of acquired assets.

For acquisitions which we have accounted for using the purchase method, we regularly evaluate the recorded amount of long-lived assets, consisting primarily of goodwill, acquired contracts and core technology, to determine whether there has been any impairment of the value of the assets and the appropriateness of their estimated remaining lives. We evaluate impairment whenever events or changed circumstances indicate that the carrying amount of the long-lived assets might not be recoverable.

In addition, recent changes in GAAP require us to discontinue amortizing goodwill and certain intangible assets. We adopted these changes effective January 1, 2002. Under this approach, goodwill and certain intangible assets are not amortized into results of operations, but instead are reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangible assets is more than its fair value. We will continue to regularly evaluate the recorded amount of our long-lived assets

including acquired contracts and core technology and test for impairment. In the event we determine that any long-lived asset has been impaired, we will record additional impairment charges in future quarters. Goodwill will be evaluated at least annually. We are unable to predict the amount, if any, of potential future impairments.

Our financial results have been, and may continue to be, negatively impacted by our recognition of losses on investments in other companies.

We hold a number of investments in third parties. The majority of the companies we have invested in are engaged in Internet, networking, e-commerce, telecommunications and wireless technologies. These investments involve a high level of risk for a number of reasons, including:

We regularly review our investments in public and private companies for other-than-temporary declines in fair value. When we determine that the decline in fair value of an investment below our accounting basis is other-than-temporary, we reduce the carrying value of the securities we hold and record a loss in the amount of any such decline. We determined that the decline in value of our investments was other-than-temporary for one of our investments in the three months ended March 31, 2003 and for several investments in the year ended December 31, 2002. We recognized non-cash losses totaling $322,000 in the three months ended March 31, 2003 and $20.3 million in the year ended December 31, 2002 to record these investments at their current fair values. With the current economic environment, it is difficult to accurately predict the amount of exposure to future investment impairment. As of March 31, 2003, Other investments were recorded at $18.7 million.

If we conclude in future quarters that the fair values of any of our investments have experienced more than a temporary decline, we will record additional investment losses, which would adversely affect our financial condition and results of operations.

We operate in new and rapidly evolving markets, and our business model continues to evolve, which makes it difficult to evaluate our future prospects.

Since inception, our business model has evolved and is likely to continue to evolve as we refine our product offerings and market focus. In particular, we announced in May 2003 that, as part of an in-depth and ongoing analysis of our business, we are taking steps to streamline operations and sharpen our strategic focus on our three core businesses: Search and Directory, the Authorize.Net payment gateway and Wireless. Businesses falling outside of these areas have been consolidated into a single operating unit, called Enterprise Solutions, charged with positioning these businesses for future disposition or exit. As a result, our potential for future profitability must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies that are in new and/or rapidly evolving markets and continuing to innovate with new and unproven technologies. Some of these risks relate to our potential inability to:

In addition, we have in the past and may in the future find it beneficial to streamline operations and reduce expenses, including such measures as reductions in the workforce, cuts in discretionary spending, reductions in capital expenditures as well as other steps to reduce expenses. Effecting any such restructuring would likely place significant strains on management and our operational, financial, employee and other resources. In addition, any such restructuring could negatively affect our development, marketing, sales and customer support efforts or alter our product development plans.

If we do not effectively address the risks we face, our business model may become unworkable and we may not achieve or sustain profitability.

The trading price of our common stock has historically been highly volatile. Since we began trading on December 15, 1998, our stock price has ranged from $3.70 to $1,385.00 (as adjusted for stock splits). On May 5, 2003, the closing price of our common stock was $11.56. Our stock price could continue to decline or be subject to wide fluctuations in response to factors such as the following:

In addition, the stock market in general, and the Nasdaq National Market and the market for Internet and technology companies in particular, have experienced extreme price and volume fluctuations. These broad market and industry factors and general economic conditions may materially and adversely affect our stock price.

We depend on third parties for content, and the loss of access to this content could cause us to reduce our product offerings to customers.

We typically do not create our own content. Rather, we acquire rights to information from numerous third-party content providers, and our future success is highly dependent upon our ability to maintain relationships with these content providers and enter into new relationships with other content providers.

We typically license content under arrangements that require us to pay usage (per query) or fixed monthly fees for the use of the content or require us to pay under an advertising revenue-sharing arrangement. In the future, some of our content providers may demand a greater portion of advertising revenues or increase the fees that they charge us for their content thus having a negative impact on our net earnings. If we fail to enter into and maintain satisfactory arrangements with content providers, our ability to provide a variety of products and services to our customers could be severely limited, thus harming our business reputation and operating results.

Our financial and operating results will suffer if we are unsuccessful at integrating acquired businesses.

We have acquired a large number of technologies and businesses in the past, and may do so in the future. Our financial results have suffered significantly due to impairment charges of goodwill and other intangible assets related to prior acquisitions. Acquisitions typically involve potentially dilutive issuances of stock, the potential incurrence of debt and contingent liabilities or large write-offs and amortization expenses related to certain intangible assets. Past and future acquisitions involve numerous risks which could materially and adversely affect our results of operations or stock price, including:

The success of the operations of companies and technologies which we have acquired will often depend on the continued efforts of the management of those acquired companies. Accordingly, we have typically attempted to retain key employees and members of existing management of acquired companies under the overall supervision of our senior management. We have, however, not always been successful in these attempts at retention.

Our strategic direction, or that of one or more of our business units, may change as a result of our recent change in leadership, which could negatively affect our future results.

In December 2002, we announced that our board of directors named James F. Voelker to succeed Naveen Jain as our Chairman and Chief Executive Officer. In April 2003, we announced the appointment of Kathleen Rae, as President and Chief Operating Officer, David Rostov, as Chief Financial Officer, and Brian McManus, as Executive Vice President, Search and Directory.

These changes to our business may not prove successful in the short or long term and may negatively impact our financial results. In particular, we expect to experience a decline in revenue in the short term due in part to the disposition of certain businesses, and we may incur additional charges due to restructuring or impairment of assets.

Our systems could fail or become unavailable, which would harm our reputation, result in a loss of current and potential customers and could cause us to breach existing agreements.

Our success depends, in part, on the performance, reliability and availability of our services. We have data centers in Seattle and Bellevue, Washington; and Papendrecht, The Netherlands. Until we complete our disaster recovery and redundancy planning, none of our data centers is currently redundant. Our systems and operations could be damaged or interrupted by fire, flood, power loss, telecommunications failure, Internet breakdown, break-in, earthquake or similar events. We would face significant damage as a result of these events, and our business interruption insurance may not be adequate to compensate us for all the losses that may occur. In addition, our systems use sophisticated software that may contain bugs that could interrupt service. For these reasons we may be unable to develop or successfully manage the infrastructure necessary to meet current or future demands for reliability and scalability of our systems.

If the volume of traffic on our Web sites or our customers’ Web sites increases substantially, we must respond in a timely fashion by expanding our systems, which may entail upgrading our technology, transaction-processing systems and network infrastructure. Due to the number of our customers and the products and application services that we offer, we could experience periodic capacity constraints which may cause temporary unanticipated system disruptions, slower response times and lower levels of customer service. Our business could be harmed if we are unable to accurately project the rate or timing of increases, if any, in the use of our products and application services or expand and upgrade our systems and infrastructure to accommodate these increases in a timely manner.

Furthermore, we have entered into service level agreements with certain merchant services distributors, including merchant banks, portal sites and most of our wireless customers. These agreements sometimes call for specific system up times and 24/7 support, and include penalties for non-performance. We may be unable to fulfill these commitments, which could subject us to penalties under our agreements, harm our reputation and result in the loss of customers and distributors.

If we are unable to retain our key employees, we may not be able to successfully manage our business.

Our business and operations are substantially dependent on the performance of our key employees, who are generally employed on an at-will basis. If we lose the services of one or more of our executive officers or key employees, and are unable to recruit and retain a suitable successor, we may not be able to successfully manage our business or achieve our business objectives.

Although all of our current executive officers have signed agreements which limit their ability to compete with us for one year after their employment with us ends, our business could be harmed if subsequent to the non-compete period one or more of them joined a competitor or otherwise decided to compete with us. Naveen Jain, our former Chairman and Chief Executive Officer, had signed a two-year non-competition agreement. In March 2003, we filed a lawsuit against Mr. Jain and other defendants for breach of their fiduciary and contractual duties owed to InfoSpace, wrongful interference with our contractual relationships and misappropriation of our trade secrets and confidential information in order to unfairly compete with us.

In May 2003, we announced that, as part of an in-depth and ongoing analysis of our business, we are taking steps to streamline operations and sharpen our strategic focus on our three core businesses: Search and Directory, the Authorize.Net payment gateway and Wireless. As part of this process, we had previously announced a workforce reduction of approximately 115 positions. Such restructuring may include additional changes to our management team and other key personnel. If we are unsuccessful in recruiting and retaining suitable replacements, or are unsuccessful in effectively managing transitions of key management employees, our business and operating results may be adversely affected.

In light of current market conditions, the value of stock options granted to employees may cease to provide sufficient incentive to our employees.

Like many technology companies, we use stock options to recruit technology professionals and senior level employees and to motivate long-term employee performance. Our stock options, which typically vest over a two or four-year period, are one of the means by which we compensate employees. We face a significant challenge in retaining our employees if the value of these stock options is either not substantial enough or so substantial that the employees leave after their stock options have vested. If our stock price does not increase significantly above the prices of our options, we may in the future need to issue new options or equity incentives or increases in other forms of compensation to motivate and retain our employees. We may undertake or seek stockholder approval to undertake programs to retain our employees that may be viewed as dilutive to our stockholders.

Unless we are able to hire, retain and motivate highly qualified employees, we will be unable to execute our business strategy.

Our future success depends on our ability to identify, attract, hire, train, retain and motivate highly skilled technical, managerial, sales and marketing and business development personnel. Our services and the industries to which we provide our services are relatively new, particularly with respect to our merchant services and our wireless data services. Qualified personnel with experience relevant to our business are scarce and competition to recruit them is intense. If we fail to successfully attract, assimilate and retain a sufficient number of highly qualified technical, managerial, sales and marketing, business development and administrative personnel, our business could suffer. Additional realignments of resources or reductions in workforce, or other future operational decisions could create an unstable work environment and may have a negative effect on our ability to retain and motivate employees.

Insiders own a large percentage of our stock, which could delay or prevent a change in control and may negatively affect your investment.

As of April 30, 2003, our officers, directors and affiliated persons beneficially owned approximately 24.8% of our voting securities. Naveen Jain, our former Chairman, Chief Executive Officer and director, beneficially owned approximately 18.6% of our voting securities as of that date. None of our insiders are subject to contractual limitations on their ability to sell their shares, other than compliance with the securities laws and our policies regarding insider trading.

These stockholders, and in particular Naveen Jain, will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, which could have the effect of delaying or preventing a third party from acquiring control over us and could affect the market price of our common stock. In addition, some of our executive officers have employment agreements that provide for accelerated vesting of options if their employment is actually or constructively terminated.

The interests of those holding this concentrated ownership may not always coincide with our interests or the interests of other stockholders, and, accordingly, they could cause us to enter into arrangements, transactions or agreements that we would not otherwise consider or could prevent us from entering into arrangements, transactions or agreements that we may consider beneficial to our business.

We are subject to legal proceedings that could result in liability and damage our business.

From time to time, we have been, and expect to continue to be, subject to legal proceedings and claims in the ordinary course of our business, including a putative securities class action lawsuit, other securities-related litigation and claims of infringement of intellectual property rights by us. Approximately thirteen lawsuits against us are currently pending in which claims have been asserted against us or current and former directors and executive officers, in addition to ordinary course collection matters and intellectual property infringement claims that are not material to our business. We are unable to determine the amount for which we potentially could be liable since a number of these lawsuits do not specify an amount for damages sought, and we maintain insurance which may cover some of the claims, should they be successful. In addition, in March 2003 we filed a lawsuit against Mr. Jain and other defendants for breach of their fiduciary and contractual duties owed to InfoSpace, wrongful interference with our contractual relationships and misappropriation of our trade secrets and confidential information in order to unfairly compete with us. Such proceedings and claims, even if claims against us are not meritorious, require the expenditure of significant financial and managerial resources, which could materially harm our business. We believe we have meritorious defenses to all the claims currently made against InfoSpace. However, litigation is inherently uncertain, and we may not prevail in these suits. We cannot predict whether future claims will be made or the ultimate resolution of any current or future claim. For an expanded discussion of our pending legal proceedings, see Note 7 to our consolidated financial statements.

Our efforts to increase our presence in markets outside the United States may be unsuccessful and could result in losses.

We have limited experience in developing localized versions of our products and application services internationally, and we may not be able to successfully execute our business model in these markets. Our success in these markets will be directly linked to the success of relationships with our customers and other third parties.

We face a number of risks inherent in and barriers to doing business in international markets, including:

As markets for Internet software and application services for wireline, merchant and wireless continue to grow, competition in these markets will likely intensify. Local companies may have a substantial competitive advantage because of their greater understanding of and focus on the local markets. If we do not effectively manage risks related to our expansion internationally, our business is likely to be harmed.

We have implemented anti-takeover provisions that could make it more difficult to acquire us.

Our certificate of incorporation, our bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors, even if the transaction would be beneficial to our stockholders. In February 2003, we amended and restated our bylaws with regard to certain of these provisions. Provisions which could have an anti-takeover effect include:

On July 19, 2002, our board of directors adopted a stockholder rights plan, pursuant to which we declared and paid a dividend of one right for each share of common stock held by stockholders of record as of August 9, 2002. Unless redeemed by us prior to the time the rights are exercised, upon the occurrence of certain events, the rights will entitle the holders to receive shares of our preferred stock, or shares of an acquiring entity. The issuance of the rights would make the acquisition of InfoSpace more expensive to the acquirer and would delay or discourage third parties from acquiring InfoSpace without the approval of our board of directors. Our board of directors has the power to redeem these rights and prevent their exercise.

We rely heavily on our technology, but we may be unable to adequately protect or enforce our intellectual property rights thus weakening our competitive position and negatively impacting our financial results.

To protect our rights, we rely on a combination of copyright and trademark laws, patents, trade secrets, and confidentiality agreements with employees and third parties and protective contractual provisions. Despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our products or services or obtain and use information that we regard as proprietary. In addition, it is possible that others could independently develop substantially equivalent intellectual property. If we do not effectively protect our intellectual property, we could lose our competitive position.

Our intellectual property may be subject to even greater risk in foreign jurisdictions, as the laws of many countries do not protect proprietary rights to the same extent as the laws of the United States. If we cannot adequately protect our intellectual property, our competitive position in markets abroad may suffer.

Our intellectual property or proprietary rights could be misappropriated, which could force us to become involved in expensive and time-consuming litigation.

Our ability to compete and continue to provide technological innovation is substantially dependent upon internally developed technology. We rely on a combination of patent, copyright and trade secrets to protect our technology, although we believe that other factors such as the technological and creative skills of our personnel, new product developments, frequent products and feature enhancements and reliable product support and maintenance are also essential to maintaining a technology leadership position. We rely on trademark law to protect the value of our corporate brand and reputation.

We generally enter into confidentiality and nondisclosure agreements with our employees, consultants, prospective customers, licensees and corporate partners. We also have entered into non-competition agreements with certain of our current and former executive officers. In addition, we control access to and distribution of our software, documentation and other proprietary information. Except for certain research and development arrangements, we do not provide customers with access to the source code for our products. Despite our efforts to protect our intellectual property and proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Effectively policing the unauthorized use of our products and trademarks is time-consuming and costly, and there can be no assurance that the steps taken by us will prevent misappropriation of our technology or trademarks, particularly in foreign countries where in many instances the local laws or legal systems do not offer the same level of protection as in the United States.

If others claim that our products infringe their intellectual property rights, we may be forced to seek expensive licenses, reengineer our products, engage in expensive and time-consuming litigation or stop marketing and licensing our products.

We attempt to avoid infringing known proprietary rights of third parties in our product development efforts. However, we do not regularly conduct comprehensive patent searches to determine whether the technology used in our products infringes patents held by third parties. Because patent applications in the United States are not publicly disclosed until the patent is issued, applications may have been filed which relate to our software products. In addition, our competitors and other companies as well as research and academic institutions have conducted research for many years in the electronic messaging field, and this research could lead to the filing of further patent applications. If we were to discover that our products violated or potentially violated third-party proprietary rights, we might not be able to obtain licenses to continue offering those products without substantial reengineering. Any reengineering effort may not be successful, nor can we be certain that any licenses would be available on commercially reasonable terms.

Substantial litigation regarding intellectual property rights exists in the software industry, and we expect that software products may be increasingly subject to third-party infringement claims as the number of competitors in our industry segments grows and the functionality of software products in different industry segments overlaps. Any third-party infringement claims could be time consuming to defend, result in costly litigation, divert management’s attention and resources, cause product and service delays or require us to enter into royalty and licensing agreements. Any royalty or licensing agreements, if required, may not be available on terms acceptable to us, if at all. 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, financial condition and results of operations.

We could be subject to liability due to fraud or privacy and security breaches in connection with use of our services.

Security and privacy concerns of users of online e-commerce and subscription services may inhibit the growth of the Internet and other online services, especially as a means of conducting commercial transactions.

Because some of our activities involve the storage and transmission of confidential personal or proprietary information, such as credit card numbers, security breaches and fraud schemes could damage our reputation and expose us to a risk of loss or litigation and possible liability. Our payment transaction and hosting services may be susceptible to credit card and other payment fraud schemes, including unauthorized use of credit cards or bank accounts, identity theft, or merchant fraud. Subscribers to some of our other services are required to provide information in order to utilize the service that may be considered to be personally identifiable or private information. Unauthorized access to, and abuse of, this information could subject us to liability. We expect that technically knowledgeable criminals will continue to attempt to circumvent our anti-fraud systems. If such fraud schemes become widespread or otherwise cause merchants or subscribers to lose confidence in our services in particular, or in Internet systems generally, our business could suffer.

In addition, the large volume of payments that we handle for our customers makes us vulnerable to employee fraud or other internal security breaches. We cannot assure you that any internal control systems will prevent material losses from employee fraud. Further, we may be required to expend significant capital and other resources to protect against security breaches and fraud to address any problems they may cause.

Our payment system may also be susceptible to potentially illegal or improper uses. These may include illegal online gambling, fraudulent sales of goods or services, illicit sales of prescription medications or controlled substances, software and other intellectual property piracy, money laundering, bank fraud, child pornography trafficking, prohibited sales of alcoholic beverages and tobacco products and online securities fraud. Despite measures we have taken to detect and lessen the risk of this kind of conduct, we cannot assure you that these measures will succeed. In addition, future regulations under the USA Patriot Act of 2001 may require us to revise the procedures we use to verify the identity of customers and to monitor more closely international transactions. Our business could suffer if customers use our system for illegal or improper purposes or if the costs of complying with regulatory requirements increase significantly.

Security breaches may pose risks to the uninterrupted operation of our systems

Additionally, our networks may be vulnerable to unauthorized access by hackers or others, computer viruses and other disruptive problems. Someone who is able to circumvent security measures could misappropriate our proprietary information or cause interruptions in our operations. We may need to expend significant capital or other resources protecting against the threat of security breaches or alleviating problems caused by breaches. Although we intend to

continue to implement and improve our security measures, persons may be able to circumvent the measures that we implement in the future. Eliminating computer viruses and alleviating other security problems may require interruptions, delays or cessation of service to users accessing our services, any of which could harm our business.

Changes to credit card association rules or practices could adversely impact our merchant business and, if we do not comply with the rules, our ability to process credit card transactions could be substantially impaired.

The Authorize.Net credit card payment gateway does not directly access the Visa and MasterCard credit card associations. As a result, we must rely on banks and their service providers to process our transactions. We must comply with the operating rules of the credit card associations. The associations’ member banks set these rules, and the associations interpret the rules. Some of those member banks compete with Authorize.Net. Visa, MasterCard, American Express or Discover could adopt new operating rules or interpretations of existing rules which we might find difficult or even impossible to comply with, in which case we could lose our ability to give customers the option of using credit cards to fund their payments. If we were unable to accept credit cards, our merchant business would be materially and adversely affected.

Governmental regulation and the application of existing laws e-commerce may slow business growth, increase our costs of doing business and create potential liability.

Businesses that handle consumers’ funds are subject to numerous regulations, including those related to banking, credit cards, escrow, fair credit reporting, privacy of financial records and others. State money transmitter regulations and federal money laundering regulations can also apply under some circumstances. The application of many of these laws with regard to electronic commerce is currently unclear. If applied to us, these rules and regulations may require us to change the way we do business in a way that increases costs or makes our business more complex. In addition, violation of some statues may result in severe penalties or restrictions on our ability to engage in online e-commerce, which could have a material adverse effect on our business.

The growth and development of the market for e-commerce may prompt more stringent consumer protection laws that may impose additional burdens on those companies conducting business online. Uncertainty and new laws and regulations, as well as the application of existing laws to the Internet, in our markets could limit our ability to operate in these markets, expose us to compliance costs and substantial liability and result in costly and time consuming litigation.

The Federal Trade Commission (FTC) has recommended to search engine providers that paid-ranking search results be delineated from non-paid results. To the extent that the FTC may in the future issue specific requirements regarding the nature of such delineation, which would require modifications to the presentation of search results, revenue from the affected search engines could be negatively impacted.

The loss of any key relationship with a third-party payment processor could slow business growth or result in loss of business.

Our credit card payment gateway business depends upon our relationships with third-party payment processors. Our ability to process credit card payments will be severely impacted if any of the processors prevent us from accessing their processing gateways. Accordingly, we process our Automated Clearing House (ACH) transactions through our Originating Depository Financial Institution (ODFI) partners. Our ability to process ACH transactions would be severely impacted if we lose any of our ODFI partners.

Consolidation in our industry could lead to increased competition and loss of customers.

The Internet and wireless industries have experienced substantial consolidation. We expect this consolidation to continue. These acquisitions could adversely affect our business and results of operations in a number of ways, including the following:

Intense competition in the wireline, merchant and wireless markets could prevent us from increasing distribution of our services in those markets or cause us to lose market share.

Our current business model depends on distribution of our products and application services into the wireline, merchant and wireless markets, all of which are extremely competitive and rapidly changing. Many of our current and prospective competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, more developed infrastructures, greater name recognition and/or more established relationships in the industry than we have. Our competitors may be able to adopt more aggressive pricing policies than we can, develop and expand their service offerings more rapidly, adapt to new or emerging technologies and changes in customer requirements more quickly, take advantage of acquisitions and other opportunities more readily, achieve greater economies of scale, and devote greater resources to the marketing and sale of their services. Because of these competitive factors and due to our relatively small size and financial resources we may be unable to compete successfully.

Some of the companies we compete with are currently customers of ours, the loss of which could harm our business. Many of our current customers have established relationships with some of our current and potential future competitors. If these competitors develop Internet software and application services that compete with ours, we could lose market share and our revenues would decrease.

We rely on the Internet infrastructure, and its continued commercial viability, over which we have no control and the failure of which could substantially undermine our business strategy.

Our success depends, in large part, on other companies maintaining the Internet system infrastructure. In particular, we rely on other companies to maintain a reliable network backbone that provides adequate speed, data capacity and security and to develop products that enable reliable Internet access and services. As a result of generally unfavorable economic conditions, some of the companies that we rely upon to maintain the network infrastructure may lack sufficient capital to support their long-term operations. In addition, as the Internet continues to experience significant growth in the number of users, frequency of use and amount of data transmitted, the Internet system infrastructure may be unable to support the demands placed on it, and the Internet’s performance or reliability may suffer as a result of this continued growth.

In addition, the Internet could lose its commercial viability as a form of media due to delays in the development or adoption of new standards and protocols to process increased levels of Internet activity. Any such degradation of Internet performance or reliability could cause advertisers to reduce their Internet expenditures; in recent months, in fact, advertisers have begun to attribute less value to advertising on the Internet. Furthermore, any loss in the commercial viability of the Internet would have a significant negative impact on our wireline and merchant services. If other companies do not develop the infrastructure or complementary products and services necessary to establish and maintain the Internet as a viable commercial medium, or if the Internet does not become a viable commercial medium or platform for advertising, promotions and electronic e-commerce our business could suffer.

We may be subject to liability for our use or distribution of information that we receive from third parties.

We obtain content and commerce information from third parties. When we integrate and distribute this information over the Internet, we may be liable for the data that is contained in that content. This could subject us to legal liability for such things as defamation, negligence, intellectual property infringement and product or service liability. Many of the agreements by which we obtain content do not contain indemnity provisions in favor of us. Even if a given contract does contain indemnity provisions, these provisions may not cover a particular claim. Our insurance coverage may be inadequate to cover fully the amounts or types of claims that might be made against us. In addition, individuals whose names appear in our yellow pages and white pages directories have occasionally contacted us. These individuals believed that their phone numbers and addresses were unlisted, and our directories are not always updated to delete phone numbers or addresses when they are changed from listed to unlisted. While we have not received any claims from these individuals, we may receive claims in the future. Any liability that we incur as a result of content we receive from third parties could harm our financial results.

We also gather personal information from users in order to provide personalized services. Gathering and processing this personal information may subject us to legal liability for negligence, defamation, invasion of privacy, or product or service liability. We may also be subject to laws and regulations, both in the United States and abroad, regarding user privacy.

Our market risks at March 31, 2003 have not changed significantly from those discussed in Item 7A of our Form 10-K for the year ended December 31, 2002 on file with the Securities and Exchange Commission. See also Management’s Discussion and Analysis of Financial Condition and Results of Operations section of Item 2 of this Form 10-Q for additional discussions of our market risks.

(a) Evaluation of disclosure controls and procedures. Based on their evaluation as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer have concluded that the our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) are effective to ensure that information required to be disclosed by us in reports that we file or submits under the Exchange Act is gathered, analyzed and reported within the time periods specified in Securities and Exchange Commission rules and forms.

(b) Changes in internal controls. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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

INFOSPACE, INC.

By		/s/ David Rostov
		David Rostov Chief Financial Officer

/s/		James F. Voelker
		James F. Voelker
		Chairman and Chief Executive Officer

/s/		David Rostov
		David Rostov
		Chief Financial Officer

Delaware		91-1718107
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

601 108th Avenue NE, Suite 1200		98004
Bellevue, Washington		(Zip Code)
(Address of principal executive offices)

Class		Outstanding at April 30, 2003
Common Stock, Par Value $.0001		31,155,205


Item 1.	Financial Statements

	Unaudited Condensed Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002	3

	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2003 and 2002	4

	Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002	5

	Notes to Unaudited Condensed Consolidated Financial Statements	6

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

	Overview	15

	Results of Operations	19

	Liquidity and Capital Resources	23

	Factors Affecting Our Operating Results, Business Prospects and Market Price of Stock	26

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42

Item 4.	Controls and Procedures	42

Part II—Other Information

Item 1.	Legal Proceedings	43

Items 2, 3, 4, and 5 are not applicable with respect to the current reporting period

Item 6.	Exhibits and Reports on Form 8-K	43

Signature		44

Certifications		45

	March 31, 2003			December 31, 2002
	(Amounts in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents (including cash held for merchants of $4,020 and $2,516)	$	163,389		$	136,672
Short-term investments, available-for-sale		124,007			138,895
Accounts receivable, net of allowance of $1,069 and $1,178		21,671			21,027
Notes and other receivables, net of allowance of $12,231 and $12,235		4,824			6,442
Payroll tax receivable		13,214			13,214
Prepaid expenses and other current assets		6,105			2,921

Total current assets		333,210			319,171
Long-term investments, available-for-sale		525			651
Property and equipment, net		23,595			26,252
Other long term assets		715			659
Other investments		18,682			25,836
Goodwill		97,844			97,844
Other intangible assets, net		9,361			10,983

Total assets	$	483,932		$	481,396

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,604		$	4,688
Funds due to merchants		4,020			2,516
Accrued expenses and other current liabilities		16,893			15,570
Short-term deferred revenue		9,260			9,169

Total current liabilities		34,777			31,943
Long-term deferred revenue		1,452			1,317

Total liabilities		36,229			33,260
Contingencies (Note 7)		—			—
Stockholders’ equity:
Preferred stock, par value $.0001—Authorized, 15,000,000 shares; issued and outstanding, 2 shares		—			—
Common stock, par value $.0001—Authorized, 900,000,000 shares; issued and outstanding, 31,148,446 and 30,957,371 shares		3			3
Additional paid-in capital		1,704,278			1,704,123
Accumulated deficit		(1,257,282	)		(1,255,975	)
Deferred expense—warrants		—			(39	)
Unearned compensation		(162	)		(543	)
Accumulated other comprehensive income		866			567

Total stockholders’ equity		447,703			448,136

Total liabilities and stockholders’ equity	$	483,932		$	481,396

	Three Months Ended March 31,
	2003			2002
	(Amounts in thousands, except per share data)
Revenues (including related party revenues of $169 and $607, respectively)	$	36,600		$	33,144
Cost of revenues		8,164			9,663

Gross profit		28,436			23,481
Operating expenses:
Product development		7,282			9,427
Sales, general and administrative		18,288			27,096
Amortization of other intangible assets		1,622			5,914
Other charges		3,956			(50	)
Restructuring charges		167			—

Total operating expenses		31,315			42,387

Loss from operations		(2,879	)		(18,906	)
Gain (loss) on equity investments		413			(16,911	)
Other income, net		1,229			2,078

Loss before income tax expense and cumulative effect of change in accounting principle		(1,237	)		(33,739	)
Income tax expense		(70	)		(144	)

Loss before cumulative effect of change in accounting principle		(1,307	)		(33,883	)
Cumulative effect of change in accounting principle		—			(206,619	)

Net loss.	$	(1,307	)	$	(240,502	)

Basic and diluted net loss per share:
Prior to cumulative effect of change in accounting principle	$	(0.04	)	$	(1.11	)
Cumulative effect of change in accounting principle		—			(6.77	)

Basic and diluted net loss per share	$	(0.04	)	$	(7.88	)

Shares used in basic and diluted net loss per share calculations		30,979			30,517

Comprehensive loss:
Net loss	$	(1,307	)	$	(240,502	)
Foreign currency translation adjustment		191			1,622
Unrealized loss on investments		(59	)		(299	)

Comprehensive loss	$	(1,175	)	$	(239,719	)

	Three months ended		Three months ended
	March 31, 2003	March 31, 2002	March 31, 2003	March 31, 2002
	Employee Stock Option Plans		Employee Stock Purchase Plan
Risk-free interest rate	2.78%	4.91%	1.66%	3.47%
Expected dividend yield	0%	0%	0%	0%
Volatility	105%	123%	92%	109%
Expected life	5 years	5 years	6 months	6 months

	March 31, 2003							December 31, 2002
	Gross carrying amount		Accumulated amortization			Other intangible assets, net		Gross carrying amount		Accumulated amortization			Other intangible assets, net
Core technology	$	32,878		(29,382	)		3,496	$	32,878	$	(29,024	)	$	3,854
Customer lists		8,587		(5,223	)		3,364		8,587		(4,791	)		3,796
Other		6,667		(4,166	)		2,501		6,667		(3,334	)		3,333

Total	$	48,132	$	(38,771	)	$	9,361	$	48,132	$	(37,149	)	$	10,983

	Three Months Ended March 31,
	2003			2002
Net gain on sale of investments	$	252		$	—
Other-than-temporary investment impairments		(322	)		(15,719	)
Increase (decrease) in fair value of warrants		483			(1,192	)

Net gain (loss) on investments	$	413		$	(16,911	)

	Severance and related costs			Estimated future lease losses			Total
Reserve balance at December 31, 2002	$	70		$	315		$	385
Payments during 2003		(13	)		(145	)		(158	)

Reserve balance at March 31, 2003	$	57		$	170		$	227

	Three Months Ended March 31, 2003
	Wireline		Merchant		Wireless		Corporate			Total
Revenues	$	16,480	$	14,004	$	6,116	$	—		$	36,600
Operating expenses		7,123		9,536		5,630		7,569	(a)		29,858
Unallocated depreciation and non-capitalized property, plant and equipment expense		—		—		—		3,866	(b)		3,866

Segment income (loss)		9,357		4,468		486		(11,435	)		2,876
Income tax expense								(70	)		(70	)
Other income, net		—		—		—		1,229			1,229
Gain on equity investments		—		—		—		413			413
Amortization of other intangible assets		—		—		—		(1,622	)		(1,622	)
Restructuring charges		—		—		—		(167	)		(167	)
Other charges		—		—		—		(3,956	)		(3,956	)
Stock based compensation expense		—		—		—		(10	)		(10	)

Net income (loss)	$	9,357	$	4,468	$	486	$	(15,618	)	$	(1,307	)

	Three Months Ended March 31, 2002
	Wireline		Merchant		Wireless			Corporate			Total
Revenues	$	14,439	$	12,125	$	6,580		$	—		$	33,144
Operating expenses		8,322		8,762		10,061			10,031	(c)		37,176
Unallocated depreciation and non-capitalized property, plant and equipment expense		—		—		—			5,400	(d)		5,400

Segment income (loss)		6,117		3,363		(3,481	)		(15,431	)		(9,432	)
Income tax expense				—		—			(144	)		(144	)
Other income, net		—		—		—			2,078			2,078
Loss on equity investments		—		—		—			(16,911	)		(16,911	)
Amortization of other intangible assets		—		—		—			(5,914	)		(5,914	)
Other charges		—		—		—			50			50
Stock based compensation expense									(3,610	)		(3,610	)
Cumulative effect of change in accounting principle		—		—		—			(206,619	)		(206,619

Net income (loss)	$	6,117	$	3,363	$	(3,481	)	$	(246,501	)	$	(240,502	)

	Three months ended March 31, 2003 (in thousands)		Percentage of Total Revenue		Change from 2002 (in thousands)			Three months ended March 31, 2002 (in thousands)		Percentage of Total Revenue
Wireline	$	16,480	45.0	%	$	2,041		$	14,439	43.6	%
Merchant		14,004	38.3	%		1,879			12,125	36.6	%
Wireless		6,116	16.7	%		(464	)		6,580	19.8	%

Total	$	36,600	100.0	%	$	3,456		$	33,144	100.0	%

		Remainder of 2003			2004			2005			2006			2007			Thereafter
Operating lease commitments, net of sublease income		$	3,970		$	5,410		$	5,012		$	4,308		$	4,243		$	3,023

	Standby Letters of Credit			Certificates of Deposit		Total
Balance at December 31, 2002	$	4,492		$	2,089	$	6,581
Net change in collateral pledged		(119	)		—		(119	)

Balance at March 31, 2003	$	4,373		$	2,089	$	6,462