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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR

For the transition from ________________ to _________________

COMMISSION FILE NUMBER 000-26365

Overture Services, Inc.

74 NORTH PASADENA AVENUE 3RD FLOOR
PASADENA, CALIFORNIA 91103
(Address of principal executive offices)

626-685-5600
(Registrant’s telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.0001 par value
Preferred Stock Purchase Rights

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. [X] YES [  ] NO

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the closing price for the registrant’s common stock in the Nasdaq National Market on February 24, 2003, was approximately $721.4 million. This calculation does not reflect a determination that certain persons are or are not affiliates of the registrant for any other purposes and assumes that shares held by affiliates include only shares held by executive officers, members of the board of directors (but not any fund of which any such persons may be a partner), and holders of greater than 5% and all shares that have been reported on Schedule 13D, consisting of The TCW Group, Inc, on behalf of the TCW Business Unit filing such Schedule 13G dated February 5, 2003; FMR Corp. filing such Schedule 13G dated February 14, 2003; AXA Assurances I.A.R.D. Mutuelle on behalf of various affiliated entities, filing such Schedule 13G dated February 10, 2003; and Bill Gross’ Idealab and other members of the group filing with Bill Gross’ Idealab filing such Schedule 13D dated November 28, 2001.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b of the Act). [X] YES [  ] NO

The aggregate market value of the voting and non-voting common equity held by non-affiliates, based on the closing price for the registrant’s common stock in the Nasdaq National Market on June 30, 2002, was approximately $942.0 million. This calculation does not reflect a determination that certain persons are or are not affiliates of the registrant for any other purposes and assumes that shares held by affiliates include only shares held by executive officers, members of the board of directors (but not any fund of which any such persons may be a partner), and holders of greater than 5% and all shares that have been reported on Schedule 13D, consisting of The TCW Group, Inc. on behalf of the TCW Business Unit filing such Schedule 13G dated February 13, 2002; RS Investment Management Co. filing such Schedule 13G dated February 15, 2002; FMR Corp. filing such Schedule 13G dated April 10, 2002; and Bill Gross’ Idealab and other members of the group filing with Bill Gross’ Idealab filing Schedule 13D dated November 28, 2001.

The number of outstanding shares of the registrant’s common stock as of the close of business on February 24, 2003 was 59,275,635

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DOCUMENTS INCORPORATED BY REFERENCE

Items 10, 11, 12 and 13 of Part III incorporate information by reference from the definitive proxy statement for the registrant’s 2003 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2002.

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OVERTURE SERVICES, INC.

FISCAL YEAR 2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

Forward Looking Statements

     In addition to historical information, this Form 10-K contains forward-looking statements, including statements related to the expected growth of our affiliate program, the amount of traffic that will be directed to us from our affiliates in the future, the timing and amount of any increase in our average price per paid introduction, continued profitability, the timing and amount of our number of paid introductions, the amount of future advertiser spending with Overture, the amount of future traffic acquisition costs as a percentage of revenue, planned acquisitions and development of services acquired in such acquisitions and, international expansion, liquidity, growth in the number of advertisers, fluctuation in the price of our common stock, changes in our quarter-to-quarter financial results, seasonal effects and future competition. We use words such as “anticipates,” “believes,” “plans,” “expects,” “future,” “intends” and similar expressions to identify these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause actual results to differ include, but are not limited to, those discussed in the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. Overture undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements.

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PART I

Item 1. Business

OVERVIEW

     Overture Services, Inc. is the global leader in Pay-For-Performance search (also known as paid search) on the Internet. Overture’s search service is comprised of advertiser’s listings, which are screened for relevance and accessed by consumers and businesses through Overture’s affiliates, a network of Web properties that have integrated Overture’s search service into their sites or that direct user traffic to Overture’s own site. In some cases, consumers and businesses access our search listings directly at our site. The search listings are ranked by the advertisers’ bid; the higher the bid, the higher the ranking. Advertisers pay Overture the bid price for clicks on the advertisers’ search listing (also known as a paid introduction, click-through or a paid click). As of December 31, 2002, Overture and its wholly owned subsidiaries, operated the Overture service in the United States, United Kingdom, Germany, France and Japan. Subsequent to the end of the year, Overture announced its intention to operate its service in South Korea, Italy, Spain, and other European markets.

     Overture was incorporated on September 15, 1997 in the state of Delaware and officially launched its service on June 1, 1998. On October 8, 2001, we changed our corporate name from GoTo.com, Inc. to Overture Services, Inc. and changed our Nasdaq Stock Market trading symbol to “OVER.” Overture has offices in California and New York in the United States; United Kingdom; Germany; France; Ireland; Japan; and South Korea.

     On February 18, 2003, Overture announced its plan to acquire the business of AltaVista Company (“AltaVista”), a pioneer in Web search technology, for $140.0 million in cash and stock.

     On February 25, 2003, Overture announced its plan to acquire the Web search unit of Norway-based Fast Search and Transfer (“Fast”), a developer of search and real-time filtering technologies, for $70.0 million in cash, plus a potential performance-based cash incentive payment of up to $30 million over three years.

     AltaVista and Fast both use advanced algorithmic search technology to crawl the Web and return relevant search results in response to users’ queries. We believe these technologies complement our own market-leading technology in commercial search and will enhance our core Pay-For-Performance search business as well as allow us to develop new products and services for our advertisers and affiliates.

INDUSTRY OVERVIEW

     Search is a large and growing market. In the United States alone, hundreds of millions of searches each day are conducted on the Internet. We believe a substantial portion of these searches are commercial in nature. Commercial search queries, we believe, are best served by paid search, which we define, generally, as targeted advertising paid per lead. We believe that paid search is the fastest growing segment of Internet search. In our view, improvements in the quality, relevance, breadth and depth of paid listings will likely drive growth of click-throughs on commercial inquiries.

     In addition, we also believe that the price per paid introduction that advertisers pay will continue to grow. Relative to alternatives, we believe, a lead on Overture at an average price of $0.35 is less expensive, yet more targeted and measurable than other direct sales methods such as targeted keyword banner ads, direct mail or the yellow pages.

     We believe that paid search is a relatively untapped market for many advertisers. Pay-For-Performance search has only been introduced recently and we believe that there are many large advertisers that still have not contributed portions of their marketing budget to Internet advertising and more specifically paid search, but will as the Internet becomes a more acceptable medium for advertising goods and services.

     We also believe that our business will continue to experience growth outside of the United States as Internet usage and e-commerce development continue to grow in other countries.

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     According to our estimate, the US commercial search market has grown and will continue to grow significantly from its $1 billion market size at the end of 2001. As the market leader, Overture’s paid introductions have grown from 173 million in 1999 to 2.2 billion in 2002.

OVERTURE STRATEGY

     Overture’s objective is to build upon its leadership position in commercial search by expanding participation in its -services, to increase the number of search listings available to users and to increase the number of click-throughs that occur through Overture’s affiliates. We believe that increasing the number of key constituents in the Overture network (consumers, advertisers and Overture’s affiliates) will enable Overture to offer a more robust search service, which may enhance our ability to generate increasing search-based revenue. Elements of Overture’s strategy follow.

Expand Consumer Base within the Overture Service. Overture delivered 563 million paid introductions through its network in the fourth quarter of 2002, and more than 2.2 billion paid introductions in fiscal 2002. Overture believes it can expand the base of consumers who access the Overture service by working with affiliates to enhance the implementation of the Overture service on the affiliates’ properties and to introduce new products and services to them. Overture has tested such new implementations with affiliates, including offering additional Overture search listings on a page, improving the placement of our search listings, and servicing certain vertical categories within affiliates’ Web properties. In addition, Overture will seek to expand its consumer base, both domestically and abroad, by adding Web properties not currently in the Overture network.

Improve our Service Quality. We believe that improving the quality of Overture’s service will make it more attractive to consumers, advertisers and affiliates. In 2002, we introduced several new services, (such as auto-bidding) and several additional advertiser account management systems that are designed to aid advertisers in maximizing their volume of paid introductions and subsequently their return on their investment.

     Overture employs a dedicated team of editors that is focused on screening search listings for relevance. Overture continues to utilize automated systems that allow our editors to make relevance determinations. These systems also allow Overture to better scale the business. In addition, in 2002, Overture implemented a series of new editorial guidelines for advertisers designed to improve the relevance and quality of Overture’s listings and the overall search experience for users.

     Overture also implemented several strategies to acquire new advertisers for the purpose of expanding the depth and breadth of Overture’s search listings. We believe these strategies have improved the overall relevance and quality of Overture’s search results. According to Overture estimates, there are still a significant number of commercial keywords that are searched by consumers for which a business has not provided a paid result. Overture’s planned acquisition of AltaVista and Fast’s Web search unit should allow us to better capture that opportunity. In addition to acquisition of new advertisers, we intend to develop new marketing and technology initiatives to increase advertiser participation in existing and new keyword markets (e.g. search terms) available to advertisers, which we believe will lead to enhanced search results within those markets.

Expand Internationally. Overture has launched its search service internationally in the United Kingdom, Germany, France and Japan. We will continue to analyze international opportunities and will seek to expand our services into countries where our service can be replicated on a cost effective basis and where consumers, advertisers and search providers desire the Overture service. Accordingly, Overture anticipates offering its services in several new overseas markets during 2003, including South Korea, Italy, Spain and other European markets.

Expand the Offering. Overture intends to expand its offering through internal development and acquisitions such as AltaVista and Fast’s Web search unit, to provide consumers, advertisers and search providers additional services. Overture’s large advertiser base and robust technical and service capacity allows Overture to develop future opportunities to provide additional value to advertisers. More specifically, Overture intends to expand its service to advertisers by providing systems and information that help advertisers maximize their advertising dollar. Overture believes that there are substantial opportunities to provide additional products and services to its affiliates and advertisers.

THE OVERTURE SERVICE

     The Overture service enables consumers and businesses to quickly locate desired providers of products and services. By offering our search service at the numerous Web properties in our affiliate network, and at our home page, the Overture service is available to millions of consumers and businesses who can receive targeted search results generated by our base of more than 80,000 advertisers.

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Bidding on the Overture Service

     The search results in the Overture service are prioritized for consumers by the amount the advertiser has bid for placement in the keyword market. Advertisers are listed in descending order of their bid, with the highest bidder appearing as the first search listing in the search results. Bids may be expressed either as the amount the advertiser pays Overture each time there is a click on the advertiser’s search listing or as the maximum amount the advertiser is willing to pay for a click on the advertiser’s search listing. Advertisers pay Overture only when a click-through occurs on the advertisers’ search listing. Advertisers may see the bids of other advertisers on their keywords, enabling the advertiser to determine his or her own bid necessary to achieve a desired ranking, which instills competition among advertisers and promotes greater relevance for consumers.

Advertising on the Overture Service

     Overture attracts advertisers who want to drive highly targeted leads to their Web sites. Most advertisers utilize Overture’s self-service tools to open and manage accounts online through our patented DirecTraffic Center®, a proprietary, automated Web-based account management tool that offers several tracking, bid management and measurement features. These accounts comprise our Online Channel, which typically consists of small and medium size enterprises and represented approximately 60% of Overture’s revenue in the fourth quarter of 2002. By automating the sales and maintenance of many of our advertiser accounts, Overture gives businesses greater control over the advertising process, while leveraging the scalable nature of our business.

     Overture account managers oversee and maintain large advertiser accounts, usually bigger enterprises or advertising agencies that pay by invoice and which are typically obtained through our direct sales force efforts. These accounts comprise our Direct Channel and represented approximately 40% of Overture’s revenue in the fourth quarter of 2002.

     Potential advertisers find Overture directly, through third-party referral programs, through our direct sales efforts and through a variety of direct marketing activities. These activities include targeted mailings, e-mails and other promotional material sent directly to businesses, advertising agencies and search engine marketers. To increase advertiser participation in the Overture service, we will continue to utilize multiple marketing channels, including our direct sales force, targeted online marketing, direct mailings, participation at trade shows and appearances in advertising industry periodicals. We will also continue to enter into referral agreements with third parties that receive payment for each business they refer to Overture that becomes an advertiser on our search service.

     When our advertisers submit listings to the Overture search service, we review them for relevance and for conformance with our editorial guidelines. Advertisers can participate only in keyword markets that are relevant to their Web site and product or service offering. In certain cases, and for a separate fee, we help advertisers optimize their search listing campaigns by recommending relevant keywords available to them based on their Web site and product or service offering. As of December 31, 2002, Overture’s proprietary database included approximately 10 million search listings in the United States.

     Currently, all new U.S. Overture advertisers must commit to a minimum bid per listing of 10 cents and a minimum $20 monthly spend. Advertisers may pre-pay by check, wire, credit card and in some cases, Overture may grant credit terms under which the advertiser is invoiced each month.

THE OVERTURE NETWORK

     Overture distributes its search listings to numerous Web properties, including many premiere Web sites such as MSN.com and Yahoo.com that offer their users Overture’s Premium Listings, which are the top Overture listings for each keyword (typically this usually consists of three to five of the top listings ). Other affiliates within the Overture network include AltaVista, AOL Europe, Applied Semantics (formerly Oingo), CNET, Comet Systems, InfoSpace (including MetaCrawler,WebCrawler, Dogpile and Excite), TerraLycos and Wanadoo (which acquired Freeserve). Overture also has relationships with the two primary Web browsers used by Internet users, which offer Overture search results as a default search service (Microsoft) or as a rotation with other providers of search listings (Netscape).

We believe that affiliates electing to offer the Overture search service on their sites can take advantage of any or all of the following benefits:

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•

Obtain an economic advantage in monetizing search;

	•		Deliver high quality and relevant search results to their users;
	•		Experience superior technical and customer service;
	•		Generate revenue without the costs and challenges associated with building and maintaining the marketing, sales and service, and supporting functions and systems;
	•		Build and maintain brand loyalty by delivering content with the look, feel and navigation features specific to each affiliate in a non-competitive way.

     Web properties can become an affiliate in one of three ways.

     First, an affiliate can choose to obtain a complete set of search results, which includes Overture’s search listings as well as algorithmic search results (search results generated by software programs that collect and organize information from the Web) provided by a third party selected by Overture. With this option, the end user, at the affiliate’s choice, will access the Overture search listings and third party results at the affiliate’s Web site or at Overture’s Web site. Pending the close of the acquisitions of AltaVista and Fast’s Web search unit, we intend to offer broad Web search capabilities (which may also include paid listings).

     Second, an affiliate may choose to offer Overture search results as part of other search results they provide their users. For example, as part of our network, we have established contracts with Web sites that aggregate the search offerings of several providers of search services. These contracts provide that our search service is included in the aggregated search offerings on these sites. Overture has also entered into contracts with portals, in which our Premium Listings are offered as part of the affiliate’s search results.

     Finally, in contracts with internet browser providers, like Microsoft’s Internet Explorer, and AOL’s Netscape, our search results are offered on the browser’s search page, or as part of the browser’s search functionality.

     The economic arrangements with affiliates vary and may include:

	•		Fixed guarantees by Overture which often carry reciprocal, performance guarantees from the affiliate;
	•		Payment by Overture based on a specified percentage of revenue;
	•		Specific payment by Overture for each click on our search results;
	•		Payment by Overture for impressions of our search results;
	•		Payment by Overture for searches done on our service; and
	•		Combinations of the foregoing.

TECHNOLOGY

     Overture’s technical operating environment is designed to provide the best search experience on the Internet to consumers and businesses, and affiliates as well as the best service level to advertisers. Overture intends to continue investing in its technology infrastructure to maintain and enhance its competitive advantage.

     Overture makes its services available to consumers and businesses, affiliates and advertisers through a combination of its own proprietary technology and commercially available technology from industry leading providers such as Sun Microsystems, Cisco and Oracle. Overture also relies upon third parties to provide hosting services, including hardware support and service and network coordination.

     Any disruption in Internet access or other services provided by third parties could have a material adverse effect on our business. Overture is undertaking initiatives to develop and implement business continuity, improve data retention, create backup and recovery processes and systems and standardize technology platforms. Overture also protects its search computer systems by maintaining multiple search serving sites which allow for global load balancing, as well as designing these systems for peak loads and non-stop operation.

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INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

     As the pioneer of Pay-For-Performance search, Overture has developed significant proprietary technologies to serve our results and service our advertisers. Overture has filed, and has been issued, patents to protect and enforce our inventions, systems and processes. Accordingly, Overture intends to vigorously enforce its intellectual property and has filed lawsuits in this regard against some of our competitors.

     We seek to protect our copyrights, service marks, trademarks, trade dress and trade secrets through a combination of laws and contractual restrictions. For example, we attempt to register our trademarks and service marks in the United States and other countries throughout the world. However, effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our services are made available online.

COMPETITION

     We face competition in three principal areas: (i) distribution of our services; (ii) demand for our services on our affiliates’ Web sites and (iii) usage of our services by advertisers.

     We compete with companies that provide pay-per-click advertising services that are similar to Overture’s. These companies include Espotting Media, Inc., FindWhat, Google, Inc., PRIMEDIA (About.com) and Terra Lycos. In addition, we cannot assure you that another search service will not successfully offer a competitive pay-per-click advertising service. We believe it is likely that there will be additional entrants to the pay-per-click search market. These competitors will compete against Overture for affiliate arrangements and could cause Overture to enter into affiliate agreements with less favorable terms or lose affiliates or potential affiliates, which could reduce our number of click-throughs, increase the amount of revenue shared with affiliates, and reduce total revenues and thereby have a material adverse effect on our business, operating results and financial condition.

     We also compete with providers of other search related services for space on the search results page, including, among others, AltaVista, Espotting Media, Inc., Fast Search & Transfer ASA, Google, Inc., Inktomi, Infospace and LookSmart, Ltd.

     Our affiliates face competition for user traffic within the search marketplace, which affects the number of paid introductions on our service. If the users of these affiliates prefer the services offered by the affiliates’ competitors with whom we do not have a relationship, the businesses of our affiliates may suffer, which may in turn have a material adverse effect on our business, operating results and financial condition. In addition, many of our affiliates compete with one other, and this may make it difficult for us to develop some affiliate relationships.

     We also compete with providers of pay-per-click search services and other search services, Internet service providers, other Web sites and advertising networks such as DoubleClick, Inc. and 24/7 Media, Inc., as well as traditional offline media such as television, radio and print and direct marketing companies, for a share of advertisers’ total advertising budgets. Accordingly, Overture may face increased pricing pressure for the sale of advertisements and direct marketing opportunities, as well as a decrease in demand for the Overture service, which could have a material adverse effect on our business, operating results and financial condition.

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

EMPLOYEES

     Overture had 876 full-time employees as of December 31, 2002. As of December 31, 2002, 226 of Overture’s employees were engaged in technical operations and product development, 483 in marketing, sales and service and 167 in finance, administration and operations. Marketing, sales and service employees include customer service representatives, salespeople, sales administration personnel, marketing and communications personnel and creative services personnel.

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AVAILABLE INFORMATION

     We file the required reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934. These reports include Overture’s annual report on Form 10-K, quarterly financial reports on Form 10-Q, and current reports on Form 8-K. This information is maintained on our Internet site as soon as practical after it is electronically filed with the SEC and is available free of charge at our site at http://www.overture.com.

Item 2. Properties

     Our headquarters are located in a leased office complex located in Pasadena, California, which aggregates approximately 116,000 square feet. We also lease space in San Mateo and Carlsbad, California and New York in the United States; United Kingdom; Germany; France; Ireland; Japan and South Korea.

Item 3. Legal Proceedings

     Overture is currently in separate litigations with Google and FindWhat in which Overture is alleging that these parties infringe our U.S. Patent No. 6,269,361 (“the ‘361 patent”) entitled “System And Method For Influencing A Position On A Search Result List Generated By A Computer Network Search Engine.” The ‘361 patent protects various features and innovations relating to bid-for-placement products and Overture’s Pay-For-Performance search technologies, including our DirecTraffic Center account management system and tools. In each litigation, the respective parties, Google and FindWhat, have alleged invalidity and unenforceability of the ‘361 patent. When the validity and enforceability of the ‘361 patent is determined, in either litigation, that determination may have a material effect on our competitive position.

     The complaint against FindWhat was filed on January 25, 2002, in the United States District Court for the Central District of California. The lawsuit charges FindWhat with willful infringement of the ‘361 patent. Overture also seeks a permanent injunction against FindWhat, an award of increased damages, and an award of attorney’s fees, costs and expenses. Also on January 25, 2002, FindWhat served Overture with an amended complaint filed in the United States District Court for the Southern District of New York for declaratory judgment of invalidity, unenforceability and non-infringement relating to our ‘361 patent. On February 13, 2003, the New York Court ordered FindWhat’s declaratory judgment action to be transferred to the Central District of California.

     The complaint against Google was filed on April 23, 2002 in the United States District Court for the Northern District of California. The lawsuit charges Google with willful infringement of the ‘361 Patent. Overture also seeks a permanent injunction against Google, an award of increased damages, and an award of attorney’s fees, costs and expenses. On June 7, 2002, Google filed its answer to the Overture complaint, denying that it infringes the ‘361 Patent and alleging counterclaims of non-infringement, invalidity and unenforceability relating to the ‘361 Patent. The parties continue to move through the discovery process. A hearing regarding the interpretation of the claims contained in the ‘361 Patent (commonly referred to as a “Markman” hearing) currently is scheduled for early August.

     Overture is a defendant in five trademark infringement actions (JR Cigar, Mark Nutritionals, PlasmaNet, Pets Warehouse and Shar Products). The plaintiffs in these cases allege that they have trademark rights in certain search terms and that Overture violates these rights by allowing competitors of the plaintiffs to bid on these search terms. The amount of damages that are claimed and, if awarded, in one or more of these lawsuits might have a material effect on our results of operations, cash flow or financial position. We believe that we have meritorious defenses to liability and damages in each of these lawsuits and we are contesting them vigorously. If Overture were to incur one or more unfavorable judgments that in themselves are not material, or if there were a development in the law in a similar case to which we are not a party that was negative to Overture’s position, we might as a result decide to change the general manner in which we accept bids on certain search terms and this change might have a material adverse effect upon the results of operations, cash flows or our financial position.

The following sets forth the details concerning the five trademark cases that have been filed against Overture based on its acceptance of bids on certain search terms. The plaintiffs in each seek money damages, including attorney’s fees and costs.

Date Instituted	Plaintiff	Venue
October 2, 2000	800-JR-Cigar, Inc.	United States District Court for the District of New Jersey
January 28, 2002	Mark Nutritionals*	United States District Court for the Western District of Texas
April 23, 2002	PlasmaNet, Inc.	United States District Court for the Southern District of New York
October 8, 2002	Robert Novak, doing business as Pets Warehouse and PetsWarehouse.com	United States District Court for the Eastern District of New York
January 2, 2003	Shar Products Company	United States District Court for the Eastern District of Michigan

* In September 2002, Mark Nutritionals filed for protection under Chapter 11 of the bankruptcy code, and in February 2003, the U.S. Trustee moved to convert the filing to Chapter 7 of the bankruptcy code.

     The following sets forth details regarding other litigation, which may be material to Overture.

     On June 19, 2001, InternetFuel.com, Inc. filed a complaint against Overture in the Superior Court of the State of California for the County of Los Angeles. The complaint alleges that Overture wrongfully terminated an agreement pursuant to which InternetFuel participated in Overture’s affiliate program and that Overture did not properly account for monies owed under that agreement. The complaint also alleges libel for messages allegedly placed by Overture on an Internet forum, and it contains claims of unfair business practices. The complaint seeks, among other remedies, monetary damages for the value of the terminated agreement and for alleged harm to InternetFuel’s reputation, punitive and exemplary relief and an injunction against alleged unfair business practices. In December 2001, Overture successfully moved the court to transfer the case to arbitration. InternetFuel.com thereafter supplemented its claims, alleging fraud under California law.

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     This matter was arbitrated in late December 2002 and early January 2003. On January 10, 2003, the arbitrator issued an interim award. Although the arbitrator found in Overture’s favor on InternetFuel’s claims for fraud and unfair business practices, the arbitrator found for InternetFuel on the breach of contract claim and awarded InternetFuel approximately $8.7 million. On January 16, 2003, InternetFuel filed an application with the arbitrator seeking approximately $840,000 in pre-judgment interest on the award. On January 28, 2003, Overture filed its opposition to InternetFuel’s request for pre-judgment interest. InternetFuel is also seeking to recover certain costs incurred during the litigation, none of which have been specified to date. Overture filed its statement opposing recovery of those costs. Overture disagrees with the arbitrator’s breach of contract award and is currently considering all of its available legal options.

     On July 12, 2001, the first of several purported securities class action lawsuits was filed in the United States District Court, Southern District of New York against certain underwriters involved in Overture’s initial public offering, Overture, and certain of Overture’s current and former officers and directors. The Court consolidated the cases against Overture into case number 01 Civ. 6339. Plaintiffs allege, among other things, violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 involving undisclosed compensation to the underwriters, and improper practices by the underwriters, and seek unspecified damages. Similar complaints were filed in the same court against numerous public companies that conducted initial public offerings of their common stock since the mid-1990s. All of these lawsuits were consolidated for pretrial purposes before Judge Shira Scheindlin. On April 19, 2002, plaintiffs filed an amended complaint, alleging Rule 10b-5 claims of fraud. On July 15, 2002, the issuers filed an omnibus motion to dismiss for failure to comply with applicable pleading standards. On October, 8, 2002, the Court entered an Order of Dismissal as to all of the individual defendants in the Overture IPO litigation, without prejudice. On February 19, 2003, the Court denied the motion to dismiss the Rule 10b-5 claims against Overture. Overture continues to deny the allegations against it, believes that it has meritorious defenses to the amended complaint, and intends to contest the allegations vigorously.

     On January 31, 2002, a complaint was filed against Overture as a result of its acquisition in May 2000 of AuctionRover.com, Inc., and other defendants in North Carolina Superior Court by an individual, Paul Rony, relating to alleged trade secrets concerning interaction with Internet auction Web sites. The causes of action alleged against Overture include misappropriation of trade secrets, quantum meruit, and constructive trust. The parties are in the early phase of the discovery process. Overture believes that it has meritorious defenses to the allegations and is contesting the allegations vigorously.

     On February 20, 2002, Overture filed a complaint against Did-It.com, Inc. for trespass, unfair competition and violations of the Computer Fraud and Abuse Act. In response to Overture’s complaint, on June 14, 2002, Did-It filed a counterclaim against Overture alleging federal and state antitrust violations, violations of the Unfair Trade Practices Act, fraud and deceit, negligent misrepresentation, false and misleading advertising, unfair competition, interference with contract and prospective economic advantage and violations of California Civil Code Section 1812.600, et.seq. On August 7, 2002, Overture filed a motion to dismiss various claims contained in Did-It’s counterclaim, including claims for antitrust violations. On August 30, 2002, Did-It filed its first amended counterclaim, which omitted some of the antitrust causes of action contained in its initial counterclaim. On October 2, 2002, Overture filed its answer to Did-It’s first amended counterclaim. The parties are entering the early phase of discovery. Overture believes that it has meritorious defenses to the allegations and is contesting the allegations vigorously.

     We may also be subject to litigation brought against us in the ordinary course of business.

Item 4. Submission of Matters to a Vote of Security Holders

     None.

EXECUTIVE OFFICERS OF THE REGISTRANT

     Information required by Item 10 of Form 10-K with respect to executive officers of Overture is set forth below. The following table sets forth certain information with respect to the executive officers of Overture as of January 31, 2003.

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     Ted Meisel has served as a Director and as Chief Executive Officer since February 2000 and he has served as President since May 1999. From December 1998 until January 2000, he also served as Chief Operating Officer. From April 1996 to November 1998, he served in a variety of roles at Ticketmaster Online-CitySearch, Inc. (formerly CitySearch, Inc.), an online provider of city guides and live-event ticketing, most recently as Vice President of the Products and Technology Group. From November 1991 to March 1996, he worked at McKinsey & Company, a management-consulting firm, most recently as an Engagement Manager. Mr. Meisel holds a B.A. in History from Dartmouth College and a J.D. from Stanford Law School.

     Jaynie Studenmund has served as Chief Operating Officer since January 2001. From February 2000 to December 2000, Ms. Studenmund was the President and Chief Operating Officer for PayMyBills, a leading Internet bill management company, where she was responsible for all line, technology, operations and staff functions. From 1997 to 1998, she was the Executive Vice President for Retail Banking at Home Savings of America, and from 1996 to 1997, served as an Executive Vice President for Retail Banking at Great Western Bank. From 1991 to 1996, Ms. Studenmund served as an Executive Vice President at First Interstate Bank of California. Ms. Studenmund has a B.A. in Economics from Wellesley College and a M.B.A. from Harvard Business School.

     Todd Tappin has served as Chief Financial Officer since October 1998. From March 1992 to October 1998, Mr. Tappin served as Senior Vice President of Finance for News Corp.-Twentieth Century Fox, where he oversaw all Finance, Strategic Planning and Business Development for the Home Entertainment and Interactive Divisions, and as the General Manager of Twentieth Century Fox’s Home Entertainment Division in Canada. Mr. Tappin began his professional career as a certified public accountant at Deloitte, Haskins and Sells. He holds a B.S. in Business from the University of Colorado.

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

     Our common stock has been quoted on the Nasdaq National Market since our initial public offering on June 18, 1999 and currently trades under the symbol “OVER.” From June 18, 1999 to October 7, 2001, our common stock was quoted under the symbol “GOTO.” In conjunction with our name change from GoTo.com, Inc. to Overture Services, Inc., our common stock began trading under the symbol “OVER” on October 8, 2001. Prior to June 18, 1999, there was no public market for our common stock. According to records of our transfer agent, there were approximately 424 stockholders of record as of February 24, 2003 and we believe there are a substantially greater number of beneficial holders. The following table sets forth the high and low bid prices of our common stock as reported on the Nasdaq National Market for the periods indicated:

     We have not paid dividends and do not anticipate declaring dividends on our common stock in the foreseeable future.

Securities Authorized for Issuance Under Equity Compensation Plans

     Information for our equity compensation plans in effect as of December 31, 2002 is as follows (amounts in thousands, except per share amounts):

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     The equity compensation plan not approved by Overture security holders was assumed in conjunction with the Company’s acquisition of Cadabra. This plan was approved by Cadabra shareholders prior to the Company’s acquisition.

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Item 6: Selected Consolidated Financial Data

     The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements appearing elsewhere in this Form 10-K. The statements of operations data set forth below for the years ended December 31, 2002, 2001, and 2000 and the balance sheet data at December 31, 2002 and 2001 are derived from our audited financial statements included elsewhere in this Form 10-K. Certain reclassifications have been made in prior years’ financial statements to conform to classifications used in the current year. The historical results are not necessarily indicative of results to be expected for any future period.

(a)

See Note 1 of Notes to the Financial Statements for an explanation of the determination of the number of shares used in computing per share data for the years ended December 31, 2002, 2001 and 2000.

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QUARTERLY RESULTS OF OPERATIONS

     The following table sets forth certain unaudited consolidated quarterly statement of operations data for the eight quarters ended December 31, 2002. These unaudited consolidated financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly Overture’s financial position, results of operations and cash flows for the periods shown.

     The consolidated quarterly data should be read in conjunction with our audited consolidated financial statements and the notes to such statements appearing elsewhere in this report. The results of operations for any quarter are not necessarily indicative of the results of operations for any future period.

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IN ADDITION TO HISTORICAL INFORMATION, THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS, INCLUDING STATEMENTS RELATED TO THE EXPECTED GROWTH OF OUR AFFILIATE PROGRAM, THE AMOUNT OF TRAFFIC THAT WILL BE DIRECTED TO US FROM OUR AFFILIATES IN THE FUTURE, THE TIMING AND AMOUNT OF ANY INCREASE IN OUR AVERAGE PRICE PER PAID INTRODUCTION, CONTINUED PROFITABILITY, THE TIMING AND AMOUNT OF OUR NUMBER OF PAID INTRODUCTIONS, THE AMOUNT OF FUTURE ADVERTISER SPENDING WITH OVERTURE, THE AMOUNT OF FUTURE TRAFFIC ACQUISITION COSTS AS A PERCENTAGE OF REVENUE, PLANNED ACQUISTIONS AND DEVELOPMENT OF SERVICES ACQUIRED IN SUCH ACQUISITIONS, INTERNATIONAL EXPANSION, LIQUIDITY, GROWTH IN THE NUMBER OF ADVERTISERS, FLUCTUATION IN THE PRICE OF OUR COMMON STOCK, CHANGES IN OUR QUARTER-TO-QUARTER FINANCIAL RESULTS, SEASONAL EFFECTS AND FUTURE COMPETITION. WE USE WORDS SUCH AS “ANTICIPATES,” “BELIEVES,” “PLANS,” “EXPECTS,” “FUTURE,” “INTENDS” AND SIMILAR EXPRESSIONS TO IDENTIFY THESE FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, AS WELL AS ASSUMPTIONS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFLECTED IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE ACTUAL RESULTS TO DIFFER INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTIONS ENTITLED “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” AND “RISKS THAT COULD AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.” READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH REFLECT MANAGEMENT’S OPINIONS ONLY AS OF THE DATE HEREOF. OVERTURE UNDERTAKES NO OBLIGATION TO REVISE OR PUBLICLY RELEASE THE RESULTS OF ANY REVISION TO THESE FORWARD-LOOKING STATEMENTS.

OVERVIEW

     Overture Services, Inc. is the global leader in Pay-For-Performance search (also known as paid search) on the Internet. Overture’s search service is comprised of advertiser generated listings, which are screened for relevance and accessed by consumers and businesses through Overture’s affiliates, a network of Web properties that have integrated Overture’s search service into their sites or that direct user traffic to Overture’s own site. In some cases, consumers and businesses access our search listings directly at our site. The search listings are ranked by the advertisers’ bid; the higher the bid, the higher the ranking. Advertisers pay Overture the bid price for clicks on the advertisers’ search listing (also known as a paid introduction, click-through or a paid click). As of December 31, 2002, Overture and its wholly owned subsidiaries, operated the Overture service in the United States, United Kingdom, Germany, France and Japan. Subsequent to the end of the year, Overture announced its intention to operate its service in South Korea, Italy, Spain, and other European markets.

     Overture was incorporated on September 15, 1997 in the state of Delaware and officially launched its service on June 1, 1998. On October 8, 2001, we changed our corporate name from GoTo.com, Inc. to Overture Services, Inc. and changed our Nasdaq Stock Market trading symbol to “OVER.” Overture has offices in California and New York in the United States; United Kingdom; Germany; France; Ireland; Japan; and South Korea.

     On February 18, 2003, Overture announced its plans to acquire the business of AltaVista Company (“AltaVista”), a pioneer in Web search technology.

     On February 25, 2003, Overture announced its plan to acquire the Web search unit of Norway-based Fast Search and Transfer (“Fast”), a developer of search and real-time filtering technologies.

     AltaVista and Fast both use advanced algorithmic search technology to crawl the Web and return relevant search results in response to users’ queries. We believe these technologies complement our own market-leading technology in commercial search and will enhance our core Pay-For-Performance search business as well as allow us to develop new products and services for our advertisers and affiliates.

International Expansion

     We launched our search service in the United Kingdom in November 2000, our German language search service in February 2002, our service for France in September of 2002 and our service for Japan in December 2002. We anticipate launching our service in South Korea, Italy, Spain and other European markets in 2003. We expect our international expansion will require continued

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investment to build internal infrastructure and grow our advertiser and affiliate bases overseas. We expect to incur losses from our international operations of approximately $25 million to $30 million for the fiscal year 2003.

Acquisitions

     On February 18, 2003, we signed an agreement subject to customary closing conditions with AltaVista, a provider of search services and technology, to acquire AltaVista’s business for $60.0 million in cash and approximately $80.0 million in stock.

     On February 25, 2003, Overture announced its plan to acquire the Web search unit of Norway-based Fast Search and Transfer (“Fast”), a developer of search and real-time filtering technologies, for $70.0 million in cash, plus a potential performance-based cash incentive payment of up to $30 million over three years.

     We expect that the development of these Web search product lines will require some investment and expect to incur losses from these Web search product lines following the proposed acquisitions of approximately $13 million to $15 million for the fiscal year 2003.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

     Revenue. We generate revenue, in the amount paid by the advertiser, primarily when a user clicks on an advertiser’s listing. We refer to these clicks as paid introductions. Revenue is recognized when earned based on paid introduction activity to the extent that the advertiser has deposited sufficient funds with us or collection is probable. Revenue also consists of listing service fees and banner advertising, which together constituted less than 1% of our revenue for the years ended December 31, 2002 and 2001. Banner advertisement revenue is recognized when earned under the terms of the contractual arrangement with the advertiser or advertising agency, provided that collection is probable. Listing service revenue is recognized when we have provided all of the services under the terms of the arrangement. We have no barter transactions. Revenue was approximately $667.7 million for the year ended December 31, 2002 compared to approximately $288.1 million for the year ended December 31, 2001. The increase was the result of the growth in our key constituents, our affiliates, advertisers and consumers, which drive the number of paid introductions and average price per paid introduction.

     We believe the increase in the worldwide number of paid introductions from 1.4 billion in the year ended December 31, 2001 to 2.2 billion in the year ended December 31, 2002 was primarily due to increased search traffic from our affiliates. The average price per paid introduction increased from $0.20 during the year ended December 31, 2001 to $0.31 during the year ended December 31,

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2002, we believe, as a result of growth of our advertiser base creating increased competition for placement, account management, new product initiatives rolled out during the year and broader acceptance of paid placement. The number of advertisers increased from approximately 53,000 in December 2001 to approximately 80,000 in December 2002.

     It is difficult to forecast the future growth of the average price per paid introduction, as advertisers primarily determine the price paid. We cannot assure you that the average price per click will continue to increase and if it does increase, at what rate, or that it will not decrease from prior levels. Our growth rate and results depend on our ability to increase the price per paid introduction, the number of advertisers who use our service and the amount our advertisers spend on our service. In addition, we believe we will experience seasonality, whereby the second and third quarters of the calendar year experience relatively lower traffic than the first and fourth quarters. This seasonal effect is difficult to predict, but we believe what we experience is typical of general internet usage. Traffic from affiliates varies as we enter into new agreements and existing agreements are renewed or expire. We anticipate these variables will fluctuate, affecting our growth rate and results.

     During the year ended December 31, 2002, we earned approximately 60% of our total revenue from advertisers who received paid introductions through Overture as supplied by Microsoft (primarily msn.com and MSN Panel on Microsoft’s Internet Explorer) and Yahoo.

     Several new and renewed affiliate relationships were signed during the year ended December 31, 2002. These agreements include AltaVista, CNET, CNN, Hewlett-Packard Company, Netscape Premier Provider, United Online (NetZero and Juno), Wanadoo (which acquired Freeserve) and Yahoo Japan. Additionally, we extended the agreements of Yahoo to April 2005, the MSN Search Pane and MSN Search sites to December 2003 and December 2004 respectively in the United States, United Kingdom and Canada and also expanded the agreements to include Germany and France. Our agreement with InfoSpace was extended to March 2006. Subsequent to year end, we signed agreements with ESPN, Daum Communication, AOL Europe, MSN Japan and New.net (an Idealab company whose traffic was previously received through Applied Semantics).

     During the year ended December 31, 2002, some of our affiliate relationships ended. These agreements include Ask Jeeves in the United States, Earthlink and our U.S. search distribution relationship with America Online (including CompuServe). Our growth rate depends, in part, on increasing the number of searches and resulting click-throughs performed by users who use our service, primarily through our affiliates. If we do not renew our affiliate agreements or replace traffic lost from terminated affiliate agreements with other sources or if our affiliates’ search businesses do not grow or are adversely affected, our revenue and results of operations may be materially and adversely affected.

     Search Serving. Search serving costs consist primarily of costs associated with serving our search results, maintaining our Web site and fees paid to outside service providers that provide and manage our unpaid listings. Costs associated with serving our search results and maintaining our Web site include depreciation of Web site equipment, co-location charges for our Web site equipment, bandwidth, software license fees and salaries of related personnel. Search serving costs were approximately $32.7 million for the year ended December 31, 2002 compared to approximately $21.0 million for the year ended December 31, 2001. The increase was primarily due to an increase in the number of personnel required to support our services and increased hardware and software costs as a result of increased traffic and our international expansion efforts. We anticipate search serving costs to continue to increase as our traffic and number of advertisers increase.

     Traffic Acquisition. Traffic acquisition costs relate to payments made to our affiliates that have integrated our search service into their sites or that direct consumer and business traffic to our Web site. There are generally three economic structures of the affiliate agreements, 1) fixed payments, based on a guaranteed minimum amount of traffic delivered, which often carry reciprocal performance guarantees from the affiliates, 2) variable payments based on a percentage of our revenue or based on a certain metric, such as number of searches or click-throughs, or 3) a combination of the above. Traffic acquisition costs were approximately $384.6 million (58% of revenue) for the year ended December 31, 2002 compared to approximately $162.1 million (56% of revenue) for the year ended December 31, 2001. The increases in total traffic acquisition costs were primarily due to the increases in revenue as previously discussed. The percentage increase in the year ended December 31, 2002 compared to the year ended December 31, 2001 was primarily due to a higher mix of traffic from more prominent search destination sites, which typically receive a higher than average share of revenue. We expect total traffic acquisition costs and traffic acquisition costs as a percentage of revenues to increase to 63% to 64% during the first quarter of 2003 and continue to increase approximately 0.25% to 0.50% each quarter thereafter as a result of increased revenue, competition, industry consolidation, shifts in market share among our partner base, and international expansion. We may be obligated to make guaranteed payments to affiliates, in the future, as described below in “Liquidity and Capital Resources” which are subject to adjustment based on the performance of the affiliate or Overture relative to certain metrics. If we do

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not meet our target metrics, then guaranteed payments may be required to be paid without a corresponding increase in revenue and traffic acquisition costs as a percentage of revenue may increase.

     The following represents our top 10 continuing affiliates based on revenue (which was approximately 86% of total revenue) that we earned for the three months ended December 31, 2002 from our advertisers, who received paid introductions through Overture as supplied by these affiliates. We have more than one agreement with some affiliates. The table that follows groups such agreements together and displays them in order of expiration date of the largest agreement. The table excludes affiliates whose agreements have terminated.

     In addition to the above continuing affiliate agreements, from time to time, we engage in tests with potential affiliates for trial periods to provide paid introductions. Revenue from advertisers who receive paid introductions through Overture, as supplied during these trial periods, can be significant. In the fourth quarter, we had one such arrangement.

     The amount of traffic from each of our affiliates has varied, and we expect it will continue to vary, from quarter to quarter and year to year, sometimes significantly. Moreover, while we seek to align economic incentives, most of our affiliate agreements contain limitations and provide varying levels of discretion to the affiliate in the implementation of our service including the degree to which affiliates can integrate our services with their own services. In addition, we have been and are likely to be dependent on searches from a limited number of affiliates. Affiliates may not like implementations we enter into with other affiliates. If we are unable to replace traffic from any of our large affiliates after expiration of our contract with them or if our relationship with any of our larger affiliates deteriorates, it could seriously harm our business, financial condition and results of operations. Our agreements with affiliates vary in duration, and depending on the agreement, may be terminable upon the occurrence of certain events, including for our failure to meet certain service levels, for general breaches of agreement terms, for changes in control or in some instances, at will. Our two largest affiliates, Microsoft and Yahoo may terminate their agreements with us upon a transaction in which our ownership undergoes a change of control. If any of the foregoing termination events occur, the related agreement could terminate earlier than the expiration date, and/or we may incur additional obligations. We may not be successful in renewing any of these agreements, or if they are renewed, they may not be on as favorable terms. We may not be successful in entering into agreements with new affiliates on commercially acceptable terms. In addition, several of these affiliates may be considered potential competitors.

     Marketing, Sales and Service. Marketing, sales and service expenses consist primarily of payroll and related expenses for personnel engaged in marketing, customer service and sales functions; advertising and promotional expenditures; and cost of systems

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used to sell and serve advertisers. Marketing, sales and services expenses were approximately $55.2 million for the year ended December 31, 2002 compared to approximately $28.1 million for the year ended December 31, 2001. The increase was primarily the result of increased payroll for customer service and sales functions, increased costs associated with advertiser development, international expansion and continued investment in product quality.

     General and Administrative. General and administrative expenses consist primarily of payroll and related expenses for executive and administrative personnel; credit card processing fees; facilities; professional services, including legal; and insurance and other general corporate expenses. General and administrative expenses were approximately $75.6 million for the year ended December 31, 2002 compared to approximately $44.9 million for the year ended December 31, 2001. The increase was primarily the result of increased headcount, increased credit card processing fees due to increased revenue, increased professional fees including costs of litigation, higher insurance costs, and international expansion. We expect general and administrative expenses to increase in 2003 due to continuing international expansion and credit card processing fees (as a result of an increase in revenue), as well as an increase in legal and insurance costs.

     Product Development. Product development expenses consist primarily of payroll and related expenses for personnel responsible for development of features and functionality for our service, as well as costs incurred in the preliminary project and post-implementation stage of computer software developed for internal use. Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” (SOP 98-1) requires that costs incurred in the preliminary project and post-implementation stages of an internal use software project be expensed as incurred and that certain costs incurred in the application development stage of a project be capitalized. We capitalized internally developed software costs of approximately $3.6 million for the year ended December 31, 2002. Product development expenses were approximately $19.4 million for the year ended December 31, 2002 compared to approximately $12.8 million for the year ended December 31, 2001. The increase was primarily the result of our international expansion and investment in product quality. We expect to invest $10.0 million to $12.0 million in the development of new product lines during 2003.

     Loss on Litigation Ruling. An expense of $8.7 million relates to an unfavorable award in a dispute with a former affiliate, InternetFuel. The arbitration proceeding was in process during the fourth quarter of 2002. See Note 6 to the financial statements.

     Interest Income, Net. Interest income, net consists primarily of earnings on our cash, cash equivalents and short-term and long-term investments, net of interest expense attributable to leased equipment. Interest income, net was approximately $3.9 million for the year ended December 31, 2002 and $4.3 million for the year ended December 31, 2001. The decrease was primarily a result of a decline in interest rates.

     Other Income, Net. Other income, net was approximately $1.0 million for the year ended December 31, 2002 compared to $2.6 million for the year ended December 31, 2001. The decrease from the year ended December 31, 2001 relates to the reimbursement of legal costs associated with the settlement of litigation with MercExchange in 2001.

     Provision For Income Taxes. Provision for income taxes was approximately $21.5 million for the year ended December 31, 2002 compared to $0.9 million for the year ended December 31, 2001. We generated taxable income during the year ended December 31, 2002, however a tax provision was recorded that was less than the statutory rate due to the benefit from the release of the valuation allowance relating to deferred tax assets. As of December 31, 2001, we had net operating loss (“NOL”) carryforwards available to reduce future federal and state taxable income. These NOLs and temporary differences (between timing of the recognition on a Generally Accepted Accounting Principle basis versus a tax basis) were carried on the balance sheet as deferred tax assets. Financial Accounting Statement Standard No. 109, “Accounting for Income Taxes” (SFAS 109) requires that a valuation allowance be set up to reduce a deferred tax asset to the extent it is more likely than not that the related tax benefits will not be realized. Due to the uncertainty regarding if and when these NOLs would be utilized and temporary differences would reverse, a full valuation allowance was initially set up against the related deferred tax asset, resulting in a net zero balance for deferred tax assets, as of December 31, 2001. The valuation allowance was released during fiscal 2002 due to the expectation of future income from our ordinary and recurring operations and our assessment that the utilization of available tax deductions was more likely than not.

     We have deductions that resulted from the exercise of certain stock options and sale of certain related stock by employees. Because no book charge is recorded upon the generation of these deductions, the corresponding tax benefits are recorded directly to stockholders’ equity. However, these deductions, to the extent available, will offset taxable income upon filing Overture’s corporate income tax returns resulting in a cash benefit. In September 2002, the state of California passed legislation suspending the use of the operating loss carryforwards for the 2002 and 2003 tax years. The legislation added two years to the carryforward period for these

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losses. As a result, we were not able to utilize our California net operating loss carryforwards for the year ended December 31, 2002 against our expected current tax liabilities.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

     Revenue. Revenue was approximately $288.1 million for the year ended December 31, 2001 compared to approximately $103.1 million for the year ended December 31, 2000. The increase was the result of continued growth of our marketplace and the corresponding participants, our affiliates and advertisers.

     Search Serving Search serving costs were approximately $21.0 million for the year ended December 31, 2001 compared to approximately $13.1 million for the year ended December 31, 2000. The increase was primarily due to the increased database and hardware capacity requirements as a result of an increase in our affiliate base and corresponding number of searches, an increase in the number of personnel required to support our services and increased fees paid to outside service providers.

     Traffic Acquisition. Traffic acquisition costs were approximately $162.1 million for the year ended December 31, 2001 compared to approximately $66.4 million for the year ended December 31, 2000. The increase was primarily due to increased distribution of our search service.

     Traffic acquisition costs as a percentage of revenue were approximately 56% and 64% for the years ended December 31, 2001 and 2000, respectively. The decrease was primarily due to better margins on new or renegotiated agreements, and in cases where traffic acquisition costs were fixed and payments were guaranteed, revenue increases, which were proportionately more than the respective traffic acquisition costs, resulted in better margins.

     Marketing, Sales and Service. Marketing, sales and service expenses were approximately $28.1 million for the year ended December 31, 2001 compared to approximately $28.1 million for the year ended December 31, 2000.

     General and Administrative. General and administrative expenses were approximately $44.9 million for the year ended December 31, 2001 compared to approximately $33.8 million for the year ended December 31, 2000. The increase was the result of increased headcount and related expenses, including facilities, credit card processing fees and increased personnel-related insurance costs.

     Product Development. Product development expenses were approximately $12.8 million for the year ended December 31, 2001 compared to approximately $13.5 million for the year ended December 31, 2000. The decrease was a result of the closure of GoTo Shopping and disposition of GoTo Auctions offset by increased staffing and associated costs relating to enhancing features and functionality to our Web site and search service.

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     Amortization of Deferred Compensation and Intangibles. Certain stock options granted from inception through our initial public offering have been considered to be compensatory for financial accounting purposes. We also granted options below fair market value in 2001, which are considered compensatory. Total compensation expense resulting from stock options amounted to approximately $7.8 million. This amount represents the difference between the exercise price of the stock options and the deemed fair value of our common stock at the time of the grants or issuances, adjusted for the return of unvested options or the repurchase of restricted stock resulting from employee terminations. Compensation associated with these stock options is amortized and expensed over the applicable vesting periods using a graded methodology. Approximately $849,000 and $1.4 million were amortized and charged to operations for the years ended December 31, 2001 and 2000, respectively.

     Amortization of intangible assets were approximately $1.2 million for the year ended December 31, 2001 compared to approximately $115.6 million for the year ended December 31, 2000. The decrease was primarily due to an impairment loss in 2000 on the net assets from the acquisitions of Cadabra and AuctionRover.

     Loss on Disposition of GoTo Auctions and GoTo Shopping. On June 29, 2001, we completed a management buyout of GoTo Auctions, whereby the operating management of GoTo Auctions purchased GoTo Auctions’ assets from us. The newly formed company is called ChannelAdvisor Corporation. We received a minority stake in this new corporation and as of December 31, 2002, we retained approximately 8% of ChannelAdvisor. In connection with the management buyout, we incurred net charges for the disposition of certain assets and exit costs. The net charges were approximately $2.0 million, which included approximately $280,000 of cash termination benefits associated with the involuntary termination of 31 GoTo Auction employees. The terminations of these positions, primarily in sales and service and product development functions, were completed by June 30, 2001. The charge also included approximately $1.6 million for fixed asset write-downs and approximately $109,000 for other exit costs. These costs were included in Loss on Disposition of GoTo Auctions in the statement of operations. Cash payments were funded from operations and did not have a significantly impact on our liquidity.

     On April 30, 2001, we closed our GoTo Shopping operations and recorded a charge for restructuring and exit costs. The net charges were approximately $1.0 million, which included approximately $201,000 of cash termination benefits associated with the involuntary termination of 21 GoTo Shopping employees. The terminations of these positions, primarily in sales and service and product development functions were completed by June 30, 2001. The charge also included approximately $59,000 for non-cash termination benefits related to the acceleration of options; approximately $256,000 for fixed asset write-downs; approximately $485,000 for the remaining lease payments on a facility lease which Overture was not able to sub-lease; and other exit costs of approximately $1,000. These costs were included in the Loss on Closure of GoTo Shopping in the statement of operations. Cash payments were funded from operations and did not have a significant impact on our liquidity.

     Interest Income, net. Interest income, net was approximately $4.3 million for the year ended December 31, 2001 compared to approximately $5.8 million for the year ended December 31, 2000. The decrease was primarily due to lower interest rates and lower returns from our investments partially offset from earnings from additional cash proceeds from our follow-on offering of approximately $58.2 million received in July 2001.

     Other Income. Other income of approximately $2.6 million for the year ended December 31, 2001 consists primarily of the reimbursement for legal costs associated with the settlement of the MercExchange litigation compared to approximately $21.3 million for the year ended December 31, 2000, which consisted primarily of the settlement of litigation with The Walt Disney Company.

     Provision For Income Taxes. Although we had sufficient net operating loss carryforwards to offset its taxable income for the year ended December 31, 2001, we recorded a current tax provision equal to the alternative minimum tax for both Federal and California purposes of approximately $900,000.

LIQUIDITY AND CAPITAL RESOURCES

     Net cash provided by operating activities totaled approximately $103.7 million and $64.8 million for the year ended December 31, 2002 and 2001, respectively. The change was due primarily to operating income, tax benefit from stock options and increased accounts payable and accrued expenses partially offset by an increase in accounts receivable, prepaid expenses and other, and prepaid traffic acquisition expense during the year ended December 31, 2002. Net cash used in investing activities totaled approximately $110.4 million and $84.8 million for the year ended December 31, 2002 and 2001, respectively. The change resulted primarily from the investment of cash generated by operating activities in short-term and long-term investments and increased capital spending in the year ended December 31, 2002. Our capital expenditures for the year ended December 31, 2002 were approximately $52.0 million.

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Net cash provided by financing activities totaled approximately $21.2 million and $69.1 million for the year ended December 31, 2002 and 2001, respectively. The decrease was due primarily to our common stock offering on July 5, 2001, which resulted in net proceeds of $58.2 million.

     Our principal sources of liquidity consisted of cash, cash equivalents, short-term investments and long-term investments of approximately $250.7 million as of December 31, 2002 compared to $170.3 million as of December 31, 2001. We believe that our cash and liquid investment reserves are sufficient to sustain operations at least through the next 12 months. As of December 31, 2002, we were obligated to make guaranteed payments totaling approximately $190.5 million, $199.3 million, $25.0 million and $0.4 million for 2003, 2004, 2005 and 2006, respectively, under contracts to provide search services to our affiliates. We lease 116,000 square feet of office space for our corporate office in Pasadena, California under operating lease agreements expiring in October 2004 with an option to extend the lease for 5 years. We also lease office space in San Mateo and Carlsbad, California and New York in the United States; United Kingdom; Germany; France; Ireland; Japan; and South Korea. As of December 31, 2002, we are obligated to make total remaining office lease payments of approximately $11.7 million. Additional uses of cash in 2003 are expected to include payments for the proposed acquisitions of AltaVista of $60.0 million and Fast’s Web search unit of $70 million plus expenses and investments of $30.0 million to $40.0 million in capital expenditures.

ACCOUNTING POLICIES SUBJECT TO ESTIMATION AND JUDGMENT

     The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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 contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to income tax and marketing related agreements with our affiliates. We base our estimates on historical experience 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. Actual results may differ from these estimates under different assumptions or conditions.

     Note 1 to the Notes of the Consolidated Financial Statements of our 2002 Form 10-K describes our significant accounting policies. We believe the following accounting policies are subject to more significant judgments and estimates used in the preparation of our consolidated financial statements.

     Income Tax

     As of December 31, 2001, we had domestic net operating loss (“NOL”) carryforwards of approximately $76.1 million and $54.7 million available to reduce future federal and state taxable income, respectively. A portion of these NOLs was attributable to employee stock option deductions (“stock option NOLs”), the benefit from which was allocated to additional paid in capital. All but $2.7 million of the domestic federal NOL carryforwards were utilized in 2002. Our ability to utilize state NOLs in the year ended December 31, 2002 was restricted by California legislation that restricted NOL usage for 2 years.

     In addition, Overture has additional foreign NOL carryforwards available to reduce future foreign income taxes. These NOLs constitute a deferred tax asset. Financial Accounting Statement Standard No. 109, “Accounting for Income Taxes” (SFAS 109) requires that a valuation allowance be set up to reduce a deferred tax asset to the extent it is more likely than not that the related tax benefits will not be realized. At December 31, 2001, due to the uncertainty regarding if and when these NOLs would be utilized, a full valuation allowance was set up against the related deferred tax asset.

     SFAS 109 indicates that all available evidence, both positive and negative, should be identified and considered in making a determination as to whether it is more likely than not that all or some portion of the deferred tax asset will be realized. Examples of positive evidence include:

	•		Strong earnings history and/or evidence that indicating that the losses generating the NOL carryforward is not a continuing condition
	•		Existing contracts or sales backlog that will produce sufficient taxable income to realize the deferred tax asset based on existing sales prices and cost structures; and

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•

An excess of appreciated asset value over the tax basis of net assets in an amount sufficient to realize the deferred tax asset.

Examples of negative evidence include but are not limited to the following:

	•		A history of operating loss, cumulative loss in recent years, or tax credit carryforwards expiring unused
	•		Losses expected in early future years (by a currently profitable entity)
	•		Unsettled circumstances that, if unfavorable resolved, could adversely affect future operations on a continuing basis

     Currently, we believe that it is more likely than not that our foreign NOLs will be realized. Therefore, we have determined that the related valuation allowance to reduce the deferred tax asset associated with the foreign NOLs should not be maintained. The impact of this decision resulted in a current year tax benefit of $3.0 million. If our international operations do not continue to perform as expected, this would be negative evidence that could require us to re-evaluate this position.

Marketing-Related Agreements with our Affiliates

     Overture has arrangements with two affiliates to obtain additional marketing-related services from these affiliates. Overture believes that the pricing of the marketing-related services were determined at arms-length and represent the fair value of the services received by Overture and therefore the costs are appropriately recorded as marketing costs in the line item, “Marketing, Sales and Service” in the Statements of Operations. If it were determined that the fair value of these marketing-related services was less than the amounts paid by Overture and these costs were more closely related to traffic provided by affiliates, these costs would be considered an expense paid to affiliates and therefore recorded on the line item, “Traffic Acquisition” in the Statements of Operations. If 100% of these marketing expenses were deemed traffic acquisition costs, this would have increased traffic acquisition costs as a percentage of revenue by less than 1% for the year ended December 31, 2002.

Loss Contingencies

     We are a defendant in several litigation matters. Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies” requires an estimated loss to be accrued when a loss is both probable and can be reasonably estimated. We analyze our litigation for probability and estimation of loss based on an analysis of potential results, considering a combination of litigation and settlement strategies in consultation with outside counsel.

RISKS THAT COULD AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS

IN ORDER FOR OUR BUSINESS TO BE SUCCESSSFUL, WE MUST CONTINUE TO MAINTAIN AND GROW OUR ADVERTISER, CONSUMER AND BUSINESS, AND AFFILIATE CONSTITUENCIES

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

     Our ability to increase the volume of transactions on our service and the amounts bid by our advertisers is dependent upon building and maintaining a substantial base of advertisers and consumers. Many potential advertisers have only limited experience advertising on the Internet and have not devoted a significant portion of their advertising expenditures to Internet advertising. Advertising through priority placement on our services in particular has been introduced only recently, and we cannot predict the level of its acceptance as an advertising medium. Periodically, we introduce new initiatives, service programs or rules that change the bidding process, search term selection rules and search methodology or other components of our services. Advertisers may dislike the effect of these new initiatives and programs which may cause advertisers to cease advertising with us or reduce their spend. Advertiser attrition or reduction in advertiser spend could have a material adverse effect on our business. Our affiliates may have specific rules that prohibit some advertisers from participating in our services, which may affect our ability to maintain and grow our advertiser base. In addition, our services may not achieve significant acceptance by consumers. Among other things, because our services prioritize search results based on advertising bids associated with keywords rather than other search and retrieval approaches, consumers may

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not use our service because they perceive our results to be less objective or not as relevant than those provided by other search methods. Failure to achieve and maintain a large and active base of advertisers and consumers could have a material adverse effect on our business, operating results and financial condition.

     We believe that our success in penetrating our target markets depends in part on our ability to further develop and maintain relationships with affiliates, which provide their users with our services on their sites or direct their traffic to our Web site. We believe these relationships are important to facilitate broad market acceptance of our services and enhance our sales. Our ability to attract users to our services is dependent upon the growth of our affiliate network, which is new and unproven. Our success depends in part on the success of, and our relationships with our affiliates. As part of our ongoing relationship with our affiliates, we may introduce new services, new implementation and/or new variations of our service our affiliates may not want. In addition, our affiliates may not regard us as significant for their own businesses. Therefore, they could reduce their commitment to us or terminate their respective relationships with us, pursue other partnerships or relationships, or attempt to develop or acquire products or services that compete with our services. Our success also depends in part on the success of our affiliates and in particular their ability to generate search traffic. New third party software developments and competition from companies with whom we do not have a relationship may lead to deterioration of searches supplied to us by our affiliates. If we are unable to successfully develop and maintain relationships with affiliates and/or our affiliates search business deteriorates, our business, operating results and financial condition will be materially and adversely affected.

     Since we rely on a limited number of affiliates for our paid introductions, consolidation among affiliates or potential affiliates, or an acquisition of an affiliate by a competitor could harm our operating results, cause us to lose our relationship with an affiliate, and reduce our competitive position. For example, if a third party that has a pre-existing relationship with one of our search competitors acquires one of our affiliates, we may lose our relationship with our affiliate in favor of the competitor. In some cases, these third parties have exclusive relationships with our competitors that would prohibit our affiliate from continuing a relationship with us after they are acquired. If one of our existing affiliates were to combine with another one of our affiliates, it would likely increase the negotiating power of these affiliates relative to us, and as a result, our financial results may suffer. We believe that consolidation among Internet sites will continue in the future, particularly as smaller firms have difficulty raising capital in a poor economic environment. This consolidation particularly among search sites, coupled with the recent increase in competition, may pressure our margins, which would harm our business.

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

     The consumers and businesses who conduct searches on our service come primarily from a limited number of sources. Our sources for users conducting searches are members of our affiliate network, including portals, browsers, and other affiliates and our Web site. In any given month, we typically depend upon one or a few of these sources for a significant amount of searches conducted on our service. Revenue is generated from paid introductions on advertisers’ listings and, generally, the more traffic from any given source, the greater number of paid introductions we will generate.

     During the year ended December 31, 2002, we earned approximately 60% of our total revenue from advertisers who received our paid introductions as supplied by Microsoft (primarily msn.com and MSN Panel on Microsoft’s Internet Explorer) and Yahoo. Unfavorable changes in our relationship with these affiliates (including, but not limited to a change in implementation or placement permitted under our agreements with this affiliates) or loss of either relationship would materially and adversely affect our revenue and results of operations.

     The amount of traffic from each of our affiliates has varied, and we expect it will continue to vary, from quarter to quarter, sometimes significantly. Moreover, while we seek to align economic incentives, most of our affiliate agreements contain limitations and provide varying levels of discretion to the affiliate in the implementation and placement of our service. In addition, we have been, and are likely to be, dependent on searches from a limited number of affiliates. Affiliates may not like implementations we enter into with other affiliates. If we are unable to replace traffic from any of our large affiliates after expiration of our contract with them or if our relationship with any of our larger affiliates deteriorates, it could seriously harm our business, financial condition and results of operations. Our agreements with our affiliates vary in duration, and depending on the agreement, may be terminable upon the occurrence of certain events, including for our failure to meet certain service levels, for general breaches of agreement terms, for changes in control in certain circumstances, or in some instances, at will. If any of the foregoing termination events occur, the related agreement could terminate earlier than the expiration date, and/or we may incur additional obligations. Microsoft, Wanadoo and Yahoo may terminate their agreements upon a change of control in the ownership. We may not be successful in renewing any of our affiliate agreements, or if they are renewed, any new agreement may not be on as favorable terms. We depend on our affiliates for

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searches and the loss of any of these affiliates could harm our business, ability to generate revenue and operating results. In addition, we may not be successful in entering into agreements with new affiliates on commercially acceptable terms.

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

     We face competition in three principal areas: (i) distribution of our services; (ii) demand for our services on our affiliates’ websites; and (iii) usage of our services by advertisers.

     We compete with companies that provide pay-per-click advertising services that are similar to ours. These companies include Espotting Media, Inc., FindWhat, Google, PRIMEDIA (About.com) and Terra Lycos. In addition, we cannot assure you that another search service will not successfully offer a competitive pay-per-click advertising service. We believe it is likely that there will be additional entrants to the pay-per-click search market including affiliates who are members of the Overture networks. These new competitors will likely compete against us for affiliate arrangements and could cause us to enter into affiliate agreements with less favorable terms or lose affiliates or potential affiliates, which could reduce our number of click-throughs, increase the amount of revenue shared with affiliates, and/or total revenues and thereby have a material adverse effect on our business, operating results and financial condition.

     We also compete with providers of other search related services for space on the search results page, including, among others, AltaVista, Espotting Media, Inc., Fast Search &Transfer ASA, Google, Inc., Inktomi, Infospace and LookSmart, Ltd.

     Our affiliates face competition for consumer traffic within the search marketplace, which affects the number of paid click-throughs on our service. If the consumers of these affiliates prefer the services offered by the affiliates’ competitors, with whom we do not have a relationship, the businesses of our affiliates may suffer, which may in turn have a material adverse effect on our business, operating results and financial condition. In addition, many of our affiliates compete with one other, and this may make it difficult for us to develop some affiliate relationships.

     We also compete with providers of pay-per-click search services, other search service, internet search providers, other Web sites and advertising networks such as DoubleClick, Inc. and 24/7 Media, Inc., as well as traditional offline media such as television, radio and print and direct marketing companies, for a share of advertisers’ total advertising budgets. Accordingly, we may face increased pricing pressure for the sale of advertisements and direct marketing opportunities, as well as decrease in demand for the Overture service which could have a material adverse effect on our business, operating results and financial condition.

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

WE DEPEND ON THE GROWTH OF THE INTERNET AND INTERNET INSTRASTRUCTURE FOR OUR FUTURE GROWTH

     We are completely dependent on online advertising and consumer search services. The failure of the Internet to continue to develop as a commercial and business medium would have a material adverse effect on our business, operating results and financial condition. The widespread acceptance and adoption of the Internet by traditional businesses for conducting business and advertising is likely only if the Internet provides these businesses with greater efficiencies and improvements.

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

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OUR PENDING ACQUISITIONS OF ALTAVISTA, FAST’S WEB SEARCH UNIT AND OTHER POTENTIAL ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE AND ADVERSELY AFFECT OUR OPERATING RESULTS

     We recently announced the acquisition of Keylime Software and our intent to acquire AltaVista and Fast’s Web search unit. In addition, we may make investments in or acquire other complementary products, services, technologies and businesses. These acquisitions and investments could disrupt our ongoing business, distract our management and employees and increase our expenses. Acquisitions may expose us to additional contingent liabilities. If we acquire a company, we could face difficulties in assimilating that company’s personnel and operations. In addition, the key personnel of the acquired company may decide not to work for us. Acquisitions of additional services or technologies also involve risks of incompatibility and the need for integration into our existing services and marketing, sales and support efforts. Previous acquisitions have not been successful. Our acquisition of AltaVista and Fast’s businesses will expand our business to algorithmic search, which although complementary to our existing business, requires different technological and marketing capabilities and may contain different risks from those of our core business. In addition, the acquisitions will add approximately 300 employees in several countries. Even assuming successful integration, we expect that the acquisitions will not be accretive to our earnings until mid-2004. We cannot assure you that we will be able to effectively integrate and operate the AltaVista and Fast business.

     If we finance the acquisitions by issuing equity securities, this would dilute our existing stockholders. Any amortization of intangible assets, or other charges resulting from the costs of these acquisitions could have a material adverse effect on our business, operating results and financial condition. In addition, we may pay more for an acquisition than an acquired products, services, technology or business is ultimately worth.

OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS BECAUSE OF MANY FACTORS

     We believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. Our operating results have varied widely in the past, and we expect that they will continue to vary widely from quarter to quarter due to variability in a number of factors, including:

	•		demand for our services by advertisers, consumers and businesses, including the number of searches performed by consumers and the rate at which they click-through to paid search results;
	•		prices paid by advertisers using our services, which in large part are not determined by Overture;
	•		decrease in traffic from our affiliates for any reason, including loss of our agreements with affiliates or reduction in demand for the services of affiliates or implementation and placement of our services by our affiliates, over which we may have limited or no control;
	•		our costs of attracting consumers and businesses to use our services, including traffic acquisition costs;
	•		costs related to agreements with affiliates;
	•		ability to protect our business model from competitors;
	•		the percentage of our search listings that are bidded listings;
	•		our ability to maintain and grow our affiliate program including amendments, extensions or new affiliate agreements;
	•		seasonal fluctuations in the use of our service, typical of our industry, in which online traffic has typically been lower in the second and third quarters of the calendar year;
	•		the amount and timing of operating costs and capital expenditures relating to expansion of our operations;
	•		costs and delays in introducing any new services and improvements to existing services;

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	•		our ability to successfully introduce new products or services;
	•		changes in the growth rate of Internet usage and acceptance by users of e-commerce;
	•		technical difficulties, system failures, system security breaches, or Internet downtime, some of which may allow affiliates to terminate their agreements with us;
	•		government regulations related to the Internet;
	•		our ability to upgrade and develop our information technology systems and infrastructure;
	•		costs related to any acquisitions or dispositions of technologies or businesses;
	•		general economic conditions, as well as those specific to the Internet and related industries; and
	•		ability to expand and compete internationally.

OUR STOCK HAS BEEN VOLATILE AND MAY CONTINUE TO BE VOLATILE IN THE FUTURE, WHICH MAY LIMIT OUR OPERATING FLEXIBILITY

     Historically, our stock price has been extremely volatile and we cannot make assurances that the price of our common stock will not decline or be extremely volatile in the future. It is likely that, in some future quarter, our operating results may be below historical levels, and/or the expectations of public market analysts and investors and, as a result of these or other factors, the price of our common stock may fall and/or significantly fluctuate.

     Since our initial public offering in June 1999, the per share trading price of our common stock has ranged from an intra-day high of $114.50 on November 15, 1999 to an intra-day low of $4.81 on December 21, 2000. Our stock price may change due to a variety of factors, including those described above in the risk factor entitled “Our Quarterly Financial Results Are Subject To Significant Fluctuations Because Of Many Factors.” In addition, short-term changes in our stock price may have little relationship to our financial results. We have in the past experienced significant declines in our stock price following announcements of changes in affiliate relationships, even when the particular affiliate relationship did not provide significant paid introductions or result in a significant amount of revenue from advertisers who received paid introductions through Overture as supplied by such affiliates. If our stock price is low, it may limit our ability to raise capital or pursue strategic opportunities, such as acquisitions. In addition, it may reduce the incentive value of our stock options and harm employee morale.

OUR LIMITED OPERATING HISTORY MAKES PLANNING FOR OUR FUTURE OPERATIONS MORE DIFFICULT

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

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

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

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that we will be able to successfully attract and retain a sufficient number of qualified personnel. Our planned acquisitions of AltaVista and Fast’s Web search unit will require us to effectively expand our infrastructure.

     In periods of significant growth, the hardware and software used to operate our services may become obsolete faster than originally anticipated, and we may be required to replace this hardware or software. As a result, we may incur additional expenses to acquire new systems and may incur unplanned charges for impairment or write-offs of obsolete assets. In addition, as our service grows and new features and services are added to our existing software platforms, at some point it may require us to conduct a more significant redesign of our software architecture. Such a redesign could be costly and any significant software redesign presents additional risks of errors or systems failures.

WE FACE NEW AND ADDITIONAL RISKS IN INTERNATIONAL MARKETS AND WE MAY BE UNABLE TO SUCCESSFULLY EXECUTE OUR BUSINESS MODEL IN INTERNATIONAL MARKETS

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

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

	•		lower per capita Internet usage in many countries abroad, due to a variety of causes such as lower disposable incomes, lack of telecommunications and computer infrastructure and questions regarding adequate online security for e-commerce transactions;
	•		relatively small Internet markets in some countries, which may prevent us from aggregating sufficient traffic and advertising revenues and scaling our business model in those countries;
	•		lower usage of the Internet for e-commerce transactions, thus limiting the number of advertisers that use our service;
	•		entering into affiliate agreements with guaranteed minimum payments that may exceed our revenues during the initial stage of the market’s development;
	•		our potential inability to aggregate a large amount of Internet traffic and find and develop relationships with international advertisers, consumers and businesses, and affiliates;
	•		competition in international markets from a broad range of competitors, including but not limited to, Espotting, Google, LookSmart and other United States and foreign search engines, content aggregators and portals, some of which have greater local experience than we do;
	•		click-through rates and price per paid introduction in international markets may not be sufficient to recoup our costs;
	•		difficulties in recruiting qualified and knowledgeable staff and in building locally relevant products and services, which could prevent us from aggregating a large advertiser base;
	•		foreign laws, which may vary country by country, which may impact how we conduct our business and provide search results
	•		higher costs of doing business in foreign countries, including different employment laws;
	•		trade barriers and unexpected changes and differences in regulatory, tax and legal requirements applicable to Internet services;

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