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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

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

For the quarterly period ended June 30, 2003

Commission File Number 000-26365

OVERTURE SERVICES, INC.

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

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

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

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

     The number of outstanding shares of the registrant’s common stock as of the close of business on July 30, 2003 was 64,085,972.

OVERTURE SERVICES, INC.

TABLE OF CONTENTS

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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

OVERTURE SERVICES, INC.

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

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

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OVERTURE SERVICES, INC.

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

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

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OVERTURE SERVICES, INC.

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

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

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OVERTURE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. THE COMPANY, BASIS OF PRESENTATION

     Overture Services, Inc. (“Overture” or the “Company”) is a global leader in commercial search services on the Internet. Overture’s paid placement search service is comprised of advertisers’ 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 sites. In some cases, consumers and businesses access our search listings directly at our sites. The search listings are ranked according to the advertiser’s bid; the higher the bid, the higher the ranking. Advertisers pay Overture the bid price for clicks on the advertiser’s search listing (also known as a paid introduction, click-through or a paid click). As of June 30, 2003, Overture and its wholly owned subsidiaries operated the Overture service in the United States, Ireland, United Kingdom, Germany, France, Italy, Japan and South Korea. The Company reports in one reportable business segment.

     Overture was incorporated on September 15, 1997 in the state of Delaware and officially launched its operations 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 its U.S. corporate office in Pasadena, California and additional offices including California, Illinois and New York in the United States, Ireland, United Kingdom, Germany, France, Japan, Norway, Italy, the Netherlands, Spain and South Korea.

     On April 21, 2003, Overture completed its purchase of the Web search unit of Fast Search and Transfer ASA (“Fast”), a Norway based developer of search and real-time filtering technologies, for $70 million in cash, plus a contingent performance-based cash incentive payment of up to $30 million over three years based on a volume metric measured quarterly.

     On April 25, 2003, Overture acquired the business of AltaVista Company (“AltaVista”), a provider of search services and technology, for $60 million in cash and $82.7 million in common stock issued based on Overture’s average stock price for the two days before and after the measurement date of February 19, 2003 when the number of shares to be issued was fixed and determinable.

     AltaVista and Fast both use algorithmic search technology to crawl the Web and return relevant search results in response to users’ queries through syndicated networks or through the AltaVista and Fast Web sites, AltaVista.com and alltheweb.com, respectively. Overture believes these technologies complement its own technology in commercial search and will enhance its core paid placement search business, as well as allow Overture to develop new products and services for its advertisers and affiliates.

     The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ materially from those estimates.

     The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for a full year or for any future period.

     These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

2. COMPREHENSIVE INCOME

     The Company accounts for comprehensive income using Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income” (SFAS 130). SFAS 130 establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined therein, refers to revenues, expenses, gains and losses that are not included in net income but rather are recorded directly in stockholders’ equity. The differences between total comprehensive income and net income for the six months ended June 30, 2003 and June 30, 2002 were $2.9 million and $0.9 million, respectively. As of June 30, 2003, accumulated other comprehensive income was comprised of $0.1 million of unrealized gains on investments and $5.7 million of

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cumulative translation adjustments.

3. EARNINGS PER SHARE COMPUTATION

     Shares used in computing basic and diluted net income per share are based on the weighted average shares outstanding in each period. Basic net income per share is calculated by dividing net income by the average number of outstanding shares during the period. Diluted net income per share is calculated by adjusting the average number of outstanding shares assuming conversion of all potentially dilutive stock options and unvested stock under the treasury stock method. Options to purchase 11.4 million and 8.2 million shares of common stock were outstanding as of June 30, 2003 and 2002, respectively.

     The following table sets forth the computation of basic and diluted net income per share for the periods indicated (in thousands, except per share amounts):

4. INCOME TAXES

     Overture generated taxable income during the three and six months ended June 30, 2003. A tax provision was recorded that was more than the statutory rate primarily due to the effect of foreign net operating losses (“NOLs”) which carry a benefit at a lower tax rate. The tax provision recorded for the six months ended June 30, 2002 was less than the statutory rate primarily due to the release of the valuation allowance associated with prior years losses.

     The following is a reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate:

     The provision for income taxes is composed of the following (in thousands):

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5. LITIGATION

     The Company is currently in separate litigations with Google and FindWhat in which the Company is alleging that these parties infringe on the Company’s 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 paid placement search technologies, including its 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. In addition, FindWhat has also alleged that the Company has violated the Sherman Act, 15 U.S.C. § 2. When the validity and enforceability of the ’361 Patent is determined, in either litigation, that determination may have a material effect on the Company’s 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. The Company 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 the Company 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 the Company’s ’361 Patent. On February 13, 2003, the New York Court ordered FindWhat’s declaratory judgment to be transferred to the Central District of California. Subsequently, after transfer, FindWhat dismissed its action in favor of the Company’s California action, which is now the only case pending between the parties. FindWhat answered the Company’s Complaint on March 25, 2003, and asserted counterclaims alleging non-infringement, invalidity and unenforceability of the Company’s patent as well as alleging that the Company has violated the Sherman Act, 15 U.S.C. § 2. On April 17, 2003, the Company filed its reply and denied the allegations of these counterclaims. The parties continue to progress through the discovery process.

     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. The Company 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. On June 25, 2002, the Company filed its reply and denied the allegations of these counterclaims. On March 28, 2003 the Company filed an Amended Complaint. On April 14, 2003 Google answered the amended complaint and re-asserted its same counterclaims. The Company filed its reply denying the allegations of these counterclaims. 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 October 2003.

     The Company is a defendant in three trademark infringement actions (JR Cigar, Mark Nutritionals and Pets Warehouse). In addition, AltaVista is also a defendant in a trademark infringement action by Mark Nutritionals. The plaintiffs in these cases allege that they have trademark rights in certain search terms and that the Company 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 the Company’s results of operations, cash flow or financial position. The Company believes that it has meritorious defenses to liability and damages in each of these lawsuits and it is contesting them vigorously. If the Company 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 the Company is not a party that was negative to the Company’s position, the Company might as a result decide to change the general manner in which it accepts bids on certain search terms and this change might have a material adverse effect upon the results of operations, cash flows or financial position of the Company.

     The Company has also been named as a defendant in six trade name infringement actions filed in Los Angeles County Superior Court (Spreen Inc., McCoy Motor Co., Apaulo Inc., Puente Hills Imports, Superior Auto of Carson LLC and Gordon Automotive Group, Inc.). The plaintiffs in these actions have alleged, among other things, that they have rights in certain search terms and that the Company violates these rights by allowing other entities to bid on these search terms. The complaints contain causes of action for trade name infringement and dilution, trademark infringement and dilution, service mark infringement and dilution, unfair business practices, intentional interference with prospective business advantage, negligence; injunction, declaratory relief, constructive trust and conspiracy. Unspecified compensatory and punitive damages as well as injunctive relief is sought. Overture believes it has meritorious defenses to the complaints and is vigorously defending the actions.

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

     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. In December 2001, the Court transferred the case to arbitration. InternetFuel.com thereafter supplemented its claims, alleging fraud under California law. 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 $8.7 million, which was recorded as an expense in the three months ended December 31, 2002. On January 16, 2003, InternetFuel filed an application with the arbitrator seeking approximately $840,000 in pre-judgment interest on the award. As a result of several motions filed by Overture, on April 2, 2003, the Arbitrator issued a Corrected Final Award, reducing the damage award against Overture to $4.8 million. This $3.9 million reduction in the award was recorded as a reduction in loss of litigation ruling in the three months ended March 31, 2003. On May 20, 2003, the Superior Court granted InternetFuel’s petition to confirm the arbitration award. On June 4, 2003, the Court entered a judgment on the arbitration award in favor of InternetFuel and against the Company in the amount of $4.8 million, plus interest of $0.1 million. The Company has appealed the Court’s ruling and deposited $7.3 million with the Court in lieu of an appeal bond.

     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 largely denied the motion to dismiss, including the Rule 10b-5 claims against Overture, and Overture remains a defendant in the case. 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. The parties have continued to engage in settlement discussions, and the plaintiffs, insurers, and defendant issuers (including individual officers and directors) are considering a final draft of a settlement memo of understanding.

     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 contained in the counterclaim and is contesting these allegations vigorously.

     In August 2001, Jeffrey Black, a former employee of AltaVista, filed a complaint in Superior Court of the State of California (Santa Clara County) in his individual capacity as well as in his capacity as a trustee of two family trusts against the AltaVista Company and CMGI, Inc. alleging certain claims arising out of the termination of his employment with AltaVista. As set forth in the complaint, Mr. Black is seeking monetary damages in excess of $70 million. Overture believes that these claims are without merit and is vigorously defending the action. In March 2002, the Court ordered the entire case to binding arbitration in California. An arbitrator was appointed in January 2003 and an arbitration hearing is scheduled to commence on August 13, 2003. On June 3, 2003, Overture was named as a defendant in the State Court action as successor in interest to AltaVista. Overture filed its answer to the third amended complaint on July 3, 2003, denying the allegations of the third amended complaint and asserting that the action was stayed pending the arbitration hearing.

     On March 11, 2002, Sean Barger filed suit in Superior Court of the State of California against AltaVista and a number of other defendants alleging (1) violation of state securities statutes, (2) fraudulent inducement, deceit, fraud, (3) negligent misrepresentation, (4) unfair competition and (5) breach of fiduciary duty. Mr. Barger is claiming an unspecified amount of damages. Mr. Barger was

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the principal shareholder of Equilibrium Technologies, Inc. (“Equilibrium”) which was a company purchased by AltaVista’s majority shareholder, CMGI, Inc. Mr. Barger claims that AltaVista and the other defendants made false representations to induce him to allow Equilibrium to be acquired by CMGI. On April 3, 2003, defendants filed their answer to plaintiff’s second amended complaint. The court has set a trial date for January 12, 2004. Overture believes it has meritorious defenses to Mr. Barger’s amended complaint and intends to defend the action vigorously.

     The Irish subsidiary of AltaVista doing business in the United Kingdom filed suit against Fraserside Holdings Limited or, in the alternative against Private Media Group, Inc., claiming damages for procurement of or inducement of breach of contract for Fraserside’s failure to pay for the performance of services including display of advertisements by the Irish subsidiary. The suit seeks approximately $2.6 million in unpaid fees, interest and costs. The suit was instituted in the Chancery Division of the High Court of Justice in England on December 6, 2001. On March 21, 2002 Fraserside served a defense, and counterclaim for breach of contract alleging damages of at least $2.7 million and other unspecified damages relating to the contract. Private served a substantially identical defense on March 27, 2002. Overture believes is has meritorious defenses to the counterclaims and are vigorously defending against them.

     On April 7, 2003, AltaVista was served with a complaint to avoid preferential transfers that was filed in the United States Bankruptcy Court, Northern District of Illinois. MarchFirst filed a voluntary bankruptcy petition on April 12, 2001 and on July 16, 2001 a Trustee was appointed under chapter 7 of the Bankruptcy Code. The Trustee seeks return of payments of approximately $0.6 million that AltaVista received within 90 days of the filing of the bankruptcy petition. These payments were in connection with advertisements displayed on AltaVista’s Web site on behalf of MarchFirst advertisers. AltaVista has provided the Trustee with a letter outlining defenses against the demand because these payments were made in the ordinary course and were earmarked for payment to AltaVista. Overture believes it has meritorious defenses to the complaint and is vigorously defending the action.

     On July 17, 2003, Bubble My Wedding and Connie Ciccone filed a complaint in the Federal District Court in Cincinnati against Overture, American Express Company and Huntington Bank. The complaint contains claims for breach of contract, fraudulent conveyance, tortious interference with business, fraud and misrepresentation, racketeer influencing and corrupt organizations, and other tortious conduct based on the alleged misappropriation of monies and properties. Overture believes it has meritorious defenses to the complaint and is vigorously defending the action.

     AltaVista is indemnifying its Brazilian law firm, Lobos & Ibeas, after it was sued by Bianca Rothier, a Brazilian fashion model, in the Eighth Civil Court of the State of Rio de Janeiro in Brazil for “moral damages” caused by the display of her name in connection with adult content Web sites in AltaVista search results. Lobos & Ibeas registered the AltaVista.br domain name on behalf of AltaVista and was named as defendant in the suit on that basis. Defendants have raised their defenses to the complaint and plaintiff has recently presented her reply to those defenses. Overture believes it has meritorious defenses to the complaint and is vigorously defending the action.

     The Company may also be subject to litigation brought against it in the ordinary course of business.

6. RELATED PARTY TRANSACTIONS

     Idealab is considered a related party of Overture because a member of management of Idealab is a member of Overture’s board of directors.

     During the three months ended June 30, 2003 and 2002, Overture recorded approximately $0.2 million and $0.2 million, respectively, and for the six months ended June 30, 2003 and 2002, Overture recorded approximately $0.4 million and $0.5 million, respectively, of search listing advertising revenue from affiliates of Idealab, which with its affiliate, Idealab! Holdings, L.L.C., is a stockholder of Overture. Management believes these amounts are materially representative of the fair value of advertising services provided. During the three and six months ended June 30, 2003, Overture paid $3.4 million and $5.1 million of traffic acquisition costs to Idealab and Idealab affiliated companies. Management believes these amounts are materially representative of fair value.

7. AFFILIATE COMMITMENTS

     The Company is obligated to make guaranteed payments totaling $101.0 million, $209.4 million, $25.5 million and $3.8 million for the remainder of 2003, 2004, 2005 and 2006, respectively, under contracts to provide search services to its affiliates.

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8. ACCOUNTING FOR STOCK-BASED COMPENSATION

     At June 30, 2003, the Company had one stock-based compensation plan. The company accounts for the plan under the recognition and measurement principles of Accounting Principles Board Opinion (APB) No. 25 “Accounting for Stock Issued to Employees” (APB 25). The following table sets forth the effect on net income and earnings per share if the Company had applied the fair value provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock Based Compensation” (SFAS 123), to stock-based employee compensation. For purposes of pro forma disclosures, the fair value of the options is amortized to expense on a graded methodology basis over the vesting period of the options.

     The fair value of these options were estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions:

     Under SFAS 123, the Company would have incurred additional pre-tax compensation expense of $11.1 million and $10.2 million for the three months ended June 30, 2003 and 2002, respectively, and $21.9 million and $18.4 million for the six months ended June 30, 2003 and 2002, respectively.

     Applying SFAS 123 in the pro forma disclosure may not be representative of the effects on pro forma net income for future years as options vest over several years and additional awards will likely be made each year.

9. ACQUISITIONS

          Keylime Software, Inc.

          On January 2, 2003, Overture completed the acquisition of all of the outstanding capital stock of Keylime Software, Inc (“Keylime”), a developer of analytical software to monitor Web site traffic and customer behavior. The acquisition enables Overture to offer advertisers enhanced services for managing and analyzing the performance of their online marketing campaigns by allowing them to better understand their return on investment, track sales conversions and identify new leads. The results of Keylime’s operations have been included in the consolidated financial statements since that date.

          The aggregate purchase price, net of acquisition costs, was $7.1 million. The aggregate purchase price was allocated to tangible and identifiable intangible assets acquired and liabilities assumed based on estimates of fair value. Identifiable intangible assets consist of developed technology totaling $1.6 million and are amortized over three years. The excess of the aggregate purchase price over the fair value of the identifiable net assets acquired of $4.5 million has been recorded as goodwill. As part of the acquisition, Overture assumed debt held by Keylime of $2.0 million and repaid this amount in conjunction with the acquisition.

          Fast Search and Transfer ASA

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          On April 21, 2003, Overture completed its purchase of the Web search unit of Fast Search & Transfer (“Fast”), a Norway based developer of search and real-time filtering technologies. In the transaction, Overture acquired Fast for approximately $70 million in cash, and a contingent performance-based cash incentive payment of up to $30 million over three years based on a volume metric measured quarterly. No payments have been made through June 30, 2003.

     The total estimated purchase price of $70.7 million consisted of $70.0 million in cash and $0.7 million in direct transaction costs. The following represents the allocation of the aggregate purchase price to the fair value of assets acquired and liabilities assumed.

     Identifiable intangible assets consist of technology and patents of $4.6 million to be amortized over six years on a proportional method based on cash flows and customer contracts of $6.2 million to be amortized over four years on a proportional method based on cash flows.

     AltaVista Company, Inc.

     On April 25, 2003, Overture acquired the business of AltaVista Company (“AltaVista”), a provider of search services and technology. The total estimated purchase price of $145.9 million consisted of $60.0 million in cash, $82.7 million in common stock issued and $3.2 million in direct transaction costs. The value of the common stock was based on Overture’s average stock price for the two days before and after the measurement date of February 19, 2003 when the number of shares to be issued was fixed and determinable. The following represents the allocation of the aggregate purchase price to the fair value of assets acquired and liabilities assumed.

     Identifiable intangible assets consist of technology and patents of $11.1 million to be amortized over six years on a proportional method based on cash flows, trademarks of $4.3 million to be amortized over six years on a proportional method based on cash flows and customer contracts of $6.0 million to be amortized over four years on a proportional method based on cash flows.

     In June 2003, the Company sold AltaVista’s enterprise search business, which was obtained as a part of the acquisition of the business of AltaVista to Fast Search and Transfer ASA. The net assets of this business were recorded at fair value upon acquisition as an asset held for sale. As a result, there was no gain or loss on the sale. The impact of the disposition and the discontinued operations was immaterial and have not been reflected as discontinued operations in the accompanying consolidated statement of operations.

     AltaVista and Fast both use algorithmic search technology to crawl the Web and return relevant search results in response to users’ queries through syndication networks or through their Web sites, AltaVista.com and alltheweb.com. Overture believes these technologies complement its own technology in commercial search and will enhance its core paid placement search business, as well as allow Overture to develop new products and services for its advertisers and affiliates.

     These factors contributed to a purchase price in excess of the fair value of the net intangible and intangible assets acquired, and as a result, the Company has recorded goodwill in connection with these transactions.

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     The results of operations of Fast and AltaVista have been included in the Company’s condensed consolidated statement of operations since the completion of the acquisitions. The following unaudited pro forma information presents a summary of the results of operations of the Company assuming the acquisitions of Fast and AltaVista occurred on January 1, 2003 and 2002, respectively (in thousands, except per share amounts):

10. AMORTIZATION OF INTANGIBLE ASSETS AND GOODWILL

     The Company applies Statement of Financial Accounting Standard 142 (“SFAS 142”), “Goodwill and Other Intangible Assets,” which was effective for acquisitions after June 30, 2001. Under SFAS 142, goodwill is determined to have an indefinite useful life and should not be amortized but rather tested annually for impairment. An impairment loss should be recognized if the carrying amount of the reporting unit for which the goodwill is assigned exceeds its fair value. Purchased intangible assets are carried at cost and amortized over the economic useful lives of the respective assets.

     Intangible assets consisted of the following (in thousands):

     Technology and patents of $15.7 million acquired as part of the acquisitions of Fast and AltaVista are being amortized on a proportional method based on cash flows over a weighted average period of six years. The remaining technology and patents are being amortized on a straight-line method over a weighted average period of approximately three years. Trademarks are being amortized on a proportional method based on cash flows over a weighted average period of approximately six years. Customer contracts are being amortized on a proportional method based on cash flows over a weighted average period of approximately four years. Amortization expense for the intangible assets for the three months ended June 30, 2003 and 2002 was $1.3 million and $0.3 million, respectively. Amortization expense for the intangible assets for the six months ended June 30, 2003 and 2002 was $1.7 million and $0.6 million, respectively. As of June 30, 2003, annual amortization of the intangible assets is expected to be $2.8 million, $6.3 million, $11.8 million, $9.2 million and $2.5 million for the remainder of the fiscal year ended December 31, 2003 and for the years ended 2004, 2005, 2006 and 2007, respectively.

11. RESTRUCTURING ACCRUAL

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     Prior to the closing of the acquisition of the business of AltaVista and Fast, management had begun to formulate a plan to exit certain activities. The Company recorded a restructuring accrual during the six months ended June 30, 2003 in conjunction with the acquisitions. The following table summarizes the activity in the restructuring accrual included in accrued expenses from January 1, 2003 through June 30, 2003 (in thousands):

     Restructuring initiatives involved decisions to reduce expenses and increase operational efficiencies of the Company as a result of the acquisitions of the businesses of AltaVista and Fast. In June 2003, the Company sold the AltaVista enterprise search business. The restructuring accrual consisted primarily of severance payments related to workforce reductions of approximately 100 employees, contract terminations, payments remaining on noncancellable leases for idle or abandoned facilities and vendor contracts on unutilized capacity.

     The Company anticipates that the remaining restructuring accruals will be paid by September 2005. The remaining contractual obligations primarily relate to severance, facility lease obligations and vendor contracts.

12. GEOGRAPHICAL SEGMENT INFORMATION

     The following table sets forth revenue by geographic area:

     The following table sets forth long-lived assets by geographic area:

13. SUBSEQUENT EVENTS

     On July 14, 2003, Overture announced that it had entered into a definitive agreement for Yahoo! Inc. (“Yahoo!”) to acquire Overture. Subject to the terms and conditions of an Agreement and Plan of Merger among Overture, Yahoo! and July 2003 Merger Corp., a wholly-owned subsidiary of Yahoo!, upon completion of the acquisition, Overture stockholders will receive 0.6108 of a share of Yahoo! common stock and $4.75 cash for each share of Overture common stock and associated Overture preferred stock purchase right owned. Shares of Yahoo! common stock will be issued with associated Yahoo! preferred stock purchase rights. In addition, Yahoo! will assume Overture’s outstanding stock options.

     The consummation of the transaction is subject to the approval of the stockholders of Overture, receipt of necessary approvals under applicable antitrust laws, effectiveness of a registration statement with the SEC and other customary closing conditions.

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

IN ADDITION TO HISTORICAL INFORMATION, THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS, INCLUDING STATEMENTS RELATED TO THE AMOUNT OF TRAFFIC THAT WE EXPECT 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, OUR PROPOSED ACQUISITION BY YAHOO!, OUR OTHER ACQUISITIONS 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 a global leader in commercial search services on the Internet. Overture’s paid placement 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 sites. In some cases, consumers and businesses access our search listings directly at our sites. The search listings are ranked according to the advertiser’s bid; the higher the bid, the higher the ranking. Advertisers pay Overture the bid price for clicks on the advertiser’s search listing (also known as a paid introduction, click-through or a paid click). As of June 30, 2003, Overture and its wholly owned subsidiaries operated the Overture service in the United States, Ireland, United Kingdom, Germany, France, Italy, Japan and South Korea.

     Overture was incorporated on September 15, 1997 in the state of Delaware and officially launched its operations 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 its U.S. corporate office in Pasadena, California and additional offices including California, Illinois and New York in the United States, Ireland, United Kingdom, Germany, France, Japan, Norway, the Netherlands, Italy, Spain and South Korea.

Proposed Acquisition by Yahoo! Inc.

     On July 14, 2003, Overture announced that it had entered into a definitive agreement under which Yahoo! Inc. (“Yahoo!”) will acquire Overture. Subject to the terms and conditions of an Agreement and Plan of Merger (the “Merger Agreement”) among Overture, Yahoo! and July 2003 Merger Corp., a wholly-owned subsidiary of Yahoo!, upon completion of the acquisition, Overture stockholders will receive 0.6108 of a share of Yahoo! common stock and $4.75 cash for each share of Overture common stock and associated Overture preferred stock purchase right owned. Shares of Yahoo! common stock will be issued with associated Yahoo! preferred stock purchase rights. In addition, Yahoo! will assume Overture’s outstanding stock options and they will become exercisable for Yahoo! stock based on an exchange ratio to give effect to the merger consideration. The consummation of the transaction is subject to the approval of the stockholders of Overture, receipt of necessary approvals under applicable antitrust laws, effectiveness of a registration statement with the Securities and Exchange Commission and other customary closing conditions.

Expansion Strategy

     Overture has launched several new initiatives to expand our commercial search offerings. We have accelerated our international market expansion this year. We have continued to implement several new initiatives to launch other Web search products, including

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algorithmic search and paid inclusion. In June 2003, we launched Content Match, our new contextual advertising product that places our search results on relevant content pages of our distribution partner’s Web sites. We are continuing to develop complementary new products, such as local search, contextual advertising and Web analytics, in addition to improving our core paid placement search product.

     Our new diversification strategies will continue to require a substantial level of investment and additional skills and capabilities, and will pose significant challenges for the remaining fiscal year. These challenges include building functional and accepted products, execution of multiple initiatives at the same time, and managing resources. We cannot be certain our new offerings will achieve market acceptance. Because of these challenges, there is substantial risk associated with the implementation of these new initiatives. Failure to successfully integrate and implement these new product lines in a timely manner may adversely affect our revenue and results of operations. We may not be able to distribute our products to our current affiliates or renew existing affiliate agreements or, if they are renewed, they may not be on as favorable terms.

     Presently, Internet search traffic is concentrated among a limited number of destination sites that attract users to conduct searches on the Internet. These include sites operated by AOL, Google, Microsoft and Yahoo!. This concentration of searches may provide these destination sites with the ability to negotiate highly favorable terms under which Overture services search traffic. Additionally, we believe competitive pressure in our core paid placement business will continue to create upward pressure on our traffic acquisition costs.

International Expansion

          We launched our commercial search marketplace in the United Kingdom in November 2000, Germany in February 2002, France in September 2002, Japan in December 2002, South Korea in April 2003 and Italy in May 2003. We anticipate launching additional commercial search services in Spain, Austria, the Netherlands, Switzerland and Scandinavia during 2003. Although we expect to be able to use our experience in the United States and other markets in conducting this expansion, we expect that our international expansion will require continued investment to build internal infrastructure, as well as 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 April 21, 2003, Overture completed its purchase of the Web search unit of Fast Search and Transfer ASA (“Fast”), a Norway based developer of search and real-time filtering technologies, for $70 million in cash, plus a contingent performance-based cash incentive payment of up to $30 million over three years on a volume based metric measured quarterly.

     On April 25, 2003, Overture acquired the business of AltaVista, a provider of search services and technology, for $60 million in cash and $82.7 million in common stock issued based on the average stock price for the two days before and after the measurement date of February 19, 2003 when the number of shares to be issued was fixed and determinable.

     AltaVista and Fast both use algorithmic search technology to crawl the Web and return relevant search results in response to users’ queries through syndication networks or through their Web sites, AltaVista.com and alltheweb.com. We believe these technologies complement our own commercial search technology and will enhance our core paid placement search business, as well as allow us to develop new products and services for our advertisers and affiliates.

New Product Development

     In June 2003, we launched Content Match, our new contextual advertising product that places our search results on relevant content pages of our distribution partner’s Web sites.

     We expect that the development of new product lines, including Web search, contextual, local search and analytics will require additional investments for fiscal year 2003. Because these products are new and untested, it is difficult to determine the impact these new products will have on our revenue and results of operations.

RESULTS OF OPERATIONS

     Revenue. We generate revenue primarily from our paid placement product in which advertisers pay for priority placement within

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our search results and when a user clicks on an advertiser’s listing upon rendering of our results. We refer to these clicks as paid introductions. Paid placement 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 from our other products is recognized when earned, collection is probable and there are no future performance commitments. Revenue was $265.3 million for the three months ended June 30, 2003 compared to $152.5 million for the three months ended June 30, 2002. Revenue was $490.1 million for the six months ended June 30, 2003 compared to $295.3 million for the six months ended June 30, 2002. 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 515 million in the three months ended June 30, 2002 to 646 million in the three months ended June 30, 2003 was primarily due to increased search traffic from our affiliates resulting from expanding implementations with existing affiliates and the addition of new affiliates. The average price per paid introduction increased from $0.30 during the three months ended June 30, 2002 to $0.40 during the three months ended June 30, 2003, we believe, as a result of growth of our advertiser base creating increased competition for placement, and as a result of improved account management, new product initiatives rolled out during 2002 and broader acceptance of paid placement search. The number of advertisers increased from approximately 67,000 in June 2002 to approximately 95,000 in June 2003.

     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 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. As we develop and implement new or improved revenue generating search efforts, growth in new products may provide new revenue, but at a lower price per click. For example, some initiatives designed to increase listings on less popular search terms that carry lower prices may increase the number of paid clicks, but lower the overall reported average price per paid introduction. We typically experience seasonality, whereby the second and third quarters of the calendar year experience relatively lower traffic than the first and fourth quarters. We did not experience this decrease in the second quarter as we believe the war in Iraq reduced the number of commercial-related searches in the first quarter. This seasonal effect is difficult to predict, but we believe what we experience is reflective of general internet usage in the United States. 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 three months ended June 30, 2003, we earned approximately 63% 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!. There were no other individual affiliates who supplied Overture paid introductions, which individually resulted in revenue from advertisers greater than 10% of our total revenue for the three months ended June 30, 2003.

     Several new, expanded and renewed affiliate relationships were signed during the three months ended June 30, 2003. These agreements include MSN for Korea and other countries and Lycos Inc. We also signed a two-year agreement with Sympatico to provide its full suite of search products that includes paid placement, algorithmic search and paid inclusion. In addition, we grew our distribution network through the launch of Content Match, adding new partners such as Edmunds.com. Subsequent to the three months ended June 30, 2003, we have extended our U.S. search distribution with Hewlett Packard Co. for an additional year and expanded the agreement to include Canada. During the three months ended June 30, 2003, several affiliates terminated their relationships or gave notice that they would be terminating their relationships with Overture. These agreements include Epinions, Iwon (and related Excite properties), Netscape , Bellsouth, Go and Search-a-lot. Certain affiliates are considering whether or not they will exercise rights to terminate their commercial affiliate agreements in connection with the proposed merger with Yahoo!. TOnline has stated an attempt to terminate the relationship immediately as a result of the proposed merger with Yahoo!. We earned less than 1% of our total revenue from advertisers who received paid introductions through Overture as supplied by TOnline for the three months ended June 30, 2003.

     Our growth rate depends, in part, on increasing the number of searches and resulting click-throughs performed by users of 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 $17.3 million for the three months ended June 30, 2003 compared to $8.7 million for the three months ended June 30, 2002. The search serving costs were $30.2 million for the six months ended June 30, 2003 compared to $14.7 million for the six months ended June 30, 2002. 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

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increased traffic, the acquisitions of Keylime, AltaVista and Fast and our international expansion efforts. We anticipate search serving costs to continue to increase as our traffic and number of advertisers increase and we expand our product offerings.

     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 $169.1 million (approximately 64% of revenue) for the three months ended June 30, 2003 compared to $81.4 million (approximately 53% of revenue) for the three months ended June 30, 2002. Traffic acquisition costs were approximately $313.1 million (approximately 64% of revenue) for the six months ended June 30, 2003, compared to $158.4 million (approximately 54% of revenue) for the six months ended June 30, 2002. The increase in total traffic acquisition costs was primarily due to the increase in revenue as previously discussed. The percentage increase in the three months ended June 30, 2003 compared to the three months ended June 30, 2002 was primarily due to competition for search traffic as well as a higher mix of traffic from more prominent search destination sites, which typically are able to negotiate and receive a higher than average share of our revenue. We experience increases in traffic acquisition costs due to increased competition and the ability of our large affiliates, as a result of their sizable market share and concentration of search traffic, to negotiate highly favorable terms. We may be obligated to make guaranteed payments to affiliates in the future, as described below in “Liquidity and Capital Resources,” which are often times subject to adjustment based on the performance of the affiliate or Overture relative to certain metrics. If we do not meet our target metrics, then we may be required to make guaranteed payments and traffic acquisition costs as a percentage of revenue may increase.

     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. Our constituents, including our affiliates, advertisers and consumers, may be averse to the agreement we entered into to be acquired by Yahoo!. This may affect the implementations we enter into with affiliates other than Yahoo! or these affiliates’ distribution or presentation of our services. In some cases, our other affiliates could terminate their relationship entirely. Our agreements with our affiliates vary in duration, and depending on the agreement, may be terminable upon the occurrence of certain events, including our failure to meet certain service levels, material breaches of agreement terms, changes in control, or in some instances, at will. If any of the foregoing termination events occur, the related agreements could terminate earlier than the expiration date, and/or we may incur additional obligations. Our two largest affiliates, Microsoft and Yahoo! may, in certain circumstances, have the ability to terminate their agreements with us upon a change of control in our ownership. The proposed merger with Yahoo! will constitute a change of control of us.

     We may not be successful in renewing any of our affiliate agreements, or if they are renewed, they may not be on as favorable terms. If we are unable to replace traffic from any of our large affiliates or if our relationship with any of our larger affiliates deteriorates, it could seriously harm our business, financial condition and results of operations. Moreover, we may not be able to adjust our cost structure quickly enough should we lose one of our two largest affiliates. 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 the cost of systems used to manage and serve advertisers. Marketing, sales and services expenses totaled $21.2 million for the three months ended June 30, 2003 compared to $12.4 million for the three months ended June 30, 2002. Marketing, sales and services expenses were approximately $39.0 million for the six months ended June 30, 2003 compared to approximately $23.9 million for the six months ended June 30, 2002. The increase was primarily the result of increased costs associated with international expansion, payroll for customer service and sales functions, the acquisitions of Keylime, AltaVista and Fast and increased costs associated with advertiser development. We anticipate these costs to increase in the future as we continue to expand internationally, and begin to offer new services.

     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, insurance and other general corporate expenses. General and administrative expenses were $32.0 million for the three months ended June 30, 2003 compared to $17.3 million for the three months ended June 30, 2002. General and administrative expenses were $56.1 million for the six months ended

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June 30, 2003 compared to $33.6 million for the six months ended June 30, 2002. The increase was primarily the result of increased headcount, the acquisitions of Keylime, AltaVista and Fast, 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 throughout 2003 due to continuing international expansion and costs to support a multi-product organization. In addition, we expect to see an increase in costs relating to the integration efforts associated with the proposed acquisition by Yahoo! as well as the integration costs associated with our previously completed acquisitions. We believe we will also continue to incur additional credit card processing fees as revenue increases, and we expect an increase in legal and insurance costs.

     Product Development. Product development expenses consist primarily of payroll and related expenses for personnel responsible for the development of features and functionality for our service, as well as for 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 $0.8 million and $0.6 million for the three months ended June 30, 2003 and 2002, respectively and $1.6 million and $0.8 million for the six months ended June 30, 2003 and 2002, respectively. Product development expenses were $10.2 million for the three months ended June 30, 2003 compared to $5.0 million for the three months ended June 30, 2002. Product development expenses were approximately $18.0 million for the six months ended June 30, 2003 compared to approximately $9.4 million for the six months ended June 30, 2002. The increase was primarily the result of the acquisitions of Keylime, Fast and AltaVista, our international expansion and investment in new offerings and search initiatives. We expect product development costs will continue to increase as we continue to develop new products and enhance our existing service.

     Reduction in Loss on Litigation Ruling. As of December 31, 2002, we recorded an accrual of $8.7 million relating to an unfavorable interim award in a dispute with a former affiliate, InternetFuel. In April 2003, the final award of $4.8 million was issued resulting in a reduction of $3.9 million, which was recorded as a one-time pre-tax credit in the three months ended March 31, 2003.

     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 an accrual relating to the loss on litigation ruling with Internet Fuel. Interest income, net was $0.4 million for the three months ended June 30, 2003 compared to $0.6 million for the three months ended June 30, 2002. Interest income was approximately $1.2 million for the six months ended June 30, 2003 compared to $1.8 million for the six months ended June 30, 2002. The decrease was primarily a result of a decline in interest rates and a decrease in cash and investment balances as a result of the cash paid for the acquisitions of Keylime, AltaVista and Fast.

     Provision For Income Taxes. Overture recorded income tax expense of $7.3 million for the three months ended June 30, 2003 and $18.3 million income tax expense for the six months ended June 30, 2003, as compared to the $10.4 million for the three and six months ended June 30, 2002. The Company recorded income tax expense for the three and six months ended June 30, 2003 greater than the statutory rate primarily due to the impact of the differences in foreign tax rates versus the U.S. tax rates. The difference between the tax expense recorded at June 30, 2002 as compared to June 30, 2003 was primarily due to the release of the valuation allowance recorded against the net deferred tax assets.

     The possibility exists that federal, state, local, or international jurisdictions may impose, or pass new legislation to impose, various taxes on our business, our partners or our affiliates. The effect of these new taxes may make doing business over the Internet less attractive. We cannot predict the impact of these potential tax changes on our business.

LIQUIDITY AND CAPITAL RESOURCES

     Net cash provided by operating activities totaled $34.0 million and $39.7 million for the six months ended June 30, 2003 and 2002, respectively. The change was due primarily to a decrease in operating income and increased accounts receivable and prepaid traffic acquisition costs during the six months ended June 30, 2003. Net cash used in investing activities totaled $33.6 million and $62.6 million for the six months ended June 30, 2003 and June 30, 2002, respectively. The change resulted primarily from the acquisitions of Keylime, Fast and AltaVista, partially offset by the sale of short-term and long-term investments. Our capital expenditures for the six months ended June 30, 2003 were $26.1 million.

     Net cash used in financing activities totaled $0.1 million for the six months ended June 30, 2003 and net cash provided by financing activities totaled $10.5 million for the six months ended June 30, 2002. The change resulted from the decrease in the

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proceeds received from the exercise of stock options and a payment of debt that was acquired in the acquisition of Keylime.

     Our principal sources of liquidity consisted of cash, cash equivalents, short-term investments and long-term investments of $113.4 million as of June 30, 2003 and $250.7 million as of December 31, 2002. We believe that our cash and liquid investment reserves are sufficient to sustain operations at least through the next 12 months. As of June 30, 2003, we were obligated to make guaranteed payments totaling $101.0 million, $290.4 million, $25.5 million and $3.8 million for the remainder of 2003, 2004, 2005 and 2006, respectively, under contracts to provide search services to our affiliates. We lease 128,000 square feet of office space for our corporate offices 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, Palo Alto, Irvine and Carlsbad, California, Illinois and New York in the United States, Ireland, United Kingdom, Germany, France, Japan, Norway, Italy, Spain and South Korea. As of June 30, 2003, we were obligated to make total remaining office lease payments of $19.4 million. Additional uses of cash in 2003 may include a contingent performance-based cash incentive payment to Fast based on a volume metric measured quarterly.

ACCOUNTING POLICIES SUBJECT TO ESTIMATION AND JUDGMENT

     The discussion and analysis of our financial condition and results of operations is 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, marketing-related agreements with our affiliates and loss contingencies. 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 of 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

     Overture has foreign NOL carryforwards available to reduce future foreign income taxes. These NOLs constitute a deferred tax asset. Currently, we believe that it is more likely than not that our foreign NOLs will be realized. Therefore, we have determined that no valuation allowance should be recorded at June 30, 2003 to reduce the deferred tax asset associated with these NOLs. If our international operations do not perform as expected, we could be required to re-evaluate this position in future periods.

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 was determined at arms-length and represents 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 was 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, traffic acquisition costs as a percentage of revenue would have increased by less than 1% for the three and six months ended June 30, 2003.

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 determine the probability of loss and the estimation of the amount of loss through an analysis of potential results, considering a combination of litigation and settlement strategies in consultation with outside counsel. If we were to incur a significant loss in litigation for which we had not provided a sufficient reserve, it could materially harm our results of operations.

RISKS THAT COULD AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Failure to complete the proposed merger with Yahoo! could adversely affect our stock price and future business and operations.

          Our business and results of operations could be affected by our announced merger with Yahoo!. On July 14, 2003, we announced that we had entered into a definitive agreement for Yahoo! to acquire Overture. The announcement of the merger could have an adverse effect on our revenue in the near-term if we are unable to negotiate, enter into or renew sources of traffic through affiliate agreements as a result of the pending consummation of the planned merger. While we are attempting to mitigate this risk through communications with our current and prospective advertisers, vendors and affiliates, current and prospective advertisers, vendors and affiliates could be reluctant to use our services due to potential uncertainty about the direction of the combined company’s product offerings and its support and service of existing products. For example, Yahoo! runs a significant destination portal site that competes with some of our affiliates. To the extent that our other affiliates believe that Yahoo! is a competitor, they may be less likely to do business with us. To the extent that our announcement of the merger creates uncertainty among current and prospective advertisers, vendors and affiliates and they delay decisions pending consummation of the planned merger, our results of operations and ability to operate profitably could be negatively affected.

          We may suffer additional consequences if the merger with Yahoo! were not to be completed. The merger is subject to several closing conditions, including receipt of regulatory approvals and approval of Overture’s stockholders, and Yahoo! and Overture may not be able to obtain these approvals on a timely basis or at all. If the planned merger with Yahoo! is not completed, we could suffer a number of consequences that may adversely affect our business, results of operations and stock price, including the following:

	•		we would not realize the strategic benefits we expect from becoming a part of a combined company with Yahoo!, including a potentially enhanced financial position;
	•		activities relating to the merger and related uncertainties may divert our management’s attention from our day-to-day business and cause disruptions among our employees and to our relationships with customers and affiliates, thus detracting from our ability to grow revenue and minimize costs and possibly leading to a loss of revenue and market position that we may not be able to regain if the transaction does not occur;
	•		the market price of our common stock could decline following an announcement that the merger has been abandoned, to the extent that the current market price reflects a favorable market assumption that the merger will be completed;
	•		we could be required to pay Yahoo! a termination fee of $65.0 million and provide reimbursement to Yahoo! for certain costs incurred. If there is a subsequent change of control of Overture, at Yahoo!’s election, Overture may be required to modify the terms of its commercial agreement with Yahoo! or pay Yahoo! certain fees and issue Overture stock to Yahoo!;
	•		we would remain liable for our costs related to the transaction, such as legal and accounting fees and a portion of the investment banking fees;
	•		we may not be able to continue our present level of operations and therefore would have to scale back our present level of business and consider additional reductions in work force;
	•		we may not be able to take advantage of alternative business opportunities or effectively respond to competitive pressures; and
	•		certain officers and key employees may not continue their employment.

          In connection with the proposed merger, Yahoo! and Overture expect to file a proxy statement/prospectus with the Securities and Exchange Commission. The proxy statement/prospectus will be mailed to all holders of our stock and will contain important information about us, Yahoo! and the proposed merger, risks relating to the merger and the combined company, and related matters. We urge all of our stockholders to read the proxy statement/prospectus when it becomes available.

Although Yahoo! and Overture expect that the merger will result in benefits to the combined company, the combined company may not realize those benefits because of integration and other challenges.

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     The failure of the combined company to meet the challenges involved in integrating the operations of Yahoo! and Overture successfully or otherwise to realize any of the anticipated benefits of the merger could seriously harm the results of operations of the combined company. Realizing the benefits of the merger will depend in part on the integration of technology, operations, and personnel. The integration of the companies will be complex, time-consuming and potentially expensive process that, without proper planning and implementation, could significantly disrupt the businesses of Yahoo! and Overture. The challenges involved in this integration include the following:

	•		combining product and service offerings;
	•		coordinating research and development activities to enhance introduction of new products and services;
	•		preserving advertising, affiliate and other important relationships of both Yahoo! and Overture and resolving potential conflicts that may arise;
	•		minimizing the diversion of management attention from ongoing business concerns;
	•		persuading employees that the business cultures of Yahoo! and Overture are compatible, maintaining employee morale and retaining key employees;
	•		coordinating and combining overseas operations, relationships and facilities, which may be subject to additional constraints imposed by local laws and regulations; and
	•		managing a complex integration process shortly after the completion of other independent acquisitions by each of Yahoo! and Overture.

     The combined company may not successfully integrate the operations of Yahoo! and Overture in a timely manner, or at all, and the combined company may not realize the anticipated benefits or synergies of the merger to the extent, or in the timeframe, anticipated. The anticipated benefits and synergies are based on projections and assumptions, not actual experience, and assume a successful integration. In addition to the integration risks discussed above, the combined company’s ability to realize these benefits and synergies could be adversely impacted by practical or legal constraints on its ability to combine operations.

The shares of Yahoo! common stock that Overture stockholders will receive as part of the merger consideration may not maintain their value.

     At the closing of the merger, each share of Overture common stock will be exchanged for $4.75 in cash and 0.6108 of a share of Yahoo! common stock. There will be no adjustment in the number of shares of Yahoo! common stock or cash distributed to Overture stockholders because of changes in the market price of either Yahoo! common stock or Overture common stock. Accordingly, the specific dollar value of Yahoo! common stock that Overture stockholders will receive upon the merger’s completion will depend entirely upon the market value of Yahoo! common stock at the time the merger is completed. This value may substantially decrease from the date proxies are submitted. Moreover, completion of the merger may occur some time after Overture stockholder approval has been obtained. In addition, Overture may not terminate the merger agreement, or refuse to complete the merger solely because of changes in the market price of Yahoo! common stock or Overture common stock. The share prices of Yahoo! common stock and Overture common stock are by nature subject to the general price fluctuations in the market for publicly traded equity securities, and the prices of both companies’ common stock have experienced significant volatility in the past. Neither Yahoo! nor Overture can predict or give any assurances as to the respective market prices of its common stock at any time before or after the completion of the merger.

In order for our paid placement business to be successful, 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, affiliates and traffic generated by our sites. Such a critical mass encourages increased participation in our paid placement search marketplace and our destination sites. 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

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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. Periodically, we introduce new initiatives, service programs or rules that affect the bidding process, search term selection rules, editorial policies and search methodology or other components of our services. Advertisers may dislike the effect of these new initiatives, programs or changes that may cause advertisers to cease advertising with us, or reduce their level of spending. Advertisers may dislike new traffic sources Overture adds, or may dislike the quality of traffic, and therefore cease advertising with us or reduce their level of spending. Advertiser attrition or reduction in advertiser spending 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 paid placement services prioritize search results based on advertising bids associated with keywords rather than other search and retrieval approaches, consumers may not use this service because they perceive our results to be less objective or not as relevant as 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. 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 services our affiliates may not want. In addition, our affiliates may not regard us as significant for their own businesses or they may regard us as competitors to their 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 could 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 one or more affiliates by competitors could harm our operating results, cause us to lose our relationships with those affiliates, and reduce our competitive position. For example, if a third party acquires one of our affiliates, we may lose our relationship with our affiliate in favor of a 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 combined 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 place pressure on our margins, which would harm our business.

We may not be successful in introducing new products and services.

     In connection with the recent acquisitions of the businesses of AltaVista and Fast’s Web search unit, we have begun offering algorithmic and paid inclusion search services, both on a stand-alone basis and together with our paid placement search service. Additionally, in June 2003, we launched Content Match, our new contextual advertising product that places our search results on relevant content pages of our distribution partner’s Web sites. Although complementary to our existing paid placement business, these search services require different technological and marketing capabilities, and present different risks, from our existing business. We have limited experience in operating and marketing algorithmic, paid inclusion and content match search service businesses. Our success in these new businesses depends in part on our relationships with existing users of such algorithmic, paid inclusion and content match search services and on the quality of such search services, as well as our ability to successfully offer such services to members of our affiliate network. If our affiliates or end-users of these search services do not find our search results to be of high quality or do not wish to use such services, our revenues or business could be adversely affected. We may not be successful in maintaining the users of our search site. If there is a continuing decline in our users, it may adversely affect our business. In addition, the quality of our algorithmic search service could impact demand for our paid placement search services to the extent that our affiliates choose to do business with only a single search provider. In addition, in order to obtain and maintain demand for our new

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algorithmic and paid inclusion search services, we must continually invest in improving search relevance, speed and other aspects of our technology. If we do not continually improve our overall search service, our business could be harmed. Because some of these new products are unproven and rely on new technologies, our forward-looking projections have a higher degree of uncertainty.

     We also plan to launch several new products and services including local search and Web analytics in 2003. These initiatives are new and untested. There may not be a demand for such products and services by any or all of our constituents. If such products and services do not achieve market acceptance, our business could be harmed. In addition, the launch of new products may detract from revenue that could be generated by other products.

We depend on a limited number of sources to direct consumers and businesses to our service to conduct searches.

     The consumers and businesses that 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 sites. 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 three months ended June 30, 2003, we earned approximately 63% 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. Our constituents, including our affiliates, advertisers and consumers may be averse to the implementations we enter into with other affiliates or these affiliates’ distribution or presentation of our services. 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 material breaches of agreement terms, for changes in control 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. Our two largest affiliates, Microsoft and Yahoo! may, in certain circumstances, terminate their agreement with us upon our change of control in our ownership. The proposed merger with Yahoo! will constitute a change of control of us. We may not be successful in renewing any of our affiliate agreements, or if they are renewed, they may not be on as favorable terms. If we are unable to replace traffic from any of our large affiliates, or if our relationship with any of our larger affiliates deteriorates, it could seriously harm our business, financial condition and results of operations. We depend on our affiliates for 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. As a result of the acquisitions of AltaVista and Fast’s Web search unit, we now operate several destination search sites. If we cannot maintain the traffic at these sites, our business could be harmed.

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’ Web sites; and (iii) usage of our services by advertisers.

     We compete with companies that provide pay-per-click (global search) advertising services and paid search that are similar to ours. These companies include Espotting Media, Inc., FindWhat, Google, Inc., PRIMEDIA (About.com), Terra Lycos and Yahoo!. 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 network. 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 current affiliates or not acquire new 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 including, among others, Espotting Media, Inc., Google, Inc., MSN, Yahoo!, AOL, Ask Jeeves, Infospace and LookSmart, Ltd.

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     Both Overture and our affiliates face competition for consumer traffic within the search marketplace, which affects the number of paid click-throughs on our service and the price we share with our affiliates for those click-throughs. 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 another, and this may make it difficult for us to develop some affiliate relationships.

     We also compete with other providers of pay-per-click search services, other search services, 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 a decrease in demand for Overture services, 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 infrastructure 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.

Our acquisitions of AltaVista, Fast’s Web search unit, Keylime and other potential acquisitions could be difficult to integrate, disrupt our business, dilute stockholder value and adversely affect our operating results.

     We recently completed the acquisitions of the businesses of AltaVista, Fast’s Web search unit and Keylime. 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. We could face difficulties in assimilating the personnel and operations of the companies we have recently acquired and those of any future acquisition. In addition, the key personnel of the acquired companies 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. In addition, the acquisitions have added approximately 275 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 businesses of AltaVista and Fast’s Web search unit.

     If we finance future 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 the acquired products, services, technology or business is ultimately worth.

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We may not be able to successfully integrate the technology and sales forces of Keylime, AltaVista and Fast’s Web search unit.

     In order to fully recognize the benefits of the acquisitions of Keylime, AltaVista and Fast’s Web search unit, we must integrate their technology into our existing technology and integrate our sales forces. We cannot assure you that we will successfully integrate these technologies and sales forces or that the integration will take place within the planned timeframe and budget. The research and development organizations are located in different locations, which we expect will make integration more difficult. The integration of technology and sales forces may distract our management and research and development teams from the day-to-day operations of the Company and may cause disruption in our relationships with affiliates. If we fail to effectively integrate the technology or are not able to cross sell our products, we will not receive the expected benefits of the acquisitions and it could adversely affect our business and financial condition.

Expansion of our business model will require significant investment and we cannot assure you that these investments will be profitable.

     Our current strategy involves significant investment, including investment in our existing paid placement business through the introductions of new technologies aimed at improving advertiser acquisition and advertiser results, expansion into additional international territories, expansion of our distribution network of affiliates, both in the United States and internationally, and introduction of new search products. This expansion will require us to enter into new markets, continue research and development efforts, hire new personnel and successfully attract new affiliates and advertisers. We cannot assure you that the investments we make in these new strategies will successfully increase our revenues and profits. In addition, the pursuit of multiple initiatives may strain our management and make each of the individual initiatives more risky. If improvements to our existing services and expansion into new businesses are not successful, we believe our business will suffer.

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, aside from minimum prices, are not determined by Overture;
	•		decrease in traffic from our affiliates for any reason and over which we may have limited or no control, 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;
	•		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;
	•		changes in the mix of commercial and non-commercial search queries on the Internet;
	•		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;

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	•		foreign exchange fluctuations;
	•		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;
	•		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;
	•		laws, government regulations and judicial determinations related to the Internet;
	•		our ability to upgrade and develop our information technology systems and infrastructure;
	•		our ability to successfully identify and integrate acquisitions;
	•		costs related to any acquisitions or dispositions of technologies or businesses;
	•		general economic and geopolitical conditions, as well as those specific to the Internet and related industries;
	•		market perceptions of our proposed acquisition by Yahoo! and the likelihood of the acquisition being completed;
	•		ability to expand and compete internationally; and
	•		the timing, acceptance and impact of the release of new search efforts.