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

FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

December 31, 2002

Commission file number 000-26521

Ask Jeeves, Inc.
(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value
Preferred Stock Purchase Rights

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [x] No [ ]

On March 4, 2003, Ask Jeeves had 42,995,642 shares of Common Stock outstanding and an approximate aggregate public market value of approximately $247,331,951 (based on 36,533,523 shares of Common Stock held by non-affiliates and a closing price of $6.77 per share of Common Stock on the Nasdaq National Market). On June 28, 2002, which was the last business day of Ask Jeeves’ most recently completed second fiscal quarter, Ask Jeeves had 41,269,627 shares of Common Stock outstanding and its public market value was approximately $35,851,733 million (based on 34,807,508 shares of Common Stock then held by non-affiliates and a closing price that day of $1.03 per share of Common Stock on the Nasdaq National Market). These public market value calculations exclude shares held on the stated dates by Ask Jeeves’ officers, directors and 5% or greater stockholders. (Exclusion from these public market value calculations does not imply affiliate status for any other purpose.)

Documents Incorporated By Reference

Portions of Ask Jeeves’ definitive Proxy Statement to be filed with the Securities and Exchange Commission (the “SEC”) pursuant to Regulation 14A in connection with Ask Jeeves’ 2003 Annual Meeting of Stockholders are incorporated by reference in Part III of this report.

Certain exhibits filed with Ask Jeeves’ Registration Statements on Form S-1, SEC file nos. 333-77539, 333-95691 and 333-30494; Current Reports on Form 8-K, filed with the SEC on November 18, 1999, February 14, 2000, May 10, 2001 and September 17, 2001; Quarterly Reports on Form 10-Q filed with the SEC on November 14, 2000, August 14, 2001, April 30, 2002 and August 14, 2002; Annual Reports on Form 10-K filed with the SEC on April 2, 2001 and February 28, 2002; and Registration Statement on Form S-8, SEC file no. 333-73400, are incorporated by reference in Item 15 of this report.

The Exhibit Index begins on page 73.

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ASK JEEVES, INC.
Annual Report on Form 10-K
for the year ended December 31, 2002

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Cautionary Note regarding Forward-Looking Statements

In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words “believe,” “expect,” “will,” “anticipate,” “intend,” “estimate,” “project,” “assume” or other similar expressions, although not all forward-looking statements contain these identifying words. All statements in this report regarding our future strategy, future operations, projected financial position, estimated future revenues, projected costs, future prospects, and results that might be obtained by pursuing management’s current plans and objectives are forward looking statements. You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this report was filed with the SEC. We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed in those statements. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such difference might be significant and materially adverse to our stockholders. Many important factors that could cause such a difference are described in this Annual Report under the captions “Competition,” “Proprietary Rights” and “Risk Factors,” which you should review carefully. Please consider our forward-looking statements in light of those risks as you read this report.

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PART I

ITEM 1. BUSINESS

Overview

At Ask Jeeves, Inc. our advanced search technologies enable computer users to locate information quickly and intuitively, whether they are searching for data across the World Wide Web (which is known as the Web) or in corporate enterprise systems. We offer our search technology to the public through advertiser-supported Web sites, and to corporate customers through software licenses. Users of our flagship Web site, Ask.com, submit their question to Jeeves, our illustrated Internet butler, whose image guides them through the question and answer process. Our technology parses their questions to determine the precise topic of users’ needs and interests, while analyzing the relationships among topically relevant Web sites to supply the user with a list of locations likely to contain the most authoritative answers. Jeeves also offers suggestions for further questions and links to related products and services.

We believe that by providing an intuitive way to access information on the Web, we make online information retrieval a more satisfying experience for users. We believe that our corporate customers can achieve the same result by licensing our software. The addition of our intuitive search engine to a complex corporate Web site can make buried information—including information in linked databases and legacy systems—more accessible to the average user, thereby increasing customer satisfaction and, often, decreasing help center calls.

We offer our search technology through our two divisions: Web Properties and Jeeves Solutions:

	•		Web Properties. Our Web Properties division administers our own Web search sites results at Ask.com, Ask.co.uk, Teoma.com and AJKids.com. It generates revenue in two ways. First by syndicating our search results and ad products to approximately 45 third party Web sites, as of December 31, 2002 including portals, infomediaries, and content and destination Web sites. And second, by offering advertisers a variety of targeted and effective tools for promoting their products to our broad user base. Types of advertising range from ubiquitous banner ads to more advanced keyword products, in which we receive a fee for either displays of our click-throughs on a link to an advertiser’s product offering in response to users’ pertinent questions. In December 2002, according to Nielsen//Netratings, our combined U.S. Web Properties attracted an audience of 12.2 million unique users, who viewed approximately 7.4 million Web pages per day on our combined U.S. Web Properties. We believe the combination of our broad user base and our comprehensive suite of keyword targeted advertising products enables us to offer advertisers an efficient and effective method of reaching online audiences.
	•		Jeeves Solutions. Our Jeeves Solutions division offers software and services to our corporate customers. Jeeves Solutions’ core software application, JeevesOne, allows corporate customers to add our intuitive search engine to their corporate Internet or intranet sites. With the purchase of additional modules JeevesOne allows users to search and access a variety of linked enterprise systems and legacy databases. With the addition of Jeeves Analytics, our corporate customers can learn about their users’ behavior, interests and usage trends so as to better serve the needs of their customers and reduce overall customer support costs. We believe our Jeeves Solutions’ technology and service offerings increase user satisfaction while enabling our corporate customers to increase sales revenue and retain customers.

Recent Events

Fiscal year 2002 saw Ask Jeeves reach many milestones. Our Web Properties division integrated the Teoma search technology, which we acquired in late 2001, into our search engine on Ask.com, which increased the relevance and authority of the search results that we deliver. By so doing, we believe we increased overall user satisfaction. Additionally, we launched Teoma.com as a separate search site and added the Teoma technology to our suite of syndicated search products. In February 2002, we acquired full ownership of our joint venture in the United Kingdom and integrated its assets into our Web Properties division. Finally, we experienced strong sales growth for our paid placement products following the addition of our sponsored links service offered by Google Inc., which we complemented during the year with our Premier Listings product.

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Our Jeeves Solutions division acquired the technology assets of Octopus Software, Inc. addressing what we believe to be a key corporate customer need by adding secure enterprise connectivity, support for leading technology standards and deployment tools for corporate information technology and business users to our JeevesOne product suite. Additionally, we extended the number of technology platforms for which the JeevesOne product suite is available.

We finished 2002 on a strong note, reporting quarterly net profits from ongoing operations for the first time in our history. In fiscal year 2002, we generated revenues of approximately $74.1 million, an 11.4% increase over the prior year despite there being no noticeable improvement in the economic environment. We believe that this accomplishment represents a turning point for us and is the result of our efforts over the past two years to better position our company to serve customers and target new opportunities as they arise.

Our Web Properties Division

Properties

Our Web Properties division consists of a network of advertising-supported Web sites that attract visitors who wish to use our intuitive question and answer technology to search the Web. Our search network includes the following Web sites:

	•		Ask.com;
	•		Ask.co.uk;
	•		Teoma.com;
	•		Ask Jeeves for Kids at AJKids.com; and
	•		Sites to which we syndicate our search services.

Industry Background

Search engine usage continues to be an essential online activity for the Web’s millions of users. Nearly 80% of Internet users navigate the Web via search engines, making search sites second only to email providers as the most popular category of Web site. Already a dynamic and accepted medium, the Internet is expected to continue its growth in 2003, with the number of active Internet users in the U.S. projected to increase 6 percent to 147 million users. Correspondingly, the U.S. online advertising industry is forecast to experience a 6.3 percent growth in 2003 to $6.7 billion. By 2005, the U.S. online advertising is expected to become an $8.1 billion industry. These projections are from studies conducted by a market research firm not affiliated with our company and are forward-looking statements, as described in the introductory cautionary note.

Web Properties’ Search Sites

Ask.com

Ask.com is the flagship Web property of our search network. Well known for its butler Jeeves, this Web site provides a guided experience that helps users find the best answers to their questions on the Web. By aggregating our highly advanced search technologies, we strive to deliver the most relevant answers to users’ queries and keyword searches. Our technology parses users’ questions or keywords to determine their likely topics of interest, and analyzes relationships among Web sites devoted to those topics, to determine which are likely to be the most authoritative. In response to a user’s questions, Ask.com then delivers the following types of responses:

	•		a list of automatically generated hyperlinks to third-party Web sites, with the most relevant and authoritative Web sites listed first;
	•		suggested questions on related topics;
	•		pre-drafted answers available in the Ask Jeeves’ Knowledge Base; and
	•		paid placement listings from our advertisers.

Jeeves, the Web’s most famous face (according to NPD Wave 4 Study, March 2001), serves as a trusted guide for our users, providing them with help and direction throughout their search experience. In December 2002, Ask.com processed approximately 3.49 million questions a day compared to approximately 3.17 million questions in December 2001. Additionally, page views on Ask.com were 302.3 million in December 2002 compared to 270.8 million in December 2001. In September 2001, we acquired Teoma Technologies and in late December 2001 we integrated their highly advanced, subject-specific popularity algorithm into Ask.com so as to deliver more authoritative and

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relevant results to Ask Jeeves’ users. Teoma’s technology is described under “Teoma.com,” below. Within one year from integrating this technology, we believe user satisfaction on Ask.com increased by 42 percent and site abandonment rate decreased by 48 percent.

Ask Jeeves UK

In February 2000, we launched Ask Jeeves UK in joint venture with two British companies. This Web site, at Ask.co.uk, consistently ranks among the top 12 most visited Web sites in the United Kingdom in its category according to Nielsen//Netratings. Like our corresponding U.S. Web site, Ask Jeeves UK carries our strong, distinctive brand of Jeeves, the Internet butler. In February 2002, we announced our agreement to acquire full ownership of Ask Jeeves UK and we integrated this venture into our Web Properties division during 2002. Ask Jeeves currently has the second highest brand awareness of all Web sites in the United Kingdom (according to RSL Capibus, November 2002).

In December 2002, 5.7 million unique users visited Ask.co.uk compared to 3.9 million users in December 2001. Page views on Ask.co.uk were 90 million in December 2002 compared to 66 million in December 2001.

We added Teoma’s search technology to our Ask.co.uk site in July 2002, which now provides users with the option of choosing to view a global results list or one limited to the United Kingdom. We believe the addition of this UK result partition has increased both the number of user visits and questions asked.

Teoma

We acquired Teoma Technologies, Inc. in September 2001 and integrated Teoma’s search technology into Ask.com in late December 2001. Utilizing a breakthrough approach, known as Subject-Specific Popularity,^SM Teoma’s search technology goes beyond traditional page ranking methods to estimate a Web site’s authority, in addition to its relevance. Instead of simply ranking search results based upon the Web sites with the most links leading to them, Teoma analyzes the Web as it naturally occurs in its subject-specific communities to determine which Web sites are most relevant. Teoma is the only search technology that ranks a Web site based on the number of same-subject pages that reference it, not just general popularity, to determine the Web site’s level of authority. We maintain Teoma.com as a stand-alone search engine in addition to utilizing this technology in Ask.com and Ask.co.uk. We also syndicate this technology to Hotbot and InfoSpace, among others.

Teoma’s technology provides users of Teoma.com with three types of search results:

	•		“Results.” The Results List includes links to topically relevant Web sites in response to a user’s query.
	•		“Refine.” The Refine List organizes results into specific sub-topic categories or communities, so users can refine their search to find the results most closely related to their query. For example, a search on “video games” would let a user choose from folders containing results in the categories of “Video Games Reviews,” “Home PC Games,” “Classic Video Games” and more. We believe no other technology can dynamically cluster search results into these topic-specific Web communities.
	•		“Resources.” The Resources List includes Web sites created by individual enthusiasts or experts. These Web sites feature lists of other authoritative Web sites and links relating to the search topic. For example, an amateur golfer may have created a page devoted to his personal collection of favorite golfing Web sites. This Web site would appear under the heading “Resources” in response to a golf-related query.

Ask Jeeves for Kids

Modeled on Ask.com, Ask Jeeves for Kids at AJKids.com is a child-friendly version of the Ask.com site that enables children and young adults to find answers to their questions while learning about the online world. Designed as a fun destination Web site focused on learning and “edutainment,” Ask Jeeves for Kids uses natural-language search technology, which allows children to ask questions like “Why is the sky blue?” or “What’s it like to live in space?” in a conversational manner. Ask Jeeves for Kids combines human editorial judgment with our filtering technology, which allows us to provide relevant and content-appropriate answers to children.

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Web Properties’ Sources of Revenue

In general, we make our Web properties available without charge to users and generate revenue primarily through the sale of branded advertisements, paid placements and paid inclusion. As described below, our Web Properties division generates revenue from the following categories of products and services:

	•		Ask Jeeves Keyword Network; and
	•		Ask Jeeves Syndicated Search.

Ask Jeeves Keyword Network

We offer a variety of advertising opportunities on our four Web sites and our syndicated sites, which we call the Ask Jeeves Keyword Network. Our suite of integrated marketing tools is designed to guide our users to advertisers’ topically relevant Web sites, thereby helping our advertisers to increase sales and build brands, as well as fulfilling our users’ information requests. Benefits we offer advertisers include the following:

	•		Broad, Loyal Audience. We offer advertisers access to our Ask.com’s broad user audience, many of whom cannot be reached through competitive search engine Web sites.
	•		Keyword Targeting. Our natural-language search technology, enables us to deliver an advertisement at the moment users are most receptive to its content – when they are searching for information related to the advertiser’s message. For example, a flower company can reach potential customers by paying us to display its message on the Ask.com results page in response to a user’s query “Where can I find gift ideas for Mother’s Day?”

Our Ask Jeeves Keyword Network offers the following categories of advertising opportunities:

	•		Traditional Products and Branded Response. We offer to display advertisers’ branded graphics in a variety of formats, from traditional Web advertisements to highly-targeted graphic units we call our Branded Response product. We syndicate our traditional advertising opportunities—banners, towers and interstitials—throughout our Ask Jeeves Keyword Network. Branded Response displays an advertisement at the moment users are most interested—when they are searching for information related to the advertised product or service. In response to pertinent questions, we display the advertiser’s graphic, which can appear in question and answer format, as a helpful fact or hint, in paragraph format, or as an interactive toolbar offering real-time content. Our Branded Response product thus allows advertisers to occupy highly visible Web real estate in the middle of our Ask.com response page as well as some of our syndication partners. Advertisers can also pay us to display links to their topically relevant promotions or incentives. Branded advertising opportunities on Ask.co.uk are available through banner ads, towers and interstitials.
	•		Paid Placements. We offer advertisers a variety of paid placement opportunities. Our Premier Listing advertising product displays text-based links to advertisers’ Web sites in a response list that looks more like an answer than an advertisement. These Premier Listings are displayed in response to keywords used in the user’s question and appear as “sponsored results” just above our automated search results. This type of paid placement is available on all Web sites in our Ask Jeeves Keyword Network, except for Ask.co.uk. Our advertising product, Answer Link, which is only available on Ask.co.uk, offers companies that have been

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			identified as having high-quality, in-depth content pay for the opportunity to be an answer in response to a user’s relevant question on Ask.co.uk’s reply page. These companies do not dictate matching or keywords for the questions as relevance is maintained through the standard matching of the editorially controlled knowledge base. Additional paid placement results on Ask.com and the Ask Jeeves Keyword Network are provided by Google, Inc., a third-party paid listings provider. The placements appear under the heading “Sponsored Results” on Ask.com. Through our agreement with Google, we entered into their sponsored links program, which syndicates paid placements. Google shares its advertising revenue under this program with us based on the number of clicks on the sponsored links we display and other factors, according to a formula. We began our participation in Google’s sponsored links program in September 2002 and generated more than 10% of our total revenue for 2002 from our participation. Additionally, paid placements listed under the heading “Web Sites I Can Show You” on Ask.co.uk are provided by e-spotting, a third-party paid listings provider, based in the United Kingdom.
	•		Paid Inclusion. Our Site Submit and Index Express products currently comprise our paid inclusion program. These products allow companies to insert and frequently update their Web pages for inclusion within Ask Jeeves’ search index. Fees are based on the number of URLs submitted for inclusion. These products are distributed on Web sites throughout the Ask Jeeves Keyword Network.

Ask Jeeves Syndication Network

Ask Jeeves Web Properties division syndicates its technologies and advertising products to portals, infomediaries and content and destination Web sites to help companies increase e-commerce and advertising revenue. Web Properties syndicates our services to approximately 45 Web sites, as of December 31, 2002. Our syndication services generate revenue through revenue-share arrangements or licensing agreements.

We license our technology for organizing and ranking search results to third parties for use on their own Web sites. Our Syndicated Search customers include Excite, HotBot and InfoSpace, among other Web publishers, portals and infomediaries. Syndicated Search customers pay us a licensing fee or share advertising revenue from their search result pages with us.

	•		Teoma Search Technology. Teoma’s technology filters search results according to each Web site’s level of expertise or authority, as estimated by a community-based approach called Subject-Specific Popularity. This approach estimates a Web site’s level of authority based on the number of same-subject pages that reference it, not just its general popularity. For example, a Web site devoted to baseball would be ranked based on how many links it receives from other Web sites geared toward baseball aficionados, with less emphasis placed on links from general sports or portal Web sites.
	•		Ask Jeeves Popularity Technology. Our popularity technology aggregates and organizes online content by tracking the products, services and information people seek, the amount of time they spend at various Web sites, and how frequently they return. A search algorithm is then applied and results are ranked by relevance.
	•		Ask Jeeves Related Search. Our Related Search tool can be used in connection with a user’s primary search. This tool increases user satisfaction by offering suggestions to broaden or narrow a particular search.

Web Properties Business Strategy

Web Properties connects interested users with relevant information, products and services through Web-based search and self-service technologies on its Web sites. We monetize our Web sites by selling advertising placements designed to match companies with interested consumers. In addition to our Web sites, which include Ask.com, Ask.co.uk, Teoma.com and Ask Jeeves for Kids, we also syndicate our search technology and advertising services to a network of affiliate partners. Opportunities for growth include increasing traffic to Ask Jeeves Web sites, increasing the percent of traffic that is monetized and increasing unit pricing.

Web Properties focused on improving relevance of our search experiences through investments in our proprietary technologies in 2002 and will continue to do so in 2003. We believe that improved relevance results in increased user frequency, more unique users and better monetization of page views.

Web Properties Sales and Marketing

Sales Strategy

In 2002, we sold a majority of advertising on our Web properties through our internal advertising sales force, which is supplemented by a number of strategic relationships with sales and implementation companies. As of December 31, 2002, our Web Properties sales organization, which included direct sales, client services, business development and syndication, consisted of 29 individuals with offices primarily in California and New York. As of December 31, 2002, the Ask Jeeves UK sales organization, which included client sales, agency sales, business development and commercial operations, consisted of 21 people who were located in our U.K. office.

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Marketing

We invested in our brand early in our company’s history and established a strong brand with a loyal user base. This investment positioned us to increase our user base despite a significant decrease in our marketing expenditures in 2002 compared to 2001 and 2000. Our marketing goal for 2003 is to generate increased traffic to our Web sites by emphasizing our new and improved search experience, particularly the improved result rankings provided by our Teoma technology. We intend to spread this message through targeted guerilla marketing and strategic public relations. These tactics, combined with positive word of mouth, should encourage new users to try our Web sites, and old users to try our Web sites again. We expect that once users experience the improvements we are making to our Web sites, return-usage rates will increase.

Customers

Our Web Properties division reached thousands of customers for our advertising, paid placement, paid inclusion and syndication services for the year ended December 31, 2002. We reached these customers both directly and indirectly through direct sales and our syndication partners. Representative customers include AT&T, Amazon, Barnes and Noble, Expedia, General Motors, McDonald’s, and Microsoft.

Our Jeeves Solutions Division

Our Jeeves Solutions division offers software and services to improve corporate customers’ Web sites. Jeeves Solutions’ core software application, JeevesOne, allows corporate customers to add our intuitive natural-language search engine to their corporate Internet or intranet sites. The functionality we offer facilitates self-service by end users; i.e., the ultimate customers’ ability to navigate through corporate Web sites and perform their desired transactions in an autonomous, self-directed manner. With the purchase of additional modules, JeevesOne allows corporate customers to search and interact with a variety of linked enterprise systems and legacy databases. Our Jeeves Solutions division also offers Jeeves Analytics software, which assists our corporate customers to learn about their users’ behavior, interests and usage trends so as to better serve the needs of their customers and reduce overall customer support costs. As of December 31, 2002, our Jeeves Solution division had 41 total customers.

Industry Background

Customer Relationship Management (or CRM) software has emerged as an important investment for today’s Global 2000 corporation. The promise of CRM is to help automate many elements of corporations’ customer relationships, thereby increasing customer satisfaction while reducing costs. With the emergence of the Internet, customer interaction processes are being redesigned and automation is beginning to reach customers in the form of self-service applications. The potential to increase usability and customer satisfaction while reducing operating costs is re-defining the way companies sell and support their products and services.

Customer Benefits Provided by Jeeves Solutions

Our technologies support real-time information retrieval and actions related to a corporation’s products and services, including knowledge-based routing, automated search and natural language question answering. We believe that our technologies make Internet-based interaction between mainstream corporate businesses and their customers more intuitive, more accessible, and more productive than historical approaches to customer interactions such as mail order and automated telephone systems and call centers. When a corporate Web site is able to provide automated answers to standard and straightforward questions, fewer employees are required to handle these basic issues and more experienced staff can be made available for complex customer inquiries or urgent sales situations. By facilitating intuitive, Web-based customer self-service, our natural-language search and enterprise connectivity technologies can help companies improve customer satisfaction, increase understanding of customer demand, improve conversion and retention rates, and reduce expensive support costs generated by call centers and customer care departments.

We have developed and deployed natural language question answering and enterprise connectivity technologies for corporate Web-based self-service. These technologies provide real-time information and actions related to a corporation’s products and services. By connecting users to answers and actions through a suite of self-service technologies that include knowledge-based routing, automated search and natural language question answering, we believe our solutions allow our corporate customers to create an intuitive interaction with their customers. Moreover, we

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believe that by providing a comprehensive, intuitive, and flexible way to access online information, our customers will be able to maximize conversion and retention rates, lower support costs, and improve their customer access to information and actions. In addition, through our analysis and reporting tool that captures user questions, we believe that we can provide critical insight into the specific needs, interests and preferences of users to help companies make customer-driven business decisions.

In addition, our Jeeves Solution division offers a software tool for analyzing and reporting on user questions, which we believe can provide corporate customers with critical insight into the specific needs, interests and preferences of end users, helping our companies make customer-driven business decisions.

In sum, we believe the return on investment of the Jeeves Solutions products derives from three distinct areas:

	•		reduced support costs as a result of JeevesOne’s ability to automate the customer interaction role of the customer service representative;
	•		improved conversion rates by offering greater control of the customer experience and guiding users to desired content; and
	•		JeevesOne Analytics ability to track, measure and decipher customer interactions that occur on a Web site and then deliver actionable insight and recommendations from those interactions.

Products and Services

Jeeves Solutions’ self-service search and navigation products are based on the JeevesOne engine. JeevesOne accepts free form natural language input from a user, determines from the request what the most satisfactory action is, either retrieving information or conducting a transaction, and suggests or performs that action. In the background, an analytics engine records the current and subsequent activity of the customer, which reveals through a set of standard analytics reports how well the corporation is serving its customers and what it can do to serve them better. JeevesOne can detect the importance or criticality of the interaction with the customer, such as an angry interaction or a high likelihood to buy, and determine automatically whether to escalate the interaction to a human-assisted communication. JeevesOne precision in understanding a customer’s question and determining the appropriate action is derived from information about the corporation’s business, which is contained in industry-specific knowledge packs. These knowledge packs were developed and validated across many of Jeeves Solutions’ customers over a period of years.

Jeeves Solutions offers three versions of the JeevesOne software product:

	•		JeevesOne Search. JeevesOne Search delivers advanced natural language-based search technology, for use on corporate Internet and intranet sites to improve users’ ability to find information on the Web site.
	•		JeevesOne Standard. In addition to natural-language search, JeevesOne Standard adds greater scalability, industry specific knowledge packs, and our analytics module. Our analytics module provides our customers with reports and question tracking capabilities, so that they may analyze and act upon unconstrained feedback gathered from user interactions.
	•		JeevesOne Enterprise. JeevesOne Enterprise contains the functionality of JeevesOne Standard, and also includes additional security features and legacy-system adapters. The product’s security architecture is designed to complement existing corporate security systems to avoid duplicative effort and introduction of risk. The product’s adapters enable the Web site software to access the organization’s enterprise computing systems as necessary to answer customers’ questions or process self-service transactions. JeevesOne Enterprise contains adapters for connecting to enterprise resource planning systems, core business systems, relational database management systems and customer relationship management systems, among others. JeevesOne Enterprise technology can combine information from multiple enterprise systems on a single results page, including information generated by third-party Web sites. For example, a customer question about the status of an order could result in a response from the company’s distribution system tied to the shipping status drawn from a parcel delivery tracking system and displayed with an online map keyed by the shipping address.

Jeeves Solutions Business Strategy

To increase market share in the enterprise search and navigation market, Jeeves Solutions intends to:

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	•		Continue to develop our technology. We intend to expand the platforms on which our software operates and add support for new industry protocols and standards so that our products will be easy to integrate into our customers’ software environments.
	•		Forge Strategic Alliances and Expand Market Reach. We are working together with other technology companies and system integrators to promote our software as the preferred search component for customers assembling a Web-site platform from multiple vendors. In addition, we are seeking to form strategic alliances to enable third parties to sell, install and support our solutions. We believe that by collaborating with system integrators we can create an indirect sales channel that will expand our market reach.

Jeeves Solutions Sales and Marketing

Sales Strategy

Our Jeeves Solutions division markets its products to Global 2000 companies and other large complex corporations. We target companies seeking to increase conversion and retention rates through our direct sales force, which is complemented by our account management team. Our account management team maintains close relationships with our corporate customers to identify and serve their ongoing needs, enabling our sales professionals to focus on new business opportunities. We believe this approach leads to a higher level of satisfaction for our corporate customers and increased cross-selling and up-selling opportunities. As of December 31, 2002, our Jeeves Solutions sales organizations, which included direct sales, account management, sales engineering and channel sales, consisted of 21 people with offices in various locations throughout the United States.

Marketing

The Jeeves Solutions marketing program is designed to acquire new corporate customers. We engage in a number of marketing programs to build our brand and reach consumers and companies. These programs include online and offline advertising, public relations, direct mail, trade shows and ongoing customer communications programs. Our marketing group assists our sales team by providing them with product collateral materials, customer case studies, market surveys and customer profiles. In addition, our marketing group helps identify and develop strategic relationship opportunities and channel distribution relationships.

Customers

Our Jeeves Solutions division had 41 total customers as of December 31, 2002, including customers in our targeted vertical markets of pharmaceutical, government, retail/consumer goods and technology. Representative Jeeves Solutions’ customers as of December 31, 2002 included Ford Motor Co., Nestle, Nike, Novartis, and the State of Washington.

International Properties

We believe there is a market opportunity for international expansion of our Web Properties division and Jeeves Solutions division into selected international markets. We have pursued a cautious strategy of gradual market entry through joint venture structures with local partners, local management and local employees. Each joint venture customizes our product and service offerings as necessary to support the local language and markets them within its geographic region or language-based market.

Additional information required by this item is incorporated herein by reference to Note 14 “Business Segment and Geographic Information” of the Notes to our Consolidated Financial Statements, which appear in Item 8 of this Annual Report on Form 10-K.

Ask Jeeves UK

Ask Jeeves UK was formed as a joint venture between our company and two British media companies, Carlton Communications and Granada Media Group. The venture marketed our search technologies and services within Great Britain and the Republic of Ireland. At December 31, 2001, Ask Jeeves owned a 50 percent interest in this joint venture. In February 2002, we announced an agreement with our partners to acquire full ownership of Ask Jeeves UK. During 2002, Ask Jeeves UK was integrated into our Web Properties division.

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Ask Jeeves En Espanol

Originally a joint venture with the Spanish language media company Univision Communications, Inc., Ask Jeeves en Espanol was formed to target Spanish speakers worldwide. In the fourth quarter of 2001, we dissolved this joint venture.

Ask Jeeves Japan

Ask Jeeves Japan, a joint venture with Trans Cosmos Inc. USA Pacific Holdings Company III, a subsidiary of a Japanese customer service and information technology support provider, was established in August 2000 to launch a Japanese language version of Ask.com, create Japan-specific content for the Japanese Ask.com Web site, and to market Jeeves Solutions products and services to the Japanese marketplace. We own approximately 47 percent of the voting securities of this joint venture. Ask Jeeves has granted to the joint venture an exclusive license to our current and future products and services in Japan and for the Japanese-speaking market.

Ask Jeeves Australia

Ask Jeeves Australia was formed in August 2000 to develop a local Australian version of the Ask.com Web site. Ask Jeeves owns 100% of this entity. In 2001, we terminated the operations of this project.

Competition

Our ability to compete depends on numerous factors, many of which are outside our control. Some of our existing competitors, as well as potential new competitors, have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. This may allow them to devote greater resources to the development and promotion of their services than we can to ours. Our competitors may develop products and services that are equal or superior to ours or that achieve greater market acceptance. Many of our competitors offer a wider range of services than we do, which could attract our customers to competitive software products or our Web users to competitors’ search sites, and consequently, result in fewer customers for us or less traffic to our Web sites.

Web Properties

The ability of our Web Properties division to compete depends on:

	•		the quality of content;
	•		the ease of use of its online services; and
	•		the timing and market acceptance of its new and enhanced online services.

We believe our Web Properties division competes favorably with respect to each of these factors. However, our competitors may engage in more extensive research and development efforts, adopt more aggressive pricing policies and make more attractive offers to existing and potential employees, collaborators, advertisers and electronic commerce partners. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to better address the needs of advertisers and businesses engaged in electronic commerce. As a result, it is possible that new competitors may emerge and rapidly acquire significant market share.

We face direct competition from companies that provide Internet-wide search services and directory listings. We compete with the following search Web sites, among others, for the Web traffic generated by Internet users seeking links to topically relevant third-party content:

	•		AOL Time Warner Inc.;
	•		AltaVista Company;
	•		FAST (AlltheWeb.com);
	•		Google, Inc.;
	•		MSN; and

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•

Yahoo! Inc. (Inktomi).

     We also compete with the following providers of directory services because they provide alternative ways for users to locate potential Web sources for desired information:

	•		Google, Inc.;
	•		Overture Services, Inc.;
	•		LookSmart, Ltd.; and
	•		Yahoo! Inc.

Jeeves Solutions

Jeeves Solutions competes with a number of companies that provide self-service search and navigation for corporate customers. We believe that our products support a type of intuitive interaction between our corporate customers and their users that is not duplicated by any one competitive product. The companies providing automated online customer products and services against which we compete can be categorized as follows:

	•		companies that provide advanced natural language self-service, including Inquira Inc., iPhrase Technologies, Inc., Kanisa Inc. and Primus Knowledge Systems;
	•		search technology companies, including Autonomy Corporation, Plc., Google, Inc. and Verity, Inc.; and
	•		catalog search companies, such as EasyAsk, Inc. and Mercado Software, Inc.

Technology and Operations

We are a provider of Web-based search and self-service technologies aimed at creating a unique user experience that emphasizes ease of use, relevance, precision and ability to learn. The goal of our Web Properties division is to combine the strengths of automated natural language parsing software, topic-specific Web content analysis tools and popularity-based search technology with advanced search algorithms to give Web users easy access to the information they seek.

Our Jeeves Solutions software and service offerings also allow companies to establish connected self-service solutions that supplement the activities of call center, contact centers and marketing departments. Our software combines knowledge-based routing, automated search and natural-language question answering to enable customers to connect to information from disparate sources, providing self-service for question answering, education and business transaction support.

Scalability and Operations

Our question answering technology runs on arrays of Intel-based server systems running Microsoft Windows 2000 and Internet Information Server Software. The Question Processing Engine, or QPE, is written in the C++ computer language and is optimized to handle high traffic volumes. The Ask Jeeves knowledge bases are deployed on these servers as read-only, memory mapped files. To scale our service as traffic increases, we only need to install our QPE and knowledge base on additional servers.

Our Popularity Engine distribution servers are arrays of Intel-based server systems running the FreeBSD operating system and Apache Web Server Software. The software is written as C++ FastCGI modules for highest scalability and real-time performance. The Popularity Engine Processing Servers are also Intel systems as well as Sun Sparc Systems running Solaris, utilizing Oracle back-end software. To scale as user traffic increases, we need only install additional distribution servers. To scale as we add more data sources such as international search or corporate databases, we add more capacity to the Oracle systems or increase the number of systems.

Our proprietary search technology runs on arrays of Intel-based server systems running the Linux operating system. The environment is scalable and cost effective. It has been optimized to provide fast real-time performance. The system is automated, secure and is replicated to ensure sufficient redundancy and failover capabilities.

The servers hosting Ask Jeeves and some of our customers’ Web sites are located at Metromedia Fiber Network in San Jose, California and London, England, Worldcom in Billerica, Massachusetts, and Cable & Wireless Communications in London, England. Additionally, some of our corporate customers’ Web sites are co-located with our customers’ servers

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at other facilities. The hosting centers provide routing and communication lines with a variety of major Internet backbone providers, as well as continuous monitoring and communications support. They also provide their own power generators and multiple, redundant backup systems. We maintain significant server over-capacity at each location so that if one hosting facility fails, another can service our entire user traffic.

Proprietary Rights

We seek to protect our intellectual property rights, but we face the risk that our actions might be inadequate to protect our patents, copyrights, trademarks or other proprietary rights. We rely upon trademark, patent and copyright law, trade secret protection and confidentiality or license agreements with our employees, customers, partners and others to help protect our proprietary rights.

We have been granted four United States patents and have eight patent applications pending with the United States Patent and Trademark Office for various aspects of our natural-language search and other database search technologies, which technologies power the JeevesOne software product and our Ask.com Web site. Our policy is to apply for patents or for other appropriate statutory protection when we develop valuable new or improved technology. The status of any patent involves complex legal and factual questions, and the breadth of claims allowed is uncertain. Accordingly, we cannot assure that any patent application filed by us will result in a patent being issued, or that our patents, and any patents that may be issued in the future, will afford adequate protection against competitors with similar technology; nor can we provide assurance that patents issued to us will not be infringed or designed around by others.

We have entered into an agreement with The Wodehouse No. 3 Trust concerning our use of the Jeeves name and butler logo. The Wodehouse No. 3 Trust is successor in interest to the late author, P.G. Wodehouse, who published a number of works that included a butler character named “Jeeves.” Under the agreement we make quarterly payments to The Wodehouse No. 3 Trust. By its terms, the agreement is perpetual unless terminated by us on 30 days notice. Upon any termination we would retain only such rights to use the Jeeves name as are provided by applicable trademark and unfair competition law, which may be limited. Our right to continue to use the butler logo would not be restricted by any termination.

We have been issued registered trademarks in the U.S. covering certain goods or services for “Ask Jeeves,” the “Ask!” button design, “Ask.com,” “Jeeves Solutions” and the “Jeeves” design, a stylized depiction of our butler logo, and the phrase “Search with Authority” used on the Teoma.com Web site. In addition, the trademarks “Ask Jeeves” and the “Jeeves” design are registered in Australia, Canada, China, the European Community, France, Germany, Japan, Korea, Mexico, Norway, Spain and the United Kingdom. We have applied for registered trademark status for “Teoma” and the “Teoma” design for certain services. We do not know whether we will be able to defend our proprietary rights since the validity, enforceability and scope of protection of proprietary rights in Internet-related industries are uncertain and still evolving. Because we are devoting significant resources to building our brands, primarily “Ask Jeeves,” “Ask.com,” “Teoma,” and “Jeeves Solutions,” if we are unable to register the trade and service marks for which we have applied, or if we are unable to defend our intellectual property rights, our business may be seriously harmed.

From time to time in the ordinary course of business we have been, and we expect to continue to be, subject to claims of alleged infringement of the trademarks and other intellectual property rights of third parties. These claims and any resultant litigation, should it occur, could subject us to significant liability for damages. In addition, even if we prevail, litigation could be time-consuming and expensive to defend, and could result in the diversion of our time and attention. Any claims from third parties may also result in limitations on our ability to use the intellectual property subject to these claims unless we are able to enter into agreements with the third parties making these claims.

Regulation of the Internet

There are still relatively few laws or regulations specifically addressed to the Internet. As a result, the manner in which existing laws and regulations should be applied to the Internet in general, and how they relate to Ask Jeeves’ business in particular, is unclear in many cases. Such uncertainty arises under existing laws regulating matters, including user privacy, defamation, pricing, advertising, taxation, gambling, sweepstakes, promotions, content regulation, quality of products and services, and intellectual property ownership and infringement.

To resolve some of the current legal uncertainty, we expect new laws and regulations to be adopted that will be directly applicable to our activities. Any existing or new legislation applicable to Ask Jeeves could expose us to substantial liability, including significant expenses necessary to comply with such laws and regulations, and could dampen the growth in use of the Internet in general. Several new federal laws have already been adopted that could have an impact on our business. The Digital Millennium Copyright Act is intended to reduce the liability of online service providers for listing or linking to third-party Web sites that include materials that infringe copyrights or other rights of others. The Children’s Online Protection Act and the Children’s Online Privacy Protection Act are intended to restrict the distribution of certain materials deemed harmful to children and impose additional restrictions on the ability of online services to collect user information from minors. In addition, the Protection of Children From Sexual Predators Act of 1998 requires online service providers to report evidence of violations of federal child pornography laws under certain circumstances. Under the U.K. Data Protection Act and the European Union Data Protection Directive, a failure to ensure that personal information is accurate and secure or a transfer of personal information to a country without adequate privacy protections could result in criminal or civil penalties. Such legislation may impose significant additional costs on our business or subject us to additional liabilities. We post our privacy policy and practices concerning the use and disclosure of user data. Any failure by us to

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comply with our posted privacy policy, Federal Trade Commission requirements or other domestic or international privacy-related laws and regulations could result in proceedings by governmental or regulatory bodies that could potentially harm our business, results of operations and financial condition. In this regard, there are a large number of legislative proposals before the European Union, as well as before the United States Congress and various state legislative bodies regarding privacy issues related to our business. It is not possible to predict whether or when such legislation may be adopted, and certain proposals, if adopted, could harm our business through a decrease in user registrations and revenues. These decreases could be caused by, among other possible provisions, the required use of disclaimers or other requirements before users can utilize our services.

Due to the global nature of the Web, it is possible that the governments of other states and foreign countries might attempt to regulate its transmissions or prosecute us for violations of their laws. We might unintentionally violate such laws, such laws may be modified and new laws may be enacted in the future. Any such developments could harm our business, operating results and financial condition. We may be subject to legal liability for our online services. We direct users to a wide variety of services that enable individuals to exchange information, generate content, conduct business and engage in various online activities on an international basis, including public message posting, sweepstakes and services relating to online auctions and homesteading. The law relating to the liability of providers of these online services for activities of their users is currently unsettled both within the United States and abroad. Claims may be threatened against us for aiding and abetting defamation, negligence, copyright or trademark infringement, or other theories based on the nature and content of information that we provide links to or that may be posted online.

Employees

Our future success is substantially dependent on the performance of our senior management and key technical personnel, and our continuing ability to attract and retain highly qualified technical and managerial personnel. As part of our business realignment and reorganization, we conducted additional workforce reductions during 2002. As of December 31, 2002, we had 347 employees. No employees are represented under collective bargaining agreements. We consider our relations with our employees to be good.

See the “Risk Factors” section in Item 7 for a further discussion of certain risks related to our employees.

Web Site Access to Our Periodic SEC Reports

Our primary Internet address is www.ask.com. We make our periodic SEC Reports (Forms 10-Q and Forms 10-K) and current reports (Form 8-K) available free of charge through our Web site as soon as reasonably practicable after they are filed electronically with the SEC. We may from time to time provide important disclosures to investors by posting them in the investor relations section of our Web site, as allowed by SEC rules.

Materials we file with the SEC may be read and copied at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet Web site at www.sec.gov that contains reports, proxy and information statements, and other information regarding our company that we file electronically with the SEC.

Incorporation History

We were incorporated in 1996 in California and reincorporated in Delaware in 1999.

ITEM 2. PROPERTIES

Our headquarters are currently located in a leased facility in Emeryville, California. Our operations in the United Kingdom, Ask Jeeves UK, are headquartered in London, England. We also lease facilities for sales, research and development and other support functions in various locations in the United States.

We believe that our remaining facilities will be adequate to meet our needs for the foreseeable future. See Note 6 of Notes to Consolidated Financial Statements for information regarding our lease obligations.

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ITEM 3. LEGAL PROCEEDINGS

From time to time, we are subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of patents, trademarks, copyrights and other intellectual property rights, and a variety of claims arising in connection with our services, such as claims alleging defamation or invasion of privacy.

On October 25, 2001, a putative class action lawsuit captioned Leonard Turroff, et al. vs Ask Jeeves, Inc., et al. was filed against us and two of our officers and directors (collectively the “Individual Defendants”) in the United States District Court for the Southern District of New York. Also named as defendants were Morgan Stanley & Co,, Inc., FleetBoston Robertson Stephens, Goldman Sachs & Co., U.S. Bancorp Piper Jaffray, and Dain Rauscher, Inc., the underwriters of our initial public offering. The complaint alleges violations of Section 11 of the Securities Act of 1933 against all defendants, and violations of Section 15 of the Securities Act against the Individual Defendants in connection with our initial public offering (“IPO”). An amended complaint was filed on December 6, 2001, which includes the same allegations in connection with our secondary offering in March 2000. The complaints seek unspecified damages on behalf of a purported class of purchasers of our common stock between June 30, 1999 and December 6, 2000. We believe the claims are without merit and intend to defend the actions vigorously.

In May 2, 2002, a stockholder derivative lawsuit was filed in the Superior Court of California, County of Alameda, titled Brenner v. Strauch et al. The lawsuit purported to be filed on behalf of our company, asserting claims against the officers and directors at the time of our IPO. Also named as defendants were Morgan Stanley & Co., Inc., and FleetBoston Robertson Stephens, the underwriters of our IPO. The complaint alleged breach of fiduciary duty, negligence an unjust enrichment of the named officers and directors, for acquiescing and/or conspiring with the underwriter defendants in underpricing the IPO. Upon Defendants’ motion, the lawsuit was transferred to the U.S. District Court in Northern California. On October 31, 2002, the Court dismissed the lawsuit, with prejudice. The plaintiff has appealed and the case has been consolidated with similar derivative actions. Appellate briefing will occur from late March to early May 2003.

In management’s opinion, resolution of these matters is not expected to have a material adverse impact on our results of operation, cash flows or financial position. However, depending on the amount and timing, an unfavorable resolution of these matters could materially and adversely affect our future results of operations, cash flows or financial position in a future period.

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

No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2002.

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PART II

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

Price Range of Common Stock

Our common stock has been quoted on the Nasdaq National Market under the symbol “ASKJ” since our initial public offering in July 1999. The following table sets forth, for the periods indicated, the high and low sales prices for our common stock as reported by the Nasdaq National Market:

As of March 4, 2003, the number of holders of record of our common stock was 998. To date, we have not paid any dividends on our common stock and we do not currently intend to pay our dividends in the foreseeable future.

In 2002, we did not sell any unregistered equity securities in connection with any equity compensation plan that was not approved by our stockholders. In addition, we have not sold any securities during the past three years that were not registered under the Securities Act.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The consolidated selected financial data set forth below presents the consolidated financial results of Ask Jeeves, Inc. and our subsidiaries and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our Consolidated Financial Statements and the related notes, included in this annual report. The consolidated operating information set forth below for the periods in the three years ended December 31, 2002 and the consolidated balance sheet data as of December 31, 2001 and 2002, are derived from and qualified by reference to our audited financial statements included in this annual report. The consolidated operating information set forth below for the years ended December 31, 1998 and 1999, and the consolidated balance sheet data as of December 31, 1998, 1999 and 2000 are derived from and qualified by reference to our audited financial statements that are not included in this annual report. Our historical results are not necessarily indicative of results for any future period.

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

The following discussion should be read in conjunction with our financial statements and the related notes contained elsewhere in this Annual Report on Form 10-K. All statements in the following discussion which are not reports of historical information or descriptions of current accounting policy are forward-looking statements. Please consider our forward-looking statements in light of the risks referred to in this report’s introductory cautionary note.

Overview

Ask Jeeves is a provider of Web-based search and self-service technologies. We create a search experience focused on understanding users’ specific needs and interests and connecting them to the most relevant information, products and services.

Our Web Properties division administers our own Web search sites results at Ask.com, Ask.co.uk, Teoma.com and AJKids.com. It generates revenue in two ways. First by syndicating our search results and ad products to approximately 45 third party Web sites, as of December 31, 2002, including portals, infomediaries, and content and destination Web sites. And second, by offering advertisers a variety of targeted and effective tools for promoting their products to our broad user base. Types of advertising range from ubiquitous banner ads to more advanced keyword products, in which we receive a fee for either displays of our click-throughs on a link to an advertiser’s product offering in response to users’ pertinent questions. In December 2002, according to Nielsen//Netratings, our combined U.S. Web Properties attracted an audience of 12.2 million unique users, who viewed approximately 7.4 million Web pages per day on our combined U.S. Web Properties. We believe the combination of our broad user base and our comprehensive suite of keyword targeted advertising products enables us to offer advertisers an efficient and effective method of reaching online audiences.

Our Jeeves Solutions division offers software and services to our corporate customers. Jeeves Solutions’ core software application, JeevesOne, allows corporate customers to add our intuitive search engine to their corporate Internet or intranet sites. With the purchase of additional modules JeevesOne allows users to search and access a variety of linked enterprise systems and legacy databases. With the addition of Jeeves Analytics, our corporate customers can learn about their users’ behavior, interests and usage trends so as to better serve the needs of their customers and reduce overall customer support costs. We believe our Jeeves Solutions’ technology and service offerings increase user satisfaction while enabling our corporate customers to increase sales revenue and retain customers.

Application of Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which are known as GAAP. These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions were made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. Our accounting policies that we believe are the most critical to a full understanding and evaluation of our reported financial results include those relating to:

	•		revenue;
	•		allowances for doubtful accounts;
	•		legal contingencies; and
	•		accounting for income taxes.

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Each of these critical accounting policies is described in more detail below.

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result. Our management has reviewed these critical accounting policies and related disclosures with our Audit Committee. See the Notes to our Consolidated Financial Statements, which contain additional information regarding our accounting policies and other disclosures required by GAAP.

Revenue

We generally recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectibility is probable. If we have doubt about the collectibility of revenue at the time it is earned, such revenue is deferred until cash has been received. Our revenue streams are derived from different sources in our two business divisions, Web Properties and Jeeves Solutions, as described below.

Web Properties

Revenues associated with our Web Properties division are generated from four general sources:

	•		sales of branded advertising products;
	•		sales of premier listings and other paid placement products;
	•		sales of paid inclusion products; and
	•		syndication of services offered on our Web sites to other companies’ sites.

Our branded advertising ranges from traditional advertising units such as banners, towers and interstitials to dynamic animated placements through our branded animation service and highly targeted graphic units through our branded response service. Branded advertising is generally sold on a cost per impression basis with the revenue derived from such arrangements recognized during the period that the service is provided, provided that no significant obligations remain at the end of the period. Such obligations typically include the guarantee of a minimum number of “impressions” or times that an advertisement appears in pages viewed by users of our online properties. To the extent the minimum guaranteed impressions are not delivered, we defer recognition of the corresponding revenue until the remaining guaranteed impressions levels are achieved.

Our premier listings and other paid placement products are text messages that are designed to simply connect users interested in a particular product or service with an advertiser offering that product or service at the exact moment they need the information, much like a Yellow Pages listing. With these products, advertisers pay only for performance, thus these revenues are generated when a user clicks on the answer that links to a merchant’s Web site on a cost per click, or CPC basis. Alternatively, we may recognize revenue on a revenue-sharing basis when the paid placement service is offered through one of our third party providers.

Our syndication services range from the sale of promotional material on behalf of partners to the syndication of our Web-wide search technology to portals, infomediaries, and content and destination Web sites. Syndication license fees primarily consist of revenue-sharing arrangements, fixed fee arrangements or fee-per-use arrangements, and revenues are recognized as the service is delivered. Revenues from revenue-sharing arrangements are recorded net of amounts paid to syndication partners, except when we act as the primary obligor in the arrangement and bear risk with respect to the inventory of promotional space and credit risk, in accordance with Emerging Issues Task Force Issue No. 99-19, which expense is recognized as a cost of sale and revenue is recorded on a gross basis.

Our paid inclusion products provide an opportunity for Web sites to ensure that they are included in our search index. Paid inclusion products are generally priced on a “per URL” basis to have the URL included in our database and periodically refreshed over a set period of time, which is typically one year. Revenues are collected in advance and recognized over the appropriate service period.

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Jeeves Solutions

Revenues from our Jeeves Solutions division are derived from two sources: software license revenues and services revenue. Software license revenues are generated from companies licensing the rights to use our natural language and customer intelligence technologies for use on their corporate Web sites. Services revenue is generated from sales of maintenance agreements, consulting services and training services associated with our licensed software.

We recognize software license revenues in accordance with AICPA Statement of Position 97-2, “Software Revenue Recognition” or SOP 97-2, as amended by Statement of Position 98-9. SOP 97-2 provides specific industry guidance and stipulates that revenue recognized from software arrangements is to be allocated to each element of the arrangement based on the relative fair value of the elements. Under SOP 97-2, the determination of fair value is based on the objective evidence that is specific to the vendor. We utilize the residual method under which revenue is allocated to the undelivered element, based on vendor specific evidence of fair value and the residual amounts of revenue are allocated to the delivered element.

We recognize license revenues at the end of the core implementation period if implementation services are included in the original license arrangement and are considered to be essential to the functionality of the software. As a result, even where we have a signed license agreement for the purchase of our software and have delivered the software, license revenue recognition depends on whether we have begun core implementation. For license agreements under which we have no implementation responsibility, or where implementation is not considered to be essential to the functionality of the software, we recognize revenue upon delivery of the software. Examples of situations under which we have no implementation responsibility include additional license sales to existing customers or customers who elect to use internal or third party resources to implement the software. In software license arrangements where a service element is critical to the functionality of the software, license, implementation and service fees are recognized ratably over the life of the arrangement, commencing upon service implementation. License payments from our joint venture are recorded as deferred revenue and are being recognized as revenues on a straight-line basis over a four year period.

We generally provide consulting and training services on a time and materials basis. We provide maintenance and support services under renewable, term maintenance agreements, which we price as a percentage of our license fees. Maintenance and support fee revenue is recognized ratably over the contractual term, which is generally twelve months and commences from the implementation of service or delivery of product. Amounts paid prior to service implementation are recorded as deferred revenue, with recognition commencing upon service implementation.

Allowances for Doubtful Accounts

We make judgments as to our ability to collect outstanding receivables and provide allowances for the portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices. For those invoices not specifically reviewed, provisions are provided at differing rates, based upon the age of the receivable. In determining these percentages, we analyze our historical collection experience and current economic trends. If the historical data we use to calculate the allowance provided for doubtful accounts does not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and our future results of operations could be harmed.

We also record a provision for returns and revenue adjustments in the same period as the related revenues are recorded. These estimates are based on historical analysis of credit memo data and other known factors. If the historical data we use to calculate these estimates does not properly reflect future uncollectible revenue, then a change in the allowances would be made in the period in which such a determination is made and revenues in that period could decrease.

Legal Contingencies

We are involved currently in various claims and legal proceedings. Periodically, we review the status of each significant matter and assess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be estimated, we accrue a liability for the estimated loss. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Such revisions in the estimates of the potential liabilities could have a material impact on our results of operations and financial position. See Note 13 of Notes to Consolidated Financial Statements for a description of our material legal proceedings.

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Income Tax

As of December 31, 2002, we had net operating loss carryforwards of approximately $211.0 million and $83.0 million available to reduce future federal and state taxable income. These net operating loss carryforwards are carried on our balance sheet as a deferred tax asset, but due to the uncertainty surrounding the timing of realizing the benefits of our deferred tax assets from our net operating loss carryforwards in future years, we have recorded a 100% valuation allowance against our deferred tax assets. Financial Accounting Statement Standard No. 109, “Accounting for Income Taxes” or SFAS 109 requires that a valuation allowance be set up to reduce a deferred tax asset to the extent it is more likely than not that the related tax benefits will not be realized. In order for a company to realize the tax benefits associated with a net operating loss, it must have taxable income within the applicable carryback or carryfoward periods. Sources of taxable income that may allow for the realization of those tax benefits include taxable income in the current year or prior years that is available though a carryback claim; future taxable income that will result from the reversal of existing taxable temporary differences, (i.e. the reversal of deferred tax liabilities); and future taxable income generated by future operations.

SFAS 109 indicates that all available evidence, both positive and negative, should be identified and considered in making a determination as to whether it is more likely than not that all or some portion of the deferred tax asset will not be realized. Examples of positive evidence include: strong earnings history; existing contracts or backlog; and assets with net built in gains for tax purposes.

Examples of negative evidence include but are not limited to the following: a pretax loss for financial reporting purposes for the current year or a recent preceding year; a deficit in stockholders’ equity; a history of operating loss or tax credit carryforwards expiring unused; and cumulative losses in recent years.

We believe that our losses in recent years and deficit in stockholder’s equity present negative evidence that required a valuation allowance to be recorded to reduce to zero the deferred tax asset associated with the net operating losses. Accordingly, we have not taken a benefit for that asset. If we generate taxable income in 2003, this would be positive evidence that could allow us to release a portion of the valuation allowance set up against the asset. However, since we still have losses in recent years and because there is no other compelling positive evidence, we believe that it would not be appropriate for us to release any more of the valuation than can be utilized in 2003.

Results of Operations

Revenues

Our revenues are derived from our two business divisions. Web Properties revenues are related to our Internet search services and to the syndication of Web search services to third party Web sites. Jeeves Solutions revenues are related to the sales of our software and service products to corporations. Total revenues for 2002 grew 11.4% as compared with 2001.

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Web Properties Revenue

Total Web Properties revenue increased 82.8% over 2001. Our revenues from this division consist of three main categories: (1) sales of paid placement products; (2) branded advertising; and (3) paid inclusion. The following table presents sales for each product line, split between the U.S. and the U.K.

Throughout 2002, we made significant investments in technology, new products and in our Web sites, with the overall goals of improving relevance of our search answers and user satisfaction. We believe that these investments resulted in the significant growth in revenues in the U.S. and, combined with our acquisition of our former joint venture in the U.K., to overall revenue growth.

Paid placement revenues increased in 2002 significantly from those in 2001 as we had improvement in both unit volumes and unit pricing. Additionally, we benefited from higher revenue sharing terms from one of our paid placement partners. Paid placement revenues also increased from the introduction of our Premier Listings product, which was launched in the first quarter of 2002.

Total advertising revenues grew for 2002 from those in 2001 due to the acquisition of our U.K. joint venture. U.S. revenue decreased slightly in 2002 as the market demand for traditional online advertising products remained soft. Additionally, as part of our efforts to improve the user experience, we removed interstitial advertising and all banner advertising on Ask.com during the fourth quarter of 2002, which negatively impacted revenues. However our Branded Response product experienced strong growth, with its revenues increasing 144% as compared to those in 2001.

Our paid inclusion product, which was launched in the first quarter of 2002, contributed approximately one percent of our revenues. This product showed strong growth on a percentage basis every quarter during the year, from a small base. We believe revenues from this product will ramp more slowly due to the nature of this product’s revenue model, with fees recognized gradually over the service periods, which typically run one year.

During 2001, Web Properties revenues were impacted by softer demand for online advertising, most significantly with respect to banner advertising, resulting in a decrease in rates paid. The decrease was partially offset by revenue from new advertising products, such as Branded Animation and interstitials, which were introduced during the year.

For 2003, we expect the continued revenue growth we experienced in 2002. We intend to seek revenue growth by increasing traffic to our Web sites, increasing the percentage of our traffic that produces revenue for us and, by increasing the price we charge for our products and services. We intend to seek increased Web traffic by improving the relevance of our search answers and, thereby, increasing user satisfaction. During the fourth quarter of 2002, we launched Teoma 2.0, which is the second generation of our search technology. This version doubled the size of our search index and added spell check functionality as well as some advanced search tools. We plan to continue our investments in technology, by doubling the size of the search index again during 2003 and adding more features and functionality. Further, we plan to increase our marketing efforts to new users, which during 2002 consisted of relatively few and minor initiatives. We believe that these steps, combined with improvements to the user experience, will lead to growth in traffic of our Web sites.

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Jeeves Solutions Revenue

Total Jeeves Solutions revenue decreased 55.3% as compared with 2001. Revenues from this division consist of license and services revenue. The following table presents sales from each category and to corporate customers and our joint venture partners.

License revenues decreased significantly in 2002 as compared with 2001. This was due to the termination of license arrangements with our Spanish language joint venture, Ask Jeeves en Espanol, in late 2001 and with our U.K. joint venture, which we acquired in early 2002. Additionally, licensing to corporate customers decreased in 2002 from 2001. In 2002, corporate licenses were adversely affected by the reductions in spending across the market for information technology.

Services revenues were lower in 2002 compared to 2001, almost entirely due to reductions in spending from corporate customers. Services to corporate customers decreased by approximately the same amount as licensing, as demand for services were similarly impacted by the decrease in information technology spending.

In 2001, license revenues increased compared to those in 2000, due to the recognition of deferred revenue associated with international licensing arrangements with our joint ventures, which was partially offset by decreases in new customer bookings for domestic corporate licenses. Service revenue in 2001 compared to 2000 was reduced because of the decrease in new customer bookings during the year. A significant portion of service revenues result from the provision of consulting and training services. Such services frequently are associated with new customer bookings. When customers renew subscription-based contracts, such renewals may not result in additional consulting service revenue.

We expect the market for corporate information technology to continue to be soft for the foreseeable future. For 2003, we plan to continue to develop Jeeves’ Services product offerings to meet the needs of our customers, so that we will be well positioned when corporate spending on technology recovers.

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Gross Margin

Web Properties Gross Margin

Cost of revenues for our Web Properties division consists primarily of costs related to traffic acquisition and the delivery of our search results. Costs to acquire traffic to our Web sites include revenue sharing and similar arrangements with our partners and affiliates who direct traffic to our properties. Costs related to delivering our search results includes depreciation of Web site equipment, salaries and related personnel costs and amortization charges related to technology acquired in certain of our business combinations.

Gross margin for Web Properties increased in 2002 due to the increase in revenue. On a dollar basis, cost of revenues increased $1.6 million to $16.3 million in 2002 as compared with 2001, reflecting increased traffic acquisition costs associated with the higher levels of traffic, partially offset by decreases in compensation-related costs and facilities charges relating to our restructuring activities. Additionally, cost of revenues in 2001 included amortization of acquired technology that did not continue into 2002.

For 2001 as compared with 2000, on a dollar basis, cost of revenues for Web Properties decreased $4.5 million to $14.6 million in 2001, reflecting significant decreases in compensation and compensation-related costs and facilities charges relating to our restructuring activities during the year, as well as reduced cost of site expenses associated with the reduction of Web Properties revenue. This decrease in cost of revenues was more than offset by the decrease in Web Properties revenue.

Jeeves Solutions Gross Margin

Cost of revenues for our Jeeves Solutions division consists primarily of salaries and related personnel costs and other direct costs of providing consulting and licensing to our corporate customers. Cost of revenues for Jeeves Solutions also includes amortization charges related to technology acquired in certain of our business combinations.

Gross margin for Jeeves Solutions decreased in 2002 due entirely to the decrease in Jeeves Solutions revenue, primarily related to the terminated license arrangements with Ask Jeeves en Espanol and our U.K. joint venture, which had high margin characteristics. On a dollar basis, cost of revenues decreased $6.9 million to $6.1 million in 2002 as compared with 2001. The decrease is reflective of significant decreases in salary and related costs resulting from the decrease in revenue levels and to the reduced personnel needs due to our migration to the JeevesOne software platform, which is less labor intensive than our hosted product.

The increase in Jeeves Solutions gross margin in 2001 over 2000 reflects significant decreases in compensation and compensation-related costs and facilities charges relating to our restructuring activities during the year. This decrease in costs more than offset the decrease in Jeeves Solutions revenue during the period.

Operating Expenses