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Form 10-Q

Commission File Number 000-26521

5858 Horton St., Suite 350, Emeryville, CA 94608

(510) 985-7400

     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 þ          No o

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

      The number of shares outstanding of the registrant’s Common Stock as of April 29, 2003 was 43,400,414.

The Exhibit Index begins on page 42.

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ASK JEEVES, INC.

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Cautionary Note regarding Forward-Looking Statements

      In addition to historical information, this Quarterly Report on Form 10-Q 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 Quarterly Report under the caption “Risk Factors” as well as in our most recent Annual Report on Form 10-K under the captions “Competition,” “Proprietary Rights” and “Risk Factors,” all of 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. FINANCIAL INFORMATION

ASK JEEVES, INC.

See accompanying notes to the condensed consolidated financial statements.

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ASK JEEVES, INC.

      See accompanying notes to the condensed consolidated financial statements.

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ASK JEEVES, INC.

See accompanying notes to the condensed consolidated financial statements.

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ASK JEEVES, INC.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Ask Jeeves, Inc. (“Ask Jeeves” or the “Company”) is a provider of Web-based search and self-service technologies. The Company creates a search experience focused on understanding users’ specific needs and interests and connecting them to the most relevant information, products and services.

      The Company’s Web Properties division administers its own Web site search results at Ask.com, Ask.co.uk, Teoma.com and AJKids.com. It generates revenue in two ways: first by offering advertisers a variety of targeted tools for promoting their products to the Company’s broad user base; and second, by syndicating its search results and ad products to third party Web sites, including portals, infomediaries, and content and destination Web sites.

      The Company’s Jeeves Solutions division offers software and services to its corporate customers. Jeeves Solutions’ core software application, JeevesOne, allows corporate customers to add its 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, the Company’s corporate customers can learn about their users’ behavior, interests and usage trends so as to serve the needs of their customers.

      The Company was incorporated in California in June 1996 and reincorporated in Delaware in June 1999.

      The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Investments in the Ask Jeeves Japan joint venture in which the Company has significant influence but does not have a controlling interest are accounted for under the equity method and investments in which the Company does not have the ability to exert significant influence are accounted for at cost. All significant intercompany transactions and balances have been eliminated upon consolidation.

      The accompanying condensed consolidated financial statements as of March 31, 2003 and for the three months ended March 31, 2003 and 2002 are unaudited but include all adjustments (consisting of normal recurring adjustments and accruals) which, in the opinion of management, are necessary for a fair statement of the consolidated financial position, operating results and cash flows as of the interim date and for the periods presented. Results for the interim period ended March 31, 2003 are not necessarily indicative of results for the entire fiscal year or future periods. The condensed consolidated balance sheet at December 31, 2002 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

      The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      Basic net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options and warrants. Potentially dilutive securities have been excluded from the computation of diluted net loss per share, as their effect is antidilutive.

      The Company accounts for employee stock options using the intrinsic value method and makes the required pro forma disclosures as if the fair value method had been used. Compensation expense based on the difference, if any, on the measurement date (generally the date of grant) between the estimated fair value of the Company’s stock and the exercise price of options to purchase that stock is amortized over the vesting period of the related option using the graded vesting method.

      Had compensation cost for the Company’s stock-based compensation plans been determined using the fair value at the grant dates for awards under those plans, calculated using the Black Scholes valuation model, the Company’s net income (loss) and basic and diluted net income (loss) per share would have been adjusted to the pro forma amounts indicated below (in thousands, except per share amounts):

      In July 2002, the Financial Accounting Standards Board (or, FASB) issued Statement of Financial Accounting Standards (or, SFAS) No. 146, Accounting for Costs Associated with Exit and Disposal Activities. This statement supercedes the accounting for exit and disposal activities under Emerging Issues Task Force (or, EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. Commitment to a plan to exit an activity or dispose of long-lived assets is no longer sufficient to record a one-time charge for most anticipated costs. Instead, SFAS 146 requires exit or disposal costs be recorded when they are “incurred” and can be measured at fair value. SFAS 146 further requires that the recorded liability be adjusted for changes in estimated cash flows. The

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

provisions of SFAS 146 are effective prospectively for exit or disposal activities initiated after December 31, 2002. Previously issued financial statements cannot be restated for the effect of the provisions of SFAS 146 and liabilities previously recorded under EITF Issue No. 94-3 are grandfathered. The Company adopted SFAS 146 on January 1, 2003 and it did not have an impact on the Company’s consolidated financial statements.

      In November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company does not believe EITF Issue No. 00-21 will have a material impact on its consolidated financial statements.

      During November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34” (“FIN 45”). FIN 45 elaborates on the existing disclosure requirements for a guarantor in its interim and annual financial statements regarding its obligations under guarantees issued. It also clarifies that at the time a guarantee is issued, the guarantor must recognize an initial liability for the fair value of the obligations it assumes under the guarantee and must disclose that information in its financial statements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002, and the disclosure requirements apply to guarantees outstanding as of December 31, 2002. The Company adopted the provisions of FIN 45 as of January 1, 2003. See further discussion regarding indemnifications in Note 3.

      In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure. This statement amends Statement 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, Statement 148 amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted Statement 148 effective January 1, 2003.

      In January 2003, the Financial Accounting Standards Board issued FASB Interpretation 46 Consolidation of Variable Interest Entities. The interpretation defines variable interest entities as those in which equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or entities in which equity investors lack certain essential characteristics of a controlling financial interest. The primary beneficiary of a variable interest entity is the party that absorbs a majority of the entity’s expected losses, receives a majority of its expected residual returns, or both, as a result of holding variable interests, which are the ownership, contractual, or other pecuniary interests in an entity. The primary beneficiary is required to consolidate the financial position and results of operations of the variable interest entity. The interpretation applies immediately to interests in variable interest entities acquired after January 31, 2003 and for the first fiscal year or interim period beginning after June 15, 2003 for interests previously acquired in such entities. The Company believes that adoption of this statement will not have a material effect on its consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      Certain prior period balances have been reclassified to conform to the current year presentation. The reclassifications did not affect previously reported net income or loss.

2. ACQUISITION OF ASK JEEVES UK

      In February 2002, the Company acquired the entire outstanding equity interests in Ask Jeeves UK. Previously, the Company held a fifty percent interest in Ask Jeeves UK, a joint venture partnership with Carlton Communications PLC and Granada Media Group Limited, that was formed to market the Company’s search and self-service technologies and services in the United Kingdom. The Company acquired full ownership of Ask Jeeves UK to enhance the synergies that exist between the U.S. and U.K. operations. The acquisition was accounted for as a purchase business combination and accordingly, the consolidated financial statements include the operating results of Ask Jeeves UK from the date of acquisition.

      During the quarter ended March 31, 2003, the Company recognized a gain of $6.1 million in connection with this transaction. This amount represents the fair value of net assets the Company recorded in excess of the consideration paid upon the acquisition of the remaining outstanding equity interests in its joint venture which were deferred due to a contingent payment obligation in the Company’s agreement with its former partners. The gain was recognized as other income when the contingent payment obligation to the former partners expired in March 2003.

      During the first quarter of 2002, the Company recognized a gain of $974,000 representing the remaining balance of deferred license fees paid to it by Ask Jeeves UK, for a licensing arrangement that was terminated when the Company acquired the entity. The gain was recognized as other income.

3. COMMITMENTS AND CONTINGENCIES

      From time to time, the Company is 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 the services, such as claims alleging defamation or invasion of privacy.

      Third parties may assert infringement claims against us. 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.

      On October 25, 2001, a putative class action lawsuit captioned Leonard Turroff, et al. vs Ask Jeeves, Inc., et al. was filed against the Company and two of the Company’s 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 the Company’s 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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

connection with the Company’s initial public offering (“IPO”). An amended complaint was filed on December 6, 2001, which includes the same allegations in connection with Ask Jeeves’ secondary offering in March 2000. The complaints seek unspecified damages on behalf of a purported class of purchasers of common stock between June 30, 1999 and December 6, 2000. The Company believes the claims are without merit and intends to defend the actions vigorously.

      On 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 the Company, asserting claims against the officers and directors at the time of the Company’s IPO. Also named as defendants were Morgan Stanley & Co., Inc., and FleetBoston Robertson Stephens, the underwriters of the Company’s 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 the Company’s 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 the Company’s future results of operations, cash flows or financial position in a future period.

Indemnifications

      While the Company has various guarantees included in contracts in the normal course of business, primarily in the form of indemnities, these guarantees do not represent significant commitments or contingent liabilities of the indebtedness of others. Accordingly, the Company has not recorded a liability related to indemnification provisions.

4. RESTRUCTURING

      In the quarter ended March 31, 2003, the Company implemented certain restructuring actions to better align its cost structure with the current and anticipated levels of business activities. These actions resulted in restructuring charges of approximately $466,000 relating to workforce reductions totaling 31 positions. These charges included employee termination costs consisting of wage continuation, advance notice pay, medical benefits, and outplacement costs. As of March 31, 2003, all of the affected employees had been notified and the terminations were either completed or will be completed within 60 days of the notification date. The following table sets forth the restructuring activity during the three months ended March 31, 2003 and 2002, respectively (in thousands).

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5. LINE OF CREDIT

      The Company has a revolving line of credit with a bank in the amount of $15.0 million. The line of credit expires on July 1, 2003, unless extended. Borrowings under the line of credit bear fixed rate interest from the date of borrowing at LIBOR plus 0.5% (2.6% at March 31, 2003). All borrowings are collateralized by an equal amount of the Company’s marketable securities. Borrowings under the line are subject to various covenants. As of March 31, 2003, $11.0 million was outstanding under the line of credit. Additionally, standby letters of credit of approximately $65,000, which are being maintained as security for performance under various obligations, were issued and outstanding under the line of credit.

6. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION

      For management reporting purposes, the Company is divided into two business segments, Web Properties and Jeeves Solutions. Results of operations for these business divisions include revenues, cost of revenues, gross profit and operating income (loss) information as provided to the Company’s Chief Executive Officer (CEO), who is the Chief Operating Decision Maker. Summarized financial information by segment for the three-month periods ended March 31, 2003 and 2002, as reported to the CEO is as follows (in thousands):

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

      The Company provides its search and self-service technologies services internationally both directly and through its joint ventures. Attribution of revenues by geographic region is based on the country in which the customer is domiciled. Geographic information on revenue is as follows (in thousands):

      Included in revenues are amounts from related parties of $1,131,000 and $2,772,000 for the three months ended March 31, 2003 and 2002, respectively.

8. COMPREHENSIVE INCOME (LOSS)

      The components of comprehensive income (loss) are as follows (in thousands):

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Forward-Looking Statements

      The following discussion should be read in conjunction with our financial statements and the related notes contained elsewhere in this Quarterly Report on Form 10-Q. All statements in the following discussion that 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 provides 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 offering advertisers a variety of targeted and effective tools for promoting their products to our broad user base and second, by syndicating our search results and ad products to third party Web sites, including portals, infomediaries, and content and destination Web sites. Types of advertising range from banner ads to more advanced keyword products, in which we receive a fee for either displays or our click-throughs on a link to an advertiser’s product offering in response to users’ pertinent questions. 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.

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

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      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 Condensed 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 product. 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 users need the information, much like a Yellow Pages listing. With these products, advertisers typically pay only for performance, so 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 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.

      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.

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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 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. Even where we have a signed license agreement for the purchase of our software and have delivered the software, when we do the implementation, 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.

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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 3 of Notes to Condensed Consolidated Financial Statements for a description of the Company’s material legal proceedings.

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, respectively. 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 and temporary differences. 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

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      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 the first quarter of 2003 grew 56.5% as compared with the first quarter of 2002.

Web Properties Revenue

      Total Web Properties revenues for the first quarter of 2003 increased 99.8% over the first quarter of 2002. This growth reflects activity in both the U.S. and U.K. markets. Growth in the U.K. was partially attributable to the inclusion of the entire quarter of U.K. results, as opposed to a partial quarter in 2002, due to its acquisition in February 2002. 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.

      Paid placement revenues in the first quarter of 2003 grew significantly over the first quarter of 2002, driven by strong growth in revenue from our paid placement and paid listings products. Paid placement benefited from improvements in both unit volumes and unit pricing, as well as better revenue sharing terms from our current primary paid links provider, Google, Inc. Paid placement revenues in the U.K. were also impacted by the inclusion of the full quarter results in 2003, as compared with 2002. Additionally, revenues from our premier listings product grew significantly in the first quarter of 2003, as compared with the year ago quarter when this product was first launched.

      Branded advertising revenues were approximately flat company wide, with a slight decline in the U.S., which was partially offset by growth in the U.K. Advertising sales in the U.S. decreased due to the discontinuation of banners and interstitials on Ask.com beginning in the fourth quarter of 2002. This decrease was partially offset by the continued growth of our branded response product. The increase in U.K. revenues was due to the inclusion of the U.K. results for the full first quarter of 2003, as compared with only being included for a partial period as a result of our acquisition of the property in the year ago quarter, as well as growth across all U.K. advertising products.

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      Revenues from paid inclusion showed strong percentage growth from the small base of the first quarter of 2002 when it was initially launched. We expect revenues from this product to ramp slowly due to the nature of this product’s revenue model, which recognizes fees gradually over the service periods that typically run one year.

      For the second quarter of 2003, we expect revenues to decrease slightly as compared with the first quarter. We believe that our traffic corresponds with overall Internet usage, which declines slightly in the second quarter heading into the summer months. We anticipate that the decline in overall traffic will be somewhat offset by increases in the percentage of our traffic that produces revenue for us and by increases in the average price we charge for our products and services. We intend to continue to seek increased Web traffic by improving the relevance of our search answers and, thereby, increasing user satisfaction.

Jeeves Solutions Revenue

      Total Jeeves Solutions revenue for the first quarter of 2003 decreased 32.1% as compared with the first quarter of 2002. 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.