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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Commission File Number 000-26521

ASK JEEVES, INC.

(Exact name of registrant as specified in its charter)

555 12th Street, Suite 500, Oakland, CA 94607-4046

(Address of principal executive offices, including zip code)

(510) 985-7400

(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes 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 (excluding treasury shares) of the registrant’s Common Stock as of May 2, 2005 was 59,151,387.

      The Exhibit Index begins on page 54.

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ASK JEEVES, INC.

TABLE OF CONTENTS

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. Our forward-looking statements in this report include those relating to our expected establishment of additional European sites; our planned investments in marketing and in developing new features for our search sites, portals and Fun Web Products; our planned research and development expenditures to improve our Teoma algorithm and computer infrastructure; our planned expansion of AJinteractive’s delivery, billing and tracking systems; our expectations regarding monetization; and our proposed acquisition by IAC. All other statements in this report regarding our future strategy, future operations, projected financial position, estimated future revenues, anticipated seasonality, projected costs, future prospects, and results that might be obtained by pursuing management’s current plans and objectives are also 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. 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 differences 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 under the captions “Competition,” “Intellectual Property Rights,” “Regulation of the Internet” and “Risk Factors,” all which you should review carefully. Please consider our forward-looking statements in light of those risks as you read this report.

PRELIMINARY NOTE REGARDING OUR TRADEMARKS

      Our registered trademarks in the United States include Ask Jeeves; the “Ask!” button design; Ask.com; Excite; the “Excite” design; iWon; the “iWon” design; the “Jeeves” design (a stylized depiction of our butler logo); Teoma; the “Teoma” design (a stylized depiction of the Teoma word trademark) and “Search with Authority” (a phrase we use on the Teoma.com Web site). 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. The trademarks Excite and the “Excite” design are registered in Argentina, Chile, Mexico and Venezuela. In addition, the trademark iWon is registered in the European Community and the “iWon” design is registered in Canada, Hong Kong, Japan, Mexico and Singapore. This quarterly report also contains trademarks and trade names of third parties.

PART I. FINANCIAL INFORMATION

ASK JEEVES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to condensed consolidated financial statements.

ASK JEEVES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to condensed consolidated financial statements.

ASK JEEVES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to condensed consolidated financial statements.

ASK JEEVES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

     The Company

      Ask Jeeves, Inc. (“Ask Jeeves” or the “Company”) provides information search and retrieval services to users through a diverse portfolio of Web sites, downloadable applications and distribution networks. On the Company’s Ask Jeeves brand sites — Ask.com in the U.S., Ask.co.uk in the U.K., es.Ask.com in Spain and Ask.jp (a joint venture) in Japan — users submit queries and the Company’s algorithmic search engine, Teoma, responds by generating a list of Web sites likely to offer the most authoritative content. The Company’s proprietary Web brands also include three content-rich portals (Excite.com, iWon.com and MyWay.com), a Web log, or “blog,” and RSS aggregation service (Bloglines.com) and several other search sites. The Company earns revenue primarily by displaying paid listings and other advertisements on its proprietary sites; and also generates advertising receipts by distributing ads and search services across two networks of third-party Web sites: the MaxOnline advertising network and the Ask Jeeves syndication network. The Company pays fees to these network sites in order to reach their users with its ads and services. The Company’s proprietary technologies include Teoma, natural language processing software, portal technology and ad-serving processes.

      Ask Jeeves’ strategic goal is to become a leading provider of differentiated search solutions to users, advertisers, publishers and partners. The Company is pursuing this goal using a multiple brand strategy.

      On May 6, 2004, Ask Jeeves acquired Interactive Search Holdings, Inc. (“ISH”), which became a wholly-owned subsidiary of the Company. ISH operates several portals and search sites and develops and distributes desktop applications. See Note 3 Acquisitions.

      On March 21, 2005 Ask Jeeves signed an agreement to be acquired by IAC/InterActiveCorp (“IAC”). Under the agreement, which is subject to approval by Ask Jeeves’ stockholders and other customary conditions, Ask Jeeves will merge with a newly formed subsidiary of IAC and Ask Jeeves stockholders will receive 1.2668 shares of IAC common stock for each share they hold of Ask Jeeves common stock at the time of the merger. Ask Jeeves will survive the merger as a wholly-owned subsidiary of IAC. The transaction is currently expected to close late in the second quarter or early in the third quarter. More information about the proposed merger will be set forth in a combined proxy statement/prospectus that Ask Jeeves will use to solicit stockholders’ approval. That proxy statement/prospectus will be mailed to Ask Jeeves stockholders prior to a special meeting of Ask Jeeves stockholders at which stockholder approval of the merger will be sought.

     Basis of Presentation

      The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principals for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ended December 31, 2005 or for any other future period.

      The condensed consolidated balance sheet at December 31, 2004 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

      The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The investment in the Ask Jeeves Japan joint venture in which the Company has significant influence but does not have a controlling voting interest or a majority interest in

ASK JEEVES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the assets, obligations or results of operations is accounted for under the equity method. 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.

      For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2004.

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

     Use of Estimates

      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. For the Company, such estimates include but are not limited to revenue recognition, allowances for doubtful accounts, legal contingencies, accounting for income taxes, impairment of goodwill, and impairment of long-lived assets. Actual results could differ materially from those estimates.

     Concentrations of Revenue

      During the three months ended March 31, 2005 and 2004, paid listing revenues from one provider accounted for 74% and 69% of revenues, respectively. This provider accounted for 47% and 38% of gross accounts receivable as of March 31, 2005 and December 31, 2004, respectively. The Company’s paid listing agreements with this provider are scheduled to terminate on December 31, 2007, unless renewed by mutual agreement.

     Net Income per Share

      Basic net income per share is computed by dividing net income 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 by the weighted average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options, warrants, and convertible subordinated notes. Potentially dilutive securities have been excluded from the computation of diluted net loss per share as their effect is anti-dilutive.

     Stock-Based Compensation

      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 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.

ASK JEEVES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      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 and basic and diluted net income per share would have been decreased to the pro forma amounts indicated below (in thousands, except per share amounts):

     Legal Proceedings

      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 its services, such as claims alleging defamation or invasion of privacy.

      On October 25, 2001, a putative class action lawsuit captioned Leonard Turroff, et al. v. 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, or IPO. 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 the Company’s IPO. An amended complaint was filed on December 6, 2001, which includes the same allegations in connection with Ask Jeeves’ second public 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. This case is similar to, and has been coordinated with, over three hundred other cases filed in the Southern District Court of New York concerning the IPO market of the late 1990’s. In June 2003, a proposed settlement of this litigation was structured between the plaintiffs, the issuer defendants in the consolidated actions, the issuer officers and directors named as defendants, and the issuers’ insurance companies. On June 24, 2003, a special committee of the Company’s board of directors approved the Company’s participation in this settlement and on July 9, 2003, the Individual Defendants approved the settlement. In June 2004, the proposed settlement was submitted to the court for preliminary approval. The

ASK JEEVES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

underwriter defendants formally objected to the settlement on July 14, 2004. The plaintiffs and issuer defendants separately filed replies to the underwriter defendants’ objections on August 4, 2004. The court granted the preliminary approval motion on February 15, 2005, subject to certain modifications and directed the parties to report back to the court regarding the modifications. If the parties are able to agree upon the required modifications, and such modifications are acceptable to the court, notice will be given to all class members of the settlement, a “fairness” hearing will be held and if the court determines that the settlement is fair to the class members, the settlement will be approved. If the settlement is ultimately approved by the court, the Company expects that the costs and expenses of the settlement will be paid by the Company’s insurers, who will be reimbursed by the Company up to the amount of the Company’s $1.0 million insurance retention. Accordingly, the Company has accrued that amount on its consolidated balance sheet. Any payments beyond that amount will be made by the Company’s insurance carriers up to the limits of the relevant policies.

      On July 29, 2003, Focus Interactive filed a legal action against InfoSpace, Inc. in New York State court, Westchester County captioned Focus Interactive, Inc. v. InfoSpace, Inc., Index No. 03/11873 (Sup. Court Westchester County New York) (“NY Action”) seeking a declaration as to the respective rights and obligations of the parties under an Internet Services Agreement (“ISA”) between Focus Interactive and InfoSpace and seeking damages as a result of InfoSpace’s ISA-related demands. (The Company acquired Focus Interactive, Inc., formerly known as The Excite Network, Inc., on May 6, 2004 upon its acquisition of ISH.) On September 22, 2003, InfoSpace filed a lawsuit against Focus Interactive in Washington State captioned InfoSpace Sales LLC v. Focus Interactive, Inc., Index No. 03-2-36 176-3SEA (Sup. Court Wash., King County) (“Washington Action”) asserting claims and seeking damages for (i) breach of contract (the ISA); (ii) breach of the duty of good faith and fair dealing in performing the ISA; (iii) unfair business practices under Washington Rev. Code § 19.86.020 that affect the public interest; (iv) misrepresentation and fraud in the inducement; and (v) a declaratory judgment seeking a declaration that Focus Interactive’s threatened actions would constitute breaches of Focus Interactive’s obligations to InfoSpace under the ISA, the covenant of good faith and fair dealing recognized by Washington law, and the Wash. Rev. Code § 19.86.020. Focus’ motion to dismiss the Washington Action was granted, and was upheld by the Court of Appeals Division I State of Washington on April 4, 2005. On September 29, 2003, InfoSpace moved to dismiss the NY Action on the grounds that a declaratory judgment was improper and on forum non conveniens grounds. Focus opposed the motion and on January 7, 2004, the New York trial court denied InfoSpace’s motion to dismiss in its entirety. On January 23, 2004, InfoSpace answered the Complaint in the NY Action and filed counterclaims similar to the claims asserted in the Washington Action. On February 11, 2004, InfoSpace appealed the trial court’s denial of its motion to dismiss by filing a Notice of Appeal with the Appellate Division of the New York Supreme Court for the Second Judicial Department. The appeal has been fully briefed and is under judicial consideration. The underlying NY Action has not proceeded as the parties have been engaged in settlement negotiations, though the settlement negotiations might not be successful.

      On January 27, 2004, a lawsuit was filed in the United States District Court for the Southern District of New York captioned American Blind and Wallpaper, Inc. v. Google, Inc., et al., in which Ask Jeeves, Inc., America Online, Inc., Netscape Communications Corporation, Compuserve Interactive Services, Inc., and EarthLink, Inc. were also named as defendants. On February 27, 2004, the Company was served with an Amended Complaint in the matter. The Complaint alleges trademark infringement, false representation, and dilution under the Lanham Act, tortious interference with prospective business advantage and other claims arising from defendants’ alleged unlawful use of plaintiff’s trademarks. Plaintiff’s claims are based on the allegations that defendants sell keywords identical to plaintiff’s marks to various third parties and by manipulating search results, consumers are unwittingly diverted to competitors’ products and services. The plaintiff seeks injunctive relief and an unspecified amount of damages. The Company has tendered this suit to Google for indemnification pursuant to the terms of the Advertising Services Agreement, dated July 17, 2002, between Ask Jeeves and Google, and Google has agreed to assume the defense and to indemnify the Company

ASK JEEVES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

to the extent the claims relate to Google paid listings. Google filed a motion to dismiss the case on the grounds that the plaintiffs have failed to state a valid claim upon which relief could be granted, the plaintiffs filed an opposing brief and, on September 17, 2004, the court held a hearing on the motion, at which the judge took the parties’ arguments under submission. On March 30, 2005, the court issued an order granting Google’s motion to dismiss with respect to the tortious interference with prospective business advantage claim and denied the motion to dismiss with respect to the trademark infringement claims.

      On August 3, 2004, a lawsuit was filed in the Superior Court of the State of California, County of San Francisco captioned Mario Cisneros et al. vs. Yahoo! Inc., et al., in which Ask Jeeves, Inc., Google, Inc., Yahoo! Inc., and several other Internet media companies are named as defendants. The complaint alleges that the defendants engaged in unfair business practices and aided, abetted and conspired with operators of illegal online gambling enterprises by selling and displaying ads for online gambling operations that allegedly violate California law. The complaint purports to be brought on behalf of the general public and a class of all California residents who incurred losses in the prior four years at any illegal Internet gambling site allegedly advertised on defendants’ Web pages. The complaint seeks declaratory and injunctive relief prohibiting Ask Jeeves and the other defendants from selling or displaying such ads. The complaint also seeks to hold Ask Jeeves and the other defendants liable for an unspecified amount of monetary restitution equal to (i) all of the revenue that defendants allegedly earned by displaying ads for illegal gambling operations; (ii) all of the gambling losses suffered by persons using computers in California to access the advertised sites; (iii) all other revenues received by the gambling site operators from such computer users; and (iv) certain State taxes and fees allegedly avoided by the gambling site operators. The complaint was filed against Internet media companies and does not specifically name the gambling site operators themselves as defendants. Defendants, including Ask Jeeves, filed a motion to strike plaintiffs’ claims for restitution of gambling losses and also filed a demurrer to the entire complaint (which is a motion to dismiss the case on the grounds that the plaintiffs have failed to state a valid claim upon which relief could be granted) based on defendants’ belief that plaintiffs lack standing to bring the action. The court denied the demurrer. Defendants’ filed a reply brief in support of their motion to strike monetary remedies on April 29, 2005. A hearing on the motion to strike the restitution claims is currently scheduled for May 9, 2005.

      On February 17, 2005, a lawsuit was filed in the Circuit Court of Miller County, Arkansas captioned Lane’s Gifts and Collectibles et al. vs. Yahoo! Inc. et al., in which Ask Jeeves, Inc., Google Inc., Yahoo! Inc., America Online and several other Internet media companies are named as defendants. The complaint alleges that the defendants overcharged advertisers by billing and collecting fees for price-per-click (PPC) advertising in response to clicks that defendants knew were not generated by bona fide consumers. It further alleges that defendants engaged in an industry-wide conspiracy to conceal the alleged overcharges from advertisers in order to increase the size of the PPC advertising market. The complaint purports to be a nationwide class action on behalf of all advertisers that have been overcharged for PPC advertising. The complaint seeks to hold Ask Jeeves and the other defendants liable for the amount of the alleged overcharges, together with prejudgment interest, attorneys’ fees and such other amounts as the court may determine. The Company has tendered this suit to Google for indemnification pursuant to the terms of the Advertising Services Agreement between Ask Jeeves and Google, and Google has agreed to assume the defense and to indemnify the Company to the extent the claims relate to paid listings provided to the Company by Google. Ask Jeeves retains any liability for ads it sold.

      The following two purported class action lawsuits have been filed relating to the Company’s pending acquisition by IAC:

ASK JEEVES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Ask Jeeves believes that these claims are without merit and intends to defend vigorously against them.

      Although management does not expect resolution of these matters to have a material adverse impact on the Company’s results of operations, cash flows or financial position, an unfavorable resolution of these matters could materially and adversely affect the Company’s future results of operations, cash flows or financial position.

     Indemnifications

      In the ordinary course of business, the Company provides indemnifications of varying scope and terms to customers, vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of such agreements, services to be provided by the Company, or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with its directors and certain officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The Company maintains director and officer insurance, which may cover certain liabilities arising from its obligation to indemnify its directors, and officers and former directors, officers and employees of acquired companies, in certain circumstances.

      It is not possible to determine the maximum potential amount payable under these indemnification agreements due to the Company’s limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Many such indemnification agreements are not subject to maximum loss clauses. Historically, the Company has not incurred material costs as a result of obligations under these agreements and it has not accrued any liabilities related to such indemnification obligations in its financial statements.

     Trustic Inc.

      On February 8, 2005, Ask Jeeves acquired Trustic Inc., the company that owns and operates Bloglines. Bloglines is a free online service for searching, subscribing, publishing and sharing RSS (Real Simple Syndication) feeds, blogs and rich web content. The acquisition brings together complementary technology assets and the Company plans to leverage these technologies across its search and portal brands. The cost of the technology will be amortized on a straight-line basis over a three-year period.

ASK JEEVES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Interactive Search Holdings

      On May 6, 2004, the Company completed its acquisition of all of the outstanding capital stock of Interactive Search Holdings, Inc. (ISH), an online search and media company. The acquisition significantly increased the Company’s market share and provided additional channels of distribution for the Company’s search services. These factors contributed to a purchase price in excess of the fair value of ISH’s net tangible and intangible assets acquired, and as a result, the Company has recorded goodwill in connection with this transaction.

      The total purchase cost for ISH of approximately $395.1 million consists of the following (in thousands, except share data):

      The value of the common stock issued was determined based on the average market price of the Company’s common shares over the period two days before and after the terms of the acquisition were agreed to and announced. The fair value of the stock options was determined as of the same date using the Black-Scholes option valuation model.

      The total purchase cost of the acquisition of ISH has been allocated to assets and liabilities based on management’s determination of their fair values together with the use of valuation studies performed by a third party. The excess of the purchase consideration over the fair value of the net assets acquired has been allocated to goodwill. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed and the estimated lives of the amortizable intangible assets (in thousands, except lives):

      Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The net purchase price paid for ISH was based on historical as well as expected performance metrics. ISH had a relatively short business history and was unprofitable in every year prior to 2002. As a result, the predominant portion of purchase price was based on the expected financial performance of ISH, and not the net asset value on the books at the time of the acquisition. This resulted in a significant amount of

ASK JEEVES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the purchase price being allocated to goodwill. Goodwill is not deductible for income tax purposes and will not be amortized for financial reporting purposes. Further, it will be tested for impairment, at least annually.

      In conjunction with the acquisition, the Company accrued $1.1 million related to involuntary termination benefits. The amount includes severance, COBRA and outplacement services. Further, the Company accrued $1.3 million related to lease buy-outs for vacated properties formerly occupied by ISH employees.

      Net deferred income tax assets related to the acquisition of Interactive Search Holdings had been fully offset by a valuation allowance.

      The results of ISH’s operations have been included in the Company’s consolidated financial statements since May 6, 2004, the date of the acquisition. The following unaudited pro forma financial information for Ask Jeeves, Inc., presented in the table below, represents the combined revenue, net income and net income per share of the Company for the three months ended March 31, 2004 as if the acquisition of ISH had occurred on the first day of the period presented, including the amortization of identified intangible assets (in thousands, except per share data).

      In June 2003, the Company issued $115.0 million aggregate principal amount of zero coupon convertible subordinated notes, due June 1, 2008. The notes were sold at face value and the net proceeds to the Company were $111.5 million, net of costs of issuance of $3.5 million, which have been recorded as other assets and are being amortized in the Consolidated Statements of Operations over the contractual term of the notes.

      The notes are convertible by the holders into shares of the Company’s common stock at any time at a conversion price of $16.90 per share, subject to certain adjustments. This is equivalent to a conversion rate of approximately 59.1716 shares per $1,000 principal amount of notes. Upon conversion, the Company has the right subject to certain conditions to deliver cash (or a combination of cash and shares) in lieu of shares of its common stock. If the merger with IAC is consummated, these notes will be assumed by IAC.

      The notes are subordinated in right of payment to all existing and future senior indebtedness, as defined in the indenture. The holders of the notes may require the Company to repurchase all or a portion of the notes, subject to specified exceptions, upon the occurrence of a change in control. The Company may choose to pay the repurchase price in cash, shares of its common stock, shares of the surviving corporation or a combination thereof. The Company may not redeem the notes prior to the maturity date.

ASK JEEVES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      In December 2000, the Company’s Board of Directors approved a restructuring program aimed at streamlining the Company’s underlying cost structure to better position the Company for growth and improved operating results. During the three months ended March 31, 2005, the Company reported no additional restructuring charges. The following table sets forth the restructuring activity during the three months ended March 31, 2005 and 2004, respectively (in thousands).

      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, 2005. Borrowings under the line of credit bear fixed rate interest from the date of borrowing at LIBOR plus 0.4%. All borrowings and letters of credit under the credit facility 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, 2005, no borrowings were outstanding under the line of credit. Standby letters of credit of approximately $61,000, which are being maintained as security for performance under various obligations, were issued and outstanding under the credit facility. Further, the Company has additional standby letters of credit totaling $580,000, which are being maintained as security for a capital lease and office space.

      The Company offers advanced Internet search technology to the public through advertiser-supported sites on the World Wide Web. The Company provides its search technologies and services internationally, both directly and through its joint venture. Attribution of our sites’ revenues by geographic region is based on the region served by each Web site. Geographic information on revenues is as follows (in thousands):

ASK JEEVES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The components of comprehensive income are as follows:

      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.

EXECUTIVE OVERVIEW

      We provide information search and retrieval services to computer users through a diverse portfolio of Web sites, downloadable applications and distribution networks. On our Ask Jeeves brand sites — Ask.com in the U.S., Ask.co.uk in the U.K., es.Ask.com in Spain and Ask.jp (a joint venture) in Japan — users submit queries and our algorithmic search engine, Teoma, responds by generating a list of Web sites likely to offer the most authoritative content. Our proprietary Web brands also include three content-rich portals (Excite.com, iWon.com and MyWay.com), a Web log, or “blog,” and RSS aggregation service (Bloglines.com) and several other search sites. We earn revenue primarily by displaying paid listings and other advertisements on our proprietary sites. We also generate advertising revenue by distributing ads and search services across two networks of third-party Web sites: the MaxOnline advertising network and the Ask Jeeves syndication network. We pay fees to these networked sites in order to reach their users with our ads and services. Our proprietary technologies include Teoma, natural language processing software, portal technology and ad-serving processes.

      Our strategic goal is to become a leading provider of differentiated search solutions to users, advertisers, publishers and partners. We are pursuing this goal using a multiple brand strategy.

      We earn revenue from advertisements we display to users as they navigate the Internet. We refer to users’ Internet activity as Web “traffic” and, in general, the more Web traffic we can attract, the more advertising revenue we will generate. We attract Web traffic in two main ways:

Each of these sources of revenue is discussed in greater detail, below.

Recent Events

      Notable events since the filing of our annual report for the year ended December 31, 2004, include the following:

Proprietary Traffic

      We seek to attract Web traffic by satisfying users’ demand for Internet search services. We make our search services available from a variety of access points and through multiple brands, each with its own differentiated user experience. Our proprietary revenues arise from the following sources:

      On most of our proprietary sites, we attempt to monetize search queries by delivering a results Web page that includes keyword-targeted advertisements (in addition to the search engine results and other elements). Keyword ads appear on the results page in response to certain words in the user’s query. Advertisers select the keywords that will cause their ads to be displayed. Most keyword ads take the form of short textual units that include a link to the advertiser’s Web site; we generically refer to these text ads as “paid listings.” We sometimes also display graphic keyword ads (which we call “Branded Response”).

      Keyword ads are a popular choice among Internet advertisers, in part because they enable advertisers to deliver their messages at the moment viewers are most likely to be interested — when users are actively searching for information related to the advertiser’s product or service. Unlike traditional non-targeted Web advertisements, which can be intrusive or annoying, keyword ads are often useful to the user and thus can be more effective for advertisers. Another reason that keyword ads appeal to advertisers is that, typically, advertisers are not charged for keyword ads unless they get results. That is, most keyword ads are sold on a price-per-click, or PPC, basis (also known as cost-per-click, or CPC, pricing); as a result, the advertiser does not pay unless the ad successfully attracts a user’s click. (Occasionally keyword ads are sold on a cost-per-action, or CPA, basis, where the advertiser does not pay unless the user clicks on the ad and takes a designated action on the advertiser’s site.)

      We identify keyword-targeted ads as “sponsored” content on all of our results pages and display them separately from the algorithmic search results. Although keyword ads are sold to advertisers by our direct sales force, we obtain most of our paid listings from third-party providers. Currently, Google Inc. is our primary supplier of paid listings. Google administers contracts with hundreds of thousands of advertisers, who bid to have their paid listings appear on participating search result pages in response to keywords they select. We transmit each query to Google (or another paid listing provider), which immediately transmits paid listings back to us for display. This ad-serving process occurs independently of, but concurrently with, the search

engine process that will generate Web results for the same query. When we deliver a user’s click on a paid listing supplied by Google, Google bills the advertiser and shares a portion of that revenue with us. We display paid listings from Google on most of the results pages we control and we distribute them to many of the third-party sites in our network. Our paid listing supply agreement with Google is scheduled to expire on December 31, 2007, unless renewed by mutual agreement.

      On our Excite and iWon portals we display both content-targeted and non-targeted ads, such as banners, towers and pop-ups. Content-targeted ads are similar to paid listings in that they appear in response to the user’s current interests. However, unlike paid listings, content-targeted ads appear on a Web page in response to the page’s other content. For example, next to a news story about the Wimbledon Championships, we might display an ad for tennis rackets. We generally obtain content-targeted ads from a third-party provider, namely Google. Our content-targeted ad supply agreement with Google is scheduled to expire on August 31, 2007, unless renewed by mutual agreement.

Network Revenues

      In general, the more users to whom we deliver search results (and ads and other revenue-generating services), the more overall revenues we will generate. Recognizing this, we approach third-party sites (and other third parties with loyal customer bases) offering to pay them a fee for the right to deliver our services to their users. We sometimes refer to those third parties as our network “partners.” The fees we pay to our network partners are often calculated as a portion of the revenue we earn by delivering services to their users, according to contractual revenue-sharing formulas. We record these fees as traffic acquisition costs (within cost of revenues). As a result of these revenue-sharing obligations, we generally earn lower gross margins on network revenues than on proprietary revenues. Our network arrangements include the following:

CRITICAL ACCOUNTING POLICIES

      The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States (known as GAAP) requires us to make certain estimates, judgments and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. 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 and estimates that we believe are the most critical to a full understanding and evaluation of our reported financial results include those relating to:

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

Revenue Recognition

      We generate revenue from the following main sources:

      Our revenue recognition policy is one of our critical accounting policies because revenue is a key component of our results of operations and is based on complex rules which require us to make judgments and estimates. We recognize revenue in accordance with current generally accepted accounting principles, which means revenue is recognized only when all of the following criteria are satisfied:

      If we doubt the collectibility of revenue at the time the service is performed or delivered, we defer recognizing the revenue until it is received in cash.

      There are several pricing plans for Internet advertisements, and the way in which we earn ad revenue varies among them. Depending upon the pricing terms, we might earn revenue every time a graphic ad is displayed (referred to as cost per thousand impressions, or CPM, pricing), every time a user clicks on an ad (referred to either as price per click, PPC, or cost per click, CPC, pricing), every time a qualified user indicates interest in the advertised topic (referred to as cost per lead, or CPL, pricing) or every time a user clicks-through on the ad and takes a specified action on the destination site (referred to as cost per action, or CPA, pricing).

      Paid listings and content-targeted ads are normally sold on a PPC basis. Although some PPC ads are sold by our direct sales force, we obtain the majority of our PPC ads from third-party providers, primarily Google Inc. We recognize paid listing (and other PPC) revenue as follows:

      In addition to paid listings, we display branded advertising. Our branded advertising ranges from keyword-targeted graphic units, which we offer to advertisers as our Branded Response product, to content-targeted and non-targeted graphic advertising units such as banners, towers, buttons and pop-ups, which appear primarily on our portals and MaxOnline network sites. With these products, advertisers generally desire to have their ads displayed (regardless of whether users click on the ads), so we generally sell branded advertising on a cost per thousand impressions, or CPM, basis. We recognize revenue from CPM arrangements during the period in which the advertising impressions are delivered, provided that no significant obligations remain unperformed by us at the end of the period and collection of the resulting receivable is probable. Our obligations typically include a guaranteed minimum number of “impressions” or times that an advertisement appears. To the extent the minimum guaranteed impressions are not delivered, we continue to run the ad and defer recognition of the corresponding revenue until the remaining guaranteed impression level is achieved. In cases where we share CPM revenue with a provider or network partner, we recognize revenue in accordance with EITF, Issue No. 99-19 as described above.

      We sell some branded advertising for which the advertiser pays only if the user clicks on the ad and goes on to take another action on the destination Web site. This arrangement is known as cost per action, or “CPA,” pricing. We recognize revenue from CPA arrangements when a user takes an action on the destination Web site, provided that collection of the resulting receivable is probable.

      Until the second quarter of 2004, we offered paid inclusion products, which provided an opportunity for Web sites to ensure that they were included in our search index. Although we have ceased offering any paid inclusion products, we will continue to recognize paid inclusion revenue until the termination of all existing paid inclusion service periods. We recognize paid inclusion revenue using either of two methods. First, for paid inclusion products that were priced on a “per URL” basis, we collected the revenues in advance and have been recognizing them over the appropriate service period, which is typically one year. Second, for paid inclusion products that were priced on a CPC basis, we recognized the revenue when the click was delivered.

      In the third quarter of 2000, we licensed our search technology to our Japanese joint venture (in which we hold a minority interest) and received a non-recurring license payment. We recorded this payment as deferred revenue and recognized it as revenue on a straight-line basis over a four-year period. This license revenue reached the end of its amortization period during the third quarter of 2004 and recognition of the revenue ended.

Allowances for Doubtful Accounts

      We make judgments as to our ability to collect outstanding receivables and provide allowances for a portion of the 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 adversely impacted.

      We also record a provision for estimated 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 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 be impacted.

Legal Contingencies

      We are currently involved 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 future results of operations and financial position. See Note 2 (Commitments and Contingencies) of Notes to Condensed Consolidated Financial Statements for a description of our material legal proceedings.

Income Taxes

      We are subject to income taxes in the U.S. and in numerous foreign jurisdictions. Significant judgment is used in evaluating our tax positions and determining our consolidated income tax provision. Uncertainties may arise with respect to the tax treatment of certain transactions, transfer pricing arrangements among related entities, and segregation of foreign and domestic income and expense. Although we believe our estimates are reasonable, we cannot be certain that the final tax outcome of these matters will not be different than that which is reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision in the period in which such determination is made.

      Due to uncertainty surrounding when or if we will realize the benefits of our deferred tax assets (primarily from our net operating loss carryforwards), we have recorded a 100% valuation allowance on our domestic net deferred tax assets. Any decrease in the valuation allowance could materially reduce our income tax provision in the period in which such determination is made. We have not established a valuation allowance against the deferred tax assets arising in certain foreign tax jurisdictions. Operations within these jurisdictions currently generate sufficient taxable income to make the realization of these deferred tax assets more likely than not.

      We provide for United States income taxes on the earnings of our foreign subsidiaries unless they are considered indefinitely invested outside the United States. We currently intend to reinvest all of our foreign

earnings in the activities of our foreign operations, and accordingly no US income tax has been provided on such earnings. At March 31, 2005, the cumulative earnings upon which United States income taxes have not been provided are approximately $17.1 million. The income tax that would arise if these items were repatriated is approximately $3.1 million, some or all of which may be reduced by NOL’s.

Impairment of Long-Lived Assets

      Our long-lived assets include goodwill and other intangible assets. Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests in certain circumstances. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit. Any impairment losses recorded in the future could have a material adverse impact on our financial condition and results of operations. The goodwill recorded in our Consolidated Financial Statements as of March 31, 2005 and December 31, 2004 was $264.9 million.

      Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, requires that we record an impairment charge on finite-lived intangibles or long-lived assets to be held and used when we determine that the carrying value of intangible assets and long-lived assets may not be recoverable. Based on the existence of one or more indicators of impairment, we measure any impairment of intangibles or long-lived assets based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our business model. Our estimates of cash flows require significant judgment based on our historical results and anticipated results and are subject to many factors. Any impairment losses recorded in the future could have a material adverse impact on our financial condition and results of operations.

Recent Accounting Pronouncements

      In December 2004, the Financial Accounting Standards Board (FASB) enacted Statement of Financial Accounting Standards 123 — revised 2004 (SFAS 123R), Share-Based Payment, which replaces Statement of Financial Accounting Standards 123 (SFAS 123), Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees. SFAS 123R requires the measurement of all employee share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our consolidated statements of income. The accounting provisions of SFAS 123 are effective for periods beginning after December 15, 2005. We are required to adopt SFAS 123R in the first quarter of fiscal 2006. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. See Note 1 in our Notes to Condensed Consolidated Financial Statements for the pro forma net income and net income per share amounts for the three months ended March 31, 2005 and 2004, as if we had used a fair-value-based method similar to the methods required under SFAS 123R to measure compensation expense for employee stock incentive awards. Although we have not yet determined whether the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123, we are evaluating the requirements under SFAS 123R and expect the adoption to have a significant adverse impact on our consolidated statements of income and net income per share.

RESULTS OF OPERATIONS

Revenues

      Total revenues for the first quarter of 2005 grew 141.8% as compared with the first quarter of 2004. The most significant cause of this increase was our acquisition of the operations of Interactive Search Holdings, Inc., or ISH, which we acquired May 6, 2004. Revenues were also favorably affected by usage of our Web sites, which we refer to as our Web traffic. Traffic to our proprietary sites continued to be strong in the first quarter of 2005, with our “Ask” branded properties in the U.S. experiencing record quarters in terms of revenues.

      We classify our revenues into the following two categories:

      We also classify our revenues as arising from North America, Europe or Asia, based on the region served by the Web site generating the revenue.

      The table below presents our revenues for each category and our total revenue, split between North America, Europe and Asia for the three months ended March 31, 2005 and 2004.

      Proprietary revenues experienced strong growth in the first quarter of 2005 as compared with the first quarter of 2004. Proprietary revenue growth was driven by the addition of new properties through acquisition in North America and increases in traffic and monetization of our original websites in North America and Europe. Traffic and monetization of our original properties continued to increase with our “Ask” branded properties in the U.S. experiencing a record quarter. New properties also contributed significantly to revenue during the first quarter of 2005 as compared with the first quarter of 2004, with the Fun Web Products business experiencing a record quarter. Year over year comparisons of graphical ads on our proprietary sites was favorably impacted by the addition of the portal properties iWon and Excite.

      Network revenue growth in the first quarter of 2005, as compared with the first quarter of 2004, was driven by our acquisition of new businesses as well as by strong performance of our existing syndication network. In May 2004 we acquired the MySearch business (as part of our acquisition of ISH), which supplies search services to users through downloadable toolbars, and which was the most significant component in the increase in revenues. A lesser cause of the increase was our acquisition of the MaxOnline network (also as part of ISH), which allows advertisers to run their ads across third-party Web sites in a number of subject channels. Finally, strong performance in the first quarter of 2005 from our network partners as well as from our co-branded portals also contributed to the increase in network revenues.

      For the second quarter of 2005, we expect that a seasonal decrease in Web traffic combined with our strategy to reduce monetization per query on some of our proprietary properties will result in revenues that are approximately equal to those of the first quarter. We believe that by reducing the monetization of search results or the number of ads that are displayed in response to search queries we can increase user satisfaction with our sites and consequently their frequency of use. We believe that this higher user satisfaction and increased frequency of use will result in higher revenues in the longer run. Additionally, we believe that our traffic generally corresponds with overall Internet usage, which historically has declined slightly in the second and third quarters during the summer months and returned in the fourth quarter. We also intend to continue to seek increased Web traffic by increasing our marketing efforts and by improving the relevance of our search results and, thereby, increasing user satisfaction and usage.

Gross Margin

      Gross profit consists of total revenues less cost of revenues. Gross margin means gross profit expressed as a percentage of total revenue. The following table presents our gross profit and gross margin for the first quarter of 2005 and 2004:

      Cost of revenues consists primarily of costs related to traffic acquisition for our syndicated sites and the delivery of our search results. Costs to acquire traffic for our syndicated sites include revenue-based payments and similar arrangements with third-parties who direct traffic to those sites. Costs related to delivering our search results include depreciation of Web site equipment, hosting and ad server management, salaries and related personnel costs and amortization charges related to technology acquired in some of our business combinations.

      Gross margin percentage in the first quarter of 2005 decreased relative to the first quarter of 2004 primarily due to the additions to the network businesses, such as MySearch and MaxOnline, acquired after the acquisition of ISH in May 2004. Our gross margins from the network side of our business tend to be lower than from the proprietary side as a result of the Web traffic acquisition fees we pay to our network partners. Our May 2004 addition of new network business lines resulted in a higher portion of total revenues coming from network traffic which negatively impacted gross margins. Cost of revenues for the first quarter of 2005 included approximately $16.5 million in network traffic acquisitions costs, compared to $1.9 million in the

corresponding quarter in 2004. Further, gross margins were negatively impacted by the addition of the amortization of acquired technology.

      We expect gross margin in the second quarter of 2005 to decrease slightly compared to the first quarter of 2005.

Operating Expenses

      Product development expenses consist primarily of salaries and related personnel costs, consultant fees and expenses related to the design, development, testing and enhancement of our technology and services. To date, all software development costs have been expensed as incurred.

      Product development expenses increased on a dollar basis but decreased as a percentage of revenue during the first quarter of 2005 as compared to the first quarter of 2004 for several reasons. Compensation and related expenses increased as we significantly grew our research and development team in order to expand our Teoma technology and add new features on our Web sites. Further, the first quarter of 2005 includes product development expenses incurred due to the addition of ISH operations.

      We expect product development expenses in the second quarter of 2005 to be in line with the first quarter.

      Sales and marketing expenses consist primarily of advertising, promotional and public relations expenditures, as well as salaries, commissions and related personnel expenses of our sales force.

      Sales and marketing increased primarily due to online, print and television advertising. These marketing campaigns were focused on promoting both branding and traffic generation. Further, included in the first quarter of 2005 are marketing expenses specifically related to ISH, which was not present in the first quarter of 2004. These expenses included user acquisition costs related to the ISH toolbars and sweepstakes and prizes won by users of our iwon.com website.

      We expect sales and marketing expenses in the second quarter of 2005 to increase, both on a dollar basis and as a percentage of revenues, relative to the first quarter of 2005 as we plan to invest in marketing across all of our product lines.

      General and administrative expenses consist of costs for general corporate functions, as well as depreciation and other facilities charges. Also included is the provision for doubtful accounts, various accounting, investor relations and legal costs associated with operating our business, and administrative function salaries.

      The increase in general and administrative expenses in the first quarter of 2005 reflects an increase in salaries, employee-related benefits and incentive compensation as we expanded headcount to manage the growing business, and rewarded employees for the company’s performance. However, as a percentage of total revenue, general and administrative expenses have decreased as compared to the three months ended March 31, 2004.

      We expect general and administrative expenses in the second quarter of 2005 to slightly decrease compared to the first quarter.

      Interest income relates primarily to interest earned on fixed income securities and correlates with the average balance of those investments and prevailing interest rates. Interest expense arises primarily from interest accruing under our capital leases.

      Interest income slightly decreased as our average balance of funds held in interest-earning investments decreased. During the first quarter of 2004, we held significant balances of marketable securities in preparation for our acquisition of ISH in May 2004.

      During 2005 we incurred interest expense on the capital lease obligations we assumed when we acquired ISH. As a result, interest expense increased from the first quarter in 2004.

      Other income includes gains and losses from foreign currency transactions and the disposal of assets, as well as realized gains and losses from investments. Compared to the first quarter of 2004, in the first quarter of 2005, our European operations were more robust and processed more transactions. As a result, we recorded a larger gain on foreign currency exchanges than in 2004. This gain was partially outweighed by larger realized gains on investments in the first quarter of 2004 compared to 2005. During the first three months of 2004, we began to liquidate marketable securities in order to fund the ISH acquisition.

      We recorded an income tax provision in the amount of $529,000 in the first quarter of 2005 relating primarily to income from our international operations. The provision differs from the amount computed by applying the statutory federal rate principally due to federal net operating loss carryforwards for which no tax benefit is provided and foreign income taxed at rates below the federal statutory rate. The tax provision is based upon our estimate of the full year effective rate for the Company. The provision decreased from the first quarter of 2004 due to changes in U.S. tax law and in the mix of foreign tax jurisdictions where income was generated.

Seasonality and Quarterly Fluctuations in Operating Results

      Our operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are beyond our control. Factors that may adversely affect our results of operations include:

      Because of the foregoing factors, we believe that period-to-period comparisons of our operating results should not be relied upon as an indicator of our future performance.

      As Internet advertising continues the transition from an emerging to a more developed market, seasonal and cyclical patterns may develop in our industry that may also affect our revenues. Similar to traditional media, this may result in our advertising sales being lower during the summer vacation period. Additionally, the seasonality of traffic on our proprietary sites corresponds with overall Internet usage. Mirroring general Internet use trends, we expect that queries on our sites will be strongest in the first and fourth fiscal quarters and weakest in the third quarter. These trends reflect greater usage during the school year and less usage during holidays and the summer vacation period. Furthermore, seasonality in the retail industry may also affect the prices advertisers are willing to bid for keywords.

ACQUISITIONS

      On May 6, 2004, we completed the acquisition of all of the outstanding capital stock of Interactive Search Holdings, Inc. (ISH), an online search and media company. The acquisition increased our market share and provided additional channels of distribution for our search services. These factors contributed to a purchase price in excess of the fair value of ISH’s net tangible and intangible assets acquired, and as a result, we have recorded goodwill in connection with this transaction. The results of ISH’s operations have been included in our consolidated financial statements since the date of the acquisition.

      The total purchase cost for ISH of approximately $395.1 million consists of the following (in thousands except share data):

      The value of the common stock issued was determined based on the average market price of our common shares over the period commencing two days before and ending two days after the date on which the terms of the acquisition agreement were publicly announced. The fair value of the stock options was determined as of the same date using the Black-Scholes option valuation model.

      The total purchase cost of the acquisition of ISH has been allocated to assets and liabilities based on management’s estimate of their fair value together with the use of valuation studies performed by a third party. The excess of the purchase consideration over the fair value of the net assets acquired has been allocated to goodwill. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed (in thousands):

      Amortizable intangible assets consist of developed technology, user base, advertiser and distribution partner relationships and trade names, with useful lives not exceeding five years. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired, and is not deductible for income tax purposes. Goodwill will not be amortized for financial reporting purposes and will be tested for impairment, at least annually.

LIQUIDITY AND CAPITAL RESOURCES

      We consider all cash and highly liquid investments with an original maturity of less than three months at the date of purchase to be cash equivalents. Our primary recurring sources of cash are collections from advertisers (and from our paid listing providers) and proceeds from the exercise of employee stock options. The primary uses of cash are payroll (salaries, bonuses and benefits), general operating expenses (marketing and facilities) and capital expenditures. The following table presents our cash, cash equivalents and marketable securities, and related data, as of March 31, 2005 and December 31, 2004 (dollars in thousands).

      During the three months ended March 31, 2005, cash, cash equivalents, and marketable securities increased by $177,000 from $109.7 million at December 31, 2004 to $109.9 million at March 31, 2005 (of which cash and cash equivalents comprised $64.8 million).

      Net cash provided by operating activities of $23.0 million for the three months ended March 31, 2005 resulted primarily from net income of $18.1 million adjusted for non-cash items, including depreciation and amortization of $3.2 million, amortization of intangible assets of $7.2 million and changes in working capital.

      Net cash used in investing activities of $40.0 million resulted primarily from purchases of property and equipment of $14.2 million and the acquisition of developed technology of $10.0 million. Further, we purchased marketable securities in the amount of $22.8 million.

      Net cash provided by financing activities of $2.0 million resulted primarily from our issuance of common stock, mainly from the exercise of stock options.

      We have a revolving line of credit with a bank in the amount of $15.0 million. The line of credit expires on July 1, 2005. Borrowings under the line of credit bear interest at LIBOR plus 0.4%. All borrowings and letters of credit are collateralized by an equal amount of our marketable securities. The line of credit agreement contains various covenants. As of March 31, 2005, no borrowings were outstanding. Standby letters of credit of approximately $61,000 were issued and outstanding under the line of credit, which are being maintained as security for performance under lease obligations. Should we choose not to renew the line of credit, we do not believe our business would be harmed. We have additional standby letters of credit totaling $580,000, which are being maintained as security for a capital lease and office space. In the merger agreement, we agreed not to in incur any indebtedness in excess of $5.0 million without the prior written consent of IAC.

      On June 8, 2004, we filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission, or SEC. The registration statement was declared effective by the SEC on July 26, 2004 and will permit (but not require) us to offer and sell up to $400.0 million of common stock, preferred stock, depositary shares, debt securities or warrants from time to time in one or more public offerings. The terms of any such future offerings will be established at the time of each offering. In the merger agreement, we agreed not to offer any securities (other than pursuant to stock option plans) without the prior written consent of IAC.

      In June 2003, we issued $115.0 million aggregate principal amount of zero coupon convertible subordinated notes, due June 1, 2008. The notes were sold at face value and our net proceeds were $111.5 million, net of costs of issuance of $3.5 million. We issued the notes for general corporate purposes, including potential future acquisitions. The notes are convertible by the holders into shares of our common stock at any time at a conversion price of $16.90 per share subject to certain adjustments. This is equivalent to a conversion rate of approximately 59.1716 shares per $1,000 principal amount of notes. Upon conversion, we have the right, subject to certain conditions, to deliver cash (or a combination of cash and shares) in lieu of shares of our common stock. The notes are subordinated in right of payment to all existing and future senior indebtedness, as defined in the indenture. The holders of the notes may require us to repurchase all or a portion of the notes, subject to specified exceptions, upon the occurrence of a change in control. We may choose to pay the repurchase price in cash, shares of our common stock, shares of the surviving corporation or a combination thereof. We may not redeem the notes prior to the maturity date. Pursuant to the merger agreement, these notes will be assumed by IAC at the closing of the merger.

      Our existing cash and marketable securities balances may decline during 2005 in the event of a weakening in our business, or changes in our planned cash outlays. However, based upon our current business plan and revenue prospects, we anticipate that our existing cash and marketable securities will be sufficient to fund our anticipated needs for working capital and capital expenditures for at least the next twelve months. Cash from operations could be affected by various risks and uncertainties, including, but not limited to the risks detailed in the section “Risk Factors.” Additionally, cash and marketable securities balances may be used to fund strategic acquisitions of other companies, international expansion or products and technologies that are complementary to our business.

      On an ongoing basis, we will need to generate sufficient cash flow from operations to meet our anticipated needs for working capital and capital expenditures, and repayment of our convertible notes if not converted into stock, or we will need to raise additional capital. However, if we are not successful in generating sufficient cash flow from operations or in raising additional capital when required in sufficient amounts and on terms acceptable to us, these failures could seriously harm our business. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our existing stockholders will be reduced.

Off Balance Sheet Arrangements

      As of March 31, 2005, our only unconsolidated subsidiary is Ask Jeeves Japan, which generally provides Ask Jeeves’ services within a defined geographic region. We do not have majority voting rights or majority residual interests in the assets or income of any off balance sheet entities, including Ask Jeeves Japan. Further, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitment or intent to provide additional funding to any such entities. Accordingly, we are not materially exposed to any market, credit, liquidity or financing risk that could arise from engaging in such relationships.

      We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Contractual Obligations

      The following table summarizes our contractual obligations in specified categories at March 31, 2005, and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

RISK FACTORS

      Described below are other risk factors that may affect our future operating results.

Risks Related to our Pending Acquisition by IAC

Our pending acquisition by IAC might cause the trading price of our common stock to vary based on the trading price of IAC’s common stock rather than our own financial performance. The trading price of IAC common stock, in turn, might be affected by factors different from or in addition to the factors affecting the trading price of our common stock.

      On March 21, 2005 we signed an agreement to be acquired by IAC. If our stockholders approve the merger and the other conditions specified in the merger agreement are satisfied, at the closing our stockholders will receive 1.2668 shares of IAC common stock for each share they hold of Ask Jeeves common stock. This exchange ratio is fixed regardless of our financial performance. Accordingly, until the closing of the merger (or any earlier termination of the merger agreement) the trading price of our common stock is likely to vary based on the trading price of IAC common stock. IAC owns and operates a number of lines of business in which we do not participate, including online retail, ticketing, travel services and online dating services. Accordingly, IAC’s results of operations, and the trading price of IAC common stock, might be affected by factors different from or in addition to those affecting our results of operations and the trading price of our common stock.

Failure to complete the merger could negatively impact the price of our common stock and our future business and operations.

      The merger agreement contains several conditions to closing, each one of which must be satisfied or waived by IAC prior to the closing. If any condition contained in the merger agreement fails to be satisfied, we cannot make any assurance that a waiver could be obtained from IAC or that the merger would be consummated. If the merger is not completed for any reason, we may experience a number of detriments, including the following:

We might lose key personnel due to uncertainty created by the proposed merger.

      Our success depends in part on the continued service of key personnel as well as recruitment of additional qualified personnel. As a result of the merger announcement, current and prospective employees could experience uncertainty about their future roles within IAC, which would adversely affect our ability to attract and retain key management, sales, marketing and technical personnel. If a substantial number of key employees leave as a result of the merger announcement, or if we fail to attract needed qualified personnel, our business might be adversely affected.

The merger agreement contains provisions that might discourage other companies from trying to acquire Ask Jeeves.

      Our merger agreement with IAC contains provisions that might discourage a third party from submitting a business combination proposal to our board that would result in greater value to Ask Jeeves stockholders than the proposed merger. For example, we are prohibited from soliciting any acquisition proposal or offer for

a competing transaction. We are also required to pay IAC a termination fee of $68.5 million if the merger agreement is terminated in specified circumstances.

The merger agreement contains provisions that prevent us from taking certain actions without IAC’s consent and might prevent us from taking actions we would otherwise pursue.

      Our merger agreement requires us to forbear from taking a number of actions without IAC’s written consent. For example, without IAC’s consent, we cannot:

      As a result of these forbearance provisions of the merger agreement, we might be prevented from pursuing actions or business strategies that we otherwise believe to be in our best interest.

Shareholder litigation related to the merger may prevent or delay the closing of the merger or otherwise negatively impact our business and operations.

      Two stockholder lawsuits have been filed against Ask Jeeves, its directors and, in one case, IAC (see “Note 2, Commitments and Contingencies” to our consolidated financial statements). The suits allege breaches of fiduciary duties by our directors in connection with the merger. The two suits seek to block the merger or, in the alternative, to undo the merger, as well as to force us to pay money damages. Even if this litigation is resolved in our favor, these actions could prevent or delay the closing of the merger. In addition, the cost of defending this litigation, even if resolved favorably, could be substantial. This litigation could also substantially divert the attention of management and our resources in general, which could in turn negatively affect our results of operations.

Additional risks relating to the combined company and the merger vote by stockholders will be set forth in the proxy statement/prospectus that will be mailed to our stockholders in advance of the special meeting at which the merger agreement will be voted upon.

Risks Related to our Business

Rapid industry change might affect our profitability.

      Although we became profitable in the fourth quarter of 2002, and have remained profitable since that time, we cannot assure investors that we will remain profitable or cash flow positive. Moreover, we might not be able to increase our operating profitability on a quarterly or annual basis. The Internet search industry is rapidly evolving and very turbulent. New search technologies could emerge that make our services comparatively less useful or new business methods could otherwise emerge that divert Web traffic away from our sites. Rapid change such as this makes it difficult for us to forecast our results accurately, particularly over longer periods, and might cause our profitability to decline significantly. Investors should not place undue reliance on our forecasts. To increase profits, we will need to generate revenue growth while continuing to control our expenses. We face the risk that our costs might increase substantially in the future. Indeed, we believe it is critical that we continue to expend financial and management resources to develop our brand loyalty through marketing and promotion, to enhance our search technologies and to expand our brands and services. If we fail to attract Web traffic or control costs, our annual net losses could resume, in which case we would eventually need to obtain additional financing or cease operations.

We derive a significant percentage of our revenue from our targeted-advertising supply arrangements with Google Inc. Any early termination, non-renewal, breach or other performance deterioration under these contracts could harm our results of operations.

      We have entered into several agreements with Google Inc. pursuant to which Google supplies paid listings and other services to some of our Web sites. We derive a significant percentage of our revenue from these agreements. For the three months ended March 31, 2005, our revenue from Google under these agreements comprised 74% of our total revenues. These agreements include the following:

      If our contracts with Google are not renewed by mutual agreement of the parties, or if Google fails to perform under these contracts or if they are terminated for any other reason, we would need to find another suitable provider or otherwise replace the lost revenues. Although alternate paid listing providers — such as Yahoo! Search Marketing Solutions (formerly known as Overture Services, Inc.) and FindWhat.com — are currently available in the market, the paid listing market has experienced consolidation in recent years (for example, Espotting Media merged with FindWhat.com), and we face the risk that we might be unable to negotiate equally advantageous terms with the remaining providers. Even if we were to negotiate equally

advantageous terms, we would face the risk that such providers might supply us with less-relevant links (which would be less likely to attract clicks and thus less likely to generate revenue).

      Similarly, if Google’s performance under these contracts unexpectedly deteriorates we will earn less revenue from our relationship with Google. Performance deterioration could occur:

      If Google’s performance under our contracts with it were to deteriorate due to any of the above (or other) causes, our results of operations would be harmed.

      Finally, if our ability to generate Web traffic for paid listings and content-targeted ads decreases, we will not continue to receive the same level of revenues from Google notwithstanding our continued contractual relationship.

If the performance of our search toolbar distribution channels declines, or if our distributors decide not to renew our distribution arrangements at the end of the applicable contract terms, we will likely experience reduced search volume and lower advertising revenue.

      A material portion of our revenue is generated by searches originating from our search toolbars. We distribute our search toolbars to the public through a variety of channels, including through downloadable software bundles distributed by third-parties. We face the risk that our distribution channels might not continue to produce new toolbar installations at the rates experienced in the past due to any number of causes, such as increasing competition for inclusion in the most popular downloadable software bundles, increasing public suspicion that any downloadable application might contain spyware or adware, and the increased legal difficulties faced by key elements of some software bundles such as peer-to-peer file sharing applications. We are experiencing some of these problems and we face a risk that these problems will become worse. We also face a risk that our distributors will not renew our distribution agreements at the end of the applicable contract terms. Any decline in the effective toolbar installation rate we generate will likely cause us to experience reduced query volume and lower advertising revenue.

We expect our operating expenses to continue to increase as we invest in increasing brand loyalty through marketing and promotion, enhancing our search technologies, developing our media properties and acquiring other businesses.

      We currently expect that our operating expenses will continue to increase as we continue to invest in:

      We face a risk that these investments might not result in commensurate increases in our Web traffic or revenues. If our expenses increase at a greater pace than our revenues, our operating results will likely be harmed.

Our business model is still evolving along with the business models of our competitors, and it is difficult to predict our future competitive position.

      Our advertising revenue and gross margin performance currently depend on our ability to attract search traffic and on the mix of proprietary traffic and network traffic. These factors changed substantially in 2004 as we acquired ISH and altered our business model to take advantage of the opportunities it provided. It is likely that our business model will continue to evolve in the future, in response to technological change, strategic innovations, acquisition opportunities or other factors. In particular, strategies for driving Web traffic to destination search sites and for increasing search toolbar installations (as well as counter-strategies for diverting traffic and reducing installations) are rapidly emerging and evolving. It is still difficult to predict which practices, if any, will emerge as industry standards and whether we will be positioned to make use of the most effective new strategies that do emerge. This uncertainty makes it difficult to project long-term Web traffic and revenue per query trends.

      Similarly, we regularly seek to optimize our revenue per query and other metrics by experimentally changing the advertising implementation and other operational variables on our Web sites. We face a risk that benefits observed in a test environment might not be realized when the changes are implemented across all users (particularly for changes that initially result in lower monetization with an expectation of longer-term benefits).

If we fail to compete effectively against Google, Yahoo!, MSN, AOL and other smaller companies, we will lose market share.

      We compete against some of the world’s largest internet media companies in the following areas, each of which is intensely competitive and rapidly changing.

      Some of our existing competitors such as Google, Yahoo!, AOL and MSN (as well as potential new competitors), have longer operating histories, greater name recognition, larger customer bases and significantly greater technical and financial resources than we do. These competitors have in the past and likely will in the future use their experience and resources against us in a variety of competitive ways, including by making key acquisitions, running more visible marketing campaigns, investing more aggressively in research and development and expanding their search indices to new areas of offline content. For example, both Google and Yahoo! recently started indexing the content of certain TV programs; and Google has announced plans to index scholarly journals as well as to digitize and index the permanent collections of five U.S. libraries. Further, Google has been steadily expanding its service offerings beyond search into complementary services, such as a web-based email service, a Web log service, a picture organization tool and movie ticket sales. It is difficult to predict the rate at which users will sample such competitive services, however over time the availability of such services from our competitors might erode our Web traffic, which would harm our business and results of operations.

      In addition, some of our competitors do not monetize queries as aggressively as we have in the past. That is, the sponsored elements on many of our result pages have tended to be relatively more prominent than on some of our competitors’ pages. We recently announced an initiative to reduce monetization efforts per query in order to increase user frequency over time (and thereby increase overall revenues in the long term). We expect this initiative will cause our revenues to be lower than they otherwise would have been in the short term. We face the risk that this initiative will not produce the expected revenue increases over the long term.

      Moreover, vertical integration appears to be increasing in the Internet search and advertising industry. For example, in the past few years, Yahoo! has acquired several search engines (Inktomi, AltaVista and AllTheWeb) as well as Overture Services, Inc., a provider of search services, paid listings and related advertising. Similarly, as mentioned above, Google administers its own advertising networks and is expanding into services beyond pure search. Vertically integrated search providers, like Yahoo! Inc. and Google Inc. have greater resources and functionality, and might be able to inhibit our access to advertisers or end users.

Some of our competitors provide Internet access, operating systems, online services or computer hardware to our users. To the extent such providers exploit their position to impair users’ continued access to our search services, our search traffic might fall, perhaps significantly.

      Accessing the Internet requires various resources, such as computer hardware, an operating system, an Internet service provider, and an Internet browser. Some of our competitors happen to be suppliers of those resources. For example, MSN is an Internet service provider and Yahoo! collaborates with another Internet service provider, SBC, to provide services to SBC’s subscribers. In those roles, our competitors occupy positions of trust with the users. We face the risk that our competitors might exploit that trust to our disadvantage, such as by encouraging users to uninstall our search toolbars and install their own. Similarly, we face a risk that other computer manufacturers or other providers of Internet access, operating systems, online services or browsers might decide to enter the search market and leverage their privileged position for their own benefit. Microsoft, in particular, has recently developed its own search algorithm and has announced that the next version of Windows will include expanded search functionality. To the extent that any such actions by our competitors occur or continue, we will likely experience reduced query volume and lower advertising revenue.

Our growth will depend on our ability to attract and retain new users through effective promotional campaigns.

      We believe that favorable perceptions of our search and portal brands are essential to our future success. Accordingly, we intend to continue pursuing brand-enhancement strategies, which may include mass market and multimedia advertising, promotional programs and public relations activities. As with any public awareness campaign, we face the risk that our expenditures might not lead to the desired result; that is, we

might experience no net increase in our brand recognition, brand loyalty, number of new users, or Web site traffic. Furthermore, even if such increases occur, they might not be sufficiently large to justify the expenditures. If we are unable to promote brand awareness and loyalty, we are unlikely to attract new users and our existing user base might shrink through attrition, which would in turn harm our business and results of operations.

If we are unable to develop, acquire or otherwise provide our users with access to new search products and portal enhancements as rapidly and successfully as our competitors, we might be unable to maintain user satisfaction with our search and portal sites.

      In the highly competitive, consolidating, and rapidly changing Internet environment, our future success depends in large part on our ability to develop, acquire or otherwise provide our users with access to popular new technologies and product enhancements as quickly as our competitors. Our recent efforts in this regard include our 2004 internal development of the MyJeeves service and our 2005 acquisition of technology from Trustic. However, our competitors continue to commit substantial resources to service innovations. If we fail to develop, acquire, or otherwise make important new technologies and product enhancements available to our users as rapidly or successfully as our competitors, we might lose market share and never recoup our development or acquisition costs. Our ability to acquire companies outside of the ordinary course of business is limited by the terms of the merger agreement.

Recent acquisitions and any future acquisitions might disrupt our business, dilute stockholder value, divert management attention or be difficult to integrate.

      In mid 2004, we acquired Interactive Search Holdings, or ISH, which nearly doubled the size of our company, as well as Tukaroo, Inc., a small private company. In early 2005, we acquired the stock of another small, privately-held company, Trustic (Bloglines.com). We may in the future seek to acquire or invest in additional businesses, products or technologies that we believe could complement or expand our business, augment our market coverage, enhance our technical capabilities or that may otherwise offer growth opportunities. The integration of ISH’s operations with our own required significant management attention and, in some respects, is still ongoing. This and any future acquisitions might disrupt our internal operations or otherwise require excessive management attention, which could negatively affect other corporate initiatives. The potential risks of any acquisition include:

      If we experience any of the above problems, or are otherwise unable to integrate future acquired companies successfully or to create new or enhanced services, we might not achieve the anticipated benefits from our acquisitions. If we fail to achieve the anticipated benefits from the acquisitions, we might incur increased expenses and experience a shortfall in our anticipated revenues and we might not obtain a satisfactory return on our investment. In addition, if a significant number of employees of acquired companies

fail to remain employed with us, we may experience difficulties in achieving the expected benefits of the acquisitions.

      We also might spend significant management time and costs in pursuing acquisitions that do not come to fruition.

If we fail to maintain effective internal financial and managerial systems, controls and procedures, our results of operations may be harmed.

      Our past business realignment and reductions in workforce placed a significant strain on our managerial staff, financial controls and operational resources as our employees assumed greater responsibilities and learned to manage their increased workload with reduced resources. Although we added additional staff and resources since becoming profitable, we encountered additional challenges which again stretched our management resources very thin. In particular, our effort to review and revise our internal controls in anticipation of our first Internal Control Report under the Sarbanes-Oxley Act of 2002 (which we included in our Form 10-K for the year ended December 31, 2004) placed a significant strain on our managerial resources and caused us to delay business initiatives that we would have otherwise undertaken. Integrating the internal control systems of ISH (and our other corporate acquisitions) with our own was also time consuming and resource intensive. We continue to evaluate our operational and financial systems and our managerial controls and procedures to determine what changes, if any, might help us to manage our current operations better. We face the risk that our systems, procedures and controls might not remain adequate to support our operations or to maintain accountability for our assets. Any such failure could harm our results of operations.

Our current international operations expose us to several risks and our planned international expansion efforts in 2005 might lose money.

      Currently, we operate a Web site, Ask.co.uk, through a subsidiary located in Dublin, Ireland that provides Internet search services to our users in the United Kingdom and Ireland. In addition, we hold a 47% interest in Ask Jeeves Japan, a joint venture operating a recently-launched Japanese-language Web search site with Japan-specific content.

      During 2005, we expect to establish local language search sites for several European markets, starting with Spain (which we beta launched on April 5, 2005). Each site will likely be supported by a small office of local employees.

      Establishing foreign operations is a significant investment that might not produce desired returns. However, our competitors are expanding their operations internationally, thus if we do not expand internationally we risk losing market share.

      Like our current foreign operations, our future expansion efforts will be subject to risks associated with all international operations, including:

If we are unable to enhance the content and services of our portal Web sites over time, our user base may decline and our attractiveness to advertisers may diminish.

      We operate proprietary portal sites (at Excite.com, MyWay.com and iWon.com) and implement and manage co-branded portal sites for third parties. We intend to introduce additional or enhanced content and services on these portals in the future in order to retain our current users, attract new users and remain attractive to advertisers. Our reputation and brands could be adversely affected if we introduce content or a service that is not favorably received. We have in the past and may continue in the future to experience difficulties that delay the introduction of new content or services. Further, new content and services have in the past and might in the future contain errors that we discover only after they are introduced, requiring us to disable them while we modify their design to correct these errors. Implementing enhancements to our web site is costly and requires significant time from our engineering personnel. Any delays we experience in implementing enhancements to our portals might reduce our user base and diminish our attractiveness to advertisers. If we are unable to continue to enhance the features and functionality of our portal sites on a timely and cost-effective basis to meet evolving user demands and compete effectively with other portals, or if these enhancements do not achieve widespread market acceptance, our existing user base might not visit our portal Web sites as frequently. Our failure to grow our user base or frequency of visits to our portal sites might diminish our attractiveness to advertisers.

      Our email terms of service prohibit our users from sending so-called “spam” email using their accounts on our portals. Nonetheless, from time to time, spam email has originated from the email accounts of our portal users, sometimes caused by viruses that infect a user’s computer and cause it to send email without the user’s knowledge or active participation. We act diligently and aggressively to enforce our email policies and to prevent spammers from utilizing our users’ accounts in that way. However, as a result of such spam originating from our servers, third-party internet service providers (or other mail service providers) have, from time to time, blocked their account holders from receiving any email, even legitimate email, sent from our servers. These events decrease the utility of our email service to users and, should they continue over time, the registered user base of our portals might decline.

Sweepstakes regulations might limit our ability to conduct sweepstakes on iWon.com or limit participation in our sweepstakes, which would adversely affect our business model.

      The business model of our iWon portal and certain other products we distribute is premised upon our ability to operate sweepstakes. Sweepstakes are subject to the gambling, lottery and disclosure laws of various jurisdictions in which we offer our sweepstakes. Currently, iWon sweepstakes are open to residents of the United States and Canada (other than Quebec). Although we outsource the operation of certain aspects of our sweepstakes to SCA Promotions, an independent sweepstakes execution company, and we believe that we operate our sweepstakes in compliance with current laws and regulations in all applicable jurisdictions, we might not be in full compliance and these laws and regulations might change in the future. If new laws or regulations are adopted that proscribe or limit our ability to conduct sweepstakes online through our iWon Web site (or other products) or significantly limit the range of individuals who can participate in our sweepstakes, the long term ability of our iWon portal (or these products) to generate revenues would be

severely undermined. From time to time, Congress and state legislatures and regulatory agencies announce initiatives aimed at the sweepstakes industry in general or regulating Internet sweepstakes in particular. We believe that additional laws and regulations are likely to be enacted, but we cannot predict what they will be or what effect they might have. If we expand our sweepstakes business model internationally, we may be subject to additional international sweepstakes regulation. Additionally, the Internet is a relatively new medium for sweepstakes, and it is difficult to predict how existing laws and regulations will be applied to our businesses.

Risks Related to Operating in our Industry

Adware and spyware concerns might damage our reputation and our business.

      Recently, significant public concern has arisen regarding so-called “adware” and “spyware” programs that are installed on users’ computers either without their consent or without their full understanding as users navigate the Internet. We define the terms as follows:

      Although we do not believe that our software products are spyware or adware, occasionally some of our toolbars and Fun Web Products have been identified as adware or spyware by anti-spyware programs that are designed to detect and remove spyware and adware from users’ computers. Therefore, we actively communicate with the authors of anti-spyware programs to educate them about our products and to understand the issues they raise. To the extent that we are not successful in educating them, or to the extent known, or new, programs classify our products as spyware or adware, our reputation might be harmed and these programs may instruct users to uninstall our toolbars thereby causing revenue to decline.

      New legislative proposals have recently appeared (and may or may not be adopted in their current forms) at the federal and state levels in the United States that would regulate any software within their respective definitions of “spyware.” New York State Attorney General Eliot Spitzer has also initiated a lawsuit against Intermix Media, Inc., a publicly traded Internet marketer, alleging that it is a provider of adware or spyware. We face a risk that other lawsuits might be initiated or that federal or state legislation might be drawn so broadly that it would make distribution of any downloadable application more difficult. Such legislation and litigation could impact our ability to distribute our toolbar products and could result in material cost and liability to us.

      We advertise our software products on ad networks and we contract with third-party application providers which bundle our toolbars with their popular downloadable applications. Recently, public discussion has focused on our products and our toolbar distribution methods. We face a risk that public controversy over spyware and adware could lead to the perception that we are purveyors or promoters of spyware and adware. This could damage our reputation and cause a decline in usage of our search toolbars, thus causing our revenues to decline. In addition, we review our advertising contracts, third-party toolbar distributor arrangements, distribution and bundling agreements, and disclosure language. Any termination of or change to any of the foregoing could cause our revenue to decline.

A decrease in expenditures by advertisers and direct marketers or a downturn in the economy could cause our advertising revenues to decline significantly in any given period.

      We generate our revenue almost entirely from advertising, directly or indirectly. We sell ads on our portals and search sites, we sell and syndicate ads for display across the MaxOnline advertising network and the Ask Jeeves Syndication Network, we provide other direct marketing services through AJinteractive and we display ads supplied to us by Google’s AdWords and AdSense Programs. We believe that a large portion of our advertising revenue is derived from ad purchases by Web publishers, direct marketers, advertisers and advertising agencies. Expenditures by those advertisers and direct marketers tend to be cyclical, reflecting overall economic conditions as well as budgeting and buying patterns. We expect our ad revenues to continue to exhibit cyclicality. Although online advertising spending is generally expected to increase over the next few years, we face the risk that online advertising spending might increase slower than predicted, or not at all, or that our market share for online ad dollars might decline. As a result of these risks, our revenues from marketing and advertising services might not increase or might decline significantly in any given period.

New technologies could block our ads, which would harm our business.

      Filter software programs are available that limit or prevent some types of advertising from being displayed on a user’s computer. Additional technologies might be developed that users could use to block the display of our ads, or allow users to preview the pages to which price-per-click ads lead without clicking on the ads. Most of our revenues are derived from fees paid to us (or to our paid listing providers) by advertisers in connection with the display of ads on portals and in connection with clicks on price-per-click ads on our search result pages. As a result, ad-blocking technology or page preview technology could adversely affect our operating results.

Index spammers could harm the integrity of web search results, which could damage our reputation and cause our users to be dissatisfied with our services.

      There is an ongoing and increasing effort by “index spammers” to develop ways to manipulate the results lists of leading search engines in order to make the spammers’ sites appear near the top of the results lists. For example, our Teoma search technology ranks a Web page’s authority based in part on the relevance of the Web sites that link to it, and spammers often link a group of Web sites together in an attempt to cause Teoma to over-estimate a site’s authority and thereby increase its ranking in the results list. We take this problem very seriously because providing relevant and authoritative information to users is critical to our success. This problem also affects Google and Yahoo!, which provide search results on some of our sites (including MySearch.com). If we or our competitors are unable to develop more sophisticated algorithms that are not influenced by index spam, our reputation for delivering relevant information could be harmed and the usefulness of Internet search engines, in general, could diminish. Either result could cause a decline in our user traffic which, in turn, would result in lower proprietory and network revenues.

The operating performance of computer systems and Web servers is critical to our business and reputation.

      Any system failure, including network, software or hardware failure due to a computer virus, malicious users (sometimes called hackers) or otherwise, that causes an interruption in our service or a decrease in our responsiveness could result in reduced user traffic on our Web sites and reduced revenues for our business.

      We have network and server equipment located at MCI in Massachusetts and New Jersey, MFN/ AboveNet in California and England, Qwest in New Jersey, Esat Telecommunications in Ireland and Equinox in Japan. Although we believe that our current back-up methods are adequate, we face the risk that our back-up servers might fail or might cause an interruption in our service.

      We have experienced slower response times and interruptions in service due to malfunction at our hosting facilities and on the Internet backbone networks, major software upgrades on our Web sites and undetected software defects. These Web site interruptions have lasted for periods ranging from a few minutes to three hours. In addition, our Web sites also could be affected by computer viruses, electronic break-ins or other

similar disruptions. If we continue to experience outages, frequent or persistent system failures or degraded response times, user satisfaction would decrease, we would likely lose advertising revenues and our reputation and brands could be permanently harmed.

      Our users depend on Internet service providers, online service providers and other Web site operators for access to our Web sites. Each of these types of providers has experienced significant outages in the past and could experience outages, delays and other operating difficulties due to system failures unrelated to our systems.

      The occurrence of an earthquake or other natural disaster, a terrorist attack, or unanticipated problem at our principal facilities or at the servers that host or backup our systems could cause interruptions or delays in our interactive network or a loss of data. Our systems are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, break-ins, earthquake and similar events. We have not developed a comprehensive disaster recovery plan to respond to system failures. Our insurance policies might not adequately compensate us for losses that may occur due to interruptions in our service.

The presence or perception of click-fraud in the market might reduce our ad revenues.

      A majority of our revenue arises from ads that are sold to advertisers on a price-per-click (or PPC) basis, meaning that the advertiser pays a fixed fee every time a user clicks on the ad. This pricing model is vulnerable to so-called “click-fraud,” which occurs when clicks are submitted on PPC ads by a party who is not truly interested in the ad. For example, the party might be motivated by a desire to increase the advertiser’s expenses or by a desire to generate revenue for the Internet site displaying the ad (or for the online advertising network syndicating the ad). Although we and our paid listing providers have systems in place that seek to detect systematic click-fraud, these systems might not be able to detect all instances of click-fraud. Recently a purported class action lawsuit was filed against us and several other internet media companies offering PPC advertising (including Google and Yahoo!) seeking to recover amounts allegedly overcharged to advertisers as a result of fraudulent clicks. If advertisers come to perceive click-fraud as a widespread and pervasive problem, regardless of its true extent, their evaluation of PPC ads’ effectiveness — and thus their willingness to purchase PPC ads — might decline. Any reduction in the growth rate of PPC advertising online will likely cause a corresponding reduction in our revenues.

Our long-term success depends upon the growth and acceptance of Internet advertising as an effective alternative to traditional advertising media.

      We compete with traditional media including television, radio and print, in addition to other high-traffic Web sites, for a share of advertisers’ total advertising expenditures. We face the risk that advertisers might find Internet advertising to be less effective than traditional media at promoting their products or services and may reduce or eliminate their expenditures on Internet advertising. Many potential advertisers and advertising agencies have only limited experience advertising on the Internet and have not devoted a significant portion of their advertising expenditures to Internet advertising.

      Acceptance of the Internet among advertisers will depend, to a large extent, on the perceived effectiveness of Internet advertising and the continued growth of commercial usage of the Internet, particularly internationally. Filter software programs that limit or prevent advertising from being displayed on a user’s computer are available. It is unclear whether this type of software will become widely accepted, but if it does, it would negatively affect Internet-based advertising. Our business could be seriously harmed if the market for Internet advertising does not continue to grow.

Legal actions may be initiated against us seeking to hold us liable for our links to, or advertising for, third-party Web sites.

      Our Internet search services are designed to link users directly to a page within a third-party Web site that contains a response to a user’s query. We also display ads linking to relevant commercial Web sites. These direct links might expose us to legal actions seeking to hold us liable for the content of those third-party Web sites. These actions might claim, for example, that we should be liable for copyright or trademark infringement

or other unauthorized actions by the third-party Web site. Although defenses are available to many claims for copyright infringement under the Digital Millennium Copyright Act, they require us to follow specified procedures, which we might fail to follow precisely. Other claims may be based on errors or false or misleading information provided through our Web sites, including information deemed to constitute legal, medical, financial, investment or other professional advice. Other claims may be based on our links to sexually explicit Web sites and our provision of sexually explicit advertisements when this content is displayed. And still other claims may be based on allegations that we link to sites engaged in illegal conduct. For example, along with Google, Yahoo! and other search companies, we are currently defending a purported class action lawsuit premised on our past display of ads for online gambling sites. We do not believe that such claims generally have merit, but defending against any such legal actions can be expensive and distract management. Implementing measures to reduce our exposure to such claims may require us to spend substantial resources and limit the attractiveness of our service to users.

Growth in the keyword-targeted advertising market might be slowed by the application of trademark laws.

      When advertisers purchase keyword-targeted internet advertising, they pay to have their graphic ad or textual paid listing appear on a search response page whenever a user includes the advertiser’s designated keyword(s) in his or her search query. Recently a lawsuit was filed against us, Google and others alleging that defendants’ sale of advertising triggered by keywords identical to plaintiff’s trademark infringes that trademark. The plaintiff is seeking an injunction and an unspecified amount of damages. We face a risk that trademark law might confer upon the owner of the trademark the exclusive right to select such trademark as a keyword when purchasing keyword-targeted advertising. Such a result might reduce the overall market for keyword advertising, and might result in lower advertising revenue than would otherwise be generated.

Disruption of our ad serving arrangements due to system failures or capacity constraints could harm our reputation.

      In 2004, our AJinteractive ad sales division began serving banner, tower and interstitial ads to its advertising network utilizing our AdVision technologies. These ad management technologies reside in data centers in multiple locations in the United States. Continued and uninterrupted performance of these technologies is critical to AJinteractive’s ad serving success. Network partners and advertisers may become dissatisfied by any system failure that interrupts our ability to provide our services to them, including failures affecting our ability to deliver advertisements without significant delay to the viewer or our ability to deliver an advertiser’s online marketing campaign as scheduled. Sustained or repeated system failures would reduce the attractiveness of AJinteractive’s products and services to customers and could result in contract terminations or damages resulting from claims or litigation, thereby reducing revenue. Slower response time or system failures may also result from straining the capacity of our technology due to an increase in the volume of advertising delivered through AJinteractive’s servers. To the extent that we do not effectively address any capacity constraints or system failures at AJinteractive, our reputation would be adversely affected.

If we do not adapt our search services for users of cell phones, PDAs and similar devices, we might lose market share as users increasingly use handheld devices to access the Internet.

      In the coming years, the number of individuals who access the Internet through devices other than a personal computer is expected to increase. These alternative devices include personal digital assistants, known as PDAs, cellular telephones and television set-top devices. The low resolution, functionality and memory currently associated with some of these alternative devices might prevent or impede their users from accessing our graphics-rich Web services. It could also impair our ability to monetize the user traffic, even if we launch services targeted at handheld devices. Recently, some of our competitors have launched services for users of handheld devices. Unless we successfully launch versions of our Web search service and popular portal contents that are easily accessible through these alternative devices, we face a risk of losing market share as users make increasing use of these alternative devices to access the Internet.

Our ability to remain profitable might depend on continued growth of Internet use internationally.

      Our revenue model depends in large part on the volume of Internet user traffic to our Web sites. The expected benefits from our international expansion plans will be reduced if Internet usage does not continue to grow in our overseas markets or grows at significantly lower rates compared to expected trends. The continued growth of the Internet internationally is subject to various risks, many of which are outside our control. These risks include the following in each market:

Our business might suffer if any of our key executives discontinues employment with us.

      Our future success depends to a large extent on the services of our key managerial employees. Although we have signed offer letters with our executives, we have not entered into formal employment agreements with them and we do not maintain key person life insurance. If we are unable to retain our executive officers or key management personnel or attract additional qualified management in the future, our business might be materially harmed.

Our success depends on our ability to attract and retain skilled technical employees.

      Our success depends on our ability to attract, retain and motivate highly skilled employees. Competition for employees with skills in search technology is intense. We have experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. If we fail to attract, retain and motivate highly-skilled employees, our business will be harmed.

We may face potential liability, loss of users and damage to our reputation for violation of privacy policies.

      Each of our various Web sites has a policy in place governing our use of any personally identifiable information we might obtain from users of that site. In the past, the Federal Trade Commission has investigated companies that have used personally identifiable information without permission or in violation of a stated privacy policy. Similarly, under the U.K. Data Protection Act and the E.U. 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. If we use personally identifiable information without permission or in violation of our policies, we may face potential liability.

Privacy concerns relating to our products and services could damage our reputation.

      From time to time, concerns might be expressed about whether our ad products and Internet services compromise the privacy of users or others. Concerns about our collection, use or sharing of personal information or other privacy-related matters could damage our reputation and operating results, even if those concerns are unfounded or even if our activities are permitted by our privacy policies and by law.

Government regulation and legal uncertainties could harm our business.

      Any new law or regulation pertaining to the Internet, or the application or interpretation of existing laws, could decrease the demand for our services, increase our cost of doing business or otherwise seriously harm our business. There is, and will likely continue to be, an increasing number of laws and regulations pertaining to the Internet. These laws or regulations may relate to liability for information retrieved from or transmitted

over the Internet, online content regulation, user privacy, taxation and the quality of products and services. Furthermore, the growth and development of electronic commerce may prompt calls for more stringent consumer protection laws that may impose additional burdens on electronic commerce companies as well as companies like us that provide electronic commerce services.

      We file tax returns in such states as required by law based on principles applicable to traditional businesses. However, one or more states could seek to impose additional income tax obligations or sales tax collection obligations on out-of-state companies, such as ours, which engage in or facilitate electronic commerce. A number of proposals have been made at state and local levels that could impose such taxes on the sale of products and services through the Internet or the income derived from such sales. Such proposals, if adopted, could substantially impair the growth of electronic commerce and seriously harm our profitability.

      Legislation limiting the ability of the states to impose taxes on Internet-based transactions was enacted by the United States Congress. However, this legislation, known as the Internet Tax Freedom Act, imposed only a three-year moratorium on state and local taxes on electronic commerce, where such taxes are discriminatory, unless such taxes were generally imposed and actually enforced prior to October 1, 1998. The legislation, which commenced October 1, 1998 and was to have expired on October 21, 2001, has since been given a five-year extension by Congress. It is unclear which steps the legislature will take next, and failure to continue to renew this legislation would allow various states to impose taxes on Internet-based commerce. The imposition of such taxes could impair the growth of the electronic commerce marketplace and impair our ability to remain profitable.

      In addition, we are not certain how our business might be affected by the application to Internet commerce of existing laws governing issues such as property ownership, copyrights, encryption and other intellectual property issues, taxation, libel, obscenity and export or import matters. The vast majority of such laws were adopted prior to the advent of the Internet. As a result, they do not contemplate or address the unique issues of the Internet and related technologies. Changes in laws intended to address such issues could create uncertainty in the Internet market. Such uncertainty could reduce demand for our services or increase the cost of doing business as a result of litigation costs or increased service delivery costs.

      Several recent federal laws could have an impact on our business. The Digital Millennium Copyright Act is intended, in part, to limit the liability of eligible 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 Privacy Protection Act and the Prosecutorial Remedies and Other Tools to End Exploitation of Children Today Act of 2003 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. Such legislation may impose significant additional costs on our business or subject us to additional liabilities.

      Due to the nature of the Web, it is possible that the governments of other states and foreign countries might attempt to regulate Web transmissions or prosecute us for violations of their laws. We might unintentionally violate such laws, such laws might be modified and new laws might be enacted in the future. Any such developments (or developments stemming from enactment or modification of other laws) could increase the costs of regulatory compliance for us or force us to change our business practices.

Third parties might bring intellectual property infringement claims against us that would be expensive to defend and, if successful, could subject us to significant liability and block us from using key technology.

      From time to time in the ordinary course of business we have been subject to claims of alleged infringement of the trademarks, patents, and other intellectual property rights of third parties. Any such claims, if made, and any resulting 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 might also result in limitations on our ability to use the intellectual property subject to these claims unless we are able to enter into license agreements that might not be available on reasonable terms, or at all.

Risks Related to Accounting Matters

The employee compensation practices we adopt in response to new option expensing rules might reduce our ability to attract qualified new employees, diminish our cash available for marketing, product development and other uses, and cause our profits and stock price to decline.

      We currently account for the issuance of stock options to employees using the intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. As a result we generally recognize no compensation cost for employee stock options. Commencing in the first quarter of 2006, however, we will be required to begin accounting for the fair value of stock options granted to employees as compensation expense under FASB Statement No. 123, revised 2004 (SFAS 123(R)), Share-Based Payment, which is a revision of FASB Statement No. 123 (SFAS 123), Accounting for Stock-Based Compensation. Our management and the compensation committee of our board of directors have not yet decided how our compensation practices will change in response to the new accounting requirements. However, we might decide to decrease the number of employee stock options granted to existing and prospective new employees. Such a reduction could affect our ability to retain existing employees and attract qualified candidates. In order to prevent any net decrease in their overall compensation packages, we might decide to make corresponding increases in the cash compensation we pay to current and prospective new employees. An increase in employee wages and salaries would diminish our cash available for marketing, product development and other uses and might cause our GAAP profits to decline. Any of these effects might cause the market price of our stock to decline, particularly if investors conclude that any resulting decrease in reported profits from and after the first quarter of 2006 was caused by operational problems rather than by accounting rule changes.

If accounting interpretations relating to revenue recognition change, our reported revenues could decline or we could be forced to make changes in our business practices.

      Over the last several years, the accounting profession has issued several standards and interpretations relating to revenue recognition. For example, the Emerging Issues Task Force, or EITF, reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, and the Securities and Exchange Commission staff issued Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition, which explains how the SEC staff believes existing revenue recognition rules should be applied. We believe that our current revenue recognition policies comply with EITF 00-21 and SAB 104.

      The accounting profession continues to discuss revenue recognition standards with the objective of providing guidance on potential interpretations. These discussions and the issuance of interpretations, once finalized, could lead to unanticipated changes in our current revenue accounting practices, which could cause us to recognize lower revenues. These changes may extend sales cycles, increase administrative costs and otherwise harm our business.

Risks Related to the Capital Markets

We might not be able to secure additional financing to meet our future capital needs.

      If we are unable to generate sufficient cash flows from operations to cover our expenses and capital expenditures, we will need to raise additional funds. We may require additional funding, for example, to fund brand promotion, develop new or enhanced products and services, respond to competitive pressures or make acquisitions. We might be unable to obtain any required additional financing on terms favorable to us, or at all. If adequate funds are not available on acceptable terms, we might be unable to fund our expansion, successfully promote our brand, develop or enhance products and services, respond to competitive pressures or take advantage of acquisition opportunities, any of which could seriously harm our business. In 2004, the SEC declared effective our shelf registration statement that will permit (but not require) us to offer and sell up to $400.0 million of common stock, preferred stock, depositary shares, debt securities or warrants from time to time in one or more public offerings. The terms of any such future offerings will be established at the time of each offering. If we raise additional funds through the issuance of equity securities, our stockholders might

experience dilution of their ownership interest, and the newly issued securities might have rights superior to those of the common stock. If we raise additional funds by issuing debt, its terms may impose limitations on our operations, including limitations on the payment of dividends. If we do not sustain profitability in the future and are unable to obtain additional financing, then we will eventually be unable to continue our operations.

Our stock price might fluctuate significantly regardless of our actual operating performance.

      Our common stock is listed for trading on the Nasdaq National Market. The trading price of our common stock has been and may continue to be highly volatile. Our stock price may be subject to wide fluctuations in response to a variety of factors, including:

      In addition, the Nasdaq National Market, where many publicly held Internet companies are traded, has periodically experienced extreme price and volume fluctuations. These fluctuations may be unrelated or disproportionate to the operating performance of these companies. These broad market and industry factors may harm the market price of our common stock, regardless of our actual operating performance. In the past, following periods of volatility in the market price of an individual company’s securities, securities class action litigation often has been instituted against that company. This type of litigation could result in substantial costs and a diversion of management’s attention and resources. Additionally, volatility or a lack of positive performance in our stock price may adversely affect our ability to retain key employees, all of whom have been granted stock options.

      See “Our pending acquisition by IAC may cause the trading price of our common stock to vary based on the trading price of IAC’s common stock rather than our own financial performance. The trading price of IAC common stock, in turn, may be affected by factors different from or in addition to the factors affecting the trading price of our common stock.”

If we fail to meet the expectations of public market analysts and investors, the market price of our common stock might decrease significantly.

      Public market analysts and investors have not been able to develop consistent financial models for the Internet market because of the unpredictable rate of growth of particular Internet sites, the rapidly changing models of doing business on the Internet and the Internet’s relatively low barriers to entry, among other factors. As a result, and because of the other risks noted in this discussion, our actual results might not meet the expectations of public market analysts and investors in future periods. If this occurs, the price of our common stock will likely decrease.

Future sales of our stock could affect our stock’s market price.

      If our stockholders sell substantial amounts of our common stock, including shares sold by directors or officers and shares issued upon the exercise of outstanding options or in connection with acquisitions, the market price of our common stock could fall. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.

Provisions in Delaware law and our charter, stock option agreements and severance benefits agreements with executive officers might prevent or delay a change of control.

      We are subject to the Delaware anti-takeover laws regulating corporate takeovers. These anti-takeover laws prevent Delaware corporations from engaging in a merger or sale of more than 10% of its assets with any stockholder, including all affiliates and associates of the stockholder, who owns 15% or more of the corporation’s outstanding voting stock, for three years following the date that the stockholder acquired 15% or more of the corporation’s assets unless:

      A Delaware corporation may opt out of the Delaware anti-takeover laws if its certificate of incorporation or bylaws so provide. We have not opted out of the provisions of the anti-takeover laws. Accordingly, these laws could prohibit or delay mergers or other takeover or change of control of Ask Jeeves and may discourage attempts by other companies to acquire us.

      Our certificate of incorporation and bylaws include a number of provisions that may deter or impede hostile takeovers or changes of control or management. These provisions include:

      These provisions may have the effect of delaying or preventing a change of control. In addition, certain material agreements contain change in control provisions that may discourage or delay attempts to acquire us.

      Furthermore, in April 2001, we adopted a stockholder rights plan and declared a dividend distribution of one right for each outstanding share of common stock to stockholders of record as of May 7, 2001. Each right entitles the holder to purchase one unit consisting of one one-thousandth of a share of our Series A Junior Participating Preferred Stock for $20 per unit. Under certain circumstances, if a person or group acquires 15% or more of our outstanding common stock, holders of the rights (other than the person or group triggering their exercise) will be able to purchase, in exchange for the $20 exercise price, shares of our common stock or

of any company into which we are merged having a value of $40. The rights expire on May 7, 2011 unless extended by our board of directors. In March 2005, we amended the rights plan to provide that our proposed acquisition by IAC will not trigger the rights. In addition, we agreed in the merger agreement with IAC to terminate the rights agreement immediately prior to consummation of the merger. Because the rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our board of directors, our rights plan could make it more difficult for another third party to acquire us or a significant percentage of our outstanding capital stock without first negotiating with our board of directors regarding such acquisition.

      Severance benefit letter agreements with our executive officers provide for the payment of severance and acceleration of options upon the termination of these executive officers without cause (or their resignation for good reason) following a change of control of Ask Jeeves. IAC has entered into a subsequent agreement with Mr. Berkowitz that will take effect upon IAC’s proposed acquisition of Ask Jeeves and will modify some of Mr. Berkowitz’ rights under his agreement with us. These agreements could have the effect of discouraging other potential takeover attempts.

Risks Related to our Subordinated Convertible Notes

Our stock price has been volatile historically and may continue to fluctuate widely regardless of our actual operating performance. Significant volatility in the price of our common stock will likely cause the price of the notes to fluctuate significantly, which may make it difficult for holders to resell the notes or the shares of our common stock issuable upon conversion of the notes when desired or at attractive prices.

      In mid-2003 we issued $115 million aggregate principal amount of zero coupon convertible subordinated notes due June 1, 2008. A description of the terms of the notes appears under the caption “Description of Notes” in the resale prospectus we filed with the SEC under Rule 424(b)(3) on November 21, 2003. Because the notes are convertible into shares of our common stock, volatility or depressed prices for our common stock could have a similar effect on the trading price of the notes. Holders who receive common stock upon conversion also will be subject to the risk of volatility and depressed prices of our common stock. In addition, the existence of the notes may encourage short selling in our common stock by market participants because the conversion of the notes could depress the price of our common stock, and the short selling could also put downward pressure on the market price of our common stock.

The notes are subordinated and there are no financial covenants in the indenture. We may be unable to repay our obligations under the notes.

      The notes are unsecured and subordinated in right of payment in full to all of our existing and future senior debt. Because the notes are subordinated to our senior debt, in the event of (1) our liquidation or insolvency, (2) a payment default on our designated senior debt, (3) a covenant default on our designated senior debt (as defined in “Description of Notes — Subordination of Notes” in the resale prospectus), or (4) acceleration of the notes due to an event of default, we will make payments on the notes only after our senior debt has been paid in full. After paying our senior debt in full, we might not have sufficient assets remaining to pay any or all amounts due on the notes.

      Our subsidiaries are separate legal entities and have no obligation to make any payments on the notes or make any funds available for payment on the notes, whether by dividends, loans or other payments. The payment of dividends and the making of loans and advances to us by our subsidiaries may be subject to statutory or contractual restrictions and are dependent upon the earnings of our subsidiaries. Our subsidiaries have not guaranteed the payment of the notes. Our right to receive assets of any of our subsidiaries upon their liquidation or reorganization, and a noteholder’s right to participate in these assets, will be effectively subordinated to the claims of that subsidiary’s creditors. Consequently, the notes are effectively subordinated to all liabilities, including trade payables, of any of our subsidiaries and any subsidiaries that we may in the future acquire or establish, except to the extent that we are recognized as a creditor of such subsidiary, in

which case our claims would still be subordinate to any security interests in the assets of such subsidiary and any debt of such subsidiary senior to that held by us.

      As of March 31, 2005, (i) we had $23.4 million of senior debt outstanding consisting primarily of operating leases, and (ii) our subsidiaries had no outstanding indebtedness and approximately $6.5 million of other liabilities, including trade payables, but excluding intercompany liabilities, to which the notes are effectively subordinated. Neither we nor our subsidiaries are prohibited or limited from incurring debt or acting as guarantors of debt for others in whom we or our subsidiaries may have an interest under the indenture. Our ability to pay our obligations on the notes could be adversely affected by our or our subsidiaries’ incurrence of additional indebtedness or other liabilities. We and our subsidiaries may from time to time incur additional indebtedness and other liabilities, including senior debt. See “Description of Notes — Subordination of Notes” in the resale prospectus.

We significantly increased our leverage as a result of the sale of the notes.

      In connection with the sale of the notes, we incurred $115.0 million of indebtedness, which substantially increased our principal payment obligations. The degree to which we are leveraged could materially and adversely affect our ability to obtain financing for working capital, acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures.

We do not expect a public market for the notes to develop.

      There currently is no organized public trading market for the notes in as much as they are not listed on any exchange and there can be no assurance as to (1) the liquidity of any market for the notes that may develop; (2) the ability of the holders to sell their notes; or (3) the prices at which holders of the notes would be able to sell their notes. If markets were to exist, the notes could trade at prices higher or lower than their initial purchase prices depending on many factors. If an active market for the notes fails to develop or be sustained, the trading price of the notes could decline significantly. We do not intend to apply for listing of the notes on any securities exchange or for quotation on The Nasdaq National Market.

We might not have the ability to repurchase the notes in cash if a holder exercises its repurchase right upon the occurrence of a change in control.

      Holders of the notes have the right to require us to redeem the notes upon the occurrence of a change in control prior to maturity as described under the heading “Description of Notes — Purchase of Notes at Your Option Upon a Change in Control” in the resale prospectus. We might not have sufficient funds to make the required repurchase in cash at such time or the ability to arrange necessary financing on acceptable terms. In addition, our ability to repurchase the notes in cash might be limited by law or the terms of other agreements relating to our indebtedness outstanding at the time. We have the ability under the terms of the notes to pay the repurchase price in shares of our common stock, regardless of whether we have cash available, but doing so might be highly dilutive.

      We are exposed to interest rate, market and credit risk and related changes in the market values of our investment portfolio. Our investment portfolio consists primarily of high credit quality U.S. federal, state and municipal government, corporate, asset-backed, and agency debt instruments. Investments in both fixed and floating rate securities have some degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted by increases in interest rates. Floating rate securities may produce less income than anticipated if interest rates fall. As a result, changes in interest rates may cause us to incur losses in principal if we are forced to sell securities that have declined in market value or may result in lower than anticipated investment income. Our investment portfolio is categorized as available-for-sale and accordingly is presented at fair value on the balance sheet.

      We manage our exposure to interest rate, market and credit risk in the investment portfolio with investment policies and procedures that limit such variables as term, credit rating and the amount of credit exposure to any one issue, issuer and type of instrument. We have not used derivative financial instruments in our investment portfolio.

      During the three months ended March 31, 2005, the effects of changes in interest rates on the fair market value of our marketable investment securities and our earnings were not material. Further, we believe that the impact on the fair market value of our securities and our earnings from a hypothetical 10% change in interest rates would not be significant.

      We do not use derivative financial instruments in our investment portfolio to manage interest rate risk. We place our investments in instruments that meet high credit quality standards, as specified in our investment policy guidelines, which limits the amount of credit exposure to any one issue, issuer or type of instrument.

      The majority of our revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, since a significant portion of our operations occurs outside of the United States, we enter into transactions in other currencies, including the British pound and the Euro. We currently do not hedge our exposure to foreign exchange rate fluctuations. However, in order to limit such exposure some contracts of our international operations are denominated in U.S. dollars and certain cash balances are maintained in U.S. dollars. Our international business is subject to risks typical of an international business, including but not limited to differing economic conditions, changes in political climate, differing tax structures, transfer pricing risks, other regulations and restrictions and foreign exchange rate volatility, particularly the exchange rate between the British pound and the U.S. dollar. Changes in these or other factors could harm our business, operating results and financial condition.

      Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report, which we refer to as the Evaluation Date. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the Evaluation Date such that the information relating to Ask Jeeves, including our consolidated subsidiaries, required to be disclosed in our SEC reports:

      During the three months ended March 31, 2005, we completed the implementation of a new accounting software system in our U.K. location in order to establish one enterprise-wide financial system. The new system, which was developed by a third-party vendor, includes general ledger, purchasing, accounts payable, fixed asset, cash management and accounts receivable functionality. Except for the implementation of the new financial system, there was no change in our internal control over financial reporting that occurred during the three months ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

      For a description of our material legal proceedings, please refer to Note 2 (commitments and contingencies) to our condensed consolidated financial statements in Part 1, Item 1 of this quarterly report.

      None.

      None.

      None.

      Not applicable.

      The exhibits listed on the Exhibit Index (following the Signatures section of this report) are included, or incorporated by reference, in this quarterly report.

SIGNATURES

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

EXHIBIT INDEX

      Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit Index immediately precedes the exhibits.

      The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q (and are numbered in accordance with Item 601 of Regulation S-K).