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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

Commission File Number 000-26521

Ask Jeeves, Inc.

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

(510) 985-7400

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

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

      The number of shares outstanding of the registrant’s Common Stock as of August 4, 2004 was 57,602,175.

The Exhibit Index begins on page 56.

ASK JEEVES, INC.

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Cautionary Note regarding Forward-Looking Statements

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

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PART I. FINANCIAL INFORMATION

ASK JEEVES, INC.

See accompanying notes to condensed consolidated financial statements.

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ASK JEEVES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to condensed consolidated financial statements.

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ASK JEEVES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to condensed consolidated financial statements.

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ASK JEEVES, INC.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Ask Jeeves, Inc. (“Ask Jeeves” or the “Company”) is a provider of Web-based information retrieval products across a diverse portfolio of Web sites and desktop applications. Ask Jeeves generates revenue primarily by displaying advertisements on its Web sites and seeks to attract Web traffic by creating distinctive search experiences that users will find intuitive and satisfying. Ask Jeeves pursues this goal using a multi-brand strategy. Ask Jeeves’ brands include six Web sites dedicated to search (Ask.com, Ask.co.uk, Teoma.com, MySearch.com, MyWebSearch.com and AJKids.com) and three broader-purpose, content-rich Web sites, known as “portals” (iWon.com, Excite.com and MyWay.com), as well as additional co-branded portals. Ask Jeeves’ search services can also be accessed through several branded search toolbars that users can install in their Internet browsers. The toolbars can be downloaded from Ask Jeeves’ Web sites and are also distributed together with other downloadable applications, including Ask Jeeves’ Fun Web Products, which are applications designed to make online activities more personal, interesting and fun for computer users. Ask Jeeves’ proprietary technologies include its algorithmic search engine, Teoma, natural language processing software, and portal- and ad-serving technologies. Ask Jeeves also provides advertisers with several types of targeted ad products on its own Web sites and syndicates their ads to a broad base of users across the Ask Jeeves Syndication Network and the MaxOnline Advertising Network of third-party Web sites.

      Until July 1, 2003, the Company operated through two divisions, Web Properties and Jeeves Solutions. On July 1, 2003, the Company sold certain assets used in the Jeeves Solutions business to Kanisa Inc. (“Kanisa”), at which time the Company ceased offering Jeeves Solutions software and services.

      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).

Basis of Presentation

      The accompanying condensed consolidated financial statements as of and for the periods ended June 30, 2004 and 2003 are unaudited, but include all adjustments (consisting of normal recurring adjustments and accruals) which, in the opinion of management, are necessary for a fair presentation of the consolidated financial position, operating results and cash flows as of the interim date and for the periods presented. Results for the three and six months ended June 30, 2004 are not necessarily indicative of results for the entire fiscal year or future periods. The condensed consolidated balance sheet at December 31, 2003 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

      The accompanying 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 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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. Actual results could differ materially from those estimates.

Concentrations of Revenue

      During the three and six months ended June 30, 2004, paid listing revenues from one provider accounted for 67% and 68% of revenues from continuing operations, respectively. During the three and six months ended June 30, 2003, paid listing revenues from the same provider accounted for 49% and 47% of revenues from continuing operations, respectively. This provider accounted for 41% and 23% of gross accounts receivable as of June 30, 2004 and 2003, respectively. The Company’s paid listing agreements with this provider are scheduled to terminate December 31, 2007.

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.

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 estimated fair value of the Company’s stock and the exercise price of options to purchase that stock is amortized over the vesting period of the related option using the graded vesting method.

      Had compensation cost for the Company’s stock-based compensation plans been determined using the fair value at the grant dates for awards under those plans calculated using the Black Scholes valuation model,

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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):

Reclassifications

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

2. COMMITMENTS AND CONTINGENCIES

      From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of patents, trademarks, copyrights and other intellectual property rights, and a variety of claims arising in connection with 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. vs Ask Jeeves, Inc., et al. was filed against the Company and two of the Company’s officers and directors (collectively the “Individual Defendants”) in the United States District Court for the Southern District of New York. Also named as defendants were Morgan Stanley & Co., Inc., FleetBoston Robertson Stephens, Goldman Sachs & Co., U.S. Bancorp Piper Jaffray, and Dain Rauscher, Inc., the underwriters of the Company’s initial public offering. The complaint alleges violations of Section 11 of the Securities Act of 1933 against all defendants, and violations of Section 15 of the Securities Act against the Individual Defendants in connection with the Company’s initial public offering (“IPO”). An amended complaint was filed on December 6, 2001, which includes the same allegations in connection with Ask Jeeves’ secondary offering in March 2000. The complaints seek unspecified damages on behalf of a purported class of purchasers of common stock between June 30, 1999 and December 6, 2000. 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

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1990’s. A coordinated settlement has been proposed and submitted to the court. 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. The settlement has not yet been approved by the court and might be opposed by the underwriter defendants. If the settlement is 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 reserved that amount on its balance sheet. Any payments beyond that amount will be made by the Company’s insurance carriers up to the limits of the relevant policies. If the settlement does not occur, and the litigation against the Company continues, the Company believes it has meritorious defenses and intends to defend the case vigorously.

      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 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 indemnify the Company to the extent the claims relate to Google paid listings.

      The Company acquired full ownership of Focus Interactive, Inc., formerly known as The Excite Network, Inc., on May 6, 2004 upon its acquisition of ISH. 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 demands. 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 moved to dismiss the Washington action, which motion was granted. InfoSpace filed an appeal in the Court of Appeals of the State of Washington. Briefing is not yet complete on the appeal in Washington.

      On September 29, 2003, InfoSpace moved to dismiss the New York 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 Supreme Court denied InfoSpace’s motion to dismiss in its entirety. On February 11, 2004, InfoSpace filed a Notice of Appeal of the Supreme Court decision to the Appellate Division of the New York Supreme Court for the Second Judicial Department. No briefing has yet occurred in the appeal in New York. On January 23, 2004, InfoSpace answered the Complaint in the NY Action and

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filed counterclaims similar to the claims asserted in the Washington action. The parties are currently engaged in settlement negotiations, though the Company faces the risk that the settlement negotiations might not be successful.

      On July 1, 2004, Kanisa, Inc. paid Ask Jeeves $380,000 in partial satisfaction of the promissory note it delivered to Ask Jeeves on July 1, 2003 in connection with Kanisa’s purchase of assets used in the Jeeves Solutions division. Ask Jeeves believes that an additional $351,000 is payable under the note which Kanisa is disputing. The promissory note proceeds received by Ask Jeeves on July 1, 2004 have been, and any additional proceeds will be, recorded as additional gain on the Jeeves Solutions transaction on the date of receipt.

      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 gambling operations that allegedly violate California law. The complaint purports to be a class action on behalf of the general public and 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 money damages 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. Ask Jeeves believes it has meritorious defenses and intends to defend the case vigorously.

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

Indemnifications

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3. ACQUISITIONS

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 $394.8 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 including the 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 using the following assumptions: risk-free interest rate of 3.7%, expected life of 4.3 years and a volatility factor of 1.1. No dividend was assumed.

      The total purchase cost of the acquisition of ISH as of the acquisition date has been allocated to assets and liabilities based on management’s preliminary estimate of their fair values. 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 at the date of acquisition and the estimated lives of the amortizable intangible assets (in thousands, except lives):

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

      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. The preliminary purchase price allocation for ISH is subject to revision as more detailed analysis is completed and additional information on the fair value of assets and liabilities becomes available. Any change in the fair value of the net assets of ISH will change the amount of the purchase price allocable to goodwill.

      Net deferred income tax assets related to the acquisition of Interactive Search Holdings had been fully offset by a valuation allowance and, accordingly, no such amounts are included in the accompanying condensed combined balance sheet.

      The results of ISH’s operations have been included in the Company’s consolidated financial statements since 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 and six months ended June 30, 2004 and 2003 as if the acquisition of ISH had occurred on the first day of the periods presented, including the amortization of identified intangible assets (in thousands, except per share data).

Tukaroo

      On June 3, 2004 the Company acquired certain technology from Tukaroo, Inc. The Company intends to integrate Tukaroo’s desktop search and file management software into its search services. The purchase consideration for the acquisition of the Tukaroo technology was not material to the condensed consolidated financial statements.

4. CONVERTIBLE SUBORDINATED NOTES

      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.

      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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

5. RESTRUCTURING AND FACILITY EXIT COSTS

      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 and six months ended June 30, 2004, the Company reported no additional restructuring charges. The following table sets forth the restructuring activity during the three and six months ended June 30, 2004 and 2003, respectively (in thousands).

6. LINE OF CREDIT

      The Company has a revolving line of credit with a bank in the amount of $15.0 million. The line of credit expires on July 1, 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 June 30, 2004, no borrowings were outstanding under the line of credit. Standby letters of credit of approximately $65,000, which are being maintained as security for performance under various obligations, were issued and outstanding under the credit facility.

      Further, our wholly-owned subsidiary, ISH, has additional standby letters of credit of approximately $500,000 and $80,000, which are being maintained as security for a capital lease and office space, respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION

      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 revenues by geographic region is based on the country in which the customer is domiciled. Geographic information on revenues from continuing operations is as follows (in thousands):

8. COMPREHENSIVE INCOME

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

9. SUBSEQUENT EVENTS

      On July 1, 2004, the Company signed an eight-year lease for 55,803 rentable square feet in the 555 City Center building in downtown Oakland, California. The future minimum lease payments are $11,550,000.

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      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.

BUSINESS OVERVIEW

      We provide consumers with Web-based information retrieval products across a diverse portfolio of Web search sites, portals and desktop applications. We provide advertisers with several types of ad products on these sites and also syndicate their ads to a broad base of users across the Ask Jeeves Syndication Network and the MaxOnline Advertising Network of over 1,500 third-party Web sites. We seek to attract Web traffic by creating distinctive search experiences that users will find intuitive and satisfying. On our Web sites, Ask.com in the U.S. and Ask.co.uk in the U.K., users submit search queries and our proprietary algorithmic search technology, Teoma, delivers a results list of Web pages likely to contain relevant and authoritative answers. In addition, in response to appropriate queries on those sites, our Smart Search function delivers the information the user is seeking right on the results page. We generate revenue primarily by displaying advertising on our Web sites, including keyword-targeted ads which appear on search results pages in response to related words in the user’s query. Our branded Web sites include six sites dedicated to search and three broader-purpose, content-rich Web sites (known generally as portals). In addition to Teoma, our proprietary technologies include natural language processing software, as well as portal-and ad-serving technologies.

      Our main goal is to increase our Web traffic by attracting more users to our sites and portals and getting them to use our search services more frequently. We are pursuing this goal using a multi-brand strategy and by making our search services accessible in several different ways.

      We have corporate headquarters in Emeryville, California, with offices in several cities throughout the United States, as well as in London, Dublin, and Tokyo.

Recent Events

      Notable events since the filing of our last quarterly report include the following:

	•	ISH Acquisition — On May 6, 2004 we closed the acquisition of Interactive Search Holdings, Inc., or ISH. Under the terms of the merger agreement, we issued approximately 9.1 million shares of common stock, assumed options to purchase approximately 200,000 shares of common stock and paid approximately $144.0 million in cash. This reflects an aggregate purchase price of $394.8 million, as explained in Note 3 (Acquisitions) to our financial statements ($501.0 million based on the closing price of our stock on May 6, 2004). The acquisition is expected to double our number of search queries per quarter.
	•	Shelf Registration Statement — 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.
	•	Renewal of Paid Listing Supply Arrangement — On July 26, 2004 Ask Jeeves, Inc. and two of our subsidiaries, Ask Jeeves Europe and Focus Interactive, entered into three definitive agreements with Google, Inc. to extend our relationship with Google until December 31, 2007. Pursuant to these agreements, Google will continue to supply sponsored advertising links to many of our search and portal brands under revised terms and conditions.

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	•	Tukaroo Acquisition — On June 3, 2004 we acquired certain technology assets from Tukaroo, Inc. We intend to integrate Tukaroo’s desktop search and file management software into our search services.
	•	Improved User Experience — We have introduced several site improvements to Ask.com over the past quarter, including the preview tool, “Binoculars” (patent-pending), and several Smart Search features. The Binoculars tool enables users to preview pages in the search results list before actually clicking-through to visit the end pages themselves. Our Smart Search features deliver rich content on the search results page. Recent Smart Search improvements include movie search, maps and driving directions, quick definitions and famous people.
	•	Expanded Email Storage Capacity — On June 24, 2004 we announced that we now offer registered users 125 megabytes of free email storage on our three branded portals: My Way (www.myway.com), Excite (www.excite.com), and iWon (www.iWon.com). In addition, premium-paying Excite Gold users now have 2 gigabytes of storage. Previously, we had offered 6 megabytes of free email storage on our branded portals.
	•	Lease of New Headquarters Space — On July 1, 2004, we signed an eight-year lease for 55,803 rentable square feet in the 555 City Center building in downtown Oakland, California. We expect to relocate our corporate headquarters to the new space in late 2004.
	•	Termination of Paid Inclusion — During the second quarter we ceased offering our paid inclusion product (which allowed Web site publishers to pay a fee to ensure that their sites were included in our index). We will continue to recognize paid inclusion revenue for the duration of the existing contract terms.

Search Services

      We offer several different branded search alternatives. We believe that different people prefer to search the Web in different ways. By offering a variety of search alternatives, we hope to deliver a search experience to each computer user that he or she will find intuitive and satisfying. In this way, we seek to attract and retain users. Our May 2004 acquisition of ISH roughly doubled the number of branded search alternatives we offer.

      Most of our search alternatives deliver a results Web page that includes advertiser-sponsored links. These textual advertising links, which we call paid listings, appear on the results page in response to keywords in the user’s query. Advertisers select the keywords that will produce their paid listings. Some of our results pages also display keyword-targeted graphic ads, which we call Branded Response. Keyword-targeted ads such as paid listings and Branded Response enable advertisers to deliver their message at the moment when viewers are most likely to be interested — when they are actively searching for information related to the advertiser’s product or service. Unlike traditional Web advertisements, which can be intrusive and annoying, keyword ads are often useful to the user, and thus can be more effective for advertisers. We identify keyword-targeted ads as “sponsored” content on our results page and display them separately from the search results.

      There are three main pricing plans for results page advertising, and the way in which we earn ad revenue varies among them. Depending upon the pricing terms, we earn advertising revenue every time users click on our paid listings (referred to as cost per click, or CPC, pricing), every time we display other types of graphic advertisements (referred to as cost per thousand impressions, or CPM, pricing) or every time users take an action on the destination site (referred to as cost per action, or CPA, pricing). Some of our paid listings are sold to advertisers by our direct sales force while others are supplied to us by our paid listings providers, primarily Google, Inc. Google sells paid listings to hundreds of thousands of advertisers and supplies us with relevant paid listings to display on our results pages in response to keywords in users’ queries.

      The search alternatives we offer include six dedicated search sites and three search-centric portal sites, among other methods of accessing our search services.

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Dedicated Search Sites

      We operate six proprietary Web sites dedicated to search.

	•	Ask.com and Ask.co.uk. Our Web sites, Ask.com in the U.S. and Ask.co.uk in the U.K., utilize our proprietary algorithmic search technology, Teoma, to generate the results list. Teoma’s approach to ranking search results is different from that of other search engines. In the Teoma results list, a site is ranked based on whether other sites linking to it are themselves respected within the pertinent subject-matter community on the Web. For example, Teoma would rank a baseball site based on how many links it receives from other Web sites specifically geared toward baseball aficionados, placing less emphasis on links from general sports or portal sites. Our natural language processing technology enables Teoma to accept and process queries written in natural language, which many users find more intuitive than Boolean logic. In addition to the Teoma results, Ask.com and Ask.co.uk also display Smart Search results in response to many popular query topics. Our Smart Search function delivers the information the user is seeking right on the results page. For example, if a user enters “weather in New York, NY,” our Smart Search function will display current New York City weather conditions in addition to other search results. We believe these direct answers help people find information faster and thereby improve their search experience. Smart Search content is currently available for stock quotes, famous people, movies, weather, driving directions, flight delays, snow conditions at ski resorts, definitions, wedding registries, and more. Our flagship sites also offer “Smart Product Search,” which enables users to easily compare product prices across multiple Web merchants. We generally license our Smart Search and Smart Product Search content from third parties.
	•	MySearch.com and MyWebSearch.com. These Web sites, which we acquired in our recent acquisition of ISH, allow users to run their search using one of several search algorithms — currently Ask Jeeves (Teoma), Google or Yahoo! — or using Looksmart’s Web directory. Regardless of which search method the user selects, we generate revenue from the results page advertising. Typically, users of these sites download the related toolbars (discussed below) so as to run searches using MySearch or MyWebSearch from anywhere on the Web.
	•	Our other dedicated search sites include Teoma.com and AJKids.com.

Portals

      We operate three proprietary branded portal Web sites. Our portals attract users by offering a mix of news, information and entertainment content together with internet services such as email, portfolio tracking, games, message boards and chat. Each portal includes prominent search functionality. Our portal content includes news, weather, shopping comparisons, horoscopes and more. We generally license these content feeds from third-party providers. Users of each portal can register to receive personalized features, which tend to increase user satisfaction and thereby increase usage of the sites. We acquired these portals in our recent acquisition of ISH:

	•	iWon.com. iWon is a content-rich portal with a user loyalty program built around cash sweepstakes prizes. The more times that registered users search through the iWon search box (or utilize other features of the site) the more chances they have to win the daily $10,000 prize and less frequent larger prizes.
	•	Excite.com. Excite is a content rich portal that seeks to attract users by aggregating news, sports, weather and entertainment content and providing e-mail, stock portfolio tracking, search, games, shopping and other services. We own the U.S. rights to The Excite Network’s portal assets; however, we do not control the Excite search results page and we do not own the international rights.
	•	MyWay.com. The MyWay portal appeals to users wanting fast and clean content delivery. It offers users a mix of content modules and free email accounts, all built around a prominent search box. MyWay is free from banner ads, pop-up ads, and rich-media ads (which are generally disliked by dial-up users because they load slowly). This site has been well received by users due its clean design and its personalization feature called My Page.

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	•	Co-Branded Portal. In addition, we build and operate a customized portal for Dell, Inc. at Dell.MyWay.com using the content modules and technology we developed for our own sites. We share the ad revenues generated by the portal with Dell, including results page ad revenues generated by searches originating from the co-branded portal.

Other Methods of Accessing our Search Services

      In addition to our dedicated search sites and our search-centric portals, we offer the following methods by which computer users can access our search services:

	•	Search Toolbars. We offer several branded search toolbars, which users can download and install in their Web browsers. These toolbars enable users to run a search using our services from anywhere on the Web without first clicking over to one of our Web sites. Toolbars are available for most of our branded sites (other than AJKids.com). Several of our toolbars offer additional benefits such as pop-up blocking and quick access to personalized portal content. The MySearch and MyWebSearch toolbar (like MySearch.com and MyWebSearch.com) currently allow users to run their search using any of the leading three search algorithms. In each case, we control the results page and, thus, even if a competitor’s technology is selected to provide the search results, we generate revenue from the paid listings and other advertising displays on the results page. Users can download these toolbars for free from our Web sites. In addition, we have distribution arrangements in place with third-party application providers, such as Weatherbug, to bundle our search toolbars with their downloadable applications. In those cases, we and our distribution partners typically share the revenues generated by the bundled toolbar.
	•	Search Boxes. We enter into agreements with third-party Web site publishers allowing them to add one of our search boxes to their Web sites. We control the results page that is displayed when a search is entered into one of those boxes (and just like on our proprietary sites, we generally obtain the paid listings from one of our providers). We share the resulting ad revenues with the third-party site (as well as with the paid listing provider).

Downloadable Applications

      We promote our search services through several downloadable applications we call our Fun Web Products. These programs are designed to make online activities more personal, interesting and fun for users, and each of them comes with one of our branded search toolbars. We make these fun web products available free of charge (at FunWebProducts.com) and benefit from users’ subsequent use of the search toolbar. Our Fun Web Products include Smiley Central (www.smileycentral.com), Cursor Mania (www.cursormania.com), Popular Screensavers (www.popularscreensavers.com), Pop Swatter (www.popswatter.com), and three email personalization applications (www.mymailstationery.com, www.mymailsignature.com and www.mymailstamp.com).

Advertising and Media Services

Search Results Page and Portal Advertising

      We provide advertisers and ad agencies with the opportunity to advertise on our search results pages and portal sites. We believe the combination of our broad user base and our suite of keyword advertising products enables us to offer advertisers an effective means of targeting precise audiences, while at the same time supplying our users with advertising content they are likely to find useful. We offer the following categories of advertising opportunities:

	•	Paid Listings. Our proprietary paid listings consist of Premier Listings in the U.S. and Answer Link in the U.K. Premier Listing advertising displays a textual link to the advertiser’s Web site in response to keywords in the user’s query. Premier Listings appear as “featured sponsored results” on Ask.com. Answer Link, which is only available on Ask.co.uk, allows operators of Web sites with high-quality, in-depth content to pay for the opportunity to appear as an identified sponsored answer on Ask.co.uk’s

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		results page in response to related queries. We source additional paid listings from third-party providers. Paid listings are clearly labeled as “sponsored” content on our results pages and are displayed separately from the algorithmic search results. Generally, paid listings are priced on a cost per click (CPC) basis, meaning that the advertiser only pays if the user clicks on its advertising link. When we display paid listings supplied by a third-party provider, we share the resulting advertising revenue with the provider.
	•	Branded Response. Branded Response, our keyword-targeted graphic advertising product, is available primarily on Ask.com and Ask.co.uk. The advertiser might design the Branded Response ad to appear as a question and answer inset, to feature a graphic logo, to appear as a helpful fact or hint in paragraph format, or as an interactive tool offering real-time content. Our Branded Response product thus allows advertisers to occupy highly visible Web real estate on our Ask.com results page (as well as the pages of some of our syndication partners). Branded Response ads are generally priced on a cost per thousand impression (CPM) basis but are sometimes priced on a cost per action (CPA) basis.
	•	Content-Targeted Advertising. We display content-targeted ads on some of our portal sites. Content-targeted ads are similar to paid listings in that they appear in response to the user’s current interests. However, unlike paid listings, which are produced by keywords in the user’s query, content-targeted ads appear on a page in response to the page’s other content. For example, next to a news story about Tiger Woods, we might display an ad for golf clubs. With this type of ad product, advertisers bid on topics, rather than keywords. We generally obtain content-targeted ads from a third-party provider, namely Google, and recognize the revenue on a cost per click (CPC) revenue-sharing basis, net of amounts retained by the provider.
	•	Non-Targeted Advertising. We offer several non-targeted advertising products, such as banners, towers and pop-ups, on Excite.com and iWon.com (which we sometimes refer to, collectively, as The Excite Network). Non-targeted ads are generally priced on a cost per thousand impression (CPM) basis but are sometimes priced on a cost per action (CPA) basis.

Ad Syndication Networks

      In addition to selling advertising to be displayed on our results pages and portals, we deliver, or “syndicate,” advertising products across our two advertising networks:

	•	Ask Jeeves Syndication Network. This network consists of approximately 40 third-party Web sites as of June 30, 2004. We provide search results and/or advertising for those Web sites to display and share the resulting revenues with them.
	•	MaxOnline Advertising Network. This network consists of over 1,500 third-party Web sites. MaxOnline offers advertisers the opportunity to communicate with this audience through a variety of advertising products. MaxOnline delivers these advertisements for display on networked sites using its own ad serving technology. MaxOnline was formed when L90, Inc. (a public company) merged with DoubleClick Media, Inc. (a subsidiary of DoubleClick) in 2002 to form MaxWorldwide (a public company). In mid-2003, the assets of MaxWorldwide’s Internet marketing division, MaxOnline, were acquired by ISH (a private company). MaxOnline became a wholly-owned subsidiary of Ask Jeeves when we acquired ISH in mid-2004.

CRITICAL ACCOUNTING POLICIES

      Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which are known as GAAP. These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions were made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between

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	•	revenue recognition;
	•	allowances for doubtful accounts;
	•	legal contingencies;
	•	accounting for income taxes; and
	•	impairment of long-lived assets.

      Each of these critical accounting policies is described in more detail below. Our management has reviewed these critical accounting policies and related disclosures with our Audit Committee. See the Notes to our Condensed Consolidated Financial Statements, which contain additional information regarding our accounting policies and other disclosures required by GAAP.

Revenue Recognition

      We generate revenue from the following main sources:

	•	sales, syndication and display of paid listings and branded advertising products;
	•	sales of paid inclusion products;
	•	licensing of our search technologies;
	•	co-branding arrangements;
	•	MaxOnline advertising sales and services.