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Form 10-Q

Commission File Number 000-26521

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

(510) 985-7400

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

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

      The number of shares outstanding of the registrant’s Common Stock as of October 31, 2003 was 46,516,716.

The Exhibit Index begins on page 41.

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ASK JEEVES, INC.

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Cautionary Note regarding Forward-Looking Statements

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

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PART I. FINANCIAL INFORMATION

ASK JEEVES, INC.

See accompanying notes to condensed consolidated financial statements.

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ASK JEEVES, INC.

See accompanying notes to condensed consolidated financial statements.

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ASK JEEVES, INC.

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 search technologies. The Company creates a search experience focused on understanding users’ specific needs and interests and connecting them to the most relevant information, products and services.

      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 to corporate customers as described in Note 7 (Discontinued Operations). Jeeves Solutions’ core software application, JeevesOne, allowed corporate customers to add its intuitive search engine to their corporate Internet or intranet sites. With the purchase of additional modules, JeevesOne allowed users to search and access a variety of linked enterprise systems and legacy databases.

      The Company currently maintains four Web sites which attract Web traffic by offering users free Internet search services. Ask.com, Ask.co.uk, and Teoma.com generate search results using the Company’s proprietary Teoma search technology, while AJKids.com utilizes the Company’s knowledgebase technology. The Company generates revenue in two ways: first, by offering advertisers a variety of targeted tools for promoting their products to the Company’s broad user base on its proprietary sites, Ask.com, Ask.co.uk and Teoma.com; and second, by syndicating its search results and ad products to third party Web sites, including portals, infomediaries, and content and destination Web sites.

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

Basis of Presentation

      The accompanying condensed consolidated financial statements as of September 30, 2003 and for the three and nine months ended September 30, 2003 and 2002 are unaudited but include all adjustments (consisting of normal recurring adjustments and accruals) which, in the opinion of management, are necessary for a fair statement of the consolidated financial position, operating results and cash flows as of the interim date and for the periods presented. Results for the interim periods ended September 30, 2003 are not necessarily indicative of results for the entire fiscal year or future periods. The condensed consolidated balance sheet at December 31, 2002 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

      The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Investments in affiliates in which the Company has significant influence but does not have a controlling interest or majority residual interests in the assets or income, or obligations to absorb the majority of the losses, are 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.

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 nine months ended September 30, 2003, paid placement revenues from one provider accounted for 61% and 52% of revenues from continuing operations, respectively. For the three and nine months ended September 30, 2002, paid placement revenues from one provider accounted for 14% and 5%, respectively. As a percentage of accounts receivable, one provider accounted for 48% of gross accounts receivable as of September 30, 2003. No provider accounted for more than 10% of accounts receivable for the period ending September 30, 2002.

Net Income (Loss) Per Share

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

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, the Company’s net income (loss) and basic and diluted net income (loss) per share would have been

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

decreased in the case of net income, and increased in the case of net losses, 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 or loss.

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, employment law claims, personal injury or other premises-liability claims, and a variety of claims arising in connection with delivery of the Company’s services, such as claims alleging defamation or invasion of privacy. In addition, the recent volatility in the Company’s stock price might increase the risk of securities class action litigation being instituted against the Company, such as the legal actions described below. Any of the foregoing types of claims, and any resultant litigation, should it occur, could subject the Company to significant liability for damages. In addition, even if the Company prevails, litigation could be time-consuming and expensive to defend, and could result in the diversion of management time and attention. Any claims from third parties may also result in limitations on the Company’s ability to use the intellectual property subject to these claims unless the Company’s able to enter into agreements with the third parties making these claims.

      On October 25, 2001, a putative class action lawsuit captioned Leonard Turroff, et al. vs Ask Jeeves, Inc., et al. was filed against the Company and two of the Company’s officers and directors (collectively the “Individual Defendants”) in the United States District Court for the Southern District of New York. Also named as defendants were Morgan Stanley & Co., Inc., FleetBoston Robertson Stephens, Goldman Sachs & Co., U.S. Bancorp Piper Jaffray, and Dain Rauscher, Inc., the underwriters of the Company’s initial public offering. The complaint alleges violations of Section 11 of the Securities Act of 1933 against all defendants,

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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. On June 24, 2003, a special committee of the Company’s Board of Directors approved the settlement of this action, subject to certain conditions including that a sufficient number of the defendants participate in the settlement, and on July 9, 2003, the Individual Defendants approved the settlement of this action. It is anticipated that the settlement will be submitted to the court for approval before the end of the year.

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

Indemnifications

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

3. CONVERTIBLE SUBORDINATED NOTES

      In June 2003, the Company issued $115,000,000 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 $111,744,000, net of costs of issuance of $3,256,000, 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 an initial conversion price of $16.90 per share subject to certain adjustments. This is equivalent to a conversion rate of approximately 59.1716 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 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.

      The Company has filed a shelf registration statement with the Securities and Exchange Commission with respect to the notes and the common stock issuable upon conversion of the notes and has agreed to use commercially reasonable efforts to cause the shelf registration statement to become effective within 180 days of the over-allotment option closing of the notes.

4. 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 nine months ended September 30, 2002, the Company

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

reported charges of approximately $73,000 and $513,000, respectively, which included severance pay and medical and other benefits. The following table sets forth the restructuring activity during the three and nine months ended September 30, 2003 and 2002, respectively (in thousands).

      During the third quarter of 2003, the Company incurred facility exit costs totaling $585,000 related to the cessation of use of leased premises. The charge was recorded to the Consolidated Statement of Operations in the following categories:

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5. LINE OF CREDIT

      The Company has a revolving line of credit with a bank in the amount of $15.0 million. The line of credit expires on July 1, 2005. Borrowings under the line of credit bear fixed rate interest from the date of borrowing at LIBOR plus 0.4%. All borrowings are collateralized by an equal amount of the Company’s marketable securities. Borrowings under the line are subject to various covenants. As of September 30, 2003, no borrowings were outstanding under the line of credit. Standby letters of credit of approximately $104,000, which are being maintained as security for performance under various obligations, were issued and outstanding under the line of credit.

6. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION

      The Company’s continuing operations are in a single business segment that includes Internet search technologies and the sale of advertising.

      The Company provides its search technologies and services internationally both directly and through its Japanese joint venture. Attribution of revenues by geographic region is predominantly based on the country in which the customer is domiciled. Geographic information on revenues from continuing operations is as follows (in thousands):

7. DISCONTINUED OPERATIONS

      On May 28, 2003, the Company entered into an agreement to sell certain assets used in the Jeeves Solutions division to Kanisa Inc. (“Kanisa”). The sale of such assets closed on July 1, 2003 at which time the Company ceased offering Jeeves Solutions products and services to corporate customers. The assets sold included, among other things, tangible personal property, intellectual property and customer and business contracts.

      In the third quarter of 2003, the Company recorded a gain of approximately $2,482,000, net of estimated income taxes of $109,000, representing the excess of the purchase consideration received at closing over the book value of the assets sold, as well as the remaining amount of deferred license fees applicable to Jeeves Solutions. In exchange for the sale of such assets, the Company received $3,400,000 in cash at the closing and a promissory note for up to $750,000, which is payable one year from the date of closing. The amount payable under the note is currently expected to be approximately $731,000, subject to certain upward or downward adjustments, but in no event shall the amount payable under the note exceed $750,000. The proceeds, if any, from the promissory note will be recorded as additional gain on the transaction upon receipt.

      Total revenues related to the discontinued operations were $1,918,000 for the three months ended September 30, 2002. No revenue from discontinued operations was recognized during the third quarter of 2003. During the nine months ended September 30, 2003 and 2002, total revenues related to the discontinued operations were $4,162,000 and $6,574,000. The assets and liabilities of Jeeves Solutions have been classified as assets and liabilities of discontinued operations in the Condensed Consolidated Balance Sheets and the

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

results of operations have been reclassified as loss from discontinued operations in the Condensed Consolidated Statement of Operations for all dates and periods presented.

8. COMPREHENSIVE INCOME (LOSS)

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

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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.

OVERVIEW

      Ask Jeeves, Inc. provides Web-based search technologies that enable Internet users to find information quickly and intuitively on the World Wide Web. We make our search technology available to the public free of charge on our three advertiser-supported Web sites: Ask Jeeves U.S. (Ask.com); Ask Jeeves U.K. (Ask.co.uk); and Teoma (Teoma.com). All of these Web sites generate search results using our Teoma Technology, which is a subject-specific popularity algorithm that utilizes page-ranking methods to estimate a Web site’s authority, in addition to its relevance. Our fourth Web site, Ask Jeeves for Kids (AJKids.com) utilizes our knowledgebase technology.

      We also syndicate our search technology and advertising products to third-party Web sites, including portals, infomediaries, and content and destination Web sites. We provide search results for those Web sites to display in response to their users’ search queries. We refer to these third-party Web sites as our syndication network.

      We generate revenue in two principal ways:

	•	First, we earn advertising revenue for displaying advertisements on our Web sites. We offer advertisers a suite of tools for promoting their products and services to our user base. Types of advertising range from banner ads on our U.K. Web site to more advanced keyword products, in which we display advertisements that are related to users’ search topics. We believe these targeted advertisements are effective because they are displayed at a time when users are particularly likely to be receptive to the advertisement — when users are actively searching for related information. A targeted advertisement may take many forms, such as a graphic ad or a paid placement. We sell paid placements directly to advertisers. We also obtain paid placements from third-party providers with whom we share advertising revenue. Currently, our principal paid placement provider is Google, Inc. We earn advertising fees based either on our displays of, or users’ click-throughs on, the advertisements.
	•	Second, we earn advertising revenue by syndicating paid placements and other advertising products to the third-party Web sites in our syndication network.

      We believe the combination of our broad user base and our suite of keyword targeted advertising products enables us to offer advertisers an efficient and effective method of reaching online audiences.

Recent Events

Sale of our Jeeves Solutions division to Kanisa, Inc.

      On July 1, 2003, we completed the sale of certain assets used in our Jeeves Solutions division to Kanisa, Inc. pursuant to an Asset Purchase Agreement dated May 28, 2003, by and between us and Kanisa. The sold assets included, among other things, tangible personal property, intellectual property, and customer and other business contracts. In exchange for the sale of such assets, we received $3,400,000 in cash at the closing and a promissory note for up to $750,000, which is payable one year from the date of closing. Currently, the amount payable under the note is expected to be $731,000, subject to certain upward or downward adjustments, but in no event shall the amount payable under the note exceed $750,000. The proceeds, if any, from the promissory note will be recorded as additional gain on the transaction upon receipt. In the third quarter of 2003, we recorded a gain of $2,482,000, net of estimated income taxes of $109,000, representing the excess of the purchase consideration received at closing over the book value of the assets sold, as well as the remaining amount of deferred license fees applicable to Jeeves Solutions.

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      The sale of our Jeeves Solution division will allow us to focus on growing our core business, which we previously referred to as our Web Properties division.

      We now maintain only one operating division. Accordingly, beginning in the second quarter of 2003, we no longer report our results on a segmented basis. For the three and nine months ended September 30, 2003 (and comparable periods of the prior year), we have reported our Jeeves Solutions results as discontinued operations.

Appointment of Steve Berkowitz as Chief Executive Officer

      On November 3, 2003, we announced that effective January 1, 2004, A. George (Skip) Battle will become the Executive Chairman of our Board of Directors and Steven Berkowitz will become our Chief Executive Officer. Garrett Gruener, who is currently Chairman of the Board will remain on our board as a director.

Critical Accounting Policies

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

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

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

      In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also cases which require management’s judgment in selecting among available alternatives but none of the alternatives would produce a materially different result. Our management has reviewed these critical accounting policies and related disclosures with our Audit Committee. See the Notes to our Condensed Consolidated Financial Statements, which contain additional information regarding our accounting policies and other disclosures required by GAAP.

Revenue-Continuing Operations

      We generally recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectibility is probable. If we have doubt about the collectibility of revenue at the time it is earned, such revenue is deferred until cash has been received. Revenues are generated from four general sources:

	•	sales of premier listings and other paid placement products;
	•	sales of branded advertising products;
	•	sales of paid inclusion products; and
	•	licensing of our search technologies.

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      Our premier listings and other paid placement products are text messages, or Web links, that are designed to connect users interested in a particular product or service with an advertiser offering that product or service at the exact moment users need the information, much like a Yellow Pages listing. With these products, advertisers pay only for performance, so these revenues are generated when a user clicks on the link to the advertiser’s Web site on a cost per click, or “CPC,” basis. We recognize CPC revenue on a revenue-sharing basis if the paid placement was procured from our third-party provider.

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

      Our paid inclusion products provide an opportunity for Web sites to ensure that they are included in our search index. We recognize paid inclusion revenue in two ways. First, on a “per URL” basis, in which the revenues are collected in advance and recognized over the appropriate service period, which is typically over one year; and second on a CPC basis, in which the revenue is recognized when the click is delivered.

      License payments received from our Japanese joint venture are recorded as deferred revenue and are recognized as revenues on a straight-line basis over a four-year period.

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

Revenue-Discontinued Operations: Jeeves Solutions

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

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

      We recognized license revenues at the end of the core implementation period if implementation services were included in the original license arrangement and were considered to be essential to the functionality of the software. As a result, even where we had a signed license agreement for the purchase of our software and had delivered the software, license revenue recognition depended on whether we had begun core

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

Allowances for Doubtful Accounts

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

      We also record a provision for revenue adjustments in the same period as the related revenues are recorded. These estimates are based on historical analysis of credit memo data and other known factors. If the historical data we use to calculate these estimates does not properly reflect future uncollectible revenue, then a change in the allowances would be made in the period in which such a determination is made and revenues in that period could 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 results of operations and financial position. See Note 2 of Notes to Condensed Consolidated Financial Statements for a description of our material legal proceedings.

Income Taxes

      As of December 31, 2002, we had net operating loss carryforwards of approximately $211.0 million and $83.0 million available to reduce future federal and state taxable income, respectively. These net operating loss carryforwards are carried on our balance sheet as a deferred tax asset, but due to uncertainty surrounding when or if we will realize the benefits of this deferred tax asset, we have recorded a 100% valuation allowance against our deferred tax asset. Financial Accounting Statement Standard No. 109, “Accounting for Income Taxes” or SFAS 109 requires that a valuation allowance be set up to reduce a deferred tax asset to the extent it is more likely than not that the related tax benefits will not be realized. In order for a company to realize the tax benefits associated with a net operating loss, it must have taxable income within the applicable carryback or carryfoward periods. Sources of taxable income that may allow for the realization of

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      SFAS 109 indicates that all available evidence, both positive and negative, should be identified and considered in making a determination as to whether it is more likely than not that all or some portion of the deferred tax asset will not be realized. Examples of positive evidence include: strong earnings history; existing contracts or backlog; and assets with net built in gains for tax purposes. Examples of negative evidence include: a pretax loss for financial reporting purposes for the current year or a recent preceding year; a deficit in stockholders’ equity; a history of operating loss or tax credit carryforwards expiring unused; and cumulative losses in recent years.

      We believe that our losses in recent years and deficit in stockholder’s equity present negative evidence that require a valuation allowance to be recorded to reduce to zero the deferred tax asset associated with the net operating loss carryforwards and temporary differences. Accordingly, we have not taken a benefit for that asset.

RESULTS OF OPERATIONS

      On May 28, 2003, we entered into an agreement to sell certain assets used in our Jeeves Solutions division to Kanisa Inc. (“Kanisa”). The sale of such assets closed on July 1, 2003, at which time we ceased offering Jeeves Solutions products and services to corporate customers. Accordingly, the results of operations relating to that division are discussed in the section entitled “Discontinued Operations” below.

Revenues

      Total revenues for the third quarter of 2003 grew 71.1% as compared with the third quarter of 2002. Generally, revenues were favorably affected by usage of our Web sites, which we refer to as our Web traffic, increasing in both the U.S. and U.K., with queries growing 33% and 39%, respectively. Contributing to the growth in queries, average user site visit frequency per month increased to 3.2 in September of 2003 as compared with 2.6 in the same period of 2002.

      Our revenues are related to our Internet search services and to our syndication of Web search services to third party Web sites. Our revenues consist of four main categories: (1) sales of paid placement products; (2) branded advertising; (3) paid inclusion; and (4) licensing. Syndication revenues are included within each of the above categories, as applicable. The table below presents revenues for each category, split between the U.S. and Europe.