INFOSPACE INC - 10-K Annual Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the fiscal year ended December 31, 2001

¨		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to

Commission File Number 0-25131

INFOSPACE, INC.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of

incorporation or organization)

91-1718107

(IRS Employer

Identification No.)

601 108th Avenue NE, Suite 1200, Bellevue, Washington 98004
(Address of principal executive offices) (Zip code)

Registrant’s telephone number, including area code:

(425) 201-6100

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.0001 per share

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

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

The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of Common Stock on February 28, 2002 as reported by Nasdaq, was approximately $325.0 million. Shares of voting stock held by each officer and director and by each person who owns 5% or more of the outstanding voting stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of February 28, 2002, 309,179,234 shares of the registrant’s Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates certain information by reference from the definitive proxy statement for the Annual Meeting of Stockholders tentatively scheduled for May 20, 2002 (the “Proxy Statement”).

TABLE OF CONTENTS

PART I

Item 1.	Business	3
	Factors Affecting Our Operating Results, Business Prospects and Market Price of Stock	16
Item 2.	Properties	27
Item 3.	Legal Proceedings	27
Item 4.	Submission of Matters to a Vote of Security Holders	29

PART II

Item 5.	Market for Registrant’s Common Stock and Related Stockholder Matters	29
Item 6.	Selected Consolidated Financial Data	30
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	51
Item 8.	Financial Statements and Supplementary Data	53
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	98

PART III

Item 10.	Executive Officers and Directors of the Registrant	98
Item 11.	Executive Compensation	98
Item 12.	Security Ownership of Certain Beneficial Owners and Management	98
Item 13.	Certain Relationships and Related Transactions	98

PART IV

Item 14.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	98

Signatures		101

ITEM 1. Business

This report contains forward-looking statements that involve risks and uncertainties. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “anticipates,” “believes,” “plans,” “expects,” “future,” “intends,” “may,” “will,” “should,” “estimates,” “predicts,” “potential,” “continue,” and similar expressions to identify such forward-looking statements. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance, achievements and prospects, and those of the wireless and Internet software and application services industry, to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties and other factors include, among others, those identified under “Factors Affecting Our Operating Results, Business Prospects and Market Price of Stock” and elsewhere in this report.

Overview

InfoSpace, Inc. is a provider of wireless and Internet software and application services. We have developed and deliver a wireless and Internet platform of software and application services that enable companies to offer network-based services under their own brands. Our customers in turn, offer these products and application services to their customers as their solutions. We provide our services across multiple platforms simultaneously, including PCs and non-PC devices.

We develop and deliver our products and application services to a broad range of customers that span each of our business areas of wireline and broadband, merchant and wireless. In our wireline and broadband business, we deliver our services to Web portals such as America Online, destination sites such as Disney, and DSL providers such as Verizon Online. In our merchant business, we deliver our products to regional Bell operating companies such as Verizon, merchant banks such as Union Bank of California, and financial institutions such as American Express. In our wireless business, we deliver our products and application services to wireless carriers such as Verizon Wireless, AT&T Wireless and Cingular, and other consumer service companies such as Charles Schwab.

Our services are predominately built on our core technology platform and use the same operational infrastructure. We do not currently allocate development or operating costs to any of these services. The following provides detail on each of our business areas.

Wireline and Broadband

Through our wireline and broadband business area, we develop and deliver Internet services for high-speed broadband and dial-up narrowband Web sites. We enable our customers such as destination Web sites and broadband service providers, including digital subscriber line (DSL) companies, to offer their customers an array of private-labeled services. We deliver our services to Web sites including America Online, Microsoft’s MSN, NBCi, Lycos and Verizon Online, among others.

InfoSpace’s product offerings are designed to help businesses attract customers, improve loyalty, create new revenue streams and monetize their customer base. Further, our services are private-labeled and delivered with each customer’s logo, color scheme and navigation design, to help strengthen the value of their brand. This ensures that our customers own the value relationship with their customer. Our wireline business unit is focused on delivering three main categories of products:

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Web search products are meta-search engines in that they simultaneously search many engines at the same time, producing fast, extensive results. Rather than offering just a single search engine, our search solutions offer some of the best search engines on the Web. We integrate search engines including Alta Vista, Overture, About, Direct Hit and Looksmart, among others, into our meta-search products.

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Directory services are an extension of search and include Internet products (White Pages and Classifieds) people use every day.

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Broadband services are designed to take advantage of higher bandwidth networks. Our current and next-generation applications and services are targeted at the DSL and cable modem markets, and are designed to create compelling reasons for customers to subscribe or migrate to high-speed connections.

In wireline, for search and directory services we are paid on a per query basis. We do not expect broadband revenues to be material in the near future.

Merchant

Our merchant business area develops and delivers products and application services that are designed to help merchants leverage Internet and wireless technologies to attract customers, reduce costs, grow sales and conduct business. These applications and services enable businesses to establish an online presence, promote their products and services, and conduct secure commerce using an Internet connected device. Our merchant services are branded for leading merchant banks and other merchant service providers who in turn offer these solutions to their business customers. Our merchant services are available through a broad merchant reseller channel, including Verizon, one of the largest providers of products and services for small to medium-sized businesses in the U.S., and major financial institutions such as American Express and Union Bank of California. Our merchant services include:

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Payment solutions that enable merchants to authorize, process, and manage credit card and electronic check transactions on Internet-enabled mobile devices and personal computers. InfoSpace payment solutions are offered as a private-label service to leading merchant banks such as Wells Fargo and Union Bank of California and directly to merchants through InfoSpace’s reseller network.

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Shopping services that offer a private-labeled, end-to-end solution designed to help partners increase traffic, build customer loyalty and drive additional revenue through offering a comparison-shopping service to their customers under their own brand. This flexible service can be customized to appeal to a partner’s specific target market(s) and can be integrated with customer registration and internal loyalty programs.

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Merchant promotions is primarily our yellow pages services, and are distributed through leading Web sites and wireless carriers over a wide range of fixed and mobile Internet connected devices, offering merchants expansive networks over which to promote their products and services.

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Hosting solutions that provide merchants and Web developers with a flexible and scalable solution for establishing and building secure Web sites.

We generate revenue in our merchant business area from the following sources:

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Payment transactions include our payment authorization and shopping services. In payment authorization, we earn revenue from our merchants through set-up fees and from monthly subscription fees, which may include a certain number of monthly transactions. As merchants exceed their minimum, we receive additional revenue per transaction. For shopping, we generally receive a percentage of the total dollars processed in each transaction, as well as a number of basis points for shopping transactions completed on certain Web sites.

•

Merchant promotions, which are primarily our yellow pages services, generate revenues on a per query basis.

•

Merchant hosting revenues are generated on a monthly basis from subscription fees and monetization of users to the merchant’s Web sites.

Wireless

Through our wireless business area, we develop, deliver and support solutions enabling our carrier customers to deliver wireless data services to their subscribers under their own brand over current and next generation networks. With our wireless platform, carriers can effectively manage and seamlessly deliver InfoSpace’s private- labeled applications and services, third party services and their own content and applications, to create a unique mobile data experience for their subscribers.

InfoSpace provides its wireless solutions to leading companies worldwide, including wireless carriers such as Verizon Wireless, Cingular Wireless, AT&T Wireless, ALLTEL, Virgin Mobile and Deutsche Telekom’s VoiceStream; and consumer services companies such as Charles Schwab. InfoSpace’s wireless solutions include:

Content Applications and Services—We offer an array of content application and services that bring personalized and timely information and entertainment services across many devices. These products include:

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Content applications including news, finance, weather, sports and entertainment applications, among others.

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Content services such as InfoSpace’s Alerts Service, including speech-enabled SMS (short message service) alerts, speech information services, 2-way SMS services and our downloadable content service. Our applications offer multiple delivery options for content distribution on any device in various data modes. Our content can be pushed or pulled as text messages over SMS to handsets and pagers, as WML or HDML decks on wireless internet-enabled phones, as HTML or cHTML pages on desktops and PDAs, or as VoiceXML for speech delivery. Our SMS delivery platform supports SMTP and a variety of direct messaging protocols such as SMPP and CIMD as well as a variety of downloadable content formats such as Nokia Smart Messaging and EMS (enhanced messaging service). For example:

•

We have deployed wireless alerts service applications in four different languages delivering content and messaging notifications to the subscribers of Verizon Wireless, Cingular Wireless, VoiceStream Wireless, ALLTEL, Cincinnati Bell, Vodafone, Virgin Mobile, KPN, Libertel, Dutchtone, BEN, Telfort, diAx, Telemig, ATL, Amazonia and Telet.

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We have deployed two-way SMS service applications in four different languages delivering content on demand to the subscribers of Vodafone, Iusacell, One2One, KPN, Libertel, Dutchtone, BEN, Telfort and Microcell.

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Content Provisioning. We provide our customers a wide selection of provisioning options. Our solutions allow users to access, personalize and schedule information services via multiple interfaces including Web, WAP, speech and one-way and mobile-originated SMS.

Messaging—Our messaging products are designed to help carriers attract and retain subscribers and drive mobile data use by providing a unified environment with a single interface where their subscribers can access and manage their voice and data communications from multiple accounts.

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Email. Our email solution leverages both the wireless and wired Internet, and the interplay between devices and communications modes. Whether a subscriber is solely active on their wireless device or mixed use with their PC, has several existing email accounts or needs a new email account, our solution is designed to meet their needs.

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Personal Information Manager. Designed to meet the needs of both consumers and business professionals, our personal information manager (PIM) solutions leverage both the wireless and wired Internet, and the interplay between devices and communications modes. By providing a server-based solution suite hosted by InfoSpace, a customer’s data is securely stored, and is accessible from virtually anywhere, using a wide variety of Internet connected device. Users can upgrade handsets, change or alternate devices without any loss of information.

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Voice Activated Dialing. The easiest way to get in touch with contacts from an address book. Voice-Activated Dialing can be used with any type of phone.

Customization and Personalization—Our customization and personalization tools give wireless carriers direct control over the wireless services they offer. These tools also give subscribers the flexibility to personalize their services, making them more valuable to the subscribers and easier to use.

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User Manager. Our User Manager incorporates a core set of standards-based technologies to combine subscription management, provisioning, personalization services, device services, loyalty and payment services in an economical, flexible and seamless wireless customer personalization and integrated provisioning solution.

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Wireless Application Manager. Our Wireless Application Manager delivers end user customization and wireless carrier control of decks, or the list of application services on the screen, content links and production releases.

We support SMS, WAP, cHTML, VoiceXML (speech) and a variety of other protocols that may be proprietary to different devices, enabling our end users to access the same personalization and services across a variety of devices. Our wireless Internet services enable carriers to support a variety of protocols such as WAP, PQAs for Palm VII and VoiceXML, in addition to HDML, SMTP and SMS. Our services are compatible with a variety of wireless gateway technologies including Nokia, OpenWave, CMG and Ericsson.

We generate revenue in our wireless business area from development and integration fees, subscription fees and licensing fees. License fee revenue is recognized ratably over the term of the agreement. Licensing fees may include a minimum number of users or usages by users. In those cases that do not have minimums or when the minimums are exceeded, we receive per subscriber or per message fees that are generated either on a monthly or quarterly basis.

International Operations

We currently maintain facilities in the United States, Canada, The Netherlands, the United Kingdom, Australia and Brazil.

We have also entered into an agreement to expand our services into Mexico and are currently investigating additional international opportunities. The expansion into international markets involves a number of risks. See “Risk Factors—Our expansion into international markets may not be successful and may expose us to risks that could harm our business” for a description of these risks.

We have historically generated the majority of revenues from our customers in the United States. Revenue generated in the United States accounted for 91% of our total revenues in 2001 and 2000 and 99% of our total revenues in 1999.

For further information about our business areas, see Note 11 to the consolidated financial statements.

Revenue Sources

We have derived all of our revenues from our wireline and broadband, merchant and wireless business areas. We generate revenues from payment transaction fees, licensing fees, subscription fees, advertising and development and integration fees.

Payment Transaction Fees

Payment transactions include our shopping and payment authorization services. In payment authorization we earn revenue from our merchants through set-up fees and monthly subscription fees, which may include a

certain number of transactions. As merchants exceed their minimum, we receive additional revenue per transaction. For shopping, we receive a percentage of the total dollars processed in each transaction, as well as a number of basis points for shopping transactions completed on certain Web sites. Transaction fees are recognized in the period the transaction occurs.

Licensing Fees

Licensing fees are generated from the access and utilization of our products and application services. License fee revenue is recognized ratably over the term of the agreement.

We have agreements with some customers, merchant banks and aggregators and wireless carriers under which they agree to pay us licensing fees, which may include guaranteed minimum fees. These arrangements are individually negotiated and have a range of specially adapted features involving various compensation structures. These are often based on the range and extent of customization. These agreements generally range from one to three years in duration.

For our wireless agreements, the licensing fees may include a minimum number of users or usages by users. In those cases that do not have minimums, or when the minimums are exceeded, we receive per subscriber or per message fees that are generated either on a monthly or quarterly basis.

Subscription Fees

We receive monthly subscription fees from our merchant hosting services and our payment authorization services. Subscription fee agreements generally range from one to three years in duration. Subscription fee revenue is recognized in the period the services are provided.

Advertising

We monetize the users of our Web sites by selling banner, button and text-link advertisements based on cost per click, or CPCs, costs per thousand impressions, or CPMs, and other CPM-based advertising. Our advertising agreements generally have terms of less than six months and guarantee a minimum number of impressions. Actual CPMs depend on a variety of factors, including, without limitation, the degree of targeting, the duration of the advertising contract and the numbers of impressions purchased, and are often negotiated on a case-by-case basis. Because of these factors, actual CPMs may fluctuate. Revenues from contracts based on the number of impressions displayed or click-throughs provided are recognized as services are rendered.

In some cases, we share some of the revenues generated from banner advertising with some of our content providers and with customers who have co-branded Web pages. We generally retain the right to enter into agreements with and sell the advertising to third parties and we are responsible for serving the advertisements and billing the advertisers. After deducting a selling fee, we usually share the revenues with the content provider or customer once a minimum impression threshold is achieved.

Development and Integration Fees

Development fees are charged for the development of private-labeled solutions for customers. Integration fees are charged for the integration of our products and application services into these private-labeled solutions. Although these fees are generally paid to us at the commencement of the agreement, the fees are recognized ratably over the term of the agreement.

Professional Services

During the fourth quarter of 2001, we established a professional services group to offer services that will help us serve the design, integration and support needs of our customers.

We expect to generate revenues from projects by charging for both time and materials, as well as under agreements with specific contractual terms. These revenues will be recognized as the services are rendered.

In 2001, we generated 56% of our revenues from our wireline business area. We expect to generate 40 to 45% of our revenues from our wireline and broadband business area in 2002. Our reliance on these revenues involves a number of risks. For additional information about these risks, see “Risk Factors—We have historically been, and currently remain, reliant upon revenues from our wireline services. Our operating results would be harmed by a decline in sales of our wireline services or our failure to collect fees for these services.”

Technology and Infrastructure

We believe that one of our principal strengths is our internally developed technology that we have designed specifically for our products and application services. Our technology architecture features specially adapted capabilities to enhance performance, reliability and scalability, consisting of multiple software modules that support the core functions of our operations. Our technology consists of three tiers: Tier I—Presentation and Authentication, Tier II—Platforms and Applications and Tier III—Core Technology. Below is a brief description of the functionality and purpose of each tier.

Tier I: Presentation and Authentication

Authentication

Requests for our products and application services are generated from wireless, non-PC and PC devices. Requests that require authentication are routed to our user manager subsystem that authenticates the user and makes that user’s profile of authorized capabilities available to the rest of our applicants and services.

Presentation

The presentation technology allows our products and services to be displayed on different devices each with their own protocols and formats without making changes to the underlying application. With our presentation technology, we have a device-, protocol-, and transport-independent platform. We support SMS, WAP, cHTML, VoiceXML (speech) and a variety of other protocols that may be proprietary to different devices, enabling our end users to access the same personalization and services across a variety of devices. The platform directly supports co-brand ability permitting easy changes to the look and structure of a site. Our wireless Internet services provide a platform which enables carriers to support a variety of protocols such as WAP, PQAs for Palm VII and VoiceXML, in addition to HDML, SMTP and SMS.

Tier II: Platforms and Applications

Our platforms and applications build upon the core technology and support the core functions of our operations.

The components include alerts services, speech, location/geo-centric platform, short message service (SMS) platform, user manager, content management and wireless access management.

Our application services include search, directory, broadband, payments, merchant promotions, hosting, shopping and a platform of wireless data services such as user manager, wireless access manager, SMS and speech among others. Most applications support HTTP/XML based programmatic interfaces to ease integration with partners and evolve into complete Web services.

Tier III: Core Technology

Web Server Technology

We designed our Web Server Technology to enable rapid development and deployment of information over multiple delivery mechanisms and output formats. It incorporates an automated publishing engine that

dynamically builds a page to conform to the look and feel and navigation features of each Web site. Our wireless data services are device-independent and provide a platform that enables our wireless carriers to support HDML, SMTP, SMPP, and a variety of emerging protocols such as VoiceXML and PQAs for Palm VII. Our services are compatible with a variety of gateway technologies including WAP gateways from Nokia, OpenWave and Ericsson.

Our Web Server Technology includes other features designed to optimize the performance of our information infrastructure services, including:

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a HTML compressor that leverages semantics-preserving modifications of file content to reduce size, thereby reducing download time for users;

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an adaptive Keep-Alive feature that maximizes the duration of HTTP connections, based on current server load, thereby improving the user experience by reducing latency; and

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a proxy server that provides the capability for real-time integration and branding of applications that reside remotely with third-party providers.

Database Technology

We have developed database technology to address the specific requirements of our business strategy and information infrastructure services. We designed our Co-operative Database Architecture to function efficiently within the unique operating parameters of the Internet, as opposed to commonly used database systems that were developed prior to the widespread acceptance of the Internet. The architecture is integrated with our Web Server Technology and incorporates the following features:

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Our Heterogeneous Database Clustering allows disparate data sources to be combined and accessed through a single uniform programmatic interface, regardless of data structure. These clusters facilitate database bridging, allowing a single database query to produce a single result set containing data extracted from multiple databases, which is a vital component of our ability to aggregate applications from multiple sources. Database clustering in this manner reduces dependence on single data sources, facilitates easy data updates and reduces integration efforts. In addition, our pre-search and post-search processing capabilities enable users to modify search parameters in real time before and after querying a database.

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Our Dynamic Parallel Index Traversal mechanism utilizes the search parameters supplied by the user to determine the appropriate database index (from among multiple indices) to efficiently locate the data requested. Further, an index compression mechanism allows us to achieve an efficient balance between disk space and compression/decompression when storing or accessing data.

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In a response to a database query, conventional databases access previously displayed results in order to display successive results to a given query, thus increasing response time by performing redundant operations. Our Automatic Query State Recovery mechanism decreases response time by maintaining the state of a query to allow the prompt access of successive results. This feature is particularly important, for example, when an end-user query retrieves a large number of results.

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We incorporate a natural word search interpreter, which utilizes familiar category and topic headings that are traditional to print directory media to generate relevant and related results to queries. By supporting a familiar navigation feature in our services, we provide end users with a more intuitive mechanism to search for and locate information.

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For our merchant services we have developed a comprehensive, enterprise-wide data warehouse. This data warehouse contains information relating to merchants, products, services, users, customers, profiles, storefronts, purchases, site traffic and metrics. The aggregation of this information in one place allows us to leverage our development efforts and reduce redundant information.

Product Development

We believe that our technology platform is essential to successfully implement our strategy of expanding and enhancing our services, expanding in the wireless and Internet software and application services market and maintaining the attractiveness and competitiveness of our solutions. We have invested significant time and resources in creating our patented and patent-pending technology. Product development expenses were $39.3 million for the year ended December 31, 2001, $40.6 million for the year ended December 31, 2000 and $15.6 million for the year ended December 31, 1999.

Intellectual Property

Our success depends significantly upon our technology. To protect our rights, we rely on a combination of copyright and trademark laws, patents, trade secrets, confidentiality agreements with employees and third parties and protective contractual provisions. Most of our employees have executed confidentiality and nonuse agreements that transfer any rights they may have in copyrightable works or patentable technologies to us. In addition, prior to entering into discussions with potential content providers and customers regarding our business and technologies, we generally require that such parties enter into nondisclosure agreements with us. If these discussions result in a license or other business relationship, we also generally require that the agreement setting forth the parties’ respective rights and obligations include provisions for the protection of our intellectual property rights. For example, the standard language in our agreement provides that we retain ownership of all patents and copyrights in our technology and requires our customers to display our copyright and trademark notices.

“InfoSpace,” the InfoSpace logo, “Go2Net,” “Authorize.Net,” the Dogpile logo, “ActiveShopper,” “100Hot,” “Web21,” “Haggle Online,” “HyperMart,” “MetaCrawler,” “MetaSpy,” “MyAgent,” “Silicon Investor,” “FraudScreen.Net,” the Get Rewarded logo, “RubberChicken.com” and “WebMarket” are registered trademarks of ours. We recently purchased the following registered trademarks from At Home Corporation: “Classifieds2000,” “Cool Notify,” “Excite,” “Excite Classifieds,” “Excite Search,” “Jango,” “Webcrawler,” and “Webcrawler Direct.” Other recently acquired registered trademarks include “Giantbear.com,” acquired with other assets from GiantBear, Inc., and “E-Cash,” “Digicash,” “E-Vote, “ “Kidcash,” “Net-Cash” and “Net-Pay,” acquired as part of our purchase of substantially all assets of eCash Technologies, Inc. In addition, we have applied for federal registration of other marks, including “ActivePromotion,” “Dogpile,” “IntelliShopper” and “Playsite,” the Go2Net logo, “Discover What You Can Do,” “Airpay,” and “SMS Direct.” From the GiantBear, Inc. asset purchase, we acquired the federal applications for “Audiocub,” “Bearcub,” “Beartracks,” “Business Bear” and “Giant Bear.” From the At Home Corporation asset purchase, we acquired the federal application for “Excite Precision Search.” We also have applied for registration of certain service marks and trademarks in the United States and in other countries, and will seek to register additional marks, as appropriate. We may not be successful in obtaining the service marks and trademarks for which we have applied.

We have been issued six U.S. patents, and recently acquired twenty more in connection with the eCash asset purchase in February 2002. Our issued patents cover private-label commerce solutions; tracking the purchase of products, services and information on the Internet and on wireless devices; and electronic transaction technologies. We also have several foreign patents and patents pending covering some of these technologies. We also have over forty-nine U.S. patent applications pending relating to various aspects of our technology, including technology we have developed for querying and developing databases, for developing and constructing Web pages, electronic commerce on-line directory services and Web scraping. We have received a notice of allowance for one of these patent applications. From the GiantBear asset purchase, we acquired three pending U.S. patents relating to wireless technology and through the eCash asset purchase, we acquired one pending patent related to electronic transaction technology. We are preparing additional patent applications on other features of our technology. We have instituted a formal patent program and anticipate on-going patent application activity in the future. Patents with respect to our technology may not be granted, and, if granted, patents may be challenged or invalidated. In addition, issued patents may not provide us with any competitive advantages and may be challenged by third parties.

Despite our efforts to protect our rights, unauthorized parties may copy aspects of our products or services or obtain and use information that we regard as proprietary. The laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the United States. In addition, others could possibly independently develop substantially equivalent intellectual property. If we do not effectively protect our intellectual property, our business could suffer.

Companies in the Internet software and application services industry have frequently resorted to litigation regarding intellectual property rights. We may have to litigate to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of other parties’ proprietary rights. From time to time, we have received, and may receive in the future, notice of claims of infringement of other parties’ proprietary rights. Any such claims could be time-consuming, result in costly litigation, divert management’s attention, cause product or service release delays, require us to redesign our products or services or require us to enter into royalty or licensing agreements. If a successful claim of infringement were made against us and we could not develop non-infringing technology or license the infringed or similar technology on a timely and cost-effective basis, our business could suffer.

MetaCrawler License Agreement. On January 31, 1997, Go2Net and Netbot entered into the MetaCrawler License Agreement pursuant to which Netbot granted Go2Net an exclusive, subject to certain limited exceptions, worldwide license to provide the MetaCrawler service. We acquired Go2Net in October 2000. Netbot was acquired by Excite, Inc. in November 1997 and Excite was acquired by At Home Corporation in May 1999. As part of the MetaCrawler License Agreement, we have the exclusive right to operate, modify and reproduce the MetaCrawler service including, without limitation, the exclusive right to use, modify and reproduce the name “MetaCrawler” and the MetaCrawler URL in connection with the operation of the MetaCrawler service. Netbot licensed the MetaCrawler service and the other intellectual property rights associated therewith from the University of Washington on an exclusive, perpetual basis. The search technology underlying the MetaCrawler service and the MetaCrawler trademark is licensed to or owned by Netbot and sublicensed to us pursuant to the MetaCrawler License Agreement. At Home Corporation is currently in bankruptcy proceedings. However, we have entered into a contingent arrangement with the original licensor of MetaCrawler and do not believe that the At Home Corporation bankruptcy will impact our ability to offer the MetaCrawler service.

Competition

We operate in the wireless and Internet software and application services market, which is extremely competitive and rapidly changing. Our current and prospective competitors include many large companies that have substantially greater resources than we have. We believe that the primary competitive factors in the market for wireless and Internet software and applications are:

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the ability to meet the specific information and service demands of a particular Web site or wireless device;

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the cost-effectiveness, reliability and security of the products and application services;

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the ability to provide products and application services that are innovative and attractive to consumers, merchants, subscribers and other end users; and

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the ability to develop innovative products and services that enhance the appearance and utility of the Web site, device or platform.

Although we believe that no one competitor offers all of the products and services we do, our primary offerings face competition from various sources. We compete, directly or indirectly, in the following ways, among others:

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wireline services compete with search providers such as Google, Yahoo and Microsoft’s MSN, directory providers such as Yahoo and Microsoft’s MSN, and broadband providers such as Yahoo,

iPlanet and Microsoft’s MSN; other information services we provide, such as classifieds, horoscopes and real-time market quotes, compete with specialized content providers.

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our merchant services compete with online payment processing services such as VeriSign’s Signio, Plug ‘n Play, CyberSource, portals such as AOL, Yahoo and MSN, merchant aggregators such as Big Step and Microsoft’s Bcentral, and merchant hosting providers such as Verio, Interland and Dellhost; our yellow pages services compete with other providers such as Switchboard, InfoUSA, Yahoo Yellow Pages and AnyWho.com; our shopping services compete with other providers such as MySimon;

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our wireless services compete with in-house information technology departments of wireless carriers and device manufacturers, and some of our services compete with those provided by OpenWave, i3Mobile, and Seven; and

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in international markets, we compete with local companies which may have a competitive advantage due to their greater understanding of and focus on a particular local market.

We expect that in the future we will experience competition from other Internet software and application services companies, including Microsoft and AOL. Some of these companies are currently customers of ours, the loss of which could harm our business.

Many of our current customers have established relationships with some of our current and potential future competitors. If our competitors develop information Internet software and application services that are superior to ours or that achieve greater market acceptance than ours, our business will suffer.

Governmental Regulation

Because of the increasing use of the Internet, U.S. and foreign governments have adopted or may in the future adopt laws and regulations relating to the Internet, addressing issues such as user privacy, pricing, content, taxation, copyrights, distribution and product and services quality.

Recent concerns regarding Internet user privacy have led to the introduction of U.S. federal and state legislation to protect Internet user privacy. Existing laws regarding user privacy that we may be subject to include the Children’s Online Privacy Protection Act, which regulates the online collection of personal information from children under 13, and the Gramm-Leach-Bliley Act, which regulates the collection and processing of personal financial information. In addition, the Federal Trade Commission has initiated investigations and hearings regarding Internet user privacy, which could result in rules or regulations that could adversely affect our business. As a result, we could become subject to new laws and regulations that could limit our ability to conduct targeted advertising, or to distribute or collect user information.

European legislation to protect Internet user privacy has not greatly impacted us so far. In October 1998, the European Union adopted a directive that may limit our collection and use of information regarding Internet users in Europe. European countries may pass new laws in accordance with the directive, or may seek to more strictly enforce existing legislation, which may prevent us from offering some or all of our services in some European countries.

We may be subject to provisions of the Federal Trade Commission Act that regulate advertising in all media, including the Internet, and require advertisers to substantiate advertising claims before disseminating advertising. The Federal Trade Commission has the power to enforce this Act. It has recently brought several actions charging deceptive advertising via the Internet and is actively seeking new cases involving advertising via the Internet.

We may also be subject to the provisions of the Children’s Online Protection Act, which restricts the distribution of certain materials deemed harmful to children. Although some court decisions have cast doubt on the constitutionality of this Act, it could subject us to substantial liability.

These or any other laws or regulations that may be enacted in the future could have several adverse effects on our business.

Employees

As of February 28, 2002, we had 741 employees. None of our employees are represented by a labor union, and we consider our employee relations to be good. Competition for qualified personnel in our industry is intense, particularly for software development and other technical staff and for personnel with experience in wireless services. During 2001, we realigned our resources to concentrate on development of our wireless, merchant and broadband services and aligned our engineering resources along business lines. These realignments allowed us to reduce our workforce by approximately 375 employees. We believe that our future success will depend in part on our continued ability to attract, hire and retain qualified personnel.

Executive Officers and Directors

The following table sets forth certain information as of February 28, 2002 with respect to our executive officers and directors:

Name	Age	Position
Naveen Jain	42	Chairman and Chief Executive Officer
Edmund O. Belsheim, Jr.	49	President, Chief Operating Officer and Director
Tammy D. Halstead	38	Chief Financial Officer
Rasipuram (“Russ”) V. Arun	44	Executive Vice President and Chief Technology Officer
York Baur	37	Executive Vice President, Wireline and Broadband
Jan E. Claesson	46	Executive Vice President, Wireless
Prakash Kondepudi	38	Executive Vice President, Merchant
John E. Cunningham, IV	44	Director
Richard D. Hearney	62	Director
Rufus W. Lumry, III	55	Director
William D. Savoy	37	Director
Lewis M. Taffer	54	Director

Naveen Jain founded InfoSpace in March 1996. Mr. Jain served as our Chief Executive Officer from our inception in March 1996 to April 2000 and was reappointed as our Chief Executive Officer in January 2001. He also served as our President from inception to November 1998 and as our sole director from our inception to June 1998, when he was appointed Chairman of the Board. From June 1989 to March 1996, Mr. Jain held various positions at Microsoft Corporation, including Group Manager for MSN, Microsoft’s online service. From 1987 to 1989, Mr. Jain served as Software Development Manager for Tandon Computer Corporation, a PC manufacturing company. From 1985 to 1987, Mr. Jain served as Software Manager for UniLogic, Inc., a PC manufacturing company. From 1982 to 1985, he served as Product Manager and Software Engineer at Unisys Corporation/Convergent Technologies, a computer manufacturing company. Mr. Jain holds a B.S. from the University of Roorkee and a M.B.A. from St. Xavier’s School of Management.

Edmund O. Belsheim, Jr. joined us in November 2000 as Senior Vice President and General Counsel, and was appointed Chief Operating Officer in January 2001 and President in July 2001. He has served as a director since January 2001. From April 1999 to November 2000, he was a partner at Perkins Coie LLP, a Seattle-based law firm. From 1996 to 1998, Mr. Belsheim served as Vice President, Corporate Development, General Counsel and Secretary of Penford Corporation, a maker of specialty starches. He also served as Senior Vice President, Corporate Development, General Counsel and Secretary of Penwest Pharmaceuticals Co., an oral drug delivery technology and products company. Prior to joining Penford Corporation, Mr. Belsheim was a member of the law firm Bogle & Gates, P.L.L.C. Mr. Belsheim holds an A.B. from Carleton College, an M.A. from the University of Chicago and a J.D. from the University of Oregon.

Tammy D. Halstead was appointed our Chief Financial Officer in January 2001. Ms. Halstead had resigned her previous positions with us in November 2000. She initially joined us as Corporate Controller in July 1998, was appointed Vice President and Chief Accounting Officer in December 1998 and became a Senior Vice President in June 2000. In addition, from November 1999 to June 2000 she served as our acting Chief Financial Officer. From March 1997 to June 1998, she worked at the Seattle office of USWeb Corporation, an Internet professional services firm, where she served as Director of Finance and Administration and later as Vice President, Finance and Administration. From April 1996 to March 1997, she served as Director of Finance and Administration at Cosmix, Inc., which was acquired by USWeb Corporation in March 1997. From December 1993 to February 1996, she served as Controller of ConnectSoft, Inc., a software development company. Prior to joining ConnectSoft, Inc., she spent eight years in private industry with a division of Gearbulk Ltd., an international shipping company, and in public accounting with Ernst & Whinney (now Ernst & Young LLP). She holds a B.B.A. from Idaho State University and is a licensed CPA.

Rasipuram (“Russ”) V. Arun joined us in May 2000 as Chief Technology Officer and was named Executive Vice President in October 2000. From 1992 to May 2000, he worked for Microsoft in various capacities including Product Unit Manager, responsible for development and strategy of products for handheld devices, Win95 Base Program Manager, Windows 98 Team Group Manager and Java Group Program Manager. Prior to joining Microsoft, Mr. Arun had ten years of experience working for SunSoft, Inc., Multisolutions, Inc. and Zenith Data Systems. Mr. Arun holds a B.S. from the Indian Institute of Technology, an M.S. from Syracuse University and an M.B.A. from the University of California at Los Angeles.

York Baur joined us in September 2001 as Executive Vice President, Wireline and Broadband. In 2000, Mr. Baur co-founded SafariDog, Incorporated, an Internet e-commerce and media consumer application company, and served as its Vice President, Sales and Marketing through August 2001. From August 1999 to January 2000, he served as Vice President, Sales of InterVU Incorporated (now Akamai Technologies, Inc.), and served as Vice President, Sales of Netpodium, Incorporated from January to August 1999. From 1994 to January 1999, Mr. Baur was employed by Wall Data, Incorporated most recently serving as Vice President, Cyberprise Products. He also has worked for Attachmate Corporation, Microsoft Corporation, Zenith Data Systems and TRW. Mr. Baur holds a B.S. from the University of Southern California.

Jan E. Claesson joined us in September 2001 as Executive Vice President, Wireless. Prior to joining InfoSpace, from August 1999 to August 2001, Mr. Claesson served as Executive Vice President Sales, Marketing and Business Development of GoAhead Software, a developer of service availability software for the wireless 3G telecom and web cluster markets. From September 1996 to July 1999, he was Chairman and Chief Executive Officer of Her Interactive.Com, Inc., a company producing interactive entertainment for girls, and was also a founding partner of Millenium Venture Management LLC, an executive management consulting and venture capital company. Mr. Claesson was employed by Microsoft Corporation from 1985 to June 1996, most recently as Director, OEM, US Mega Accounts. He holds an M.B.A. from the University of Gothenburg (Sweden).

Prakash Kondepudi joined us in April 2000 as Vice President, Mobile Commerce and was appointed Executive Vice President, Merchant in February 2001. Mr. Kondepudi had served as Vice President, Application Services of Saraide Inc. (formerly saraide.com, inc.) from November 1998 until our acquisition of Saraide in March 2000. At Saraide, he led the development of wireless application services such as e-mail, content applications and mobile commerce on GSM phones. From May 1995 to October 1998, Mr. Kondepudi worked for VeriFone, Inc., where he initially served as Director, Client/Server Technology and was later appointed Director, Business Development. Mr. Kondepudi holds a Bachelors in Technology from Jawaharlal Nehru Technology University (India) and a Masters in Technology from the Indian Institute of Technology-Madras.

John E. Cunningham, IV has served as a director since July 1998. Since April 1995 he has served as President of Kellett Investment Corporation, an investment fund for early-stage, high-growth private companies. He is on the Board of Directors of Petra Capital, LLC and digiMine.com. Mr. Cunningham also serves as an advisor to Petra Mezzanine Fund, LP and Virtual Bank.com. During 1997, Mr. Cunningham acted as interim

Chief Executive Officer of Real Time Data, a wireless services company. From December 1994 to August 1996, he was President of Pulson Communications, Inc. From February 1991 to November 1994, he served as Chairman and Chief Executive Officer of RealCom Office Communications, a privately held telecommunications company that merged with MFS Communications Company, Inc., and was subsequently acquired by WorldCom, Inc. Mr. Cunningham holds a B.A. from Santa Clara University and an M.B.A. from the University of Virginia.

Richard D. Hearney has served as a director since September 2001. General Hearney served as President and Chief Executive Officer of Business Executives for National Security, an organization focusing on national security policy, from January 2000 to April 2002. General Hearney joined McDonnell Douglas Corporation in 1996 and served as Regional Vice President of Business Development—Western Europe until the acquisition of McDonnell Douglas by The Boeing Company in 1997, and subsequently served as Vice President of the Military Aircraft and Missile Systems Group of Boeing until November 1999. General Hearney served in the United States Marine Corps for over 30 years, and retired from military service in 1996 as Assistant Commandant of the Marine Corps. He holds a B.A. from Stanford University and an M.A. from Pepperdine University and graduated from the Naval War College.

Rufus W. Lumry, III has served as a director since December 1998. Since 1992, Mr. Lumry has served as President of Acorn Ventures, Inc., a venture capital firm he founded. Prior to founding Acorn Ventures, Mr. Lumry served as a director and Chief Financial Officer of McCaw Cellular Communications. Mr. Lumry was one of the founders of McCaw in 1982, and retired from McCaw in 1990 as Executive Vice President and Chief Financial Officer. Mr. Lumry holds an A.B. from Harvard University and an M.B.A. from the Harvard Graduate School of Business Administration.

William D. Savoy has served as a director since October 2000. He served as a director of Go2Net, Inc. from May 1999 until its acquisition by InfoSpace. Currently, Mr. Savoy serves as a President of Vulcan Inc., managing the personal finances of Paul G. Allen, and President of Vulcan Ventures Inc. wholly-owned by Paul G. Allen. From 1987 until November 1990, Mr. Savoy was employed by Layered, Inc. and became its President in 1988. Mr. Savoy serves on the Advisory Board of DreamWorks SKG and also serves as director of Charter Communications, Inc., drugstore.com, INVESTools, Inc., Peregrine Systems, Inc., RCN Corporation and USA Networks, Inc. Mr. Savoy holds a B.S. from Atlantic Union College.

Lewis M. Taffer has served as a director since June 2001. Since May 2001, Mr. Taffer has been an independent consultant specializing in marketing, business development and strategic partnerships. From 1979 through April 2001, Mr. Taffer served in various positions at American Express Company, most recently as Senior Vice President—Corporate Business Development, a position at which he developed and launched an online shopping portal for American Express Cardmembers which utilized InfoSpace services. Previously, Mr. Taffer’s career at American Express focused primarily on managing the company’s relationships with large, U.S.-based airlines, hotels, retailers, restaurants and entertainment companies. Mr. Taffer serves on the board of directors of Lymphoma Research Foundation, a nonprofit entity. Mr. Taffer holds a B.A. from the University of Pittsburgh and a J.D. from the University of Michigan.

FACTORS AFFECTING OUR OPERATING RESULTS,

BUSINESS PROSPECTS AND MARKET PRICE OF STOCK

Financial Risks Related to Our Business

We have a history of losses and expect to continue to incur significant operating losses, and we may never be profitable.

We have incurred net losses from our inception through December 31, 2001. As of December 31, 2001, we had an accumulated deficit of approximately $910.7 million. We have not achieved profitability under accounting principles generally accepted in the United States of America (GAAP) and we expect to continue to incur operating losses in the future. These losses may be higher than our current losses. Many of our operating expenses are relatively fixed in nature, particularly in the short term. As we have previously disclosed, we expect to incur a non-cash charge estimated to range from $100 million to $200 million, which will be recorded in the first quarter of 2002 for the cumulative effect of adopting SFAS No. 142 Goodwill and Other Intangible Assets. We have retained an independent valuation firm to conduct the valuation analysis pursuant to SFAS 142 and we expect to receive the results of their analysis by the end of April 2002. There can be no assurance that the results of the analysis by this independent valuation firm will not result in a non-cash charge less than or in excess, perhaps substantially, of the amount previously estimated and disclosed by us. We will also perform an annual evaluation of our intangibles and may have future non-cash charges as a result of implementing this accounting standard. We must therefore generate revenues sufficient to offset these expenses in order for us to become profitable under GAAP. We cannot assure you that we will successfully generate sufficient revenues or that we will ever achieve profitability under GAAP. If we do achieve profitability, we may not be able to sustain it.

Our financial results are likely to continue to fluctuate, which could cause our stock price to be volatile or decline.

Our financial results have varied on a quarterly basis and are likely to fluctuate in the future. These fluctuations could cause our stock price to be volatile or decline. Several factors could cause our quarterly results to fluctuate materially, including:

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variable demand for our products and application services;

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our ability to attract and retain customers;

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the amount and timing of fees we pay to Web portals to include our information services on their Web sites;

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expenditures for expansion of our operations;

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effects of acquisitions and other business combinations;

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our ability to meet service level agreements with our carrier partners;

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the introduction of new or enhanced services by us, or other companies that compete with us or our customers; and

•

the inability of our customers to pay us or to fulfill their contractual obligations to us.

For these reasons, you should not rely on period-to-period comparisons of our financial results to forecast our future performance. Furthermore, our fluctuating operating results may fall below the expectations of securities analysts or investors, which would cause the trading price of our stock to decline.

We operate in new and rapidly evolving markets, and our business model continues to evolve, which makes it difficult to evaluate our future prospects.

Since inception, our business model has evolved and is likely to continue to evolve as we expand our product offerings and enter new markets. As a result, our potential for future profitability must be considered in

light of the risks, uncertainties, expenses and difficulties frequently encountered by companies that are in new and/or rapidly evolving markets and continuing to innovate with new and unproven technologies. Some of these risks relate to our potential inability to:

•

develop and integrate new features with our existing services;

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expand our services to new and existing merchants, merchant banks and aggregators and wireless carriers;

•

manage our growth, control expenditures and align costs with revenues;

•

expand successfully into international markets;

•

attract, retain and motivate qualified personnel; and

•

respond to competitive developments, including rapid technological change, changes in customer requirements and new products introduced into our markets by our competitors.

If we do not effectively address the risks we face, our business model may become unworkable and we may not achieve or sustain profitability.

Our stock price has been and is likely to continue to be highly volatile.

The trading price of our common stock has historically been highly volatile. Since we began trading on December 15, 1998, our stock price has ranged from $1.06 to $138.50 (as adjusted for stock splits). On February 28, 2002, the closing price of our common stock was $1.35. Our stock price could continue to decline or to be subject to wide fluctuations in response to factors such as the following:

•

actual or anticipated variations in quarterly results of operations;

•

announcements of technological innovations, new products or services by us or our competitors;

•

changes in financial estimates or recommendations by securities analysts;

•

conditions or trends in the Internet and online commerce industries;

•

announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us, our customers or our competitors; and

•

additions or departures of key personnel.

In addition, the stock market in general, and the Nasdaq National Market and the market for Internet and technology companies in particular, have experienced extreme price and volume fluctuations. These broad market and industry factors and general economic conditions may materially and adversely affect our stock price.

We have historically been, and currently remain, reliant upon revenues from our wireline services. Our operating results would be harmed by a decline in sales of our wireline services or our failure to collect fees for these services.

Historically, we have derived a majority of our revenues from our wireline services, including licensing and advertising revenue from our customers. Based upon our reliance on revenues from wireline services, total revenues may decline if revenues from our wireline services do not meet our expectations.

As a result of unfavorable market or economic conditions, some of our wireline customers are having difficulty raising sufficient capital to support their long-term operations or are otherwise experiencing adverse business conditions. These customers may not be able to pay us some or all of the fees they are required to pay us under their existing agreements or may not be able to enter into new agreements. If we are unable to collect these fees or enter into new agreements, our operating results will be harmed.

If we are unable to continue the diversification of our revenues, a significant portion of our revenues will continue to be derived from wireline products and application services, which could weaken our financial position.

For 2002, we expect more of our total revenues to come from our merchant and wireless business areas than in prior years. Our ability to diversify our revenues could be hindered by numerous risks, including:

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