Ask Jeeves 10Q 2001 Q2 Quarterly report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly period ended June 30, 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 000-26521

ASK JEEVES, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
Incorporation or organization)

94-3334199
(IRS Employer
Identification No.)

5858 Horton St., Suite 350, Emeryville, CA 94608
(Address of principal executive offices, including zip code)

(510) 985-7400
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

/x/ Yes / / No

The number of shares outstanding of the registrant's Common Stock as of July 31, 2001 was 36,854,415.

ASK JEEVES, INC.

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Consolidated Financial Statements:
	Condensed Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000	3
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2001 and 2000	4
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000	5
	Notes to the Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	32
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 2.	Change in Securities	33
Item 3.	Defaults Upon Senior Securities	33
Item 4.	Submission of Matters to a Vote of Securities Holders	33
Item 5.	Other Information	33
Item 6.	Exhibits and Reports on Form 8-K	34
Signatures		35

PART I. FINANCIAL INFORMATION

Item 1.Unaudited Condensed Consolidated Financial Statements

ASK JEEVES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

				June 30, 2001			December 31, 2000
				(Unaudited)			(Note 1)
ASSETS
Current assets:
	Cash and cash equivalents			$	36,496		$	41,445
	Restricted cash				7,192			4,701
	Short-term marketable securities				23,741			46,392

		Total cash, cash equivalents and short-term marketable securities			67,429			92,538
	Accounts receivable, net				12,494			22,812
	Prepaid expenses and other current assets				7,412			6,244

			Total current assets		87,335			121,594
Restricted marketable securities					20,938			12,428
Property and equipment, net					18,042			19,088
Goodwill and other intangible assets, net					20,359			381,577
Other long-term assets					2,579			3,180

			Total assets	$	149,253		$	537,867

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable			$	2,644		$	5,186
	Accrued compensation and related expenses				8,476			6,981
	Accrued marketing expenses				1,015			3,133
	Accrued restructuring costs				11,272			9,132
	Other accrued liabilities				9,549			9,482
	Deferred revenue				31,965			33,410
	Current portion of long-term liabilities				892			886

			Total current liabilities		65,813			68,210
Capital lease obligations, less current portion					1,026			1,465
Long-term debt					11,000			—
Other liabilities					1,224			2,424

			Total liabilities		79,063			72,099
Commitments
Stockholders' equity:
Convertible preferred stock, $.001 par value; 5,000,000 shares authorized; no shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively
Common stock, $.001 par value; 150,000,000 shares authorized; 36,758,934 and 36,246,144 shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively					719,415			716,518
Deferred stock compensation					(233	)		(711	)
Accumulated deficit					(649,320	)		(250,174	)
Accumulated other comprehensive income					328			135

			Total stockholders' equity		70,190			465,768

			Total liabilities and stockholders' equity	$	149,253		$	537,867

See accompanying notes to the unaudited condensed consolidated financial statements.

ASK JEEVES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except share and per share data)

		Three Months Ended						Six Months Ended
		June 30, 2001			June 30, 2000			June 30, 2001			June 30, 2000
Revenues:
	Web Properties	$	7,664		$	15,997		$	16,691		$	28,313
	Jeeves Solutions (1)		9,009			9,871			19,065			15,313

Total revenues			16,673			25,868			35,756			43,626
Cost of revenues:
	Web Properties (exclusive of $6 and $11 and $13 and $27 reported below as stock-based compensation for the three months ended June 30, 2001 and 2000, and six months ended June 30, 2001 and 2000, respectively)		4,319			5,625			8,557			9,642
	Jeeves Solutions (exclusive of $6 and $12 and $13 and $27 reported below as stock-based compensation for the three months ended June 30, 2001 and 2000, and six months ended June 30, 2001 and 2000, respectively)		4,244			5,500			8,553			9,425

	Total cost of revenues		8,563			11,125			17,110			19,067
	Gross profit		8,110			14,743			18,646			24,559
Operating expenses:
	Product development (exclusive of $13 and $186 and $301 and $438 reported below as stock-based compensation for the three months ended June 30, 2001 and 2000, and six months ended June 30, 2001 and 2000, respectively)		5,412			6,786			11,013			12,248
	Sales and marketing (exclusive of $43 and $87 and $95 and $199 reported below as stock-based compensation for the three months ended June 30, 2001 and 2000, and six months ended June 30, 2001 and 2000, respectively)		12,181			21,971			26,210			41,474
	General and administrative (exclusive of $25 and $78 and $56 and $538 reported below as stock-based compensation for the three months ended June 30, 2001 and 2000, and six months ended June 30, 2001 and 2000, respectively)		4,757			7,069			12,625			12,111
	Stock-based compensation		93			375			478			1,229
	Amortization of goodwill and other intangible assets		218			22,533			22,587			37,558
	Write-off of acquired in-process technology		—			—			—			11,652
	Impairment of long-lived assets		—			—			339,177			—
	Restructuring and other		7,394			—			8,062			—

	Total operating expenses		30,055			58,734			420,152			116,272

	Operating loss		(21,945	)		(43,991	)		(401,506	)		(91,713	)
	Interest and other income, net		1,009			2,004			2,360			2,528

	Net loss	$	(20,936	)	$	(41,987	)	$	(399,146	)	$	(89,185	)

Basic and diluted net loss per share		$	(0.58	)	$	(1.20	)	$	(11.10	)	$	(2.66	)

Weighted average shares outstanding used in computing basic and diluted net loss per share			36,067,925			35,065,953			35,955,976			33,499,181

(1) Revenues from related parties		$	5,051		$	2,909		$	9,865		$	3,297

See accompanying notes to the unaudited condensed consolidated financial statements.

ASK JEEVES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

			Six Months Ended
			June 30, 2001			June 30, 2000
Operating activities
Net loss			$	(399,146	)	$	(89,186	)
Adjustment to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization			4,298			2,219
	Compensation charge related to grants of stock options			1,968			—
	Stock-based compensation			478			1,229
	Amortization of goodwill and intangible assets			27,276			40,076
	Impairment charge for long-lived assets			339,177			—
	Write-off of acquired in-process technology			—			11,652
	Changes in operating assets and liabilities:
		Accounts receivable		10,318			(7,689	)
		Prepaids and other current assets		(915	)		3,106
		Other assets		92			—
		Accounts payable		(2,542	)		4,908
		Accrued compensation and related expenses		790			5,563
		Accrued marketing expenses		(2,118	)		(660	)
		Accrued merger costs		(18	)		(14,392	)
		Accrued restructuring costs		2,241			—
		Other accrued liabilities		85			6,155
		Deferred revenue		(1,445	)		7,987

Net cash used in operating activities				(19,461	)		(29,032	)
Investing activities
Purchases of property and equipment				(2,177	)		(8,017	)
Purchases of restricted marketable securities				(11,000	)		(42,131	)
Proceeds from redemption of marketable securities				22,843			21,652
Purchases of intangibles				(4,750	)		—
Acquisition of business				(1,475	)		—
Cash acquired from business combinations				—			12,646

Net cash provided by (used in) investing activities				3,441			(15,850	)
Financing activities
Issuance of common stock				735			126,211
Redemption of common stock				(30	)		(2,000	)
Issuance of notes receivable to stockholders				(200	)		(2,046	)
Borrowings under line of credit				11,000			—
Repayment of capital lease obligations				(434	)		(401	)

Net cash provided by financing activities				11,071			121,764

Increase (decrease) in cash and cash equivalents				(4,949	)		76,882
Cash and cash equivalents at beginning of period				41,445			17,420

Cash and cash equivalents at end of period			$	36,496		$	94,302

Supplemental disclosure of noncash investing and financing activities
	Interest paid		$	244		$	300

See accompanying notes to the unaudited condensed consolidated financial statements.

ASK JEEVES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Summary of Significant Accounting Policies

The Company

Ask Jeeves, Inc. ("Ask Jeeves" or "the Company") provides intuitive, intelligent natural language question answering technologies and services. The Company's proprietary technology combined with human intelligence creates an interaction centered on understanding users' specific needs and interests and connecting them to the most relevant information, products and services. The Company delivers its natural language question answering technologies and services through its own Web sites at Ask.com, DirectHit.com, AJKids.com, and Etour.com. Through the Company's Web Properties Group, Ask Jeeves provides a highly targeted medium for advertisers to reach online users. The Company also syndicates services to portals, infomediaries, and content and destination sites to help companies increase e-commerce and advertising revenue. Through its Jeeves Solutions Group, the Company develops and maintains customized automated search, natural language question answering, and intelligent advisor services on numerous corporate 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 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 are accounted for under the equity method and investments in which the Company does not have the ability to exert significant influence are accounted for at cost. All significant intercompany transactions and balances have been eliminated upon consolidation. The accompanying condensed consolidated financial statements at June 30, 2001 and for the three and six months ended June 30, 2001 and 2000 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 June 30, 2001 and 2000 are not necessarily indicative of results for the entire fiscal year or future periods. The condensed consolidated balance sheet at December 31, 2000 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 and Form 10-K/A for the year ended December 31, 2000.

Use of Estimates

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

Net Loss Per Share

Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding for the period. Diluted net loss per share reflects the potential dilution of

securities by adding other common stock equivalents, including stock options, warrants and convertible preferred stock, in the weighted average number of common shares outstanding for a period, if dilutive. Potentially dilutive securities have been excluded from the computation as their effect is antidilutive.

Reclassifications

Certain prior period balances have been reclassified to conform to the current year presentation.

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 trademarks, copyrights and other intellectual property rights, and a variety of claims arising in connection with the services, such as claims alleging defamation or invasion of privacy. In addition, from time to time, third parties assert patent infringement claims against the Company in the form of letters, lawsuits and other forms of communication.

On December 16, 1999, Patrick H. Winston and Boris Katz filed a complaint against the Company in the United States District Court for the District of Massachusetts(Patrick H. Winston and Boris Katz v. Ask Jeeves, Inc., Case No. 99GV12584 MLW), alleging infringement by the Company of United States Patent Nos. 5,309,359 and 5,404,295 that are alleged to be held by the plaintiffs. The Company settled this lawsuit in July 2001, and an Order of Dismissal with Prejudice was entered by the Court on July 27, 2001. Under the terms of the settlement agreement, the Company will receive a license to certain intellectual property owned by Mr. Winston and Mr. Katz. The portion of the settlement cost allocable to the future license of intellectual property of $1.5 million is being charged to cost of revenues over the next 30-months.

3. Business Segments

For management reporting purposes, the Company is divided into two business groups, Web Properties and Jeeves Solutions. Results of operations for these business groups include revenues, cost of revenues and gross profit (loss) information as provided to the Company's Chief Executive Officer (CEO), who is the Chief Operating Decision Maker. Information as to operating expenses, operating loss and net loss is not provided by business segment. Summarized financial information by segment for the three-month periods ended June 30, 2001 and 2000, as reported to the CEO is as follows (in thousands):

		Three Months Ended				Six Months Ended
		June 30, 2001		June 30, 2000		June 30, 2001		June 30, 2000
WEB PROPERTIES:
	Revenues	$	7,664	$	15,997	$	16,691	$	28,313
	Cost of revenues		4,319		5,625		8,557		9,642

	Gross profit		3,345		10,372		8,134		18,671

JEEVES SOLUTIONS:
	Revenues	$	9,009	$	9,871	$	19,065	$	15,313
	Cost of revenues		4,244		5,500		8,553		9,425

	Gross profit		4,765		4,371		10,512		5,888

4. Line of Credit

The Company has available a revolving line of credit with a bank in the amount of $25 million. The line of credit expires on July 1, 2002, unless extended. Borrowings under the line of credit bear interest (5.0% at June 30, 2001) at one of the following rates as selected by the Company: LIBOR plus 0.5% or the bank's prime rate. Borrowings at the LIBOR reference rate may be fixed over the borrowing term. All obligations under the line of credit are collateralized by the Company's cash and marketable securities. Borrowings under the line are subject to various affirmative and negative covenants. As of June 30, 2001, the Company is in compliance with all financial covenants. The outstanding balance on the line of credit was $11.0 million as of June 30, 2001. As of December 31, 2000, there were no amounts outstanding under the line of credit. Additionally, at June 30, 2001, standby letters of credit of approximately $13.8 million have been issued under the line of credit, which are being maintained as security for performance under various contracts.

5. Comprehensive Loss

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

			Three Months Ended						Six Months Ended
			June 30, 2001			June 30, 2000			June 30, 2001			June 30, 2000
Net loss			$	(20,936	)	$	(41,987	)	$	(399,146	)	$	(89,185	)
Other comprehensive income:
	Change in unrealized gain on investments			(11	)		39			193			55

		Total comprehensive loss	$	(20,947	)	$	(41,948	)	$	(398,953	)	$	(89,130	)

6. Restructuring

In December 2000, the Company's Board of Directors approved a restructuring program aimed at streamlining its underlying cost structure to better position the Company for growth and improved operating results. The Company incurred a charge of approximately $13.5 million in the fourth quarter of the year ended December 31, 2000 relating to the restructuring.

In response to continued change in the marketplace, in April 2001 the Company's Board of Directors approved additional restructuring activities designed to better align its underlying cost structure with anticipated levels of business activities. The additional restructuring activities included a reduction in force of 73 positions, termination of certain contractual obligations and consolidation of space at certain locations. Additionally, the Company recorded additional charges relating to the December 2000 restructuring to reflect the difference between the actual and estimated proceeds received on disposal of certain assets and to adjust the expected exposure on certain leases to reflect changed real estate market conditions.

The Company incurred a charge of approximately $7.4 million during the three months ended June 30, 2001 related to the restructuring. This charge included $1.7 million related to severance and other employee costs associated with the elimination of 73 positions. Costs associated with employee terminations included severance pay and medical and other benefits. All of the affected employees had been terminated as of June 30, 2001.

The charge also included approximately $5.0 million in estimated facility exit costs as well as $100,000 in non-cash asset write-offs. The facility exit costs are associated with the consolidation of certain facilities, primarily in New York, and with adjustments to previous accruals to reflect deterioration in the real estate market. The asset write-offs related to the adjustment of previous estimates of residual value at disposal to actual experience.

The following table sets forth the restructuring activity during the three months ended June 30, 2001.

		Accrued Restructuring Costs, March 31, 2001		Restructuring Charges		Cash Paid			Asset Write-offs			Accrued Restructuring Costs, June 30, 2001
Charged to restructuring expense:
Facility exit costs		$	6,861	$	5,034	$	(727	)	$	—		$	11,168
Asset write-offs			—		100		—			(100	)		—
Contract terminations			—		518		(518	)		—			—
Severance and professional fees			125		1,742		(1,763	)		—			104

	Total	$	6,986	$	7,394	$	(3,008	)	$	(100	)	$	11,272

7. Recent Accounting Pronouncements

In June 2001 the Financial Accounting Standards Board (FASB) issued SFAS No. 141Business Combinations and SFAS No. 142Goodwill and Other Intangible Assets. SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. SFAS No. 142 requires the use of a non-amortization approach to account for purchased goodwill and intangibles deemed to have indefinite lives. Under a non-amortization approach, goodwill and intangible assets deemed to have indefinite lives will not be amortized into results of operations, but instead would be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The provisions of the Statements that apply to goodwill and intangible assets acquired prior to June 30, 2001 will be adopted by the Company on January 1, 2002. The Company is currently evaluating the impact these Statements will have on its consolidated financial position and results of operations.

Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations

Except for the historical information contained herein, this overview and the following discussion contain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K/A filed June 8, 2001. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes included elsewhere herein.

Overview

Ask Jeeves, Inc. is a leading provider of intuitive, intelligent natural language question answering technologies and services. Our proprietary technology combined with human intelligence creates an interaction centered on understanding users' specific needs and interests and connecting them to the most relevant information, products and services. The Company delivers its natural language question answering technologies and services through its own Web sites at Ask.com, DirectHit.com, AJKids.com, and Etour.com. Through our Web Properties group, Ask Jeeves provides a highly targeted medium for advertisers to reach online users. The Company also syndicates services to portals, infomediaries, and content and destination sites to help companies increase e-commerce and advertising revenue. These services enable companies to convert online shoppers to buyers, reduce support costs, understand customer preferences and improve customer retention.

Through our Jeeves Solutions group, the Company delivers essential customer conversion and retention services to corporate customers worldwide. By connecting people with answers through a combination of technology and human insight, Ask Jeeves helps companies provide a more personal, relevant experience for online customers. We believe this unique combination delivers higher conversion rates, lower support costs, valuable customer intelligence and increased customer loyalty.

Revenues associated with our Web Properties group include all revenue streams generated from the Web sites we own and operate, as well as from the syndication of services offered on our sites to other companies' sites. These revenues consist primarily of four components:

•: advertising revenues;
•: syndication fees;
•: targeting and acquisition revenues; and
•: eCommerce lead generation revenues.

A significant portion of the Company's revenues from its Web Properties group are derived from the sale of promotional space on the Company's online Internet properties. Promotional space offered ranges from run of site banner advertisements and sponsorships to targeting and acquisition service. Targeting and acquisition service products are tailored to deliver a customer's promotional content to a specific target market in a dynamic, customized environment and which may include the development of co-branded, integrated websites. Revenue derived from such arrangements is recognized during the period which the service is provided, provided that no significant obligations remain at the end of the period. Company obligations typically include the guarantee of a minimum number of "impressions" or times that an advertisement appears in pages viewed by users of the Company's online properties. To the extent the minimum guaranteed impressions are not delivered, the Company defers recognition of the corresponding revenue until the remaining guaranteed impressions levels are achieved. Syndication services offered range from the sale of promotional material on behalf of partners to the syndication of our web-wide search technology to portals, infomediaries, and content and destination sites. Syndication fees primarily consist of revenue-sharing arrangements, fixed or fee-per-use arrangements, and revenues are recognized as the service is delivered. Revenues from electronic commerce are generated when a

user clicks on the answer that links to an electronic commerce merchant's Web site on a cost per click, or CPC basis. Electronic commerce transaction fees are derived from short-term electronic commerce merchant contracts, generally over a three-to-six month period, and are recognized as services are performed.

Revenues from our Jeeves Solutions group include revenue streams that are derived from the licensing of our natural language navigation and business intelligence technologies and from consulting services associated with implementing a customized natural language question and answering solution. We are targeting accounts in the vertical markets of technology, financial services, retail and government. We recognize consulting services, ongoing support, and licensing fees ratably over the contractual term, generally twelve months, commencing with the implementation of service. Payments received prior to service implementation or provision of consulting services are recorded as deferred revenue and recognized ratably over the contractual term, commencing upon service implementation.

Cost of revenues for our Web Properties group consists primarily of salaries and related personnel costs associated with the content development, data analysis, testing and maintenance of our Web sites. Additionally, cost of revenues includes revenue sharing expenses associated with our distribution relationships. Cost of revenues for our Jeeves Solutions group consists primarily of salaries and related personnel costs and other direct costs to provide consulting, and information services to our corporate customers. Cost of revenues for our Web Properties and Jeeves Solutions groups also include amortization charges related to certain technology assumed as part of our acquisitions.

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

Sales and marketing expenses consist primarily of salaries, commissions and related personnel expenses as well as advertising and promotional expenditures. We have a direct sales force dedicated to selling our services, which is supplemented by a number of strategic relationships with sales and implementation companies.

General and administrative expenses consist primarily of salaries and related costs for general corporate functions, recruiting and fees for other professional services as well as various accounting and legal costs associated with operating our business.

Other income includes interest income on our cash and investments, partially offset by interest due on our financing obligations.

Stock-based compensation reflects the amortization of stock compensation charges from employee stock options. Deferred compensation charges arise from the difference between the exercise price and the deemed fair value of specific stock options granted to our employees and are amortized over the vesting period.

The Company has recorded goodwill and other intangible assets as a result of various purchase acquisitions made. Amortization of goodwill and intangible assets is amortized ratably over the estimated economic lives of the respective assets, generally three to five years.

Write-off of in-process technology relates to costs incurred in connection with our acquisitions.

We have incurred significant net losses and negative cash flows from operations since our inception, and at June 30, 2001, we had an accumulated deficit of approximately $649 million. These losses have been funded primarily through the issuance of preferred and common equity securities, including our initial public offering in July 1999 and follow-on public offering in March 2000. We believe that we will continue to incur negative cash flows from operations through at least the fourth quarter of 2001.

RESULTS OF OPERATIONS

Revenues

Revenues were $16.7 million for the three months ended June 30, 2001, and $25.9 million for the three months ended June 30, 2000. Web Properties revenues were $7.7 million or 46.0% of total revenues for the three months ended June 30, 2001 and $16.0 million or 61.8% of total revenues for the three months ended June 30, 2000. These revenues consisted of $1.6 million in advertising revenues for the three months ended June 30, 2001, and $8.8 million for the three months ended June 30, 2000. Revenues from targeting and acquisition services were $3.3 million and $4.0 million for the three months ended June 30, 2001 and 2000, respectively. Syndication fees were $2.1 million for the three months ended June 30, 2001 and $1.0 million for the three months ended June 30, 2000. Electronic commerce revenues were $670,000 for the three months ended June 30, 2001 and $2.2 million for the three months ended June 30, 2000. Web Properties revenues continued to be negatively impacted by softening demand and decreasing rates for online advertising, most significantly with respect to banner advertising. This softness was partially offset by increased traffic and unique users to the site as compared with the three months ended June 30, 2000, as well as continued product diversification. Unique users stayed flat as compared with the prior quarter at approximately 14 million. Ask.com ranked as the 17th most visited Web site in the June 2001 Media Metrix Internet Web properties listing.

Jeeves Solutions revenues were $9.0 million or 54.0% of total revenues for the three months ended June 30, 2001, and $9.9 million or 38.2% of total revenues for the three months ended June 30, 2000. These revenues consisted of licensing fee revenues of $7.7 million for the three months ended June 30, 2001 and $5.9 million for the three months ended June 30, 2000. Consulting services were $1.3 million for the three months ended June 30, 2001, and $4.0 million for the three months ended June 30, 2000. Compared with the second quarter of 2000, the decrease in consulting services revenues is due to a decrease in new bookings for the quarter as a result of longer sales cycles. A significant portion of consulting services revenues result from the creation of knowledge bases and other custom features, and such revenue is recognized over the expected term of the agreement. While customer renewals have remained strong, they may not result in additional customization that would yield consulting service revenue.

For the six months ended June 30, 2001, revenues were $35.8 million as compared with $43.6 million for the six months ended June 30, 2000. Web Properties revenues were $16.7 million or 46.7% of total revenues for the six months ended June 30, 2001 and $28.3 million or 64.9% of total revenues for the six months ended June 30, 2000. These revenues consisted of $3.1 million in advertising revenues for the six months ended June 30, 2001, and $18.0 million for the six months ended June 30, 2000. Electronic commerce revenues were $1.8 million for the six months ended June 30, 2001 and $3.9 for the six months ended June 30, 2000. Targeting and acquisition revenues were $7.6 million for the six months ended June 30, 2001 and $4.7 for the six months ended June 30, 2000. Syndication fees were $4.2 million for the six months ended June 30, 2001, and $1.7 for the six months ended June 30, 2000.

Jeeves Solutions revenues were $19.1 million or 53.3% of total revenues for the six months ended June 30, 2001, and $15.3 million or 35.1% of total revenues for the six months ended June 30, 2000. These revenues consisted of licensing fee revenues of $16.4 million for the six months ended June 30, 2001 and $8.2 million for the six months ended June 30, 2000. Consulting services were $2.7 million for the six months ended June 30, 2001 and $7.1 million for the six months ended June 30, 2000.

Cost of Revenues

Cost of revenues for Web Properties was $4.3 million for the three months ended June 30, 2001 and $5.6 million for the three months ended June 30, 2000. Cost of revenues for Jeeves Solutions was

$4.2 million for the three months ended June 30, 2001 and $5.5 million for the three months ended June 30, 2000. The decrease in cost of revenues is primarily attributed to decreased personnel and related personnel costs as we have been able to leverage our improvements in technology and tools associated with developing, maintaining, analyzing and testing of our websites, as well as those associated with providing consulting, information and maintenance services to our customers. Cost of revenues also includes amortization charges related to assets acquired from acquisitions.

For the six months ended June 30, 2001, cost of revenues for Web Properties was $8.6 million as compared with $9.6 million for the six months ended June 30, 2000. Cost of revenues for Jeeves Solutions was $8.6 million for the six months ended June 30, 2001 and $9.4 million for the six months ended June 30, 2000.

Product Development Expenses

Product development expenses were $5.4 million and $11.0 for the three and six months ended June 30, 2001, respectively, and $6.8 million and $12.2 for the three and six months ended June 30, 2000, respectively. The decrease in expenses is due primarily to operational streamlining resulting from our restructuring activities that have resulted in decreased personnel and related personnel costs and consultant fees. Additionally, we are focusing on key, strategic areas of product development to support our business plan and have therefore eliminated a number of product development initiatives that are not essential to delivering future financial results.

Sales and Marketing Expense

Sales and marketing expenses were $12.2 million and $26.2 for the three and six months ended June 30, 2001, respectively and $22.0 million and $41.5 for the three and six months ended June 30, 2000, respectively. The decrease in expenses is primarily attributable to decreases in advertising and public relations expenses as we began to realize the benefits of a more focused advertising initiative, resulting in decreased customer acquisition costs. Such expenses declined from $10.8 million for the three months ended June 30, 2000 to $3.9 million for the three months ended June 30, 2001.

General and Administrative Expenses

General and administrative expenses were $4.8 million and $12.6 for the three and six months ended June 30, 2001, respectively, and $7.1 million and $12.1 for the three and six months ended June 30, 2000, respectively. The decrease in expenses for the three and six month periods are attributed to the favorable impact on personnel and related personnel costs that the efficiencies resulting from our restructuring activities have yielded, as well as a decrease in the provision for doubtful accounts from that recorded during the three months ended June 30, 2000.

Stock-based Compensation

For the three and six months ended June 30, 2001, we recorded $93,000 and $478,000, respectively in amortization of deferred stock compensation in connection with the grant of stock options to employees and consultants. This compares with $375,000 and $1.2 million for the three and six months ended June 30, 2000. The decrease in amortization is due to the graded vesting method of amortization resulting in larger deferred compensation charges being incurred in earlier periods.

In-Process Technology

For the six months ended June 30, 2000, we recorded purchased in-process research and development costs of $11.7 million in connection with the acquisition of certain technology from Evergreen and Direct Hit. There were no similar acquisitions during the three or six months ended June 30, 2001.

Restructuring and Other

In response to continued change in the marketplace, in April 2001 the Company's Board of Directors approved additional restructuring activities designed to better align its underlying cost structure with anticipated levels of business activities. The restructuring activities included a reduction in force of 73 positions, termination of certain contractual obligations and consolidation of space at certain locations. Additionally, the Company recorded additional charges relating to the December 2000 restructuring to reflect the difference between actual and estimated proceeds received on disposal of certain assets and to adjust expected exposure on certain leases to reflect changed real estate market conditions.

The charge also included approximately $5 million in estimated facility costs as well as $100,000 in non-cash asset write-offs. The facility exit costs are associated with the consolidation of certain facilities, primarily in New York, and with adjustments to previous accruals to reflect deterioration in the real estate market. The asset write-offs related to the adjustment of previous estimates of residual value at disposal to actual experience.

While we believe that our business realignment will assist us in streamlining operations, reducing expenses and thereby achieving profitability, we cannot assure you that we will achieve these anticipated results. We may in the future be required to take additional actions, including further changes to the business organization, in order to realign the business with anticipated requirements. If we are not successful in realigning our business to increase revenues and decrease costs, we may never achieve profitability.

Interest and Other Income

Interest and other income was $1.0 million for the three months ended June 30, 2001, and $2.0 for the three months ended June 30, 2000. The decrease in interest income is attributable to decreases in market yields on investment securities over the period as well as decreased balances of securities invested.

Recent Accounting Pronouncements

In June 2001 the Financial Accounting Standards Board (FASB) issued SFAS No. 141Business Combinations and SFAS No. 142Goodwill and Other Intangible Assets. SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. SFAS No. 142 requires the use of a non-amortization approach to account for purchased goodwill and intangibles deemed to have indefinite lives. Under a non-amortization approach, goodwill and intangibles deemed to have indefinite lives will not be amortized into results of operations, but instead would be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The provisions of the Statements that apply to goodwill and intangible assets acquired prior to June 30, 2001 will be adopted by the Company on

January 1, 2002. The Company is currently evaluating the impact these Statements will have on its consolidated financial position and results of operations.

Seasonality and Quarterly Fluctuations in Operating Results

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

•: our ability to obtain new corporate customers, the length of the development cycle for corporate customers and the timing of revenue recognition with respect to contracts with corporate customers;
•: our ability to obtain new advertising contracts, maintain existing ones, and effectively manage our advertising inventory;
•: the number of questions asked and answered on our websites and on the Web sites of our corporate customers;
•: our ability to attract and retain advertisers and our ability to link our electronic commerce partners to potential customers;
•: rate changes for advertising on our websites;
•: marketing expenses and technology infrastructure costs as well as other costs that we may incur as we expand our operations.
•: seasonal and other fluctuations in demand for our electronic commerce services and for advertising space on our websites;
•: our ability to develop and introduce new technology;
•: announcements and new technology introductions by our competitors;
•: our ability to attract and retain key personnel; and
•: costs relating to possible acquisitions and integration of technologies or businesses;

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

As Internet advertising makes the transition from an emerging to a more developed market, seasonal and cyclical patterns may develop in our industry that may also affect our revenues. Similar to traditional media, this may result in our advertising sales being lower during summer vacation and year end holiday periods. Seasonality in the retail industry and in Internet service usage is likely to cause quarterly fluctuations in our results of operations and could harm our business.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through the private placement of equity securities, our initial public offering and our follow-on offering. As of June 30, 2001, we had $88.4 million in cash and cash equivalents and marketable securities. Of this amount, $28.1 million is restricted as collateral for borrowings and various contractual obligations. Net cash used in operating activities was $19.5 million for the six months ended June 30, 2001, and $29.0 million for the six months ended June 30, 2000. Net cash used in operating activities resulted primarily from net losses adjusted for non-cash operating activities and decreases in accounts receivable, partially offset by the timing of accrued compensation, accrued marketing expenses and deferred revenue.

Net cash provided by investing activities was $3.4 million for the six months ended June 30, 2001, compared to net cash used of $15.9 million for the six months ended June 30, 2000. Net cash provided by investing activities related primarily to the net redemption of marketable securities of $11.8 million.

Net cash provided by financing activities was $11.1 for the six months ended June 30, 2001, and $121.8 million for the six months ended June 30, 2000. Net cash provided by financing activities was due to our draw against our line of credit for $11.0 million to take advantage of the favorable relationship between our fixed costs of borrowing relative to available fixed yields in the marketplace over the same term. Cash provided by financing activities was higher for the six months ended June 30, 2000 due to net proceeds of $126.2 million from the sale of common equity securities in our follow-on offering. There was no such offering in the period ended June 30, 2001.

Our capital requirements depend on numerous factors, including market acceptance of our services and the amount of resources we invest in site and content development, marketing and selling our services, our brand promotions and any future acquisitions or divestitures.

We currently believe that our available cash resources will be sufficient to meet our anticipated needs for working capital and capital expenditures for at least the next twelve months. At the end of such period, we will need to generate sufficient cash flow from operations to meet our anticipated needs for working capital and capital expenditures, or we will need to raise additional capital. However, if following that twelve-month period, we are not successful in generating sufficient cash flow from operations or in raising additional capital when required in sufficient amounts and on terms acceptable to us, these failures could seriously harm our business. If we raise additional funds through the issuance of equity securities or convertible debt securities, the percentage ownership of our existing stockholders will be reduced.

BUSINESS RISKS

Risk Factors

Our Business is Extremely Difficult to Evaluate Because Our Operating History is Limited.

We were incorporated in June 1996 and launched Ask Jeeves at Ask.com, our flagship public Web site, in April 1997. Because the market and industry conditions affecting Internet companies are constantly changing, we may need to evolve our business model to adapt to prevailing conditions.

Any investment in our company must be considered in light of the problems frequently encountered by companies in new and rapidly evolving markets. To address the risks we face, we must, among other things:

•: maintain and enhance our brand;
•: refine our product and service offerings;
•: increase the amount of traffic to our Web sites;
•: increase the number and types of businesses that use our natural language question answer technologies and services;
•: increase the value of our natural language question answer technologies and services to our users, customers, electronic commerce merchants and advertisers; and
•: attract, integrate, retain and motivate qualified personnel.

We cannot be certain that our business strategy will be successful or that we will successfully address these risks.

We Have a History of Net Losses and Expect to Continue to Incur Net Losses.

We incurred net losses of $52,929,000 in 1999, $189,606,000 in 2000 and $399,146,000 during the six month period ended June 30, 2001. As of June 30, 2001, we had an accumulated deficit of approximately $649.3 million. We expect to have net operating losses and negative cash flows, as determined under accounting principles generally accepted in the United States, for the foreseeable future. The size of these net financial reporting losses will depend, in part, on the rate of growth of our revenues from our advertisers, corporate customers and electronic commerce merchants and on our expenses. It is critical to our success that we continue to expend financial and management resources to develop our brand loyalty through marketing and promotion, enhancement of our natural language question answer technologies and services and expansion of our other services. We recently announced steps to narrow our financial reporting losses, including business realignment and a reduction in our workforce. Although these steps are intended to reduce our financial reporting losses in the future, we cannot guarantee that these steps will achieve the expected reduction in financial reporting losses.

As our operating expenses are likely to continue to exceed our revenues in the near term, we will need to generate significant additional revenues to achieve operating profitability. Even if we do achieve operating profitability, we may not be able to maintain or increase our operating profitability on a quarterly or annual basis. If we do not achieve or sustain profitability in the future, then we will eventually be unable to continue our operations.

Our Business Realignments May Not Result in the Intended Benefits.

In fourth quarter of 2000, we completed a realignment of our business organization in an effort to streamline operations, increase revenues, reduce costs and bring staffing in line with our current and anticipated requirements. Through the realignment, our two independent business units, Jeeves Solutions and Web Properties, were given independent gross profit and loss accountability. Our Jeeves

Solutions business focuses on licensing our technologies to corporate clients and our Web Properties business focuses on sales of our targeting solutions on our Web sites. In addition, as part of our business realignment, we implemented a workforce reduction of approximately 152 employees, representing approximately 20% of our staff, in the fourth quarter of 2000. In April 2001, we completed an additional workforce reduction of 73 employees, or approximately 15% of our staff.

Although we believe that our business realignments will assist us in streamlining operations, increasing revenues, reducing expenses and thereby achieving profitability, we cannot assure you that we will achieve these intended results. In addition, our business realignments and workforce reductions may prompt employees whom we wish to retain to leave the Company. If we are not successful in increasing revenues and decreasing costs, we may never achieve profitability.

Our Natural Language Question Answer Technologies and Services are Unproven.

We will be successful only if Internet users adopt our natural-language services and popularity-based searches as a primary method of navigating the Internet. Internet users have a variety of other search techniques, such as directory searches, available to them to navigate the Internet. Users can also rely on methods, such as call centers, chat rooms and e-mail, rather than difficult-to-navigate corporate Web sites, to obtain information on products and services. It is difficult to predict the extent and rate of user adoption of our natural language question answer technologies and services. Visitors to our natural language question answer services may try our Web sites and then revert to other search techniques to navigate the Internet or choose new search techniques. It is uncertain whether widespread acceptance of our natural-language services and popularity-based searches will occur.

If Accounting Interpretations Relating to Revenue Recognition Change, our Reported Revenues Could Decline or We Could Be Forced to Make Changes in our Business Practices.

Over the last several years, the American Institute of Certified Public Accountants issued Statement of Position or SOP 97-2, "Software Revenue Recognition," and SOP 98-9 "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions." These standards address software revenue recognition matters primarily from a conceptual level and do not include specific implementation guidance. In addition, in December 1999, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements", or SAB 101, which explains how the SEC staff believes existing revenue recognition rules should be applied or analogized to for transactions not addressed by existing rules. The Company believes that it is currently in compliance with SOP 97-2, SOP 98-9 and SAB 101.

The accounting profession continues to discuss certain provisions of SOP 97-2 and SAB 101 with the objective of providing guidance on potential interpretations. These discussions and the issuance of interpretations, once finalized, could lead to unanticipated changes in the Company's current revenue accounting practices, which could cause Ask Jeeves to recognize lower revenues. As a result, the Company may need to change its business practices in order to continue to recognize a substantial portion of its license revenues. These changes may extend sales cycles, increase administrative costs and otherwise adversely affect our business.

Events or Changes in Circumstances May Result in Impairment of Our Goodwill.

The Company has recorded significant amounts of goodwill and other intangible assets on its consolidated financial statements. In the first quarter of 2001, we identified indicators of possible impairment of these assets and subsequently recorded an impairment charge of $339.2 million to our results of operations during that quarter. These assets will continue to be subject to evaluation for impairment when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. If a determination is made that the assets are impaired, it could result in a

significant reduction in the carrying value of such assets and a material adverse effect upon the Company's consolidated financial position or results of operations.

Our Methods of Generating Revenue are Relatively New and Largely Untested.

Internet Advertising. We expect that revenues from advertising will continue to represent a significant portion of our total revenues for the foreseeable future. Our advertising revenues decreased in the latter part of 2000 and first half of 2001 and may continue to decrease due to the prevailing conditions in the online advertising market and downward pressure on advertising rates industry-wide.

We compete with traditional media such as television, radio and print, as well as online advertisers and high-traffic Web sites, for a share of advertisers' total advertising expenditures. We have experienced, and may continue to experience, downward pressure on advertising prices in the industry due to the increasing amount of advertising inventory becoming available on the Internet. As the Internet evolves, advertisers may find Internet advertising to be a less effective means of promoting their products or services relative to traditional advertising media and may reduce or eliminate their expenditures on Internet advertising. Many potential advertisers and advertising agencies have only limited experience advertising on the Internet and have not devoted a significant portion of their advertising expenditures to Internet advertising. Acceptance of the Internet among advertisers will depend, to a large extent, on the perceived effectiveness of Internet advertising and the continued growth of commercial usage of the Internet.

Currently, there are a variety of pricing models for selling advertising on the Internet, including models based on the number of impressions delivered, the number of click-throughs by users, the duration over which the advertisement is displayed or the number of keywords to which the advertisement is linked. It is difficult to predict which pricing model, if any, will emerge as the industry standard. This uncertainty makes it difficult to project our future advertising rates and revenues that we may generate from advertising. A decrease in advertising sold or advertising rates could adversely affect our operating results.

In addition, our ability to earn advertising revenues depends on the number of advertising impressions per search and the number of click-throughs. We believe category searches generally result in a greater number of advertising impressions per search and a higher number of click-throughs than keyword searches. Accordingly, if we are unable to implement category-based search broadly across our network of affiliates, or if users decide to use keyword searches more frequently than category searches, our advertising revenues could decline.

In addition, our advertising revenues will depend on our ability to achieve, measure and demonstrate to advertisers the breadth of the traffic base using our search service and the value of our targeted advertising. Filter software programs that limit or prevent advertising from being displayed on a user's computer are available. It is unclear whether this type of software will become widely accepted, but if it does, it would negatively affect Internet-based advertising. Our business could be seriously harmed if the market for Internet advertising does not continue to grow or if we are unsuccessful in increasing our advertising revenues.

We rely on third-party advertising services, provided by DoubleClick, Inc. and L90, Inc. to deliver advertisements to our users. If DoubleClick or L90 fails to deliver the advertisements as contracted for, due to reliability or performance problems, or if advertisements cannot be targeted as promised to advertisers, our revenues may decrease.

Licensing. For the six months ended June 30, 2001, $19.1 million, or approximately 53.4% of our revenues, were generated from licensing our services to corporate customers and to our joint ventures through our Jeeves Solutions Group. Jeeves Solutions revenues include intellectual property licensing revenues of approximately $9.9 million from our joint ventures. If, in the future, we are unable to

generate sufficient licensing revenue from our corporate customers and/or our joint ventures, our results of operations could be substantially impaired.

Renewals. The Jeeves Solutions group depends on its existing customer base for additional future revenue from services and licenses of other products. If our customers fail to renew their maintenance agreements, our revenue could decrease. The maintenance agreements are generally renewable annually at the option of the customers and there are no mandatory payment obligations or obligations to license additional software. Therefore, current customers may not necessarily generate significant maintenance revenue in future periods. In addition, customers or joint venture partners may not necessarily continue to purchase additional products or services. Our services revenue and maintenance revenue also depend upon the use of these services by our installed customer base. Any downturn in software license revenue could result in lower service revenues in future quarters.

Electronic Commerce. In addition, a portion of our revenue is derived from the facilitation of electronic commerce transactions. The market for Internet products and services continues to develop and is rapidly changing. Therefore, the success of our business depends upon the adoption of the Internet as a medium for commerce by a broad base of customers. If this market fails to develop or develops more slowly than expected, or if our electronic commerce services do not achieve market acceptance, our business may suffer.

Many of our Advertisers are Emerging Internet Companies that Represent Credit Risks.

We expect to continue to derive a significant portion of our revenues from the sale of advertising to Internet companies. Many of these companies have limited operating histories and are operating at a loss. Moreover, many of these companies have limited cash reserves and limited access to additional capital. We have in some cases experienced difficulties collecting outstanding accounts receivable and we may continue to have these difficulties in the future. These difficulties may increase as a recent downturn in economic activity and reductions in funding for Internet companies from public capital markets and private venture capital and equity sources. If any significant part of our customer base experiences commercial difficulties or is unable or unwilling to pay our advertising fees for any reason, our business will suffer.

Our Past and Future Acquisitions May Be Difficult to Integrate, Disrupt Our Business, Dilute Stockholder Value or Divert Management Attention.

We have acquired a number of companies and we may in the future seek to acquire or invest in additional businesses, products or technologies that we believe could complement or expand our business, augment our market coverage, enhance our technical capabilities or that may otherwise offer growth opportunities. We may encounter problems with the assimilation of acquired businesses, products or technologies including:

•: difficulties in assimilation of acquired personnel, operations, technologies or products;
•: unanticipated costs associated with acquisitions;
•: diversion of management's attention from other business concerns and potential disruption of our ongoing business;
•: adverse effects on our existing business relationships with our customers;
•: potential patent or trademark infringement from acquired technologies.
•: adverse effects on our current employees and the inability to retain employees of acquired companies;
•: use of substantial portions of our available cash as all or a portion of the purchase price; and

•: dilution of our current stockholders due to issuances of additional securities as consideration for acquisitions.

If we are unable to successfully integrate our acquired companies or to create new or enhanced services, we may not achieve the anticipated benefits from our acquisitions. If we fail to achieve the anticipated benefits from the acquisitions, we may incur increased expenses and experience a shortfall in our anticipated revenues and we may not obtain a satisfactory return on our investment. In addition, if a significant number of employees fail to remain employed with us, we may experience difficulties in achieving the expected benefits of the acquisitions.

Our Growth Will Depend on Our Ability to Develop Our Brand.

We believe that a favorable consumer perception of the Ask Jeeves brand is essential to our future success. Accordingly, we intend to continue pursuing brand-enhancement strategies, which will include mass market and multimedia advertising, promotional programs and public relations activities. These expenditures may not result in a sufficient increase in revenues to cover such advertising and promotional expenses. In addition, even if brand recognition increases, the number of new users may not increase. Further, even if the number of new users increases, the amount of traffic on our Web sites and the number of corporate customers may not increase sufficiently to justify the expenditures.

To Manage Our Growth, We Need to Improve Our Systems, Controls and Procedures.

We have experienced and may continue to experience rapid growth, which has placed, and could continue to place, a significant strain on our managerial, financial and operational resources. As a result of our recent realignment of our business, we must continue to improve our operational and financial systems and managerial controls and procedures, train and manage our workforce with reduced human resources. We cannot be assured that our systems, procedures or controls will be adequate to support our operations or that we will be able to manage any growth effectively. If we do not manage growth effectively, our business would be seriously harmed.

More Individuals are Utilizing Non-PC Devices to Access the Internet and We May Not Be Successful in Developing a Version of Our Service that Will Gain Widespread Adoption by Users of Such Devices.

In the coming years, the number of individuals who access the Internet through devices other than a personal computer such as personal digital assistants, cellular telephones and television and television set-top devices is expected to increase. Our services are designed for rich, graphical environments such as those available on personal and laptop computers. The lower resolution, functionality and memory associated with alternative devices may make the use of our services through such devices difficult and we may be unsuccessful in our efforts to modify our online properties to provide a compelling service for users of alternative devices.

As we have limited experience to date in operating versions of our service developed or optimized for users of alternative devices, it is difficult to predict the problems we may encounter in doing so and we may need to devote significant resources to the creation, support and maintenance of such versions. If we are unable to attract and retain a substantial number of alternative device users to our online services, we will fail to capture a sufficient share of an increasingly important portion of the market for online services. Further, as a significant portion of our revenues are derived through the sale of banner and other advertising optimized for a personal computer screen, we may not be successful at developing a viable strategy for deriving substantial revenues from online properties that are directed at the users of alternative devices. Any failure to develop revenue-generating online properties that are adopted by a significant number of handheld device users could severely hurt our business.

We May Not Be Able to Effectively Compete Against Our Current and Potential Competitors.

Web Properties. We face direct competition from companies that provide Internet search and directory services. For example, Web Properties competes with search engines, including AltaVista Company, Excite@Home Corporation, Google Inc., Northern Light, Infoseek Corporation, and Inktomi Corporation, for the traffic generated by Internet users seeking links to third- party content to address their online information needs. Web Properties also competes with directory services, such as Goto.com, Inc. LookSmart, Ltd., and Yahoo! Inc., because they provide alternative ways for users to obtain the desired information.

Jeeves Solutions. We compete with a number of companies that are addressing the same need to improve automated or online customer service for corporate customers. For example, Jeeves Solutions competes with companies that provide shopping advisors, such as Active Research Inc.; automated e-mail response and live interaction, such as Kana Communications, Inc.; search technology, such as Inktomi Corporation; and customer relationship management, such as Siebel Systems, Inc.

Our ability to compete depends on many factors, many of which are outside of our control. These factors include: the quality of content, the ease of use of online services, the timing and market acceptance of new and enhanced online services and sales and marketing efforts by our competitors and by us.

Many of our existing competitors, as well as potential new competitors, have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. This may allow them to devote greater resources than we can to the development and promotion of their services. Many of these competitors offer a wider range of services than we do. These services may attract users to our competitors' sites and, consequently, result in a decrease in traffic to our site. These competitors may also engage in more extensive research and development, adopt more aggressive pricing policies and make more attractive offers to existing and potential corporate customers, advertisers, syndicators and electronic commerce merchants. Our competitors may develop products and services that are equal to, or superior to, our products and services, or achieve greater market acceptance. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to better address the needs of advertisers and businesses engaged in electronic commerce. As a result, it is possible that new competitors may emerge and rapidly acquire significant market share.

Our Geographic Properties May Not Be Successful

Our wholly owned subsidiary, Ask Jeeves International, Inc., or AJI, was formed for the purpose of marketing our natural language question answering technologies and services outside of the United States. To date, AJI has entered into joint ventures to provide our services in the United Kingdom, Japan, and to the Spanish-speaking market worldwide. AJI has also formed a subsidiary in Australia to provide a localized version of our services for the Australian market. This expansion into international markets requires substantial management attention and financial resources. We cannot be certain that our investment in AJI and in establishing operations in other countries will produce the desired levels of revenue. In addition, AJI and its investment properties are subject to other inherent risks and problems, including:

•: the impact of business cycles and downturns in economies outside the United States;
•: longer payment cycles and greater difficulty in accounts receivable collections;
•: unexpected changes in regulatory requirements;
•: difficulties and costs of staffing and managing foreign operations;
•: reduced protection for intellectual property rights in some countries;

•: unanticipated tax costs associated with the cross-border use of intangible assets;
•: political and economic instability;
•: fluctuations in currency exchange rates;
•: difficulty in maintaining effective communications with employees and customers due to distance, language and cultural barriers;
•: lower brand recognition for Ask Jeeves and the Jeeves character in non-English speaking counties;
•: lower per capita Internet usage in many foreign countries, for a variety of reasons such as lower disposable incomes, lack of adequate telecommunications and computer infrastructure and concerns regarding online security for e-commerce transactions; and
•: competition in international markets from a broad range of competitors, including AltaVista, Goto.com, LookSmart, Terra Lycos, Yahoo! and other United States and foreign portals, search engines and service providers.

Some or all of the above factors could seriously harm the results of our operations.

Our Operating Results are Volatile and Difficult to Predict.

You should not rely on our results of operations during any particular quarter as an indication of our future results for a full year or any other quarter. Our quarterly revenues and operating results have varied significantly in the past and may vary significantly in the future due to a number of factors, including:

•: our ability to obtain new corporate customers, the length of time needed to implement our natural language question answering technologies and services for corporate customers and the timing of revenue recognition with respect to contracts with corporate customers;
•: our ability to obtain new advertising contracts, maintain existing ones and effectively manage our advertising inventory;
•: the number of users of our Web sites, Web sites syndicating our services and the Web sites of our corporate customers;
•: our ability to link our electronic commerce merchants to potential customers;
•: seasonal and other fluctuations in demand for our electronic commerce services and for advertising space on our Web sites;
•: our ability to develop and introduce new technology;
•: announcements and new technology introductions by our competitors;
•: our ability to attract, retain and motivate key personnel;
•: credit risk of Internet companies within our customer base;
•: rate changes for advertising on our Web sites;
•: marketing expenses and technology infrastructure costs as well as other costs that we may incur as we expand our operations; and
•: costs relating to possible acquisitions of technologies and businesses including the timing of charges related to the acquisitions and any amortization of expenses related to the acquisitions; and

•: the other factors discussed in this section on "Business Risks."

We have experienced seasonality in user traffic to our Websites, including lower traffic during the year-end holiday season and a slower rate of growth during the summer months. Given our limited operating history, user traffic on our Web sites is extremely difficult to forecast accurately. Moreover, obtaining new corporate customers depends on many factors that we are not able to control, such as the allocation of budgetary resources by potential customers. The average sales cycle for obtaining new corporate customers has averaged four months. Therefore, it is difficult to predict the number of corporate customers that we will have in the future. We may be unable to adjust spending to compensate for an unexpected shortfall in our revenues. As a result, if we experience an unexpected shortfall in revenues, or if our revenues do not grow faster than the increase in these expenses, we could experience significant variations in the operating results from quarter to quarter.

Our Stock Price may Fluctuate Significantly Regardless of Our Actual Operating Performance.

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

•: actual or anticipated variations in quarterly operating results and announcements of technological innovations;
•: new products or services offered by Ask Jeeves or its competitors;
•: changes in financial estimates by securities analysts;
•: conditions or trends in the Internet services industry and the online customer service segment in particular;
•: Ask Jeeves' announcement of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
•: additions or departures of key personnel;
•: sales by current holders of our common stock and general financial conditions and investor sentiment regarding Internet companies generally; and
•: other events that may be beyond Ask Jeeves' control.

In addition, the Nasdaq National Market, where most publicly held Internet companies are traded, has periodically experienced extreme price and volume fluctuations. These fluctuations may be unrelated or disproportionate to the operating performance of these companies. These broad market and industry factors may materially adversely affect the market price of our common stock, regardless of our actual operating performance. In the past, following periods of volatility in the market price of an individual company's securities, securities class action litigation often has been instituted against that company. This type of litigation, if instituted, could result in substantial costs and a diversion of management's attention and resources.

If We Fail to Meet the Expectations of the Public Market Analysts and Investors, the Market Price of Our Common Stock May Decrease Significantly.

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

Failure to Add or Retain Corporate Customers May Have an Adverse Effect On Our Revenues.

In the coming year we expect that revenues associated with corporate customers will be comprised primarily of corporations with large, difficult-to-navigate Web sites. If we do not complete sales to a sufficient number of customers, our future revenues will be adversely affected.

Most of our corporate customer contracts have a term of one year following the implementation of our services. As a result, if we are unable to offer value to our customers during the term of these contracts, or if our customers choose a competitor's service over our service, or if our customers decide to use their own proprietary technology to develop services similar to ours, those customers may not renew their contracts. If we do not obtain a sufficient number of contract renewals or if such renewal contracts are obtained on terms less favorable than the original contract, our business could be adversely affected.

Implementing Our Services for Our Corporate Customers is Labor Intensive.

Because the implementation of our services is labor intensive, it is difficult to predict the length of the development cycle. Factors that affect the length of the development cycle include the overall size and complexity of the Web site, the interaction with the customer and the dynamic nature of the content. Launching a customized version of our services may take a month or longer. The long development cycle makes it difficult to predict the delivery time to the customer, realize our revenue goals and manage our internal hiring needs to meet new projects. In addition, in order to meet increased demand by corporate customers, we may have to hire additional people and train them in advance of orders. When we outsource development of custom knowledge bases, we will have little control over the speed and quality of the development. Any decline in the speed or quality of the implementation of our services could seriously harm our business.

We Depend on Third Party Content.

Our Web sites are designed to directly link users to a page within a third-party Web site that contains the answer to a question asked. However, when our Web sites attempt to direct the user to a page within the Web site, some companies have automatically redirected users to their home page. If companies prevent us from directly linking our users to a page within a third-party Web site, and if there are no comparable alternative Web sites to which we can direct our users, the utility and attractiveness of our services to consumers may be reduced. If this occurs, traffic on our Web sites could significantly decrease, which would seriously harm our business.

Visitors to our Web sites use the sites to obtain direct access to the information, products and services they need through the display of a third-party Web page containing the answer to the user's question. We have little control over the content of these third-party Web sites. If these third-party Web sites do not contain high-quality, up-to-date and useful information to the user, the utility of our service to the user will be reduced, which could seriously harm our business.

We May Be Liable for Our Links to Third-Party Web Sites.

We could be exposed to claims for liability with respect to the selection of third-party Web sites that may be accessible through our Web sites. These claims might include, among others, that by linking to Web sites operated by third parties, we may be liable for copyright or trademark infringement or other unauthorized actions by these third-party Web sites. Other claims may be based on errors or false or misleading information provided on our Web sites, including information deemed to constitute professional advice such as legal, medical, financial or investment advice. Other claims may be based on our links to sexually explicit Web sites and our provision of sexually explicit advertisements when this content is displayed. While no such claims are pending and we do not believe that any such claim would have legal merit, our business could be seriously harmed due to the cost of

investigating and defending these claims, even to the extent these claims do not result in liability. Implementing measures to reduce our exposure to such claims may require us to spend substantial resources and limit the attractiveness of our service to users.

We Face Risks Related to Expanding Into Relatively New Services and Business Areas.

To increase our revenues, we will need to refine our business model by promoting new or complementary products and by targeting our products and services to meet the needs of different customers. Our development of new product and service offerings may not be timely or may not generate sufficient revenues to offset their cost. The evolution of our electronic commerce services may strain our management, financial and operational resources. If this occurs, our business, operating results and financial condition will be seriously harmed.

Our Future Success Depends on Our Ability to Attract, Retain Key Management and Skilled Technical Employees.

The loss of services from our Chief Executive Officer, A. George (Skip) Battle could seriously harm our business. Mr. Battle is also a member of our Board of Directors.

Additionally, our future success depends on our ability to attract, retain and motivate highly skilled employees. Competition for employees in the San Francisco Bay Area, where our headquarters is located, is intense. This is due, in part, to the high concentration of high-tech companies vying for qualified employees, high housing costs and traffic congestion. We have experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. If we fail to attract, retain and motivate our employees, our business will be harmed.

Our Workforce Reductions and Financial Performance May Adversely Affect the Morale and Performance of our Personnel and our Ability to Hire New Personnel.

In connection with our effort to streamline operations, increase revenues, reduce costs and bring our staffing and structure in line with our current and anticipated requirements, we recently realigned our business organization, which included a reduction in our workforce of approximately 152 employees, or approximately 20% of our workforce in the fourth quarter of 2000, and an additional reduction in force announced in April 2001 of approximately 73 employees, or 15% of our workforce. There were costs associated with the workforce reductions related to severance and other employee-related costs, and our realignment plan may yield unanticipated costs and consequences, such as attrition beyond our planned reduction in staff. In addition, our common stock has recently declined in value below the exercise price of many options granted to employees pursuant to our stock option plans. Thus, the intended benefits of the stock options granted to our employees, the creation of performance and retention incentives, may not be realized. In addition, workforce reductions and management changes create anxiety and uncertainty and may adversely affect employee morale. As a result, we may lose employees whom we would prefer to retain. As a result of these factors, our remaining personnel may seek employment with larger, more established companies or companies they perceive as having less volatile stock prices.

We Need to Expand Our Sales and Support Organizations.

Competition for highly-qualified sales personnel is intense, and we may not be able to maintain the kind and number of sales personnel we need. Hiring highly qualified customer service and account management personnel is very competitive in our industry due to the limited number of people available with the necessary technical skills and understanding of the Internet.

We Will Only Be Able to Execute Our Business Plan if Internet Usage Grows.

Our business would be adversely affected if Internet usage does not continue to grow or grows at significantly lower rates compared to current trends. The continued growth of the Internet depends on various factors, many of which are outside our control. These factors include:

•: the Internet infrastructure may not be able to support the demands placed on it;
•: performance and reliability of the Internet may decline as usage grows;
•: continued growth in utility and accessibility to desired information;
•: security and performance concerns due to hackers and authentication concerns with respect to the transmission over the Internet of confidential information, such as credit card numbers, and attempts by unauthorized computer users, so-called hackers, to penetrate online security systems; and
•: privacy concerns, including those related to the ability of Web sites to gather user information without the user's knowledge or consent.

The Operating Performance of Our Systems and Servers is Critical to Our Business and Reputation.

Any system failure, including network, software or hardware failure, that causes an interruption in our service or a decrease in responsiveness of Ask Jeeves could result in reduced user traffic on our Web sites and reduced revenues. We have network and server equipment located at AboveNet, Exodus, Qwest, HarvardNet in various locations in California and Massachusetts and in London, England. Although we believe that our current back-up methods are adequate, we cannot be assured that the back-up servers will not fail or cause an interruption in our service.

We have experienced slower response times and interruptions in service due to malfunction at our hosting facilities and on the Internet backbone networks, major software upgrades on our Web sites and undetected software defects. Ask.com and DirectHit.com have had partial interruptions for periods ranging from a few minutes to three hours. In addition, our Web sites could also be affected by computer viruses, electronic break-ins or other similar disruptions. If we experience outages, frequent or persistent system failures or degraded response times, our reputation and brand could be permanently harmed. In addition, we could lose advertising revenues during these interruptions and user satisfaction could be negatively impacted if the service is slow or unavailable.

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

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

Power Outages In California Could Adversely Affect Us.

We have significant operations in the state of California and are dependent on a continuous power supply. California's energy crisis could substantially disrupt our operations and increase our expenses. California, has recently implemented, and may in the future continue to implement, rolling blackouts

throughout the state. Although state lawmakers are working to minimize the impact, if blackouts interrupt our power supply, we may be temporarily unable to continue operations at our California facilities. Any such interruption in our ability to continue operation at our facilities could delay the development of our products and services and disrupt communications with our customers or other third parties on which we rely, such as Web hosting service providers. Future interruptions could damage our reputation and could result in lost revenue, either of which could substantially harm our business and results of operations. Furthermore, shortages in wholesale electricity supplies have caused power prices to increase. If energy prices continue to increase, our operating expenses will likely increase which could have a negative effect on our operating results.

Our Security Could Be Breached, Which Could Damage Our Reputation and Deter Customers From Using Our Services.

We must protect our computer systems and network from physical break-ins, security breaches and other disruptive problems caused by the Internet or other users. Computer break-ins could jeopardize the security of information stored in and transmitted through our computer systems and network, which could adversely affect our ability to retain or attract customers, damage our reputation and subject us to litigation. We could be subject to denial of service, vandalism and other attacks on its systems by Internet hackers. Although we intend to continue to implement security technology and establish operational procedures to prevent break-ins, damage and failures, these security measures may fail. Our insurance coverage in certain circumstances may be insufficient to cover issues that may result from such events.

We May Not Be Able to Adapt Evolving Internet Technologies and Customer Demands.

To be successful, we must adapt to rapidly changing Internet technologies by continually enhancing our products and services and introducing new services to address our customers' changing needs. We could incur substantial development or acquisition costs if we need to modify our services or infrastructure to adapt to changes affecting providers of Internet services. Our business could be seriously harmed if we incur significant costs to adapt to these changes. If we cannot adapt to these changes, or do not sufficiently increase the features and functionality of our products and services, our customers may switch to the product and service offerings of our competitors. Furthermore, our competitors or potential competitors may develop a novel method of Internet navigation that is equal or superior to those we offer. As a result, demand for our natural language question answering technologies and services may decrease.

We May Face Potential Liability, Loss of Users and Damage to our Reputation for Violation of Privacy Policies.

We have a policy against using personally identifiable information obtained from users of our natural language question answering technologies and without the user's permission. In the past, the Federal Trade Commission has investigated companies that have used personally identifiable information without permission or in violation of a stated privacy policy. If we use this information without permission or in violation of our policy, we may face potential liability for invasion of privacy for compiling and providing information to our corporate customers and electronic commerce merchants.

Government Regulation and Legal Uncertainties Could Harm Our Business.

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

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

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

Legislation limiting the ability of the states to impose taxes on Internet-based transactions recently has been enacted by the United States Congress. However, this legislation, known as the Internet Tax Freedom Act, imposes only a three-year moratorium, which commenced October 1, 1998 and ends on October 21, 2001, on state and local taxes on electronic commerce, where such taxes are discriminatory and Internet access, unless such taxes were generally imposed and actually enforced prior to October 1, 1998. It is possible that the tax moratorium could fail to be renewed prior to October 21, 2001. Failure to renew this legislation would allow various states to impose taxes on Internet-based commerce. The imposition of such taxes could impair the growth of the e-commerce marketplace and impair our ability to become profitable.

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

We May Face Potential Electronic Commerce-Related Liabilities and Expenses.

Arrangements with electronic commerce merchants may expose us to legal risks and uncertainties, including potential claims for liabilities to consumers of the products and services offered by these electronic commerce merchants. Although we carry general liability insurance, our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be imposed.

Some of the risks that may result from these arrangements with businesses engaged in electronic commerce include:

•: potential claims for liabilities for illegal activities that may be conducted by participating merchants;
•: product liability or other tort claims relating to goods or services sold through third-party commerce sites;
•: claims for consumer fraud and false or deceptive advertising or sales practices;
•: breach of contract claims relating to merchant transactions;
•: claims that materials included in merchant sites or sold by merchants through these sites infringe third-party patents, copyrights, trademarks or other intellectual property rights, or are libelous, defamatory or in breach of third-party confidentiality or privacy rights; and

•: claims relating to any failure of merchants to appropriately collect and remit sales or other taxes arising from electronic commerce transactions.

Even to the extent that such claims do not result in material liability, investigating and defending such claims could seriously harm our business. For example, investigating and defending any such claims may require significant financial and human resources, may result in negative publicity for our company and injure our business reputation.

We May Be Unable to Protect Our Intellectual Property Rights and Other Proprietary Rights and We May Be Liable for Infringing Upon the Intellectual Property Rights of Others.

Third parties may assert infringement claims against us. From time to time in the ordinary course of business we have been subject to claims of alleged infringement of the trademarks and other intellectual property rights of third parties. Any such claims, if made, and any resulting litigation, should it occur, could subject us to significant liability for damages. In addition, even if we prevail, litigation could be time-consuming and expensive to defend, and could result in the diversion of our time and attention. Any claims from third parties may also result in limitations on our ability to use the intellectual property subject to these claims unless we are able to enter into agreements with the third parties making these claims. (See further discussion below under Part II, Item 1, Legal Proceedings)

We May Not Be Able to Secure Additional Financing to Meet Our Future Capital Needs.

We currently anticipate that our available cash resources will be sufficient to meet our anticipated needs for working capital and capital expenditures for at least twelve months. If, however, we are unable to generate sufficient cash flows from operations to meet our anticipated needs for working capital and capital expenditures, we will need to raise additional funds to fund brand promotion, develop new or enhanced services, respond to competitive pressures or make acquisitions. We may be unable to obtain any required additional financing on terms favorable to us, if at all. If adequate funds are not available on acceptable terms, we may be unable to fund our expansion, successfully promote our brand, develop or enhance services, respond to competitive pressures or take advantage of acquisition opportunities, any of which could seriously harm our business. If we raise additional funds through the issuance of equity securities, our stockholders may experience dilution of their ownership interest, and the newly issued securities may have rights superior to those of the common stock. If we raise additional funds by issuing debt, we may be subject to limitations on our operations, including limitations on the payment of dividends.

Future Sales of Stock Could Affect Our Stock Price.

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

Provisions in Delaware Law and our Charter, Stock Option Agreements and Offer Letters to Executive Officers may Prevent or Delay a Change Of Control.

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

•: the board of directors approved the transaction where the stockholder acquired 15% or more of the corporation's assets;

•: after the transaction where the stockholder acquired 15% or more of the corporation's assets, the stockholder owned at least 85% of the corporation's outstanding voting stock, excluding shares owned by directors, officers and employee stock plans in which employee participants do not have the right to determine confidentially whether shares held under the plan will be tendered in a tender or exchange offer; or
•: on or after this date, the merger or sale is approved by the board of directors and the holders of at least two-thirds of the outstanding voting stock that is not owned by the stockholder.

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

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

•: our board is classified into three classes of directors as nearly equal in size as possible with staggered three year-terms;
•: the authority of our board to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences and privileges of these shares, without stockholder approval;
•: all stockholder actions must be effected at a duly called meeting of stockholders and not by written consent;
•: except under limited circumstances, special meetings of the stockholders may be called only by the chairman of the board, the chief executive officer the board or by holders of shares entitled to cast not less than 50% of the votes of the meeting; and
•: except under limited circumstances, no cumulative voting.

These provisions may have the effect of delaying or preventing a change of control.

Furthermore, we recently announced our adoption of a stockholder rights plan and declared a dividend distribution of one right for each outstanding share of common stock to stockholders of record as of May 7, 2001. Each right entitles the holder to purchase one unit consisting of one one-thousandth of a share of our Series A Junior Participating Preferred Stock for $20 per unit. Under certain circumstances, if a person or group acquires 15% or more of our outstanding common stock, holders of the rights (other than the person or group triggering their exercise) will be able to purchase, in exchange for the $20 exercise price, shares of our common stock or of any company into which we are merged having a value of $40. The rights expire on May 7, 2011 unless extended by our board of directors. Because the rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our board of directors, our rights plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our board of directors regarding such acquisition.

Our certificate of incorporation and bylaws provide that we will indemnify officers and directors against losses that may incur in investigations and legal proceedings resulting from their services to us, which may include services in connection with takeover defense measures. These provisions may have the effect of preventing changes in our management.

In addition, our option agreements under the 1996 Stock Option plan provide that if a change of control of Ask Jeeves occurs prior to the first anniversary of the vesting commencement date of an option, then the vesting which would have occurred by such anniversary shall occur. After the first anniversary of the date of grant, these option agreements provide that the vesting of each option shall accelerate by six months upon a change of control. Furthermore, offer letters with our executive

officers provide for the payment of severance and acceleration of options upon the termination of these executive officers following a change of control of Ask Jeeves. These provisions in our stock option agreements and offer letters could have the effect of discouraging potential takeover attempts.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

The Company's exposure to market risk for interest rate changes relates primarily to its investment portfolio. The Company had no derivative financial instruments as of June 30, 2001. The Company places its investment portfolio in high credit quality instruments and the amount of credit exposure to any one issue, issuer and type of instrument is limited. The Company does not expect any material loss with respect to its investment portfolio.

The Company's investments are principally confined to our cash and cash equivalents and marketable securities, which have short maturities and, therefore, minimal market risk.

PART II. OTHER INFORMATION

Item 1.Legal Proceedings

Item 2.Changes in Securities and Use of Proceeds

On April 26, 2001 the Company's Board of Directors adopted a stockholder rights plan and declared a dividend distribution of one right for each outstanding share of Common Stock to stockholders of record as of May 7, 2001. Each right entitles the holder to purchase one unit consisting of one one-thousandth of a share of our Series A Junior Participating Preferred Stock for $20 per unit. The description and terms of the rights are set forth in a rights agreement dated as of April 26, 2001 by and between the Company and Fleet National Bank, N.A., as rights agent. The rights expire on May 7, 2011 unless extended by the Company's Board of Directors.

Item 3.Defaults Under Senior Securities

Not applicable.

Item 4.Submission of Matters to a Vote of Security Holders

The Company's annual meeting of stockholders was held on May 30, 2001.

The following nominees were elected as directors, each to hold office until the 2004 Annual Meeting of Stockholders, or until their successors are duly elected and qualified, by the vote set forth below

Nominee	For	Against/Withheld
Roger A. Strauch	25,595,441	104,469
A. George (Skip) Battle	24,578,441	1,121,131
Garrett Gruener	25,594,816	105,094

In addition, the following directors were not up for re-election and their terms as directors continued after the annual meeting: James Kirsner, Daniel Nova, Geoffrey Yang.

Ernst & Young LLP was ratified as independent auditors of the Company for its fiscal year ending December 31, 2001, by the vote of 25,277,086 for, 104,469 against/withheld.

Item 5.Other Information

Not applicable.

Item 6.Exhibits and Reports on Form 8-K

a)Exhibits

3.1(1)		Certificate of Designation for Series A Junior Participating Preferred Stock.
4.1(1)		Rights Agreement, dated as of April 26, 2001, between the Company and Fleet National Bank, N.A., which includes the form of Rights Certificate as Exhibit B and the Summary of Rights to Purchase Series A Preferred Stock as Exhibit C.
10.41+		Amended Offer Letter dated April 3, 2001, by and between the Registrant and A. George (Skip) Battle.
10.42+		Offer Letter dated April 23, 2001, by and between the Registrant and Steve Berkowitz.
10.43+		Promissory Note dated March 15, 2001 by and between the Registrant and Steven Sordello.

(1): Incorporated herein by reference from the Registrant's Form 8-K filed with the Commission on May 10, 2001.
+: Management contract, compensatory plan or arrangement.

b)Reports on Form 8-K.

On May 10, 2001, the Company filed a report on Form 8-K, which announced that on April 26, 2001, its Board of Directors adopted a Stockholder Rights Plan. A copy of the Company's press release announcing this matter and the Rights Agreement were attached and incorporated by reference therein.

SIGNATURES

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

	ASK JEEVES, INC.
August 14, 2001	By:	/s/ A. GEORGE (SKIP) BATTLE A. George (Skip) Battle Chief Executive Officer (Principal Executive Officer)
August 14, 2001	By:	/s/ STEVEN J. SORDELLO Steven J. Sordello Chief Financial Officer (Principal Financial Officer)
August 14, 2001	By:	/s/ CHRISTINE M. DAVIS Christine M. Davis Vice President and Corporate Controller (Principal Accounting Officer)

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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

ASK JEEVES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

BUSINESS RISKS

Item 3. Quantitative and Qualitative Disclosures About Market Risk

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 2. Changes in Securities and Use of Proceeds

Item 3. Defaults Under Senior Securities

Item 4. Submission of Matters to a Vote of Security Holders

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

SIGNATURES

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Good

Ask Jeeves (ASKJ) Inactive 10-Q2001 Q2 Quarterly report

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