10-Q

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 2002
o	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	94-3334199
(State or other jurisdiction of Incorporation or organization)	(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.

        ý Yes        o No

        The number of shares outstanding of the registrant's Common Stock as of April 26, 2002 was 41,141,007.

ASK JEEVES, INC.

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Consolidated Financial Statements:
	Condensed Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001	3
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001	4
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001	5
	Notes to the Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	37
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	39
Item 2.	Change in Securities	39
Item 3.	Defaults Upon Senior Securities	39
Item 4.	Submission of Matters to a Vote of Securities Holders	39
Item 5.	Other Information	39
Item 6.	Exhibits and Reports on Form 8-K	40
	Signatures	43

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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)

			March 31, 2002			December 31, 2001
			(Unaudited)			(Note 1)
ASSETS
Current assets:
	Cash and cash equivalents		$	27,692		$	33,125
	Short-term marketable securities			13,110			18,671
	Restricted cash and marketable securities			11,000			15,489
		Total cash, cash equivalents and marketable securities		51,802			67,285
	Accounts receivable, net			8,959			8,482
	Prepaid expenses and other current assets			2,856			2,453
		Total current assets		63,617			78,220
Restricted marketable securities				106			9,317
Property and equipment, net				12,887			17,098
Intangible assets, net				4,821			5,384
Other assets				2,235			1,319
		Total assets	$	83,666		$	111,338
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$	3,953		$	3,428
	Accrued compensation and related expenses			5,010			5,282
	Accrued marketing expenses			1,628			1,501
	Accrued restructuring costs			1,513			18,429
	Other accrued liabilities			7,858			6,618
	Deferred revenue			13,451			16,069
	Borrowings under line of credit			11,000			11,000
		Total current liabilities		44,413			62,327
Other liabilities				666			1,797
		Total liabilities		45,079			64,124
Commitments and contingencies
Stockholders' equity:
	Convertible preferred stock, $.001 par value; 5,000,000 shares authorized; no shares issued or outstanding
	Common stock, $.001 par value; 150,000,000 shares authorized; 40,860,630 and 39,482,015 shares issued and outstanding at March 31, 2002 and December 31, 2001, respectively			724,308			722,310
	Notes receivable from stockholders			(57	)		(57	)
	Deferred stock compensation			(55	)		(98	)
	Accumulated deficit			(685,872	)		(675,432	)
	Accumulated other comprehensive income			263			491
		Total stockholders' equity		38,587			47,214
		Total liabilities and stockholders' equity	$	83,666		$	111,338

See accompanying notes to the condensed consolidated financial statements.

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ASK JEEVES, INC.

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

		Three Months Ended
		March 31, 2002			March 31, 2001
Revenues:
	Web Properties	$	10,804		$	9,027
	Jeeves Solutions (1)		5,273			10,056
Total revenues			16,077			19,083
Cost of revenues:
	Web Properties		3,743			4,238
	Jeeves Solutions		2,043			4,309
Total cost of revenues			5,786			8,547
Gross profit			10,291			10,536
Operating expenses:
	Product development		4,589			5,601
	Sales and marketing		10,015			14,028
	General and administrative		5,267			7,869
	Stock-based compensation		41			385
	Amortization of goodwill and other intangible assets		—			22,369
	Impairment of long-lived assets		2,231			339,177
	Restructuring costs and other		—			668
Total operating expenses			22,143			390,097
Operating loss			(11,852	)		(379,561	)
Interest and other income (expense), net			1,413			1,351
Net loss		$	(10,439	)	$	(378,210	)
Basic and diluted net loss per share		$	(0.26	)	$	(10.55	)
Weighted average shares outstanding used in computing basic and diluted net loss per share			39,517,426			35,842,783
(1) Revenues from related parties		$	2,772		$	4,814

See accompanying notes to the condensed consolidated financial statements.

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ASK JEEVES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

		Three Months Ended
		March 31, 2002			March 31, 2001
Operating activities
Net loss		$	(10,439	)	$	(378,210	)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			2,433			2,071
Compensation charge related to grants of stock options			—			1,372
Stock-based compensation			41			385
Amortization of goodwill and intangible assets			563			23,687
Impairment charge for long-lived assets			2,231			339,177
Changes in operating assets and liabilities:
	Accounts receivable		(477	)		5,471
	Prepaids and other assets		(437	)		(848	)
	Accounts payable		(1,481	)		(1,077	)
	Accrued compensation and related expenses		(536	)		718
	Accrued marketing expenses		126			(2,376	)
	Accrued merger costs		385			—
	Accrued restructuring costs		(16,915	)		(2,145	)
	Other accrued liabilities		(2,098	)		(1,113	)
	Deferred revenue		(3,185	)		(2,794	)
Net cash used in operating activities			(29,789	)		(15,682	)
Investing activities
Purchases of property and equipment			(438	)		(1,172	)
Proceeds from redemption of marketable securities			19,019			8,737
Purchases of intangible assets			—			(1,250	)
Net cash acquired from acquisition of joint venture			5,247			—
Net cash provided by investing activities			23,828			6,315
Financing activities
Issuance of common stock			748			550
Repayment of capital lease obligations			(220	)		(220	)
Net cash provided by financing activities			528			330
Decrease in cash and cash equivalents			(5,433	)		(9,037	)
Cash and cash equivalents at beginning of period			33,125			41,445
Cash and cash equivalents at end of period		$	27,692		$	32,408
Supplemental disclosure of noncash investing and financing activities
Common stock issued for acquisition of joint venture		$	1,250		$	—
Interest paid		$	183		$	54

See accompanying notes to the condensed consolidated financial statements.

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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") is a leading provider of search and self-service technologies. Our proprietary natural-language capabilities combined with patented search technology create 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, AJKids.com and Teoma.com. Through the Company's Web Properties Group, Ask Jeeves provides innovative, targeted and effective tools for reaching a broad base of highly valuable customers. 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 offers software and services that allow corporations to establish connected self service solutions that supplement the activities of call center, contact centers and marketing departments.

        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 as of March 31, 2002 and 2001 and for the three months ended March 31, 2002 and 2001 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 period ended March 31, 2002 are not necessarily indicative of results for the entire fiscal year or future periods. The condensed consolidated balance sheet at December 31, 2001 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001.

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

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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. Potentially dilutive securities have been excluded from the computation, as their effect is antidilutive. If the Company had reported net income, diluted net income per share would reflect 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.

Recent Accounting Pronouncements

        In June 2001 the Financial Accounting Standards Board (FASB) issued SFAS No. 141 Business Combinations and SFAS No. 142 Goodwill 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 by charges to 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 were adopted by the Company on January 1, 2002. The adoption of this statement did not have a material impact on the Company's consolidated financial statements.

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets". SFAS No. 144 establishes a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale. Consistent with SFAS No. 121, SFAS No 144 continued to require a step approach for recognizing and measuring the impairment of long-lived assets to be held and used. The adoption of this statement by the Company did not have a material impact on its consolidated financial statements.

Reclassifications

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

2. BUSINESS COMBINATIONS

        In February 2002, the Company acquired the entire outstanding equity interests in Ask Jeeves UK. Previously, the Company held a fifty percent interest in Ask Jeeves UK, a joint venture partnership with Carlton Communications PLC and Granada Media Group Limited, that was formed to market the Company's search and self-service technologies and services in the United Kingdom. The Company acquired full ownership of Ask Jeeves UK to enhance the synergies that exist between the U.S. and U.K. operations.

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        The purchase cost consisted of cash of $1.2 million, 774,792 shares of common stock with a fair value of $1.3 million, the assumption of liabilities of $3.8 million and transaction expenses of $450,000. The terms of the agreement include an obligation for Ask Jeeves to pay to its former partners fifty percent of the net proceeds of any qualifying sale or offering of shares of Ask Jeeves UK through March 2003. The purchase cost was allocated entirely to cash, and the Company recorded a deferred gain of $801,000 representing the value of cash acquired by the Company in excess of consideration paid. Additionally, during the three months ended March 31, 2002, the Company recorded a gain of $974,000 representing the remaining balance of deferred license fees paid to the Company by the venture.

        The acquisition was accounted for as a purchase business combination and accordingly, the consolidated financial statements include the operating results of Ask Jeeves UK from the date of acquisition. Previously, the Company accounted for its investment in the joint venture under the equity method of accounting. The Company had recorded no value for its interest in the joint venture for accounting purposes. Therefore, the Company had not recognized any portion of the net losses of the joint venture. The unaudited pro forma information presented in the table below represents the combined revenue, net loss and net loss per share of the Company for the three month periods ended March 31, 2001 and 2002 as if the acquisition had taken place on January 1, 2001.

	2002			2001
(in thousands, except share and per share amounts)
Revenues	$	16,147		$	19,453
Net loss	$	(11,530	)	$	(382,640	)
Net loss per share basic and diluted	$	(0.29	)	$	(10.45	)
Weighted average shares outstanding used in computing basic and diluted net loss per share		40,249,174			36,617,575

3. COMMITMENTS AND CONTINGENCIES

        From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of patents, trademarks, copyrights and other intellectual property rights, and a variety of claims arising in connection with the services, such as claims alleging defamation or invasion of privacy.

        Third parties may assert infringement claims against us. From time to time in the ordinary course of business we have been, and we expect to continue to be, subject to claims of alleged infringement of the trademarks and other intellectual property rights of third parties. These claims and any resultant 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.

        On October 25, 2001, a putative class action lawsuit captioned Leonard Turroff, et al. vs Ask Jeeves, Inc., et al. was filed against the Company and two of our officers and directors (collectively the

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"Individual Defendants") in the United States District Court for the Southern District of New York. Also named as defendants were Morgan Stanley & Co,, Inc., FleetBoston Robertson Stephens, Goldman Sachs & Co., U.S. Bancorp Piper Jaffray, and Dain Rauscher, Inc., the underwriters of the Company's initial public offering. The complaint alleges violations of Section 11 of the Securities Act of 1933 against all defendants, and violations of Section 15 of the Securities Act against the Individual Defendants in connection with the Company's initial public offering ("IPO"). An amended complaint was filed on December 6, 2001, which includes the same allegations in connection with Ask Jeeves' secondary offering in March 2000. The complaints seek unspecified damages on behalf of a purported class of purchasers of common stock between June 30, 1999 and December 6, 2000. We believe the claims are without merit and intend to defend the actions vigorously, however, an unfavorable outcome could have a material adverse effect on our operating results and financial position.

        In February 2002, the Company reached agreement on the settlement of a 10-year lease obligation. The terms of the agreement include the one-time payment of $16 million. The entire amount of the settlement was included in the Company's restructuring charges in 2001. As a result of the settlement of the lease obligation, the Company terminated a standby letter of credit pledged as security on the lease in the amount of $13.7 million.

4. STOCK-BASED COMPENSATION

        The following table shows the amount of stock-based compensation that would have been classified under the following categories had stock-based compensation not been separately stated on the consolidated statements of operations (in thousands):

		Three Months Ended
		2002		2001
Cost of revenues:
	Web Properties	$	3	$	7
	Jeeves Solutions		3		7
Product development			6		288
Sales and marketing			18		52
General and administrative			11		31
	Total	$	41	$	385

5. IMPAIRMENT OF LONG-LIVED ASSETS

        During the first quarter of 2001, the Company identified indicators of possible impairment of its long-lived assets, consisting principally of acquired intangible assets and goodwill. These indicators included deterioration in the business climate for Internet advertising and other web-related companies, reduced levels of venture capital funding activity for Internet-based consumer businesses, significant declines in the market values of the Company's competitors in the Internet advertising industry and changes in its 2001 operating and cash flow forecasts.

        With the assistance of independent valuation experts, the Company performed asset impairment tests at the enterprise level, the lowest level for which there are identifiable cash flows related to its

9

acquired intangible assets and goodwill. The tests were performed by comparing the expected undiscounted cash flows for a four-year period, plus a terminal value for future cash flows, to the carrying amount of the long-lived assets resulting from purchase business combinations. Based on the results of these tests, the Company determined that the long-lived assets initially recorded in connection with its business combinations were impaired.

        With the assistance of independent valuation experts, the Company determined the fair value of the impaired long-lived assets. Fair value was determined using the discounted cash flow method. A write-down of long-lived assets totaling $339.2 million, allocated entirely to goodwill, was recorded during the first quarter of 2001 reflecting the amount by which the carrying amount of the assets exceed their respective fair values.

        During the first quarter of 2002, the Company recorded impairment charges totaling $2.2 million related to computer equipment and software, furniture and fixtures that we disposed of or were no longer in use.

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. During the three months ended March 31, 2001, the Company reported charges of approximately $668,000, which included approximately $280,000 related to adjustments to facility exit costs as a result of a rapidly deteriorating real estate market. In addition, the charge included additional severance pay and medical and other benefits of approximately $388,000. In September 2001, the Company's Board of Directors approved additional restructuring activities. The following table sets forth the restructuring activity during the three months ended March 31, 2002 and 2001, respectively (in thousands).

		Accrued Restructuring Costs, Beginning of Period		Restructuring Charges		Cash Paid			Accrued Restructuring Costs, End of Period
Three months ended March 31, 2002
Facility exit costs		$	18,119	$	—	$	(16,698	)	$	1,421
Severance and professional fees			310		—		(218	)		92
	Total	$	18,429	$	—	$	(16,916	)	$	1,513
Three months ended March 31, 2001
Facility exit costs		$	7,984	$	280	$	(1,403	)	$	6,861
Severance and professional fees			1,148		388		(1,411	)		125
	Total	$	9,132	$	668	$	(2,814	)	$	6,986

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7. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION

        For management reporting purposes, the Company is divided into two business segments, Web Properties and Jeeves Solutions. Results of operations for these business divisions include revenues, cost of revenues, gross profit (loss) and operating loss information as provided to the Company's Chief Executive Officer (CEO), who is the Chief Operating Decision Maker. Summarized financial information by segment for the three-month periods ended March 31, 2002 and 2001, as reported to the CEO is as follows (in thousands):

Three months ended:	Web Properties			Jeeves Solutions			Other			Total
	(unaudited)
March 31, 2002
Revenues	$	10,804		$	5,273		$	—		$	16,077
Cost of revenues		3,743			2,043			—			5,786
Gross profit	$	7,061		$	3,230		$	—		$	10,291
Segment loss from operations	$	(4,162	)	$	(4,855	)	$	—		$	(9,017	)
Unallocated corporate operating expense		—			—			(2,835	)		(2,835	)
Total operating loss										$	(11,852	)

Three months ended:	Web Properties			Jeeves Solutions			Other			Total
	(unaudited)
March 31, 2001
Revenues	$	9,027		$	10,056		$	—		$	19,083
Cost of revenues		4,238			4,309			—			8,547
Gross profit	$	4,789		$	5,747		$	—		$	10,536
Segment loss from operations	$	(9,816	)	$	(5,828	)	$	—		$	(15,644	)
Unallocated corporate operating expense		—			—			(363,917	)		(363,917	)
Total operating loss										$	(379,561	)

        The Company provides its search and self-service technologies services internationally directly and through its joint ventures. Attribution of revenues by geographic region is based on the country in which the customer is domiciled. Geographic information on revenue is as follows (in thousands):

		Three Months Ended
		March 31, 2002		March 31, 2001
		(unaudited)
Revenues:
	North America	$	11,162	$	14,830
	United Kingdom		3,784		3,122
	Other International		1,131		1,131
	Total	$	16,077	$	19,083

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        Included in United Kingdom and Other International revenues are amounts from related parties of $2,772,000 and $4,814,000 for the three months ended March 31, 2002 and 2001, respectively.

8. COMPREHENSIVE LOSS

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

			Three Months Ended
			March 31, 2002			March 31, 2001
			(unaudited)
Net loss			$	(10,439	)	$	(378,210	)
Other comprehensive income:
	Change in unrealized gain on investments			(228	)		204
		Comprehensive loss	$	(10,667	)	$	(378,006	)

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

Forward-Looking Statements

        In addition to historical information, this Quarterly Report contains forward-looking statements. All statements, other than statements of historical facts included in this Quarterly Report, regarding our strategy, future operations, financial position, estimated revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. As contained herein, the words "expects," "anticipates," "believes," "intends," "will," and similar types of expressions identify forward-looking statements, although not all forward-looking statements contain these identifying words. These statements are based on information that is currently available to the Company, speak only as of the date hereof, and are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors." Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or to reflect any change in events, conditions, or circumstances on which any such forward-looking statement is based, in whole or in part. Readers should carefully review the risk factors described in other documents the Company files from time to time with the SEC, including the Annual Report on Form 10-K for the fiscal year ended December 31, 2001. The following discussion should be read in conjunction with our financial statements and the related notes contained elsewhere in this Quarterly Report.

OVERVIEW

        Ask Jeeves is a leading provider of search and self-service technologies. Our proprietary natural-language capabilities combined with patented search technology create an interaction centered on understanding users' specific needs and interests and connecting them to the most relevant information, products and services.

        Through our Web Properties Group, Ask Jeeves provides innovative, targeted and effective tools for reaching a broad base of highly valuable customers. The Company also syndicates services to portals, infomediaries, and content and destination sites to help companies increase e-commerce and advertising revenue through powerful search. 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 offers software and services that allow corporations to establish connected self service solutions that supplement the activities of call center, contact centers and marketing departments. Jeeves Solutions core software application, JeevesOne, allows customers to get answers to their questions, and with the use of additional modules, place orders and request status through a variety of connected enterprise transaction systems. In turn, through Jeeves Analytics, companies learn about user behavior, interests and trends, allowing them to better serve customer needs. Our technology and services increase user satisfaction while enabling corporations to profit from the interactions and retaining customers.

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Critical Accounting Policies

Revenue

        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. They consist primarily of advertising revenues and paid placement revenues.

        The Company generally recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectibility is probable. A significant portion of the Company's revenues from its Web Properties Group is derived from the sale of advertising on the Company's online Internet properties. Advertising offered ranges from "run-of-site" banner advertisements and sponsorships to keyword targeting and branded content. Revenue derived from such arrangements is recognized during the period that the service is provided, provided that no significant obligations remain at the end of the period. Such 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 revenue-sharing arrangements are recorded net of amounts paid to syndication partners, except when the Company acts as the primary obligor in the arrangement and bears risk with respect to the inventory of promotional space and credit risk, in accordance with Emerging Issues Task Force Issue No. 99-19, which expense is recognized as a cost of sale and revenue is recorded on a gross basis. Revenues from paid placements are generated when a user clicks on the answer that links to a merchant's Web site on a cost per click, or CPC basis.

        Revenues from our Jeeves Solutions Group are derived from two sources: 1) software license revenues and; 2) services revenue. Software license revenues are generated from companies licensing the rights to use our natural language and customer intelligence technologies for use on corporate websites. Services revenue is generated from sales of maintenance agreements, consulting services and training services.

License Revenue

        We recognize software license revenue in accordance with AICPA Statement of Position 97-2, "Software Revenue Recognition," (SOP 97-2) as amended by Statement of Position 98-9. SOP 97-2 provides specific industry guidance and stipulates that revenue recognized from software arrangements is to be allocated to each element of the arrangement based on the relative fair value of the elements. Under SOP 97-2, the determination of fair value is based on the objective evidence that is specific to the vendor. If such evidence of fair value for each element of the arrangement does not exist, all revenue from the arrangement is deferred until such time that evidence of fair value does exist or until all elements of the arrangement have been delivered.

        We recognize license revenue over the core implementation period if implementation services are included in the original license arrangement and are considered to be essential to the functionality of the software. As a result, even where we have a signed license agreement for the purchase of our software and have delivered the software, license revenue recognition depends on whether we have begun core implementation. For license agreements under which we have no implementation responsibility, or where implementation is not considered to be essential to the functionality of the software, we recognize revenue upon delivery of the software. Examples of situations under which we have no implementation responsibility include additional license sales to existing customers or

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customers who elect to use internal or third party resources to implement the software. Software license arrangements where a service element is critical to the functionality of the software are recognized ratably over the life of the arrangement, commencing upon implementation.

        We enter into distributor agreements that typically provide for sublicense fees based on a percentage of list price. Sublicense fees are generally recognized when persuasive evidence of an arrangement between the distributor and their customer exists, "sell through", the software is delivered to their customer, collection is probable and the fee is fixed or determinable. Our agreements with our end customers and distributors do not contain product return rights.

Service Revenue

        We generally provide consulting and training services on a time and materials basis. We provide maintenance and support services under renewable, term maintenance agreements, which we price as a percentage of our license fees. Maintenance and support fee revenue is recognized ratably over the contractual term, generally twelve months, commencing from the implementation of service. Amounts invoiced prior to service implementation are recorded as deferred revenue, with recognition commencing upon service implementation.

Impairment of Long-lived Assets

        The Company's long-lived assets include intangible assets. At March 31, 2002, the Company had $4.8 million of other intangible assets. In assessing the recoverability of the Company's other intangibles the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for these assets not previously recorded. Effective as of January 1, 2002 the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," (SFAS 142) and was required to analyze its goodwill for impairment issues during the first six months of fiscal 2002, and then on a periodic basis thereafter. The adoption of SFAS 142 did not have a material impact on the Company's consolidated financial statements. During the first quarter of 2002, the Company recorded impairment charges totaling $2.2 million related to computer equipment and software, furniture and fixtures that we disposed of or were no longer in use.

RESULTS OF OPERATIONS

Revenues

		Three Months Ended March 31,
(dollars in thousands)
		2002		Change		2001
Web Properties revenue		$	10,804	19.7	%	$	9,027
	Percentage of total revenues		67.2%				47.3%
Jeeves Solutions revenue		$	5,273	(47.5	)%	$	10,056
	Percentage of total revenues		32.8%				52.7%
Total revenue		$	16,077	(15.8	)%	$	19,083

Web Properties revenue

        Web Properties revenues increased 19.7% to $10.8 million in the first quarter of 2002, as compared with $9.0 million for the corresponding period in 2001. Advertising revenues totaled $6.0 million and $7.8 million for the first quarter of 2002 and 2001, respectively. Paid placement revenues were $4.8 million and $1.2 million for the first quarter of 2002 and 2001, respectively. Web Properties revenues continued to be impacted in the first quarter of 2002 by softer demand for online advertising,

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most significantly with respect to banner advertising. The decrease in revenue from the weak banner advertising market was partially offset by the inclusion of Ask Jeeves UK advertising sales for the second half of the quarter, subsequent to our acquisition and consolidation of the entity, as well as by revenue from new ad products, such as Branded Animation, Interstitials and E-mail, which were introduced during the latter part of 2001. The growth in paid placement revenue is due to the launch of new products, including Paid Links and Branded Responses, as well as the continued development of existing paid placement products.

        Traffic on our properties continued its growth with total page views increasing to 1.57 billion in the first quarter of 2002 from 1.45 billion during the fourth quarter of 2001 and unique users increasing to 16.0 million in March 2002 as compared with 15.6 million in December 2001.

        We expect the launch of our Teoma.com site out of the beta stage will result in additional growth in traffic. Further, the series of enhanced ad products launched by the Company during the second half of 2001 and the planned introduction of additional products during 2002 is expected to result in favorable quarter over quarter revenue comparisons during the second quarter of 2002.

Jeeves Solutions revenue

        Jeeves Solutions revenues decreased 47.5% to $5.3 million as compared with $10.1 million for the three months ended March 31, 2002 and 2001, respectively. These revenues consisted of licensing fee revenues of $3.0 million and $6.0 million for the three months ended March 31, 2002 and 2001, respectively. License revenue decreased in the first quarter of 2002 as compared with 2001 due primarily to the termination of the international licensing arrangements with our UK and Spanish language joint ventures. Services revenue was $2.3 million and $4.1 million for the three months ended March 31, 2002 and 2001, respectively. Service revenue in the first quarter of 2002 was impacted by the decrease in new customer bookings in the latter half of 2001. A significant portion of services revenues result from the provision of consulting and training services. Such services frequently are associated with new customer bookings. When customers renew subscription-based contracts, such renewals may not result in additional consulting service revenue.

        We expect the challenging advertising and information technology markets to continue into the near future. Further, we acquired full ownership of our Spanish language and United Kingdom operations, resulting in the termination of those related license arrangements. The termination of these license revenues will be offset by media revenues from the consolidation of the Ask Jeeves UK web property, as noted in the discussion above. We anticipate that these factors will combine to result in decreased quarter over quarter revenue comparisons for Jeeves Solutions for the second quarter of 2002. Beginning in the second half of 2002, we expect revenues will begin to show consecutive quarter growth, driven by increased market penetration of JeevesOne and by other new product introductions.

Gross Margin

		Three Months Ended March 31,
(dollars in thousands)
		2002		Change		2001
Web Properties gross profit		$	7,061	47.4	%	$	4,789
	Web Properties gross margin		68.6%				45.5%
Jeeves Solutions gross profit		$	3,230	(43.8	)%	$	5,747
	Jeeves Solutions gross margin		31.4%				54.5%
Total gross profit		$	10,291	(2.3	)%	$	10,536
	Total gross margin		64.0%				55.2%

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Web Properties gross margin

        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 and amortization charges related to technology from certain of our acquisitions and licenses. Gross margin for Web Properties increased 47.4% in the first quarter of 2002 to $7.1 million, as compared with $4.8 million in 2001. On a dollar basis, cost of revenues decreased $495,000 to $3.7 million in the first quarter of 2002 as compared with 2001, reflecting a significant decrease in amortization charges due to impairment write-downs on acquired technology taken during 2001 as well as decreased compensation and compensation-related costs and facilities charges relating to our restructuring activities during 2001.

        We expect Web Properties gross margin to continue to improve in 2002, as we realize the cost savings from our restructuring activities and realize scale benefits from increases in revenue.

Jeeves Solutions gross margin

        Cost of revenues for our Jeeves Solutions Group consists primarily of salaries and related personnel costs and other direct costs to provide consulting, and licensing to our corporate customers. Cost of revenues for Jeeves Solutions also includes amortization charges related to certain technology assumed as part of our acquisitions and through licenses. Gross margin for Jeeves Solutions decreased 43.8% in the first quarter of 2002 to $3.2 million, as compared with $5.7 million for 2001. On a dollar basis, cost of revenues decreased $2.3 million to $2.0 million for the first quarter of 2002 as compared with 2001, reflecting significant decreases in compensation and compensation-related costs and facilities charges relating to our restructuring activities during the year. This decrease in costs was offset by the decrease in Jeeves Solutions revenue during the period.

        We expect Jeeves Solutions gross margin as a percentage of revenue to continue to fall slightly in the second quarter of 2002, reflecting the termination of international license arrangements with two of our joint ventures. Beginning in the second half of the year, we expect Jeeves Solutions gross margin, as a percentage of revenue, to improve as the JeevesOne product increases market penetration, with full year 2002 margins expected to be higher than 2001.

Operating Expenses

		Three Months Ended March 31,
(dollars in thousands)
		2002		Change		2001
Product development		$	4,589	(18.1	)%	$	5,601
	Percentage of total revenues		28.5%				29.4%
Sales and marketing		$	10,015	(28.6	)%	$	14,028
	Percentage of total revenues		62.3%				73.5%
General and administrative		$	5,267	(33.1	)%	$	7,869
	Percentage of total revenues		32.8%				41.2%
Stock-based compensation		$	41	(89.4	)%	$	385
	Percentage of total revenues		0.3%				2.0%
Amortization of goodwill and other intangible assets		$	—	(100.0	)%	$	22,369
	Percentage of total revenues		—%				117.2%

Product Development Expenses

        Product development expenses consist primarily of salaries and related personnel costs, consultant fees and expenses related to the design, development, testing and enhancement of our technology and

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services. To date, all software development costs have been expensed as incurred. Product development expenses, as a percentage of total revenues, decreased to 28.5% for the first quarter of 2002 from 29.4% in 2001. On a dollar basis, product development expenses decreased by $1.0 million in the first quarter of 2002 as compared with the same period in 2001. This cost reduction reflects the benefits from our restructuring activities during the year. Decreased compensation and compensation-related costs comprise the majority of the dollar decrease in 2002 over 2001, and resulted from our focus on key, strategic areas of product development to support our business plan and reduction in the number of product development initiatives that are not essential to delivering future financial results.

Sales and Marketing Expenses

        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. Sales and marketing expenses, as a percentage of total revenues, decreased to 62.3% for the first quarter of 2002, as compared with 73.5% in 2001. On a dollar basis, sales and marketing expenses decreased 28.6% to $10.0 million in the first quarter of 2002 as compared with $14.0 million in 2001. The decrease in such expenses reflects cost-cutting measures in variable spending areas such as advertising, promotional programs and public relations, as well as lower variable compensation such as commissions and bonuses. During 2001, we replaced mass-market promotion with targeted marketing initiatives, resulting in an a decrease in the total amount of spending.

General and Administrative Expenses

        General and administrative expenses consist primarily of salaries and related costs for general corporate functions, recruiting and fees for other professional services, provision for doubtful accounts as well as various accounting and legal costs associated with operating our business. General and administrative expenses, as a percentage of revenues, decreased to 32.8% for the first quarter of 2002 from 41.2% in 2001. On a dollar basis, general and administrative expenses decreased 33.1% to $5.3 million in the first quarter of 2002 as compared with $7.9 million in 2001, reflecting the benefits of our restructuring efforts during 2001. Expenses were lower primarily due to decreased compensation and compensation-related expenses as well as a decreased use of outside consultants and decreased legal fees, due to the resolution of certain legal matters during 2001.

Stock-based Compensation

        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 is amortized over the vesting period. For the three months ended March 31, 2001and 2000, we recorded $41,000 and $385,000, respectively, in amortization of deferred stock-based compensation in connection with the grant of stock options to employees and consultants. The decrease in amortization is due to our graded vesting method of amortization resulting in larger deferred compensation charges being incurred in earlier periods.

Amortization of Goodwill and Other Intangible Assets

        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. For the three months ended March 31, 2001, we recorded $22.4 million in amortization of goodwill and other intangible assets, compared with no amortization for the three months ended March 31, 2002. During the fiscal year 2001, we recorded an impairment loss of $355.3 million on goodwill and other intangibles relating

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to certain of our acquisitions. This impairment loss reduced our recorded basis in goodwill and other intangibles and had the effect of reducing amortization expense during 2002.

		Three Months Ended March 31,
(dollars in thousands)
		2002		Change		2001
Impairment of long-lived assets		$	2,231	(99.3	)%	$	339,177
	Percentage of total revenues		13.9%				1,777.4%
Restructuring and other		$	—	NA		$	668
	Percentage of total revenues		0.0%				3.5%

Impairment of Long-lived Assets

        During the first quarter of 2002, we recorded impairment charges totaling $2.2 million related to computer equipment and software, furniture and fixtures that we disposed of or were no longer in use.

        During the first quarter of 2001, we identified indicators of possible impairment of our long-lived assets, consisting principally of acquired intangible assets and goodwill. These indicators included deterioration in the business climate for Internet advertising, decreases in average advertising rates, reduced levels of venture capital funding activity for Internet-based consumer businesses, significant declines in the market values of our competitors in the Internet advertising industry and changes in our 2001 operating and cash flow forecasts.

        With the assistance of independent valuation experts, we performed asset impairment tests at the enterprise level, the lowest level for which there are identifiable cash flows related to our acquired intangible assets and goodwill. The tests were performed by comparing the expected undiscounted cash flows for a four-year period, plus a terminal value for future cash flows, to the carrying amount of the long-lived assets resulting from purchase business combinations. Based on the results of these tests, we determined that long-lived assets initially recorded in connection with our business combinations were impaired.

        We measured the impairment loss related to long-lived assets based on the amount by which the carrying amount of such assets exceeded its fair value. Measurement of fair value was based on an analysis by us, with assistance from independent valuation experts, of the future discounted cash flows at the enterprise level. In performing this analysis, we used the best information available in the circumstances including reasonable and supportable assumptions and projections. The discounted cash flow analysis considered the likelihood of possible outcomes and was based on our best estimate of projected future cash flows, including terminal value cash flows expected to result from the disposition of the asset at the end of its useful life, discounted at a rate of 26 percent. The discount rate was based on historical risk premiums required by investors for companies of our size, industry and capital structure and included risk factors specific to us. The analysis indicated that our long-lived assets were impaired by an amount totaling $339.2 million. Accordingly, we recorded an impairment write-down, allocated to goodwill, of this amount during the first quarter of 2001.

Restructuring Costs

        In response to new challenges in the business environment, 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. As part of the restructuring program, the Company implemented a reduction in force of approximately 152 positions. During the three months ended March 31, 2001, the Company reported charges of approximately $668,000, which included approximately $280,000 related to adjustments to facility exit costs as a result of a rapidly deteriorating real estate market. In addition, the charge included additional severance pay and medical

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and other benefits of approximately $388,000. The Company completed the December 2000 restructuring program during the fourth quarter of the year ended December 31, 2001.

Interest and other income (expense), net

		Three Months Ended March 31,
(dollars in thousands)
		2002			Change		2001
Interest and other income (expense), net		$	1,413		4.6	%	$	1,351
	Percentage of total revenues		8.8	%				7.1	%

        Interest income was $514,000 as compared with $1.3 million for the three months ended March 31, 2002 and 2001, respectively. Interest income relates primarily to interest earned on fixed income securities and correlates with the average balance of those investments and prevailing interest rates. The decrease in interest income in the first quarter of 2002 compared with 2001 relates to decreases in both average balances and prevailing interest rates during the year. Interest expense was $183,000 and $54,000 for the three months ended March 31, 2002 and 2001, respectively. The increase in interest expense is attributable to the interest charges incurred on borrowings under our line of credit.    In addition to interest income and expense, during the three months ended March 31, 2002, we recorded a gain of $974,000 representing the remaining balance of deferred license fees paid to the Company by Ask Jeeves UK, for a licensing arrangement that was terminated when we acquired the remaining outstanding equity interest of Ask Jeeves UK.

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 partners to potential customers;

        —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.

        —seasonal and other fluctuations in demand for our 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 and retain key personnel; and

        —costs relating to possible acquisitions and integration of technologies or businesses;

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

        As Internet advertising continues the transition from an emerging to a more developed market, seasonal and cyclical patterns may develop in our industry that may also affect our revenues. For example, we have historically experienced stronger periods of growth in the second and fourth quarters of the year. Similar to traditional media, this may result in our advertising sales being lower during summer vacation period. 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

(dollars in thousands)		March 31, 2002			December 31, 2001
Unrestricted cash, cash equivalents and marketable securities		$	40,802		$	51,796
Restricted cash, cash equivalents and marketable securities		$	11,106		$	24,806
Total cash, cash equivalents and marketable securities		$	51,908		$	76,602
	Percentage of total assets		62.0	%		68.8	%
Current ratio*			2.05			1.69
Days sales outstanding			50			51
*Calculated excluding deferred revenue

	Three Months Ended March 31,
(dollars in thousands)
	2002			2001
Cash used in operating activities	$	(29,789	)	$	(15,682	)
Cash provided by investing activities	$	23,828		$	6,315
Cash provided by financing activities	$	528		$	330

        Our principal source of liquidity is our cash, cash equivalents and investments in marketable securities. Since our inception, we have financed our operations primarily through the private placement of equity securities, our initial public offering in June 1999 and our follow-on offering in March 2000. As of March 31, 2002, we had $51.9 million in cash and cash equivalents, and marketable securities, of which $11.1 million was reported as restricted. Marketable securities consist of highly liquid instruments (primarily U.S., state and municipal government securities and corporate debt securities) with short maturities. Of this amount, $27.7 million was categorized as cash and cash equivalents at March 31, 2002, representing a decrease of $5.4 million from December 31, 2001. The Company considers all cash and highly liquid investments with an original maturity of less than three months at the date of purchase to be cash equivalents. The decrease resulted primarily from cash used in operations of $29.8 million, partially offset by cash flows from investing activities and financing activities of $23.8 million and $528,000, respectively.

        Net cash used in operating activities of $29.8 million resulted primarily from net losses of $10.4 million adjusted for non-cash items, changes in working capital and other items and from the payment of restructuring liabilities. Significant non-cash items included asset write-offs of $2.2 million and depreciation and amortization of $2.4 million. Changes in working capital used $24.6 million. Cash used by working capital largely resulted from decreases in accrued restructuring of $16.9 million and a decrease in deferred revenue of $3.2 million. The decrease in deferred revenue was due to the acquisition of the outstanding interest in Ask Jeeves UK and related termination of the license agreement, resulting in the recognition of a one-time gain relating to license fees which had been paid in advance and deferred, as well as to the decrease in advance bookings of Jeeves Solutions licensing arrangements during 2001.

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        Net cash provided by investing activities was $23.8 million for the three months ended March 31, 2002. Cash from investing activities resulted primarily from the net redemption of marketable securities of $19.0 million, partially offset by capital expenditures and business acquisitions.

        Net cash provided by financing activities was $528,000 for the three months ended March 31, 2002. Cash from financing relates primarily to cash proceeds from exercises of stock options of $748,000.

        We have 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 at LIBOR plus 0.5% (5.0% at March 31, 2002). All borrowings are collateralized by our marketable securities. Borrowings under the line are subject to various covenants. As of March 31, 2002, $11.0 million was outstanding under the line of credit.

        In February 2002, we settled a ten-year lease obligation in exchange for a payment of $16.0 million. Additionally, we terminated a standby letter of credit securing this obligation in the amount of $13.7 million, which resulted in a corresponding reduction of restricted cash and marketable securities.

        The following summarizes the Company's contractual obligations at March 31, 2002, and the effect such obligations are expected to have on its liquidity and cash flows in future periods:

(in thousands)		Total		Less than 1 year		1-3 years		4-5 years
Borrowings under line of credit		$	11,000	$	11,000	$	—	$	—
Capital lease obligations			1,319		973		346		—
Non-cancelable operating leases			14,635		3,617		8,013		3,005
	Total	$	26,954	$	15,590	$	8,359	$	3,005

        We have no material commitments or obligations other than those under leases and our line of credit. As of March 31, 2002, we have one unconsolidated subsidiary in the form of a joint venture in Japan, which generally provides Ask Jeeves' services within a defined geographic region. We did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities nor does we have any commitment or intent to provide additional funding to any such entities. As such, we are not materially exposed to any market, credit, liquidity or financing risk that could arise if we had engaged in such relationships.

        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 products and services, our brand promotions and any future acquisitions or divestitures.

        We anticipate that our existing unrestricted cash and marketable securities will be sufficient to fund our anticipated needs for working capital and capital expenditures for at least the next twelve months. 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 during that twelve-month period or thereafter, 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, we will eventually be unable to continue our operations. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our existing stockholders will be reduced.

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RISK FACTORS

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

        We incurred net losses in each year since inception and, as of March 31, 2002, we had an accumulated deficit of approximately $685.9 million. We expect to have net losses and negative cash flows, as determined under accounting principles generally accepted in the United States, for at least the next twelve months. The size of these net losses will depend, in part, on the rate of growth of our revenues from our advertisers and corporate customers 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, enhance our search technologies and services and expand our other services.

        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 and are unable to obtain additional financing, then we will eventually be unable to continue our operations.

We Rely on Revenues Derived from Internet Advertising and Licensing of our Products and Services, Which are Subject to Uncertain Demand and are Difficult to Forecast Accurately

        Internet Advertising.    We expect that revenues from advertising will continue to represent a significant portion of our total revenues for the foreseeable future. We have experienced a decrease in our advertising revenues that may continue for the foreseeable future due to the prevailing conditions in the online advertising market and to 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. 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 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.

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        Licensing.    For the year ended December 31, 2001, $21.0 million, or approximately 31.6% 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 for this period included intellectual property licensing revenues of approximately $19.0 million from our joint ventures. In October 2001 and February 2002, we acquired full ownership of Ask Jeeves en Espanol and Ask Jeeves UK, respectively. Consequently, these intellectual property licenses have terminated or will terminate and will result in a decline in future licensing revenues in Jeeves Solutions. If, in the future, we are unable to generate sufficient licensing revenue from our corporate customers and/or our remaining joint venture, our results of operations could be substantially impaired.

        JeevesOne.    In September 2001, we launched JeevesOne, the Company's first productized software product. While we believe that the product responds to market need for this type of enterprise software, there is no assurance that JeevesOne will achieve market acceptance. If we are unable to generate significant sales of software licenses, our business could be seriously harmed.

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

        We currently anticipate that our cash, cash equivalents and marketable securities will be sufficient to meet our anticipated needs for working capital and capital expenditures for at least twelve months. If, after twelve months, 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 products and 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 products and 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. If we do not achieve or sustain profitability in the future and are unable to obtain additional financing, then we will eventually be unable to continue our operations.

We Rely on Third-Party Advertising Delivery Which Could Effect Our Ability to Deliver Advertisements On Our Web Sites

        We rely on third-party advertising services, provided by DoubleClick, Inc. to deliver advertisements to our users. DoubleClick is currently the only provider available in the market that meets our delivery needs. If DoubleClick 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.

Some of Our Web Properties Customers are Emerging Internet Companies that Represent Credit Risks

        We expect to continue to derive a significant portion of our revenues from sales 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 result of a recent downturn in economic activity and reductions in funding for Internet companies from public capital

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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 for any reason, our business will suffer.

Our Search Technologies and Services are Unproven

        We will be successful only if Internet users adopt our search technologies and services 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. Our search technologies are novel and unproven. It is difficult to predict the extent and rate of user adoption of our search technologies and services. Users of our 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 search technologies and services will occur.

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:

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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;



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growth in utility and accessibility to desired information may slow, decreasing the number of new Internet users;



•

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 may impact use of the Internet; and



•

privacy concerns, including those related to the ability of Web sites to gather user information without the user's knowledge or consent may limit the Internet's use.

We Depend on Third Party Content to Provide the Answers to Questions Asked on Our Web Sites

        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.

        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.

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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, Google Inc., Northern Light, 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 Overture Services, Inc., 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 provide customer self-service solutions for corporate customers. For example, Jeeves Solutions competes with other companies that provide advanced natural language solutions, such as iPhrase Technologies, Inc. and Kanisa Inc.; search technology companies, such as Inktomi Corporation and Verity, Inc.; knowledge management companies such as Primus Knowledge Systems, and eGain Communications Company; and customer relationship management companies, such as Siebel Systems, Inc. and Kana Communications, 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 and syndicators. 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 Growth Will Depend on Our Ability to Develop and Maintain Our Brands

        We believe that favorable consumer and business community perceptions of the Ask Jeeves brands are essential to our future success. Accordingly, we intend to continue pursuing brand-enhancement strategies, which may include mass market and multimedia advertising, promotional programs and public relations activities. 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 and corporate customers 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.

If We Are Unable to Rapidly and Successfully Develop New Products, New Product Enhancements and Integrate Acquired Technologies, We May Be Unable to Meet Customer Demand

        We operate in a highly competitive, rapidly changing environment and our future success depends on our ability to develop and introduce new products that meet the needs of our customers. In our Web Properties division, we are currently developing new advertising products such as Premier Listings, Site Submit and Index Express in order to meet new demands in the marketplace. If we are unable to develop these and other new and enhanced products, our business and operating results may be

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adversely affected. Also, many of our products must be available on a variety of operating system platforms. We must ensure that such products are available on the platforms that our customers require. For example, at March 31, 2002, JeevesOne was not yet available on the Solaris Operating Environment. We must successfully launch JeevesOne on this platform in order to meet customer demand.

        Additionally, we have acquired technology to accelerate our ability to meet new product requirements and enhancements. For example, in September 2001 the Company acquired Teoma Technologies, Inc. and in January 2002, we announced the acquisition of certain technology from Octopus Software, Inc. We must continue to scale and integrate these technologies into our existing and new products. If we are unable to successfully and rapidly integrate these and other technologies into our products, our business may be harmed.

If We Are Unable to Continue to Improve Operations Efficiencies, We May Be Unable to Meet Customer Demand

        Our past and planned growth in traffic may continue to place strain on our current and planned systems. We must continue to develop new technologies to improve our ability to serve and manage the growth on our sites as well as the sites of our syndication partners. Additionally, we may not have adequate capacity to meet demand for new products. If any of this were to occur, it could damage our reputation and limit our future growth.

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 existing 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 cross sales of other products, or if such renewals are obtained on terms less favorable than the original contract, our business could be adversely affected.

Implementing Our Services for Some of Our Corporate Customers is Labor Intensive

        Because the implementation of some of our services is labor intensive, it is difficult to predict the length of the development cycle in Jeeves Solutions. 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 some 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.

If Accounting Interpretations Relating to Revenue Recognition Change, our Reported Revenues Could Decline

        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

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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. We believe that our revenue recognition policies are 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 our current revenue accounting practices, which could cause us to recognize lower revenues. These changes may extend sales cycles, increase administrative costs and otherwise adversely affect our business.

Events or Changes in Circumstances May Result in Additional Impairment of Our Acquired Intangible Assets

        We recorded significant amounts of goodwill and other intangible assets on our consolidated financial statements. In the first quarter of 2001, we identified indicators of possible impairment of these assets and recorded an impairment charge of $339.2 million to our results of operations during that quarter. In the third quarter of 2001 we identified additional indicators of possible impairment of these assets and recorded an additional impairment charge of $16.1 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 in the future a determination is made that the assets are impaired, it could result in a significant reduction in the carrying value of such assets and which could harm our consolidated financial position or results of operations.

Our Business Will Suffer in a Variety of Ways Unless Overall Economic Conditions Improve

        Many of our customers are making and will continue to make significant cutbacks in their sales and marketing efforts and capital expenditures, which will in turn adversely affect our financial results.

        Current economic conditions pose a variety of additional challenges to our business. The financial condition of many of our customers has deteriorated and continues to deteriorate because of their inability to raise additional funds for their businesses. The ability of these customers to generate additional revenue for us has been reduced dramatically, if not eliminated. Our inability to rapidly replace this portion of our customer base will have a material adverse impact on our business.

Recent Terrorist Activities and Resulting Military and Other Actions Could Adversely Affect Our Business

        Terrorist attacks in New York and Washington, D.C. in September of 2001 disrupted commerce throughout the world. The continued threat of terrorism and the potential for military action and heightened security measures in response to this threat may cause significant disruption to commerce throughout the world. To the extent that disruptions result in a general decrease in corporate spending on information technology or advertising, our business and results of operations could be materially and adversely affected. We also may experience delays in receiving payments from customers that have been affected by the attacks, which, in turn, would harm our cash flow. We are unable to predict whether the threat of terrorism or the responses thereto will result in any long-term commercial disruptions or if such activities or responses will have a long-term adverse effect on our business, results of operations or financial condition. These and other developments arising out of the attacks may make the occurrence of one or more of the factors discussed under "Risk Factors" likely to occur.

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Our Business Realignments May Not Result in the Intended Benefits

        In the fourth quarter of 2000, we announced a realignment of our business organization in an effort to streamline operations, increase revenues, reduce costs and bring staffing in line with our then current and anticipated requirements. During 2001 we took additional steps to rationalize the resources required to operate efficiently in the prevailing market. Through the realignments, our two 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 have implemented workforce reductions and facility closures as necessary to rationalize the resources required to operate efficiently in the current market.

        In 2001, our business realignments resulted in reduced operating costs, however we cannot assure that we will be able to continue to reduce operating costs, or that operating costs will not increase in the future. For example, we incurred additional operating costs as a result of our acquisition of Ask Jeeves UK. If we are not successful in increasing revenues and decreasing costs, we may never achieve profitability.

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

        Our business realignment included reductions in our workforce in order to reduce costs and bring staffing in line with our anticipated requirements. 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 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.

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, including Teoma Technologies, Inc. in September 2001 and Ask Jeeves UK in February 2002. 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:

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difficulties in assimilation of acquired personnel, operations, technologies or products;



•

unanticipated costs associated with acquisitions;



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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;



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potential patent or trademark infringement from acquired technologies.



•

adverse effects on our current employees and the inability to retain employees of acquired companies;

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•

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

We Must Continually Improve Our Systems, Controls and Procedures

        We have a limited operating history, and we initially experienced rapid growth, which placed a significant strain on our managerial, financial and operational resources. We must continue to improve our operational and financial systems and managerial controls and procedures, train and manage our workforce with reduced 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.

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 MFN, Exodus, Qwest and Hosting.com 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. Our Web sites 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.

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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 or subject us to litigation. We could be subject to denial of service, vandalism and other attacks on our 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.

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.

Our International Properties May Not Be Successful

        In addition to our activities in the United States, we market our search technologies and services in markets outside of the United States. We provide our services in the United Kingdom, Japan, Australia and to the Spanish-speaking market worldwide either directly or through joint ventures. In October 2001 we dissolved our Spanish language venture, Ask Jeeves en Espanol. In February 2002, we acquired full ownership of our UK joint venture, Ask Jeeves UK.

        Our expansion into international markets requires substantial management attention and financial resources. We cannot be certain that our investment in establishing operations in other countries will produce the desired levels of revenue. We may not realize planned operational efficiencies from our international properties, or they may compete for resources. In addition, our foreign operations are subject to other inherent risks and problems, including:

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the impact of business cycles and downturns in economies outside the United States;



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longer payment cycles and greater difficulty in accounts receivable collections;



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unexpected changes in regulatory requirements;



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difficulties and costs of staffing and managing foreign operations;

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reduced protection for intellectual property rights in some countries;



•

unanticipated tax costs associated with the cross-border use of intangible assets;



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political and economic instability;



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fluctuations in currency exchange rates;



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difficulty in maintaining effective communications with employees and customers due to distance, language and cultural barriers;



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lower brand recognition for Ask Jeeves and the Jeeves character in non-English speaking counties;



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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



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competition in international markets from a broad range of competitors, including AltaVista, Google, Overture Services, Inc., LookSmart, 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 search technologies and services for corporate customers and the timing of revenue recognition with respect to contracts with corporate customers;



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our ability to obtain new advertising contracts, maintain existing ones and effectively manage our advertising inventory;



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the number of users of our Web sites, Web sites syndicating our services and the Web sites of our corporate customers;



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seasonal and other fluctuations in demand for our services and for advertising space on our Web sites;



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our ability to develop and introduce new technology;



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announcements and new technology introductions by our competitors;



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our ability to attract, retain and motivate key personnel;



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credit risk of Internet companies within our customer base;



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rate changes for advertising on our Web sites;



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marketing expenses and technology infrastructure costs as well as other costs that we may incur as we expand our operations;



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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;



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terminations of significant license arrangements or large numbers of license arrangements resulting in the discontinuation of licensing revenues for those contracts; and



•

the other factors discussed in this section on "Risk Factors."

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        We have experienced seasonality in user traffic to our Web sites, including lower traffic during the year-end holiday season and 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 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:

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actual or anticipated variations in quarterly operating results and announcements of technological innovations;



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new products or services offered by Ask Jeeves or its competitors;



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changes in financial estimates by securities analysts;



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changes in research coverage by securities analysts;



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conditions or trends in the Internet services industry and the online customer service segment in particular;



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Ask Jeeves' announcement of significant acquisitions, strategic partnerships, joint ventures or capital commitments;



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additions or departures of key personnel;



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sales by current holders of our common stock and general financial conditions and investor sentiment regarding Internet companies generally; and



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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. On October 25, 2001, a putative class action lawsuit captioned Leonard Turroff, et al. vs Ask Jeeves, Inc., et al. was filed against the Company and two of our officers and directors in the United States District Court for the Southern District of New York, alleging violation of Federal securities laws. This type of litigation could result in substantial costs and a diversion of management's attention and resources.

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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.

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 and in connection with acquisitions, the market price of our common stock could fall. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.

Failure to Comply With NASDAQ's Listing Standards Could Result in Our Delisting By NASDAQ From the NASDAQ National Market and Severely Limit the Ability to Sell Any of Our Common Stock

        Our stock is currently traded on the NASDAQ National Market. Under NASDAQ's listing maintenance standards, if the closing bid price of our common stock is under $1.00 per share for 30 consecutive trading days, NASDAQ may choose to notify us that it may delist our common stock from the NASDAQ National Market. If the closing bid price of our common stock does not thereafter regain compliance for a minimum of 10 consecutive trading days during the 90 days following notification by NASDAQ, NASDAQ may delist our common stock from trading on the NASDAQ National Market. There can be no assurance that our common stock will remain eligible for trading on the NASDAQ National Market. If our stock were delisted, the ability of our shareholders to sell any of our common stock at all would be severely, if not completely, limited.

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.

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

        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

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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.

We Need to Maintain 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. If we are unable to hire and retain qualified sales personnel our business may suffer.

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, imposed only a three-year moratorium 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. The legislation, which commenced October 1, 1998 and was to have expired on October 21, 2001, has since been given a five-year extension by the House of Representatives. It is unclear which steps the legislature will take next, and failure to continue to renew this legislation would allow various states to impose taxes on Internet-based commerce. The imposition of such taxes could impair the growth of the e-commerce marketplace and impair our ability to become profitable.

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        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 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.

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;

36

•

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, in April 2001, we adopted a stockholder rights plan and declared a dividend distribution of one right for each outstanding share of common stock to stockholders of record as of May 7, 2001. Each right entitles the holder to purchase one unit consisting of one one-thousandth of a share of our Series A Junior Participating Preferred Stock for $20 per unit. Under certain circumstances, if a person or group acquires 15% or more of our outstanding common stock, holders of the rights (other than the person or group triggering their exercise) will be able to purchase, in exchange for the $20 exercise price, shares of our common stock or of any company into which we are merged having a value of $40. The rights expire on May 7, 2011 unless extended by our board of directors. 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

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

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

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        During the three months ended March 31, 2002, the effects of changes in interest rates on the fair market value of our marketable investment securities and our earnings were not material. Further, we believe that the impact on the fair market value of our securities and our earnings for the remainder of the year from a hypothetical 10% change in interest rates would not be significant.

        The majority of our revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, since a portion of the operations consist of operations outside of the U.S., we enter into transactions in other currencies, primarily the British pound. We currently do not hedge our exposure to foreign exchange rate fluctuations. Our international business is subject to risks typical of an international business, including but not limited to differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions and foreign exchange rate volatility, particularly the exchange rate between the British pound and the U.S. dollar. The effect of foreign exchange rate fluctuations on the Company for the quarter ended March 31, 2002 was not material.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

        On October 25, 2001, a putative class action lawsuit captioned Leonard Turroff, et al. vs Ask Jeeves, Inc., et al. was filed against the Company and two of our officers and directors (collectively the "Individual Defendants") in the United States District Court for the Southern District of New York. Also named as defendants were Morgan Stanley & Co,, Inc., FleetBoston Robertson Stephens, Goldman Sachs & Co., U.S. Bancorp Piper Jaffray, and Dain Rauscher, Inc., the underwriters of the Company's initial public offering. The complaint alleges violations of Section 11 of the Securities Act of 1933 against all defendants, and violations of Section 15 of the Securities Act against the Individual Defendants in connection with the Company's initial public offering ("IPO"). An amended complaint was filed on December 6, 2001, which includes the same allegations in connection with Ask Jeeves' secondary offering in March 2000. The complaints seek unspecified damages on behalf of a purported class of purchasers of common stock between June 30, 1999 and December 6, 2000. We believe the claims are without merit and intend to defend the actions vigorously, however, an unfavorable outcome could have a material adverse effect on our operating results and financial position.

Item 2. Changes in Securities and Use of Proceeds

        On March 27, 2002, we issued an aggregate of 774,792 shares of our common stock to Carlton Communications PLC and Granada Media Group Limited, two holders of the entire issued share capital of Carlton & Granada Internet Limited ("CGIL"), a private company formed under the laws of the United Kingdom and our partner in the Ask Jeeves UK joint venture partnership. These shares had a fair market value of $1,250,000 and were issued as partial consideration for the acquisition of the outstanding share capital of CGIL in a private placement exempt from registration under Section 4(2) of the Securities Act of 1933, as amended (the "Act") and/or Regulation D promulgated under the Act. No underwriters were involved in this offering and no commissions or remuneration was paid in connection with the sales of these securities. Appropriate legends are affixed to the shares issued in this transaction. On March 26, 2002, a shelf registration statement on Form S-3 for these shares of common stock was declared effective by the SEC.

Item 3. Defaults Under Senior Securities

        Not applicable.

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

        Not applicable.

Item 5. Other Information

        Effective March 25, 2002, the remaining members of the Board of Directors elected Joshua C. Goldman as a member of the Board to fill the vacancy created by the resignation of Daniel J. Nova in September 2001.

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Item 6. Exhibits and Reports on Form 8-K

a) Exhibits

        The following exhibits are filed herewith or incorporated by reference:

Exhibit	Description
2.1(11)	Agreement relating to the Sale and Purchase of the Entire Issued Share Capital of Carlton & Granada Internet Limited, dated February 7, 2002, by and among Registrant, Carlton Communications, PLC, Granada Media Group Limited, Ask Jeeves International, Inc. and Ask Jeeves (Jersey) Limited.
3.1(1)	Certificate of Incorporation of the Registrant.
3.1.1(6)	Certificate of Designation of Series A Junior Participating Preferred Stock
3.2(1)	Bylaws of the Registrant.
4.1(1)	Reference is made to Exhibits 3.1 and 3.1.1.
4.2(1)	Specimen Certificate for Registrant's Common Stock.
4.3(1)	Warrant to purchase 15,000 shares of Common Stock granted by the Registrant to Antenna Group PR dated as of June 30, 1998.
4.4(1)	Warrant to purchase 20,000 shares of Common Stock granted by the Registrant to Antenna Group PR dated as of July 31, 1998.
4.5(1)	Warrant to purchase 8,000 shares of Common Stock granted by the Registrant to Antenna Group PR dated as of May 31, 1998.
4.6(6)	Rights Agreement, dated as of April 26, 2001, between the Registrant 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.
4.7(10)	Warrant to purchase 105,000 shares of Common Stock granted by Registrant to Boris Katz dated as of July 26, 2001.
4.8(10)	Warrant to purchase 70,000 shares of Common Stock granted by Registrant to Patrick Winston dated as of July 26, 2001.
10.1(1)	Amended and Restated 1996 Equity Incentive Plan.
10.2(1)	Form of Option Agreement for the Amended and Restated 1996 Equity Incentive Plan.
10.3.3(5)†	1999 Equity Incentive Plan, as Amended and Restated.
10.4.1(1)†	Form of Option Agreement for the 1999 Equity Incentive Plan.
10.4.2(5)†	Form of Option Agreement for the 1999 Equity Incentive Plan, as Amended and Restated.
10.5.1(1)†	1999 Employee Stock Purchase Plan.
10.5.2(1)†	1999 Employee Stock Purchase Plan, as Amended and Restated.
10.6(7)†	1999 Equity Incentive Plan, as Amended and Restated through May 25, 2000.
10.7(7)†	Form of Option Agreement for the 1999 Equity Incentive Plan, as Amended and Restated through May 25, 2000.
10.8(7)†	1999 Employee Stock Purchase Plan, as Amended and Restated through May 25, 2000.
10.12(1)	License Agreement dated as of October 2, 1998, by and between the Registrant and Compaq Computer Corporation.
10.18.1†(10)	Severance terms as of April 30, 2001, by and between the Registrant and Frank Vaculin.
10.19.3(5)†	Employment Agreement dated as of December 1, 2000, by and between the Registrant and Robert W. Wrubel.
10.26(1)	Form of Indemnity Agreement by and between the Registrant and each of its directors and executive officers.
10.28(1)	Office Lease dated as of April 29, 1999, by and between the Registrant and Emery Station Associates, L.L.C.
10.30(1)	Master Lease Agreement dated as of June 15, 1999, by and between the Registrant and Comdisco, Inc.

40

10.31(1)	Forms of Promissory Note and Stock Pledge Agreement for loans to executive officers.
10.33(2)	Agreement and Plan of Merger and Reorganization dated as of January 25, 2000, by and among the Registrant, Direct Hit Technologies, Inc. and Answer Acquisition Corp.
10.36(3)	Office Lease dated as of February 24, 2000, by and between the Registrant and Oakland City Center LLC.
10.37(4)	Lease Agreement dated as of May 15, 2000, by and between the Registrant and Oakland City Center, LLC.
10.39(5)†	Offer letter dated as of July 24, 2000, by and between the Registrant and Adam Klein.
10.39.1†(10)	Severance letter dated March 28, 2001, by and between the Registrant and Adam Klein.
10.40(5)†	Offer letter dated as of December 8, 2000, by and between the Registrant and A. George (Skip) Battle.
10.40.2(8)†	Offer letter of New Terms of Employment dated April 3, 2001, by and between the Registrant and A. George (Skip) Battle.
10.41(8)†	Promissory Note dated March 15, 2001 of Steven Sordello, as Maker, in favor of the Registrant.
10.42(8)†	Offer letter dated April 23, 2001, by and between the Registrant and Steve Berkowitz.
10.44.1†(10)	Promissory Note secured by Deed of Trust, dated February 29, 2000, of Enrique T. Salem and Marcela M. Salem, as Borrower, in favor of the Registrant.
10.44.2†(10)	Addendum to Promissory Note secured by Deed of Trust, dated February 29, 2000, of Enrique T. Salem and Marcela M. Salem, as Borrower, in favor of the Registrant.
10.45.1†(10)	Incentive Agreement, entered into as of January 2, 2001, by and between the Registrant and Claudio Pinkus.
10.45.2†(10)	Amendment to Incentive Agreement, dated June 18, 2001, by and between Registrant and Claudio Pinkus.
10.45.3†(10)	Second Amendment to Incentive Agreement, entered into as of August 29, 2001, by and between Registrant and Claudio Pinkus.
10.45.4†(10)	Third Amendment to Incentive Agreement, entered into as of November 27, 2001, by and between the Registrant and Claudio Pinkus.
10.46.1†(10)	Incentive Agreement, entered into as of January 2, 2001, by and between the Registrant and George Lichter.
10.46.2†(10)	Amendment to Incentive Agreement, dated June 18, 2001, by and between Registrant and George Lichter.
10.46.3†(10)	Second Amendment to Incentive Agreement, entered into as of August 30, 2001, by and between Registrant and George Lichter.
10.46.4†(10)	Separation Agreement, dated February 6, 2002, made by and between George Lichter and Registrant.
10.47.1(9)	Agreement and Plan of Merger and Reorganization, dated as of September 10, 2001, by and among the Registrant, Answer Acquisition Corp. No. 2, and Teoma Technologies, Inc., and, solely with respect to Article X, Hawk Holdings, LLC, as Stockholders' Agent, and Chase Manhattan Bank and Trust N.A., as Escrow Agent.
10.47.2(9)	Registration Rights Agreement, dated September 10, 2001, by and between the Registrant and the multiple parties listed therein.
10.48(10)	Lease Amendment and Termination Agreement, made February 4, 2002, by and between Registrant, as Tenant, and Oakland City Center LLC, as Landlord.
10.49*	Further Supplemental Partnership Deed relating to Ask Jeeves UK, dated February 14, 2002, by and among Registrant, Carlton Communications PLC, Granada Media Group Limited, Carlton & Granada Internet Limited, Ask Jeeves (Jersey) Limited, and Ask Jeeves International, Inc.

41

10.50* Tax Deed relating to the acquisition of the entire issued share capital of Carlton & Granada Internet Limited, dated March 6, 2002, by and among the Registrant, Carlton Communications PLC and Granada Media Group Limited.

(1)

Previously filed with Registrant's S-1 Registration Statement, No. 333-77539.

(2)

Previously filed with Registrant's Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 14, 2000.

(3)

Previously filed with Registrant's S-1 Registration Statement, No. 333-30494.

(4)

Previously filed with Registrant's Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission on November 14, 2000.

(5)

Previously filed with Registrant's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on April 2, 2001.

(6)

Previously filed with Registrant's Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 10, 2001.

(7)

Previously filed with Registrant's S-8 Registration Statement, No. 333-73400.

(8)

Previously filed with Registrant's Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission on August 14, 2001.

(9)

Previously filed with Registrant's Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 17, 2001.

(10)

Previously filed with Registrant's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 28, 2002.

(11)

Previously filed with Registrant's S-3 Registration Statement, No. 333-83830.

*

Filed herewith.

†

Management contract, compensatory plan or arrangement.

b) Reports on Form 8-K.

        Not applicable.

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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.
April 30, 2002	By:	/s/  A. GEORGE (SKIP) BATTLE A. George (Skip) Battle Chief Executive Officer (Principal Executive Officer)
April 30, 2002	By:	/s/  STEVEN J. SORDELLO Steven J. Sordello Chief Executive Officer (Principal Executive Officer)
April 30, 2002	By:	/s/  CHRISTINE M. DAVIS Christine M. Davis Vice President and Corporate Controller (Principal Accounting Officer)

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QuickLinks

ASK JEEVES, INC. TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ASK JEEVES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)
ASK JEEVES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except share and per share data)
ASK JEEVES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
ASK JEEVES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
PART II. OTHER INFORMATION
SIGNATURES

EX-10.49

Exhibit 10.49

THIS DEED is made the 14th day of February 2002

BETWEEN:-

(1)	Carlton Communications PLC (registered number 00348312) whose registered office is at 25 Knightsbridge London SW1X 7RX ("Carlton")
(2)	Granada Media Group Limited (registered number 3106525) whose registered office is at The London Television Centre Upper Ground London SE1 9LT ("Granada")
(3)	Carlton & Granada Internet Limited (registered number 1836419) whose registered office is at The London Television Centre Upper Ground London SE1 9LT ("CGIL")
(4)	Ask Jeeves Inc. a corporation established under the laws of Delaware the principal place of business of which is situated at 5858 Horton Street Emeryville California 94608 USA ("AJ")
(5)	Ask Jeeves (Jersey) Limited a corporation established under the laws of Jersey whose registered number is 75676 and whose registered office is at Normandy House, Grenville Street, St Helier Jersey JE2 4UF ("AJJ")
(6)	AJ International Inc a corporation established under the laws of Delaware the principal place of business of which is situated at 5858 Horton Street Emeryville California 94608 USA ("AJI")
(7)	Ask Jeeves UK, a partnership carried on between CGIL and AJJ and having its principal office at 59 Proctor Street London WC1 (the "Partnership").
WHEREAS:
(A)	The parties entered into a partnership agreement on 4 December 1999 and a supplemental partnership agreement on 16 June 2000.
(B)	The Partnership Agreements set out the terms on which the parties will establish, participate in and operate the online business in the United Kingdom under the "Ask Jeeves" brand known as The Ask Jeeves UK Partnership.
(C)	The parties now wish to enter into this further supplemental partnership agreement to accept certain additional obligations, clarify certain existing obligations and vary the terms of the Partnership Agreements in accordance with the terms set out in this Deed.
IT IS AGREED:
1.	INTERPRETATION
1.1	In this Deed:
	"Advance Advertising Payment" means the amount paid by the Partnership to Carlton and Granada pursuant to clause 5.1;
	"Advertising" means any advertising or promotion of the Partnership Business including, without limitation television advertising;
	"Affiliate" means any subsidiary or holding company of such company and any subsidiary or holding company of such subsidiary or holding company;
	"AJ Company" means AJ and any Affiliate of AJ from time to time;
	"AJ's Solicitors" means Brobeck Hale and Dorr of Park Gate, 25 Milton Park, Oxford OX14 4SH;
	"Applicable Laws" means all applicable laws and regulations including in respect of the acquisition of Advertising, the rules of the Independent Television Commission;

	"Barclays" means Barclays Bank plc;
	"C&G Company" means CGIL and any Affiliate or CGIL and each of Carlton and Granada and any Affiliate of either Carlton or Granada;
	"Confidential Information" means the contents of this Deed and any and all information (in whatever form) disclosed directly or indirectly by either party to the other (the "Recipient") or obtained (in whatever manner) by the Recipient directly or indirectly from the other party either pursuant to the Original Agreements or this Deed. The term shall not, however, include:
	(a)	information in the public domain at the time of disclosure (save that any compilation of otherwise public information in a form not publicly known shall nevertheless be treated as Confidential Information);
	(b)	information which passes into the public domain after disclosure through no act or default of the Recipient;
	(c)	information communicated to the Recipient by an Independent Third Party who has the lawful right to do so without any duty to respect any right of confidence in the information;
	(d)	information which (prior to the time of disclosure) was known to, or had been independently generated by, the Recipient;
	(e)	information whose disclosure is required by law or by the order of any court;
	"Contra Arrangements" means "contra" arrangements of the type described in clause 12.3 of the Partnership Deed;
	"Contra Value" has the meaning given to it in clause 5.1(b)
	"Effective Date" means the date of this Deed;
	"Existing Debt" means the outstanding aggregate indebtedness of the Partnership to Carlton and Granada and their Affiliates being £1,900,000 as at the Effective Date;
	"Fair Value" means a rate no less favourable than the rate that would have been charged had Carlton or Granada (as the case may be) been a normal third party customer of the Partnership;
	"Loan Drawdown Amount" means any sum drawn down by the Partnership from the Loan Facility as at the Effective Date and any interest and bank charges which accrue thereon;
	"Loan Facility" means the loan facility made available to the Partnership by Barclays;
	"Partnership Agreements" means the Partnership Deed and the Supplemental Partnership Deed;
	"Partnership Business" means the business activities of the Partnership as such activities have and do develop from time to time and as the same have been and are carried on by the Partnership or may be carried on under the ownership of one or more AJ Company from time to time;
	"Partnership Deed" means the agreement dated 4 December 1999 between AJJ, CGIL, AJI, Carlton and Granada for the creation of the Partnership; and
	"Supplemental Partnership Deed" means the agreement dated 16 June 2000 between AJJ, CGIL, AJI, Carlton and Granada amending the Partnership Deed and recording certain additional agreements between the parties regarding the Partnership.
1.2	This Deed means this document, including its recitals and any Schedules and unless otherwise stated:
	(a)	references to this Deed or any other document include references to this Deed, or such other document as varied, supplemented and/or replaced in any manner from time to time;

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	(b)	references to any party shall, where relevant, be deemed to be references to or to include, as appropriate, their respective lawful successors, assigns or transferees;
	(c)	references to recitals, clauses and sub-divisions of them are references to the recitals and clauses of this Deed and subdivisions of them respectively;
	(d)	references to a "person" include any individual, company, corporation, firm, partnership, association, organisation, institution, trust or agency, whether or not having a separate legal personality;
	(e)	references to the one gender include all genders and references to the singular shall include the plural and vice versa; and
	(f)	headings are inserted for convenience only and shall be ignored in construing this Deed.
2.	LOAN FACILITY
2.1	Immediately following execution of this Deed AJ, AJJ and AJI shall procure that with effect from the Effective Date, the Partnership transfers the Loan Drawdown Amount from its banking current accounts to repay the amount of any drawdown on the Loan Facility and that instructions to that effect are given to the Partnership's bankers.
2.2	Immediately following the transfer of the Loan Drawdown Amount pursuant to clause 2.1, AJ, AJJ, AJI, Granada, Carlton and CGIL shall take all such steps as they are legally entitled to so as to procure that:
	(a)	the Loan Facility is terminated with immediate effect such that CGIL and Carlton and Granada shall have no further liability whether contingent or actual in connection with any guarantee given in respect of the Loan Facility; or
	(b)	Barclays shall unconditionally release CGIL and Carlton and Granada from any and all liabilities (whether actual or contingent) in respect of the Loan Facility and any guarantee given in respect thereto with immediate effect.
2.3	AJ shall procure the compliance of AJJ and Carlton and Granada shall procure the compliance of CGIL with the obligations under this clause 2.
3.	ADDITIONAL CAPITAL CONTRIBUTION
	CGIL shall contribute an amount equal in total to £10,500,000 to the capital of the Partnership. Such amount shall be paid, held and utilised solely in accordance with the provisions of this Deed.
4.	DISCHARGE OF EXISTING INDEBTEDNESS
	The Partners agree that £1,900,000 of the aggregate of the amount contributed by CGIL pursuant to clause 3 shall be utilised immediately on execution of this Deed by the Partnership to repay the Existing Debt due to Carlton and Granada or their respective Affiliates to whom any relevant amount is owed in connection with the purchase by the Partnership of Advertising prior to 31 December 2001. The amount payable pursuant to this clause shall be paid in accordance with clause 6.

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5.	ADVERTISING COMMITMENTS
5.1	£8,600,000 of the amount contributed by CGIL to the capital of the Partnership pursuant to clause 3 shall be paid by the Partnership to a joint account nominated by Carlton and Granada by way of an advance payment for the provision of Advertising as follows:
	(a)	subject to paragraph 5.1(b), the payment of the Advance Advertising Payment shall entitle the Partnership to acquire Advertising from Carlton and Granada or any Affiliate of Carlton or Granada at station average price but otherwise on the standard terms of the relevant provider of the advertising in the period commencing on the 31 December 2001 and ending on 31 March 2004;
	(b)	on specific written request of the Partnership to Carlton and Granada, the Partnership may direct that part of the Advance Advertising Payment, being an amount not exceeding £3,200,000, (the "Contra Value") be utilised by Granada and Carlton to procure advertising from third parties which are not Affiliates of Granada or Carlton by way of Contra Arrangements PROVIDED THAT the value of advertising which the Partnership is entitled to acquire from Carlton and Granada or any Affiliate of Carlton or Granada at station average price shall be reduced by the amount of any Contra Value
	PROVIDED THAT, for the avoidance of doubt, the Partnership shall have no other rights in respect of that credit and in particular without limitation shall not be entitled to receive any cash payment if it fails to use Advertising up to the full value of the Advance Advertising Payment and FURTHER PROVIDED THAT Advertising may be acquired, and will only be provided, under this clause, and any such advertising shall only be used, for the purposes of advertising or promoting the Partnership Business.
5.2	The amounts payable pursuant to clause 5.1 shall be paid in accordance with clause 6.
5.3	If the Partnership provides documentation which Carlton and Granada agree (such agreement not to be unreasonably withheld or delayed) demonstrates that during the calendar year ending on 31 December 2001 the Partnership properly and unequivocally requested Carlton and Granada to deliver Advertising to the Partnership by way of Contra Arrangements to a value, calculated at station average price, of £350,000 and that Carlton and Granada have failed to do this by an amount (the "Shortfall") then, as the sole remedy of the Partnership and of AJJ in respect of such, the Partnership shall deduct the Shortfall from the sum referred to in clause 5.1 and accordingly the Partnership shall not be obliged to use an amount equal to the Shortfall to purchase Advertising in accordance with clause 5.1.
5.4	Carlton and Granada or their Affiliates shall, in period ending on 31 December 2002 purchase online advertising on ask.co.uk (or any replacement or successor website) valued at an aggregate of £348,000 (exclusive of VAT) calculated at a Fair Value. For the avoidance of doubt Carlton and Granada for themselves and for and on behalf of their Affiliates hereby acknowledge that after 31 December 2002 they shall have no right to advertise as aforesaid but that any part of the sum of £348,000 (exclusive of VAT) then unpaid shall, nevertheless, still be payable unless and to the extent that it remains unpaid by reason of a failure of the online advertising to be provided to Carlton or Granada or their Affiliates after they have requested that it be so provided.

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5.5
Save as is expressly stated in this Agreement all amounts referred to in his Agreement are expressed inclusive of any Value Added Tax or other duty thereon.

6.	PAYMENT MECHANICS
	The amounts payable by CGIL to the Partnership pursuant to clause 3 and to be applied by the Partnership in accordance with clauses 4 and 5 shall be paid as follows:
	(a)	immediately following receipt by CGIL of a written undertaking from AJ's Solicitors that those monies will be held and applied solely as contemplated in this clause 6, CGIL shall pay those amounts to the Client Account of AJ's Solicitors, who shall hold such monies on behalf of the Partnership;
	(b)	forthwith on receipt those monies shall be paid by the Partnership's Solicitors (on behalf of the Partnership) to Carlton and Granada by way of discharge of the payment obligations referred to in clauses 4 and 5; and
	(c)	the Partnership shall give, and CGIL and AJJ shall each take such steps as are necessary to ensure that the Partnership gives, all necessary instructions to AJ's Solicitors to give effect to the provisions of paragraphs (a) and (b) of this clause.
6.2	AJ shall procure the compliance of AJJ and Carlton and Granada shall procure the compliance of CGIL with the obligations under this clause 6.
7.	ACCOUNTING ISSUES
7.1	The parties agree that the Financial Year of the Partnership shall be amended such that Effective Date shall be the last day of the current Financial Year of the Partnership, and AJJ and CGIL shall procure that the Partnership shall, as soon as practicable after the Effective Date, prepare Accounts of the Partnership for that Financial Year.
7.2	The parties hereby agree that, for the avoidance of doubt, CGIL shall be responsible for any losses of the Partnership which arise as a result of the transactions contemplated by this agreement which liability shall be deemed to have been discharged by the capital contribution in accordance with clause 3 of this Agreement.
8.	CONFIDENTIALITY
8.1	Each party agrees:
	(a)	to keep and procure that its directors, employees and agents keep in strict confidence the Confidential Information of the other party;
	(b)	not to use, reproduce or reduce to writing all or part of the other party's Confidential Information except as necessary for the enjoyment of its rights or the performance of its obligations under this Deed;
	(c)	save to the extent specifically required or permitted by this Deed not to disclose the other party's Confidential Information to any third party;
	(d)	not to release any press statement or issue any other announcement or publicity regarding the existence or terms of this Deed or which otherwise relates to the relationship between the parties, without the prior consent in writing of the other party other than as required by law or by any competent authority in any jurisdiction (including, without limitation, the United States' Securities and Exchange Commission).

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9.	NOTICES
9.1	Any notice or other communication to be given under this Agreement shall be in writing and shall be deemed to have been duly served on, given to or made in relation to a party if it is left at the authorised address of that party or posted by registered post addressed to that party at such address and shall if:
	(a)	personally delivered, be deemed to have been received at the time of delivery; or
	(b)	posted to an inland address in England or Wales, be deemed to have been received on the second Business Day after the date of posting and if posted to an overseas address, be deemed to have been received on the seventh Business Day after the date of posting
	provided that where, in the case of delivery by hand delivery occurs after 6 pm on a Business Day or on a day which is not a Business Day, receipt shall be deemed to occur at 9 am on the next following Business Day.
9.2	For the purposes of this clause the authorised address of each party shall be in the case of Carlton, Granada or CGIL the registered office described above and in the case of any AJ Company the office of AJ's Solicitors or such other address in England or Wales as such party may notify to each of the other parties hereto in writing from time to time in accordance with the requirements of clause 9.1.
10.	COSTS
	Each party shall bear its own costs and expenses in relation to the negotiation, preparation, execution and implementation of this Deed, including the fees and disbursements of their respective legal, accountancy and other advisers.
11.	COUNTERPARTS
	This Deed may be executed in any number of counterparts, each of which when executed and delivered shall be an original, but all of which when taken together shall constitute a single instrument.
12.	ENTIRE AGREEMENT AND VARIATION OF TERMS
12.1	This Deed contains the entire agreement and understanding of the parties and supersedes all prior agreements, understandings or arrangements (both oral and written) relating to the subject matter of this Deed.
12.2	No variation, supplement, or replacement of or from this Deed or any of its terms shall be effective unless made in writing and signed by or on behalf of each party with the intention to vary, supplement or replace being clearly expressed.
13.	THIRD PARTIES
	Save as is specifically provided in this Deed this agreement is not intended by the parties to give rise to any right which is enforceable by any Third Party by virtue of he Contracts (Rights of Third Parties) Act 1999.
14.	GOVERNING LAW AND JURISDICTION
14.1	This Deed shall be governed by, construed and take effect in accordance with English law.
14.2	The courts of England shall have exclusive jurisdiction to settle any claim, dispute or matter of difference which may arise out of or in connection with this Deed (including without limitation claims for set-off or counterclaim) or the legal relationships established by this Deed.

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In Witness whereof this document has been executed as a deed and delivered the day and year first before written.

EXECUTED
by	)	/s/ Gerry Murphy
and	)	/s/ Dianne Denmead
for and on behalf of	)
Carlton	)
EXECUTED
by	)	/s/ illegible
and	)	/s/Julian Burns
for and on behalf of	)
Granada	)
EXECUTED
by	)	/s/ Julian Burns
and	)	/s/ Dianne Denmead
for and on behalf of	)
CGIL	)
EXECUTED
by	)	/s/ A. George Battle
and	)	/s/ Cynthia Pevehouse
for and on behalf of	)
AJ	)
EXECUTED
by	)	/s/ A. George Battle
and	)	/s/ Cynthia Pevehouse
for and on behalf of	)
AJ J	)
EXECUTED
by	)	/s/ A. George Battle
and	)	/s/ Cynthia Pevehouse
for and on behalf of	)
AJI	)
EXECUTED
by	)	/s/ A. George Battle
and	)	/s/ Steven Berkowi
for and on behalf of	)
AskJeeves (Jersey) Limited	)

- 7 -

DATED February 14, 2002

Carlton Communications PLC

- and -

Granada Media Group Limited

- and -

Carlton & Granada Internet Limited

- and -

Ask Jeeves Inc.

- and -

Ask Jeeves (Jersey) Limited

- and -

Ask Jeeves International Inc.

- and -

Ask Jeeves UK

FURTHER SUPPLEMENTAL PARTNERSHIP DEED

- RELATING TO -

ASK JEEVES UK

Lovells
65 Holborn Viaduct
London EC1A 2DY

Ref: A3NSJB/PDW

EX-10.50

QuickLinks -- Click here to rapidly navigate through this document

Exhibit 10.50

        Dated March 6, 2002

CARLTON COMMUNICATIONS PLC (1)

GRANADA MEDIA GROUP LIMITED (2)

and

ASK JEEVES INC (3)

TAX DEED
Relating to the acquisition of
the entire issued share capital
of Carlton & Granada Internet Limited

Brobeck Hale and Dorr

Alder Castle
10 Noble Street
London EC2V 7QJ
Tel: +44 (0)20 7645 2400
Fax: +44 (0)20 7645 2424

Contents

Clause	Heading	Page
1	DEFINITIONS	1
2	INTERPRETATION	3
3	COVENANTS BY COVENANTORS	5
4	EXCLUSIONS	6
5	OBLIGATIONS AND RELEASE OF COVENANTORS	8
6	CONDUCT OF NEGOTIATION AND PROCEEDINGS	8
7	DATE FOR PAYMENT	9
8	TAX RETURNS FOR PERIODS BEFORE AND INCLUDING COMPLETION	10
14	GENERAL	13

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DATE OF DEED March 6, 2002

PARTIES

(1)	CARLTON COMMUNICATIONS PLC (registered number 00348312) whose registered office is at 25 Knightsbridge, London SW1X 7RX ("Carlton");
(2)	GRANADA MEDIA GROUP LIMITED (registered number 3106525) whose registered office is at London Television Centre, Upper Ground, London SE1 9LT ("Granada") (Carlton and Granada together, the "Covenantors", and each of whom a "Covenantor"); and
(3)	ASK JEEVES INC., a corporation established under the laws of Delaware the principal place of business of which is situated at 5858 Horton Street, Emeryville, California 94608 USA; (the "Purchaser").
INTRODUCTION
(A)	The Covenantors have agreed to sell the entire issued share capital of the Company to the Purchaser. The terms of the sale are set out in the Agreement.
(B)	The Agreement provides for the Covenantors to enter into this deed which contains certain covenants on their part in favour of the Purchaser relating to taxation matters.
THIS DEED WITNESSES THAT:
1	DEFINITIONS
1.1	In this deed the following words have the meanings set out below.
	1.1.1	"Accounts" means the audited balance sheets as at the Accounts Date and audited profit and loss accounts for the year ended on that date of the Company and the notes and directors' reports relating to them;
	1.1.2	"Actual Liability to Taxation" means any liability to make actual payment of (or of an amount in respect of) Taxation.
	1.1.3	"Agreement" means an agreement of an even date herewith made between Carlton (1), Granada (2), the Purchaser (3), Ask Jeeves (Jersey) Limited (4) and AJ International Inc (5).
	1.1.4	"Accounts Date" means 30 September 2000.
	1.1.5	"Claim" means:
		1.1.5.1	any letter, assessment, notice, demand or other document issued or action taken by any Taxation Authority; or
		1.1.5.2	any action that the Company has to take as a result of any Taxation legislation or requirement of the relevant Taxation Authority,
		from which it appears that the Company is or may be or may become liable to any Liability to Taxation.
	1.1.6	"Company" means Carlton & Granada Internet Limited (company no. 1836419);
	1.1.7	"Effective Liability to Taxation" shall have the meaning given in clause 2.5

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1.1.8	"Event" includes any event, act, transaction or omission or deemed event, act, transaction or omission or combination or series of actual or deemed events, acts, transactions or omissions whether or not the Company is a party to it, including (without limitation), the declaration, payment or making of any dividend or other distribution, and completion of the sale of the shares of the Company to the Purchaser pursuant to the Agreement.
1.1.9	"Group Relief" means relief the subject of a surrender or claim pursuant to Chapter IV of part X of the ICTA 1988 and any tax refund the subject of a surrender or claim pursuant to section 102 of the Finance Act 1989.
1.1.10	"Liability to Taxation" means any Actual Liability to Taxation and/or Effective Liability to Taxation and/or other payment and/or liability referred to in clause 3.
1.1.11	"non-availability" includes in relation to a Relief the reduction, modification, loss, claw-back, counteraction, disallowance or cancellation of that Relief or right to repayment of Taxation or a failure to obtain a Relief or to receive the benefit of a right to repayment of Taxation to which the Company was or assumed it was entitled.
1.1.12	"Post Completion Relief" means any Relief to which the Company was not entitled before Completion and which arises as a result of any Event occurring after Completion.
1.1.13	"Pre-Sale Reorganisation" means i) the subscription for shares in the Company for £10,500,000 by Carlton and Granada; ii) the contribution of £10,500,000 additional partnership capital by the Company to the Ask Jeeves UK Partnership; iii) the discharge of £1,900,000 of outstanding debt by the Ask Jeeves UK Partnership to Carlton and Granada or their associates; iv) the advance payment of £8,600,000 by the Ask Jeeves UK Partnership to Carlton and Granada or their associates in fees for advertising; v) the repayment of the Barclays Loan Facility; vi) the surrender of trading losses by way of group relief from the Company to Carlton and Granada or their associates; and vii) the change of accounting reference date of the Company and of the Partnership.
1.1.14	"Relevant Relief" means:
	1.1.14.1	any Relief which was treated as an asset of the Company in the Accounts; or
	1.1.14.2	any Relief which was taken into account in computing (and so reducing or eliminating) any provision for deferred Taxation which appears in the Accounts or which would have appeared in the Accounts but for the presumed availability of such Relief.
1.1.15	"Relief" means any loss, relief, allowance, exemption, credit, set-off, charge or deduction or right to repayment of Taxation in respect of any Taxation or for the purposes of computing income profits or gains for Taxation, including (without limitation) losses which the meaning of section 393 of the Taxes Act.

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	1.1.16	"Taxation" means all forms of taxation, and statutory, governmental, state, provincial, local governmental or municipal impositions, duties, imposts, contributions, rates and levies, in each case whether of the United Kingdom or elsewhere in the world whenever imposed, and any payment whatsoever which the Company may be or become bound to make to any person as a result of the discharge by that person of any Taxation which the Company has failed to discharge or as a result of any enactment relating to Taxation (including (without limitation) any income tax required to be deducted or withheld from or accounted for in respect of any payment under section 203 of the Taxes Act) or otherwise and any sums paid or owing to the representative member of a VAT group (as defined in section 43 of the VATA (or any corresponding legislation in any foreign jurisdiction)) and all penalties, fines, charges, costs and interest relating thereto which the Company may be or become liable to pay to any Taxation Authority or any other person.
	1.1.17	"Taxation Authority" means the Inland Revenue, the Commissioners for Customs and Excise or any other statutory or governmental authority or body (whether in the United Kingdom or otherwise) involved in the collection or administration of Taxation.
	1.1.18	"Taxes Act" means the Income and Corporation Taxes Act 1988.
	1.1.19	"TCGA" means the Taxation of Chargeable Gains Act 1992.
	1.1.20	"VATA" means the Value Added Tax Act 1994.
2	INTERPRETATION
2.1	Reference to income or profits or gains, earned, accrued or received includes income or profits or gains deemed to have been, treated as or regarded as earned, accrued, received or otherwise arising for the purposes of any Taxation legislation.
2.2	Reference to a Claim for Taxation shall include any Claim whether made before or after Completion (whether or not it is satisfied at that date).
2.3	There shall be excluded (without limitation) from the meaning of "ordinary course of business" any Event which results in or involves the following:
	2.3.1	any Taxation arising under Part VIII of the Taxes Management Act 1970 (charges on non-residents) (or any corresponding legislation in any foreign jurisdiction);
	2.3.2	any Taxation arising under Part XVII of the Taxes Act (tax avoidance) (or any corresponding legislation in any foreign jurisdiction);
	2.3.3	any Taxation arising in respect of any distribution (as defined in Part VI of the Taxes Act) (or any corresponding legislation in any foreign jurisdiction) or deemed distribution;
	2.3.4	any Taxation arising in respect of the acquisition, disposal or supply or deemed acquisition, disposal or supply of any assets, goods, service or business facility of any kind (including a loan of money or the letting, hiring or licensing of any tangible or intangible property) for a consideration deemed for Taxation purposes to be in excess of that (if any) actually received or for a consideration deemed for Taxation purposes to be less than that actually given;
	2.3.5	any Taxation arising in respect of a transaction which may result in the Company or the Purchaser becoming liable to pay or bear Taxation chargeable directly or primarily against or attributable directly or primarily to another person, firm or company other than any Taxation which the Company has deducted pursuant to the provisions of section 203 of the Taxes Act;
	2.3.6	any Taxation which the Company failed to deduct or which arises as a result of a failure by the Company to deduct or duly account for Taxation; and

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	2.3.7	any Taxation arising from the disposal or acquisition or deemed disposal or acquisition of any asset other than trading stock.
2.4	Any reference to an "Effective Liability to Taxation" shall be construed as a reference to:
	2.4.1	the set-off of any Post Completion Relief or Relevant Relief against any Actual Liability to Taxation of the Company or against any income, profit or gains in respect of which the Covenantors would, but for such set-off, have been liable under clause 3.1 and, for the purposes of clause 3.1, the amount of such an Effective Liability to Taxation arising as a result of such set-off will be an amount equal to the amount of Taxation saved as a result of the set-off; or
	2.4.2	the non-availability (in whole or in part) of any Relevant Relief and, for the purposes of clause 3.1, the amount of such Effective Liability to Taxation shall be:
		2.4.2.1	if the Relevant Relief was a deduction from or set-off against Taxation or a right to repayment of Taxation, the amount of that Relevant Relief; or
		2.4.2.2	in any other case, the amount of Taxation that would have been saved but for such non-availability on the assumption that the Relevant Relief was available and was capable of being fully utilised and was so utilised immediately prior to it becoming non-available.
2.5	For the purposes of clause 2.4 when determining whether an Effective Liability to Taxation has arisen, it shall be assumed that Relevant Reliefs are utilised or become non-available (in which case clause 2.4.2 operates) prior to any other Reliefs to which the Company is entitled or to which it is assumed the Company is entitled and/or which arose prior to Completion.
2.6	Words and expressions defined or used in the Agreement shall (unless the context requires otherwise) have the same meanings in this deed.
2.7	Any reference to a statutory provision includes a reference to all prior and subsequent modifications, re-enactments and amendments of that provision and any regulation made under it.
2.8	Reference to clauses shall be a reference to the clauses of this deed unless otherwise stated.
2.9	Reference to the singular number shall include the plural and vice versa.
2.10	For the avoidance of doubt, reference to any Actual Liability to Taxation of the Company which results from any gains earned or received or any Event which occurs or is deemed to occur on or before Completion for the purposes of Taxation shall include a reference to any Liability to Taxation arising under Section 179 TCGA (or any corresponding legislation in any foreign jurisdiction) which results from the sale of the Shares pursuant to the Agreement.
3	COVENANTS BY COVENANTORS
3.1	Subject as hereinafter provided the Covenantors hereby jointly and severally covenant to pay to the Purchaser an amount equal to:
	3.1.1	any Actual Liability to Taxation of the Company resulting from or by reference to:
		3.1.1.1	any income, profits or gains earned, accrued or received on or before Completion; or
		3.1.1.2	any Event which occurred on or before Completion or was deemed to occur on or before Completion for the purposes of Taxation whether alone or in conjunction with other Events which occurred on or before Completion; or

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		3.1.1.3	any Event occurring after Completion in pursuance of a legally binding obligation or arrangement, in either case whether or not conditional, incurred or entered into by the Company on or before Completion;
	3.1.2	any Effective Liability to Taxation;
	3.1.3	any payment made by the Company, whether to a Taxation Authority or not, where such payment is made between the Accounts Date and Completion in respect of an Actual Liability to Taxation that would have been a liability of the Covenantors under clause 3.1.1 but for such payment;
	3.1.4	any Liability to Taxation of the Company which is also a Liability to Taxation of another person (other than any of the AJ Parties) and which is payable by the Company by virtue of (i) the other person failing to discharge such Liability to Taxation and (ii) the Company being at any time before Completion a member of the same group as such other person or otherwise connected with or related to such other person for Taxation purposes; and
	3.1.5	any costs and expenses properly incurred by the Purchaser and/or the Company in connection with any such Liability to Taxation (or claim therefor) or in successfully taking or defending any action under this deed.
3.2	In respect of payments made pursuant to the covenants contained within this deed:
	3.2.1	all sums payable by the Covenantors to the Purchaser shall be paid free and clear of all deductions, withholdings, set-offs or counterclaims whatsoever save only as may be required by law; and
	3.2.2	if any deductions or withholdings are required by law to be made from any sums, the Covenantors shall be obliged to pay the Purchaser such further amount as will, after the deduction or withholding has been made, leave the Purchaser with the same amount as it would have been entitled to receive in the absence of such requirement to make a deduction or withholding; and
	3.2.3	if any sum payable by the Covenantors to the Purchaser under clause 3 (including clause 3.2.2 and this clause 3.2.3) shall be subject to an Actual Liability to Taxation in the hands of the Purchaser or would have been so subject but for the availability of a Relief, the Covenantors shall pay to the Purchaser such further sum equal to such Actual Liability to Taxation.
4	EXCLUSIONS
4.1	The covenants by the Covenantors in clause 3.1 shall not apply to any Liability to Taxation:
	4.1.1	to the extent that specific provision or reserve in respect thereof has been made in the Accounts or to the extent that payment or discharge of such Liability to Taxation has been taken into account therein; or;
	4.1.2	for which the Company is or may become primarily liable as a result of transactions entered into in the ordinary course of its business after the Accounts Date and on or before Completion;
	4.1.3	to the extent that such Liability to Taxation arises or is increased, or in respect of which a specific provision or reserve in the Accounts is insufficient, by reason of any increase in rates of Taxation, or in the published practice of any Taxation Authority, made after Completion;

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	4.1.4	unless the Purchaser has served on the Covenantors a written notice on or before the seventh anniversary of Completion giving such details of the claim as the Purchaser then has;
	4.1.5	to the extent that it would not have arisen but for a voluntary act, omission, arrangement or transaction of the Purchaser (or its successors in title to the Shares) or of the Company, or of any company controlled by the Purchaser, or of a person or persons controlling the Purchaser, in each case occurring after Completion, but excluding any voluntary act, omission, arrangement or transaction;
		4.1.5.1	carried out or effected in pursuance of a legally binding obligation or arrangement incurred or entered into by the Company on or before Completion;
		4.1.5.2	carried out or effected in the ordinary course of business of the Company; or
		4.1.5.3	which the Purchaser or the Company was not aware and could not reasonably have been expected to be aware would give rise to such Liability to Taxation;
	4.1.6	to the extent that the Liability to Taxation would not have arisen or would have been reduced or eliminated but for the failure or omission on the part of the Company after Completion to comply with a request of the Covenantors or their duly authorised advisers to make any valid claim, election, surrender or disclaimer, or give any valid notice or consent, or to do any other thing under the provisions of any enactment or regulation relating to Tax, the making, giving or doing of which was taken into account in computing the provisions for Tax in the Accounts, but excluding any failure or omission;
		4.1.6.1	carried out or effected in pursuance of a legally binding obligation or arrangement incurred or entered into by the Company on or before Completion;
		4.1.6.2	which the Company is not legally permitted to make, give or do; or
		4.1.6.3	which the Purchaser or the Company was not aware and could not reasonably have been expected to be aware would give rise to such Liability to Taxation;
	4.1.7	to the extent that any Relief (other than a Post Completion Relief or a Relevant Relief) is available to the Company to set against or otherwise mitigate such Liability to Taxation;
	4.1.8	to the extent that the Liability to Taxation arises or is increased as a direct or indirect result of any fraudulent or negligent act or omission prior to Completion on the part of the Purchaser, any company in the Purchaser's group or the management of the Partnership (excluding any director or employee of the Company or any of the C&G Companies); or
	4.1.9	to the extent that the Liability to Taxation arises or is increased as a direct or indirect result of any error or inaccuracy (whether wilful, negligent or otherwise) in any information provided by the Purchaser, any company in the Purchaser's group or the management of the Partnership (excluding any director or employee of the Company or any of the C&G Companies) on which the Company or either of the Covenantors has relied.
5	OBLIGATIONS AND RELEASE OF COVENANTORS
5.1	The obligations of the Covenantors under this deed shall be joint and several.
5.2	Any liability to the Purchaser under this deed may in whole or in part be released, compounded or compromised or time or indulgence may be given by the Purchaser in its absolute discretion as regards any of the Covenantors under such liability without in any way prejudicing or affecting its rights against any other or others of the Covenantors under the same or a like liability whether joint and several or otherwise.

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5.3	Except as otherwise provided under this deed, no delay or omission of the Purchaser in exercising any right, power or privilege under this deed shall impair such right, power or privilege or be construed as a waiver thereof and any single or partial exercise of any such right, power or privilege shall not preclude the further exercise of any right, power or privilege.
6	CONDUCT OF NEGOTIATION AND PROCEEDINGS
6.1	If the Purchaser becomes aware of a Claim relevant for the purposes of this deed it shall as soon as reasonably practicable (and in any event in the case of claims where there is a time limit for appeal at least 14 days prior to the expiry of the time limit for the appeal) give written notice of it to the Covenantors but such notice shall not be a condition precedent to the liability of the Covenantors under this deed.
6.2	If the Covenantors first indemnify the Purchaser and the Company to the reasonable satisfaction of the Purchaser against all losses, costs, liabilities, damages and expenses (including interest on overdue Taxation which may be incurred thereby) the Purchaser will take (and procure that the Company takes) such action as the Covenantors may reasonably and promptly by written notice request to avoid, resist, appeal, compromise or defend the Claim provided that:
	6.2.1	the Purchaser shall not be obliged to procure that the Company appeal against the Claim, if having given the Covenantors written notice of the receipt of the Claim the Purchaser has not within 30 working days thereafter (or if earlier 5 working days prior to the expiry of any time limit by which action must be taken) received instructions from the Covenantors, in accordance with the preceding provisions of this clause 6.2, to make that appeal and in such circumstances the Purchaser may choose to treat the Liability to Taxation in respect of that Claim as determined at the value specified in the Claim and/or the Purchaser and/or the Company shall (without prejudice to their rights under this deed) be free to pay or settle the Claim on such terms as they may in their absolute discretion consider fit;
	6.2.2	the Purchaser shall not be obliged to procure that the Company pursue any appeal beyond the General Commissioners of Inland Revenue, the Special Commissioners of Inland Revenue or Value Added Tax Tribunal or any equivalent forum in the United Kingdom or any other jurisdiction unless the Covenantors furnish the Purchaser with the written opinion of leading Tax Counsel to the effect that an appeal against the Liability to Taxation will, on the balance of probabilities, be won; and
	6.2.3	the Purchaser shall not in any event be obliged to comply with any unreasonable instruction of the Covenantors to make a settlement or compromise of the Claim or agree any matter in the course of disputing the Claim which is likely to materially adversely affect the amount thereof or increase the future liability of the Company in respect of Taxation or materially adversely affect the relationship of the Company with the relevant Taxation Authority.
6.3	If any of the Covenantors or the Company shall be proven to have committed acts or omissions which constitute fraudulent or negligent conduct (pursuant to section 36 of the Taxes Management Act 1970) clause 6.2 shall not apply, providing however, for the avoidance of doubt, that fraudulent or negligent conduct of the Purchaser, any company in the Purchaser's group or the management of the Partnership (excluding any director or employee of the Company or any of the C&G Companies) shall not count as acts or omissions of the Covenantors or the Company for the purposes of this clause.

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7	DATE FOR PAYMENT
7.1	The Covenantors shall make payments to the Purchaser under this deed within 5 working days after the date on which a notice containing a written demand for the amount of the payment required to be made is delivered to the Covenantors or, if later, on the following dates:
	7.1.1	in so far as a Claim represents Taxation to be borne by the Company but which has not yet become due, the Covenantors shall make the payment in respect of that Claim (or so much thereof as represents that Taxation) 5 working days before that Taxation becomes due;
	7.1.2	in so far as a Claim consists of the loss of a right to repayment of Taxation, the Covenantors shall make the payment in respect of that Claim (or so much thereof as represents that loss) on the date on which that repayment would otherwise have become due;
	and for this purpose references to a date on which Taxation becomes due include a reference to the date on which it would have become due were it not for the availability of some Relief or right to repayment of Taxation. Any payment which becomes due on a day which is not a working day shall be paid on the next following working day.
7.2	If any payment required to be made by the Covenantors under this deed is not made by the due date for payment thereof, then that payment shall carry interest from the due date of payment until actual payment (as well after judgment as before) at the rate of 2 per cent above the base rate from time to time of Barclays Bank PLC, calculated on a daily basis.
8	TAX RETURNS FOR PERIODS BEFORE AND INCLUDING COMPLETION
8.1	The Covenantors shall procure that the Purchaser is promptly sent a copy of any communication from any Taxation Authority insofar as it relates to or impacts upon the Taxation affairs of the Company.
8.2	The Taxation returns of the Company for all accounting periods ending on or before Completion shall be determined in accordance with clause 9 of the Agreement.
8.3	The Covenantors shall afford or procure that there is afforded to the Company or its duly authorised agents such information and assistance as the Purchaser or the Company or its duly authorised agents may reasonably request for the purpose of preparing, submitting and agreeing the Taxation returns of the Company for all accounting periods ending after Completion and for the accounting period beginning before and ending after Completion.
9	PURCHASERS INDEMNITY
9.1	The Purchaser warrants to the Covenantors that the Purchaser does not intend to permit the corporation tax liabilities of the Company, to the extent provided for in the Accounts or arising in the ordinary course of business after the Accounts Date and to the extent payable by the Company to remain undischarged, and that it is not entering into this transaction on the assumption referred to in section 767AA(2) of the ICTA 1988.
9.2	The Purchaser hereby covenants with the Covenantors that it will indemnify each Relevant Person and keep them indemnified against any liability arising pursuant to:
	(a)	section 767A of the ICTA 1988, in circumstances where the taxpayer company (as defined in section 767(1)) is the Company; or
	(b)	section 767AA of the ICTA 1988, in circumstances where the relevant transferred company or associated company as defined in section 767AA is the Company;

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	to the extent that the corporation tax to which the liability relates:
		(i)	has been the subject of a claim by the Purchaser hereunder which has been satisfied; or
		(ii)	is one in respect of which the Covenantors have (disregarding any limit on the amount of such liability) no liability hereunder.
9.3	For the purposes of paragraph 9.2, a "Relevant Person" is:
	(c)	any person who at any time in the three year period prior to Completion had control of the Company; or
	(d)	any company of which the person mentioned in paragraph (a) above has at any time in the three year period prior to Completion had control.
10	CORRESPONDING SAVINGS AND REFUNDS
10.2	If the auditors of the time being of the Company (the "Auditors") shall certify that any Tax liability which has resulted in a payment having been made by the Covenantors under this covenant or for breach of any of the Tax Warranties has given rise to a Relief for the Company or the Purchaser which would not otherwise have arisen, then as and when such Relief reduces a liability to make an actual payment of Taxation, the amount of that reduction shall be dealt with in accordance with clause 11.3 below.
10.3	If the Covenantors at any time pay to the Purchaser an amount pursuant to a claim under this covenant or under the Tax Warranties and the Purchaser or the Company is or becomes entitled to recover from some other person (other than the Company or the Purchaser or any member of the same group as the Purchaser, but including any Tax authority) any sum in respect of the matter giving rise to such claim (other than by reason of any Relevant Relief or any Post Completion Relief), the Purchaser, if so required by the Covenantors, will (and will procure that the Company will), at the cost of the Covenantors and upon the Covenantors providing security to the reasonable satisfaction of the Purchaser against all costs which may thereby be incurred, take all reasonable steps to enforce such recovery and the Purchaser shall promptly following such recovery repay to the Covenantors the lesser of:
	(a)	the sum so recovered by the Purchaser or the Company from such other person (including sums recovered in respect of costs and any interest or repayment supplement received in respect of the sum recovered, but less any costs of recovery not previously reimbursed, and less any Tax chargeable on the sum recovered); and
	(b)	the amount referred to above paid by the Covenantors to the Purchaser.

11.	OVER PROVISIONS
11.1	If the Auditors shall certify (at the request and expense of the Covenantors) that any provision for taxation in the Accounts has proved to be an overprovision (except to the extent that such overprovision results from the utilisation of a Relevant Relief or a Post Completion Relief), then the amount of such overprovision shall be dealt with in accordance with clause 11.3 below.
11.2	If the Purchaser becomes aware that there are or may be such amounts as are referred to in paragraph 11.1 above, it shall (or shall procure that the Company shall) promptly inform the Covenantors of that fact. In giving any certificate under clause 11.1, the Auditors shall act as experts and not as arbitrators and (in the absence of manifest error) their decision shall be final and binding on the parties hereto.

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11.3	Where it is provided under paragraph 11.1 or 10.2 above that any amount (the "Relevant Amount") is to be dealt with in accordance with this paragraph 12:
	(a)	the Relevant Amount shall first be set off against any payment then due from the Covenantors under this covenant, and
	(b)	to the extent there is an excess of the Relevant Amount after any amounts have been set off under paragraph 11.3(a) above a refund shall be made to the Covenantors of any previous payment or payments by the Covenantors under this covenant and not previously refunded under this paragraph 11.3(b) up to the amount of such excess; and
	(c)	to the extent that the excess referred to in paragraph 11.3(b) is not exhausted under that paragraph, the remainder of that excess shall be carried forward and set off against any future payment or payments which become due from the Covenantors under this covenant, and reduce or eliminate the liability against which it is so set-off.
11.4	Where any such certification as is mentioned in paragraph 11.1 above has been made, the Covenantors or the Purchaser may (at their own expense) request the Auditors to review such certification in the light of all relevant circumstances, including any facts which have become known only since such certification, and to certify whether such certification remains correct or whether, in the light of those circumstances, the amount that was the subject of such certification should be amended.
11.5	If the auditors certify under paragraph 11.4 that an amount previously certified should be amended, that amended amount shall be substituted for the purposes of paragraph 11.3 as the Relevant Amount in respect of the certification in question in place of the amount originally certified, and such adjusting payment (if any) as may be required by virtue of the above mentioned substitution shall be made as soon as practicable by the Covenantors or the Purchaser, as the case may be.
12.	PURCHASER'S FURTHER OBLIGATIONS AND MITIGATION
12.1	The Purchaser agrees to procure that, at the written request of the Covenantors, the Company:
	(a)	uses all Reliefs (other than Post Completion Reliefs and Relevant Reliefs) available to it (including by way of surrender from one company to another) and makes all elections, except in respect of matters after Completion, so as to reduce or eliminate the liability of the Covenantors under this covenant; and
	(b)	at the request and expense of the Covenantors, delivers to the Covenantors a certificate from its auditors for the time being confirming that all such Reliefs have been so used and elections made;
	provided that the Purchaser shall not be obliged to procure that the Company makes any elections which are not legally permissible.
12.2	The Covenantors may by notice in writing to the Purchaser elect to mitigate or eliminate any liability under this covenant by surrendering or procuring the surrender to the Company of any Relief to the extent permitted by law but without any payment being made in consideration of the surrender, and the Covenantors shall be absolved from all liability under this covenant to the extent of the amount of Liability to Taxation relieved by such surrender. The Purchaser agrees to procure that the Company takes all such steps as the Covenantors may reasonably require to permit and effect any such surrender.

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12.3	The Purchaser agrees to procure that the Company preserves, and affords to the Covenantors reasonable access to, all documents, records, correspondence, accounts and other information whatsoever in respect of or relevant for the purpose of determining any Liability to Taxation of the Company for which the Covenantors are liable hereunder until such time as the Covenantors shall cease to have any liability or contingent liability under the terms of this covenant.
12.4	The Purchaser agrees to procure that the Company duly pays and discharges each and every amount of Tax in respect of which provision was made in the Accounts, or which was taken into account in computing the amount of any such provision, and which, in either case, had not been paid and discharged at Completion.
13.	SURRENDER OF RELIEFS
13.1	The Purchaser shall procure that, to the extent that it can lawfully do so, the Company surrenders any Group Relief to any company specified by the Covenantors, in respect of any accounting period of the Company ending on or before Completion.
13.2	No payment shall be made for any surrender under paragraph 13.1.
14.	GENERAL
14.1	Clauses 17 (Notices) and 23 (Governing Law) to the Agreement shall apply to this deed as if set out herein.

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IN WITNESS of which the parties have executed this deed on the date set out above

SIGNED and delivered as a deed by CARLTON COMMUNICATIONS PLC acting by two Directors or a Director and the Company Secretary:

Director
Signature	:	/s/ Gerry Murphy
Name	:
Director/Company Secretary
Signature	:	/s/ David Abdoo
Name	:

SIGNED and delivered as a deed by GRANADA MEDIA GROUP LIMITED acting by two Directors or a Director and the Company Secretary:

Director
Signature	:	/s/ illegible
Name	:
Director/Company Secretary
Signature	:	/s/ Julian Burns
Name	:

SIGNED and delivered as a deed by ASK JEEVES INC acting by its duly authorised signatory:

Signature	:	/s/ A. George Battle, Chief Executive Officer
Name	:
Signature	:	/s/ Cynthia Pevehouse, Secretary
Name	:

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