LOOKSMART LTD
10-K, 2000-03-30
COSTUME JEWELRY & NOVELTIES
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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                               ----------------

                                   FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

  For the fiscal year ended December 31, 1999

                                      OR

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

  For the transition period from         to

                         Commission File No. 000-26357

                               ----------------

                                LOOKSMART, LTD.
            (Exact name of Registrant as specified in its charter)

<TABLE>
<S>                            <C>                            <C>
          Delaware                          7373                        13-3904355
(State or other jurisdiction
             of                 (Primary Standard Industrial         (I.R.S. Employer
      incorporation or
        organization)                Identification No.)           Identification No.)
</TABLE>

                  625 Second Street, San Francisco, CA 94107
                                (415) 348-7000
  (Address, including zip code, and telephone number, including area code, of
                   Registrant's principal executive offices)


                               ----------------

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

                                     None

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

                    Common Stock, par value $.001 per share

                               ----------------

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

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

  The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of common stock on March 23, 2000,
was approximately $1,286,216,000. Shares of voting stock held by each officer
and director and by each person who owns 5% or more of the outstanding voting
stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes. As of March 23, 2000, 87,899,230 shares of
the registrant's common stock were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

   The information called for by Part III of this Form 10-K is incorporated by
reference to the definitive proxy statement for the annual meeting of
stockholders of the company which will be filed no later than 120 days after
December 31, 1999.

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<PAGE>

                               TABLE OF CONTENTS

                                     PART I

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
 <C>      <S>                                                             <C>
 ITEM 1.  BUSINESS......................................................    3

 ITEM 2.  PROPERTIES....................................................   24

 ITEM 3.  LEGAL PROCEEDINGS.............................................   24

 ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........   24

                                    PART II

 ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
           STOCKHOLDER MATTERS..........................................   25

 ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA..........................   27

 ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
           AND RESULTS OF OPERATIONS....................................   27

 ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....   39

 ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................   40

 ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL
           DISCLOSURE...................................................   60

                                    PART III

 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............   61

 ITEM 11. EXECUTIVE COMPENSATION........................................   61

 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT....................................................   61

 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................   61

                                    PART IV

 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
          8-K...........................................................   62
</TABLE>


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                                    PART I

   This Annual Report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. Discussions containing forward-looking
statements may be found in the material set forth under "Business,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in other sections of the report. We use words such as
"believes", "intends", "expects", "anticipates", "plans", "may", "will" and
similar expressions to identify forward-looking statements. You should not
place undue reliance on these forward-looking statements. Our actual results
could differ materially from those anticipated in the forward-looking
statements for many reasons, including the risks described below in the
section entitled "Risk Factors" and elsewhere in this report.

ITEM 1. BUSINESS

Overview

   LookSmart is a leading global Internet search infrastructure company. We
have built a robust suite of scalable, customizable and high-quality search
products and have distributed these products, in varying forms, to our network
of approximately 100,000 partners and affiliates worldwide. Our search
partners choose LookSmart because our search solutions are developed to
satisfy their various strategic goals. First and foremost, we build our search
solutions to provide our partners' Internet users with a fast, effective and
high-quality environment to find the most relevant results. Second, we craft
our search solutions to maximize the generation of revenue for our partners.
Third, because of the scale of our distributed search solution network, we are
able to drive significant amounts of traffic to various destinations
throughout the Internet. Finally, we build private-label search solutions for
our partners that are highly customized and deeply integrated to meet each of
our partners' specific goals. Because our search solutions leverage our
existing Internet directory, we are able to deploy our search solutions in a
cost-effective and scalable manner.

  Our domestic network of search partners and affiliates includes:

  .  Internet portals such as Microsoft, Excite@Home, Alta Vista and Go2Net;

  .  media companies such as Time Warner, Sony, Cox Interactive Media and
     MacroMedia/Shockwave;

  .  Internet services providers, or ISPs, such as US West, IBM.net,
     RoadRunner, Flashnet and Prodigy; and

  .  approximately 95,000 personal and small business websites.

   BT LookSmart, our joint venture with British Telecommunications, is
primarily responsible for the expansion of our international network of
partners and country-specific search directories in Europe and Asia, including
the United Kingdom, the Netherlands, Hong Kong, Singapore, Malaysia, New
Zealand, Japan and Korea. We also maintain the www.looksmart.com website,
primarily as a showcase for our search products and as a destination for users
who wish to search directly with LookSmart.

   In January 2000, more than 45 million unique users accessed the websites of
our distribution partners and www.looksmart.com, according to Media Metrix.
This figure is calculated by combining the unduplicated reach of the websites
of our search partners with the unduplicated reach of our www.looksmart.com
properties. On a duplicated basis, our reach exceeds 100 million users per
month.

   Our search solutions consist of a robust suite of search products. At the
core of our search solutions is a directory of high-quality, granular content.
Through the use of technology and human editors, we have assembled what we
believe to be the largest collection of high-quality, granular content on the
Internet. Our directory currently includes a collection of over 1.5 million
links to, and reviews of, high-quality websites organized into more than
100,000 categories. We exclude hate and pornographic content from our
directory. We provide various

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methods to Internet users to search our solutions, including browsing the
directory by categories, searching the directory by keyword and asking
questions in a natural language, interactive format to our team of specialized
Internet editors.

Industry Background

   The emergence and wide acceptance of the Internet has fundamentally changed
how millions of people worldwide share information, communicate and conduct
business. International Data Corporation estimates that the number of Internet
users worldwide will increase from approximately 142 million in 1998 to
approximately 399 million by the end of 2002. IDC expects the total number of
URLs to grow from 925 million in 1998 to 8 billion by 2002. This includes
"suffixed" pages, which are separate URLs within individual websites. We
believe this increase is leading to a greater amount of highly specific
content on the Internet. Major factors driving this growth in Internet usage
and content include the increasing familiarity with and acceptance of the
Internet by businesses and consumers, the growing number of personal computers
in homes and offices, the ease, speed and lower cost of Internet access and
improvements in network infrastructure. These factors make the Internet
accessible to inexperienced users as well as the technologically
sophisticated. The growth in the number of Internet users has also led to the
emergence of the Internet as a powerful advertising and commerce medium.
Forrester Research estimates that total spending on Internet advertising in
the United States will grow from $1.5 billion in 1998 to nearly $11 billion in
2002.

 The Search Challenge

   The massive volume and growth of granular content on the Internet has
created the need for an organizing layer that can successfully match end users
with content providers. This organizational challenge, which we call the
"search challenge", has led to the development of several Internet services,
including directories and search engines, designed to help users locate
information. These services also seek to enable content providers, including
website owners, Internet communities, advertisers and sellers of goods and
services, to reach their target audiences.

   We believe that most Internet organization efforts to date have failed to
fully meet this challenge. Traditional Internet directories often lack focused
and relevant category structures, have limited content and contain many links
to "dead", outdated or irrelevant websites. Search engines, which use software
to locate websites based on user-entered keywords, often generate large sets
of results but typically cannot determine website quality. Moreover, search
engines often have limited capacity to determine the relevance of websites to
a query, have poor "ranking algorithms" to order results, do not contain
recently published websites and fail to respond to "dynamic" or frequently
changing material. We believe Internet users are demanding smarter search
capabilities and better organized content that will allow them to find
granular, deeply specialized and local content.

 The Search Infrastructure Challenge

   We believe that search is critical to most Internet users' ability to use
of the Internet productively and effectively. To provide a satisfying user
experience, many portals, ISPs, media companies and other website operators
have recognized the need to provide sophisticated search functionality on
their websites. We believe that as these companies invest more heavily in
adding content and functionality to their websites, they will have relatively
fewer resources to devote to creating and maintaining relevant and focused
directory and search services. At the same time, the complexity and resources
needed to provide superior directory and search capabilities are increasing.
Specialized expertise is needed to organize the growing amount and specificity
of content available on the Internet. Search technologies are becoming
increasingly sophisticated, because of the need to integrate internal company
data, information from across the company's website properties and data from
external Internet websites into search results. Therefore, the editorial and
technical demands for companies to maintain high quality directories and
advanced search functionality has grown significantly. As a result, many large
companies, portals and websites are finding it more effective and efficient to
outsource their Internet search and directory infrastructure.

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 The Advertising Challenge

   The rapid emergence of Internet advertising and commerce has created new
challenges for businesses seeking to advertise and sell their products and
services online. As businesses try to attract qualified people to their
website through online advertising, they need to find a means of both
aggregating a large volume of traffic through their websites and targeting
their advertising message according to individual users' interests. However,
the ability to effectively target an advertising message to Internet users
requires specialized capabilities. Therefore, expanding website traffic and
developing targeting capabilities is a key element of the online advertising
challenge.

   In addition, many companies have little understanding of, or experience in,
monetizing their website traffic through advertising. Finding firms who wish
to advertise on a company's website, selling effective advertising products to
them, serving the advertisements and billing the clients requires a scale in
activities that can discourage website owners from conducting these tasks
themselves. Online companies can derive significant benefits from outsourcing
this function to a specialized service in order to monetize their traffic and
maximize their advertising revenues.

The LookSmart Solution

   We have created a powerful suite of search solutions to enable our partners
and affiliates to achieve their objectives of providing a superior user
experience and maximizing the revenues from their traffic. We have assembled
what we believe to be the largest collection of high-quality, granular content
on the Internet, organized in a categorical, easy-to-search directory format.
We have also developed and partnered with technology leaders to develop
flexible search capabilities that can be customized to our partners'
specifications. Finally, we have developed an interactive search solution
which enables users to access the expertise of our web-searching experts. In
developing this full set of search solutions, we believe we are creating a
highly scalable asset that can be distributed to a large number of Internet
users through our network of distribution partners and through our Internet
properties. In the process, we seek to address the challenges faced by users,
content providers, advertisers and vendors.

 Our Search Solution

   We provide search solutions that enable users to find useful information
quickly. Our services allow users to choose between browsing the directory
through an intuitive category search path, inputting keywords in a search box
or interacting with our editors to find the most relevant sites quickly.

   Comprehensive Content. The LookSmart directory currently contains over 1.5
million unique URLs in over 100,000 categories. We have developed locally
relevant and culturally sensitive Internet directories for Canada, Australia
and some Latin American countries, as well as over 70 local areas in the
United States. We have also developed specialized directories for several
countries in Europe and Asia, which we have licensed to BT LookSmart, our
joint venture with British Telecommunications. BT LookSmart plans to offer
these and other directory services for countries in Europe and Asia, aside
from China.

   High-Quality Content. We focus on including only authoritative, up-to-date,
categorized content in our directory. Our team of over 200 editors includes
taxonomists, copy editors, subject specialists, maintenance editors and
generalist editors. Our editors use proprietary and licensed software products
that help them find, categorize, index and rate high-quality websites. They
also review the directory regularly to check whether websites are active and
still relevant. Additionally, they exclude hate and pornographic websites from
our directory.

   Easy-to-Navigate Content. The LookSmart directory is organized to provide
relevant search results for both category-based and keyword search. Our
navigation interface allows a user to follow a search path into sub-categories
and sub-sub-categories visually on the screen, enabling the user to see not
only which path was

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chosen, but also those which were not. We believe that this is a critical
element in the trial and error process that most users undertake to find
material. Our keyword search brings users directly to website results. All of
our navigation results include a brief review of each website to help guide
users.

   LookSmart Live! In July 1999, we introduced a service that enables users to
directly contact our editors to get assistance with their Internet search and
related activities. We developed this feature in response to consistent data
from our qualitative research that suggests that Internet users, particularly
new users, often "get stuck" and would greatly value assistance.

 Our Search Infrastructure Solution

   Our ability to categorize and organize highly granular content from the
Internet and integrate it with internal and company-specific information
allows us to offer a variety of Internet infrastructure solutions to our
business partners. We have developed and partnered with technology providers
to offer customized versions of our directory and customized search algorithms
to our affiliates. Our ability to tailor search solutions according to the
specifications of our partners is an important part of LookSmart's value
proposition to our partners. We work with our partners to customize our search
solutions to meet the particular needs of their website strategy and core
audience.

   Our outsourcing Internet infrastructure solution has three principal
benefits to our distribution affiliates. First, we enable our affiliates to
obtain customized private label search functionality without expending
resources and expertise to develop and maintain a comprehensive Internet
directory and search technology. Second, inclusion in our network enables our
partners to gain exposure to a large number of Internet users and advertisers.
Third, we build our search solutions to maximize the generation of revenue for
our partners.

 Our Advertising Solution

   We launched www.looksmart.com, the showcase site for our LookSmart
directory, in October 1996. We leverage our database by syndicating, licensing
and distributing our search solutions to leading Internet portals, ISPs, media
companies and other websites, including Alta Vista, Excite@Home, Go2Net,
Microsoft Network, Netscape Netcenter, Shockwave (a Macromedia company) and
Time Warner. According to Media Metrix, in January 2000 over 45 million unique
users viewed the websites of our distribution partners and our
www.looksmart.com website. As a result of this substantial Internet user base,
we are able to offer advertisers the opportunity to reach Internet users on a
broad scale.

   In addition, by offering advertisers the ability to place their
advertisements on category and keyword results pages, advertisers are able to
find their target audience more effectively. Rather than tracking individual
users' Internet page views or matching this user data with personal
information about the user, our targeted advertising solution is achieved by
placing contextually relevant advertisements on the pages and in the
categories of information the Internet user has specifically requested from
our search solutions.

The LookSmart Strategy

   Our strategy is to establish LookSmart as the leading search infrastructure
provider to Internet portals, ISPs, media companies and other websites
worldwide. We seek to address our partners' search needs through our directory
and search solutions and derive multiple revenue streams by leveraging these
core assets. The key elements of our growth strategy include the following:

 Expand Our Collection of High-Quality, Granular Content

   We intend to expand both the number of high-quality URLs included in our
directory as well as the number of categories into which we classify the URLs.
Our mission to be the largest provider of granular information on the Internet
requires us to continually improve the content in our existing categories by
including new websites, communities and commerce environments, deleting
outdated links and updating editorial reviews. We also plan

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to expand the type of content in our directory, including new content in our
Australian, Canadian and Latin American databases, expanding our broadband
directory and providing information for wireless Internet devices. Our joint
venture with British Telecommunications, BT LookSmart, plans to enhance our
existing directories and develop new directories for selected countries in
Europe and Asia. In order to expand these directories, we plan to increase the
number of Internet editors that we have worldwide and leverage their efforts
with advanced productivity tools.

 Broaden Our Network of Affiliates, Advertisers and Ecommerce Partners

   We intend to continue building a network of portals, media companies, ISPs
and other websites that use our directory and search infrastructure solutions.
At the same time, we plan to capitalize on our expanded reach to attract
additional advertisers and ecommerce partners who wish to reach a larger, more
targeted audience.

 Utilize LookSmart Directory and Search Solutions to Drive Multiple Revenue
 Streams

   Our goal is to leverage our unique assets--the LookSmart directory and
search solutions--and monetize them in several ways. We are targeting the
convergence of three market opportunities: online advertising and syndication,
licensing, and ecommerce/distribution. We plan to continue monetizing our
assets through these revenue opportunities, as well as to create additional
revenue streams, including international sources and new ecommerce and
distribution opportunities.

 Pursue Strategic Acquisitions and Alliances

   We plan to pursue acquisitions and alliances to strengthen our technology,
broaden our audience reach, capture new distribution channels or open new
revenue streams. In addition, we may seek to acquire businesses or develop
alliances which will further expand our syndication, licensing and
ecommerce/distribution services.

 Expand into Select International Markets

   As a company with relevant operational experience outside the United
States, we believe we are well positioned to enter major international markets
in a locally relevant, culturally-sensitive manner. We plan to expand our
directory and search solutions in selected markets internationally, both
through direct offerings of our services to Internet users in Australia,
Canada and selected countries in Latin America and through the BT LookSmart
joint venture in Europe and Asia.

The LookSmart Directory

   The LookSmart directory has been structured to include "all of the useful
stuff and none of the junk". The database is organized in order to enable
users to follow intuitive category and sub-category "paths" to find their
desired content or to retrieve it by typing a keyword in a search box.

   We create this directory database using a combination of proprietary and
licensed software and a highly structured Internet editorial team. Our
editorial teams are located in San Francisco, Amsterdam, Copenhagen, Melbourne
and Montreal. Our software includes a sophisticated desktop tool that enables
editors to find, review, describe and categorize websites and to check whether
websites is currently active and available. The systems we have developed
enable our editors to perform five core processes:

 Find the Content

   Our editors use a range of automated search technologies, other websites,
website submissions from website owners/builders, off-line data sources and
other methodologies to find the content our users may require.

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 Select the Content

   In finding useful content, our editors also encounter a lot of "junk",
material that is unlikely to be useful to our users. For example, a user
searching through traditional Internet directories for material on surgery for
breast cancer is likely to come across material that is either commercial
material, material related to cosmetic surgery, pornographic material, or
material from sources with limited medical authority. Our editors select and
place content for each of over 100,000 categories according to parameters that
our taxonomy team maintains. Also, the editors will often organize the
websites to enable the user to find the most generally useful or authoritative
source first and view the more specialized or marginal sources later.

 Organize the Content

   Our team of full-time taxonomists, primarily library science and
information science specialists, create and frequently modify our category
taxonomy to ensure that it is logical, current and intuitive.

 Describe the Content

   The end product that users typically seek from a navigation service is a
list of website links. Our editors facilitate the search process by providing
succinct descriptions of up to 20 words for every listed website to assist
users in determining which websites contain content most relevant to their
search.

 Maintain the Content

   Our editors regularly review user requests and content availability to add
new categories and new websites for existing categories. We also use a
combination of software and editorial intervention to minimize inactive links
in the database. Websites in each category are reviewed according to a
schedule that is appropriate to the subject matter. For example, we update our
collection of material related to the current news much more frequently than
we update our material on historical subjects.

Advertising and Syndication of Our Directory and Search Solutions

   In 1999, $22.1 million or 45% of our revenues derived from advertising and
syndication of our directory and search solutions. We offer a full suite of
search solutions and often sell and serve the advertising on our partners'
websites. In most cases we offer a complete search solution where we create a
unique HTML environment for the client's search feature, host the service,
sell advertising on those pages and share advertising revenue with the client.
We believe that there are three factors that drive advertising business to
LookSmart:

  .  we deliver highly targeted advertising based on the specific content
     category on the page;

  .  we create a quality environment with all sites selected by expert web
     editors and exclude all hate and pornography; and

  .  advertisers are attracted to the scale we have achieved through our
     distribution network of search solutions customers.

   Our advertising sales were handled through Softbank Interactive Marketing
until October 1997 and by DoubleClick, Inc. from October 1997 through mid-
1998. In an effort to maintain stronger relationships and loyalties with our
advertisers and to reduce advertising sales costs as a percentage of revenues,
in mid-1998 we created our own sales organization, which now consists of a
national sales team of 29 personnel located in San Francisco and New York. We
plan to expand the size of the team and the location of the offices
commensurate with traffic expansion.

   The following is a list of some of the advertisers that have recently
advertised on our www.looksmart.com website or the websites of our
distribution affiliates: Amazon.com, Ameritech, Barnes & Noble, Bell Atlantic,
eBay, Farmers Insurance, JC Penney, Jenny Craig, LowestFare, Microsoft,
Nordstrom, Office Max and Providian Financial.

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Licensing of Our Directory and Search Solutions

   In 1999, $19.3 million or 39% of our revenues derived from licensing of our
directory and search solutions. We receive revenue from licensing our existing
directory and customizing our directory based on the specifications and needs
of our customers. Clients who license our directory include Microsoft and
Excite@Home. We have built 25 country databases and established partnerships
abroad, most recently with British Telecommunications to form BT LookSmart, an
equally-owned joint venture which will provide search and directory services
in Europe and Asia.

Ecommerce and Distribution

   In 1999, $7.5 million or 15% of our revenues derived from our ecommerce and
distribution activities. Many online businesses have elected to be included in
the LookSmart search network, because it allows them to reach a potential
audience of tens of millions of Internet users. Our "Buy It On The Web"
shopping website promotes and sells a range of consumer products, including
the "As Seen on TV" product line promoted by our partner Guthy Renker
Corporation. We plan to establish additional distribution partnerships with a
range of other businesses in order to expand our distribution-based revenue
streams. We also intend to work with existing and new partners to explore ways
to leverage our distribution network and create new revenue streams.

International Operations

   LookSmart has established international operations to meet worldwide demand
for improved search infrastructure on the Internet. Central to our
international efforts is our ability to localize our database for individual
markets in order to create a more locally relevant, culturally sensitive
offering. We currently have editorial teams located in San Francisco
(primarily for United States, Latin American, Japanese and Korean services),
London (primarily for English-language European services), Melbourne
(primarily for Australian, British and New Zealand services), Montreal
(primarily for Canadian services) and Copenhagen and Amsterdam (for non-
English European services).

   Our recently-formed joint venture, BT LookSmart, plans to enhance existing
local directories, build new country-specific directories and provide search
solutions for selected countries in Europe and Asia. BT LookSmart is equally
jointly owned by LookSmart and British Telecommunications and will seek to
provide Internet search solutions and specialized locally relevant directories
in a number of countries across Europe and Asia. See "Business--Risk Factors--
The BT LookSmart joint venture will require a substantial investment of
resources and may not ever become profitable".

Network of Distributors and Affiliates

   We have actively pursued relationships with portals, ISPs, media companies
and other websites and regard these relationships as key drivers of growth in
traffic and revenue. These relationships include the following:

 British Telecommunications

   In February 2000, LookSmart and British Telecommunications established a
joint venture, BT LookSmart, which plans to offer locally relevant, culturally
sensitive Internet directories for selected countries in Europe and Asia. We
licensed to BT LookSmart our websites for several countries, including the
United Kingdom, the Netherlands, Singapore, Malaysia and New Zealand, as well
as our directories for several countries, including Japan and Korea. BT
LookSmart intends to expand these existing directories and build new ones for
selected countries in Europe and Asia. The joint venture plans to offer its
services to British Telecommunications' established base of Internet customers
in Europe and Asia.

 Cox Interactive Media

   We have a strategic alliance with Cox Interactive Media relating to local
websites, local navigation services and local content. Our United States
directory is prominently placed on all 23 of Cox's local city sites, such as

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www.accessatlanta.com. Cox Interactive Media, using its own editorial staff,
provides the local content for over 70 city markets for our United States
directory database using a licensed copy of our proprietary Editorial Support
System.

 Excite@Home

   In June 1999, we entered into a three-year licensing agreement with
Excite@Home Corporation under which Excite@Home licensed our directory
databases for use on the www.excite.com website and other properties. Under
the agreement, we update the database periodically.

 Microsoft

   In December 1998, we entered into a five-year licensing agreement with
Microsoft Corporation under which Microsoft licensed our directory database
for use on the www.msn.com website and other properties. The agreement is
terminable by either party on six months' notice at any time after June 5,
2000. Under the agreement, we provide Microsoft with custom-tailored Internet
directory content according to Microsoft's requests in six-month increments.

 Time Warner

   In January 2000, we entered into an agreement with Time Warner, Inc. under
which we agreed to syndicate our search service across Time Warner Internet
properties including www.CNN.com, www.CNNfn.com, CNNSI, www.warnerbros.com
(Warner Bros.), www.Entertaindom.com and www.EW.com (Entertainment Weekly).

Competition

   We compete in markets that are new, intensely competitive, highly
fragmented and rapidly changing. We compete on the basis of several factors,
including the quality of content and the ease of use of online services. In
the licensing and syndication market, there are additional factors such as
performance, scalability, price, and relevance of results. The number of
companies and websites competing for users, Internet advertisers' and
ecommerce marketers' spending has increased significantly. With no substantial
barriers to entry in these markets, we expect this competition to continue to
increase. Competition may also increase as a result of industry consolidation.

   We face direct competition from companies that provide several types of
Internet services, as illustrated in the following table.

<TABLE>
<CAPTION>
        Category                    Focus                Example Competitors
        --------                    -----                -------------------
 <C>                    <C>                           <S>
 Internet content       Internet search, content      AOL, Yahoo!, Netscape
  retrieval             aggregation and content       Open Directory, Inktomi,
                        licensing                     Ask Jeeves, Alta Vista,
                                                      Lycos NBCi, Go Network,
                                                      GoTo.com

 Internet advertising   Demographically targeted and  Internet advertising
                        content-targeted advertising  networks like DoubleClick
                                                      and 24/7 Media; Internet
                                                      navigation firms with
                                                      similar content targeting
                                                      capabilities like AOL,
                                                      Yahoo!, and Lycos

 Internet outsourcing   Outsourcers of Internet       Inktomi, InfoSpace.com,
                        search solutions, Internet    Netscape Open Directory,
                        portal or website             Ask Jeeves, GoTo.com,
                        enhancement content           MyWay.com, NBCi, Lycos

 Online commerce        Small vendors Internet and    TicketMaster-CitySearch,
  enabling companies    transaction enabling          AOL's Digital Cities,
                                                      Sidewalk, Go2Net, iMall
                                                      and Hypermart
</TABLE>


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   See "Business--Risk Factors--If we are unable to compete effectively in the
Internet navigation market, our business and profitability will suffer".

Technology

   One of our principal assets is our internally-developed and licensed
software for creating and distributing the LookSmart directory and search
solutions. In addition, we use a variety of hardware and communications
technologies to distribute and maintain our business.

 Editorial Support System

   We have developed a proprietary software application, the Editorial Support
System, used by our editors to discover, edit, and categorize websites into
the LookSmart database. This system undergoes frequent revision and upgrade
and over 200 editors can use the application simultaneously. In addition to
the Editorial Support System, we have developed several proprietary algorithms
which enable us to extract data from the database, publish this data in
various editions of the directory and perform routine maintenance on the
database, such as deadlink checking.

   The Editorial Support System also provides various statistical and
reporting functions, including editorial productivity levels and work quality,
and identifies trends in user preferences. We have recently enhanced the
system to include capabilities for Asian characters and languages.

 Taxonomy and Search

   We publish our data in a proprietary and unique set of categories in a
specific taxonomy. This taxonomy has over 100,000 categories. We have
developed proprietary search technology to search this database and return
relevant answers to users. In addition, by integrating keyword search software
from Fast Search and Transfer into our systems, we can create custom search
solutions for our partners' data and content. Through our partnership with
Inktomi, our partners can create and manage customized directories, utilizing
the breadth, depth and ongoing development of Looksmart's core directories.

 Server Architecture

   We believe we have developed a proprietary, dynamic and scalable server
software architecture that allows us to support our ISP partners by serving
custom versions of the ISP's home page or any other page on the ISP's website
as part of our distribution of directory content. In January 1999, we signed a
license agreement with Engage Technologies to license their Accipiter
advertising server technology. We converted our advertising serving
functionality from an internal proprietary application to the Accipiter
technology effective in March 1999.

 GlobalCenter

   In February 1999, we signed an agreement with GlobalCenter, Inc. to provide
co-location, Internet connectivity, and maintenance of our hardware equipment
at GlobalCenter's facilities in Santa Clara, California. GlobalCenter provides
comprehensive facilities management services, including human and technical
monitoring of all production servers, 24 hours per day, seven days per week.

Marketing

   Marketing activities will be important in our efforts to build traffic and
attract additional advertisers, syndication affiliates and ecommerce partners.
We have initiated a multi-tiered marketing strategy to support activities
related to key aspects of our business model. We have identified the following
primary targets for our marketing programs:

  .  the advertising trade, including advertising agency media planners who
     plan and buy online advertising for their clients;

                                      11
<PAGE>

  .  business partners, including leading ISPs, media companies, portals and
     other websites that use LookSmart on a branded, co-branded or unbranded
     basis to enhance the search experience of their customers; and

  .  Ecommerce websites and online marketers of products and services that
     seek to be reviewed and included in LookSmart's database of URLs in
     order to gain online reach through our partner network.

Employees

   We had 151 employees at the end of 1998 and approximately 535 at the end of
1999. We have never had a work stoppage, and none of our employees is
represented by a labor union. We consider our relations with our employees to
be good.

                                      12
<PAGE>

                                 RISK FACTORS

   You should carefully consider the risks described below before making an
investment decision. If any of the following risks actually occur, our
business, financial condition or results of operations could be harmed. In
that case, the trading price of our common stock could decline, and you could
lose all or part of your investment.

We have a history of net losses and expect to continue to incur net losses

   We have incurred net losses since our inception, including net losses of
approximately $12.9 million and $64.7 million for the years ended December 31,
1998 and 1999. As of December 31, 1999, we had an accumulated deficit of
approximately $87.9 million. We expect to have increasing net losses and
negative cash flow for the foreseeable future. The size of these net losses
will depend, in part, on our ability to grow our revenues and capitalize on
new sources of revenue and on the level of our expenses. We expect to spend
significant amounts to:

  .  develop our international business, particularly through our BT
     LookSmart joint venture with British Telecommunications;

  .  maintain and expand our network of strategic distribution partners;

  .  fund new product development and enhance the functionality of our search
     and navigation services; and

  .  acquire complementary technologies and businesses.

   As a result, we expect that our operating expenses and non-operating losses
will increase significantly in the near term and, consequently, we will need
to generate significant additional revenues to achieve profitability. Even if
we do achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis.

Our quarterly revenues and operating results may fluctuate due to many
factors, each of which may negatively affect our stock price

   Our quarterly operating results may fluctuate significantly as a result of
a variety of factors that could affect our revenues in any particular quarter.
These factors include:

  .  the level of user traffic on our and our affiliates' websites and our
     ability to monetize that traffic in any given quarter;

  .  the demand for our Internet search and navigation services;

  .  the level of demand for Internet advertising and changes in the
     advertising rates we charge;

  .  the timing of revenue recognition under our licensing and advertising
     contracts;

  .  the level and timing of our entry into new contracts for Internet
     infrastructure building, database licensing and syndication;

  .  seasonality of our advertising and ecommerce revenues, as Internet usage
     is typically lower in the first and third quarters of the year;

  .  technical difficulties and systems downtime or failures, whether caused
     by us, third party service providers or hackers;

  .  changes in our or our partners' pricing policies or termination of
     contracts; and

  .  the timing of our delivery of URLs under the Microsoft contract. We
     recognize quarterly revenues under this contract based on the number of
     URLs added to our database during the quarter relative to the total
     number of URLs we are required to add to our database during the
     relevant six-month period. As a result, to the extent that we satisfy
     our database update obligations unevenly, the revenues we recognize may
     be skewed on a quarter-to-quarter basis.

                                      13
<PAGE>

   Our expense levels are based in part on expectations of future revenues
and, to a large extent, are fixed. We may be unable to adjust spending quickly
enough to compensate for any unexpected revenue shortfall. Our operating
results may vary as a result of changes in our expenses and costs, including
costs related to acquisitions and integration of technologies or businesses.

   Due to the above factors, we believe that period-to-period comparisons of
our operating results are not necessarily meaningful. You should not rely on
period-to-period comparisons as indicators of our future performance. If our
operating results in any future period fall below the expectations of
securities analysts and investors, the market price of our securities would
likely decline.

We will need additional capital in the future to support our growth and
additional financing may not be available to us

   Although we believe that our working capital will provide adequate
liquidity to fund our operations and meet our other cash requirements until
the end of fiscal 2000, unanticipated developments in the short term, such as
the acquisition of businesses with high negative cash flows, may also require
additional financing. In any case, we will seek to raise additional funds
through public or private debt or equity financings in order to:

  .  fund our operations and capital expenditures;

  .  take advantage of favorable business opportunities, including geographic
     expansion or acquisitions of complementary businesses or technologies;

  .  develop and upgrade our technology infrastructure;

  .  reduce outstanding debt;

  .  develop new product and service offerings;

  .  take advantage of favorable conditions in capital markets; or

  .  respond to competitive pressures.

   The capital markets, and in particular the public equity market for
technology and Internet companies, have traditionally been volatile. It is
difficult to predict when, if at all, it will be possible for Internet
companies to raise capital through these markets. We cannot assure you that
the additional financing we need will be available on terms favorable to us,
or at all.

Our business prospects depend on the use of the Internet as an advertising
medium and our ability to generate advertising revenues

   For the quarter and year ended December 31, 1999, advertising and
syndication revenues accounted for 55% and 45% of our total revenues. We
expect that revenues from advertising and syndication will continue to
represent a significant portion of our total revenues for the foreseeable
future. 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. We expect
downward pressure on advertising prices in the industry generally due to the
increasing amount of advertising inventory becoming available on the Internet.
As the Internet evolves, advertisers may find Internet advertising to be a
less effective means of promoting their products or services relative to
traditional advertising media and may not continue to spend money on Internet
advertising. Acceptance of the Internet among advertisers will depend, to a
large extent, on the level of Internet usage by consumers and upon growth in
the commercial usage of the Internet.

   In addition, advertising on the Internet is at an earlier stage of
development in international markets compared to the United States. We intend
to expand our overseas operations and will therefore be subject to the greater
uncertainties associated with our reliance on advertising revenues from
international operations.

                                      14
<PAGE>

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

   Intense competition for advertising revenues exists among high-traffic
websites, which results in significant price competition. Currently, there are
a variety of pricing models for selling advertising on the Internet. Several
of the most widely used pricing models are based on the number of impressions
or clickthroughs, the duration over which the advertisement is displayed or
the number of keywords to which the advertisement will be 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. 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 management and internal systems may be inadequate to handle the growth of
our business

   Since January 1, 1998, our workforce has grown substantially, from 55
employees at that date to approximately 535 employees on December 31, 1999. In
addition, many members of our management team have only recently started in
their current positions, including our Senior Vice President, Engineering and
Senior Vice President, Finance. We also need to hire employees to fill several
key positions, including Senior Vice President, Marketing and Vice President,
International. Implementation of our growth strategy requires that we hire
additional highly qualified personnel in the near term, particularly in our
engineering, administration, product development and sales operations.

   Our growth has placed, and will continue to place, a significant strain on
our management, our engineering and product development staff, and our
internal accounting, operational and administrative systems. To manage future
growth, we must continue to improve these systems and expand, train, retain
and manage our employee base. If our systems, procedures and controls are
inadequate to support our operations, our expansion could be slowed. We cannot
assure you that we will be able to manage our growth effectively, and any
failure to do so could harm our business.

We derive a significant amount of our revenues from Microsoft, and if
Microsoft terminates their contract with us, our business could be harmed

   We derive a significant amount of our revenues under an agreement with
Microsoft Corporation, and after June 5, 2000, either party may terminate the
agreement for any reason on six months' notice. For the quarter and year ended
December 31, 1999, revenues from Microsoft under this agreement accounted for
$4.7 million (26%) and $18.8 million (39%) of our total revenues. The cash
payments we receive for each six-month period under this agreement are subject
to full or partial refund if we fail to provide the stated number of URLs
during that period. Microsoft has the right to use our database during the
term of the agreement and, after the agreement is terminated, to continue to
use the content we delivered during the term of the agreement. Microsoft also
has the right to sublicense these rights to others, both during and for up to
two years after the term of the agreement. Microsoft may not sublicense its
rights to a specified group of companies, which includes some of our
competitors.

Our revenues and income potential are unproven and our business model is
continuing to evolve

   We were formed in July 1996 and launched our search and navigation service
in October 1996. Because of our limited operating history, it is extremely
difficult to evaluate our business and prospects. You should evaluate

                                      15
<PAGE>

our business in light of the risks, uncertainties, expenses, delays and
difficulties associated with starting a new business, many of which are beyond
our control. In addition, we compete in the relatively new and rapidly
evolving Internet search infrastructure market, which presents many
uncertainties that could require us to further refine or change our business
model. Our success will depend on many factors, including our ability to:

  .  expand and maintain our network of distribution relationships, thereby
     increasing the amount of traffic to Internet properties using our search
     services;

  .  attract and retain a large number of advertisers from a variety of
     industries; and

  .  profitably establish and expand our service offerings, including
     ecommerce distribution and LookSmart Live!

   Our failure to succeed in one or more of these areas may harm our business,
results of operations and financial condition.

The BT LookSmart joint venture will require a substantial investment of
resources and may not ever become profitable

   We face many risks associated with the BT LookSmart joint venture:

  .  we will recognize 50% of the net income or loss from the joint venture
     as non-operating income or expense on our statement of operations. In
     the early years of operation we expect the venture to incur significant
     losses and require large capital expenditures. As a result, LookSmart's
     earnings will be adversely impacted. We cannot project when BT LookSmart
     will reach cash flow break-even or become profitable, if at all.

  .  we may be unable to raise funds to meet our financing obligations, in
     which case our equity ownership of the joint venture will be
     proportionately reduced;

  .  the joint venture will face competition in international markets from a
     range of competitors, including Yahoo!, Microsoft Network, Alta Vista,
     UK Plus, France Telecom, Deutsche Telecom, Tele Denmark, Scandinavian
     Online, Sonera Plaza and other American and foreign search engines,
     content aggregators and portals, some of which have greater capital
     resources and local experience in these markets;

  .  the joint venture may fail to offer locally-relevant search products and
     services, which would prevent it from aggregating a large base of
     Internet traffic;

  .  the joint venture will face risks associated with conducting operations
     in many different countries, including risks of currency fluctuations,
     government and legal restrictions, privacy or tax laws, cultural or
     technical incompatibilities and economic or political instability;

  .  the joint venture's success will depend on its ability to aggregate a
     large amount of Internet traffic and monetize that traffic through
     advertising and other revenue streams;

  .  the joint venture may fail to establish an effective management team and
     hire experienced and qualified personnel in each of the countries in
     which it offers its search and navigation services; and

  .  we have not previously worked with British Telecommunications and may be
     unable to forge an effective working relationship in the joint venture
     due to differences in business goals, assessment of and appetite for
     risk or other factors.

If we are unsuccessful in expanding the network of affiliates using our
directory and search services, we may be unable to increase future revenues

   Our success depends on our ability to expand the network of affiliates
using our directory and search services. We have invested, and will continue
to invest, a significant amount of our human and capital resources to expand
this network. However, we cannot assure you that this strategy will be
successful or that we will

                                      16
<PAGE>

continue to grow and expand the traffic through the network of websites using
our Internet infrastructure services. If we are unsuccessful in doing so, the
reach of our search services, and consequently our ability to generate
advertising revenues, will be seriously harmed. In that event, our business
prospects and results of operations may deteriorate.

A failure to manage and integrate businesses we acquire could divert
management's attention and harm our operations. Acquisitions may also dilute
our existing stockholders

   If we are presented with appropriate opportunities, we intend to make
additional acquisitions of, or significant investments in, complementary
companies, products or technologies to increase our technological capabilities
and expand our service offerings. Acquisitions may divert the attention of
management from the day-to-day operations of LookSmart. In addition,
integration of acquired companies into LookSmart could be expensive, time
consuming and strain our managerial resources. In particular, it may be
difficult to retain key management and technical personnel of the acquired
company during the transition period following an acquisition. Geographic
distances between LookSmart and its acquired businesses may require some
employees to relocate. For these reasons, we may not be successful in
integrating any acquired businesses or technologies and may not achieve
anticipated revenue and cost benefits.

   Acquisitions may also result in dilution to our existing stockholders if we
issue additional equity securities and may increase our debt. We may also be
required to amortize significant amounts of goodwill or other intangible
assets in connection with future acquisitions, which would adversely affect
our operating results.

We may be unable to address capacity constraints on our software and
infrastructure systems in a timely manner

   We have developed custom, proprietary software for use by our editors to
create the LookSmart directory and we also use proprietary and licensed
software to distribute the LookSmart directory and associated pages, and to
serve advertising to those pages. This software may contain undetected errors,
defects or bugs or may fail to operate with other software applications. The
following developments may strain our capacity and result in technical
difficulties with our website or the websites of our syndication partners:

  .  demands on our software and infrastructure systems resulting from
     substantial increases in editorial activity or the number of URLs in our
     directory;

  .  customization of the database for syndication;

  .  substantially increased traffic; and

  .  the addition of new features or changes in our directory structure.

   If we fail to address these constraints and difficulties in a timely
manner, our advertising, syndication and other revenues will decline and our
business will suffer. In addition, as we expand our service offerings and
enter into new business areas such as ecommerce distribution, we may be
required to significantly modify, enhance and expand our software and
infrastructure systems. If we fail to accomplish these tasks in a timely
manner, our business will suffer.

The operating performance of our systems is critical to our business and
reputation

   Any system failure, including network, software or hardware failure,
whether caused by us, a third party service provider or hackers, that causes
an interruption in our service or a decrease in the responsiveness of the web
pages that we serve could result in reduced user traffic, a decline in
revenues and damage to our reputation and brand name. In addition, our users
and customers depend on ISPs, online service providers and other website
operators for access to the LookSmart directories. These service providers
have experienced significant outages in the past and could experience outages,
delays and other operating difficulties in the future.

                                      17
<PAGE>

   In February 1999, we entered into an agreement with GlobalCenter, Inc. to
house our hardware equipment at their facilities in Santa Clara, California.
We do not presently maintain fully redundant systems at separate locations, so
our operations depend on GlobalCenter's ability to protect the systems in its
data center from earthquake, fire, power loss, water damage,
telecommunications failure, hackers, vandalism and similar events. Although
GlobalCenter provides comprehensive facilities management services,
GlobalCenter does not guarantee that our Internet access will be
uninterrupted, error-free or secure. We have not developed a disaster recovery
plan to respond to system failures. Although we maintain property insurance
for our equipment and business interruption insurance, we cannot guarantee
that our insurance will be adequate to compensate us for all losses that may
occur as a result of any system failure.

We face risks related to expanding into new services and business areas,
including LookSmart Live! and ecommerce distribution

   To increase our revenues, we will need to expand our operations by
promoting new or complementary products and services and by expanding into new
business areas. We are continuing to develop and implement various ecommerce
services, including facilitating transactions and providing ecommerce
solutions for small to mid-sized businesses. These products and services will
require both modification of existing software and systems and the creation or
acquisition of new software and systems. We may lack the managerial, editorial
and technical resources necessary to expand our service offerings. These
initiatives may not generate sufficient revenues to offset their cost. In
addition, as we continue to expand our offerings in these and other markets,
we will require significant additional managerial and financial resources that
may strain our existing resources.

   For example, one of our new business areas, LookSmart Live!, is capital and
human resource intensive, and may be difficult to scale quickly and
profitably. If we are unable for any reason to expand the service in line with
consumer demand, our reputation and business could suffer. In the fourth
quarter of 1999, the LookSmart Live! service generated no revenues and had
$2.0 million in operating expenses. If we are unable to monetize the traffic
generated from this service, it may not become profitable and may harm our
results of operations and financial condition.

If we are unable to compete effectively in the Internet search infrastructure
market, our business and profitability will suffer

   We compete in the Internet search infrastructure market, which is
relatively new and highly competitive. We expect competition to intensify as
the market evolves. Many of our competitors have longer operating histories,
larger user bases, longer relationships with consumers, greater brand
recognition and significantly greater financial, technical and marketing
resources than we do. As a result of their greater resources, our competitors
may be in a position to respond more quickly to new or emerging technologies
and changes in consumer requirements and to develop and promote their products
and services more effectively than we do.

   The barriers to entry into some segments of the Internet search
infrastructure market are relatively low. As a result, new market entrants
pose a threat to our business, particularly with respect to providing Internet
search services to vertical market segments. We do not own any patented
technology that precludes or inhibits competitors from entering the Internet
search infrastructure market. Existing or future competitors may develop or
offer technologies or services that are comparable or superior to ours, which
could harm our business.

   We currently face direct competition from companies that provide directory
content, search algorithms, content aggregation and licensing, demographically
and content-targeted advertising, Internet outsourcing and online interactive
service capabilities. As we expand the scope of our Internet services, we will
compete directly with a greater number of Internet search and navigation
providers, content aggregators and other media companies across a wide range
of different online services, including:

  .  subject-specific websites where competitors may have advantages in
     expertise and brand recognition;

  .  portals that have a branded franchise and a high frequency of repeat
     visitors;

                                      18
<PAGE>

  .  metasearch services and software applications that allow a user to
     search the databases of several directories and catalogs simultaneously;
     and

  .  category-based and directory-based services that offer information
     search and retrieval capabilities.

   To date, the Internet search infrastructure market has been characterized
by intense competition for consumer traffic. This has resulted in the payment
of consumer referral fees by us and others to frequently used websites such as
portals and ISPs. If these companies fail to provide these referrals, or the
market for these referrals becomes more competitive so that the cost of
referrals increases, our business and potential profitability could be harmed.

Recent acquisitions and strategic alliances involving our competitors could
reduce traffic to our and our affiliates' websites

   A number of significant acquisitions and strategic alliances have been
completed or announced in the Internet search and navigation market involving
some of our competitors, including:

  .  CMGI's acquisition of an interest in Alta Vista;

  .  America OnLine's acquisition of Netscape Communications Corporation and
     proposed acquisition of Time Warner, Inc.;

  .  The Walt Disney Company's acquisition of an interest in Infoseek
     Corporation;

  .  NBCi's formation from Snap, XOOM.com, NBC.com, NBC Interactive
     Neighborhood, AccessHollywood.com, VideoSeeker and a 10% equity stake in
     CNBC.com;

  .  Yahoo, Inc.'s acquisition of Geocities;

  .  @Home Network's acquisition of Excite, Inc.; and

  .  Ask Jeeves' acquisition of Direct Hit Corporation.

   Although the effect of these acquisitions and strategic alliances on our
business cannot be predicted with certainty, these transactions could provide
our competitors with significant opportunities to increase traffic on their
websites and expand their service offerings, which could drive down traffic
for our network. In addition, these transactions align some of our competitors
with companies, including television networks, that are significantly larger
and have substantially greater marketing and technical resources and name
recognition than LookSmart. As a result, these competitors may be in a
position to respond more quickly to new or emerging technologies and changes
in consumer requirements and to develop and promote their products and
services more effectively than we do.

We may be unable to execute our business model in international markets

   A key component of our strategy is to expand our operations into selected
international markets, both through the BT LookSmart joint venture in Europe
and Asia and through our direct offerings of search and navigation services in
Australia, Canada and selected countries in Latin America. To date, we have
limited experience in syndicating localized versions of our service offerings
in international markets, and we may be unable to execute our business model
in these markets. In addition, most foreign markets have lower levels of
Internet usage and online advertising than the United States. In pursuing our
international expansion strategy, we face several additional risks, including:

  .  lower per capita Internet usage in many countries abroad, due a variety
     of causes such as lower disposable incomes, lack of telecommunications
     and computer infrastructure and questions regarding adequate on-line
     security for ecommerce transactions;

  .  relatively small Internet markets in some countries may prevent us from
     aggregating sufficient traffic and advertising revenues and scaling our
     business model in those countries;

                                      19
<PAGE>

  .  competition in international markets from a broad range of competitors,
     including Yahoo!, Alta Vista and other United States and foreign
     telecommunications firms, search engines, content aggregators and
     portals, some of which have greater local experience than we do;

  .  uncertainty of market acceptance in new regions due to language,
     cultural, technological or other factors;

  .  our potential inability to aggregate a large amount of Internet traffic
     and find and develop relationships with international advertising and
     distribution partners;

  .  difficulties in recruiting qualified and knowledgeable staff and in
     building locally relevant products and services, which could prevent us
     from aggregating a large user base;

  .  unexpected changes and differences in regulatory, tax and legal
     requirements applicable to Internet services; and

  .  foreign currency fluctuations.

Our failure to address these risks could inhibit or preclude our efforts to
expand our business in international markets.

Our future success depends on our ability to attract and retain key personnel

   Our future success depends, in part, on the continued service of our key
management personnel, particularly Evan Thornley, our Chairman and Chief
Executive Officer, and Tracey Ellery, our President. Mr. Thornley and Ms.
Ellery are husband and wife. The loss of the services of either of these
individuals, or the services of other key employees, could adversely affect
our business. LookSmart does not have employment agreements with Mr. Thornley
and Ms. Ellery, and they do not have stock options or restricted stock subject
to vesting based on continued employment.

   Our success also depends on our ability to identify, attract, retain and
motivate highly skilled administrative, technical, editorial and marketing
personnel. In particular, we are currently conducting searches for senior
marketing, international operations and finance personnel. Competition for
such personnel, particularly in the San Francisco Bay area, is intense, and we
cannot assure you that we will be able to retain our key employees or that we
can identify, attract and retain highly skilled personnel in the future.

Many of our advertisers are emerging Internet companies that represent credit
risks

   We expect to derive an increasingly significant portion of our revenues
from the sale of advertising to other Internet companies. Many of these
companies have limited operating histories, are operating at a loss and have
limited access to capital. If any significant part of our customer base
experiences financial difficulties or is not commercially successful, our
business will suffer.

Our results will be negatively affected if we fail to adapt to rapid
technological change and evolving industry standards

   To be successful, we must adapt to rapidly changing Internet technologies
and evolving industry standards. The introduction of new technologies,
including new or superior Internet search methods, or the emergence of new
industry standards and practices could render our systems and proprietary
software obsolete or require us to make significant unanticipated investments
to adapt to these changes. We must also enhance our existing service offerings
and introduce new products and services to address the changing needs and
demands of Internet users and our customers. If we are unable to respond to
any of these developments on a timely and cost-effective basis, our business
will be adversely affected.

                                      20
<PAGE>

We may face liability for intellectual property claims or information
contained in our search and navigation services, and these claims may be
costly to resolve

   We make information available to end users on our search and navigation
services, both on our website and our distribution affiliates' websites. We
also provide our distribution affiliates with custom-developed software and
software developed by others as part of our service offerings. Although we do
not believe that our website content and services infringe any proprietary
rights of others, we cannot assure you that others will not assert claims
against us in the future or that these claims will not be successful. We or
our distribution affiliates could be subject to claims for defamation,
invasion of privacy, negligence, copyright, trademark infringement, breach of
contract or other theories based on the nature and content of our information
and services. These types of claims have been brought, sometimes successfully,
against online service providers in the past. In addition, we are obligated
under some agreements to indemnify other parties as a result of claims that we
infringe on the proprietary rights of others.

   Even if such claims do not result in liability to us or our distribution
affiliates, we could incur significant costs and diversion of management time
in investigating and defending against them. Our insurance may not cover
claims of this type, may not be adequate to cover all costs incurred in
defense of these claims, and may not indemnify us for all liability we incur.

Our business prospects depend on the continued growth in the use of the
Internet

   Our business is substantially dependent upon continued growth in the use of
the Internet as a medium for obtaining information and engaging in commercial
transactions. Internet usage may decline and ecommerce may be inhibited for
various reasons, including:

  .  user inability or frustration in locating and accessing required
     information;

  .  actual or perceived lack of security of information;

  .  limitations of the Internet infrastructure resulting in traffic
     congestion, reduced reliability or increased access costs;

  .  inconsistent quality of service;

  .  governmental regulation, such as tax or privacy laws;

  .  general economic problems in the United States or abroad which decreases
     users' disposable income;

  .  uncertainty regarding intellectual property ownership; and

  .  lack of appropriate communications equipment.

   We believe that capacity constraints caused by growth in the use of the
Internet may, unless resolved, impede further growth in Internet use. Further,
the adoption of the Internet for commerce and communications, particularly by
those individuals and companies that have historically relied upon traditional
means of commerce and communication, generally requires the understanding and
acceptance of a new way of conducting business and exchanging information.
Companies that have already invested substantial resources to conduct commerce
and exchange information through other means may be particularly reluctant or
slow to adopt a new Internet-based strategy that may make their existing
personnel and infrastructure obsolete. If any of the foregoing factors affects
the continuing growth in the use of the Internet, our business could be
harmed.

Privacy-related regulation of the Internet could limit the ways we currently
collect and use personal information which could decrease our advertising
revenues or increase our costs

   Internet user privacy has become an issue both in the United States and
abroad. The Federal Trade Commission and government agencies in some states
and countries have been investigating some Internet companies, and lawsuits
have been filed against some Internet companies, regarding their use of
personal information. Any regulations imposed to protect the privacy of
Internet users may affect the way in which we currently collect and use
personal information.

                                      21
<PAGE>

   The European Union has adopted a directive that imposes restrictions on the
collection and use of personal data, guaranteeing citizens of European Union
member states various rights, including the right of access to their data, the
right to know where the data originated and the right to recourse in the event
of unlawful processing. We cannot assure you that this directive will not
adversely affect our activities, or the activities of BT LookSmart, in
European Union member states.

   As is typical with most websites, our website places information, known as
cookies, on a user's hard drive, generally without the user's knowledge or
consent. This technology enables website operators to target specific users
with a particular advertisement and to limit the number of times a user is
shown a particular advertisement. Although some Internet browsers allow users
to modify their browser settings to remove cookies at any time or to prevent
cookies from being stored on their hard drives, many consumers are not
familiar with or technically proficient to customize these settings. In
addition, some Internet commentators, privacy advocates and governmental
bodies have suggested limiting or eliminating the use of cookies. If this
technology is reduced or limited, the Internet may become less attractive to
advertisers and sponsors, which could result in a decline in our revenues.

   We retain information about our users. If others were able to penetrate our
network security and gain access to, or in some other way misappropriate, our
users' information, we could be subject to liability. These claims could
result in litigation, our involvement in which, regardless of the outcome,
could require us to expend significant time and financial resources. We could
incur additional expenses if new regulations regarding the use of personal
information are introduced or if any regulator chooses to investigate our
privacy practices.

New tax treatment of companies engaged in Internet commerce may adversely
affect the Internet industry and our company

   Tax authorities on the international, federal, state and local levels are
currently reviewing the appropriate tax treatment of companies engaged in
Internet commerce. New or revised state tax regulations may subject us to
additional state sales, income and other taxes. We cannot predict the effect
of current attempts to impose sales, income or other taxes on commerce over
the Internet. However, new or revised taxes and, in particular, sales taxes,
would likely increase our cost of doing business and decrease the
attractiveness of advertising and selling goods and services over the
Internet. These events would likely have an adverse effect on our business and
results of operations.

Future sales of our securities may cause our stock price to decline

   The market price of our common stock could decline as a result of sales of
substantial amounts of our common stock in the public market, or the
perception that such sales could occur. As of December 31, 1999, approximately
26.6 million shares of common stock were held by non-affiliates and
approximately 59.1 million shares were held by affiliates, all of which are
currently available for resale in the public market without registration,
subject to compliance with Rule 144 under the Securities Act. Moreover, as of
December 31, 1999, the holders of approximately 42.2 million shares of common
stock and warrants to purchase approximately 13.5 million shares of common
stock had rights to require us to register those shares under the Securities
Act.

   In addition, the Chess Depository Interests, or CDIs, which are publicly
traded on the Australian Stock Exchange under the symbol "LOK", are
exchangeable into shares of LookSmart common stock at a ratio of 20 CDIs per
share of common stock. Holders of CDIs may exchange their CDIs for shares of
LookSmart common stock. In that event, the exchanged shares of common stock
may be available for resale at the option of the holders in the Nasdaq
National Market. The CDIs currently trading on the Australian Stock Exchange
are exchangeable into an aggregate of approximately 4.4 million shares of
common stock.

   These resales of common stock in the Nasdaq National Market, or the
perception that they may occur, could cause our stock price to decline. These
events may also make it more difficult for us to raise funds through future
offerings of common stock.


                                      22
<PAGE>

Our stock price is extremely volatile and investors may not be able to resell
their shares for a profit

   The stock market has experienced significant price and volume fluctuations,
and the market prices of technology companies, particularly Internet-related
companies, have been extremely volatile. These broad market and industry
fluctuations may adversely affect the market price of our common stock,
regardless of our actual operating performance. You may not be able to sell
your shares for a profit as a result of a number of factors which may cause a
decline in the stock price, including:

  .  changes in the market valuations of Internet companies in general and
     comparable companies in particular;

  .  actual or anticipated quarterly fluctuations in our operating results;

  .  changes in financial estimates by securities analysts;

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

  .  conditions or trends in the Internet that suggest a decline in rates of
     growth of advertising-based Internet companies.

   In the past, securities class action litigation has often been instituted
after periods of volatility in the market price of a company's securities. A
securities class action suit against us could result in substantial costs and
the diversion of management's attention and resources, regardless of the
outcome.

Government regulation and legal uncertainties could decrease demand for our
services or increase our cost of doing business

   Any new law or regulation pertaining to the Internet, or the application or
interpretation of existing laws, could decrease demand for our services, or
increase our cost of doing business, or both. Currently, there are a number of
laws and regulations that pertain to communications or commerce on the
Internet, and it is likely that the number of such laws and regulations will
increase. These laws or regulations may relate to liability for information
transmitted over the Internet, online content regulation, user privacy or the
quality of products or services provided over the Internet. Moreover, the
applicability to the Internet of existing laws governing intellectual property
ownership and infringement, copyright, trademark and trade secret is uncertain
and developing.

Directors, officers and significant stockholders have substantial influence
over LookSmart, which could prevent or delay a change in control

   As of December 31, 1999, our executive officers, directors and significant
stockholders and the funds for whom they act as general partner, collectively
owned approximately 69% of the outstanding shares of our common stock. If
these stockholders choose to act or vote together, they will have the power to
control matters requiring stockholder approval, including the election of our
directors, amendments to our certificate of incorporation and approval of
significant corporate transactions, including mergers or sales of all of our
assets. This concentration of ownership may have the effect of discouraging
others from making a tender offer or bid to acquire LookSmart at a price per
share that is above the then-current market price.

The anti-takeover provisions of Delaware's general corporation law and
provisions of our charter and bylaws may discourage a takeover attempt

   Our charter and bylaws and provisions of Delaware law may deter or prevent
a takeover attempt, including an attempt that might result in a premium over
the market price for our common stock. Our board of directors has the
authority to issue shares of preferred stock and to determine the price,
rights, preferences and restrictions, including voting rights, of those shares
without any further vote or action by the stockholders. The issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate

                                      23
<PAGE>

purposes, could have the effect of making it more difficult for a third party
to acquire a majority of our outstanding voting stock. In addition, our
charter and bylaws provide for a classified board of directors. These
provisions, along with Section 203 of the Delaware General Corporation Law,
could discourage potential acquisition proposals and could delay or prevent a
change of control.

ITEM 2. PROPERTIES

   Our headquarters are located in 137,000 square feet of leased office space
in San Francisco, California. The lease term for our headquarters extends to
October 15, 2009. The lease provides us with an option to renew the lease for
two additional five-year periods after the initial lease term of ten years
expires. In January 2000, we subleased approximately 43,000 square feet of
space at our headquarters facility to third parties. In March 2000, we
subleased an additional 30,000 square feet of space in this facility. These
subleases terminate in December 2000 and the rent received on the subleases is
in excess of our obligation under the original lease.

   We also lease approximately 17,000 square feet of space in San Francisco
through November 30, 2000. In January 2000, we subleased all of this space to
a single tenant through the term of the original lease. The rent received on
the sublease is in excess of our obligation under the original lease.

   We lease a number of smaller facilities overseas in Melbourne, Sydney,
Montreal, Copenhagen and Amsterdam. These facilities have various lease terms
extending as far as October 2004.

ITEM 3. LEGAL PROCEEDINGS

   On October 5, 1998, Hollinger Digital, Inc. filed a complaint against us in
New York Supreme Court (Case No. 604797/98). The complaint alleged that we
breached an agreement to sell 3,059,798 shares of our Series C preferred stock
(representing approximately 15% of our fully vested capitalization at the time
of the alleged breach) to Hollinger for $2.33 per share. The complaint also
asserted claims for promissory and equitable estoppel and sought specific
performance of the proposed terms of the alleged Series C transaction, which
included a right to pro rata participation in future financings prior to our
initial public offering. On December 1, 1998, we filed a motion to dismiss
Hollinger's complaint. On March 17, 1999, the court issued an order granting
our motion and dismissed Hollinger's complaint with prejudice. On May 4, 1999,
Hollinger filed a Notice of Appeal. On November 16, 1999, the Appellate
Division heard oral argument on the matter and took the appeal under
submission. We believe that Hollinger's complaint is without merit and we will
continue to vigorously defend the lawsuit. If we are required to issue shares
of our capital stock in connection with Hollinger's claims, however, our
investors will suffer dilution.

   Except for the Hollinger litigation, we are not a party to any material
legal proceedings.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1999.

                                      24
<PAGE>

                                    PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
     STOCKHOLDER MATTERS

   LookSmart, Ltd. common stock is quoted on the Nasdaq National Market under
the symbol "LOOK". The following table sets forth the range of high and low
closing sales prices for each period indicated:

<TABLE>
<CAPTION>
                                                                 HIGH     LOW
                                                                ------- -------
   <S>                                                          <C>     <C>
   Fiscal 1999:
     Third quarter (from August 20)............................ $40.500 $16.250
     Fourth quarter............................................ $42.063 $24.375
   Fiscal 2000:
     First quarter (through March 23).......................... $69.625 $27.500
</TABLE>

   LookSmart had approximately 7,505 stockholders of record as of December 31,
1999. We have not declared or paid any cash dividends on the common stock and
presently intend to retain our future earnings, if any, to fund the
development and growth of our business and, therefore, do not anticipate
paying any cash dividends in the foreseeable future.

Report of Offering of Securities and Use of Proceeds Therefrom

   On August 20, 1999, the Securities and Exchange Commission declared
effective our registration statement on Form S-1 (File No. 333-80581)
registering the initial public offering of 8,855,000 shares of our common
stock at an offering price of $12.00 per share. The initial public offering
was managed by Goldman, Sachs & Co., BancBoston Robertson Stephens and
Hambrecht & Quist. Gross proceeds of the offering, including the underwriters'
exercise of the over-allotment option, were approximately $106.3 million. Net
proceeds to LookSmart for the offering, after deducting commissions, fees and
expenses related to the offering, were approximately $96.9 million. As of
December 31, 1999, a portion of the net proceeds had been used for general
corporate purposes, including working capital, marketing and promotional
activities, expanded operations, new product development and increased
personnel. The remaining proceeds were invested in short-term investments in
order to meet anticipated cash needs for future working capital.

Recent Sales of Unregistered Securities

   Since our incorporation in July 1996, we have sold and issued the following
unregistered securities:

     (1) On July 24, 1996, we issued 119,640,000 shares of common stock to
  two founding stockholders for an aggregate consideration of $19,940.00.

     (2) On September 22, 1997, we repurchased 101,640,000 shares of our
  common stock from one founding stockholder for the aggregate repurchase
  price of $16,940.00 in exchange for the issuance of a warrant to purchase
  9,000,000 shares of common stock and a promissory note in the aggregate
  amount of $1,500,000. The warrant has an exercise price of $0.00017 per
  share.

     (3) On January 5, 1998, we issued a warrant for 1,500,000 shares of
  mandatorily redeemable convertible preferred stock (Series A) to a bank in
  connection with a line of credit agreement for an aggregate purchase price
  of $534,400.00.

     (4) On February 1, 1998, we issued to one investor a convertible
  promissory note in the aggregate amount of $250,000.00, mandatorily
  redeemable for preferred stock (Series A).

     (5) On February 5, 1998, we issued to two investors convertible
  promissory notes in the aggregate amount of $250,000.00, mandatorily
  redeemable for preferred stock (Series A).

     (6) On March 7, 1998, we issued to one investor a convertible promissory
  note in the aggregate amount of $50,000.00, mandatorily redeemable for
  preferred stock (Series A).

                                      25
<PAGE>


     (7) On March 12, 1998, we issued to one investor a convertible
  promissory note in the aggregate amount of $75,000.00, mandatorily
  redeemable for preferred stock (Series A).

     (8) On March 26, 1998, we issued a warrant for 1,010,412 shares of
  mandatorily redeemable convertible preferred stock (Series A) to one
  investor for an aggregate purchase price of $359,976.12.

     (9) On March 27, 1998, we issued to one investor a convertible
  promissory note in the aggregate amount of $1,500,000, mandatorily
  redeemable for preferred stock (Series A).

     (10) On April 6, 1998, we issued to one investor a warrant for 336,804
  shares for an aggregate purchase price of $56,134.00 and a convertible
  promissory note in the aggregate amount of $500,000.00, both for
  mandatorily redeemable convertible preferred stock (Series A).

     (11) On May 6, 1998, we issued 1,057,500 shares of common stock to one
  director for an aggregate consideration of $8,906.25.

     (12) On May 7, 1998, we issued 6,352,614 shares of Series A preferred
  stock to seven investors for an aggregate consideration of $2,287,493.39,
  we issued 14,327,748 shares of Series B preferred stock to one investor for
  an aggregate consideration of $6,004,997.98, and we issued a warrant to
  purchase 1,500,000 shares of common stock to one investor for an aggregate
  purchase price of $3,750,000.00 and warrants to purchase an aggregate of
  3,024,924 shares of Series A preferred stock to two investors for an
  aggregate of $1,267,846.48.

     (13) On September 10, 1998, we issued a warrant to purchase 480,000
  shares of common stock to one investor for an aggregate purchase price of
  $200,800.00.

     (14) On October 23, 1998, we issued 6,000,000 shares of Series 1 Junior
  Preferred to seven investors for an aggregate of $2,900,000.00 in
  connection with the acquisition of BeSeen.com, Inc. as a wholly-owned
  subsidiary.

     (15) On March 24, 1999, we issued 12,007,590 shares of Series C
  preferred stock to 45 investors for an aggregate of $60,037,950.00, and a
  warrant to purchase 439,999 shares of Series C preferred stock to one
  investor for an aggregate purchase price of $2,199,997.50. On April 26,
  1999, we issued 75,939 shares of Series C preferred stock to 14 investors
  for an aggregate of $379,695.00.

     (16) On April 9, 1999, we issued 2,550,000 shares of common stock to one
  investor for the aggregate consideration of $6,375,000.00 in connection
  with an asset purchase.

     (17) On June 9, 1999, we issued warrants to purchase an aggregate of
  540,000 shares of common stock to four investors for an aggregate
  consideration of $675,000 in connection with an asset purchase.

     (18) On December 30, 1999, we committed to issue up to 71,870 shares of
  common stock to four investors in connection with a purchase of securities
  in Futurecorp International Pty Ltd.

     (19) Since our incorporation, we have issued options to purchase an
  aggregate of 25,693,000 shares of common stock with exercise prices ranging
  from $0.00953 to $34.6250 per share. Since our incorporation, options to
  purchase 3,019 shares of common stock have been exercised for an aggregate
  consideration of $187,000.

     (20) Since our incorporation, we have issued warrants to purchase an
  aggregate of 17,832,140 shares of preferred and common stock with exercise
  prices ranging from $0.00017 to $7.50 per share. Since our incorporation,
  warrants to purchase 14,423,048 shares of preferred and common stock have
  been exercised for an aggregate consideration of $2,522,000.

   There were no underwriters employed in connection with any of the foregoing
transactions.

   The issuances of securities described in (1), (4), (5), (7), (9), (12),
(15) and (18) were deemed to be exempt from registration under the Securities
Act in reliance on Section 4(2) and on Regulation S of the Securities Act as

                                      26
<PAGE>

transactions by an issuer not involving a public offering and the offer and
sale of securities to non-U.S. investors. The issuance of securities described
in (2), (3), (6), (10), (11), (13), (16) and (17) were deemed to be exempt
from registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving a public offering.
The issuance of securities described in (14) and (15) were deemed to be exempt
from registration in reliance on Sections (2) and 4(6) of the Securities Act.
The issuances of securities described in (19) and (20) were deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2)
or Rule 701 promulgated thereunder as transactions pursuant to compensatory
benefit plans and contracts relating to compensation. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed
to the share certificates and other instruments issued in such transactions.
All recipients either received adequate information about the Registrant or
had access, through employment or other relationships, to such information.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

   The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes to those
statements and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this report.

<TABLE>
<CAPTION>
                            Period from
                           July 19, 1996                Year Ended
                          (Inception)  to --------------------------------------
                           December 31,   December 31, December 31, December 31,
                               1996           1997         1998         1999
                          --------------- ------------ ------------ ------------
                                 (in thousands except per share amounts)
<S>                       <C>             <C>          <C>          <C>
Statements of Operations
 Data:
  Net revenues..........     $      3       $   949      $  8,785     $ 48,865
  Gross profit..........          (87)          519         7,199       41,947
  Total operating
   expenses.............        2,739         7,848        19,097      109,065
  Net income (loss).....       (2,900)       (7,514)      (12,858)     (64,663)
  Net income (loss) per
   share--basic and
   diluted..............     $  (0.03)        (0.08)     $  (0.68)    $  (1.42)
  Shares used in per
   share calculation--
   basic and diluted....      115,947        91,589        18,790       45,518
</TABLE>

<TABLE>
<CAPTION>
                            December 31, December 31, December 31, December 31,
                                1996         1997         1998         1999
                            ------------ ------------ ------------ ------------
<S>                         <C>          <C>          <C>          <C>
Balance Sheet Data:
  Working capital
   (deficit)...............    $ (429)     $(1,125)     $(6,507)     $ 82,688
  Total assets.............     2,825        2,275       14,090       161,519
  Long-term debt and
   capital lease
   obligations, net of
   current portion.........       --         1,500        1,500         1,423
  Total stockholders'
   equity (deficit)........    $2,091      $  (453)     $(1,261)     $119,552
</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

   The following discussion should be read in conjunction with the
consolidated financial statements and the notes to those statements which
appear elsewhere in this Form 10-K. The following discussion contains forward-
looking statements that reflect our plans, estimates and beliefs, including
without limitation forward-looking statements regarding anticipated revenue
growth, trends in costs of revenues and operating expenses, international
expansion and introduction of additional services, the adequacy of our capital
reserves and our future need for additional capital. Our actual results could
differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are
not limited to, those discussed below and elsewhere in this report,
particularly in "Business-- Risk Factors".

                                      27
<PAGE>

Overview

   LookSmart was formed in July 1996 as a Delaware corporation under the name
of NetGet Ltd. to acquire the business and associated intellectual property of
HomeBase Directories Pty Ltd., an Australian company founded by Evan Thornley
and Tracey Ellery in October 1995. At that time, The Reader's Digest
Association purchased approximately 85% of our outstanding common stock, an
investment it held until October 1997 when it exchanged this stock for
warrants to purchase 9 million shares of our common stock and a $1.5 million
promissory note. We changed our name to LookSmart, Ltd. in October 1996. In
July 1997, we relocated our headquarters from Australia to San Francisco,
California.

   Prior to July 1997, revenues from our business were incidental and we were
primarily focused on investing in editorial resources and building our
Internet directory. Until October 1997, our cash requirements were satisfied
primarily by funds provided by The Reader's Digest Association and, to a
lesser extent, from advertising revenues from sales made through outside sales
forces. Our advertising revenues continued to increase during the fourth
quarter of 1997 and the first quarter of 1998.

   During 1998, we entered into several key operational relationships designed
to increase traffic to our website and to expand our directory. In May 1998,
we raised a total of approximately $8.3 million in our Series A and Series B
preferred stock financings, marking the beginning of our strategic
relationship with Cox Interactive Media to develop web directories for key
local United States markets. This infusion of capital allowed us to
significantly increase the resources devoted to editorial and product
development, establish our own advertising sales force and significantly
strengthen our management team.

   In May 1998, we entered into a one-year traffic contract with Netscape,
which has been renewed through July 2000. Under this arrangement, Netscape
periodically directs user search traffic to LookSmart for a fixed cost per
thousand impressions.

   In October 1998, we acquired BeSeen.com, Inc., a leading provider of tools
to webmasters, for 6 million shares of our Series 1 Junior preferred stock.
The primary purpose of this transaction was to generate traffic and website
relationships for LookSmart to increase advertising sales.

   In December 1998, we entered into a five-year contract with Microsoft.
Under this agreement, we license our database to Microsoft, and we are
obligated to increase the number of unique URLs included in our database every
six months by pre-defined amounts. Microsoft has the right to determine the
criteria for a portion of these URLs. Microsoft paid us an initial non-
refundable license fee and committed to a fixed schedule of additional
payments for updates. A portion of each update payment is subject to refund if
we fail to provide the contractually required number of URLs. The difference
between any cash received under the contract and revenues recognized to date
is recorded as deferred revenues. At December 31, 1999, deferred revenue
associated with the Microsoft contract was $18.5 million. After June 5, 2000,
either party may terminate the agreement for any reason on six months' notice

   The terms of our agreement with Microsoft could cause our quarterly
licensing revenues and operating results to fluctuate significantly. We
recognize quarterly revenues under this agreement based on the number of URLs
added to our database during the quarter relative to the total number of URLs
we are required to add to our database during the relevant six-month
contractual measurement period. As a result, to the extent that we satisfy our
database update obligations unevenly, the revenues we recognize may be skewed
on a quarter-to-quarter basis. Because the six-month contractual measurement
periods end on June 5 and December 5 of each year, our second and fourth
quarters may include revenues from more than one six-month contractual
measurement period. This may result in additional quarter-to-quarter
fluctuations in revenues.

   In March 1999, we raised approximately $60.3 million in our Series C
preferred stock round of financing. The proceeds from this financing were used
to increase working capital, to fund operating losses and to enter into
strategic relationships and acquisitions.


                                      28
<PAGE>

   In April 1999, we acquired certain lines of business and other rights from
Guthy-Renker Internet, LLC as part of a strategic alliance between our two
companies for $5.0 million in cash and 2.55 million shares of LookSmart common
stock. We also earn revenues from Guthy-Renker Corporation's "As Seen on TV"
products that are sold online and promoted through television infomercials. We
are entitled to place LookSmart advertising on Guthy-Renker Corporation
infomercials.

   On June 9, 1999, we acquired substantially all of the assets of ITW
NewCorp, Inc., in exchange for $5.0 million in cash and warrants to purchase
420,000 shares of LookSmart common stock. Through this asset purchase, we
provide Internet bulletin board services which generate advertising revenue.

   In June 1999, we entered into five agreements with three PBS-related
entities under which we agreed to sponsor five programs on PBS. The agreements
vary in duration from three to five years. At December 31, 1999, LookSmart was
committed to pay a total of $13.3 million for the remainder of the contract
periods if all five agreements remain effective throughout their terms. These
payments will be recorded as sales and marketing expense, and generally will
be spread equally over the terms of the contracts. The PBS-related entities,
in return, have agreed to promote LookSmart on their respective websites.
Specifically, the arrangement provides that LookSmart's website is provided a
direct link to the PBS website www.pbs.org. The agreements do not guarantee
LookSmart a minimum number of impressions.

   In June 1999, we entered a three-year licensing agreement with Excite@Home.
Under this agreement, we license our database to Excite@Home.

   On August 19, 1999, LookSmart completed its initial public offering of
8,855,000 shares of common stock, including 1,155,000 shares issued in
connection with the exercise of the underwriters' over-allotment option. All
shares were issued at an offering price of $12.00 per share. Net proceeds from
the offering after underwriting discounts and commissions and offering
expenses of $9.3 million were approximately $96.9 million.

   In November 1999, we entered into an agreement with Inktomi Corp. to co-
bundle our search technologies for offerings to vertical portals. As of
December 31, 1999, we had not recognized any revenue related to this
agreement.

   In December 1999, we acquired 14.5% of the outstanding voting stock of
Dstore Pty Ltd, an Australian privately held company, for $328,000. This
transaction was accounted for as an investment using the cost method of
accounting. Dstore is an online department store offering a variety of
products for sale over the Internet.

   In December 1999, we acquired stock which controls 52% of the outstanding
voting rights of Futurecorp International Pty Ltd., an Australian privately
held company, for $1,840,000 cash and the committed issuance of 71,870 shares
of common stock. This transaction was accounted for as a purchase.
Futurecorp's results of operations subsequent to the transaction have been
consolidated as of December 31, 1999. Through the acquired business, we
provide web-based communication applications and community building solutions
focused primarily in Australia.

Revenues and Cost of Revenues

   Advertising and Syndication. LookSmart provides a high quality environment
for advertisers to promote their products and services. We generally provide
advertisers with one to three month agreements to serve a minimum number of
banner impressions over the term of the agreement. In several cases, we have
entered into longer agreements. We offer advertisers the ability to specify
the category of traffic for their banner advertisements, and we are able to
charge premiums on some categories based on advertisers' perceptions of
economic value, including the placement of the advertisement on the page, the
demographics of the users who view the page, and the size of the audience
requesting the page.

   We expect advertising revenues to continue to account for a significant
portion of our revenues for the foreseeable future. Our ability to maintain
current levels of advertising revenues will depend on our ability to re-

                                      29
<PAGE>

sign or replace existing advertisers as their contracts expire. We expect
downward pressure on advertising prices in the industry generally due to the
increasing amount of advertising inventory coming onto the Internet from other
sources. Therefore, we expect that any future increases in advertising
revenues will depend on our ability to effectively manage our advertising
inventory by leveraging our targeted category-based model to charge premium
rates, and on our ability to grow the inventory availability by increasing
traffic to Internet properties using our search solutions.

   In our limited operating history, we have experienced seasonality in
advertising revenues with typically weaker demand from advertisers in the
first and third calendar quarters. We expect that advertising revenues will
continue to be subject to seasonality. In particular, the rate of growth, if
any, between the last quarter of one year and the first quarter of the next
year tends to be less than the rate of growth experienced between other
consecutive quarters. This is due in part to the fact that the fourth quarter
contains increased advertising spending in anticipation of the holiday season.

   Because advertising revenues represent a significant portion of our
business, fluctuations in advertising revenues due to pricing pressures, the
timing or cancellation of contracts, inventory management, seasonality, site
down time or other factors can be expected to have a significant effect on our
overall operating advertising revenues. However, our costs are fixed, at least
in the short term, and cannot be expected to track fluctuations in advertising
revenues. To the extent that costs do not track changes in advertising
revenues, fluctuations from this revenues source will have a
disproportionately large impact on net income or loss.

   We generate revenues from syndication agreements by sharing with our
syndication partners advertising sales revenue associated with traffic
referred between the partners and LookSmart. In some cases, our syndication
partner receives gross revenues from the advertiser and then makes a payment
to LookSmart for our share of those revenues. In other cases, we receive the
gross revenues from the advertiser, and then forward a portion of these
revenues to the syndication partner. We work with our ISP partners to "co-
brand", or create partner-specific home pages which have the "look and feel" a
partner desires and which provides the ISP subscriber fully-functional access
to the LookSmart database. In these cases, LookSmart derives the advertising
sales revenues from the traffic generated by the ISP partner and compensates
the partner, typically on a per impression or per referral basis, for this
traffic.

   The principal components of cost of advertising and syndication revenues
are personnel costs of our in-house advertising operations employees,
equipment depreciation, other expenses relating to hosting advertising
operations and agency commissions paid to outside advertising sales
organizations.

   Licensing. We license our database content to some of our partners,
including Microsoft and Excite@Home. We expect revenues from licensing to
fluctuate from period to period because these revenues are dependent upon the
particular terms of our licensing arrangements and the expiration, renewal and
addition of agreements with current and future partners. We do not anticipate
recurring cost of licensing revenues in connection with our licensing
activities; the cost of developing URL databases is included in product
development. Revenues associated with licensing contracts are recognized as
delivery occurs as specified under the contracts, and where no refund
obligations exist.

   Ecommerce/Distribution. The scale and quality of our alliances provide an
effective distribution network to marketers of products and services. We
enable users searching for products and services in our database to find
ecommerce vendors seeking a channel to reach relevant business and consumers.
We offer ecommerce solutions to marketers of products and services, providing
them with significant opportunities to reach the highly targeted audience of
Internet users accessing our search solutions. These solutions may include
carriage or listing services, referral or lead generation services and product
distribution services.

   The Company's ecommerce/distribution revenue is generated by the sale of
merchandise and the design, construction and hosting of commercial websites.
Revenue from the sale of merchandise is reported on a gross basis if the
Company acts as the principal in the transaction with associated product cost
reported as cost of

                                      30
<PAGE>

revenues. Revenue is recognized at the time goods are shipped. Revenue from
the design and construction of websites is recognized when the website is
delivered to the customer, or when the Company's obligation terminates.
Hosting revenues are recognized in the period in which hosting occurs.

   The principal components of cost of ecommerce and distribution revenues are
product costs paid in connection with our "As Seen on TV" merchandise sales,
fulfillment costs and direct costs associated with site hosting. These costs
will fluctuate with the level of these activities.

Operating Expenses

   We do not track operating expenses by reportable segment, but treat these
as shared overhead of our three reportable segments.

   Sales and Marketing. Sales and marketing expenses include payments to
syndication partners who are portals, ISP partners and other traffic providers
for directing online users to the LookSmart database. Traffic payments can
exhibit significant fluctuations from period to period depending on the
contracts in effect, volume of traffic going to the partner sites and the
contracted rates. Further, traffic payments as a percentage of revenues can
vary significantly depending on the structure of the payment arrangements
between us and our affiliates. When a traffic arrangement is structured so
that we receive only the portion of the gross advertising revenues forwarded
to us then little or no sales and marketing expense is directly associated
with that revenue stream. On the other hand, when a traffic arrangement is
structured so that we collect the gross advertising revenues and forward a
portion to our affiliate, we record as revenues the entire amount of the gross
advertising revenues, and the portion forwarded to the partner is recorded as
sales and marketing expense. We expect payments to our affiliate and
distribution partners to increase as we expand our business.

   From April 1999 through October 1999, our sales and marketing expenses
included the cost of website development seminars which focused on selling web
pages and offering related services. Sales and marketing expenses also include
the costs of advertising, trade shows and public relations activities. Due to
the one-time nature of these expenditures, sales and marketing expenses will
be subject to significant fluctuations from period to period. Sales and
marketing costs also include salaries and associated costs of employment
overhead and facilities. Sales and marketing costs are expensed as incurred.

   Product Development. Product development costs, including research and
development costs, have been expensed as incurred except to the extent that
costs for internal use software are required to be capitalized and amortized
under American Institute of Certified Public Accountants Statement of Position
98-1 (SOP 98-1). During 1999 we capitalized $443,000 of internal use software
costs and we are amortizing these costs over two years. Amortization relating
to internal use software was $84,000 in 1999. Product development expenses
include the editorial development costs of building our content database and
engineering costs of maintaining and improving the development environment,
including our proprietary Editorial Support System software. These costs
include salaries and associated costs of employment, overhead and facilities.
Software licensing and computer equipment depreciation related to supporting
product development functions are also included in product development
expenses. These costs are relatively fixed in the short term.

   We expect product development costs to continue to increase as we increase
the size and reach of our distribution network and offer new products and
services to our partners, both domestically and overseas.

   General and Administrative. General and administrative expenses include
overhead costs such as executive management, human resources, finance, legal,
investor relations and facilities personnel. These costs include salaries and
associated costs of employment, overhead and facilities. General and
administrative expenses include consulting and professional service fees which
are subject to significant variability over time. We expect general and
administrative expenses to increase in the future due to the growth of our
business.

   Unearned Compensation. In fiscal 1999 we recorded aggregate unearned
compensation of approximately $15.1 million. These amounts were recorded in
connection with the grant of stock options to employees and

                                      31
<PAGE>

directors and represent the difference between the deemed fair value for
accounting purposes of the common stock subject to the options at the dates of
grant and the exercise price of the options. The unearned compensation is
amortized over the vesting period of the applicable options, typically four
years. Amortization of unearned compensation was $9.9 million for the year
ended December 31, 1999. We expect to amortize additional unearned
compensation expenses of approximately $4.0 million in 2000, $2.0 million in
2001, $702,000 in 2002 and $58,000 in 2003.

   Amortization of Goodwill and Intangibles. In connection with the October
1998, April 1999 and June 1999 acquisitions of, or asset purchases from,
BeSeen.com, Inc., Guthy-Renker Internet and ITW NewCorp, we recorded goodwill
and intangible assets of $3.9 million, $17.2 million and $9.3 million. These
amounts are being amortized over periods from one to five years. We began
amortizing the goodwill and other intangibles arising from the acquisition of
BeSeen.com, Inc. in the fourth quarter of 1998, and the Guthy-Renker Internet
and ITW NewCorp amounts in the second quarter of 1999. We recorded goodwill
and intangible assets of $3.8 million in December 1999 in connection with the
acquisition of Futurecorp. We amortized an aggregate of $5.4 million in 1999,
and we anticipate amortizing $7.8 million in 2000, $7.5 million in 2001, $6.7
million in 2002, $5.7 million in 2003, and $1.6 million in 2004 in connection
with these transactions. Part of our growth strategy is to make additional
acquisitions as we identify attractive opportunities. As a result, we expect
additional amortization of goodwill and intangibles to occur in future
periods.

   Income Taxes. Although we are not yet profitable on a consolidated basis,
tax charges will be incurred in connection with our operations in foreign
jurisdictions. We expect that foreign taxes will become more significant with
continued overseas business growth and expansion.

                                      32
<PAGE>

Results of Operations

   The following table sets forth, for the periods indicated, line items from
LookSmart's consolidated statements of operations as percentages of revenues:

<TABLE>
<CAPTION>
                                                              Year Ended
                                                             December 31,
                                                            ------------------
                                                            1997   1998   1999
                                                            ----   ----   ----
<S>                                                         <C>    <C>    <C>
Revenues:
  Advertising and syndication..............................   99%    63%    45%
  Licensing................................................    1     37     39
  Ecommerce/distribution...................................  --     --      16
                                                            ----   ----   ----
    Total revenues.........................................  100    100    100
Cost of revenues:
  Advertising and syndication..............................   45     12      6
  Licensing................................................  --       6    --
  Ecommerce/distribution...................................  --     --       8
                                                            ----   ----   ----
    Total cost of revenues.................................   45     18     14
                                                            ----   ----   ----
    Gross profit...........................................   55     82     86
Operating expenses:
  Sales and marketing......................................  387    125    121
  Product development......................................  274     54     54
  General and administrative...............................  123     30     17
  Amortization of goodwill and intangibles.................   43      7     11
  Amortization of unearned compensation....................  --       1     20
                                                            ----   ----   ----
    Total operating expenses...............................  827    217    223
                                                            ----   ----   ----
Loss from operations....................................... (772)  (135)  (137)
Non-operating income (expense), net........................   (2)   (10)     6
                                                            ----   ----   ----
Loss before income taxes................................... (774)  (145)  (131)
Income taxes...............................................  (18)    (1)    (1)
                                                            ----   ----   ----
Net loss................................................... (792)% (146)% (132)%
                                                            ====   ====   ====
</TABLE>

1999 Compared to 1998

Revenues

   Our revenues increased 456% to $48.9 million in 1999 compared to
$8.8 million in 1998. Advertising and syndication revenues increased to $22.1
million in 1999, an increase of 297% over the $5.6 million recognized in 1998.
This increase is attributable to increased traffic, better inventory
management, higher yields and new syndication agreements. Licensing revenue
increased to $19.3 million in 1999, an increase of 497% over the $3.2 million
recognized in 1998. This increase reflects the inclusion of a full year of
licensing revenues from our agreement with Microsoft Corporation in 1999. This
agreement was signed in December 1998. In 1999 ecommerce/distribution revenues
were $7.5 million; in 1998 there were no comparable revenues.
Ecommerce/distribution revenues primarily represent sales of "Buy-It-On-The-
Web" products, a collection of consumer merchandise available for sale via the
Internet. The "Buy-It-On-The-Web" Internet distribution rights were acquired
as part of the Guthy-Renker Internet asset purchase transaction in April 1999.

   As a percentage of total revenues, advertising and syndication decreased to
45% for 1999 compared to 63% of total revenues in 1998. Licensing revenues as
a percentage of total revenues increased slightly to 39% for 1999 compared to
37% of total revenues in 1998. In 1999, 16% of total revenues were generated
by ecommerce/distribution revenues, whereas there were no
ecommerce/distribution revenues in 1998.

                                      33
<PAGE>

Cost of Revenues

   Cost of revenues increased 336% to $6.9 million in 1999 compared to
$1.6 million in 1998. Of this increase, $4.0 million was attributable to
product costs paid as a result of "Buy-It-On-The-Web" merchandise sales. The
distribution agreement came into effect in April 1999. There were no such
costs for the comparable period in 1998. Cost of advertising and syndication
revenue increased 164% to $2.9 million in 1999 from $1.1 million in 1998. This
increase was the result of increased depreciation on computer hardware and
software capital expenditures, as well as the increased salaries and benefits
costs for additional employees in advertising operations. Cost of licensing
revenues was $500,000 for the year ended December 31, 1998. This amount
represents a one-time finder's fee related to a licensing agreement. There was
no cost of licensing revenues for the comparable period in 1999.

   As a percentage of revenues, cost of revenues decreased to 14% in 1999
compared to 18% in 1998. As a percentage of advertising and syndication
revenues, cost of advertising and syndication revenues decreased to 13% in
1999 compared to 20% in 1998. This decrease was primarily attributable to
economies of scale associated with higher traffic volume and higher yields on
saleable traffic. Cost of ecommerce/distribution revenues was 54% of revenues
in 1999 and was primarily attributable to sales of "Buy-It-On-The-Web"
merchandise. This business did not exist in the prior year.

Operating Expenses

   Sales and Marketing. Sales and marketing expenses increased 438% to $59.1
million in 1999 from $11.0 million in 1998. As a percentage of revenues, sales
and marketing expenses decreased to 121% in 1999 from 125% in 1998. The dollar
increase in sales and marketing expenses is primarily attributable to the
following: marketing expenses, including our branding campaign and our
corporate PBS sponsorships, represent approximately $17.0 million of the
increase; traffic costs increased approximately $14.0 million as the result of
the growth of our ISP partner program, the impact of renewing our traffic
agreement with Netscape and the cost associated with our traffic agreement
with NetZero. Sales expenses contributed approximately $4.3 million to the
increase in sales and marketing as a result of our addition of an internal
sales staff in the second half of 1998. Costs associated with the seminar
business acquired as part of the Guthy-Renker Internet, LLC asset acquisition
in April 1999, accounted for $6.5 million of the increase in sales and
marketing. The use of seminars as a marketing tool was discontinued in October
1999.

   Product Development. Product development expenses increased 458% to $26.6
million in 1999 from $4.8 million in 1998. As a percentage of revenues,
product development expenses were 54% in both 1999 and 1998. The dollar
increase in product development expenses is primarily due to a significant
increase in editorial, engineering and product design personnel to support our
efforts to expand our database and services offered both in the United States
and overseas. During 1999 we launched editorial operations in Montreal,
Amsterdam and Copenhagen.

   General and Administrative. General and administrative expenses increased
209% to $8.1 million in 1999 from $2.6 million in 1998. As a percentage of
revenue, general and administrative expenses decreased to 17% in 1999 from 30%
in 1998. The dollar increase in general and administrative expenses is
primarily due to additional personnel in the finance, human resources and
legal functions as well as additional professional services costs incurred to
support the growth of the company.

   Amortization of Goodwill and Intangibles. We are amortizing goodwill and
intangibles as a result of the purchase of intellectual property at our
inception in 1996, the BeSeen.com acquisition in October 1998, the Guthy-
Renker Internet asset purchase in April 1999 and the ITW NewCorp asset
purchase in June 1999. Amortization of these assets increased 800% to $5.4
million in 1999 from $605,000 in 1998. The dollar increase was due primarily
to the fact that 1999 included a full years impact of the BeSeen.com, Inc.
acquisition, as well as the Guthy-Renker Internet and ITW NewCorp asset
purchase transactions which occurred in 1999.

                                      34
<PAGE>

   Amortization of Unearned Compensation. Amortization of unearned
compensation was $9.9 million for the year ended December 31, 1999 compared to
$133,000 for the same period in 1998. We began recording unearned compensation
in the second half of 1998.

   Non-operating Income (Expense), Net. Net interest income (expense) includes
interest expense on our debt and capital lease obligations, net of interest
income from our cash and cash equivalents. We recorded net interest income of
$2.9 million 1999 compared to net interest expense of $675,000 in 1998. The
change from net interest expense to net interest income between the two
periods is primarily the result of having larger cash balances on hand in 1999
resulting from the sale of preferred stock in March and Initial Public
Offering proceeds in August.

   Other Net Income (Expense). Other net income (expense) primarily includes
foreign exchange gains and losses arising from the change in the value of
foreign currencies, primarily the Australian dollar, relative to the United
States dollar. We recorded other net expenses of $8,000 in 1999 compared to
other net expenses of $139,000 in 1998.

Income Taxes

   We recorded income tax expenses of $470,000 in 1999, primarily associated
with our Australian operations, compared to $146,000 in 1998.

1998 Compared to 1997

Revenues

   Our revenues increased 826% to $8.8 million in 1998 from $949,000 in 1997.
The largest portion of the increase was due to an increase of $4.6 million, or
492%, in advertising and syndication revenues as compared to 1997. This
increase was the result of increased traffic, better advertising inventory
management and new syndication agreements. Also contributing significantly to
the increase were new revenues of $3.2 million from licensing in the last half
of 1998. Before the third quarter of 1998, database content licensing was not
significant.

Cost of Revenues

   Cost of revenues increased 269% to $1.6 million in 1998 from $430,000 in
1997. Cost of advertising and syndication revenues increased 153% to $1.1
million in 1998 from $430,000 in 1997. Agency commissions paid to outside
advertising sales organizations, costs associated with advertising operations
personnel and depreciation on related advertisement serving software and
hardware contributed to the absolute dollar increase in cost of advertising
and syndication revenues. As a percentage of advertising and syndication
revenues, cost of advertising and syndication revenues decreased to 20% in
1998 compared to 46% in 1997. This decrease can be attributed primarily to
economies of scale associated with higher traffic volume and higher yields on
saleable traffic.

   Cost of licensing revenues was $500,000 in 1998. This amount represents a
one-time finder's fee related to a licensing agreement. There was no cost of
licensing revenues in 1997.

Operating Expenses

   Sales and Marketing. Sales and marketing expenses increased 199% to $11.0
million in 1998 from $3.7 million in 1997. As a percentage of revenues, sales
and marketing decreased to 125% in 1998 from 387% in 1997. The dollar increase
in sales and marketing expenses is primarily attributable to a $4.9 million
increase in traffic costs as a result of our agreements with Netscape and Alta
Vista, which became effective in the second quarter of 1998, and the overall
growth of our ISP partner program. Also contributing to this dollar increase
was our addition of an advertising sales staff in the second half of 1998.

                                      35
<PAGE>

   Product Development. Product development expenses increased 83% to $4.8
million in 1998 from $2.6 million in 1997. As a percentage of revenues,
product development expenses decreased to 54% in 1998 from 274% in 1997. The
dollar increase in product development costs is primarily due to a significant
increase in editorial and engineering personnel to accelerate the addition of
URLs to our database and due to an increase in product design personnel to add
features to our website.

   General and Administrative. General and administrative expense increased
125% to $2.6 million in 1998 from $1.2 million in 1997. As a percentage of
revenues, general and administrative expenses decreased to 30% in 1998 from
123% in 1997. The dollar increase in general and administrative expenses is
primarily due to additional personnel and professional services costs incurred
to support our growth.

   Amortization of Goodwill and Intangibles. Amortization increased 48% to
$605,000 in 1998 from $410,000 in 1997. The dollar increase in amortization of
goodwill and intangibles is the result of the amortization expenses associated
with the October 1998 acquisition of BeSeen.com.

   Amortization of Unearned Compensation. We began recording unearned
compensation in the second half of 1998. The charge to the income statement
for the year was $133,000.

   Non-operating Income (Expense), Net. We recorded net interest expense of
$675,000 in 1998 compared to net interest expense of $16,000 in 1997. The
increase in net interest expense between the two periods is primarily the
result of interest expense related to the issuance of warrants with debt, and
interest accruals on larger debt balances outstanding in 1998 compared to
1997.

Income Taxes

   We recorded income tax expense of $146,000 in 1998, primarily associated
with our Australian operations, compared to $166,000 in 1997.

                                      36
<PAGE>

Quarterly Results of Operations

   The following tables set forth certain unaudited statements of operations
data for the eight quarters ended December 31, 1999. This data has been
derived from the unaudited interim financial statements prepared on the same
basis as the audited consolidated financial statements contained in this
annual report, and, in the opinion of management, include all adjustments
consisting only of normal recurring adjustments that we consider necessary for
a fair presentation of such information when read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in
this annual report. The operating results for any quarter should not be
considered indicative of results of any future period.

<TABLE>
<CAPTION>
                                                    Three Months Ended
                            -------------------------------------------------------------------------
                             Mar.     June     Sept.    Dec.     Mar.
                              31,      30,      30,      31,      31,    June 30,  Sept. 30  Dec. 31
                             1998     1998     1998     1998     1999      1999      1999      1999
                            -------  -------  -------  -------  -------  --------  --------  --------
                                                       (unaudited)
                                                      (in thousands)
<S>                         <C>      <C>      <C>      <C>      <C>      <C>       <C>       <C>
Revenues:
  Advertising and
   syndication............  $   805  $ 1,015  $ 1,359  $ 2,380  $ 2,191  $  3,433  $  6,258  $ 10,194
  Licensing...............      --        25      364    2,837    4,389     5,237     4,601     5,028
  Ecommerce/distribution..      --       --       --       --       --      1,820     2,422     3,292
                            -------  -------  -------  -------  -------  --------  --------  --------
    Total revenues........      805    1,040    1,723    5,217    6,580    10,490    13,281    18,514
Cost of revenues:
  Advertising.............      250      245      226      365      318       430     1,009     1,113
  Licensing...............      --       --       --       500      --        --        --        --
  Ecommerce/distribution..      --       --       --       --       --      1,130     1,339     1,579
                            -------  -------  -------  -------  -------  --------  --------  --------
    Total cost of
     revenues.............      250      245      226      865      318     1,560     2,348     2,692
                            -------  -------  -------  -------  -------  --------  --------  --------
    Gross profit..........      555      795    1,497    4,352    6,262     8,930    10,933    15,822
Operating expenses:
  Sales and marketing.....    1,124    2,088    3,317    4,446    6,422    10,736    17,489    24,435
  Product development.....      529      615    1,186    2,435    3,884     5,683     8,655     8,371
  General and
   administrative.........      362      397      671    1,189    1,615     2,051     2,098     2,318
  Amortization of goodwill
   and intangibles........      103      102      103      297      395     1,523     1,806     1,718
  Amortization of unearned
   compensation...........      --       --        19      114      789     2,005     5,830     1,242
                            -------  -------  -------  -------  -------  --------  --------  --------
    Total operating
     expenses.............    2,118    3,202    5,296    8,481   13,105    21,998    35,878    38,084
                            -------  -------  -------  -------  -------  --------  --------  --------
Loss from operations......   (1,563)  (2,407)  (3,799)  (4,129)  (6,843)  (13,068)  (24,945)  (22,262)
Non-operating income
 (expense), net...........      (64)    (503)      (2)    (245)      19       570       936     1,400
                            -------  -------  -------  -------  -------  --------  --------  --------
Loss before income taxes..   (1,627)  (2,910)  (3,801)  (4,374)  (6,824)  (12,498)  (24,009)  (20,862)
Income taxes..............       45       31       18       52       52       --        --        418
                            -------  -------  -------  -------  -------  --------  --------  --------
    Net loss..............  $(1,672) $(2,941) $(3,819) $(4,426) $(6,876) $(12,498) $(24,009) $(21,280)
                            =======  =======  =======  =======  =======  ========  ========  ========
</TABLE>

Liquidity and Capital Resources

   LookSmart has incurred losses and consumed cash each year since inception.
Operating activities used $37.0 million of cash in 1999 compared to $1.9
million in 1998. The consumption of cash in operating activities was primarily
driven by: a net loss of $64.7 million in 1999 compared to $12.9 million in
1998; an increase of

                                      37
<PAGE>

$6.1 million in accounts receivable, due to the increased level of revenues;
and increases in prepaid and other assets of $6.3 million due to higher
prepaid distribution marketing costs and higher security deposits. Cash was
provided by an increase in accounts payable and accrued liabilities of $11.1
million and an increase in deferred revenue of $11.6 million compared to $9.3
million, primarily due to cash received in excess of revenues of $9.7 million
on the Microsoft contract.

   In 1999 we used $11.5 million of cash to make strategic business
investments including the acquisitions of assets from Guthy-Renker and ITW
NewCorp, Inc.; the acquisition of a controlling interest in Futurecorp, an
Australian corporation; and the acquisition of a minority interest in Dstores;
an Australian corporation. In 1998 the comparable cash investment was $907,000
related to the acquisition of BeSeen, Inc.

   In 1999 we purchased property and equipment of $11.6 million compared to
$1.6 million in 1998. The significantly higher level of expenditure in 1999
was driven by the need to obtain office space, office furnishings and computer
equipment to support the increase in headcount during 1999. In November 1999,
we signed a lease for our San Francisco premises which requires that we make
aggregate rent payments of approximately $44.0 million over the ten year term
of the lease; we have subleased part of the building not required for our
current occupancy. We obtained $2.6 million in equipment lease financing for
the purchase of property and equipment in 1999.

   Net cash provided by financing activities in 1999 was $160.6 million
compared to $7.9 million in 1998. Major financing events in 1999 were the
raising of $60.3 million of net proceeds from the Series C preferred stock
financing and $96.9 million of net proceeds from the initial public offering.

   As of December 31, 1999 LookSmart had $104.0 million of cash and short-term
investments.

   Our capital requirements depend on numerous business facts including our
hiring and product development needs, the funding needs of strategic alliances
and distribution agreements and the pace at which we pursue overseas expansion
of our business. We have experienced a substantial increase in expenditures
since inception driven by growth in the size and nature of our operations. We
anticipate that this trend will continue for the foreseeable future. We will
continue to evaluate acquisitions and strategic investments in complementary
businesses both in the United States and internationally. These acquisitions
may require the use of cash and, to the extent that acquired interests have
not reached cash flow breakeven, we may need to fund the operations and
expansion of these acquired interests in addition to funding the growth of our
current business.

   Management believes that our current cash balance is sufficient to meet our
operating requirements and funding commitments to the BT LookSmart joint
venture until at least the end of fiscal 2000. We expect that we will need to
seek additional financing to fund further expansion. We cannot assure you that
such financing will be available on reasonable terms. If we raise funds
through the issuance of equity or convertible debt securities, our existing
stockholders will experience dilution of their holdings.

Subsequent Events

   In February 2000, LookSmart entered into a joint venture agreement with
British Telecommunications. LookSmart and BT will have an equal equity
interest in the joint venture, BT LookSmart, which will provide localized
directory services in Europe and Asia. We will account for our investment in
the joint venture using the equity method of accounting. Our share of the
joint ventures net income or loss will be reported as non-operating income or
expense.

   The agreement establishing the joint venture requires that LookSmart commit
up to $108.0 million in cash through March 2003. Under the terms of the
agreement, BT extended a $50.0 million credit facility with interest at 20%
per annum. We drew down $50.0 million from the credit facility in February
2000. Draw downs on the credit facility are convertible into LookSmart common
stock at $35.00 per share at BT's discretion.

   On February 25, 2000, we completed the listing of approximately 90 million
Chess Depository Interests, or CDIs, on the Australian Stock Exchange, or ASX,
under the trading symbol "LOK". We completed the listing in order to enable
investors that are required to invest only in ASX-listed companies to acquire
an equity interest

                                      38
<PAGE>

in LookSmart. All of the shares of LookSmart common stock exchangeable for the
CDIs were offered by selling stockholders. We did not issue any new securities
in connection with, or receive any proceeds from, the issuance of the CDIs.
Each CDI is exchangeable into 0.05 shares of LookSmart common stock at the
option of the holder.

Recent Accounting Pronouncements

   In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for
transactions entered into after March 31, 2000 and requires that all
derivative instruments be recorded on the balance sheet at fair value. Changes
in the fair value are recorded in current earnings or other comprehensive
income. The Company has not held any derivative instruments or participated in
any hedging activities and anticipates the adoption of this standard will not
materially impact the Company's financial statements.

   In December 1999, the Securities and Exchange Commission issued staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 becomes effective for the second quarter of the year
ending December 31, 2000. The Company is in the process of determining the
impact that adoption of SAB 101 will have on the consolidated financial
statements.

   In December 1999, the Emerging Issues Task Force issued EITF No. 99-17,
"Accounting of Advertising Barter Transactions" (EITF 99-17). EITF 99-17 is
effective for years ended December 31, 2000. The Company believes that the
adoption of EITF 99-17 will not have a material effect on the consolidated
financial statements.

Year 2000 Risks

   Even though we have not experienced any immediately adverse impact from the
transition to the Year 2000 on January 1, 2000, we cannot guarantee that we,
our suppliers and customers have not been or will not be affected in a manner
that is not yet apparent. In addition, certain computer programs that were
date sensitive to the Year 2000 may not process the Year 2000 as a leap year
and any consequential effects may remain unknown until later. Total costs
incurred in 1999 to complete our Year 2000 review and remediation amounted to
$247,000.

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   Interest Rate Risk. The Company's exposure to market risk for interest rate
changes relates primarily to its short-term investments. The Company had no
derivative financial instruments as of December 31, 1999 or 1998. The Company
invests its excess cash in debt instruments of high-quality corporate issuers
with original maturities greater than three months and current maturities less
than twelve months. The amount of credit exposure to any one issue, issuer and
type of instrument is limited.

   Foreign Currency Risk. International revenues from the Company's foreign
subsidiaries were less than 10% of total revenues in 1999 and were derived
entirely from our Australian operations. The Company's 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, partially the exchange rate between the Australian
dollar and the United States dollar. The effect of foreign exchange rate
fluctuations on the Company in 1997, 1998 and 1999 were not material.

                                      39
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                       INDEX TO THE FINANCIAL STATEMENTS

                        LOOKSMART, LTD. AND SUBSIDIARIES
                       CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Report of Independent Accountants........................................  41

Consolidated Balance Sheets at December 31, 1998 and 1999................  42

Consolidated Statements of Operations and Comprehensive Loss for the
 years ended
 December 31, 1997, 1998, and 1999.......................................  43

Consolidated Statements of Stockholders' Equity (Deficit) for the years
 ended December 31, 1997, 1998, 1999.....................................  44

Consolidated Statements of Cash Flows for the years ended December 31,
 1997, 1998, and 1999....................................................  45

Notes to Consolidated Financial Statements...............................  46
</TABLE>

                                       40
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
LookSmart, Ltd. and Subsidiaries:

   In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive loss, of
stockholders' equity (deficit) and of cash flows present fairly, in all
material respects, the financial position of LookSmart, Ltd. and Subsidiaries
(the Company) at December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits in accordance with auditing standards generally accepted in the United
States which require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.

                                          /s/ PricewaterhouseCoopers LLP

San Francisco, California
January 26, 2000 except as
to Note 14, which is as of
February 25, 2000

                                      41
<PAGE>

                                LOOKSMART, LTD.

                          CONSOLIDATED BALANCE SHEETS
                   (In Thousands, except for per share data)

<TABLE>
<CAPTION>
                                                              December 31,
                                                            ------------------
                                                              1998      1999
                                                            --------  --------
<S>                                                         <C>       <C>
                          ASSETS
                          ------
Current assets:
  Cash and cash equivalents...............................  $  3,501  $ 75,971
  Short term investments..................................       --     28,038
  Trade accounts receivable, net of allowance for doubtful
   accounts of $127 and $610 at December 31, 1998 and
   1999...................................................     2,895     8,039
  Trade accounts receivable from related party............       --        980
  Prepaid distribution costs..............................       546     1,435
  Prepaid expenses........................................       245     2,275
  Other current assets....................................        61       965
                                                            --------  --------
    Total current assets..................................     7,248   117,703
Property and equipment, net...............................     1,979    11,595
Goodwill and intangible assets, net of accumulated
 amortization of $1,220 and $6,661 at December 31, 1998
 and 1999.................................................     4,744    29,301
Other assets..............................................       119     2,920
                                                            --------  --------
    Total assets..........................................  $ 14,090  $161,519
                                                            ========  ========
       LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
       --------------------------------------------
Current liabilities:
  Trade accounts payable..................................  $  1,325  $  4,002
  Other accrued liabilities...............................     2,873    12,915
  Deferred revenue........................................     9,234    16,705
  Income taxes payable....................................       323       650
  Capital lease obligations--current portion..............       --        743
                                                            --------  --------
    Total current liabilities.............................    13,755    35,015
Deferred revenue..........................................        96     4,919
Capital lease obligations.................................       --      1,423
Note payable to stockholder...............................     1,500       --
Minority interest.........................................       --        610
                                                            --------  --------
    Total liabilities.....................................    15,351    41,967
Commitments (Note 7)
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par value; Authorized:
 32,216 at December 31, 1998 and 5,000 at December 31,
 1999; Issued and Outstanding: 26,681 at December 31, 1998
 and none at December 31, 1999; liquidation preference of
 $70,306 at December 31, 1998 and $0 at December 31, 1999
 .........................................................        26       --
Common stock, $.001 par value; Authorized: 81,000 and
 200,000 shares at December 31, 1998 and 1999,
 respectively; Issued and Outstanding: 19,459 and 86,267
 at December 31, 1998 and 1999, respectively..............        19        86
Additional paid-in capital................................    21,928   211,305
Other equity (deficit)....................................        38    (3,904)
Accumulated deficit.......................................   (23,272)  (87,935)
                                                            --------  --------
    Total stockholders' equity (deficit)..................    (1,261)  119,552
                                                            --------  --------
    Total liabilities and stockholders' equity (deficit)..  $ 14,090  $161,519
                                                            ========  ========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       42
<PAGE>

                                LOOKSMART, LTD.

          CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                   ---------------------------
                                                    1997      1998      1999
                                                   -------  --------  --------
<S>                                                <C>      <C>       <C>
Revenues:
  Advertising and syndication..................... $   939  $  5,559  $ 22,076
  Licensing.......................................      10     3,226    19,255
  Ecommerce/distribution..........................     --        --      7,534
                                                   -------  --------  --------
    Total revenues................................     949     8,785    48,865
Cost of revenues
  Advertising and syndication.....................     430     1,086     2,870
  Licensing.......................................     --        500       --
  Ecommerce/distribution..........................     --        --      4,048
                                                   -------  --------  --------
    Total cost of revenues........................     430     1,586     6,918
                                                   -------  --------  --------
    Gross profit..................................     519     7,199    41,947
Operating expenses:
  Sales and marketing (exclusive of amortization
   of unearned compensation of 0, 40 and 2,781 in
   1997, 1998 and 1999, respectively).............   3,668    10,975    59,082
  Product development (exclusive of amortization
   of unearned compensation of 0, 86 and 4,837 in
   1997, 1998 and 1999, respectively).............   2,605     4,765    26,593
  General and administrative (exclusive of
   amortization of unearned compensation of 0, 7
   and 2,248 in 1997, 1998 and 1999,
   respectively)..................................   1,165     2,619     8,082
  Amortization of goodwill and intangibles........     410       605     5,442
  Amortization of unearned compensation...........     --        133     9,866
                                                   -------  --------  --------
    Total operating expenses......................   7,848    19,097   109,065
                                                   -------  --------  --------
Loss from operations..............................  (7,329)  (11,898)  (67,118)
Non-operating income (expense):
  Other income (expense), net.....................      (3)     (139)       (8)
  Interest income (expense), net..................     (16)     (675)    2,933
                                                   -------  --------  --------
Loss before income taxes..........................  (7,348)  (12,712)  (64,193)
Income taxes......................................     166       146       470
                                                   -------  --------  --------
Net loss..........................................  (7,514)  (12,858)  (64,663)
Other comprehensive income (loss):
  Change in unrealized loss on securities during
   the period.....................................     --        --        (77)
  Change in translation adjustment................     (39)      (16)       77
                                                   -------  --------  --------
Comprehensive loss................................ $(7,553) $(12,874) $(64,663)
                                                   =======  ========  ========
Basic and diluted loss per share.................. $ (0.08) $  (0.68) $  (1.42)
                                                   =======  ========  ========
Weighted average shares outstanding used in per
 share calculation................................  91,589    18,790    45,518
                                                   =======  ========  ========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       43
<PAGE>

                                LOOKSMART, LTD.

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                 (In Thousands)

<TABLE>
<CAPTION>
                           Convertible
                            Preferred
                              Stock         Common Stock     Additional                           Total
                          ---------------  ----------------   Paid-In    Other    Accumulated Stockholder's
                          Shares   Amount   Shares   Amount   Capital    Equity     Deficit      Equity
                          -------  ------  --------  ------  ---------- --------  ----------- -------------
<S>                       <C>      <C>     <C>       <C>     <C>        <C>       <C>         <C>
Balance at January 1,
 1997...................      --   $ --      90,000  $  90    $  4,900  $    --    $ (2,900)    $  2,090
Common stock issued for
 cash...................      --     --      29,640     30         125       --         --           155
Stockholder
 contribution...........      --     --         --     --        4,855       --         --         4,855
Common stock repurchased
 and
 exchanged for
 warrants...............      --     --    (101,640)  (102)         17        85        --           --
Translation adjustment..      --     --         --     --          --        (39)       --           (39)
Net loss................      --     --         --     --          --        --      (7,514)      (7,514)
                          -------  -----   --------  -----    --------  --------   --------     --------
Balance at December 31,
 1997...................      --     --      18,000     18       9,897        46    (10,414)        (453)
Common stock issued upon
 exercise of options....      --     --         402    --            5       --         --             5
Common stock issued for
 cash...................      --     --       1,057      1           8       --         --             9
Preferred stock issued
 for cash, conversion of
 notes, and as part of
 acquisitions, net of
 costs of $688..........   26,681     26        --     --       11,340       --         --        11,366
Issuance of warrants
 with preferred stock...      --     --         --     --         (770)      770        --           --
Issuance of warrants
 with debt..............      --     --         --     --          --        379        --           379
Issuance of warrants for
 services...............      --     --         --     --          --         31        --            31
Issuance of warrants
 with financing
 agreements.............      --     --         --     --          --        143        --           143
Unearned compensation...      --     --         --     --        1,448    (1,448)       --           --
Amortization of unearned
 compensation...........      --     --         --     --          --        133        --           133
Translation adjustment..      --     --         --     --          --        (16)       --           (16)
Net loss................      --     --         --     --          --        --     (12,858)     (12,858)
                          -------  -----   --------  -----    --------  --------   --------     --------
Balance at December 31,
 1998...................   26,681  $  26     19,459  $  19    $ 21,928  $     38   $(23,272)    $ (1,261)
Preferred stock Series A
 issued for cash........    1,500      2        --     --          531       --         --           533
Preferred stock Series C
 issued for cash, net of
 costs of $29...........   12,083     12        --     --       60,332       --         --        60,344
Unearned Compensation...      --     --         --     --       15,135   (15,135)       --           --
Amortization of unearned
 compensation...........      --     --         --     --          --      9,866        --         9,866
Common stock issued as
 part of Guthy Renker
 acquisition............      --     --       2,550      3      11,472       --         --        11,475
Issuance of warrants as
 part of ITW
 acquisition............      --     --         --     --          --      4,263        --         4,263
Issuance of warrants
 with Series C preferred
 stock..................      --     --         --     --       (1,443)    1,443        --           --
Common stock issued upon
 exercise of options....      --     --       2,616      3         179       --         --           182
Common stock issued as
 part of IPO, net of
 offering costs of
 $9,342.................      --     --       8,855      9      96,900       --         --        96,909
Preferred stock stock
 repurchased............     (555)    (1)       555      1         --        --         --           --
Conversion of preferred
 stock to common stock..  (39,709)   (39)    39,710     39         --        --         --           --
Common stock issued upon
 exercise of warrants...      --     --      12,465     12       5,687    (4,379)       --         1,320
Common stock issued for
 Employee Stock Purchase
 Plan...................      --     --          57     --         584       --         --           584
Unrealized loss on
 securities.............      --     --         --     --          --        (77)       --           (77)
Translation adjustment..      --     --         --     --          --         77        --            77
Net loss................      --     --         --     --          --        --     (64,663)     (64,663)
                          -------  -----   --------  -----    --------  --------   --------     --------
Balance at December 31,
 1999...................      --   $ --      86,267  $  86    $211,305  $ (3,904)  $(87,935)    $119,552
                          =======  =====   ========  =====    ========  ========   ========     ========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                   statements

                                       44
<PAGE>

                                LOOKSMART, LTD.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                                  ---------------------------
                                                   1997      1998      1999
                                                  -------  --------  --------
<S>                                               <C>      <C>       <C>
Cash flows from operating activities:
Net loss......................................... $(7,514) $(12,858) $(64,663)
Adjustments to reconcile net loss to net cash
 used in operating activities
  Depreciation and amortization..................     679       956     7,552
  Amortization of unearned compensation..........     --        133     9,866
  Write-off of in-process research and
   development...................................     --        338       --
  Warrants and other non-cash charges............     --        557       --
  Loss on disposition of equipment...............      12        12       259
  Changes in operating assets and liabilities
    Trade accounts receivable....................     (37)   (2,709)   (6,124)
    Prepaid expenses.............................       5      (781)   (2,919)
    Other assets.................................      (8)     (170)   (3,375)
    Trade accounts payable.......................     254       834     2,677
    Other accrued liabilities and payables.......     236     2,431     8,411
    Deferred revenues............................     --      9,330    11,571
                                                  -------  --------  --------
      Net cash used in operating activities......  (6,373)   (1,927)  (36,745)
                                                  -------  --------  --------
Cash flows from investing activities:
  Acquisitions...................................     --       (907)  (11,489)
  Purchase of short-term investments.............     --        --    (28,038)
  Purchases of property and equipment............    (336)   (1,573)  (11,885)
                                                  -------  --------  --------
      Net cash used in investing activities......    (336)   (2,480)  (51,412)
Cash flows from financing activities:
  Proceeds from stockholder contribution.........   4,855       --        --
  Proceeds from notes............................   1,500     4,952       --
  Repayment of notes.............................     --     (2,327)   (1,500)
  Proceeds from issuance of preferred stock,
   net...........................................     --      5,237    60,887
  Proceeds from sale of equipment under sale
   lease-back agreement..........................     --        --      2,635
  Repayments on equipment lease..................     --        --       (469)
  Proceeds from exercise of common stock
   warrants......................................     --        --      1,321
  Net proceeds from issuance of common stock.....     155        14    97,676
                                                  -------  --------  --------
      Net cash provided by financing activities..   6,510     7,876   160,550
                                                  -------  --------  --------
Effect of exchange rate changes on cash..........     (39)      (16)       77
                                                  -------  --------  --------
Increase (decrease) in cash and cash
 equivalents.....................................    (238)    3,453    72,470
Cash and cash equivalents, beginning of period...     286        48     3,501
                                                  -------  --------  --------
Cash and cash equivalents, end of period......... $    48  $  3,501  $ 75,971
                                                  =======  ========  ========
Supplemental disclosure of cash flow information
 (Note 12)
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                   statements

                                       45
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies:

 Nature of Business and Principles of Consolidation

   LookSmart offers its business partners and consumers comprehensive Internet
search infrastructure services. LookSmart distributes its proprietary
directory to a large number of Internet users through LookSmart owned web
properties, as well as our strategic partners, including portals, Internet
service providers and media companies.

   The consolidated financial statements include the accounts of the Company
and its subsidiaries: LookSmart International Pty Ltd, Futurecorp
International Pty Ltd, BeSeen.com, Inc., LookSmart Netherlands B.V. and
LookSmart Holdings (Delaware), Ltd. All significant intercompany balances and
transactions have been eliminated in consolidation. Investments in 20% to 50%
owned partnerships and affiliates are accounted for on the equity method and
investments in less than 20% owned affiliates are accounted for on the cost
method.

 Use of Estimates

   The financial statements have been prepared in conformity with accounting
principles generally accepted in the United States. This requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and revenues and expenses during the reporting period. Actual
results could differ from those estimates.

 Reclassifications

   Certain prior years' balances have been reclassified to conform with the
current year's presentation.

 Fair Value of Financial Instruments

   The Company's financial instruments, including cash and cash equivalents,
short-term investments, accounts receivable, accounts payable and capital
lease are carried at cost, which approximates fair value due to the relatively
short maturity of those instruments.

 Stock Splits

   On December 17, 1997, the Company authorized and implemented a one
thousand-for-one stock split. On March 23, 1999, the Company authorized and
implemented a four-for-one stock split. On July 23, 1999, the Company
authorized and implemented a three-for-two stock split. All share and per
share amounts have been retroactively restated to reflect the effect of the
stock splits.

 Foreign Currencies

   The balance sheets of the Company's foreign subsidiaries are translated
into United States dollars at year end rates of exchange. Revenues and
expenses are translated at average rates for the year. The resulting
translation adjustments are shown as a separate component of stockholders'
equity and as a component of comprehensive loss.

   Exchange gains and losses arising from transactions denominated in a
foreign currency other than the functional currency of the entity involved are
included in other expense. Such exchange gains (losses) amounted to $9,000,
($119,000) and $0 for years ended December 31, 1997, 1998 and 1999,
respectively. The Company has not entered into foreign currency forward
exchange contracts or any other derivative instruments.

                                      46
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Cash and Cash Equivalents

   Cash and cash equivalents are stated at cost. The Company considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents.

 Short-Term Investments

   The Company accounts for short-term investments under Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS 115). SFAS 115 requires the classification
of investments in debt and equity securities with readily determined fair
values as "held-to-maturity," "available-for-sale," or "trading." The Company
invests its excess cash in debt instruments of high-quality corporate issuers.
All highly liquid instruments with original maturities greater than three
months and current maturities less than twelve months from the balance sheet
date are considered short-term investments. These securities are classified as
available-for-sale and carried at fair value, based on quoted market prices.
Net unrealized gains or losses, if material, on these investments are reported
as a component of comprehensive income (loss) in stockholders' equity, net of
tax. There have been no realized gains or losses through December 1999.

 Property and Equipment

   Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets as follows:

<TABLE>
   <S>                                                             <C>
   Computer equipment............................................. 3 years
   Furniture and fixtures......................................... 5 years
   Software....................................................... 2 to 3 years
</TABLE>

   Leasehold improvements are amortized on a straight line basis over the
shorter of their estimated useful lives or the lease term.

   When assets are retired or otherwise disposed of, the cost and accumulated
depreciation are removed from their respective accounts, and any gain or loss
on such sale or disposal is reflected in operating expenses. Maintenance and
repairs are charged to expense as incurred. Expenditures which substantially
increase an asset's useful life are capitalized.

 Internal Use Software

   The Company accounts for internal use software in accordance with Statement
of Position No. 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." In accordance with the
capitalization criteria of SOP 98-1 the Company has capitalized external
direct costs of materials and services consumed in developing and obtaining
internal-use computer software and the payroll and payroll-related costs for
employees who are directly associated with and who devote time to the
internal-use computer software project. The Company has capitalized software
costs of $0 and $443,000 with related accumulated amortization of $0 and
$84,000 at December 31, 1998 and 1999, respectively. Capitalized software is
accounted for in other assets and is amortized over two years.

 Goodwill and Intangible Assets

   Goodwill and intangible assets consist of the excess of purchase price paid
over the fair market value of identified intangible and tangible net assets of
acquired companies. Goodwill and intangible assets are amortized using the
straight-line method over one to five years depending on the period of
expected benefit. The majority

                                      47
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

of goodwill and intangible assets are amortized over five years, the period of
expected benefit. Valuation of goodwill and intangible assets are reassessed
periodically to conform to changes in management's estimates of future
performance giving consideration to existing and anticipated competitive and
economic conditions. Cash flow forecasts used in evaluation of goodwill and
intangibles are based on trends of historical performance and management's
estimate of future performance.

 Asset Impairment

   Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
(SFAS No. 121) requires recognition of impairment of long-lived assets in the
event the net book value of such assets exceeds the future undiscounted cash
flows attributable to such assets. SFAS No. 121 has not had an impact on the
consolidated financial statements of the Company.

 Stock-Based Compensation

   The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25, (APB
No. 25) "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of SFAS No. 123 "Accounting for Stock-based
Compensation." Under APB No. 25, compensation cost is recognized based on the
difference, if any, on the date of grant between the fair value of the
Company's stock and the amount an employee must pay to acquire the stock.

 Net Loss Per Share

   SFAS No. 128 "Earnings per Share," establishes standards for computing and
presenting earnings per share. Basic earnings per share is calculated using
the average shares of common stock outstanding. Diluted earnings per share is
calculated using the weighted average number of common and dilutive common
equivalent shares outstanding during the period, using either the as if
converted method for convertible preferred stock or the treasury stock method
for options and warrants. Pursuant to SEC Staff Accounting Bulletin No. 98,
common stock and convertible preferred stock issued for nominal consideration,
prior to the anticipated effective date of an initial public offering, are
included in the calculation of basic and diluted net loss per share as if such
stock were outstanding for all periods presented.

 Revenue Recognition

   The Company generates revenues from advertising and syndication, licensing
and ecommerce/distribution activities. Advertising and syndication revenues
are derived from the sale of advertisements on the websites of the Company and
its syndication partners who display LookSmart content. Advertising revenues
are recognized ratably as impressions are delivered over the period in which
the advertisement is displayed, provided that no significant Company
obligations remain at the end of a period and collection of the resulting
receivable is probable. Company obligations typically include guarantees of a
minimum number of "impressions," or times that an advertisement appears in
pages viewed by users of the Company's or its partners' online properties. To
the extent minimum guaranteed impressions are not met, the Company defers
recognition of the corresponding revenues until the remaining guaranteed
impression levels are achieved.

   Revenues also include barter transactions which are the exchange of
advertising space on the Company's websites for advertising space on other
websites. These transactions are recorded at the fair value of the
advertisements provided or received, whichever is more readily determinable.
For the years ended December 31, 1997, 1998 and 1999 the Company recognized
$94,000, $478,000 and $257,000, respectively, in barter transactions.

                                      48
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Revenues associated with licensing contracts are recognized as delivery
occurs as specified under the contracts, and where no refund obligations
exist. Payments from customers received in advance of delivery are recorded as
deferred revenues.

   The Company's ecommerce/distribution revenue is generated by the sale of
merchandise and the design, construction and hosting of commercial websites.
Revenue from the sale of merchandise is reported on a gross basis if the
Company acts as the principal in the transaction with associated product cost
reported as cost of revenues. Revenue is recognized at the time goods are
shipped. Revenue from the design and construction of websites is recognized
when the website is delivered to the customer, or when the Company's
obligation terminates. Hosting revenues are recognized in the period in which
hosting occurs.

   In November 1999 the Company entered into a three year distribution
agreement with Inktomi Corporation. Under this contract Inktomi may act as a
reseller of the Company's database content and would share a portion of these
revenues with the Company. The contract provides for an annual minimum of such
revenues from Inktomi and for a start up fee and per query fee from each third
party customer to whom Inktomi resells the database content. The start up fees
are recognized as revenue over the term of the third party customer
relationship. The per query fees are recognized as revenue at the time the
query results are served. As of December 31, 1999, there have been no resale
transactions consummated by Inktomi.

 Advertising Costs

   Advertising costs are charged to sales and marketing expenses as incurred
and amounted to $938,000, $256,000 and $13.0 million for the years ended
December 31, 1997, 1998 and 1999, respectively.

 Product Development Costs

   Costs incurred in the classification and organization of listings within
the unique URL database and the development of new products and enhancements
to existing products are charged to expense as incurred. SFAS No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed," requires capitalization of certain software development costs
subsequent to the establishment of technological feasibility. Based upon the
Company's product development process, technological feasibility is
established upon completion of a working model. Costs incurred by the Company
between completion of the working model and the point at which the product is
ready for general release have been insignificant.

 Comprehensive Income

   The Company has adopted the accounting treatment prescribed by SFAS No.
130, "Comprehensive Income." The components of the Company's "Comprehensive
income (loss)" includes no provision for United States income taxes.

 Concentration of Credit Risk and Business Risk

   The Company's short-term investments are managed by one institution.

   Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable. The
Company maintains a reserve for doubtful accounts receivable based upon
expected collectibility of accounts receivable. The Company has advertising
contracts with a number of early stage internet companies that may suffer cash
flow problems.

   As of December 31, 1999, one receivable from a related party in our
ecommerce/distribution segment accounted for 11% of the total trade
receivables. As of December 31, 1998, one customer in our advertising and
syndication segment accounted for 13% of total accounts receivable.

                                      49
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   One customer in our licensing segment individually accounted for
approximately 0%, 32%, and 39% of total revenues for the years ended December
31, 1997, 1998 and 1999, respectively.

   Two customers in our advertising and syndication segment individually
accounted for approximately 36% and 20% of total revenues for the year ended
December 31, 1997. The same two customers individually accounted for
approximately 22% and 0% of total revenues for the year ended December 31,
1998. We had no revenues from these same two customers for the year ended
December 31, 1999.

   The Internet navigation market is highly competitive. The success of the
Company is dependent upon its ability to raise capital, generate traffic and
advertising revenues, and attract and retain key personnel.

   Factors that may materially and adversely affect the Company's future
operating results include: demand for and market acceptance of the Company's
products and services; introduction of products and services or enhancements
by the Company; timely expansion of capacity constraints of software and
infrastructure; retention of key personnel; reliable continuity of operating
performance; identification and adoptions to rapidly changing Internet
technologies and evolving industry standards; conditions specific to the
Internet industry and other general economic factors; and new government
legislation and regulation.

 Segment Information

   The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in the fiscal year ended December 31,
1998. SFAS 131 establishes standards for reporting information regarding
operating segments in annual financial statements and requires selected
information for those segments to be presented in interim financial reports
issued to stockholders. SFAS 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company operates in three segments: advertising and syndication, licensing
and ecommerce/distribution. In the Consolidated Statements of Operations and
Comprehensive Loss, the Company reports revenue and cost of revenues along
these three segments based on the services currently provided by each. With
the exception of accounts receivable, information available to the chief
operating decision makers of the Company does not include allocations of
assets and liabilities or operating costs to the Company's segments. As of
December 31, 1998 and 1999, accounts receivable by segments are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                 --------------
                                                                  1998    1999
                                                                 ------  ------
   <S>                                                           <C>     <C>
   Advertising and syndication.................................. $3,022  $8,368
   Licensing....................................................    --      269
   Ecommerce/distribution.......................................    --      992
                                                                 ------  ------
   Total........................................................  3,022   9,629
   Allowance for doubtful accounts..............................   (127)   (610)
                                                                 ------  ------
   Accounts receivable, net..................................... $2,895  $9,019
                                                                 ======  ======
</TABLE>

   As of December 31, 1998 and 1999, deferred revenue by segments are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                                  December 31,
                                                                 --------------
                                                                  1998   1999
                                                                 ------ -------
   <S>                                                           <C>    <C>
   Advertising and syndication.................................. $  508 $   239
   Licensing....................................................  8,822  18,597
   Ecommerce/distribution.......................................    --    2,788
                                                                 ------ -------
   Total........................................................ $9,330 $21,624
                                                                 ====== =======
</TABLE>

                                      50
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Recently Issued Accounting Pronouncements

   In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for
transactions entered into after March 31, 2000 and requires that all
derivative instruments be recorded on the balance sheet at fair value. Changes
in the fair value are recorded in current earnings or other comprehensive
income. The Company has not held any derivative instruments or participated in
any hedging activities and anticipates the adoption of this standard will not
materially impact the Company's financial statements.

   In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB 101). SAB 101 becomes effective for the second quarter of the year ending
December 31, 2000. The Company is in the process of determining the impact
that adoption of SAB 101 will have on the consolidated financial statements.

   In December 1999, the Emerging Issues Task Force issued EITF No. 99-17,
"Accounting for Advertising Barter Transactions" (EITF 99-17). EITF 99-17 is
effective for years ended December 31, 2000. The Company believes that the
adoption of EITF 99-17 will not have a material effect on its consolidated
financial statements.

2. Property and Equipment:

   Property and equipment consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                  December 31,
                                                                 --------------
                                                                  1998   1999
                                                                 ------ -------
   <S>                                                           <C>    <C>
   Computer equipment........................................... $2,240 $ 9,332
   Furniture and fixtures.......................................    207   1,382
   Software.....................................................    130   2,751
   Leasehold improvements.......................................     77     865
                                                                 ------ -------
                                                                  2,654  14,330
   Less accumulated depreciation and amortization...............    675   2,735
                                                                 ------ -------
   Property and equipment, net.................................. $1,979 $11,595
                                                                 ====== =======
</TABLE>

   Cost and accumulated depreciation related to assets under capital lease
obligations at December 31, 1999 were $2.6 million and $272,000, respectively.
No assets were subject to capital lease prior to 1999. Depreciation expense
was $269,000, $351,000, and $2.1 million for the years ended December 31,
1997, 1998 and 1999, respectively.

3. Other Accrued Liabilities

<TABLE>
<CAPTION>
                                                                  December 31,
                                                                 --------------
                                                                  1998   1999
                                                                 ------ -------
                                                                 (in thousands)
   <S>                                                           <C>    <C>
   Accrued expenses and other current liabilities:
   Accrued compensation and related expenses...................  $  302 $ 1,485
   Accrued content, connect, and other costs...................     538   1,664
   Accrued sales and marketing related expenses................     181   3,167
   Accrued professional service expenses.......................   1,123   1,366
   Commitment to former shareholders of Futurecorp.............     --    1,958
   Other.......................................................     729   3,275
                                                                 ------ -------
                                                                 $2,873 $12,915
                                                                 ====== =======
</TABLE>


                                      51
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

4. Notes Payable:

   In September 1997, the Company issued a note payable for $1.5 million to a
stockholder. Interest was charged at the rate of 10% per annum and was payable
quarterly starting September 30, 1998. The Company repaid the note in June
1999.

   From January to April 1998, the Company issued convertible promissory notes
in the principal amount of $2.9 million to investors of the Company. All notes
bore interest at 10% per annum and included an issuance of 2,510,412 Series A
preferred stock warrants (Note 6). In May 1998, in accordance with the terms
of these notes, outstanding principal of $2.1 million was converted into
Series A preferred stock; outstanding principal and interest of $505,000 was
converted into Series B preferred stock and outstanding principal of $250,000
was repaid to a note holder.

   In September 1998, the Company entered into a financing agreement with
Microsoft to borrow up to $11.9 million at an interest rate of 8% per annum.
In December 1998, pursuant to a licensing agreement with Microsoft, this note
was applied as an offset against the payments due under that license agreement
and was recorded as deferred revenue of $11.4 million on the Company's balance
sheet. Warrants to purchase 480,000 shares of common stock at an exercise
price of $0.6275 per share were issued in conjunction with the financing
agreement. These warrants expire in September 2003. The fair value of these
warrants was recorded as interest expense over the term the financing
agreement was effective.

5. Income Taxes:

   The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards No. 109 (SFAS No.
109). Under this method, deferred tax liabilities and assets are determined
based on the difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse. Valuation allowances are established
when necessary to reduce deferred tax assets to the amounts expected to be
realized. The provision for income taxes of $166,000, $146,000, and $470,000
for the years ended December 31, 1997, 1998, and 1999 applies to the Company's
foreign subsidiaries.

   The primary components of the net deferred tax asset are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                                December 31,
                                                              -----------------
                                                               1998      1999
                                                              -------  --------
   <S>                                                        <C>      <C>
   Deferred tax asset:
   Net operating losses...................................... $ 4,699  $ 26,950
   Deferred revenue..........................................   3,637       --
   Depreciation and amortization.............................     391       975
   Accrual and reserves......................................     110       624
   Compensation..............................................     --        517
                                                              -------  --------
   Total deferred tax assets.................................   8,837    29,066
   Deferred tax liability....................................      (3)      --
                                                              -------  --------
   Net deferred tax asset....................................   8,834    29,066
   Less: valuation allowance.................................  (8,834)  (29,066)
                                                              -------  --------
                                                              $   --   $    --
                                                              =======  ========
</TABLE>

   As of December 31, 1999, the Company has net operating loss (NOL)
carryforwards of approximately of $70.0 million and $65.0 million for federal
and state tax purposes, respectively. Pursuant to the provisions of

                                      52
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Section 382 of the Internal Revenue Code, utilization of the NOLs are subject
to annual limitations through 2011 due to a greater than 50% change in the
ownership of the Company which occurred during fiscal years 1997 and 1998.
These loss carryforwards expire from 2004 to 2019.

6. Commitments:

 Operating Leases and Advertising and Marketing Commitments

   The Company leases office space under non-cancelable operating leases which
expire at various dates through the year 2009. The Company has also entered
into non-cancelable advertising and marketing programs with contracts which
expire at various dates through the year 2004. In June 1999, the Company
entered into several advertising and marketing agreements.

   Future minimum payments under all operating leases and advertising and
marketing programs at December 31, 1999 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                           Year ending December
                                                                    31:
                                                           ---------------------
                                                                     Advertising
                                                                         And
                                                           Operating  Marketing
                                                            Leases   Commitments
                                                           --------- -----------
   <S>                                                     <C>       <C>
   2000...................................................  $ 5,047    $ 4,372
   2001...................................................    4,910      4,507
   2002...................................................    4,699      2,800
   2003...................................................    4,446      1,450
   2004...................................................    4,405      1,215
   Thereafter.............................................   22,508        --
                                                            -------    -------
   Total..................................................  $46,015    $14,344
                                                            =======    =======
</TABLE>

   Rent expense under all operating leases for the years ended December 31,
1997, 1998 and 1999 amounted to $215,000, $508,000 and $1.9 million,
respectively. Under the terms of the primary office lease agreement, the
Company has two consecutive options to extend the term, each for a five year
period.

 Capital Leases

   In February 1999, the Company entered into an agreement for the sale and
leaseback of certain of its computer equipment with a total commitment of $2.0
million which is accounted for as a capital lease. The Company has pledged as
collateral certain computer equipment. At December 31, 1999 total credit
remaining available to the Company under the agreement was $300,000.

   In December 1999, the Company entered into an agreement for the sale and
leaseback of certain of its computer equipment. The Company has pledged as
collateral certain computer equipment. At December 31, 1999 the Company had
drawn down the entire $898,000 credit available under the terms of the
agreement.

   No gain or loss was recognized on these transactions. Depreciation on
properties sold and leased back has been reflected in accordance with the
Company's normal accounting practices.


                                      53
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Future minimum lease payments under capital leases at December 31, 1999 are
as follows (in thousands):

<TABLE>
   <S>                                                                  <C>
   Year ending December 31,
     2000.............................................................. $ 1,015
     2001..............................................................   1,015
     2002..............................................................     605
                                                                        -------
   Total minimum lease payments........................................   2,635
   Less: Interest......................................................    (469)
                                                                        -------
   Present value of net minimum lease payments.........................   2,166
   Less current portion................................................    (743)
                                                                        -------
   Capital lease obligation--long-term................................. $ 1,423
                                                                        =======
</TABLE>

7. Stockholders' Equity:

 Financings

   Through April of 1999, the Company issued Series A, B, C, and 1 Junior
convertible preferred stock. Total cash proceeds from the issuance of
convertible preferred stock, net of $717,000 issuance costs, amounted to
$66.1 million. The Series 1 Junior convertible preferred stock was issued as
part of the consideration for the acquisition of BeSeen.com, Inc. On August
19, 1999, LookSmart completed its initial public offering of 8,855,000 shares
of common stock, including 1,155,000 shares issued in connection with the
exercise of the underwriters' over-allotment option. All shares were issued at
an offering price of $12.00 per share. Upon closing of the initial public
offering, 39,708,978 shares of outstanding convertible preferred stock were
converted into common stock. Net proceeds from the offering after underwriting
discounts and commissions and offering expenses of $9.3 million were
approximately $96.9 million.

 Convertible Preferred Stock

   Convertible preferred stock issued and outstanding immediately prior to the
Company's initial public offering was as follows:

<TABLE>
<CAPTION>
                                                          Designated Outstanding
                                                          ---------- -----------
                                                              (in thousands)
   <S>                                                    <C>        <C>
   Series A..............................................   11,888      7,853
   Series B..............................................   14,328     14,328
   Series C..............................................   12,590     12,083
   Series 1 Junior.......................................    6,000      5,445
                                                                       ------
   Total convertible preferred...........................              39,709
                                                                       ======
</TABLE>

   The Company's charter authorizes the board of directors to issue up to
5,000,000 shares of $0.001 par value preferred stock. At December 31, 1999, no
shares of preferred stock were issued or outstanding.

 Treasury Stock

   In August 1999, the Company repurchased 554,913 shares of Series 1 Junior
preferred stock which have been recorded as treasury stock.


                                      54
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 Warrants

   From 1997 through 1999, the Company issued warrants to purchase 14,384,923
shares of common and preferred shares at exercise prices ranging from $0.00017
to 5.00 per share. All of these warrants were exercised in 1999. These
warrants were issued in connection with preferred stock issuances and
acquisitions. The fair values of these warrants are recorded as issuance costs
or as part of the related acquisition purchase price.

   In 1998, the Company issued warrants to purchase 2,510,412 shares of Series
A preferred stock at $0.35625 per share in connection with the issuance of
convertible notes payable (Note 4). During 1998, 1,500,000 of these warrants
were exercised. The remaining warrants are exercisable until their expiration
March 2005. The fair value of the warrants was recorded as interest expense
over the period the notes were outstanding.

   In 1998, the Company issued a warrant to purchase 1,500,000 shares of
common stock at an exercise price of $2.50 per share as part of a strategic
alliance. The warrant is currently outstanding and expires in May 2003. The
exercise price exceeded the deemed fair value of the underlying stock at the
date of grant resulting in no impact on earnings.

   In 1998, the Company issued a warrant to purchase up to 480,000 shares of
common stock at an exercise price of $0.41833 per share in connection with a
financing agreement. This warrant was exercised in Feburary 2000.

   In 1999, the Company granted warrants to purchase 120,000 shares of common
stock at $1.25 per share to two individuals in connection with their
employment. As of December 31, 1999, 38,125 of these warrants had been
exercised. Of the remaining 81,875 warrants, 18,125 are vested. The warrants
vest at a rate of 3,750 shares per month provided the individuals continue to
be employees of the Company. These warrants expire in June 2004. The Company
recorded deferred compensation of $1,218,000 for the difference between
exercise price and the fair market value of the underlying common stock at the
date of grant under APB No. 25.

   As of December 31, 1999, 3,008,537 warrants outstanding are exercisable.
The following table sets forth warrants outstanding as of December 31, 1999
(in thousands, except for per share data):

<TABLE>
<CAPTION>
                                         Number of Exercise price
   Date of grant                         warrants    per share       Expires
   -------------                         --------- -------------- --------------
   <S>                                   <C>       <C>            <C>
   March 1998...........................   1,010       $0.36      March 2005
   May 1998.............................   1,500       $2.50      May 2003
   September 1998.......................     480       $0.42      September 2003
   June 1999............................      82       $1.25      June 2004
</TABLE>

 Stock Option Plan

   In December 1997, in connection with a stock split, the Company canceled
the 1996 Stock Option Plan and all options granted thereunder. In December
1997, the Company approved the 1998 Stock Option Plan (the Plan). The Company
has reserved 9,750,000 and 20,850,000 shares of common stock for issuance
under the Plan at December 31, 1998 and December 31, 1999, respectively.
Options generally become exercisable over a four year period from the grant
date and have a term of ten years. Under the Plan, the Company may grant
incentive stock options, nonstatutory stock options and stock purchase rights
to employees, directors and consultants.

   As of December 31, 1999, 11,485,703 options were issued and 6,338,449
shares remained available for grant under the Company's plan.


                                      55
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   Stock option activity under the plans during the periods indicated is as
follows (in thousands, except for per share data):

<TABLE>
<CAPTION>
                                                                        Weighted
                                                                        Average
                                                            Outstanding Exercise
                                                              Options    Price
                                                             Number of    Per
                                                              Shares     Share
                                                            ----------- --------
   <S>                                                      <C>         <C>
   Balance at December 31, 1996                                             --
     Granted...............................................   13,401    $0.0047
     Canceled..............................................   (8,964)   $0.0002
                                                              ------
   Balance at December 31, 1997............................    4,437    $0.0095
     Granted...............................................    5,514    $0.1620
     Canceled..............................................     (618)   $0.0246
     Exercised.............................................     (402)   $0.0095
                                                              ------
   Balance at December 31, 1998............................    8,931    $0.1026
     Granted...............................................    6,790    $8.5255
     Canceled..............................................   (1,611)   $1.1740
     Exercised.............................................   (2,624)   $0.0696
                                                              ------
   Balance at December 31, 1999............................   11,486    $4.9394
                                                              ======
</TABLE>

   The Company accounts for employee stock options under APB No. 25 and
related Interpretations. For the years ended December 31, 1998 and 1999, the
Company recorded deferred compensation of $1.5 million and $15.1 million
respectively, for stock option grants where the deemed fair value of the
option at grant date was in excess of the exercise price.

   The following table summarizes information about stock options outstanding
at December 31, 1999:

<TABLE>
<CAPTION>
                                   Options Outstanding          Options Exercisable
                          ------------------------------------- --------------------
                            Number                     Weighted   Number    Weighted
                          Outstanding Weighted Average Average  Exercisable Average
                             as of       Remaining     Exercise    as of    Exercise
Range of Exercise Prices   12/31/99   Contractual Life  Price    12/31/99    Price
- ------------------------  ----------- ---------------- -------- ----------- --------
<S>                       <C>         <C>              <C>      <C>         <C>
$0.0095-0.5000..........   5,545,128        8.57       $ 0.1417  1,773,427  $ 0.0957
 1.2500-5.0000..........   3,699,125        9.21         2.0610     36,375    1.2500
 7.3333-12.0000.........   1,148,250        9.50         9.6127     29,749    7.9636
 27.4375-34.6250........   1,093,200        9.92        34.1062      1,241   34.0000
                          ----------                             ---------
$0.0095-34.6250.........  11,485,703        9.00       $ 4.9394  1,840,792  $ 0.2686
</TABLE>

   As of December 31, 1997 and 1998, there were 999 and 1,771,311 options
exercisable, respectively.

   The following information concerning the Company's stock options plan is
provided in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation".

   The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted-
average assumptions:

<TABLE>
<CAPTION>
                                                               1997  1998  1999
                                                               ----  ----  ----
   <S>                                                         <C>   <C>   <C>
   Expected volatility........................................    0%    0%  104%
   Risk-free interest rate.................................... 5.72% 5.18% 5.05%
   Expected lives (years).....................................    5     5     5
   Expected dividend yield....................................  --    --    --
</TABLE>


                                      56
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   The weighted average fair value for options granted was $.00273, $.30013
and $7.819 for 1997, 1998 and 1999, respectively. The fair value of options
granted to independent contractors has been determined using the Black-Scholes
model with the same assumptions as options granted to employees and with a
volatility of 104%. The fair value of options granted to consultants is
recorded as consulting expense as services are provided.

   The pro forma net loss for the Company for 1997, 1998 and 1999 is as
follows (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                    1997      1998      1999
                                                   -------  --------  --------
   <S>                                             <C>      <C>       <C>
   Net Loss
     As reported.................................. $(7,514) $(12,858) $(64,663)
     Pro forma.................................... $(7,515) $(12,933) $(70,588)
   Basic and Diluted net loss per share
     As reported.................................. $ (0.08) $  (0.68) $  (1.42)
     Pro forma.................................... $ (0.08) $  (0.69) $  (1.55)
</TABLE>

   These pro forma results are not necessarily indicative of results which may
be expected in the future as additional grants are made each year and options
vest over several years.

 Employee Stock Purchase Plan

   In 1999, the shareholders approved the 1999 Employee Stock Purchase Plan. A
total of 750,000 shares of common stock have been reserved for issuance under
the Plan, plus annual increases on January 1 of each year, beginning in 2000.
As of December 31, 1999, 57,331 shares have been issued under the 1999
Purchase Plan.

8. Other Equity Items:

   Other equity items consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                               December 31,
                                                              ----------------
                                                               1998     1999
                                                              -------  -------
   <S>                                                        <C>      <C>
   Warrants.................................................. $ 1,408  $ 2,735
   Unearned Compensation.....................................  (1,315)  (6,584)
   Unrealized loss on securities.............................     --       (77)
   Translation adjustments...................................     (55)      22
                                                              -------  -------
                                                              $    38  $(3,904)
                                                              =======  =======
</TABLE>

9. Microsoft Contract:

   The Company entered into a five year, fixed-fee contract with Microsoft
Corporation. Under the terms of this contract, the Company has licensed its
proprietary database and is obligated to add a certain number of URLs ratably
over the contract term. Microsoft may specify the content for approximately
half the required URL delivery. Through December 31, 1999, the Company has met
all URL delivery requirements under the contract to date. The Company
recognizes revenues under this contract ratably as access to URLs is delivered
and no further obligation for performance or refund exists. Under the terms of
the contract, beginning in June 2000 either party may terminate the agreement
for any reason on six months' notice.

   Under the contract, the Company received an up-front, nonrefundable fee of
$30.0 million and receives quarterly payments throughout the contract term.
Payments received in advance of performance under the contract are recorded as
deferred revenues. As of December 31, 1999, deferred revenue relating to the
Microsoft contract was $18.5 million.

                                      57
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


10. Net Loss Per Share:

   In accordance with the requirements of SFAS No. 128, a reconciliation of
the numerator and denominator of basic and diluted loss per share is provided
as follows (in thousands, except share amounts):

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                   ---------------------------
                                                    1997      1998      1999
                                                   -------  --------  --------
   <S>                                             <C>      <C>       <C>
   Numerator-Basic and diluted:
     Net loss..................................... $(7,514) $(12,858) $(64,663)
   Denominator-Basic and diluted:
     Weighted average common shares outstanding...  91,589    18,790    45,518
   Basic and diluted loss per share............... $ (0.08) $  (0.68) $  (1.42)
</TABLE>

   In September 1997, the Company reorganized its capital structure by
repurchasing 101,640,000 shares of its common stock. Options and warrants to
purchase common and preferred shares are not included in the diluted loss per
share calculations as their effect is antidilutive for all periods. The
dilutive securities included weighted average common stock equivalents
relating to preferred stock, stock options and warrants to purchase common and
preferred shares and are as follows (in thousands):

<TABLE>
<CAPTION>
                                                            Year Ended December
                                                                    31,
                                                            --------------------
                                                             1997   1998   1999
                                                            ------ ------ ------
   <S>                                                      <C>    <C>    <C>
   Preferred stock.........................................    --  26,681    --
   Options.................................................  4,437  8,931 11,486
   Warrants................................................  9,000 16,515  3,072
                                                            ------ ------ ------
   Total dilutive shares................................... 13,437 52,127 14,558
                                                            ====== ====== ======
</TABLE>

11. Acquisitions:

   All of the transactions below were recorded using the purchase method of
accounting and the operating results of these acquisitions have been included
in the Company's results of operations since the date they were acquired. The
purchase prices have been allocated to assets acquired and liabilities assumed
based on the fair values on the acquisition dates.

   On October 23, 1998, the Company acquired all of the outstanding stock of
BeSeen.com, Inc. (BeSeen), a privately held company, for $907,000 cash,
including acquisition costs of $157,000, and the issuance of 6,000,000 shares
of Series 1 Junior preferred stock. At the acquisition date, the Series 1
Junior preferred stock was valued at $0.583 per share. The total purchase
price was $4.4 million, of which $3.9 million was allocated to goodwill and
intangible assets.

   On April 9, 1999, the Company acquired certain assets and liabilities of
Guthy-Renker Internet, LLC in exchange for $5.0 million cash and 2,550,000
shares of the Company's common stock. At the date of acquisition, the common
shares were valued at $4.50 each. The total purchase price of this transaction
was $17.3 million including direct costs and expenses related to the
acquisition, of which $17.2 million were allocated to goodwill and intangible
assets.

   On June 9, 1999, the Company acquired substantially all of the assets and
liabilities of ITW NewCorp, Inc. in exchange for $5 million cash and warrants
to purchase 420,000 shares of the Company's common stock at $1.25. At the date
of acquisition, the common shares were valued at $11.40 each. The total
purchase price of this transaction was $9.3 million, including direct costs
and expenses related to the acquisition, all of which were recorded as
goodwill.

                                      58
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   On December 22, 1999, the Company acquired 14.5% of the outstanding voting
stock of Dstore Pty Ltd, (Dstore) a privately held company, for $328,000. This
transaction was accounted for as an investment using the cost method of
accounting. The investment is stated at cost as of December 31, 1999.

   On December 30, 1999, the Company acquired stock which controls 52% of the
outstanding voting rights of Futurecorp International Pty Ltd (Futurecorp), a
privately held company, for $1,840,000 cash and the committed issuance of
71,870 shares of common stock. The Company is entitled to appoint two of the
four Futurecorp directors, and through its appointed directors controls four
of the total six board votes. At the acquisition date, the Company's common
stock was valued at $27.25 per share. This transaction was accounted for as a
purchase, and its results have been consolidated as of December 31, 1999. The
total purchase price of $3.8 million was allocated to goodwill and intangible
assets.

 Pro Forma Disclosure of Significant Acquisitions (Unaudited)

   The following summary, prepared on a pro forma basis, combines the
consolidated results of operations of the Company as if BeSeen.com, GRI and
ITW had been purchased by the Company as of January 1, 1998, after including
the impact of certain adjustments, such as increased amortization expense due
to recording of intangible assets:

<TABLE>
<CAPTION>
                                                                Year Ended
                                                               December 31,
                                                             ------------------
                                                               1998      1999
                                                             --------  --------
                                                              (in thousands,
                                                             except per share
                                                                   data)
   <S>                                                       <C>       <C>
   Revenues................................................. $ 24,184  $ 52,592
   Net income...............................................  (15,601)  (66,514)
   Basic and diluted net income per share...................    (0.73)    (1.44)
</TABLE>

   The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition had been in effect for the entire period
presented and are not intended to be a projection of future results.

12. Supplemental Disclosure of Cash Flow Information (in thousands):

<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                                        -----------------------
                                                         1997    1998    1999
                                                        ------- ------- -------
<S>                                                     <C>     <C>     <C>
Supplemental disclosure of cash flow information:
  Cash paid during the year for:
    Interest........................................... $    24 $   274 $   168
                                                        ======= ======= =======
    Income taxes.......................................      --     --  $   174
                                                        ======= ======= =======
  Noncash investing and financing activities:
  Conversion of notes payable to stock.................      -- $ 2,630     --
                                                        ======= ======= =======
  Note payable converted to deferred revenue under
   license agreement...................................      -- $11,385     --
                                                        ======= ======= =======
  Issuance of stock for acquisitions...................      -- $ 3,663 $15,738
                                                        ======= ======= =======
</TABLE>

13. Related Party Transactions:

   The Company receives licensing revenues from Cox Interactive Media, Inc., a
stockholder of the Company, for the design and licensing of LookSmart database
content used on Cox Interactive websites. Revenues from Cox Interactive Media,
Inc. amounted to $0, $538,000 and $55,000 for the years ended December 31,
1997, 1998 and 1999, respectively.

                                      59
<PAGE>

                       LOOKSMART, LTD. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The Company has a distribution agreement with Guthy Renker Corporation
(GRC), one of the Company's stockholders. At December 31, 1999, the Company
had a receivable of $980,000 from GRC resulting from the distribution
agreement. Additionally, during 1999, the Company paid GRC $131,000 for rent
and administration support.

   The Company had an agreement with Shim & Sons Enterprises, Inc., which is
owned by an individual who is one of the Company's stockholders and an
employee. During 1999, the Company paid $108,000 to Shim & Sons Enterprises,
Inc.

14. Subsequent Events:

   In February 2000, the Company signed an equally-owned joint venture
agreement with British Telecommunications (BT). The joint venture will develop
and operate Internet portals in Europe and Asia. The Company is obligated to
fund 50% of the joint venture's operating cash flow requirements, and will
reflect its share of the joint venture's income or loss as a non-operating
item using the equity method of accounting. Under the terms of the agreement,
BT has extended, and the Company has borrowed the full amount of, a
$50.0 million credit facility with interest at 20% per annum. Draw downs on
the credit facility are convertible into common stock of the Company at $35.00
per share at BT's discretion.

   In January 2000, the Company entered into two agreements to sublease
certain office space under lease. Both sublease agreements expire in 2000. The
Company's total rent receipts under these two agreements will be $1.6 million
in 2000.

   On February 25, 2000, we completed the listing of approximately 90 million
Chess Depository Interests, or CDIs, on the Australian Stock Exchange, or ASX,
under the trading symbol "LOK". We completed the listing in order to enable
investors that are required to invest only in ASX-listed companies to acquire
an equity interest in LookSmart. All of the shares of LookSmart common stock
exchangeable for the CDIs were offered by selling stockholders. We did not
issue any new securities in connection with, or receive any proceeds from, the
issuance of the CDIs. Each CDI is exchangeable into 0.05 shares of LookSmart
common stock at the option of the holder.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE

   None.

                                      60
<PAGE>

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

   The information required by this item is incorporated herein by reference
to the Company's definitive proxy statement relating to the 2000 annual
meeting of stockholders (the "1999 Proxy Statement"), which the Company
intends to file with the Securities and Exchange Commission within 120 days of
the Company's fiscal year ended December 31, 1999.

ITEM 11. EXECUTIVE COMPENSATION

   The information required under this item may be found in the 1999 Proxy
Statement and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   The information required under this item may be found in the 1999 Proxy
Statement and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   The information required under this Item may be found in the 1999 Proxy
Statement and is incorporated herein by reference.

                                      61
<PAGE>

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

  (a) The following documents are filed as part of this report:

   (1) Index to Financial Statements.

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
     <S>                                                                   <C>
     Report of Independent Accountants...................................   41

     Consolidated Balance Sheets at December 31, 1998 and 1999...........   42

     Consolidated Statements of Operations and Comprehensive Loss for the
      years ended
      December 31, 1997, 1998, and 1999..................................   43

     Consolidated Statements of Stockholders' Equity (Deficit) for the
      years ended December 31, 1997, 1998, 1999..........................   44

     Consolidated Statements of Cash Flows for the years ended December
      31, 1997, 1998, and 1999...........................................   45

     Notes to Consolidated Financial Statements..........................   46

     Schedule II--Valuation and Qualifying Accounts......................   65
</TABLE>

     All other schedules have been omitted because they are not applicable,
  not required, or because the information required to be set forth therein
  is included in the consolidated financial statements or in notes thereto.

  (b) Reports on Form 8-K

     The Company did not file any reports on Form 8-K during the three months
  ended December 31, 1999.

  (c) Exhibits.

<TABLE>
   <C>     <S>
    3.1*   Restated Certificate of Incorporation

    3.2*   Bylaws

    4.1**  Form of Specimen Stock Certificate

    4.2*   Second Amended and Restated Investor Rights Agreement dated March
            24, 1999

   10.1*   Form of Indemnification Agreement entered into between the
            Registrant and each of its directors and officers

   10.2*   Amended and Restated 1998 Stock Plan

   10.3*   1999 Employee Stock Purchase Plan

   10.4+*  License and Update Agreement with Microsoft Corporation

   10.5+*  Asset Purchase Agreement with Guthy-Renker Internet LLC

   10.6+*  Development Agreement with Cox Interactive Media, Inc.

   10.7+*  Premier Positions on US Search Pages with Netscape Communications
            Corporation

   10.8+** 1999-2000 U.S. Net Search Premier Provider Agreement with Netscape
            Communications Corporation

   10.9+*  PBS Group Sponsorship Agreements

   10.10*  Lease Agreement with 487 Bryant Street, LLC for property located at
            487 Bryant Street, San Francisco, California, dated May 4, 1998

   10.11*  Sublease Agreement with Jaran, Inc. for property located at 275
            Brannan Street, San Francisco, California, dated April 30, 1999
</TABLE>


                                      62
<PAGE>

<TABLE>
   <C>     <S>
   10.12*  Lease Agreement with Rosenberg SOMA Investments III, LLC for
            property located at 625 Second Street, San Francisco, California,
            dated May 5, 1999

   10.13*  Consent to Sublease Agreement with Ninety Park Property LLC, and
            First Manhattan Consulting Group Inc. for property located at 90
            Park Avenue, New York, New York, dated October 22, 1998

   10.14*  Lease Agreement with Euro Asia Properties Pty Ltd for property
            located at Level 5, 388 Lonsdale Street, Melbourne, Australia,
            dated September 1, 1998

   10.15*  Lease Agreement with Tonicalon Pty Limited for property located at
            Level 3, 68 Alfred Street, Milsons Point, Sydney, Australia, dated
            June 1, 1999

   10.16*  Summary Plan Description of 401(k) Plan

   10.17++ Joint Venture Agreement between the Registrant, Transceptgate Ltd.,
            BT LookSmart Ltd., LookSmart (Barbados), Inc. and British
            Telecommunications Plc dated February 15, 2000

   10.18++ Joint Venture Know How Technology and Database License Agreement
            between the Registrant, BT LookSmart Ltd., and LookSmart
            (Barbados), Inc. dated February 15, 2000

   10.19   Loan Letter Agreement between the Registrant and Transceptgate Ltd.
            dated February 15, 2000

   21.1*   List of Subsidiaries

   23.1    Consent of PricewaterhouseCoopers LLP

   24.1    Power of Attorney (contained in the signature page to this Annual
            Report)

   27.1    Financial Data Schedule
</TABLE>
- --------
(*)   Filed in connection with the Company's Registration Statement on Form S-1
      (File No. 333-80581) filed with the SEC on June 14, 1999.

(**)  Filed in connection with the Company's Amendment No. 1 to the
      Registration Statement on Form S-1 (File No. 333-80581) filed with the
      SEC on July 27, 1999.

(***) Filed in connection with the Company's Amendment No. 2 to the
      Registration Statement on Form S-1 (File No. 333-80581) filed with the
      SEC on August 10, 1999.

(+)   Confidential treatment has been granted with respect to portions of the
      exhibit.

(++)  Confidential treatment has been requested with respect to portions of the
      exhibit.


                                       63
<PAGE>

                     REPORT OF INDEPENDENT ACCOUNTANTS ON
                         FINANCIAL STATEMENT SCHEDULES

To the Board of Directors and Stockholders
of LookSmart, Ltd. and Subsidiaries:

   Our audits of the consolidated financial statements referred to in our
report dated January 26, 2000, except as to Note 14, which is as of February
25, 2000, appearing in the 1999 Annual Report to Stockholders of LookSmart,
Ltd. and Subsidiaries in this Annual Report on Form 10-K also included an
audit of the financial statement schedules listed in Item 14(a)(2) of this
Form 10-K. In our opinion, these financial statement schedules present fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.

/s/ PricewaterhouseCoopers LLP

San Francisco, California
January 26, 2000

                                      64
<PAGE>

                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
                                 (In Thousands)

                        LOOKSMART, LTD. AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                           Balance  Charged             Balance
                                             at     to Costs            at End
                                          Beginning   and                 of
Description                               of Period Expenses Deductions Period
- -----------                               --------- -------- ---------- -------
<S>                                       <C>       <C>      <C>        <C>
Year ended December 31, 1997:
Deferred tax valuation allowance.........  $  986   $ 3,191    $ --     $ 4,177
                                           ------   -------    -----    -------
 Total...................................  $  986   $ 3,191    $ --     $ 4,177
                                           ======   =======    =====    =======
Year ended December 31, 1998:
Allowance for doubtful accounts..........  $  --    $   127    $ --     $   127
Deferred tax valuation allowance.........   4,177     4,657      --       8,834
                                           ------   -------    -----    -------
 Total...................................  $4,177   $ 4,784    $ --     $ 8,961
                                           ======   =======    =====    =======
Year ended December 31, 1999:
Allowance for doubtful accounts..........  $  127     1,203    $ 787    $   543
Deferred tax evaluation allowance........   8,834    20,232      --      29,066
                                           ------   -------    -----    -------
 Total...................................  $8,961   $21,435    $ 787    $29,609
                                           ======   =======    =====    =======
</TABLE>

                                       65
<PAGE>

                                  SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized in San Francisco, California, on
March 29, 2000:

                                          LOOKSMART, LTD.

                                                      /s/ Ned Brody
                                          By: _________________________________
                                                 Ned Brody, Chief Financial
                                                          Officer
                                                  (Principal Financial and
                                                    Accounting Officer)

                               POWER OF ATTORNEY

   KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Martin Roberts and Evan Thornley,
jointly and severally, as his or her attorneys-in-fact, each with the full
power of substitution, for him or her, in any and all capacities, to sign any
amendment to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting to said attorneys-in-fact, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact or any of them, or
their or his or her substitute or substitutes, may lawfully do or cause to be
done by virtue hereof. Pursuant to the requirements of the Securities Act of
1934, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
             Signature                           Title                  Date
             ---------                           -----                  ----


<S>                                  <C>                           <C>
        /s/ Evan Thornley            Chairman of the Board,        March 29, 2000
____________________________________  Chief Executive Officer
           Evan Thornley              (Principal Executive
                                      Officer)


          /s/ Ned Brody              Chief Financial Officer       March 29, 2000
____________________________________  (Principal Financial and
             Ned Brody                Accounting Officer)


        /s/ Tracey Ellery            President and Director        March 29, 2000
____________________________________
           Tracey Ellery


       /s/ Anthony Castagna          Director                      March 29, 2000
____________________________________
          Anthony Castagna


      /s/ Mariann Byerwalter         Director                      March 29, 2000
____________________________________
         Mariann Byerwalter


         /s/ Robert Ryan             Director                      March 29, 2000
____________________________________
            Robert Ryan


       /s/ Scott Whiteside           Director                      March 29, 2000
____________________________________
          Scott Whiteside
</TABLE>

                                      66
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
 Exhibit
 Number                          Description of Document
 -------                         -----------------------
 <C>     <S>
  3.1*   Restated Certificate of Incorporation

  3.2*   Bylaws

  4.1**  Form of Specimen Stock Certificate

  4.2*   Second Amended and Restated Investor Rights Agreement dated March 24,
          1999

 10.1*   Form of Indemnification Agreement entered into between the Registrant
          and each of its directors and officers

 10.2*   Amended and Restated 1998 Stock Plan

 10.3*   1999 Employee Stock Purchase Plan

 10.4+*  License and Update Agreement with Microsoft Corporation

 10.5+*  Asset Purchase Agreement with Guthy-Renker Internet LLC

 10.6+*  Development Agreement with Cox Interactive Media, Inc.

 10.7+*  Premier Positions on US Search Pages with Netscape Communications
          Corporation

 10.8+** 1999-2000 U.S. Net Search Premier Provider Agreement with Netscape
          Communications Corporation

 10.9+*  PBS Group Sponsorship Agreements

 10.10*  Lease Agreement with 487 Bryant Street, LLC for property located at
          487 Bryant Street, San Francisco, California, dated May 4, 1998

 10.11*  Sublease Agreement with Jaran, Inc. for property located at 275
          Brannan Street, San Francisco, California, dated April 30, 1999

 10.12*  Lease Agreement with Rosenberg SOMA Investments III, LLC for property
          located at 625 Second Street, San Francisco, California, dated May 5,
          1999

 10.13*  Consent to Sublease Agreement with Ninety Park Property LLC, and First
          Manhattan Consulting Group Inc. for property located at 90 Park
          Avenue, New York, New York, dated October 22, 1998

 10.14*  Lease Agreement with Euro Asia Properties Pty Ltd for property located
          at Level 5, 388 Lonsdale Street, Melbourne, Australia, dated
          September 1, 1998

 10.15*  Lease Agreement with Tonicalon Pty Limited for property located at
          Level 3, 68 Alfred Street, Milsons Point, Sydney, Australia, dated
          June 1, 1999

 10.16*  Summary Plan Description of 401(k) Plan

 10.17++ Joint Venture Agreement between the Registrant, Transceptgate Ltd., BT
          LookSmart Ltd., LookSmart (Barbados), Inc. and British
          Telecommunications Plc dated February 15, 2000

 10.18++ Joint Venture Know How Technology and Database License Agreement
          between the Registrant, BT LookSmart Ltd., and LookSmart (Barbados),
          Inc. dated February 15, 2000

 10.19   Loan Letter Agreement between the Registrant and Transceptgate Ltd.
          dated February 15, 2000

 21.1*   List of Subsidiaries

 23.1    Consent of PricewaterhouseCoopers LLP

 24.1    Power of Attorney (contained in the signature page to this Annual
          Report)

 27.1    Financial Data Schedule
</TABLE>
- --------
(*)  Filed in connection with the Company's Registration Statement on Form S-1
     (File No. 333-80581) filed with the SEC on June 14, 1999.

                                       67
<PAGE>

(**)  Filed in connection with the Company's Amendment No. 1 to the
      Registration Statement on Form S-1 (File No. 333-80581) filed with the
      SEC on July 27, 1999.

(***) Filed in connection with the Company's Amendment No. 2 to the
      Registration Statement on Form S-1 (File No. 333-80581) filed with the
      SEC on August 10, 1999.

(+)   Confidential treatment has been granted with respect to portions of the
      exhibit.

(++)  Confidential treatment has been requested with respect to portions of the
      exhibit.


                                       68

<PAGE>

                                                                   EXHIBIT 10.17

CONFIDENTIAL TREATMENT                      **Confidential treatment has been
HAS BEEN REQUESTED FOR                      requested with respect to the
CERTAIN PORTIONS OF THIS                    information contained within the
DOCUMENT                                    "[**]" marking. Such marked
                                            portions have been omitted from
                                            this filing and have been filed
                                            separately with the Securities and
                                            Exchange Commission.


                               15 FEBRUARY 2000






                             TRANSCEPTGATE LIMITED

                                      and

                                 LOOKSMART LTD

                                      and

                           LOOKSMART (BARBADOS) INC

                                      and

                               BT LOOKSMART LTD

                                      and

                        BRITISH TELECOMMUNICATIONS PLC



                            JOINT VENTURE AGREEMENT

<PAGE>

[* * *] - Confidential Treatment Requested

THIS JOINT VENTURE AGREEMENT is made on 15 February 2000


BETWEEN

(1)  TRANSCEPTGATE LIMITED whose registered office is at Queen Victoria House,
     Queen Victoria Street, Douglas, Isle of Man ("BTH");

(2)  LOOKSMART LTD with its principal place of business at 625 Second Street,
     San Francisco, CA 94107, USA ("LOOK");

(3)  LOOKSMART (BARBADOS) INC. with its principal place of business at Hastings
     Business Services Limited, Hastings, Christ Church, Barbados ("LOOK
     BARBADOS");

(4)  BT LOOKSMART LTD, a Bermuda exempted company, whose registered office is at
     Clarendon House, 2 Church Street, Hamilton HM CX, Bermuda  ("BT
     LOOKSMART"); and

(5)  BRITISH TELECOMMUNICATIONS plc whose registered office is at 81 Newgate
     Street, London, EC1A 7AJ ("BT").


WHEREAS

(A)  LOOK BARBADOS and BTH wish to agree terms for the formation of a business
     venture for the purpose of making available and exploiting the revenue and
     profit opportunities available from portal web sites and supply of
     component parts of those portal web sites, with a brand agreed with equal
     prominence given to each party's brand, with regional or country-specific
     appellations. These sites will provide category-based Internet directory
     services and associated "portal" functionality similar to existing LOOK
     sites and other Web portals but will be targeted at Internet users residing
     in or carrying on business in the Territory.

(B)  LOOK wishes to expand its consumer internet business and content service
     provision outside its current core territories, the United States of
     America, Canada and Australia and is seeking a partner to increase the
     speed to market of its portal proposition through distribution and
     territory know-how.

(C)  BTH wishes to increase its presence outside the United Kingdom in the
     portal business and to provide content and a portal platform for the ISPs
     of its joint ventures.

(D)  LOOK BARBADOS is the owner of the existing Territory Databases. The parties
     wish to combine LOOK's Databases, associated with the existing LOOK sites
     and any Territory Databases developed by LOOK, or to be developed by the
     joint venture and LOOK BARBADOS, and LOOK's other technical and software
     experience, market knowledge, content, Internet culture and reputation with
     BTH's knowledge, contacts, ability to generate users through its ISP and
     other access businesses, applications and reputation.
<PAGE>

(E)  LOOK BARBADOS and BTH have formed BT LOOKSMART which will develop, market
     and sell products and/or services in the Territory pursuant to licensing
     arrangements between LOOK, LOOK BARBADOS and BT LOOKSMART and utilising
     other third party products and/or services.

(F)  LOOK BARBADOS and BTH are entering into this Agreement to establish the
     manner in which BT LOOKSMART is to be established and to set out the terms
     governing the relationship of BTH and LOOK BARBADOS as shareholders of BT
     LOOKSMART.

(G)  The parties intend to utilise their complementary skills to secure this
     venture as a successful business venture.  BTH and LOOK BARBADOS desire to
     have BT LOOKSMART act and BT LOOKSMART desires to act as an independent
     vehicle for the BT LOOKSMART activities described in this Agreement.


IT IS AGREED as follows:

1.   INTERPRETATION

Definitions

1.1  In this Agreement, the following terms shall (unless the context requires
     otherwise) have the following respective meanings:

     "Accounting Principles" is defined in Clause 12;

     "affiliate" means a company in which a party holds directly or indirectly
     20 per cent or more of the equity share capital or controls directly or
     indirectly, 20 percent or more of the voting rights;

     "Agreed Form" means in relation to any document (or the draft of it) the
     form which BTH and LOOK BARBADOS have initialled for the purposes of
     identification;

     "Ancillary Agreements" means the list of agreements set out in Schedule 1;

     "Best Market Terms" means terms equivalent to the best available terms
     (taking into account price, quality of service, volume, performance and
     other relevant criteria) which the relevant party offers to a third party
     and which in the context of regulated services will mean the applicable
     published tariffs and terms and conditions;

     "Board" means the board of directors of BT LOOKSMART;

     "BTAP" means a company within the Territory in which BT holds directly or
     indirectly an interest in the equity share capital or with whom BT has a
     strategic relationship;

     "BT Directors" means the directors of BT LOOKSMART from time to time
     appointed by the BT Shareholder pursuant to Clause 9.2;

     "BT Group" means all companies which control or are controlled by BT,
     either directly or indirectly, through one or more companies, control being
     defined as the holding of 50 per cent or more of the equity share capital
     or of the voting rights of the controlled company;
<PAGE>

     "BT LOOKSMART Group" means all companies which are controlled by BT
     LOOKSMART, either directly or indirectly, through one or more companies,
     control being defined as the holding of 50 per cent or more of the equity
     share capital or of the voting rights of the controlled company;

     "BT Shares" means Shares with nominal value of US$.01 each of BT LOOKSMART,
     held from time to time by BTH or other members of the BT Group;

     "BT Shareholder" means BTH and its successors and/or such member of the BT
     Group which is the holder(s) for the time being of BT Shares;

     "BT Trade Mark Licence Agreement" means the agreement set out in Schedule
     3;

     "Budget" means a budget for BT LOOKSMART for a particular Financial Year
     (in a format approved from time to time by the Board);

     "Business Day" means a day on which banks generally are open in Sydney for
     a full range of business;

     "Business Plan" means a 5 year rolling business plan for BT LOOKSMART (in a
     format approved from time to time by the Board) to be updated annually
     having its origins in the Initial Business Plan;

     "Bye-laws" means the Bye-laws of BT LOOKSMART to be adopted pursuant to
     Clause 5.3, in the form to be agreed between BTH and LOOK BARBADOS (as they
     may subsequently be altered from time to time);

     "CEO" means the chief executive officer from time to time of BT LOOKSMART;

     "CFO" means the chief financial officer from time to time of BT LOOKSMART;

     "Chairman" means the chairman from time to time of the Board;

     "Company" includes any body corporate, wherever incorporated;

     "Completion" means completion of the matters set out in Clause 5.1;

     "Directors" means directors of BT LOOKSMART;

     "Fair Price" means the fair value, having regard to all relevant factors,
     of the relevant Shares between a willing seller and a willing third party
     buyer without any premium or discount being attributable to the percentage
     of the issued share capital of BT LOOKSMART constituted by the relevant
     Shares;

     "free access portal" means the combination of portal and Internet access,
     for which the only charges to the end user are local rate telephony
     charges;

     "Financial Year" means each financial year of BT LOOKSMART beginning on 1
     January and ending on 31 December;

     "holding company" shall be construed in accordance with sections 736 and
     736A of the UK Companies Act 1985, as amended;
<PAGE>

     "Initial Business Plan" means the first Business Plan as set out in
     Schedule 4;

     "Initial Period" means the period from the date of signing of this
     Agreement to and including 31 March 2001;

     "Insolvency Event" is defined in Clause 21;

     "Intellectual Property Rights" means registered designs, copyright of any
     kind, database rights, rights (contractual or otherwise) to prevent
     disclosure or use of confidential information, and any other similar form
     of intellectual property or proprietary rights, statutory or otherwise,
     whether registrable or not and shall include applications for any of them;

     "ISP" means internet service provider;

     "Loan Agreement" means the loan agreement referred to in Clause 5.2;

     "Loco" means an operating subsidiary or a local presence of BT LOOKSMART in
     a country within the Territory;

     "LOOK Databases" means web directory databases, created and owned by LOOK,
     of web sites for countries and/or languages not in the Territory;

     "LOOK Directors" means the directors of BT LOOKSMART from time to time
     appointed by the LOOK Shareholder pursuant to Clause 9.2;

     "LOOK Group" means all companies which control or are controlled by LOOK,
     either directly or indirectly, through one or more companies, control being
     defined as the holding of 50 per cent or more of the equity share capital
     or of the voting rights of the controlled company;

     "LOOK Licensing Agreement" means the agreement in the form set out in
     Schedule 5, pursuant to which LOOK grants BT LOOKSMART exclusive rights to
     the LOOK Databases and LOOK BARBADOS grants BT LOOKSMART exclusive rights
     to the Territory Databases;

     "LOOK Services Agreement" means the agreement to be entered into between
     LOOK BARBADOS and BT LOOKSMART containing the principles set out in
     Schedule 6 pursuant to which LOOK BARBADOS shall provide certain services
     to BT LOOKSMART, including the creation of Territory Databases;

     "LOOK Shares" means Shares with nominal value of US$.01 each of BT
     LOOKSMART, held from time to time by LOOK BARBADOS or other members of the
     LOOK Group;

     "LOOK Shareholder" means LOOK BARBADOS and its successors and/or such
     member of the LOOK Group which is the holder(s) for the time being of LOOK
     Shares;

     "LOOK Trade Mark Licence Agreement" means the agreement in the form set out
     in Schedule 14;
<PAGE>

     "LOOK Transfer Agreement" means the agreement, in the form set out in
     Schedule 15, to be entered into for the transfer to a member of the BT
     LOOKSMART Group of LOOK's business and assets in the Territory;

     "Memorandum" means the Memorandum of Association of BT LOOKSMART, a copy of
     which is set out in Schedule 2  (as it may subsequently be altered from
     time to time);

     "BT LOOKSMART Business" has the meaning set out in Clause 3.1;

     "parties" means LOOK, LOOK BARBADOS, BTH, BT and BT LOOKSMART, and party
     shall be construed accordingly;

     "Peak Funding Requirement" means the maximum aggregate amount of cash
     required to implement and build a successful BT LOOKSMART Business in
     accordance with the plans set out in the Initial Business Plan, as may be
     amended from time to time;

     "Performance Objectives" means the Year One Performance Objectives and/or
     the Year Two Performance Objectives, as appropriate;

     "portal" means an internet site, based on current and future Territory
     Databases and LOOK's and BT LOOKSMART's Intellectual Property Rights, which
     aggregates general content and services designed for users in the
     Territory;

     "Regulatory Action" means any order of a court of competent jurisdiction or
     any order, decision or view made, given or expressed by a competent
     governmental or regulatory authority or agency or an enhancement of a
     legislative body:

          (a)  which after Completion would materially prohibit or restrict the
               carrying on of BT LOOKSMART Business as contemplated by this
               Agreement; or

          (b)  in consequence of which, any of the Parties would incur fines or
               a liability in damages were this Agreement to be performed in
               accordance with its terms;

     "Shareholders"  means the LOOK Shareholder and the BT Shareholder (and
     Shareholder shall be construed accordingly);

     "Shareholder Matters" means the matters so defined in Clause 11.2;

     "Shares" means shares in BT LOOKSMART with voting rights;

     "subsidiary" shall be construed in accordance with sections 736 and 736A of
     the UK Companies Act 1985 (as amended);

     "Territory Databases" means existing web directory databases created and/or
     owned by LOOK or LOOK BARBADOS for the Territory at the date of this
     Agreement and any web directory databases created by LOOK BARBADOS on
     behalf of BT LOOKSMART after the date of this Agreement, ownership of which
     shall vest in LOOK BARBADOS until such time as the Performance Objectives
     are met, at which time ownership shall thereafter vest in BT LOOKSMART;
<PAGE>

     "Territory" means the countries comprising (i) all of Europe and (ii) Asia
     Pacific but excluding Australia and China but including Hong Kong and
     Taiwan, as identified in Schedule 7;

     "URL" means Uniform Resource Locator;

     "USA" means United States of America;

     "VISP" means virtual internet service provider;

     "WAP" means wireless application protocol;

     "wholesale services" means any services offered to third parties by BT
     LOOKSMART including, without limitation, homepage programming, search,
     licensing and syndication;

     "Year One Performance Objectives" means the performance objectives set out
     in Paragraph 1.1 of Schedule 8;

     "Year Two Performance Objectives" means the performance objectives set out
     in Paragraph 1.2 of Schedule 8.

Clauses and Schedules

1.2  Except where the context requires otherwise, references to Clauses and
     Schedules are to Clauses of or Schedules to this Agreement.

Headings

1.3  Headings are inserted for convenience only and shall not affect the
     construction of this Agreement or the Schedules.

1.4  In this Agreement, words and terms shall be read and construed in
     accordance with trade, custom and usage in the Internet and e-commerce
     business in the United Kingdom.

2.   CHARACTERISTICS OF BT LOOKSMART

2.1  BT LOOKSMART is a company incorporated on 27 January 2000 in Bermuda as an
exempted company with an authorised share capital of US$12,000 consisting of
12,000 shares with a par value of US$1.00 with 6,000 shares issued to BTH and
6,000 shares issued to LOOK BARBADOS. The share capital was subsequently
subdivided into 1,200,000 shares with a par value of US$0.01. On 7 February
2000, or such later date as BTH and LOOK BARBADOS shall agree, the authorised
share capital of BT LOOKSMART shall be increased from US$12,000 to US$2,000,000
by the creation of 198,800,000 new shares with a par value of US$.01. Fifteen
million (15,000,000) of such new shares shall be set aside for the BT LOOKSMART
stock plan to be established pursuant to Clause 15.2.

2.2  The directors of BT LOOKSMART on the date hereof are Evan Thornley, Vernon
Irvin, Stephen Davies, Anthony Castagna, Timothy Pethick and a Chief Financial
Officer to be appointed pursuant to Clause 9.10.
<PAGE>

3.   BUSINESS OF BT LOOKSMART

BT LOOKSMART Business

3.1  The business of BT LOOKSMART ("BT LOOKSMART Business") is:

     (a)   To be a leading Internet media company which offers content-rich free
          Internet based services, based on the Territory Databases and the LOOK
          Databases and other services, to users resident in the Territory by
          building and maintaining a portal in each country in the Territory,
          the aim of which is for BT LOOKSMART to be one of the top three
          amongst its competitors in the relevant country as measured by page
          views, visitors, registered users, revenues and applications.

     (b)  To be a leading Internet media company which offers wholesale Internet
          based services in the Territory by:

          (i)  offering wholesale services in each country in the Territory;

          (ii) working with BT or a BTAP, if any, or a third party in each
               country in the Territory to offer  packaged wholesale access and
               wholesale services.

3.2  BT LOOKSMART's initial business shall be narrowband and BT LOOKSMART shall
     develop services to be delivered over other means including broadband and
     mobile. Subject to the agreement of BTH, BT LOOKSMART will be given the
     opportunity to participate in any emerging distribution channels offered by
     BT or a BTAP including but not limited to WAP.

3.3  BT LOOKSMART shall be responsible for the development or acquisition of
     specific Territory content and applications, for the operation, support and
     maintenance of any Territory file servers, applications and technologies,
     for marketing in the Territory, ad sales, business development, additional
     content licensing and developing Intellectual Property Rights.

3.4  BT LOOKSMART shall commence business in those countries as set out in the
     Initial Business Plan. BT LOOKSMART may set up a Loco to conduct its
     business in a particular country within the Territory. A BTAP or other
     third party may be offered a shareholding in Loco with the consent of the
     Shareholders.

3.5  The parties shall consider on a country by country basis whether BT
     LOOKSMART shall offer a free access portal.

Commercial principles

3.6  The activities of BT LOOKSMART shall be conducted in the best interests of
     BT LOOKSMART in accordance with the general principles of the then current
     Business Plan approved by the Board and on sound commercial basis and in
     compliance with applicable local laws and regulations.


4.  REPRESENTATIONS AND WARRANTIES ON SIGNATURE

    LOOK, LOOK BARBADOS, BTH and BT each warrant and represent to each other
    that:
<PAGE>

     (a)  it has obtained all necessary corporate authorisations to enter into
          this Agreement and the Ancillary Agreements; and

     (b)  nothing in its Bye-laws or internal regulations prevents the full
          performance of its obligations under this Agreement and the Ancillary
          Agreements.

5.   COMPLETION


Completion

5.1  Completion shall take place at Clarendon House, 2 Church Street, Hamilton
     HM CX, Bermuda on 16 February 2000 or such later date as BTH and LOOK
     BARBADOS shall agree but in any event no later than 28 February 2000, when
     the events set out below shall take place:

     (a)  LOOK BARBADOS shall subscribe unconditionally for 41,900,000 Shares at
          an issue price of US$.0238 per share, payment for which shall be made
          in accordance with Clause 8.2;

     (b)  BTH shall subscribe unconditionally for 41,900,000 Shares at an issue
          price of US$.0238 per share, payment for which shall be made in
          accordance with Clause 8.3;

     (c)  LOOK BARBADOS and BTH shall procure that BT LOOKSMART allots and
          issues and BT LOOKSMART shall allot and issue:

          (A) 41,900,000 Shares to LOOK BARBADOS credited as fully paid; and

          (B) 41,900,000 Shares to BTH credited as fully paid;

          and BT LOOKSMART shall cause the names of LOOK BARBADOS and BTH to be
          entered in the register of members of BT LOOKSMART as the respective
          holders of the Shares subscribed by them and that share certificates
          are issued to LOOK BARBADOS and BTH in respect of such Shares;

     (d)  LOOK BARBADOS and BTH shall procure that Evan Thornley, Anthony
          Castagna, Timothy Pethick, Vernon Irvin and Stephen Davies are
          appointed to the Board of Directors of BT LOOKSMART with Evan Thornley
          being appointed Chairman of BT LOOKSMART and that Richard Jenkyn of
          Codan Services Limited in Hamilton, Bermuda be appointed Secretary of
          BT LOOKSMART.

     (e)  LOOK, LOOK BARBADOS and BT LOOKSMART shall execute and deliver the
          LOOK Licensing Agreement and LOOK and BT LOOKSMART shall execute and
          deliver the LOOK Trade Mark License Agreement;

     (f)  BT LOOKSMART shall adopt and LOOK BARBADOS and BTH shall approve the
          Initial Business Plan;
<PAGE>

     (g)  BT and BT LOOKSMART shall execute and deliver the BT Trade Mark
          Licence Agreement;

     (h)  LOOK and BTH shall enter into the Loan Agreement.

5.2  LOOK undertakes to enter into the LOOK Transfer Agreement and LOOK
     BARBADOS, BTH and BT LOOKSMART shall procure that an appropriate company
     from a tax perspective within the BT LOOKSMART Group shall enter into the
     LOOK Transfer Agreement on the date specified in a written notice from BT
     LOOKSMART to LOOK that the transfer is to take place, such date to be no
     earlier than the third Business Day after the date of such notice.

5.3  Within 30 days after the date of this Agreement, BTH and LOOK BARBADOS
     shall agree the form of Memorandum and Byelaws and BT LOOKSMART shall and
     BTH and LOOK BARBADOS shall procure that BT LOOKSMART shall adopt such
     Memorandum and Byelaws.

5.4  No party shall be obliged to complete any of the transactions or do any of
     the things referred to in subclause 5.1(a) to (g) unless all other
     transactions and things referred to in those subclauses are completed in
     accordance with subclauses 5.1(a) to (g).

Rescission

5.5  If a party shall fail or be unable to comply with any of its obligations
     under subclause 5.1(a) to (g), the parties not in default may together:

     5.5.1  defer Completion to a date not more than 28 days after the date set
            by Clause 5.1; or

     5.5.2  agree to proceed to Completion so far as practicable (without
            prejudice to its rights hereunder); or

     5.5.3  rescind this Agreement.

6.   RELATIONSHIP BETWEEN BT LOOKSMART, THE  LOOK GROUP AND THE BT GROUP


6.1  LOOK BARBADOS, BTH and BT LOOKSMART hereby agree that BT LOOKSMART shall
     and BT LOOKSMART shall procure that Locos shall acquire telecommunications
     products and services from the BT Group or a BTAP provided that their Best
     Market Terms for providing the same are as favourable as a third party's
     Best Market Terms (or, if not available, arm's length terms) for providing
     the same.

6.2  BT and BT LOOKSMART shall use their respective reasonable endeavours to
     procure that a BTAP located in a country in which BT LOOKSMART is
     conducting or is about to conduct business, enters into a commercial
     relationship with BT LOOKSMART for the provision of services by BT
     LOOKSMART which may include BT LOOKSMART programming the BTAP's ISP home
     page provided that  BT LOOKSMART's Best Market Terms for providing the same
     are as favourable as a
<PAGE>

     third party's Best Market Terms (or, if not available, arm's length terms)
     for providing the same.

6.3  Subject to agreeing commercial terms and to applicable law and regulation,
     BT shall provide on- and off-web marketing of BT LOOKSMART and Loco
     services and, if possible, shall promote the business of BT LOOKSMART and
     the relevant Loco through its BTAP in a relevant country and the partners
     of the BTAP (including but not limited to BTAPs and their partners that are
     providers of mobile services), to the customers of such BTAP and partners.

6.4  LOOK BARBADOS, BTH and BT LOOKSMART agree that BT LOOKSMART shall and BT
     LOOKSMART shall procure that Locos shall acquire applications, including
     email and IP communications services from the BT Group, a BTAP or the LOOK
     Group provided that their Best Market Terms for providing the same are as
     favourable as a third party's Best Market Terms (or, if not available,
     arm's length terms) for providing the same. If more than one of the BT
     Group, a BTAP and the LOOK Group could provide the application, then
     whichever provides the Best Market Terms shall provide the application
     subject to its Best Market Terms for providing the same being as favourable
     as a third party's Best Market Terms (or, if not available, arm's length
     terms) for providing the same.

6.5  LOOK BARBADOS, BTH and BT LOOKSMART agree that BT LOOKSMART shall and BT
     LOOKSMART shall procure that Locos shall acquire wholesale access, network
     and hosting platforms from the BT Group or a BTAP, provided that their Best
     Market Terms for providing the same are as favourable as a third party's
     Best Market Terms (or, if not available, arm's length terms) for providing
     the same.

6.6  Subject to agreeing commercial terms and to applicable law and regulation,
     LOOK shall provide on-and-off-web marketing of BT LOOKSMART`s services and
     shall promote the business of BT LOOKSMART.

6.7  BT LOOKSMART and LOOK BARBADOS shall enter into the LOOK Services Agreement
     within three months after the date of this Agreement. Until the LOOK
     Services Agreement is entered into, LOOK BARBADOS shall use its best
     endeavours to create new Territory Databases in accordance with the
     principles set out in Schedule 6 as requested by BT LOOKSMART and BT
     LOOKSMART shall pay for the creation of such new Territory Databases at
     cost as set out in Schedule 6. BT LOOKSMART shall reimburse LOOK at LOOK's
     cost as set out in Schedule 17 for the creation of any Territory Databases
     which BT LOOKSMART has requested LOOK or LOOK BARBADOS to develop and the
     databases developed by LOOK or LOOK BARBADOS for the Territory since 3
     December 1999.

     The parties agree that ownership of any new Territory Databases created by
     LOOK BARBADOS on behalf of BT LOOKSMART after the date of this Agreement
     shall vest in LOOK BARBADOS until such time as BT LOOKSMART shall have met
     the Performance Objectives, at which time any new Territory Databases
     thereafter created by LOOK BARBADOS on behalf of BT LOOKSMART shall vest in
     BT LOOKSMART. All such new Territory Databases owned by LOOK BARBADOS shall
     be licensed to BT LOOKSMART pursuant to the terms of the LOOK Licensing
     Agreement.

6.8  BT LOOKSMART and LOOK BARBADOS shall agree a staffing plan each year that
     the LOOK Services Agreement is in effect for the staffing of offices
     established by the
<PAGE>

     LOOK Group to work on the Territory Databases. Provided the Performance
     Objectives have been met, the parties agree that BT LOOKSMART shall have an
     option to acquire all (but not some only unless agreed by the parties) of
     the editorial staff identified on the agreed staffing plan referred to in
     this Clause 6.8 of one or more of the offices established by the LOOK Group
     to work on the Territory Databases under the LOOK Services Agreement which
     may be by way of acquisition of the subsidiary of LOOK which employs such
     staff and/or by way of transfer of the relevant staff. The option to
     acquire such staff may be exercised by BT LOOKSMART by giving written
     notice to LOOK at any time after [* * *]. The consideration for the
     acquisition of such staff shall be [* * *]. The transfer shall be
     effected within six months after the date of the written notice by BT
     LOOKSMART referred to in this Clause 6.8. LOOK BARBADOS shall indemnify BT
     LOOKSMART in respect of any losses, claims, proceedings, liabilities, costs
     and expenses arising out of or in connection with any claim by a member of
     such staff, including without limitation, for unfair dismissal, breach of
     employment regulations, breach of contract of employment or similar
     employment issue which arises or relates to a period prior to the date that
     such staff are transferred to BT LOOKSMART. BT LOOKSMART shall indemnify
     LOOK BARBADOS in respect of any losses, claims, proceedings, liabilities,
     costs and expenses arising out of or in connection with any member of such
     staff which arises or relates to a date after the date that such staff are
     transferred to BT LOOKSMART.

6.9  LOOK shall grant the licences to the LOOKSMART Technology (as defined in
     the LOOK Licensing Agreement) pursuant to the terms of the LOOK Licensing
     Agreement.


6.10 Other than services provided under any Ancillary Agreement or pursuant to
     Clause 6.1 to 6.6 above, LOOK BARBADOS, BTH and BT LOOKSMART hereby agree
     that BT LOOKSMART shall and BT LOOKSMART shall procure that Locos shall
     acquire products and services from the BT Group, a BTAP or the LOOK Group
     where such products and services are available from the BT Group and/or a
     BTAP and/or the LOOK Group provided, in each case, that the BT Group's or a
     BTAP's or the LOOK Group's Best Market Terms for providing the same are as
     favourable as a third party's Best Market Terms (or, if not available,
     arm's length terms) for providing the same. If each of the BT Group, a BTAP
     and the LOOK Group could provide the product or service, then whichever
     provides the Best Market Terms shall provide the product or service subject
     to its Best Market Terms for providing the same being as favourable as a
     third party's Best Market Terms (or, if not available, arm's length terms)
     for providing the same.

7.   TERRITORY DATABASES AND TECHNOLOGY



7.1  If the Year One Performance Objectives are met during the Initial Period:

     7.1.1  LOOK BARBADOS shall transfer to BT LOOKSMART at no cost the legal
            and beneficial ownership with full title guarantee and shall assign
            with full title guarantee all of LOOK BARBADOS' Intellectual
            Property Rights in the Territory Databases existing at the date of
            such transfer. Such transfer shall be subject to LOOK's retention of
            ownership and Intellectual Property Rights to the LOOK trademarks
            which are licensed to BT LOOKSMART pursuant to
<PAGE>

            the LOOK Trade Mark License Agreement; and shall be subject to
            Clauses 7.4 and 7.8 below, subject to the non-exclusive, non
            perpetual license granted to the Inktomi Corporation ("Inktomi")
            pursuant to the Portal Services Agreement dated 6 November 1999
            between LOOK and Inktomi, and subject to the non-exclusive, non
            perpetual syndication and license agreements identified as exhibits
            to the LOOK Transfer Agreement. Such transfer to BT LOOKSMART shall
            take place on the tenth Business Day after the date on which LOOK or
            LOOK BARBADOS receives notice that the Performance Objectives are
            met;

     7.1.2  Pursuant to the terms of the LOOK License Agreement, LOOK shall
            continue to license to BT LOOKSMART the LOOK Databases on an
            exclusive (in the Territory), non-transferable basis; and

     7.1.3  The Year Two Performance Objectives shall not apply.

7.2  If the Year One Performance Objectives have not been met at the end of the
     Initial Period, the licenses to the LOOK Database and the Territory
     Databases in the LOOK Licensing Agreement shall be extended pursuant to the
     terms of the LOOK Licensing Agreement on the same terms for an additional
     twelve (12) month period to 31 March 2002 and the Year Two Performance
     Objectives shall apply.

7.3  If the Year Two Performance Objectives are met during the period commencing
     on 1 April 2001 and ending on 31 March 2002:

     7.3.1  LOOK BARBADOS shall transfer to BT LOOKSMART at no cost the legal
            and beneficial ownership with full title guarantee and shall assign
            with full title guarantee all of LOOK BARBADOS' Intellectual
            Property Rights in the Territory Databases existing at the date of
            such transfer. Such transfer shall be subject to LOOK's retention of
            ownership and Intellectual Property Rights to the LOOK trademarks
            which are licensed to BT LOOKSMART pursuant to the LOOK Trade Mark
            License Agreement; and shall be subject to Clauses 7.4 and 7.8
            below, subject to the non-exclusive, non perpetual license granted
            to the Inktomi Corporation ("Inktomi") pursuant to the Portal
            Services Agreement dated 6 November 1999 between LOOK and Inktomi,
            and subject to the non-exclusive, non perpetual syndication and
            license agreements identified as exhibits to the LOOK Transfer
            Agreement. Such transfer to BT LOOKSMART shall take place on the
            tenth Business Day after the date on which LOOK or LOOK BARBADOS
            receives notice that the Performance Objectives have been met; and

     7.3.2  Pursuant to the terms of the LOOK Licensing Agreement, LOOK shall
            continue to license to BT LOOKSMART the LOOK Databases on an
            exclusive (in the Territory), non-transferable basis.

7.4  The parties acknowledge that the Territory Databases contain URL Content
     which LOOK does not own and that LOOK does not transfer ownership of
     Intellectual Property Rights in such URL Content.  As used herein, "URL
     Content" means the words or symbols which together make up an individual
     URL and the content of any web pages which a customer may see after
     clicking on any URL listed in the Territory Databases.
<PAGE>

7.5  If the Year Two Performance Objectives have not been met by 31 March 2002,
     the licence(s) by LOOK and LOOK BARBADOS to BT LOOKSMART of the LOOK
     Databases and the Territory Databases shall continue on the same terms
     except that it or they shall become perpetual and non-exclusive as set
     forth in the LOOK Licensing Agreement and BT LOOKSMART shall cease to fund
     the creation of the Territory Databases and shall pay to LOOK a royalty as
     set forth in the LOOK Licensing Agreement.


7.6  If the Shareholders decide to wind-up BT LOOKSMART, BTH and LOOK BARBADOS
     shall each be entitled to a copy, without any restrictions on use, of any
     Territory Databases which are owned by BT LOOKSMART and to any other
     Intellectual Property Rights of BT LOOKSMART.

7.7  During the Initial Period and, if the Year One Performance Objectives have
     not been met at the end of the Initial Period, during the period from 1
     April 2001 to 31 March 2002, LOOK and LOOK BARBADOS each undertake not to
     transfer, assign or grant any licence in (save for the transfer or licence
     agreed to in this Agreement or the LOOK Licensing Agreement, and subject to
     Section 7.8 below) or in any way encumber the Territory Databases or any
     Intellectual Property Rights in the Territory Databases.

7.8  The parties understand and agree that the LOOK Licensing Agreement and the
     transfer of the Territory Databases referred to in this Clause 7 are
     subject to LOOK's obligations as set out in Schedule 9 to Microsoft
     Corporation pursuant to an agreement between LOOK and Microsoft dated 4
     December 1998 (the "Microsoft Agreement"). Save as set out in Schedule 9,
     LOOK represents and warrants to BTH and BT LOOKSMART that there are no
     obligations in the Microsoft Agreement that have not been disclosed to BTH
     and BT LOOKSMART which will limit or impair any of the rights of BT
     LOOKSMART, under this Agreement or the LOOK Licensing Agreement, to the use
     of the LOOK Database and/or the Territory Databases.


7.9  Within 10 Business Days after the date upon which the Performance
     Objectives are met, BTH shall nominate a person at BT's Adastral Park to
     liaise with BT LOOKSMART.

7.10 LOOK agrees to provide a link (which shall have equal prominence with other
     non US databases, and if such other non US databases appear above the fold,
     shall appear above the fold) on the looksmart.com website to the URLs of BT
     LOOKSMART at which the Territory Databases are displayed.


8.  FUNDING

Shareholder Funding

8.1  The Peak Funding Requirement for the BT LOOKSMART Business as set out in
     the Initial Business Plan is US$216,000,000.

8.2  LOOK BARBADOS shall pay US$997,220 by subscribing for 41,900,000 Shares in
     accordance with Clause 5.1 which shall be credited as fully paid.  The
     balance of
<PAGE>

     $107,000,000 (or such lesser amount as provided in any approved revised
     Business Plan) payable by LOOK BARBADOS shall be paid in cash by LOOK
     BARBADOS by subscribing for Shares at the then current valuation as
     determined by the Board in the amounts as provided in Clause 8.10.

8.3  BTH shall pay US$997,220 by subscribing for 41,900,000 Shares in accordance
     with Clause 5.1 which shall be credited as fully paid.  The balance of
     $107,000,000 (or such lesser amount as provided in any approved revised
     Business Plan) payable by BTH shall be paid in cash by BTH by subscribing
     for Shares at the then current valuation as determined by the Board in the
     amounts as provided in Clause 8.10.

8.4  Each Shareholder shall be liable only for 50 per cent of the Peak Funding
     Requirement and shall not be jointly and severally liable in respect of the
     Peak Funding Requirement.  If a Shareholder shall not subscribe for Shares
     as set out in Clauses 8.2 and 8.3 on the due date for subscription, that
     Shareholder shall be diluted.

8.5  Subject to LOOK BARBADOS subscribing for shares up to the maximum amounts
     set out in Schedule 10, if required by LOOK BARBADOS, BT shall provide or
     shall procure that a member of the BT Group shall provide to BT LOOKSMART
     or to LOOK BARBADOS or the designated member of the LOOK Group, at LOOK
     BARBADOS'S option, funds up to US$50 million principal amount for the
     payment of part of LOOK BARBADOS'S Funding Commitment on the following
     terms:


a)   the instrument will be non-recourse except as specifically provided in this
     Clause 8.5, and will yield a compound rate of return of twenty per cent per
     annum on the funds made available by BT;

b)   capital and interest will be rolled up;

c)   repayment of each drawdown will be made on the third anniversary of the
     date of that drawdown;

d)   BT shall have a lien on the LOOK Shareholder's interest in BT LOOKSMART on
     a prorated percentage basis determined by dividing the total amount of
     drawdowns by LOOK pursuant to this Clause 8.5 by the total amount
     contributed to BT LOOKSMART by the LOOK Shareholder including the
     drawdowns;

e)   BT shall have the option at any time upon thirty (30) days prior written
     notice to LOOK to convert the instrument into shares in the share capital
     of LOOK or its successor at a price of US$35 per share;

f)   BTH shall pay to LOOK US$50 million in accordance with the terms of the
     Loan Agreement. If the funds are not paid into BT LOOKSMART, BT may demand
     instant repayment of the total funds loaned to LOOK BARBADOS under this
     Clause 8.5, or BT may require that the funds be converted immediately into
     the ordinary share capital of LOOK at US$35 per share. In such a situation,
     BT is immediately relieved of its obligation to provide any of the
     remaining balance of the US$50 million debt commitment. Unless otherwise
     agreed by the parties, the amounts of the drawdowns shall be as provided in
     Schedule 10; provided however, that LOOK may defer some or all of the
     amount of a drawdown to a subsequent drawdown.
<PAGE>

g)   Upon a transfer of the LOOK Shareholder's Shares, the instrument described
     in Clause 8.5(a) may be assigned subject to (i) BT's consent and (ii) the
     successor entity providing appropriate security for its obligations under
     the instrument. If BT does not consent to such an assignment, BT may
     convert the instrument to the ordinary share capital of LookSmart, Ltd. at
     US$35 per share or demand repayment from LOOK BARBADOS.

h)   Upon a change of control of LOOK, the instrument described in Clause 8.5(a)
     may be assigned provided the entity that becomes the controlling entity
     offers to guarantee the debt. LOOK undertakes that it will give written
     notice to BTH as soon as it makes a public announcement of or files a
     notice with the SEC in relation to a change of control of LOOK.

External Funding

8.6  The Board may approve the raising of funds by BT LOOKSMART from third party
     lenders on a non-recourse (to the Shareholders) basis provided that BT
     LOOKSMART's maximum external debt does not exceed fifty per cent (50%) of
     BT LOOKSMART's equity (aggregate Shareholder funding pursuant to Clause 8.2
     and 8.3, plus BT LOOKSMART's accumulated reserves per the last signed
     audited annual accounts).

8.7  Any incremental funding ("Incremental Funding") of BT LOOKSMART over and
     above the Peak Funding Requirement that is required by cash flow forecasts
     prepared by the CFO and approved by the CEO and which is approved by both
     of the Shareholders and which is not obtained from a third party shall be
     provided as follows:

     (a)  equally by way of equity if both Shareholders agree to fund the
          Incremental Funding;

     (b)  if both Shareholders approve the Incremental Funding but one wishes to
          fund less than its pro-rata proportion of such amount, it shall be
          diluted on the basis of the amount of Incremental Funding provided by
          the other Shareholder divided by the then current valuation price per
          share.

IPO

8.8  LOOK BARBADOS and BTH agree that a public offering of shares in BT
     LOOKSMART is the preferred method for BT LOOKSMART to raise funds. LOOK
     BARBADOS and BTH intend to have an initial public offering of shares in BT
     LOOKSMART at the earliest possible time subject to favourable market
     conditions and the consent of the LOOK Shareholder and the BT Shareholder.


Dilution

8.9  If, as a result of a dilution in accordance with this Clause 8, the non-
     funding Shareholder holds a percentage interest in the share capital of BT
     LOOKSMART of 40 per cent or less, it will lose the right, in the case of
     the LOOK Shareholder, to nominate the CEO and, in the case of the BT
     Shareholder, to nominate the CFO.  If, as a result of such dilution, the
     non-funding Shareholder holds a percentage interest in the share capital of
     BT LOOKSMART of 30 per cent or less, it will lose the right to
<PAGE>

     appoint one out of the three people it is entitled to appoint to the Board
     of BT LOOKSMART and the size of the Board will be reduced accordingly. If,
     as a result of such dilution, the non-funding Shareholder holds a
     percentage interest in the share capital of BT LOOKSMART of 20 per cent or
     less, it will lose the right to appoint one out of the two people it is
     entitled to appoint to the Board of BT LOOKSMART and the size of the Board
     will be reduced accordingly. If, as a result of such dilution, the non-
     funding Shareholder holds a percentage interest in the share capital of 10
     per cent or less, it will lose all rights to appoint any person to the
     Board of BT LOOKSMART, and the size of the Board will be reduced
     accordingly.

8.10 The Board shall determine when additional subscriptions for Shares will
     occur and shall do so consistent with the Initial Business Plan or approved
     revised Business Plan. The parties agree that BT LOOKSMART shall not hold
     cash reserves in excess of those required for a 5 week operating period.
     The Shareholders shall receive a minimum of thirty (30) days prior written
     notice of a subscription date and the amounts due. The Board shall set a
     fair market value of BT LOOKSMART at each issuance of additional Shares to
     the Shareholders or grant of stock options pursuant to the BT LOOKSMART
     stock option plan to be established pursuant to Clause 15.2.

9.   DIRECTORS AND MANAGEMENT

Supervision by the Board

9.1  The Board shall have the authority vested in it by this Agreement, the Bye-
     laws and the relevant provisions of Bermuda law.  Therefore, the Board
     shall have the overall responsibility for the general course of the BT
     LOOKSMART Business. The Board may form committees by a decision of the
     Directors which committees shall consist of at least 1 LOOK Director and 1
     BT Director (subject to one of the Shareholders having lost its right to
     appoint one or all of its Directors, as the case may be, as a result of
     dilution in accordance with Clause 8 in which case the composition of
     committees shall be amended accordingly) and delegate certain functions to
     them as the Board may from time to time decide.  All committees formed by
     the Board shall meet at such intervals as directed by the Board and shall
     have such powers and responsibilities as the Board shall delegate to them.

Board of Directors

9.2  The Board shall be comprised of an equal number of LOOK Directors and BT
     Directors (subject to one of the Shareholders having lost its right to
     appoint one or all of its Directors as the case may be, as a result of
     dilution in accordance with Clause 8) and the CEO and CFO.  Until otherwise
     agreed by the Shareholders or until dilution occurs pursuant to Clause 8,
     there shall be 3 LOOK Directors and 3 BT Directors.  The initial
     appointments to the Board are as follows:


LOOK Directors      BT Directors        CEO                 CFO
- --------------      -------------       ---                 ---

Evan Thornley       Vernon Irvin        Timothy Pethick     To be nominated by
                                                            the BT Shareholder
Anthony Castagna    Stephen Davies

Tracey Ellery       To be nominated by the
                    BT Shareholder
<PAGE>

     Board meetings shall take place once each month or less frequently as the
     Board shall agree unless by exception the Board agrees otherwise. Each
     Shareholder shall bear the costs of the Directors appointed by it attending
     Board meetings. Directors may participate in Board meetings by telephone or
     video conference, except from the UK or Australia, and shall be counted as
     present for quorum and voting purposes.

Appointment and removal of Directors

9.3  Any appointment or removal of a Director appointed by a Shareholder shall
     be effected by notice in writing to BT LOOKSMART signed by or on behalf of
     the Shareholder in question and shall take effect, subject to any contrary
     intention expressed in the notice, when the notice effecting the same is
     delivered to BT LOOKSMART.

     If one of the Shareholders loses its right to appoint one or all of its
     Directors, as the case may be, as a result of dilution in accordance with
     Clause 8, it shall forthwith procure the resignation of the relevant number
     of Directors and obtain from each resigning Director a waiver of any and
     all rights for compensation for loss of office that they might have.

Quorum

9.4  The quorum for the transaction of business at any meeting of the Board
     (including any adjourned meeting) shall be at least one (1) LOOK Director
     (or his alternate) and at least one (1) BT Director (or his alternate)
     present at the time when the relevant business is transacted. If such a
     quorum is not present within 30 minutes from the time appointed for the
     meeting or if during the meeting such a quorum ceases to be present, the
     meeting shall be adjourned for 7 Business Days and the same quorum
     requirements shall than apply. A Director shall be regarded as present for
     the purposes of a quorum if represented by an alternate Director in
     accordance with Clause 9.6. If, as a result of dilution in accordance with
     Clause 8, either Shareholder has lost the right to appoint any Directors to
     the Board, the quorum shall be simply any two (including at least one
     Director appointed by the Shareholder that has the right to appoint one or
     more Directors) Directors present at the time when the relevant business is
     transacted.

Notice and Agenda

9.5  At least 14 days written notice shall be given to each of the members of
     the Board of any meeting of the Board, provided always that a shorter
     period of notice may be given with the written approval of at least one (1)
     LOOK Director (or his alternate) and at least one (1) BT Director (or his
     alternate). If, as a result of dilution in accordance with clause 8, either
     Shareholder has lost the right to appoint any Directors to the Board, such
     shorter period of notice may be given with the written approval of any two
     Directors. Any such notice shall contain, inter alia, an agenda identifying
     in reasonable detail the matters to be discussed at the meeting and shall
     be accompanied by copies of any relevant papers to be discussed at the
     meeting. Any matter which is to be submitted to the Board for a decision
     which is not identified in reasonable detail as aforesaid shall not be
     decided upon, unless otherwise agreed in writing by all of the members of
     the Board.

Board voting

9.6  Except as otherwise agreed by the LOOK Shareholder and the BT Shareholder,
     if no dilution has occurred pursuant to Clause 8 resulting in one
     Shareholder losing the right to appoint one or all of its Directors, all
     decisions of the Board shall require the
<PAGE>

     positive vote of at least 95 per cent of all the Directors. If dilution has
     occurred pursuant to Clause 8 resulting in one Shareholder losing the right
     to appoint one or all of its Directors, all decisions of the Board shall be
     by simple majority vote. Each Director shall have one vote. Any Director
     who is absent from any meeting may nominate any other person to act as his
     alternate and to vote in his place at the meeting. If any of the Directors
     appointed by a Shareholder is not present at any Board meeting (whether
     present in person or by alternate), then one of the Directors appointed by
     such Shareholder so present shall be entitled at that meeting to such
     additional vote or votes as shall result in the Directors so present
     appointed by each Shareholder having in aggregate an equal number of votes.

9.7  It is recognised that the subsidiaries of BT LOOKSMART may operate
     independently of the Board. However, the Board reserves the right to take
     responsibility for the following matters on giving notice to BT LOOKSMART's
     subsidiaries:

     (a)  capital expenditure by any member of the BT LOOKSMART Group in respect
          of any item or project in excess of  $1,000,000 not contained in the
          then current Business Plan or such other sum as may be approved by the
          Board from time to time;

     (b)  annual updates, extensions and variations of the Business Plan and
          Budgets;

     (c)  the adoption of (or variation to) share option plans and the
          remuneration package of  the CEO and his direct reports;

     (d)  the formation of policies for any member of the BT LOOKSMART Group in
          respect of business conduct, the environment and health and safety
          issues;

     (e)  the entry into by any member of the BT LOOKSMART Group of any
          contract, liability or commitment which could involve an obligation of
          a material magnitude or nature (a liability for expenditure in excess
          of  $2,000,000 being regarded as material for this purpose);

     (f)  any change in any member of the BT LOOKSMART Group Accounting
          Principles:

     (g) appointment and removal of the CEO and the CFO;

     (h)  major decisions relating to the conduct or settlement of material
          legal proceedings (potential liability or claim in excess of $750,000
          being regarded as material for these purposes) or the conduct of any
          competition or regulatory proceedings;

     (i)  contracts between any member of the BT LOOKSMART Group and a member of
          the BT Group or the LOOK Group;

     (j)  any acquisition or disposal (whether in a single transaction or series
          of transactions) by any member of the BT LOOKSMART Group of any
          business (or any material part of any business) or of any shares in
          any company;

     (k)  (except for contracts which satisfy such criteria as the Board may
          from time to time approve as part of the procedures for the entry into
          of contracts by any member of the BT LOOKSMART Group) the entry into
          by any member of the
<PAGE>

          BT LOOKSMART Group of any contract, liability or commitment which is
          outside the ordinary course of business of the BT LOOKSMART Group;

     (l)  the entry into (or termination) by any member of the BT LOOKSMART
          Group of any material partnership or joint venture.

9.8  The Chairman of the Board shall be appointed immediately following each
     annual general meeting. The office of Chairman shall rotate between a BT
     Director and a LOOK Director, with the first Chairman being a LOOK
     Director. The Chairman shall not have a casting vote.

Management

9.9  The CEO who shall be responsible to the Board for:

     (a)  the successful implementation of the Business Plan;

     (b)  BT LOOKSMART's efficient and cost effective management; and

     (c)  submission of monthly reports to the Board in a form agreed by the
          Board.

     These responsibilities shall be reflected in the CEO's terms and conditions
     of appointment with BT LOOKSMART which shall contain performance related
     targets. The CEO shall be a member of the Board. The LOOK Shareholder shall
     nominate each CEO whose appointment shall be subject to a positive vote of
     at least 95 per cent of all the Directors (excluding the votes of the CEO
     and the CFO) if no dilution has occurred pursuant to Clause 8 resulting in
     a Shareholder losing its right to appoint one or more Directors and by
     simple majority vote of the Board if dilution has occurred resulting in a
     Shareholder losing its right to appoint one or more Directors. If the LOOK
     Shareholder has lost the right to nominate the CEO pursuant to Clause 8,
     the Board shall nominate the CEO. The first CEO shall be Timothy Pethick.

9.10 The CFO shall be a member of the Board. The CFO will undertake BT
     LOOKSMART's day-to-day financial control, report to the CEO and be
     responsible to the Board for keeping BT LOOKSMART's financial books and
     records in accordance with appropriate accounting principles and for
     preparing and submitting monthly financial reports to the Board and the
     Shareholders and as may be required by relevant law. The BT Shareholder
     shall nominate each CFO whose appointment shall be subject to a positive
     vote of at least 95 per cent of all the Directors (excluding the votes of
     the CEO and the CFO) if no dilution has occurred pursuant to Clause 8
     resulting in a Shareholder losing the right to appoint one or more
     Directors and by simple majority vote of the Board if dilution has occurred
     resulting in a Shareholder losing the right to appoint one or more
     Directors. If the BT Shareholder has lost the right to nominate the CFO
     pursuant to Clause 8, the Board shall nominate the CFO.

10.  BUSINESS PLAN

10.1 The Initial Business Plan and any subsequent approved revised Business Plan
     constitute the blue print for the development of the BT LOOKSMART Business.
     The parties agree that the Board shall meet within thirty (30) days of
     Completion to discuss and agree a revised Business Plan. The Initial
     Business Plan shall be updated annually by the unanimous approval by the
     Board if no dilution has occurred pursuant to Clause 8 resulting in a
     Shareholder losing its right to appoint one or more
<PAGE>

     Directors and by simple majority vote of the Board if dilution has occurred
     resulting in a Shareholder losing its right to appoint one or more
     Directors and shall form the rolling 5 year Business Plan. Reviews,
     updates, modifications and extensions to the Business Plan shall follow the
     content, timing and procedures determined by the Board.

10.2 The Board shall procure that BT LOOKSMART's management prepare, 30 days
     prior to the end of a Financial Year, a draft annual update for approval by
     the Board on the basis of BT LOOKSMART's existing activities and services.
     If the Board shall fail to approve an update, the last agreed Business Plan
     or update shall continue to apply for the Financial Year in question until
     such time as an update is duly approved. Annual updates shall be in the
     same format as the Initial Business Plan and shall consist of a forecast of
     the next 5 subsequent Financial Years. The CEO's prime responsibility shall
     be to implement the Business Plan and he/she shall be required to provide
     the Board with regular reports of performance against Business Plan
     targets.

11.  SHAREHOLDER MATTERS

Use of powers

11.1 The Shareholders shall use their respective powers to procure, so far as
     they are legally able, that no decision relating to any of the matters
     specified in Clause 11.2 ("Shareholder Matters") shall be taken (whether by
     the Board, BT LOOKSMART or any subsidiary of BT LOOKSMART or any of the
     committees, officers or managers of BT LOOKSMART) unless prior approval has
     been given (i) by at least 95 per cent of the Shareholders if no dilution
     has occurred pursuant to Clause 8 resulting in one of the Shareholders
     holding a percentage interest in the share capital of BT LOOKSMART of 40
     per cent or less or (ii) subject to Clause 11.4(f), by simple majority of
     the votes cast if dilution has occurred pursuant to Clause 8 resulting in
     one of the Shareholders holding a percentage interest in the share capital
     of BT LOOKSMART of 40 per cent or less.

Shareholder Matters

11.2 The Shareholder Matters are the following:

     (a)  adoption of or any alteration to the Memorandum of Association or the
          Bye-laws or other constitutional documents of BT LOOKSMART;

     (b)  any change in the authorised or issued share capital of BT LOOKSMART
          or any increase (or reduction) by BT LOOKSMART in its shareholding in
          any other company;

     (c)  any material change in the nature or scope of BT LOOKSMART's
          activities, including without limitation any decision referred to in
          sub-clause (o) below;

     (d)  the declaration or payment of any dividend or distribution by BT
          LOOKSMART;

     (e)  the creation of any mortgage, charge, encumbrance or other security
          interest of whatsoever nature in respect of all or any material part
          of the undertaking, property or assets of BT LOOKSMART;

     (f)  the appointment or removal of the auditors of BT LOOKSMART;
<PAGE>

     (g)  the approval of the statutory accounts of BT LOOKSMART;

     (h)  any proposal that BT LOOKSMART be wound-up;

     (i)  the introduction of any third party to BT LOOKSMART or a Loco;

     (j)  contracts between BT LOOKSMART or a Loco and a member of the LOOK
          Group or the BT Group which is for an amount in aggregate exceeding
          $1.5 million;

     (k)  approval of the corporate mark and URLs of BT LOOKSMART and Locos and
          any changes to such marks or URLs;

     (l)  any decision to conduct business in a country which is outside the
          Territory;

     (m)  any decision for BT LOOKSMART or a Loco to offer a free access portal;

     (n)  any decision for BT LOOKSMART or a Loco to provide any
          telecommunications services.

Method of approval by Shareholders

11.3 The approval of the Shareholders to any of the Shareholder Matters (or to
     any variation thereof) shall be given by  the Shareholders either by
     unanimous written resolution or at a general meeting of BT LOOKSMART.

Meetings of Shareholders

11.4 General meetings of Shareholders shall take place in accordance with the
     applicable provisions of the Bye-laws on the basis (inter alia) that:

     (a)  if no dilution has occurred pursuant to Clause 8 resulting in one of
          the Shareholders holding a percentage interest in the share capital of
          BT LOOKSMART of 40 per cent or less, a quorum shall be one (1) duly
          authorised representative of the LOOK Shareholder and one (1) duly
          authorised representative of the BT Shareholder;

     (b)  if a dilution has occurred pursuant to Clause 8 resulting in one of
          the Shareholders holding a percentage interest in the share capital of
          BT LOOKSMART of 40 per cent or less, a quorum shall be two (2) duly
          authorised representatives of the Shareholder holding 50 per cent plus
          one vote or more of the issued share capital of BT LOOKSMART;

     (c)  the notice of meeting shall (unless otherwise agreed by each of the
          Shareholders) set out an agenda identifying in reasonable detail the
          matters to be discussed;

     (d)  the chairman of any such meeting shall not have a casting vote;

     (e)  subject to Clause 11.4 (f), a decision to approve any of the
          Shareholder Matters shall require (i) a  positive vote of at least 95
          per cent of the Shareholders present or (ii) a simple majority vote of
          the Shareholders present, if a dilution has occurred pursuant to
          Clause 8 resulting in one of the
<PAGE>

          Shareholders holding a percentage interest in the share capital of BT
          LOOKSMART of 40 per cent or less.

     (f)  if a dilution has occurred pursuant to Clause 8 resulting in one of
          the Shareholders holding a percentage interest in the share capital of
          BT LOOKSMART of 40 per cent or less, a decision to approve the
          Shareholder Matters set out in sub-clauses 11.2 (a), (b), (c), (e),
          (j) and (l) shall require a simple majority vote of the Shareholders
          present, which majority shall include all Shareholders holding a
          percentage interest in the share capital of BT LOOKSMART of 30 per
          cent or more.

11.5 Any matters requiring a general meeting of or approval by the Shareholders
     under relevant corporate laws, but not covered by the Shareholder Matters,
     shall be dealt with in accordance with the Bye-laws.

Deadlock

11.6 If a deadlock arises by reason of a failure by the Shareholders to reach
     agreement on any of the Shareholder Matters or any management matter
     requiring decision by the Board, either Shareholder may serve formal
     written notice on the other Shareholder that a deadlock has arisen. If the
     Shareholders are unable to resolve the matter within a 3 week period after
     the service of such notice, then the matter shall be referred to the Chief
     Executive Officer of LOOK and the President and CEO of the BT Worldwide
     division (or similar senior executive) of BT with a view to the matter
     being resolved within fifteen (15) days of the date on such referral.

12.  FINANCIAL MATTERS

Accounting Principles

12.1 BT LOOKSMART shall, in relation to its financial statements, adopt
     accounting principles in accordance with US GAAP and approved by the Board
     (the "Accounting Principles").

Auditors

12.2 BT LOOKSMART's auditors shall be such firm of chartered accountants of
     recognised international standing as may be recommended by the Board and
     approved by the Shareholders from time to time.

Dividend policy

12.3 The Board shall decide how much to distribute of the consolidated profit
     (after taxation and extraordinary items) of BT LOOKSMART as shown by the
     financial statements of BT LOOKSMART for that Financial Year and available
     for distribution in accordance with applicable law. The constitutional
     documents of BT LOOKSMART shall, wherever legally permitted, make provision
     for the payment of interim dividends.

13.  INFORMATION AND REPORTING

Inspection and information

13.1 Each Shareholder (and its auditors and other representatives) shall be
     entitled to and shall at its request be supplied with:
<PAGE>

     (a)  full access (including copying facilities), at reasonable times and on
          reasonable notice, to the separate books, records, accounts,
          regulatory filings, documents, premises, processes, systems, business
          activities, management and auditors of BT LOOKSMART and its
          subsidiaries and affiliates, whether in connection with such
          Shareholder's own internal audit of BT LOOKSMART or otherwise; and

     (b)  all information, including, but not limited to, monthly management
          accounts, operating statistics (including, but not limited to, the
          number of users, subscribers and advertising sales), details of tax
          payments and other trading and financial information, in such form and
          at such times as such Shareholder may reasonably require to keep it
          properly informed about the business and affairs of BT LOOKSMART and
          to fulfil such Shareholder's own group reporting requirements.

Accounts, Business Plan and Budgets

13.2 The LOOK Shareholder and the BT Shareholder shall, in any event and
     without prejudice to the generality of Clause 13.1, be supplied by BT
     LOOKSMART with copies of:

     (a)  audited accounts for BT LOOKSMART (complying with all relevant legal
          requirements);

     (b)  a Business Plan and itemised revenue and capital Budgets for each
          Financial Year showing proposed trading and cash flow figures,
          staffing levels and all material proposed acquisitions, disposals and
          other commitments for such Financial Year; and

     (c)  within 12 days of the end of each month, monthly/quarterly management
          accounts of BT LOOKSMART including a statement of progress against the
          relevant Business Plan, a statement of any variation from the
          quarterly revenue Budget and up-to-date rolling forecasts for the
          balance of the relevant Financial Year and an itemised account of all
          transactions referred to in the capital Budget entered into by BT
          LOOKSMART during that period. BT LOOKSMART shall maintain a sufficient
          level of oversight from its auditors to ensure that any publicly-
          disclosed accounting information is accurate.

14.  BUDGETARY PROCEDURES

14.1 The Shareholders shall procure that the Board endeavours to agree the
     Budget no less than 30 days prior to the commencement of the relevant
     Financial Year. The Budget (unless otherwise agreed among the Directors)
     shall include the following items:

     (a)  strategic plan;

     (b) traffic, yield and reach assumptions for ad sales revenue projections;

     (c)  customer count and transaction size assumptions for eCommerce revenue
          projections;

     (d)  cost of sales assumptions and projections;
<PAGE>

     (e)  marketing plan and budget;

     (f)  sales and marketing budget including ad sales, business development,
          distribution fees, customer service, and marketing department costs;

     (g)  product development budget including editorial, product development
          and engineering costs;

     (h)  administration budget including finance, executive, human resources
          and facilities expenses;

     (i)  customer services budget;

     (j)  resource budget, including:

          (i)   procurement budget and transfer prices from parent companies;

          (ii)  investment budget (capital expenditure); and

     (k)  financial forecasts analysed into monthly elements including:

          (i)   cash flow;

          (ii)  profit and loss statement;

          (iii) balance sheet; and

          (iv)  financial and economic assumptions on which they are based; and

     (l)  analysis of forecast receipts and payments between BT LOOKSMART and
          the LOOK Shareholder and the BT Shareholder and their respective
          affiliates.

14.2 A variance analysis of Budget figures compared with actual figures and the
     updated forecasts of "year-end" figures will be submitted to the Directors
     on a quarterly basis.

15.  EMPLOYEES

15.1 The Shareholders will at the request of BT LOOKSMART's management exercise
     reasonable endeavours in order to make appropriately qualified personnel
     available to BT LOOKSMART on a temporary basis to enable its early and
     efficient start-up. The cost of the secondments will be met by BT LOOKSMART
     unless otherwise agreed. The Shareholders intend that as soon as
     practicable BT LOOKSMART will be autonomous in the employees required in
     the ordinary course of its business although as Shareholders they shall
     continue to co-operate fully in the development of BT LOOKSMART's skills
     and expertise and in meeting its special needs. For the avoidance of doubt,
     the terms of any such secondment arrangements shall be treated as a
     Shareholder related contract for the purpose of this Agreement.


15.2 Subject to applicable law and regulation, BT LOOKSMART shall establish a
     stock plan substantially in the form set out in Schedule 11.
<PAGE>

16.  CONFIDENTIALITY

Confidentiality obligation

16.1 Each party undertakes with the other that it shall use (and shall procure
     that each member of its Group uses) all reasonable endeavours to keep
     confidential any information:

     (a)  which it may have or acquire (whether before or after the date of this
          Agreement) in relation to BT LOOKSMART's customers, business, assets
          or affairs (including, without limitation, any information provided
          pursuant to Clause 13);

     (b)  which, in consequence of the negotiations relating to this Agreement
          or being a Shareholder or having appointees on the Board or the
          exercise of its rights or performance of its obligations under this
          Agreement, it may have or acquire (whether before or after the date of
          this Agreement) in relation to the customers, business, assets or
          affairs of any member of the LOOK Group (if the party is BTH) or of
          any member of the BT Group (if the party is LOOK BARBADOS); or

     (c)  which relates to the contents of this Agreement or any Ancillary
          Agreement (or any agreement or arrangement entered into pursuant to
          this Agreement).

     No party shall use for its own business purposes or disclose to any third
     party any such information (collectively, "Confidential Information")
     without the consent of the other Parties. In performing its obligations
     under this Clause 16, each party shall apply such confidentiality standards
     and procedures as it applies generally in relation to its own confidential
     information.

Exceptions from confidentiality

16.2 The obligation of confidentiality under Clause 16. 1 shall not apply to :

     (a)  the disclosure (subject to Clause 16.3) on a "need to know" basis to a
          company which is another member of the LOOK Group or BT Group (as the
          case may be) where such disclosure is for a purpose reasonably
          incidental to this Agreement; provided that such disclosure is made
          subject to confidentiality obligations at least as protective as set
          forth in this Clause 16;

     (b)  information which is independently developed by the relevant party or
          acquired from a third party to the extent that it is acquired with the
          right to disclose the same;

     (c)  the disclosure of information to the extent required to be disclosed
          by law, any stock exchange regulation or any binding judgement, order
          or requirement of any court or other competent authority, including
          any regulatory or competition authority, provided that to the extent
          possible prior to making such disclosure the disclosing party provides
          advance written notice to the other party and reasonable assistance in
          seeking confidential treatment or a protective order;

     (d)  the disclosure of information to any tax authority to the extent
          reasonably required for the purposes of the tax affairs of the party
          concerned or any member of its Group;
<PAGE>

     (e)  the disclosure (subject to Clause 16.3) in confidence on a "need to
          know" basis to a party's or a party's Group Officers, employees,
          representatives or advisers of information reasonably required to be
          disclosed for a purpose reasonably incidental to this Agreement;
          provided that such disclosure is made subject to confidentiality
          obligations at least as protective as set forth in this Clause 16;

     (f)  information which becomes within the public domain (otherwise than as
          a result of a breach of this Clause 16); or

     (g)  any announcement or disclosure made in accordance with the terms of
          Clause 28.

Employees, advisers etc.

16.3 Each party shall inform its officers, employees (including those of its
     Group), representatives or any adviser advising it (or any member of its
     Group) in relation to the matters referred to in this Agreement, or to whom
     it provides Confidential Information, that such information is confidential
     and shall instruct them:

     (a)  to keep it as confidential; and

     (b)  not to disclose it to any third party (other than those persons to
          whom it has already been disclosed in accordance with the terms of
          this Agreement).

     The disclosing party shall remain responsible for any breach of this Clause
     16 by the person to whom it is disclosed.

Survival after termination

16.4 The provisions of this Clause 16 shall survive any termination of this
     Agreement.

17.  REGULATORY MATTERS

     Co-operation

17.1 The parties shall co-operate with each other to ensure that all
     information necessary or desirable for the making of (or responding to any
     requests for further information consequent upon) any notifications or
     filings made in respect of this Agreement, or the transactions contemplated
     hereunder, is supplied to the party dealing with such notification and
     filings and that they are properly, accurately and promptly made. BTH shall
     lead on the making of any appropriate regulatory filings but both parties
     shall use all reasonable endeavours to ensure these can be promptly and
     effectively made.

UK Restrictive Trade Practices Act

17.2 No restriction in this Agreement or any document to be executed pursuant
     to this Agreement which renders this Agreement or such document registrable
     under the Restrictive Trade Practices Act 1976 shall have effect until
     immediately after particulars have been furnished to the Office of Fair
     Trading of the United Kingdom as required by the Act.

Regulatory Action

17.3 If any Regulatory Action is to be taken or is threatened, the parties
     shall promptly meet to discuss the situation and the action to be taken as
     a result and whether any
<PAGE>

     modification to the terms of this Agreement (or any Ancillary Agreement or
     other agreement entered into pursuant to this Agreement) should be made, in
     order that any requirements (whether as a condition of giving any approval,
     exemption, clearance or consent or otherwise) of the Commission of the
     European Communities or other regulatory authority may be reconciled with,
     and within the intended scope of, the business arrangement contemplated by
     this Agreement. The parties shall co-operate in giving effect to any
     modifications so agreed upon.

Material regulatory objection

17.4 If under relevant European Union law or other relevant laws applicable to
     the joint venture, the Commission of the European Communities or other
     regulatory authority (after all appropriate notifications and hearings have
     been made and held) makes a decision or order or expresses a conclusive
     view that effect should not be given to the basic principles of the joint
     venture to be established pursuant to this Agreement or which would negate
     the original commercial imperatives of the individual parties in entering
     into this Agreement, then the parties shall:

     (a)  promptly meet to decide the appropriate course in the mutual interests
          of the parties to give effect to the requirements of the Commission of
          the European Communities and/or other regulatory authority; and

     (b)  in the absence of agreement to any other course, take appropriate
          steps to reinstate, as fully as may be possible, the legal position of
          the parties which prevailed in relation to the LOOK business and the
          BT business respectively prior to the signing of this Agreement.

18.  INTELLECTUAL PROPERTY AND BRANDING

Intellectual Property Rights

18.1 Subject to the terms of the LOOK Licensing Agreement and the LOOK Services
     Agreement, the parties acknowledge that all Intellectual Property Rights
     created and/or commissioned by BT LOOKSMART during the term of this
     Agreement shall vest in BT LOOKSMART. Any Intellectual Property Rights
     acquired or licensed by BT LOOKSMART from LOOK or BT shall be dealt with by
     specific licence or purchase agreements and be subject to the specific
     terms of those agreements.

Branding

18.2 BTH and LOOK BARBADOS shall agree a brand for BT LOOKSMART and any Locos.
     Such brand shall give equal prominence to BT's brand and to LOOK's brand.
     The parties agree that the "look and feel" of any BT LOOKSMART site shall
     be substantially similar to the current user interface at the site at
     www.looksmart.com.  The parties acknowledge that use of the LOOK brand and
     -----------------
     LOOK "look and feel" shall be subject to the terms of the LOOK Trade Mark
     License Agreement, and use of the BT brand shall be subject to the terms of
     the BT Trade Mark License Agreement.

18.3 Each of BT LOOKSMART's portals and each Loco portal (except for wholesale
     services) shall be branded with a BT LOOKSMART brand and shall have a BT
     LOOKSMART or a LOOKSMART URL.

18.4 The homepage of each portal shall contain a "Communications Centre" section
     which shall be branded with such elements of the BT trade mark as BTH shall
     decide and which shall provide links to and promote BT IP communications
     services and other
<PAGE>

     BT or BTAP services (except for wholesale services). The homepage of each
     portal shall also have links to other sites of LOOK.

19.  TAX MATTERS


19.1 BT LOOKSMART shall comply with the following provisions:

     (a)  all business decisions shall be made in Bermuda;

     (b)  it shall not maintain a bank account outside of Bermuda;

     (c)  it shall not hold any assets (save for shares in companies) outside of
     Bermuda;

     (d)  it shall not employ any individuals who reside or perform services on
     behalf of BT LOOKSMART outside of Bermuda except for members of the board
     of Directors, provided that, in the case of members of the Board of
     Directors who reside outside of Bermuda, they do not perform such functions
     on behalf of BT LOOKSMART whilst outside of Bermuda;

     (e)  it shall not have an office or fixed place of business outside of
     Bermuda;

     (g)  it shall not directly or indirectly acquire a USA real property
     interest as defined under the US Internal Revenue Code section 897;

     (h)  it shall not enter into any contract or sign any contract outside of
     Bermuda;

     (j)  no person acting as agent of BT LOOKSMART shall reside or perform
     services for them outside of Bermuda.

19.2 References in clause 19.1 above to Bermuda shall include such other
     territories as the Board may agree with due regard to any possible tax
     consequences.


20   TRANSFER OF SHARES

General

20.1 The provisions of this Clause 20 shall apply in relation to any transfer,
     or proposed transfer, of Shares in BT LOOKSMART or any interest in such
     Shares.  With regard to the provisions of this Clause 20, time is of the
     essence.

Restrictions on transfer

20.2 Each party shall procure that, unless LOOK BARBADOS (in the case of a
     proposed transfer of BT Shares) or BTH (in the case of a proposed transfer
     of LOOK Shares) has given its prior consent in writing, no Shareholder
     shall:

     (a)  transfer any Shares (otherwise than in accordance with Clauses 20.3 to
          20.11); or

     (b)  grant, declare, create or dispose of any right or interest in any
          Shares; or

     (c)  create or permit to exist any pledge, lien, charge (whether fixed or
          floating) or other encumbrance over any Shares.
<PAGE>

Initial period

20.3 No Shareholder shall transfer any Shares during the period from the date
     of Completion of this Agreement to the later of 31 March 2001 and the date
     the Performance Objectives are met (save for intra-Group transfers
     permitted under Clause (20.10).

Transfer Notice

20.4 After the expiry of the period mentioned in Clause 20.3 and before a
     transferring Shareholder (the "Seller") (and/or any Shareholder in its
     Group) makes any transfer of its Shares (the "Seller's Shares"), the Seller
     shall first give to the other Shareholder(s) ( the "Continuing Party")
     notice in writing (a "Transfer Notice") of any proposed transfer together
     with details of the proposed third party purchaser thereof (the "Third
     Party Purchaser"), the purchase price and other material terms agreed
     between the Seller and the Third Party Purchaser. A Transfer Notice shall,
     except as hereinafter provided, be irrevocable. The Seller may give notice
     to transfer all but not some only of the Seller's Shares.

Right of Continuing party to purchase

20.5 On receipt of the Transfer Notice, the Continuing Party shall have the
     right to purchase all (but not some only) of the Seller's Shares at the
     purchase price specified in the Transfer Notice (or at such other price as
     shall be agreed between the Seller and the Continuing Party) by giving
     written notice to the Seller within thirty (30) days of receipt of the
     Transfer Notice ("Acceptance Period").  The obligations of the parties to
     complete such purchase shall be subject to the provisions of Clause 20.6.

Obligation to complete

20.6 The Continuing Party shall become bound (subject only to any necessary
     approvals of its shareholders in general meeting and of any competent
     regulatory authorities) to purchase the Seller's Shares on giving written
     notice to the Seller to exercise its rights under Clause 20.5. In such
     event, completion of the sale and purchase of the Seller's Shares shall
     take place within thirty (30) days after the giving of such notice or, if
     later, the obtaining of all necessary approvals of any competent regulatory
     authorities which the Continuing Party undertakes to use reasonable
     endeavours to obtain. Notwithstanding the foregoing, such notice and right
     of the Continuing Party to acquire the Seller's Shares shall cease to have
     effect if (i) any necessary approval of the Continuing Party's shareholders
     in general meeting has not been obtained with the said period of thirty
     (30) days or (ii) any necessary Regulatory Approval has not been obtained
     within sixty (60) days after the giving of such notice or (iii) if earlier
     than the expiry of such latter period, any such authority has conclusively
     refused to grant any such regulatory approval.

Seller's right to sell to Third Party Purchaser

20.7 If the Continuing Party does not exercise its rights of purchase under
     Clause 20.5 or any notice given thereunder ceases to have effect pursuant
     to Clause 20.6, the Seller shall (subject to Clause 20.9 below) be entitled
     to transfer the Seller's Shares on a bona fide arm's length sale to a Third
     Party Purchaser at a price being not less than the purchase price and upon
     terms no more favourable than the terms specified in the Transfer Notice,
     provided that:
<PAGE>

      (a)  such transfer shall have been completed within a period of one
           hundred and twenty (120) days after (i) the date of receipt of the
           Transfer Notice or (ii) if any notice given by the Continuing Party
           shall have ceased to have effect pursuant to Clause 20.6, the date on
           which such notice ceased to have effect;

      (b)  the Third Party Purchaser is financially sound.

20.8  The parties undertake to procure that the Shareholders shall give their
      approval, if and to the extent required under the provisions of the Bye-
      laws, to any transfer of Shares to a Third Party Purchaser permitted by
      the terms of this Paragraph.

Conditions applicable to the Third Party Purchaser

20.9  Completion of any transfer of Shares to a Third Party Purchaser shall be
      subject to the conditions that:

      (a)  the Third Party Purchaser shall first have entered into an agreement
           with the Continuing Party whereby it agrees to be bound (in terms
           reasonably satisfactory to the Continuing Party) by provisions of
           this Agreement and any related agreements binding upon the Seller;

      (b)  any loans, loan capital, borrowings and indebtedness in the nature of
           borrowing (but excluding, for the avoidance of doubt, any debts
           incurred in the ordinary course of trade which are at the relevant
           time outstanding on inter-company account) owing at that time from BT
           LOOKSMART to the Seller or any member of its Group shall first have
           been assigned to, or equivalent finance made available by, the Third
           Party Purchaser; and

      (c)  In no event may BTH transfer its Shares to one of the direct
           competitors of LOOK listed in Schedule 12.

Intra-Group Transfers

20.10  Each Shareholder shall be entitled at any time to transfer all but not
       part only of its Shares to a company in which it holds not less than 50
       per cent of the voting share capital of the company or in which it has
       joint control provided that completion of any transfer of shares as
       contemplated by this Clause 20.10 shall be subject to the condition that
       the transferee shall first have entered into an agreement with the
       Continuing Party whereby it agrees to be bound (in terms reasonably
       satisfactory to the Continuing Party) by the provisions of this Agreement
       binding upon the Seller and provided further that the transferor shall
       have undertaken to procure that such Shares shall at no time be held by a
       company which ceases to satisfy the requirements of this Clause 20.10 and
       provided that BTH or LOOK BARBADOS, as applicable, shall be fully
       responsible for the obligations of the transferee under this Agreement
       and if the transferee ceases to satisfy the requirements of this Clause,
       the Shares shall be transferred to a member of the BT Group or the LOOK
       Group, as appropriate, which does satisfy such requirements. Prior to the
       proposed transfer, the transferor shall satisfy BT LOOKSMART that the
       transferee does satisfy the requirements of this Clause. In no event may
       the BT Shareholder transfer its Shares to an entity which is controlled
       by one of the direct competitors of LOOK listed in Schedule 12.

Change of Control of LOOK
<PAGE>

20.11  In the event that there is a change of control of LOOK, the BT
       Shareholder and the LOOK Shareholder shall enter into good faith
       negotiations for a period of 45 days from the earlier of the date that
       the BT Shareholder is aware of a potential change of control of LOOK and
       the date of the change of control to consider how to address any concerns
       that the BT Shareholder may have as a result of such change of control.
       Such discussions may include possible restructuring of BT LOOKSMART. If
       the BT Shareholder and the LOOK Shareholder fail to agree within the 45
       day period how to deal with the BTShareholder's concerns, the BT
       Shareholder shall have the right to require the LOOK Shareholder to
       acquire its Shares at the fair market value as agreed between the parties
       or in the absence of agreement as determined by an independent expert
       appointed by agreement of the parties or in the absence of agreement by
       the President of the Institute of Chartered Accountants in England and
       Wales. The fair market value shall be determined as between a willing
       vendor and a willing purchaser on an arm's length basis. The
       determination of the expert shall be final and binding save in the case
       of manifest error. BTH recognises that the LOOK Shareholder may not be
       able to provide the fair market value entirely in cash. If cash is not
       paid, the LOOK Shareholder will ensure that BTH has a liquid form of
       exit, such liquid form of exit to be to the BTShareholder's satisfaction.

       A change of control for the purpose of this Clause 20.11 means any change
       in control of 50 per cent or more of the voting stock of LOOK at the time
       in question.

21.    Insolvency
       ----------

Insolvency Events

21.1   It shall be an Insolvency Event in relation to a Shareholder if:

       (a)  an order is made by a court of competent jurisdiction, or a
            resolution is passed, for the dissolution or administration of that
            Shareholder (otherwise than in the course of a reorganisation or
            restructuring);or

       (b)  any step is taken (and not withdrawn within ninety (90) days) to
            appoint a liquidator, manager, receiver, administrator, trustee or
            other similar officer in respect of any assets which include either
            (i) the Shares held by that Shareholder or (ii) shares in that
            Shareholder or any Holding Company thereof; or

       (c)  that Shareholder convenes a meeting of its creditors or makes or
            proposes any arrangement or composition with, or any assignment for
            the benefit of, its creditors;

       and reference to a "Shareholder" in this Paragraph (other than reference
       to the other Shareholder) shall include any Holding Company of that
       Shareholder.

Action following an Insolvency Event

21.2   If an Insolvency Event shall occur in relation to a Shareholder (the
       "Affected Shareholder"), the Affected Shareholder shall be deemed to be a
       Seller which has given a Transfer Notice under Clause 20.4 and the other
       Shareholder shall have the right, as therein provided, to purchase the
       Affected Shareholder's investment at such
<PAGE>

     price as shall be agreed between the Affected Shareholder and the other
     Shareholder or, in the absence of agreement, the Fair Price as determined
     by an independent expert whose decision shall be binding on the parties.

22.  SHAREHOLDER ASSURANCES


     Each Shareholder undertakes with the other that (so far as it is legally
     able) it will exercise all voting rights and powers, direct and indirect,
     available to it in relation to BT LOOKSMART (and its subsidiaries) so as to
     ensure the complete and punctual fulfilment, observance and performance of
     the provisions of this Agreement (and the other agreements referred to in
     this Agreement) and generally that full effect is given to the principles
     set out in this Agreement.

23.  NON-ASSIGNMENT
     Except as expressly permitted herein, no party may assign any of its rights
     or obligations under this Agreement in whole or in part.

24.  WAIVER OF RIGHTS

     No waiver by a party of a failure by any other party to perform any
     provision of this Agreement shall operate or be construed as a waiver in
     respect of any other or further failure whether of a similar or different
     character.

25.  AMENDMENTS

     This Agreement may be amended only in writing by an instrument signed by
     duly authorised representatives of each party.

26.  INVALIDITY

     If any of the provisions of this Agreement is or becomes invalid, illegal
     or unenforceable, the validity, legality or enforceability of the remaining
     provisions shall not in any way be affected or impaired.  The parties shall
     nevertheless negotiate in good faith in order to agree the terms of a
     mutually satisfactory provision, achieving as nearly as possible the same
     commercial effect, to be substituted for the provision found to be void or
     unenforceable.

27.  NO PARTNERSHIP OR AGENCY

27.1 Nothing in this Agreement (or any of the arrangements contemplated
     hereby) shall be deemed to constitute a partnership between the parties
     nor, save as may be expressly set out herein, constitute either party the
     agent of the other party for any purpose.

27.2 In addition, unless otherwise agreed in writing between the Parties, no
     party shall enter into contracts with any third party as agent for BT
     LOOKSMART or for the other parties nor shall any party describe itself as
     agent or in any way hold itself out as being an agent.
<PAGE>

28.  ANNOUNCEMENTS

28.1 No public announcement or press release on the signature or subject
     matter of this Agreement shall (subject to Clause 28.2 and 28.3) be made or
     issued by or on behalf of any party or any member of its Group without the
     prior written approval of the other parties (such approval not to be
     unreasonably withheld or delayed).

28.2 No party shall discuss any provision of this Agreement or any other
     agreement referred to herein with any competition or regulatory body
     without obtaining the prior written approval of the other parties.

28.3 If a party has an obligation to make or issue any announcement required
     by law or by any stock exchange or by any governmental or regulatory
     authority, the relevant party shall give the other parties every reasonable
     opportunity to comment on any such announcement or release before it is
     made or issued and the approval of that other parties shall be required to
     any specific references therein to that party, its affairs or to BT
     LOOKSMART including its management (provided always that this shall not
     have the effect of preventing the party making the announcement or release
     from complying with its legal and stock exchange obligations, from making
     its quarterly or annual earnings releases, or from disclosing operating
     statistics and financial information including but not limited to forward-
     looking information regarding the business of the BT LOOKSMART Group to
     investors, potential investors and securities analysts).

29.  COSTS

     Subject to the terms of a Cost Sharing Agreement dated 19 January 2000
     between LOOK and BT, each of the parties shall pay its own costs, charges
     and expenses incurred in connection with the preparation and implementation
     of this Agreement and the transactions contemplated by it. The costs of and
     incidental to the incorporation and establishment of BT LOOKSMART shall be
     borne and paid by BT LOOKSMART.


30.  LOOK Guarantee

30.1 In consideration of the payment to LOOK of the sum of US$1.00, receipt of
     which is hereby acknowledged, LOOK as primary obligor, irrevocably and
     unconditionally guarantees to the BT Shareholder due performance by LOOK
     BARBADOS or the LOOK Shareholder, as applicable, of all LOOK BARBADOS's (or
     the LOOK Shareholder's as applicable) obligations contained in this
     Agreement, the LOOK Licensing Agreement and the loan agreement to be
     entered into pursuant to the provisions of Clause 8.5.

30.2 The guarantee contained in this Clause 30 is a continuing guarantee and
     shall remain in full force and effect so long as any of the obligations of
     LOOK BARBADOS or the LOOK Shareholder remain to be fully performed or
     satisfied.

30.3 LOOK's liability under the guarantee contained in this Clause 30 shall not
     be discharged or impaired by:

     (a)  anything which would not discharge it or affect its liability if it
          were the sole principal obligor;
<PAGE>

     (b)  the release of or granting of any time or any other indulgence to LOOK
          BARBADOS, the LOOK Shareholder or any third party; and

     (c)  any other act, event or omission which would or might, but for this
          Clause 30 operate to impair or discharge LOOK's liability hereunder,
          other than a release in writing, under the hand of an authorised
          representative of  BTH or the BT Shareholder as applicable or a
          deferral of all or part of such liability.

30.4 The BT Shareholder shall be entitled to take action against LOOK under
     this Clause 30 without first being obliged to take any action of any sort
     against LOOK BARBADOS or the LOOK Shareholder in connection with any
     failure to perform any obligation hereunder.

30.5 All payments to be made by LOOK shall be made in full without set-off or
     counterclaim and free and clear of any deduction whatsoever except to the
     extent permitted by law or where such a set-off, counterclaim or deduction
     would also have been available to LOOK BARBADOS (or the LOOK Shareholder,
     as applicable).

31.  BT Guarantee

31.1 In consideration of the payment to BT of the sum of US$1.00, receipt of
     which is hereby acknowledged, BT as primary obligor, irrevocably and
     unconditionally guarantees to the LOOK Shareholder due performance by BTH
     or the BT Shareholder, as applicable, of all BTH's (or the BT Shareholder's
     as applicable) obligations contained in this Agreement.

31.2 The guarantee contained in this Clause 31 is a continuing guarantee and
     shall remain in full force and effect so long as any of the obligations of
     BTH or the BT Shareholder remain to be fully performed or satisfied.

31.3 BT's liability under the guarantee contained in this Clause 31 shall not
     be discharged or impaired by:

     (a)  anything which would not discharge it or affect its liability if it
          were the sole principal obligor;

     (b)  the release of or granting of any time or any other indulgence to BTH,
          the BT Shareholder or any third party; and

     (c)  any other act, event or omission which would or might, but for this
          Clause 31 operate to impair or discharge BT's liability hereunder,
          other than a release in writing, under the hand of an authorised
          representative of  LOOK BARBADOS or the LOOK Shareholder as applicable
          or a deferral of all or part of such liability.

31.4 The LOOK Shareholder shall be entitled to take action against BT under
     this Clause 31 without first being obliged to take any action of any sort
     against BTH or the BT Shareholder in connection with any failure to perform
     any obligation hereunder.

31.5 All payments to be made by BT shall be made in full without set-off or
     counterclaim and free and clear of any deduction whatsoever except to the
     extent permitted by law
<PAGE>

     or where such a set-off, counterclaim or deduction would also have been
     available to BTH (or the BT Shareholder, as applicable).


32.  ENTIRE AGREEMENT

     This Agreement constitutes the entire agreement between the parties with
     respect to the subject matter hereof and supersedes all prior and
     contemporaneous agreements with respect thereto, including without
     limitation that certain agreement between LOOK and BT dated 08 November
     1999. Notwithstanding the foregoing, this Agreement does not supersede any
     of the Ancillary Agreements or the Cost Sharing Agreement between BT and
     LOOK dated 19 January 2000. It is agreed that:

     (a)  no party has entered into this Agreement in reliance upon any
          representation, warranty or undertaking of the other parties which is
          not expressly set out or referred to in this Agreement;

     (b)  a party may claim in contract for breach of warranty under this
          Agreement but otherwise shall have no claim or remedy in respect of
          misrepresentation (whether negligent or otherwise) or untrue statement
          made by the other parties;

     (c)  this Clause shall not exclude any liability for fraudulent
          misrepresentation.

33.  CONFLICT WITH CONSTITUTIONAL DOCUMENTS


     In the event of any conflict between the provisions of this Agreement and
     the Memorandum of Association or the Bye-laws or other constitutional
     document of BT LOOKSMART, the provisions of this Agreement shall prevail as
     between the parties. The parties shall exercise all voting and other rights
     and powers available to them so as to give effect to the provisions of this
     Agreement and shall further (if necessary) procure any required amendment
     to the Memorandum of Association or the Bye-laws or other constitutional
     document of BT LOOKSMART.

34.  TERMINATION OF AGREEMENT

     This Agreement shall continue in full force and effect unless and until
     terminated with the written agreement of the parties.

35.  NOTICES

Address of notices

35.1 Any notice or other communication to be given hereunder shall either be
     delivered by hand or sent by first class post or facsimile transmission
     (provided that, in the case of facsimile transmission, the notice is
     confirmed by being delivered by hand or sent by first class post within 48
     hours thereafter) as follows:

     (a)  LOOK
          Address: 625 Second Street, San Francisco, CA 94107, USA
          Fax No: (415) 348-7034
<PAGE>

          Addressed for the personal attention of : Chief Executive Officer
          (with a copy to the General Counsel at the same address)

     (b)  LOOK BARBADOS
          Address:  Hastings Business Services Limited, Hastings, Christ Church,
          Barbados
          Fax No:  (246) 437-7477
          Addressed for the personal attention of:  Chief Executive Officer

     (c)  BTH
          Address: Celtic House, Victoria Street, Douglas, Isle of Man
          Fax No: +44 1624 615654
          Addressed for the personal attention of: Chief Executive Officer
          With a copy to BT as set out below

     (d)  BT LOOKSMART
          Address: Clarendon House, 2 Church Street, Hamilton, HM CX, Bermuda
          Fax No: (441) 292-4720
          Addressed for the personal attention of: Chief Executive Officer (with
          a copy to the General Counsel at the same address)

          (e)  BT
          Address: 81 Newgate Street, London, EC1A 7AJ
          Fax No: + 44 171 356 6638
          Addressed for the personal attention of: The Group General Counsel

Changes

35.2 LOOK, LOOK BARBADOS, BTH, BT LOOKSMART or BT may change the address, fax
     number or the name of the person for whose attention notices are to be
     addressed by serving a notice on the other in accordance with this Clause.

Deemed Service

35.3 All notices given in accordance with Clause 34.1 shall be deemed to have
     been served as follows:

     (a)  if delivered by hand, at the time of delivery;

     (b)  if posted, at the expiration of 5 Business Days after the envelope
          containing the same was delivered into the custody of the postal
          authorities;

     (c)  if communicated by facsimile, at the time of transmission;

     PROVIDED that where, in the case of delivery by hand or transmission
     by telex or facsimile, such delivery or transmission occurs after 6 p.m. on
     a Business Day or on a day which is not a Business Day, service shall be
     deemed to occur at 9 a.m. on the next following Business Day. References to
     time in this Clause are to local time in the country of the addressee.

Proof of service

In providing service it shall be sufficient to prove that the envelope
containing notice was properly addressed and delivered either to the address
shown thereon or into the custody of the postal authorities as a pre-paid first
class letter, or that the telex transmission was made and the recipient's
answerback received or that the facsimile transmission was made after
<PAGE>

obtaining in person or by telephone appropriate evidence of the capacity of the
addressee to receive the same, as the case may be.

36.  COUNTERPARTS

This Agreement may be executed in one or more counterparts each signed by one of
the parties and such counterparts shall together constitute one agreement.

37.  GOVERNING LAW

This Agreement shall be governed by and construed in accordance with the laws of
England. The Courts of England shall have non-exclusive jurisdiction to settle
any disputes which may arise in connection with this Agreement.


AS WITNESS this Agreement has been signed by the duly authorised representatives
of the parties the day and year first before written.

<PAGE>

                                                                   EXHIBIT 10.18

CONFIDENTIAL TREATMENT                       **Confidential treatment has been
HAS BEEN REQUESTED FOR                       requested with respect to the
CERTAIN PORTIONS OF THIS                     information contained within the
DOCUMENT                                     "[**]" markings. Such marked
                                             portions have been omitted from
                                             this filing and have been filed
                                             separately with the Securities and
                                             Exchange Commission.



       JOINT VENTURE KNOW HOW TECHNOLOGY AND DATABASE LICENSE AGREEMENT

     This Joint Venture Know How Technology and Database License Agreement (the
"Agreement") is made and entered into as of February 15, 2000 (the "Effective
Date"), by and among LookSmart, Ltd. ("LOOKSMART USA"), a Delaware corporation
with principal offices at 625 Second Street, San Francisco, California 94107,
USA, and LookSmart (Barbados), Inc. ("LOOKSMART BARBADOS"), a Barbados
corporation with principal offices at Hastings Business Services Limited,
Hastings, Christ Church, Barbados on the one hand, and BT LOOKSMART LTD
("HOLDCO") a Bermuda exempted company whose registered office is at Clarendon
House, 2 Church Street, Hamilton HM CX, Bermuda on the other hand. As used
herein, all references to "LOOKSMART" refer collectively to LOOKSMART USA and
LOOKSMART BARBADOS, except that the license grants to the LOOKSMART Database and
LOOKSMART Technology are made solely by LOOKSMART USA and the license grants to
the Territory Databases are made solely by LOOKSMART BARBADOS, and except as
otherwise expressly set forth in this Agreement. Capitalized terms not otherwise
defined shall have their meaning as set forth in Section 1 below.

                                   RECITALS

     WHEREAS, LOOKSMART USA, LOOKSMART BARBADOS, HOLDCO, Transceptgate Limited
and British Telecommunications plc ("BT") have entered into that certain Joint
Venture Agreement dated as of February 15, 2000 (the "JV Agreement") for the
purpose of forming HOLDCO in the Licensed Territory;

     WHEREAS, the parties desire that HOLDCO launch and operate the HOLDCO
Portals in the Licensed Territory, which will provide category-based Internet
directory services and associated portal functionality similar to existing
LOOKSMART Web sites and other Web portals but will be targeted at customers
residing in or carrying on business in the Licensed Territory;

     WHEREAS, the parties desire that LOOKSMART grant to HOLDCO an exclusive
license to use LOOKSMART Technology and the Licensed Databases in connection
with the operation of such Portal opportunities in the Licensed Territory;

     WHEREAS, the parties desire to have HOLDCO use the Licensed Databases,
along with the LOOKSMART Technology, to provide the Portal services for
customers in the Licensed Territory; and

     NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, the parties hereby agree as follows:

                                       1
<PAGE>

     1.   DEFINITIONS
          -----------

          a.   "Annual Period" means each successive twelve-month period
commencing on the Effective Date and each successive anniversary thereof.

          b.   "Branch" shall mean a wholly-owned corporate entity or presence
in a country or jurisdiction in the Licensed Territory.

          c.   "BTAP" shall mean a company within the Licensed Territory in
which BT holds directly or indirectly an interest in the equity share capital or
with whom BT has a strategic relationship.

          d.   "Customer" means a customer of the Wholesale Services or an end-
user customer that accesses or uses the Licensed Databases via the HOLDCO
Portals or via the Wholesale Services.

          e.   "LOOKSMART Documentation" shall mean any technical documentation
associated with or related to the Licensed Databases and delivered to HOLDCO by
LOOKSMART hereunder.

          f.   "Extension Period" shall mean the period commencing upon 01
April, 2001 and expiring on 31 March, 2002.

          g.   "Initial Period" shall mean the period commencing on the
Effective Date and expiring on 31 March, 2001.

          h.   "Intellectual Property Rights" shall mean registered designs,
copyright of any kind, database rights, rights (contractual or otherwise) to
prevent disclosure or use of confidential information, and any other similar
form of intellectual property or proprietary rights, statutory or otherwise,
whether registrable or not and shall include applications for any of them.

          i.   "JV Services Agreement" means that certain database development
services agreement to be entered into between LOOKSMART and HOLDCO as described
in Schedule 6 of the JV Agreement.

          j.   "Licensed Databases" shall mean the Territory Databases and the
LOOKSMART Databases collectively.

          k.   "Licensed Territory" shall mean the countries identified as the
Territory  in the JV Agreement as of the Effective Date, and any other countries
added to the Territory of the JV Agreement pursuant to the terms of the JV
Agreement during the period when the LOOKSMART shareholding remains undiluted or
with LOOKSMART's prior written consent.

          l.   "LoCo" means an operating Subsidiary or Branch of HOLDCO in any
given country in the Licensed Territory.

                                       2
<PAGE>

          m.   "LOOKSMART Database" shall mean the web directory databases owned
by LOOKSMART as at the Effective Date that are designed for use by Customers
located in countries and/or languages outside the Licensed Territory, as further
described in Exhibit A.

          n.   "LOOKSMART Technology" shall mean know how, information,
documentation, software, inventions and technology of any kind owned from time
to time by LOOKSMART or which LOOKSMART is from time to time free to disclose or
license that relates to HOLDCO's business as contemplated by the JV Agreement,
including but not limited to that certain existing technology identified in
Exhibit D, and any updates or new versions of such technology owned by LOOKSMART
during the Term of this Agreement.

          o.   LOOKSMART Newly Acquired Rights shall mean any intellectual
property rights in LOOKSMART Technology which are acquired or licensed on an
arms length basis by LOOKSMART under an assignment or license agreement executed
subsequent to the Effective Date hereof.

          p.   "Performance Objectives" shall mean the Performance Objectives to
be attained by BT and/or the BTAPS as set forth in the JV Agreement.

          q.   "Portal(s)" or "HOLDCO Portal(s)" means one or more Internet Web
sites based on current and future Territory Databases and which aggregate
general content and services designed primarily for use by customers in the
Licensed Territory.

          r.   "Remainder Period" shall mean the period commencing upon the date
of transfer of the Territory Databases to HOLDCO pursuant to 2(c) of this
Agreement continuing in perpetuity subject to termination in accordance with the
terms of this Agreement.

          s.   "Royalty Period" shall mean the period commencing upon the date
of expiration of the Extension Period and continuing in perpetuity subject to
termination in accordance with the terms of this Agreement.

          t.   "Subsidiaries" means all current and future business entities of
which HOLDCO owns, directly or indirectly, more than  fifty percent (50%) of the
equity securities or other equity interest granting voting rights exercisable in
electing the management of the entities, for so long as such ownership exists.

          u.   "Territory Databases" means those certain existing web directory
databases identified in Exhibit B and any  web directory databases  that
LOOKSMART  develops  pursuant to the terms of the JV  Agreement, which databases
are designed for use primarily by Customers located in one or more of the
countries comprising the Licensed Territory.

          v.   "Third Party Technology" shall mean know-how, information,
documentation, software, inventions and technology of any kind owned by any
third party and licensed  from time to time  by LOOKSMART that relates to the
business of HOLDCO as contemplated by the JV Agreement including but not limited
to the technology listed in Exhibit E.

                                       3
<PAGE>

          w.   "URL Content" means the words or symbols which together make up
an individual Universal Resource Locator (URL) and the content of any web pages
which a customer may see after clicking on any URL listed in the Licensed
Databases.

          x.   "Wholesale Services" means any services offered to third parties
by HOLDCO or a LoCo including, without limitation, homepage programming, search,
licensing and syndication.

     2.   LICENSE OF DATABASES.
          --------------------

          a.   Exclusive License to Databases.  LOOKSMART hereby grants to
               ------------------------------
HOLDCO an exclusive, non-transferable, perpetual (subject to termination as set
forth in this Agreement) license (i) to reproduce, use, modify and display and
exploit (subject to the limitations and restrictions set forth in this Agreement
and the JV Agreement) the LOOKSMART Database and the Territory Databases in
connection with the development and operation of HOLDCO Portal services and
Wholesale Services to Customers in the Licensed Territory; and (ii) to
sublicense the license rights described in this Section 2(a) as set forth in
Section 2(d) below. In the event that during the Initial Period or the Extension
Period, as applicable, BT and/or the BTAPs have met the Performance Objectives,
LOOKSMART's ownership rights to the Territory Databases shall immediately be
transferred to HOLDCO pursuant to the terms of the JV Agreement. The license to
the LOOKSMART Database shall be subject to payment of the license fees and
royalties set forth in Section 4(b) below, and the license to the Territory
Databases shall be royalty-free subject to the provisions of Section 2(b) below.

          b.   Nonexclusive License to Databases.  Notwithstanding Section 2(a)
               ---------------------------------
above, in the event that upon expiration of the Extension Period BT and/or the
BTAPs have not met the Performance Objectives, the foregoing licenses to the
LOOKSMART Database and the Territory Databases shall be automatically converted
to a nonexclusive basis as of such expiration date and shall continue for the
duration of the Royalty Period, and the license to the Territory Databases shall
automatically convert to a royalty-bearing license as of such expiration date,
subject to agreement of the parties on a royalty as set forth in the following
sentence. In the event that the foregoing licenses are converted to a
nonexclusive basis, HOLDCO shall pay to LOOKSMART BARBADOS an operating royalty
for the Territory Databases pursuant to Section 4(a) (the "Operating Royalty")
which shall be fair and reasonable taking into account that HOLDCO will have
funded the creation and development of the Territory Databases pursuant to the
JV Services Agreement, which royalty rate shall in any event be no greater than
LOOKSMART's Best Market Terms (as defined in the JV Agreement). In the event
that at any time after the expiration of the Extension Period LOOKSMART offers
or agrees a royalty rate to any third party for a comparable license arrangement
which is lower than the Operating Royalty, then LOOKSMART shall inform HOLDCO
promptly and at the option of HOLDCO the Operating Royalty shall be reduced to
such lower royalty rate.

          c.   License to LOOKSMART Technology.  Subject to the terms and
               -------------------------------
conditions of this Agreement, LOOKSMART hereby grants to HOLDCO during the term
of this Agreement a non-transferable license to use the LOOKSMART Technology in
the Licensed Territory in

                                       4
<PAGE>

connection with the development and operation of HOLDCO Portal services and
Wholesale Services to Customers in the Licensed Territory using the Licensed
Databases provided that in respect of LOOKSMART Newly Acquired Rights the
parties shall agree fair and reasonable license fees having regard to the sums
paid or payable by LOOKSMART for the licensing or acquisition of the rights and
the arms-length fair market value of such license to HOLDCO. In the event that
royalty or other third party costs would be incurred by LOOKSMART in connection
with the license granted hereunder to any LOOKSMART Technology, such license
shall only be effective in the event that HOLDCO elects in writing to acquire
such license, and HOLDCO shall undertake to pay such costs. HOLDCO shall have
the right to sublicense the LOOKSMART Technology to LoCos where HOLDCO has the
right to sublicense the Licensed Databases pursuant to Section 2(d) below;
provided that such sublicenses include confidentiality provisions at least as
protective as the provisions of Section 7 hereof. The foregoing license shall be
on an exclusive basis so long as the license to the LOOKSMART Database set forth
above is exclusive and shall automatically convert to a nonexclusive basis at
such time as the license to the LOOKSMART Database converts to a nonexclusive
basis; provided, however, that with respect to the LOOKSMART Technology the
foregoing exclusivity shall in no event subsist for longer than a maximum period
of ten (10) years from the date on which the LOOKSMART Technology is first
utilised to put a service on the market in the European Union, and for all
improvements, updates or subsequent licenses of technology constituting
LOOKSMART Technology or LOOKSMART Newly Acquired Rights under this Section 2(c),
such exclusivity shall in no event subsist for longer than a maximum period of
ten (10) years from the date on which these updates, improvements, or further
licenses are first utilised to put a service on the market in the European
Union. LOOKSMART shall disclose the LOOKSMART Technology and the Third Party
Technology to HOLDCO as and when it is licensed, created or acquired and, in any
event, LOOKSMART shall provide to HOLDCO at the end of each quarter a list of
such LOOKSMART Technology and Third Party Technology which it has licensed,
created or acquired during that quarter. LOOKSMART undertakes on request from
HOLDCO at HOLDCO's expense to use reasonable endeavours to assist HOLDCO to
obtain licenses for any Third Party Technology. Subject to Section 2(e) below,
so long as the foregoing license is exclusive, LOOKSMART shall not for the
period set out in this Section 2(c) exploit the LOOKSMART Technology in the
Licensed Territory nor license any third party or customer to do so; provided,
however, that nothing in this Agreement shall preclude LOOKSMART from using the
LOOKSMART Technology to make the LOOKSMART Database accessible on a worldwide
basis via the Internet. LOOKSMART warrants that the LOOKSMART Technology listed
in Exhibit D is a complete list of LOOKSMART Technology as of the Effective Date
hereof.

          d.   Sublicenses to LoCos.  LOOKSMART agrees that HOLDCO shall have
               --------------------
the right to grant sublicenses to LoCos  for the purpose of enabling each such
LoCo to exercise the license rights granted to HOLDCO in 2 (a), (b) and (c) in
the country or countries of the Licensed Territory in which such LoCo does
business and also as follows: (1) to use and supply copies and grant sublicenses
in the Territory Databases to HOLDCO Wholesale Services customers (including
LoCos and their Wholesale Services customers) in the Licensed Territory so that
such Wholesale Services customers may offer service to their own end-user
customers in the Licensed Territory; and (2) to license HOLDCO Wholesale
Services customers (including LoCos and their Wholesale Services customers) in
the Licensed Territory to enter into a linking agreement or other similar

                                       5
<PAGE>

arrangement to permit a third-party Web site to link to the Licensed Databases
residing at the HOLDCO or LoCo Web site(s), so long as such linking agreement or
other similar arrangement does not grant any sublicense to the Licensed
Databases, and so long as such arrangement is designed for and marketed to end
user customers in the Licensed Territory. The foregoing right to grant
sublicenses is subject to the compliance by HOLDCO with the following
provisions: (i) such LoCo and Wholesale Customer sublicensees are identified in
Exhibit C or HOLDCO provides LOOKSMART with written notice and an updated list
of additional such sublicensees at least once per quarter, (ii) such
sublicensees are contractually obligated to comply with the terms of this
Agreement pursuant to reasonably appropriate written sublicense agreement at
least as protective of the licensed rights as this Agreement, (iii) LOOKSMART is
named as a third-party beneficiary of such written sublicense agreement, and
(iv) with respect to any LoCo sublicensee, such sublicense automatically
terminates in the event that such LoCo at any time ceases to be a Subsidiary or
Branch of HOLDCO except to the extent such cessation is due to compliance with
director qualifying shares requirements or other local law restrictions on
maximum ownership. Notwithstanding the granting of any sublicenses to LoCos or
Wholesale Services customers pursuant to this Section 2(d), LOOKSMART's
affirmative obligations hereunder will be limited to the HOLDCO entity
designated as signatory to this Agreement. HOLDCO hereby guarantees the
performance of its sublicensee LoCos under this Agreement and shall indemnify
and hold LOOKSMART harmless from and against all losses, costs, liabilities and
expenses arising out of or relating to any breach or default by such sublicensee
LoCos of the terms of this Agreement, and HOLDCO will enforce or cause its LoCos
to enforce, the provisions of such sublicense agreements against any Wholesale
Services customer sublicensee.

          e.   Scope of Exclusive Rights.  So long as HOLDCO's license rights
               -------------------------
set forth in Section 2(a) remain on an exclusive basis, (i.e., unless and until
such license rights are converted to a nonexclusive basis pursuant to Section
2(b) above or Section 2(g) below), LOOKSMART undertakes that it shall not use
any Licensed Databases or any LOOKSMART Technology or extract any part of any
Licensed Databases for use in the Licensed Territory for any purpose whatsoever
or outside the Licensed Territory for the purpose of offering any service
directed at any Customer located in the Licensed Territory and, in each case,
shall not license any third party to do so; provided however, that nothing in
this Agreement shall preclude LOOKSMART from making the LOOKSMART Database
accessible on a worldwide basis only via the Internet.

          f.   Limitation on Holdco's Rights. The parties understand and agree
               -----------------------------
that any grant of a license to the Licensed Databases hereunder and any transfer
of ownership in any of the Territory Databases pursuant to the terms of the JV
Agreement is subject to those pre-existing obligations of LOOKSMART under its
Agreement dated 04 December, 1998 with Microsoft Corporation, which are
disclosed in Schedule 9 of the JV Agreement.

          g.   Territorial Changes. In the event that the Territory of the JV
               -------------------
Agreement is changed without LOOKSMART's prior written consent at any time when
the LOOKSMART shareholding in the joint venture has become diluted, the licenses
granted by LOOKSMART to HOLDCO under this Section 2 shall automatically convert
to a nonexclusive basis.

                                       6
<PAGE>

          h.   Effect of Transfer of JV Shares.  Upon a transfer of LOOKSMART's
               -------------------------------
shares in HOLDCO pursuant to Section 20 of the JV Agreement, or at such time as
LOOKSMART disposes of all of its ownership interest in HOLDCO after an initial
public offering of HOLDCO shares, the licenses granted by LOOKSMART to HOLDCO to
use the LOOKSMART Database will extend for 180 days following the transfer and
shall terminate upon the expiration of such 180 day period.  Prior to the end
of such period, LOOKSMART shall offer to grant to HOLDCO a non-exclusive license
at a royalty rate that is on Best Market Terms (as defined in the JV Agreement)
to use the LOOKSMART Database for a period of twelve (12) months following such
180 day period.  In addition, if BT and/or the BTAPs have failed to meet the
Performance Objectives prior to such transfer of shares, the non-exclusive
license granted by LOOKSMART to HOLDCO to use the Territory Databases referred
to Section 2(b) above shall apply and shall continue in perpetuity subject to
termination in accordance with the terms of this Agreement, and HOLDCO shall pay
the Operating Royalty described in Section 2(b) above.

          i.   Limitation on License Rights. HOLDCO agrees that it will not
               ----------------------------
itself, or through any LoCo sublicensee or other third party: (i) encumber the
LOOKSMART Database or, for the term of the license, the Territory Databases (ii)
attempt to decompile, disassemble or reverse engineer the LOOKSMART Technology,
the LOOKSMART Database or, for the term of the license, the Territory Databases
in whole or in part, except and only to the extent that a restriction on any
such actions is expressly prohibited by local law; or except as expressly
permitted under the licenses granted hereunder take any other action that HOLDCO
would reasonably know to be in derogation of LOOKSMART's or its licensors'
intellectual property rights licensed hereunder; (iii) provide, disclose,
divulge or make available to, or permit use of the LOOKSMART Technology by any
party other than HOLDCO or LoCo sublicensees; (iv) modify or alter the editorial
review text of the LOOKSMART Database or, for the term of the license, the
Territory Databases, without LOOKSMART's prior written consent; or (v) remove,
obscure, or alter LOOKSMART's copyright notice, trademarks, or other proprietary
rights notices affixed to or contained within the LOOKSMART Technology, the
LOOKSMART Database or Documentation or, for the term of the license, the
Territory Databases or Documentation. With respect to subpart (ii) above,
information necessary to achieve interoperability of the Licensed Databases with
other programs within the meaning of the EC Directive on the Legal Protection of
Computer Programs will be made available from LOOKSMART upon written request, to
the extent applicable and required by local law.

          j.   Reservation of Rights; Ownership. All rights not expressly
               --------------------------------
granted hereunder are reserved by LOOKSMART. This Agreement does not authorize
or imply any rights of use other than as expressly set forth herein. LOOKSMART
retains ownership of the LOOKSMART Database and the LOOKSMART Technology and all
right, title and interest therein, including without limitation all Intellectual
Property Rights therein, and HOLDCO acknowledges and agrees that it is acquiring
only a limited right to use the LOOKSMART Database and the LOOKSMART Technology
as licensed hereunder. Unless and until transferred to HOLDCO pursuant to the
terms of the JV Agreement, LOOKSMART retains ownership of the Territory
Databases, and all right, title and interest therein, including without
limitation all Intellectual Property Rights therein, and unless and until the
Territory Databases are transferred to HOLDCO, HOLDCO acknowledges and agrees
that it is acquiring only a limited right to use the Territory Databases as
licensed hereunder.

                                       7
<PAGE>

          k.   Delivery of Databases. LOOKSMART shall deliver to HOLDCO within
               ---------------------
ten (10) business days after the Effective Date, one (1) copy of the LOOKSMART
Database and one (1) copy of the existing Territory Databases identified in B,
along with one (1) copy of any Documentation.  LOOKSMART will deliver updates
and new versions of LOOKSMART Databases and LOOKSMART Technology as they are
put into use or issued.

          l.   HOLDCO License Grant.  Subject  to the exclusivity provisions of
               --------------------
Section 2 hereof, HOLDCO hereby grants to LOOKSMART or a designated wholly-owned
member of the LOOK Group (as defined in the JV Agreement) a non-exclusive,
perpetual, royalty-free right and license to integrate all Territory Databases
now or hereafter licensed or owned by HOLDCO and created or designed pursuant to
LOOKSMART editorial standards, including without limitation the English language
Territory Databases for the United Kingdom, Singapore, Malaysia, and Hong Kong,
into the LOOKSMART Database, and to reproduce, distribute, use, modify, display
and exploit such Territory Databases as part of the LOOKSMART Database,
including without limitation the right to grant sublicenses as part of
sublicensing the LOOKSMART Database; provided, however, that nothing in this
Agreement shall preclude LOOKSMART from making the LOOKSMART Database (including
such Territory Databases as part thereof) accessible on a worldwide basis only
via the Internet. LOOKSMART may not offer, supply or display the Territory
Databases licensed in this Section 2(l) as a stand-alone database; the Territory
Databases are provided on an as is basis with no warranty and HOLDCO shall have
no liability arising from their use by LOOKSMART. LOOKSMART agrees that while
licensed under this section it will not itself or through any third party (i)
encumber the Territory Databases or (ii) attempt to decompile, disassemble or
reverse engineer the Territory Databases in whole or in party, except and only
to the extent that a restriction on any such actions is expressly prohibited by
local law, or except as expressly permitted under the license granted hereunder
take any other action that LOOKSMART would reasonably know to be in derogation
of HOLDCO's or its licensors' intellectual property rights licensed hereunder.
In addition to the license granted to LOOKSMART by HOLDCO above, HOLDCO also
grants LOOKSMART a nonexclusive, perpetual, irrevocable, non-terminable,
royalty-free right and license to supply copies to Microsoft Corporation of any
and all Territory Databases, and all other HOLDCO databases whether created by
or for or owned by or licensed to HOLDCO or its wholly-owned Subsidiaries during
the term of the JV Agreement, for use consistent with Schedule 9 of the JV
Agreement under LOOKSMART's agreement with Microsoft dated 04 December, 1998 and
only to the extent necessary to comply with the said agreement.

     3.   ADDITIONAL OBLIGATIONS OF HOLDCO AND LOOKSMART.
          ----------------------------------------------

          a.   Standard of Business Practices  HOLDCO shall comply with all laws
               ------------------------------
and regulations relating or pertaining to the exercise of the rights licensed
and/or transferred under this Agreement in the Licensed Territory, and shall
comply with the regulations and directives of any regulatory agencies which
shall have jurisdiction over the exercise of the rights licensed and/or
transferred under this Agreement.

          b.   Representations of HOLDCO and LOOKSMART.  Each party represents
               ---------------------------------------
and warrants on a continuous basis that it is duly organized, validly existing
and in good standing under

                                       8
<PAGE>

the laws of the country of organization first set forth above; it has full
right, power and authority to enter into this Agreement and to perform all of
its obligations hereunder; its execution, delivery and performance of this
Agreement have been duly and properly authorized by all necessary actions and
this Agreement constitutes its valid and binding obligation, enforceable against
it in accordance with its terms; and its execution, delivery and performance of
this Agreement will not, with or without the giving of notice or passage of
time, or both, conflict with, or result in a default or loss of rights under,
any provision of or any other material agreement to which it is a party or by
which it or any of its material properties may be bound.

          c.   Intellectual Property Registrations and Government Approvals.
               ------------------------------------------------------------
HOLDCO shall give LOOKSMART reasonable  assistance with any registrations or
filings required to obtain copyright, or other Intellectual Property Rights
protection, in the Licensed Databases and/or the LOOKSMART Technology, in the
Licensed Territory, and to obtain any necessary government approvals that may be
required with respect to this Agreement.  Each party shall be responsible for
all fees or expenses which it incurs in connection with such intellectual
property registrations or filings so long as the licenses granted to HOLDCO
hereunder are exclusive.  In addition, HOLDCO shall be responsible for all fees
or expenses incurred in connection with obtaining any necessary government
approvals with respect to this Agreement.

     4.   ROYALTIES AND PAYMENT TERMS.
          ---------------------------

          a.   Territory Database Operating Royalty.  During the Royalty Period,
               ------------------------------------
HOLDCO shall pay LOOKSMART BARBADOS the Operating Royalty pursuant to Section
2(b) above.

          b.   LOOKSMART Database License Fee.  During the term of this
               ------------------------------
Agreement, HOLDCO shall pay LOOKSMART USA in consideration of the licensing of
the LOOKSMART Database and the LOOKSMART Technology hereunder an annual, non-
refundable license fee ("License Fee"), which shall be payable no later than ten
(10) business days after the Effective Date and each anniversary thereof in a
net amount equal to:

                    A.   [* * *] US Dollars (US$[* * *]) for the initial
Annual Period.

                    B.   [* * *] US Dollars (US$[* * *]) for each subsequent
Annual Period. Notwithstanding the foregoing, the annual US$[* * *]

          c.   CPM Royalty.  In addition to the license fees set forth in
               -----------
subpart (b) above, during the term of this Agreement, in consideration of the
licensing of the LOOKSMART Database and the LOOKSMART Technology hereunder,
HOLDCO shall pay LOOKSMART USA a royalty "(CPM Royalty") in an amount equal to a
net payment of US$[* * *] CPM (Cost Per Thousand) for LOOKSMART Database pages
served in the Licensed Territory by or for HOLDCO or any LoCo; provided,
however, that such royalty shall not be payable unless and until the total
LOOKSMART Database pages served in the Licensed Territory equals or exceeds
[* * *] [* * *] pages per month. In any month in which such minimum page view
threshold is not met, there shall be no

                                       9
<PAGE>

royalty due. In any month in which such minimum page view threshold is met, the
royalty shall be due on all pages served in such month over [* * *] [* * *]
pages. Notwithstanding the foregoing, in the event that the total number of
Internet users in the Licensed Territory increases or decreases in any month,
then the threshold amount for such month shall increase or decrease
proportionately to reflect the applicable percentage increase or decrease in the
total number of Internet users in the Licensed Territory. For the avoidance of
doubt, by way of an example, if the total number of Internet users in the
Licensed Territory increases by [* * *] in a given month, then the minimum page
view threshold shall be increased to [* * *]. The benchmark date for measurement
of any increase or decrease in the total number of Internet users shall be the
date upon which HOLDCO begins to serve LOOKSMART Database pages via a HOLDCO
URL. The parties will mutually agree upon a third-party research publication
generally accepted as reliable in the Internet industry to be used to determine
the monthly total number of Internet users in the Licensed Territory.

          d.   Royalty Statements.  Within thirty (30) days after the end of
               ------------------
each calendar quarter during the term of this Agreement, HOLDCO shall deliver to
LOOKSMART a written statement setting forth an itemized report for the preceding
calendar quarter, together with full payment of the applicable Operating
Royalties ("Royalties") shown on such statements to be due in accordance
herewith. A statement shall be issued regardless of whether any Royalties are
then due. Each statement shall contain information on the calculation of the
Royalties accrued with respect to the applicable quarter, which information
shall be categorized by country, by the entity generating the revenue (HOLDCO or
the applicable LoCo) and by revenue source (e.g., advertising, sponsorship,
license, e-commerce revenue, etc.), and shall contain such supporting or
additional information as LOOKSMART may from time to time reasonably request.
All payments required hereunder shall be made in United States Dollars, unless
otherwise designated by LOOKSMART, by wire transfer to the account of LOOKSMART
in accordance with such instructions as LOOKSMART may from time to time provide
to HOLDCO. HOLDCO shall be solely responsible for all costs of any currency
conversion to United States Dollars, and such costs shall not reduce the amounts
due to LOOKSMART hereunder. Acceptance of Royalties by LOOKSMART shall not
preclude LOOKSMART from questioning the correctness of any statement at any time
within two (2) years after the date of the applicable statement. All Royalties
shall be made without set-off of any amount whatsoever, whether based upon any
claimed debt or liability of LOOKSMART to HOLDCO.

          e.   Accounting and Audit Rights.  HOLDCO shall keep and maintain full
               ---------------------------
and accurate books of account and records covering all transactions relating to
the calculation of the Royalties. LOOKSMART or its designees shall be entitled
to audit and inspect such books and records on a quarterly basis during or after
the term of this Agreement during reasonable business hours and in each case
upon five (5) days prior written notice to HOLDCO, and make copies and summaries
of such books and records. All such books of account and records shall be
retained by HOLDCO for a minimum of two (2) years after expiration or
termination of this Agreement. If LOOKSMART or its duly authorized
representative discovers a deficiency in the Royalties paid to LOOKSMART
pursuant to any Royalty statement in the period under audit (an "Audit
Deficiency"), HOLDCO shall promptly pay such Audit Deficiency to LOOKSMART and,
if such Audit

                                       10
<PAGE>

Deficiency is five percent (5%) or more of the Royalties paid to LOOKSMART
pursuant to any Royalty statement in such audit period, HOLDCO shall promptly
pay the reasonable, out-of-pocket costs and expenses incurred by LOOKSMART in
connection with such audit.

          f.   Late Payments.  HOLDCO shall pay interest on any Audit
               -------------
Deficiency, as well as on all unpaid and overdue License Fees or Royalty
payments hereunder, at 1.5% per month or the maximum legal rate, whichever is
less, compounded annually at that rate from time to time in effect and
calculated from the date on which such payment was due.

          g.   Taxes.  All payments made by HOLDCO in respect of fees and
               -----
royalties hereunder shall be made without any deduction except for any income
tax which HOLDCO is required to withhold at source under HOLDCO's domiciliary
law.  Such income tax shall be borne by LOOKSMART, if HOLDCO does all things
necessary (including giving proper evidence as to payment) to enable LOOKSMART
to claim exemption from it under any Treaty between HOLDCO's country of domicile
and LOOKSMART's country of domicile to avoid double taxation.  LOOKSMART shall
pay all income taxes imposed on it by its own domestic law.

     5.   WARRANTY AND DISCLAIMER.
          -----------------------

          a.   LOOKSMART warrants that the LOOKSMART Database and the existing
Territory Databases identified in Exhibit B substantially conform to the
Database Standards set forth in Exhibit F.

          b.   LOOKSMART warrants that to the best of its knowledge in the
creation of the Licensed Databases it has not infringed and shall not infringe
the Intellectual Property Rights of any third party.

          c.   EXCEPT AS EXPRESSLY SET FORTH IN SECTION 5(a)and (b) ABOVE, THE
LICENSED DATABASES AND THE LOOKSMART TECHNOLOGY ARE LICENSED ON AN "AS IS" BASIS
WITH ALL FAULTS, AND ANY AND ALL IMPLIED WARRANTIES WITH RESPECT THERETO ARE
HEREBY DISCLAIMED TO THE FULLEST EXTENT PERMITTED BY LAW, INCLUDING WITHOUT
LIMITATION ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE. LOOKSMART DOES NOT WARRANT THAT THE LICENSED DATABASES WILL BE FREE
FROM ERRORS.

     6.   INDEMNIFICATION OBLIGATIONS
          ---------------------------

          a.   Indemnification by LOOKSMART.  LOOKSMART will indemnify, defend
               ----------------------------
and hold harmless HOLDCO, its parents, subsidiaries, affiliates and each of
their respective successors and permitted assigns, directors, officers,
employees, representatives, agents, consultants and contractors (herein "HOLDCO
Indemnitees") in respect of any and all losses, claims, suits, proceedings,
liabilities, causes of action, damages, costs, expenses (including reasonable
attorneys' fees and expenses) to the extent arising out of or relating to any
third-party claim on the issue of infringement or alleged infringement by the
Licensed Databases of such third-party's Intellectual Property Rights, but
excluding any claim arising from or related to any URL Content that is

                                       11
<PAGE>

contained in the Licensed Databases, and also excluding the content of any
databases to the extent that such content is supplied to LOOKSMART by HOLDCO or
its designees, and subject to the limitations hereinafter set forth. LOOKSMART
shall have sole control of the defense of any such action and any settlement
negotiations, and LOOKSMART agrees to pay, subject to the limitations
hereinafter set forth, any final judgment entered against HOLDCO on such issue
in any such suit or proceeding. HOLDCO agrees to notify LOOKSMART promptly in
writing of such claim, suit or proceeding and to give LOOKSMART authority to
proceed as contemplated herein, and, at LOOKSMART's expense, give LOOKSMART
information and assistance reasonably necessary to settle and/or defend any such
claim, suit or proceeding. If the Licensed Databases in whole or in part, are,
or in the opinion of LOOKSMART may become, the subject of any claim, suit or
proceeding for infringement of any Intellectual Property Right, LOOKSMART shall
have the right to withdraw the applicable portion of the Licensed Databases that
is the subject of such claim from the scope of the license in the particular
country or countries in which such infringement claim arose. LOOKSMART shall use
reasonable commercial efforts to replace such infringing portion with a
reasonable substitute.

          b.   Limitation.  The provisions of Section 6(a) above shall not apply
               ----------
to the extent that (i) any infringement arises from any combination, method or
process in which any of the Licensed Databases may be used but not covering the
Licensed Databases when used alone, including without limitation any
infringement arising from the use in combination with software belonging to
third parties, regardless of whether such software may be necessary to the use
or modification of, or compatible with, the Licensed Databases, (ii) any
infringement arises from the modification or servicing of the Licensed
Databases, or any part thereof, unless such modification or servicing was
performed by LOOKSMART, (iii) any infringement arises from the failure of HOLDCO
to implement any changes to the Licensed Databases within a reasonable period,
if the infringement would have been avoided by the use of such changes;
provided, however, that with respect to any changes that LOOKSMART notifies
HOLDCO in writing are made as a result of a potential or existing infringement
claim, such changes shall be implemented on an expedited basis including take-
down of any potentially infringing material from HOLDCO's own servers within 48
hours after written notice from LOOKSMART; (iv) any trademark infringement
arising from any marking or branding included in the Licensed Databases; or (iv)
any infringement arises from uses of the Licensed Databases which do not comply
with the uses permitted under this Agreement.

          c.   Entire Liability. The foregoing provisions of this Section 6
               ----------------
state the  obligations of LOOKSMART and the exclusive remedy of HOLDCO and its
customers, with respect to any alleged infringement of patents, copyrights,
trademarks or other intellectual property rights by the rights licensed or
granted hereunder or any part thereof.

          d.   Indemnification by HOLDCO.  HOLDCO will indemnify, defend and
               -------------------------
hold harmless LOOKSMART, its parents, subsidiaries, affiliates, and each of
their respective successors and permitted assigns, directors, officers,
employees, representatives, agents, consultants, and contractors (herein,
"LOOKSMART Indemnitees") in respect of any and all losses, claims, suits,
proceedings, liabilities, causes of action, damages, costs, expenses (including
reasonable attorneys'

                                       12
<PAGE>

fees and expenses) arising out of or relating to any third party claim on the
issue of infringement or alleged infringement of such third-party's Intellectual
Property Rights, to the extent arising out of or relating to any modifications
or developments made by HOLDCO or its customers to the Licensed Databases or the
LOOKSMART Technology ("HOLDCO Modifications"), but excluding any claim arising
from or related to any URL Content that is contained in the HOLDCO
Modifications. HOLDCO shall have sole control of the defense of any such action
and any settlement negotiations, and HOLDCO agrees to pay, subject to the
limitations hereinafter set forth, any final judgment entered against LOOKSMART
Indemnitees on such issue in any such suit or proceeding. LOOKSMART agrees to
notify HOLDCO promptly in writing of such claim, suit or proceeding and to give
HOLDCO authority to proceed as contemplated herein, and, at HOLDCO's expense,
give HOLDCO information and assistance reasonably necessary to settle and/or
defend any such claim, suit or proceeding. The foregoing indemnification
obligations shall not apply to the extent that (i) any infringement arises from
any combination, method or process in which any of the HOLDCO Modifications may
be used but not covering the HOLDCO Modifications when used alone, including
without limitation any infringement arising from the use in combination with
software belonging to third parties, regardless of whether such software may be
necessary to the use or modification of, or compatible with, the HOLDCO
Modifications; and (ii) any infringement arises from the failure of LOOKSMART to
implement any changes to the HOLDCO Modifications within a reasonable period, if
the infringement would have been avoided by the use of such changes; provided,
however, that with respect to any changes that HOLDCO notifies LOOKSMART in
writing are made as a result of a potential or existing infringement claim, such
changes shall be implemented on an expedited basis including take-down of any
potentially infringing material from LOOKSMART's own servers within 48 hours
after written notice from HOLDCO. The foregoing provisions of this Section 6(d)
state the obligations of HOLDCO and the exclusive remedy of LOOKSMART with
respect to any alleged infringement of patents, copyrights, trademarks or other
intellectual property rights by the HOLDCO Modifications.

     7.   CONFIDENTIAL INFORMATION
          ------------------------

          a.   Confidential Information.  "LOOKSMART Confidential Information"
               ------------------------
means this Agreement and its Exhibits, any addenda hereto signed by both
parties, the LOOKSMART Technology, the LOOKSMART Databases, the Territory
Databases (prior to transfer of ownership to HOLDCO), the Documentation, and all
specifications, all knowledge and know-how inherent to the foregoing, as well as
the knowledge and know-how that is applied to the configuration of the
foregoing, and any other proprietary information supplied to HOLDCO by LOOKSMART
hereunder.

          b.   Nondisclosure Obligations.  HOLDCO acknowledges that the
               -------------------------
LOOKSMART Confidential Information constitutes valuable trade secrets of
LOOKSMART and HOLDCO agrees that it shall use the Confidential Information
solely in accordance with the provisions of this Agreement and  save where
necessary for the exercise of the licenses granted hereunder will not disclose,
or permit to be disclosed, directly or indirectly, to any third party without
LOOKSMART's prior written consent.  Any disclosure permitted hereunder shall be
made under the terms of a confidentiality agreement at least as protective of
the confidential information as this Agreement.

                                       13
<PAGE>

HOLDCO agrees to exercise the same standard of care in protecting the LOOKSMART
Confidential Information from unauthorized use and disclosure that it uses to
protect its own most valuable confidential information, but in no event less
than reasonable care. However, HOLDCO bears no responsibility for safeguarding
information that is publicly available, already in HOLDCO's possession and not
subject to a confidentiality obligation, obtained by HOLDCO from third parties
without restrictions on disclosure, or required to be disclosed by order of a
court or other governmental entity after opportunity for LOOKSMART to seek
confidential treatment or a protective order.

          c.   Confidential Information.  "HOLDCO Confidential Information"
               ------------------------
means this Agreement and its Exhibits, any addenda hereto signed by both
parties, the Territory Databases (after transfer of ownership to HOLDCO), the
HOLDCO Documentation, and all specifications, all knowledge and know-how
inherent to the foregoing, as well as the knowledge and know-how that is applied
to the configuration of the foregoing, and any other proprietary information
supplied to LOOKSMART by HOLDCO hereunder.

          d.   Nondisclosure Obligations. LOOKSMART acknowledges that the HOLDCO
               -------------------------
Confidential Information constitutes valuable trade secrets of HOLDCO and
LOOKSMART agrees that it shall use the Confidential Information solely in
accordance with the provisions of this Agreement and save where necessary for
the exercise of the licenses granted hereunder will not disclose, or permit to
be disclosed, directly or indirectly, to any third party without HOLDCO prior
written consent. Any disclosure permitted hereunder shall be made under the
terms of a confidentiality agreement at least as protective of the confidential
information as this Agreement. LOOKSMART agrees to exercise the same standard of
care in protecting the HOLDCO Confidential Information from unauthorized use and
disclosure that it uses to protect its own most valuable confidential
information, but in no event less than reasonable care. However, LOOKSMART bears
no responsibility for safeguarding information that is publicly available,
already in LOOKSMART's possession and not subject to a confidentiality
obligation, obtained by LOOKSMART from third parties without restrictions on
disclosure, or required to be disclosed by order of a court or other
governmental entity after opportunity for HOLDCO to seek confidential treatment
or a protective order. In addition, LOOKSMART agrees to maintain the
confidentiality of the Territory Databases prior to their transfer to HOLDCO so
long as HOLDCO's license thereto remains on an exclusive basis.

     8.   TERM AND TERMINATION.  This Agreement shall commence upon the
          --------------------
Effective Date and continue until terminated in accordance with the provisions
of this Agreement.

          a.   Mutual Agreement.  This Agreement may be terminated pursuant to
               ----------------
the mutual, written agreement of the parties.

          b.   Termination for Default. If either party defaults in the
               -----------------------
performance of any material provision of this Agreement, then the non-defaulting
party may refer the default to non-binding dispute resolution in accordance with
Section 11.6 of the JV Agreement. Notwithstanding the foregoing, in the event
that the parties fail to resolve such dispute within thirty (30) days pursuant
to such dispute resolution procedure, the non-defaulting party may give written
notice to

                                       14
<PAGE>

the defaulting party that if the default is not cured within thirty (30) days
the Agreement will be terminated. If the non-defaulting party gives such notice
and the default is not cured during such thirty (30) day period, then the
Agreement shall automatically terminate at the end of that period.

          c.   Termination for Insolvency of HOLDCO.  This Agreement may be
               ------------------------------------
terminated by LOOKSMART, on written notice, (i) upon the institution by or
against HOLDCO of insolvency, receivership or bankruptcy proceedings or any
other proceedings for the settlement of HOLDCO's debts, (ii) upon HOLDCO's
making an assignment for the benefit of creditors, or (iii) upon HOLDCO's
dissolution, winding up or ceasing to conduct business in the normal course, or
any other termination of the JV Agreement.

          d.   Return of Materials.  Within thirty (30) days after the
               -------------------
expiration or termination of this Agreement for any reason whatsoever, HOLDCO
shall de-install all copies of the LOOKSMART Database, Territory Databases
(unless previously transferred to HOLDCO pursuant to the terms of the JV
Agreement), Documentation, and LOOKSMART Technology, and, at LOOKSMART's
election, return or destroy all copies of the foregoing, and any other LOOKSMART
Confidential Information, or other items owned by LOOKSMART in HOLDCO's
possession or control. LOOKSMART shall in the same manner return or destroy all
copies of the HOLDCO Confidential Information (other than the Territory
Databases if owned by HOLDCO), or other items owned by HOLDCO in LOOKSMART's
possession or control. Effective upon the termination of this Agreement, each
party shall cease to use any or all of the foregoing belonging to the other
party, except as permitted by Section 7.6 of the JV Agreement. Each party shall
furnish the other party with a certificate signed by a duly authorized executive
officer of such party verifying that the same has been done and that none of the
foregoing is being used or retained on any computer or storage device.

          e.   Survival of Certain Terms. The provisions of Sections 1, 2(g),
               -------------------------
2(j), 2(l), 4(e), 5, 6, 7, , 8(d), 9(a)--(l), (n) and 10 shall survive the
expiration or termination of this Agreement for any reason. All other rights and
obligations of the parties shall cease upon termination of this Agreement.

     9.   MISCELLANEOUS PROVISIONS.
          ------------------------

          a.   Resolution of Disputes.  Any dispute, controversy or claim
               ----------------------
arising out of or relating to this Agreement or to a breach hereof, including
the interpretation, performance or termination, shall be submitted for non-
binding dispute resolution in accordance with the dispute resolution procedures
set forth in Section 11.6 of the JV Agreement.

          b.   Injunctive Relief.  Notwithstanding Section 9(a) above, each
               -----------------
party shall have the right to institute judicial proceedings against the other
party or anyone acting by, through or under such other party in order to seek
injunctive or other equitable relief in order to restrain an actual or
threatened breach of the provisions of Section 2 or 7. The prevailing party in
any such legal action for injunctive or equitable relief shall be entitled, in
addition to any other rights and remedies it may have, to reimbursement for its
expenses, including court costs and reasonable attorneys' fees. With respect to
any such legal action for injunctive or equitable relief, the Courts of

                                       15
<PAGE>

England shall have nonexclusive jurisdiction. The service of process or of any
other papers with respect to such proceedings upon either party by certified or
registered mail in accordance with the notice provisions of Section 9(e) below
shall for all purposes constitute good, proper and effective in personam
service.

          c.   Governing Laws.  The validity, construction and enforceability of
               --------------
this Agreement shall be governed in all respects by the laws of England, without
reference to conflict of law principles. For the avoidance of doubt, the rights
and obligations of the parties under this Agreement shall not be governed by the
1980 United Nations Convention on Contracts for the International Sale of Goods.

          d.   Publicity.  LOOKSMART and HOLDCO shall consult with each other
               ---------
before issuing any press releases or otherwise making any public statements with
respect to this Agreement and the transactions contemplated hereby. Neither
LOOKSMART nor HOLDCO shall issue any such press release or make any public
statement without the agreement of the other party, except as may be required by
law.

          e.   Notices. All notices required hereunder shall be given in
               -------
accordance with the terms of Section 35 of the JV Agreement.

          f.   Severability.  Whenever possible, each provision of this
               ------------
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision or portion of any provision of this
Agreement should be invalid under applicable law, such provision or portion of
such provision shall be ineffective to the extent of such invalidity, without
invalidating the remainder of such provision or remaining provisions of this
Agreement. and the parties shall, in good faith, take all necessary steps to
replace or amend the relevant provision(s) with one which fulfils as closely as
possible the same commercial imperatives as the original clause and/or pursue
any other appropriate routes to secure these original commercial imperatives
while complying with the relevant laws

          g.   Waiver.  A provision of this Agreement may be waived only by a
               ------
written instrument executed by the party entitled to the benefit of such
provision.  The failure of any party at any time to require performance of any
provision of this Agreement shall in no manner affect such party's right at a
later time to enforce the same.  A waiver of any breach of any provision of this
Agreement shall not be construed as a continuing waiver of other breaches of the
same or other provisions of this Agreement.

          h.   Further Assurances.  The parties shall each perform such acts,
               ------------------
execute and deliver such instruments and documents, and do all such other things
as may be reasonably necessary to accomplish the transactions contemplated by
this Agreement.

          i.   Subject Headings; Interpretation; Counterparts.  The subject
               ----------------------------------------------
headings of the sections of this Agreement are included for the purposes of
convenience only, and shall not affect the construction or interpretation of any
of its provisions.  In this Agreement, words and terms shall be read and
construed in accordance with trade, custom and usage in the Internet and e-
commerce

                                       16
<PAGE>

business in the United Kingdom. This Agreement may be executed in counterparts.
Each executed counterpart may be delivered to the other party by facsimile and
copies bearing the facsimile signature of a party will constitute a valid and
binding execution and delivery of this Agreement.

          j.   Entire Agreement. This Agreement, including the Exhibits attached
               ----------------
hereto, constitutes the entire agreement of the parties with respect to the
subject matter hereof and supersedes all prior agreements, communications and
understandings between them with respect thereto, including without limitation
as set forth in that certain agreement between LOOKSMART and BT dated 08
November 1999.  No modification of this Agreement shall be effective without the
mutual written agreement of both parties.  No terms or conditions of any
purchase order, acknowledgment or other business form that HOLDCO may use in
connection with the acquisition or licensing of the Licensed Rights will have
any effect on the rights and obligations of the parties hereunder, or otherwise
modify this Agreement, regardless of any failure by LOOKSMART to object to such
terms or conditions.

          k.   Independent Contractors.  The relationship of LOOKSMART and
               -----------------------
HOLDCO established by this Agreement is that of independent contractors, and
nothing contained in this Agreement shall be construed to (i) give either party
the power to direct and control the day-to-day activities of the other, (ii)
constitute the parties as partners, joint venturers, co-owners or otherwise as
participants in a joint or common undertaking, or (iii) allow HOLDCO to create
or assume any obligation on behalf of LOOKSMART for any purpose whatsoever. All
financial obligations associated with HOLDCO's business are the sole
responsibility of HOLDCO. All sales and other transactions or agreements between
HOLDCO and its customers are HOLDCO's exclusive responsibility and shall have no
effect on HOLDCO's obligations under this Agreement. Each party (the
"indemnifying party") shall be solely responsible for, and shall indemnify and
hold the other free and harmless from, any and all claims, damages or lawsuits
(including reasonable attorneys' fees) arising out of the negligence or other
tortious conduct of the indemnifying party, its employees or its agents.

          l.   Nonassignability and Binding Effect.  A mutually agreed
               -----------------------------------
consideration for LOOKSMART's entering into this Agreement is the reputation,
business standing, and goodwill honored and enjoyed by HOLDCO under its present
ownership, and, accordingly, HOLDCO agrees that its license and other rights and
obligations under this Agreement may not be transferred or assigned, whether by
operation of law or otherwise, without the prior written consent of LOOKSMART;
provided, however that such consent shall not be required in connection with a
transfer or assignment of this Agreement to a wholly-owned Subsidiary of HOLDCO,
or to a company of which HOLDCO is a wholly-owned Subsidiary, provided, that
advance written notice thereof shall be required.   Subject to the foregoing
sentence, this Agreement shall be binding upon and inure to the benefit of the
parties hereto, their successors and assigns.

          m.   Force Majeure.  Except for payment obligations hereunder, neither
               -------------
party shall incur liability to the other party due to any delay or failure in
performance hereunder caused by reason of any occurrence or contingency beyond
its reasonable control, including but not limited to failure of suppliers,
strikes, lockouts or other labor disputes, riots, acts of war or civil unrest,

                                       17
<PAGE>

earthquake, fire, the elements or acts of God, novelty of product manufacture,
unanticipated product development problems, or governmental restrictions or
other legal requirements; provided, that such party notifies the other party in
writing immediately upon commencement of such event and makes diligent efforts
to resume performance immediately upon cessation of such event.  In the event
such events continue for a period of one hundred eighty (180) days in the
aggregate, the other party shall have the right to terminate this Agreement upon
written notice to such party.

          n.   Language.  This Agreement is in the English language only, which
               --------
language shall be controlling in all respects, and all versions hereof in any
other language shall not be binding on the parties hereto.  All communications
and notices to be made or given pursuant to this Agreement shall be in the
English language.

          o.   Compliance With Laws.  HOLDCO shall, at its own expense, pay all
               --------------------
import and export licenses and permits, pay customs charges and duty fees, and
take all other actions required to accomplish the export, import and use of the
Licensed Databases in the Licensed Territory.  HOLDCO shall ensure compliance
with any applicable laws relating to its activities under the terms of this
Agreement, including, without limitation, any applicable stock exchange or self-
regulatory organization rules and regulations in connection with the brokering
of financial instruments.

          p.   Government Regulations.   The parties acknowledge that either
               ----------------------
of them may be subject to regulation by agencies of the various sovereign
governments, which may prohibit use, export, re-export or diversion of certain
products and technology to certain countries within the Licensed Territory. Any
and all obligations of the parties to provide the Licensed Databases, LOOKSMART
Technology, Documentation, or any media in which any of the foregoing is
contained, as well as any other technical assistance shall be subject in all
respects to such applicable laws and regulations as shall from time to time
govern the license and delivery of technology and products. The parties agree to
cooperate with each other, including, without limitation, providing required
documentation, in order to obtain any necessary export licenses or exemptions
therefrom. Each party warrants that it will comply with all such applicable laws
and regulations governing use, exportation and reexportation in effect from time
to time.

    10.   LIMITATION OF LIABILITY. EXCEPT WITH RESPECT TO DAMAGES PAYABLE TO
          -----------------------
THIRD PARTIES UNDER INDEMNIFICATION OBLIGATIONS, IN NO EVENT SHALL ANY PARTY BE
LIABLE TO ANY OTHER PARTY OR ANY OTHER ENTITY FOR ANY SPECIAL, CONSEQUENTIAL,
INCIDENTAL, INDIRECT OR RELIANCE DAMAGES, HOWEVER CAUSED, WHETHER FOR BREACH OF
CONTRACT, NEGLIGENCE OR UNDER ANY OTHER LEGAL THEORY, WHETHER FORESEEABLE OR NOT
AND WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES, AND NOTWITHSTANDING THE FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED
REMEDY. IN NO EVENT SHALL ANY PARTY BE LIABLE FOR LOST DATA, LOST PROFITS,
BUSINESS INTERRUPTION, FAILURE OF THE TECHNOLOGY OR DATABASES, OR COSTS OF
PROCUREMENT OF SUBSTITUTE GOODS BY ANYONE. THE PARTIES

                                       18
<PAGE>

AGREE THAT THESE LIMITATIONS OF LIABILITY ARE AGREED ALLOCATIONS OF RISK AND ARE
REFLECTED IN THE CONSIDERATION AGREED UPON BY THE PARTIES.



Remainder of page intentionally left blank.
- ------------------------------------------

                                       19
<PAGE>

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective officers thereunto duly authorized.

BT LOOKSMART, LTD.                        LOOKSMART, LTD.



By:________________________________       By:________________________________
               (Signature)                            (Signature)

Name:______________________________       Name:______________________________
             (Print or Type)                         (Print or Type)

Title:_____________________________       Title:_____________________________



LOOKSMART (BARBADOS), INC.


By:________________________________
               (Signature)

Name:______________________________
             (Print or Type)

Title:_____________________________



                                       20
<PAGE>

List of Exhibits:
- ----------------



Exhibit A:  LOOKSMART Database
- ------------------------------

Exhibit B:  Existing Territory Databases
- ----------------------------------------

Exhibit C:  Sublicensees
- ------------------------

Exhibit D:  Existing LOOKSMART Technology
- -----------------------------------------

Exhibit E:  Existing Third Party Technology
- -------------------------------------------

Exhibit F:  Database Standards
- ------------------------------

                                       21
<PAGE>

                                   EXHIBIT A
                                   ---------

                              LOOKSMART DATABASE
                              ------------------


LOOKSMART Database means the "World Edition" version of LOOKSMART's directory.
The "World Edition" version is LOOKSMART's primary, English language directory
of worldwide web URL links with editorial descriptions. The LOOKSMART Database
does not include, at present or at any time during the term of this Agreement,
any of LOOKSMART's local editions, any non-United States editions other than
Canada, or any third-party directories.

Documentation means technical documents that define the database table structure
and fields.

                                       22
<PAGE>

                                   EXHIBIT B
                                   ---------

                         EXISTING TERRITORY DATABASES
                         ----------------------------


                                    Belgium

                                    Denmark

                                  Netherlands

                                    Finland

                                     France

                                     Italy

                                     Japan

                                     Korea

                                    Malaysia

                                  New Zealand

                                     Norway

                                   Singapore

                                     Spain

                                     Sweden

                                 United Kingdom

                                       23
<PAGE>

                                   EXHIBIT C
                                   ---------

                                 SUBLICENSEES
                                 ------------



                                     None

                                       24
<PAGE>

                                   EXHIBIT D
                                   ---------

                         EXISTING LOOKSMART TECHNOLOGY
                         -----------------------------

<TABLE>
<CAPTION>
Software/Application            Functionality                                           Source         Department
- ---------------------------------------------------------------------------------------------------------------------------
<S>                             <C>                                                     <C>            <C>

                                                              [* * *]

</TABLE>

[* * *] - Confidential Treatment Requested

                                       25
<PAGE>

                                   EXHIBIT E
                                   ---------

                        EXISTING THIRD PARTY TECHNOLOGY
                        -------------------------------


<TABLE>
<CAPTION>
Software/Application          Functionality                                   Source                  Department
- -----------------------------------------------------------------------------------------------------------------------
<S>                           <C>                                             <C>                     <C>

                                                              [* * *]

</TABLE>

[* * *] - Confidential Treatment Requested
                                    [* * *]


                                       26
<PAGE>

                                   EXHIBIT F
                                   ---------

                              DATABASE STANDARDS
                              ------------------



The following words shall have the following meanings:

"Links":  URL links with any accompanying editorial descriptions

"Inactive Link" means a URL included in the Database that does not successfully
return a web page within 60 seconds when requested on three (3) days of five (5)
consecutive days.

"Node" means a category of a web directory taxonomy.

The LOOKSMART Database will contain approximately:

Links                     800,000

Unique Nodes              70,000

The LOOKSMART Database shall not contain more than 5% Inactive Links.

The existing Territory Databases identified in Exhibit B in the aggregate will
contain approximately:

Links:                    250,000

Unique Nodes              25,000

The Territory Databases shall not contain more than 5% Inactive Links.

                                       27

<PAGE>

                                                                   EXHIBIT 10.19

LookSmart, Ltd
625 Second Street,
San Francisco,
CA 94107,
USA

                                                            15 February 2000



Dear Sirs,

                             50,000,000 US Dollars

We are pleased to confirm that we, Transceptgate Limited, a company incorporated
in the Isle of Man and having a registered office at Celtic House, Victoria
Street, Douglas, Isle of Man ("Transceptgate") are prepared to make a term loan
facility of up to 50,000,000 US Dollars (the "Facility") available to you (the
"Borrower"), to be used for the sole purpose of subscribing for shares in BT
LookSmart ("BT LookSmart") pursuant to the terms of an agreement between
Transceptgate, the Borrower, Looksmart (Barbados) Inc. ("LOOK") having its
principal place of business at Hastings Business Services Limited, Hastings,
Christ Church, Barbados, BT Looksmart and British Telecommunications Plc dated
15 February 2000 (the "Joint Venture Agreement") upon the following terms:

1.   Definitions

     In this letter "this Agreement" means this letter as accepted by the
     Borrower and LOOK:

     "Advance"           means an advance of the Facility made or to be made in
                         accordance with the terms of this Agreement together
                         with accrued interest thereon;

     "Banking Day"       means a day on which dealings in deposits of US Dollars
                         are carried on in the London Interbank Market;

     "Default"           means any event which, with the giving of notice, lapse
                         of time, determination of materiality or satisfaction
                         of any other condition (or any combination of the same)
                         could constitute an Event of Default;

     "Drawdown Notice"   means a notice in the form of Schedule 1 or such other
                         form as Transceptgate and the Borrower may agree;
<PAGE>

     "Drawdown Period"             means the period from the date of this
                                   Agreement up to and including 31 March 2000;

     "Encumbrance"                 means any mortgage, charge (whether fixed or
                                   floating), pledge, lien, hypothecation,
                                   assignment by way of security, security
                                   interest or other encumbrance of any kind but
                                   does not include liens arising in the
                                   ordinary course of trading by operation of
                                   law and not by way of contract;

     "Escrow Agent"                means the agent appointed from time to time
                                   pursuant to the terms of the Escrow
                                   Agreement;

     "Escrow Agreement"            means the agreement pursuant to which the
                                   Borrower deposits in an escrow account the
                                   Advance before the same is utilised for the
                                   purchase of the Shares in a form and
                                   substance satisfactory to Transceptgate;

     "Escrow Advance"              means an advance released to LOOK from time
                                   to time pursuant to the terms of the Escrow
                                   Agreement;

     "Event of Default"            means any of the events or circumstances set
                                   out in Schedule 2;

     "Indebtedness"                means any obligation for the payment or
                                   repayment of money, whether as principal or
                                   as surety and whether present or future,
                                   actual or contingent;

     "Prepayment Date"             means the last Banking Day of each quarter;

     "Loan"                        means the aggregate principal amount of the
                                   Advance from time to time borrowed and
                                   outstanding under this Agreement of up to
                                   US$50,000,000;

     "Share Market Value"          means the market value of the Shares subject
                                   to the Share Pledge as determined by the
                                   board of directors of BT LookSmart;

     "Share Subscription Date"     means any day on which LOOK subscribes for
                                   Shares;

     "Loan Conversion              means the agreement to be entered into
      Agreement"                   between Transceptgate and the Borrower
                                   pursuant to which the Borrower shall grant to
                                   Transceptgate rights in respect of its shares
                                   and the registration of the same in a form
                                   and substance satisfactory to Transceptgate.
<PAGE>

     "Repayment Date"              means in respect of the Advance whichever is
                                   the earlier of (i) the date falling 3 years
                                   from the date of the Advance and (ii) the
                                   date on which the Advance becomes repayable
                                   pursuant to Clause 11 provided always that no
                                   Repayment Date shall fall later than 3 years
                                   from the date of the Advance;

     "Security Documents"          means the Share Pledge, the Loan Conversion
                                   Agreement and the Escrow Agreement;

     "Shares"                      means the shares purchased by LOOK from time
                                   to time in accordance with the terms of the
                                   Joint Venture Agreement in the share capital
                                   of the BT Looksmart;

     "Share Pledge"                means the instrument pursuant to which the
                                   Borrower pledges in favour of Transceptgate
                                   the Shares, which instrument shall be in a
                                   form and substance satisfactory to
                                   Transceptgate, together with the original
                                   share certificates representing all such
                                   shares and instruments of transfer in respect
                                   of all such shares executed in blank;

     "Subsidiary"                  means:

                                   (a)  a subsidiary within the meaning of
                                        Section 736 of the Companies Act 1985 as
                                        amended by Section 144 of the Companies
                                        Act 1989; and

                                   (b)  unless the context otherwise requires, a
                                        subsidiary undertaking within the
                                        meaning of Section 21 of the Companies
                                        Act 1989.

     "U.S. Dollars",               means the lawful currency of the United
     "USD" or "Dollars"            States of America;

2.   Operation of the Facility

2.1  Availability: The Facility may be borrowed in one amount up to the amount
     of the Loan on any Banking Day during the Drawdown Period. The Facility
     shall be cancelled to the extent not borrowed by the end of the Drawdown
     Period.

2.2  Drawdown procedure: To draw the Advance, the Borrower must serve a Drawdown
     Notice on Transceptgate which must be received at least 7 days before the
     proposed drawdown date. Any such Drawdown Notice shall be effective only on
     receipt and shall be irrevocable.
<PAGE>

3.   Interest and Charges

3.1  Interest shall accrue on the amount of the Advance from time to time
     outstanding at the rate of 20% per annum. Such interest shall accrue from
     day to day by reference to a year of 360 days and shall be applied to the
     Advance at each twelve-month anniversary of that Advance and on the
     Repayment Date of that Advance.

4.   Repayment and Prepayment

4.1  Repayment

     The Advance shall be repaid, together with all interest accrued thereon and
     any other amounts outstanding under this Agreement, on the Repayment Date.

4.2  The Advance may be prepaid (in whole or in part, provided that any such
     part must be at least USD 1,000,000) on a Prepayment Date provided that
     Transceptgate is given not less than 40 (forty) days' written notice of the
     intended prepayment. No amount prepaid may be redrawn.

4.3  Transceptgate may, at any time, including without prejudice to the
     generality of the foregoing, on receipt of a notice of prepayment pursuant
     to Clause 4.2, at its sole option, serve a notice on the Borrower of its
     intention to convert some or all of the Advance into shares in the Borrower
     pursuant to the terms of the Loan Conversion Agreement. No amounts
     converted into shares in the Borrower may be redrawn.

4.4  Any funds remaining in escrow pursuant to the Escrow Agreement upon the
     Repayment Date shall be transferred by the Escrow Agent to Transceptgate
     and will be credited towards satisfaction of any sum then due and payable
     from the Borrower hereunder.

5.   Fees and Expenses

5.1  The Borrower shall pay to Transceptgate on demand:

     (a)  fifty per cent of the reasonable expenses (including legal and out-of-
          pocket expenses) incurred by Transceptgate in connection with the
          instruction of US and Bermudian lawyers for the purposes of the
          negotiation, preparation and execution of this Agreement and the
          Security Documents and of any amendment or extension of or the
          granting of any waiver or consent under or in respect of this
          Agreement or the Security Documents; and

     (b)  all expenses (including legal and out-of-pocket expenses) reasonably
          incurred by Transceptgate in contemplation of, or otherwise in
          connection with, the enforcement of any rights under this Agreement
          and the Security Documents together with interest at the rate referred
          to in
<PAGE>

          Clause 3 from the date on which such expenses were incurred to the
          date of payment (as well after as before judgment).

     All expenses payable pursuant to this Clause 5 shall be paid together with
     Value Added Tax (if any) thereon.

6.   Payments

6.1  If any period would end or payment would fall due under this Agreement on a
     day which is not a Banking Day, the period (or the date for payment) shall
     be extended to the next succeeding Banking Day, unless such next succeeding
     Banking Day falls in the next calendar month in which case the period shall
     be shortened (or the payment date advanced) to end on the immediately
     preceding Banking Day. Where a period or date for payment is altered under
     this clause, interest (and any other payment accruing from day to day)
     shall be re-calculated accordingly.

6.2  The Borrower will pay interest on any moneys due and unpaid, from the due
     date to actual payment (as well after as before judgment) at 20% per annum
     so long as the default continues such interest shall be compounded at each
     twelve-month anniversary of the Advance.

6.3  Transceptgate may apply any credit balance to which the Borrower is
     entitled on any account of the Borrower with Transceptgate in or towards
     satisfaction of any sum then due and payable from the Borrower hereunder.
     For this purpose, Transceptgate is authorised to purchase with the moneys
     standing to the credit of such account such other currencies as may be
     necessary to effect such application.

6.4  The Borrower shall indemnify Transceptgate against any reasonable loss or
     expense that Transceptgate shall incur or sustain in consequence of (i) any
     default in payment by the Borrower of any sum under this Agreement when
     due, (ii) the occurrence of any Event of Default (iii) any prepayment of
     any Advance or part thereof other than on an Interest Payment Date therefor
     in accordance with Clause 4 or (iv) any Advance not being made for any
     reason (excluding any default by Transceptgate) after a Drawdown Notice has
     been given for such Advance.


7.   Representations and Warranties

     By acceptance of this letter the Borrower and LOOK represent and warrant to
     Transceptgate that:

7.1  the execution, delivery and performance of this Agreement and the Security
     Documents will not (i) contravene any existing law, regulation or
     authorisation to which it or LOOK is subject, (ii) result in any breach of
     or default under any agreement or other instrument to which the Borrower or
     LOOK is a party or is subject and this Agreement and the Security Documents
     constitutes valid and
<PAGE>

     legally binding obligations of the Borrower and LOOK enforceable in
     accordance with its terms;

7.2  no litigation or arbitration is taking place, pending or, to the Borrower's
     or LOOK's knowledge, threatened against the Borrower or LOOK or any assets
     of the Borrower or LOOK that is or is likely to have a material adverse
     effect on either the Borrower or LOOK; and

7.3  no Default has occurred and is continuing.

8.   Undertakings

     By acceptance of this letter the Borrower and LOOK undertakes with
     Transceptgate that (save with the prior written consent of Transceptgate)
     throughout the Drawdown Period and so long as the Advance remains
     outstanding under the Facility:

     (a)  the Borrower and LOOK, shall procure that the Advance is utilised
          for the purpose only of purchasing the Shares and immediately upon the
          issue of any Shares funded by the Advance or any part thereof it shall
          procure that LOOK transfers the Shares to Transceptgate pursuant to
          the terms of the Share Pledge;

     (b)  the Borrower and LOOK shall procure that on each twelve- month
          anniversary of the Advance the aggregate amount of the Escrow Advances
          together with all interest accrued on such Escrow Advances calculated
          at the rate and in the manner set out in Clause 3 shall not exceed the
          Share Market Value;

     (c)  the Borrower and LOOK shall procure that on each Share Subscription
          Date that the number of Shares subject to the Share Pledge expressed
          as a percentage of all the Shares shall be equal to or greater than
          the aggregate amount of the Escrow Advances expressed as a percentage
          of the total amount paid for Shares;

     (d)  LOOK will not create or allow to exist any Encumbrance over its
          present or future assets, rights or revenues;

     (e)  the Borrower will not create or allow to exist any Encumbrance over
          its present or future assets, rights or revenues otherwise than in the
          ordinary course of its business (for the avoidance of doubt, the
          ordinary course of the Borrower's business shall include investing in,
          buying and selling assets goodwill and shares in other corporate
          entities);

     (f)  LOOK will not enter into any guarantee, indemnity or like agreement to
          answer for the obligations or default of any person;

     (g)  the Borrower will not enter into any guarantee, indemnity or like
          agreement to answer for the obligations or default of any person other
<PAGE>

          than a Subsidiary of the Borrower or otherwise in the ordinary course
          of its business (for the avoidance of doubt, the ordinary course of
          the Borrower's business shall include investing in, buying and selling
          assets goodwill and shares in other corporate entities); and

      (h) the Borrower and LOOK will not whether by one or a series of
          transactions related or not, sell, transfer, lend or otherwise dispose
          of or cease to exercise direct control over any part of their present
          or future assets or revenues otherwise than by transfers, sales or
          disposals of assets made for full consideration in the ordinary course
          of business;

9.    Information

      By acceptance of this letter the Borrower and LOOK undertake with
      Transceptgate that throughout the Drawdown Period and so long as any
      moneys remain outstanding under the Facility:

      (a) they will inform Transceptgate of any Default forthwith upon becoming
          aware thereof; and

      (b) they will provide Transceptgate with such financial and other
          information concerning their financial affairs no less than six
          monthly save that nothing in this sub-clause shall require the
          Borrower to disclose market sensitive information.

10.   Conditions

10.1  Transceptgate shall not be obliged to make the Advance under this
      Agreement unless within seven (7) days after the date of the Drawdown
      Notice for the Advance, it shall have received the Security Documents on
      the terms set out in Schedule 3 and there has occurred completion of the
      Joint Venture Agreement in accordance with all its terms both in form and
      substance satisfactory to it.

10.2  The obligation of Transceptgate to make the Advance under this Agreement
      is subject to the further conditions that, at the time of the proposed
      date for the making of the Advance:

      (a) the representations and warranties set out in Clause 7 are true and
          correct as if each was made with respect to the facts and
          circumstances existing at such time; and

      (b) no Default shall have occurred and be continuing or would result from
          the making of the Advance.

11.   Events of Default

      Transceptgate may, without prejudice to its other rights hereunder
      including its rights pursuant to the Loan Conversion Agreement, terminate
      its obligation to make the Facility available, declare some or all of the
      Advance together with all
<PAGE>

      accrued interest and other moneys payable hereunder immediately repayable
      or payable at any time after any Event of Default shall have occurred (so
      long as the same is continuing). The Borrower shall repay or pay any
      moneys declared repayable or payable under this Clause 11 forthwith on
      such declaration being made. Provided that the sole recourse of
      Transceptgate for Default by the Borrower and/or LOOK hereunder shall be
      by the exercise of its rights under the terms of any one or more of the
      Security Documents.

12.   Notices

12.1  Every notice under this letter shall be in writing and may be given or
      made by post or telefax to the Borrower, LOOK or Transceptgate at their
      respective addresses given below. Notices shall be effective only upon
      actual receipt or when mailed by registered or certified mail, return
      receipt requested.

12.2  No failure or delay by any party to this Agreement in exercising any right
      or remedy hereunder shall operate as a waiver thereof nor shall any single
      or partial exercise of any right or remedy preclude any further exercise
      thereof or the exercise of any other right or remedy. The rights and
      remedies herein are cumulative and not exclusive of any rights and
      remedies provided by law.

12.3  The address and facsimile number of LOOK are:

      Lookmart (Barbados) Inc.
      Hastings Business Services Limited
      Hastings
      Christ Church
      Barbados

      Facsimile Number: (246) 437-7477
      Attention: Chief Executive Officer

12.4  The address and facsimile number of the Borrower are:

      LookSmart Ltd
      625 Second Street
      San Francisco
      CA 94107
      USA

      Facsimile: (415) 348 7034
      Attention: Chief Executive Officer  (with a copy to the General Counsel at
      the same address)

12.5  The address and facsimile number of Transceptgate are:

      81 Newgate Street
      London
      EC1A 7AJ
      Facsimile: +44 171 356 6054
<PAGE>

      Attention: The Group Treasurer

13.   Assignment

      Transceptgate may assign all or any part of its rights under this
      Agreement without the Borrower's consent to any wholly owned subsidiary of
      British Telecommunications plc, but may only transfer any of its
      obligations with the Borrower's prior consent in writing.

14.   Conflict

      In the event of any conflict between the provisions of this Agreement and
      the Joint Venture Agreement the provisions of this Agreement shall
      prevail.

15.   Governing Law

      This Agreement shall be governed by and interpreted in accordance with
      English Law. The Courts of England shall have the non-exclusive
      jurisdiction to settle any dispute which may arise in connection with this
      Agreement.

16.   Availability

      We enclose a copy of this letter. To signify your acceptance of the
      Facility we would ask you to sign the enclosed copy and return the same to
      us before 28 February failing which the offer contained in this letter
      will lapse.

                              Yours faithfully,


                              For and on behalf of

                             Transceptgate Limited

Accepted and agreed.

                                    BORROWER



                                      LOOK

                         ............................
<PAGE>

                                  SCHEDULE 1


                            Form of Drawdown Notice

To:

                                                            [Date]


                50,000,000 US Dollars Term Loan Facility Letter
                          dated [            ], 2000

We refer to the above agreement (the "Agreement") and hereby give you notice
that we wish to draw the Advance of an amount of [   ] US Dollars on ..........,
2000. The funds should be credited to The Pacific Bank, National Association,
with its principal place of business at 100, Montgomery Street, San Francisco,
California Account No. [    ].

We confirm that:

(i)    we are in compliance with the obligations assumed by us and undertakings
       given by us under the Agreement and no Default has occurred and is
       continuing;

(ii)   the representations and warranties contained in Clause 7 of the Agreement
       are true and correct at the date hereof as if made with respect to the
       facts and circumstances existing at such date;

(iii)  the Advance shall be placed in an escrow account pursuant to the terms of
       the Escrow Agreement and thereafter used for the sole purpose of
       subscribing for ordinary shares in the capital of BT LookSmart.

Words and expressions defined in the Agreement shall have the same meanings when
used herein.

                              For and on behalf of
                              BORROWER

                    .......................................


                              For and on behalf of
                                      LOOK


                    .......................................
<PAGE>

                                  SCHEDULE 2

                               Events of Default

There shall be an Event of Default if:

     (a)  the Borrower fails to pay any sum payable by it under this Agreement
          when due; or

     (b)  the Borrower and/or LOOK defaults in the due performance or observance
          of any other provision of this Agreement and (if such default is in
          the opinion of Transceptgate capable of remedy) such default shall not
          have been remedied within 14 days of Transceptgate notifying the
          Borrower and/or LOOK of such default and the remedy required; or

     (c)  any representation made or deemed to be made by the Borrower and/or
          LOOK in or pursuant to this Agreement or the Joint Venture Agreement
          is or proves to have been incorrect in any material respect; or

     (d)  any obligation (including a contingent obligation) of the Borrower
          and/or LOOK in respect of Indebtedness is not paid when due or becomes
          due or capable of being declared due prior to its stated maturity by
          reason of default in circumstances where the aggregate amount of
          Indebtedness is in excess of US$25 million; or

     (e)  a judgment or order made against the Borrower and/or LOOK is not
          complied with within seven days or an encumbrancer takes possession or
          a receiver or administrator is appointed of any part of the
          undertaking, assets, rights or revenues of the Borrower and/or LOOK or
          a distress, execution or other process is levied or enforced upon any
          of the assets, rights, undertaking or revenues of the Borrower and/or
          Guarantor and is not discharged within 7 days; or

     (f)  the Borrower and/or LOOK stops or suspends payment of its debts or is
          unable to or admits inability to pay its debts (within the meaning of
          section 268 of the Insolvency Act 1986 or otherwise but ignoring the
          references in that section to determination by the court) or becomes
          insolvent or proposes or commences negotiations with one or more of
          its creditors with a view to the general rescheduling of its debts or
          proposes or enters into any composition or other arrangement for the
          benefit of its creditors generally or any class of its creditors; or

     (g)  a petition is presented or an order made for the insolvency of the
          Borrower and/or LOOK; or

     (h)  any event occurs or proceeding is taken with respect to the Borrower
          and/or LOOK in any jurisdiction to which it is subject which has an
<PAGE>

          effect equivalent or similar to any of the events mentioned in sub-
          paragraphs (e), (f) or (g); or

     (i)  any steps are taken to repossess any goods in the possession of the
          Borrower and/or LOOK under any hire purchase, conditional sale,
          leasing, retention of title or similar agreement where the aggregate
          value of such goods exceeds US$25 million; or

     (j)  the Joint Venture Agreement is terminated in accordance with the terms
          thereof; or

     (k)  the Borrower and/or LOOK defaults in the due performance or observance
          of any material provision of the Joint Venture Agreement and/or any of
          the Security Documents and in the case of default in respect of the
          Joint Venture Agreement the default is not remedied pursuant to Clause
          11.6 of that Agreement; or

     (l)  any Security Document is not, or ceases to be, in full force and
          effect; or

     m)   LOOK fails, within 5 days of the date of any Escrow Advance to
          subscribe for Shares and deliver the share certificates of the same to
          Transceptgate; or

     (n)  any other event occurs or circumstance arises which, in the reasonable
          opinion of Transceptgate, is likely materially and adversely to affect
          the ability of the Borrower and/or LOOK to perform all or any of its
          obligations under or otherwise to comply with the terms of this
          Agreement and/or the Joint Venture Agreement.
<PAGE>

                                  SCHEDULE 3

            Documents and Evidence Required as Conditions Precedent

1.   The Share Pledge.

2.   The Loan Conversion Agreement.

3.   The Escrow Agreement.

4.   Legal Opinions in form and substance satisfactory to Transceptgate in
     respect of the Borrower, and the Guarantee from each of Orrick Herrington &
     Sutcliffe (New York) (in respect of the Loan Conversion Agreement) and
     Graham Thompson (in respect of due execution of the Share Pledge) and
     lawyers from Barbados (in respect of due execution of this Agreement  and
     the Share Pledge).

<PAGE>

                                                                    Exhibit 23.1

                       CONSENT OF INDEPENDENT ACCOUNTANTS

   We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-89653) of LookSmart, Ltd. and Subsidiaries of
our report dated January 26, 2000, except for Note 14, which is as of February
25, 2000, relating to the financial statements, which appears in the Annual
Report to Stockholders, which is incorporated in this Annual Report on Form 10-
K.

/s/ PricewaterhouseCoopers LLP

San Francisco, California
March 29, 2000

<TABLE> <S> <C>

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31,
1999 FORM 10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>

<S>                             <C>                     <C>
<PERIOD-TYPE>                   YEAR                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1998             DEC-31-1999
<PERIOD-START>                             JAN-01-1998             JAN-01-1999
<PERIOD-END>                               DEC-31-1998             DEC-31-1999
<CASH>                                           3,501                  75,971
<SECURITIES>                                         0                  28,038
<RECEIVABLES>                                    2,895                   9,629
<ALLOWANCES>                                     (127)                   (610)
<INVENTORY>                                          0                       0
<CURRENT-ASSETS>                                 7,248                 117,703
<PP&E>                                           2,654                  14,330
<DEPRECIATION>                                   (675)                 (2,735)
<TOTAL-ASSETS>                                  14,090                 161,519
<CURRENT-LIABILITIES>                           13,755                  35,015
<BONDS>                                              0                       0
                                0                       0
                                         26                       0
<COMMON>                                            19                      86
<OTHER-SE>                                     (1,306)                 119,466
<TOTAL-LIABILITY-AND-EQUITY>                    14,090                 161,519
<SALES>                                          8,785                  48,865
<TOTAL-REVENUES>                                 8,785                  48,865
<CGS>                                            1,586                   6,918
<TOTAL-COSTS>                                    1,586                   6,918
<OTHER-EXPENSES>                                19,097                 109,065
<LOSS-PROVISION>                                   127                   1,203
<INTEREST-EXPENSE>                                 675                     172
<INCOME-PRETAX>                               (12,712)                (64,193)
<INCOME-TAX>                                       146                     470
<INCOME-CONTINUING>                           (12,858)                (64,663)
<DISCONTINUED>                                       0                       0
<EXTRAORDINARY>                                      0                       0
<CHANGES>                                            0                       0
<NET-INCOME>                                  (12,858)                (64,663)
<EPS-BASIC>                                     (0.68)                  (1.42)
<EPS-DILUTED>                                   (0.68)                  (1.42)


</TABLE>


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