10-Q

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2007

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 Number: 000-26357

LOOKSMART, LTD.

(Exact Name of Registrant as Specified in its Charter)

Delaware	13-3904355
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

625 Second Street

San Francisco, California 94107

(415) 348-7000

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

NASDAQ Stock Market LLC

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

Common Stock, par value $0.001 per share

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

None

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 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 whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer, as defined in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company, as defined in Rule 12b-2 of the Exchange Act.    Yes  ¨    No  x

As of August 7, 2007, there were 22,912,800 shares of the registrant’s common stock outstanding.

Table of Contents

FORM 10-Q

INDEX

		Page
PART I FINANCIAL INFORMATION
ITEM 1:	Unaudited Condensed Consolidated Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006	3
	Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2007 and June 30, 2006	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and June 30, 2006	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
ITEM 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
ITEM 3:	Quantitative and Qualitative Disclosures About Market Risk	25
ITEM 4:	Controls and Procedures	25
PART II OTHER INFORMATION
ITEM 1:	Legal Proceedings	26
ITEM 1A:	Risk Factors	28
ITEM 6:	Exhibits	37
ITEM 7:	Signature	38
EXHIBIT INDEX		39

2

PART I — FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

LOOKSMART, LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

	June 30, 2007			December 31, 2006
ASSETS
Current assets:
Cash and cash equivalents	$	23,703		$	32,901
Short-term investments		14,549			7,257
Total cash, cash equivalents and short-term investments		38,252			40,158
Trade accounts receivable, net of allowance for doubtful accounts of $339 and $323 at June 30, 2007 and December 31, 2006, respectively, and allowance for returns of $40 and $14 at June 30, 2007 and December 31, 2006, respectively		5,612			4,639
Prepaid expenses		459			516
Other current assets		1,068			339
Total current assets		45,391			45,652
Long-term investments		—			998
Property and equipment, net		3,863			4,588
Capitalized software and other assets, net		3,870			3,533
Intangible assets, net		1,969			3,364
Goodwill		14,422			14,422
Total assets	$	69,515		$	72,557
LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	3,916		$	2,576
Accrued expenses and other current liabilities		6,560			5,624
Deferred revenue and customer deposits		1,858			2,541
Current portion of lease restructuring and other long-term liabilities		1,373			1,391
Total current liabilities		13,707			12,132
Lease restructuring and other long-term liabilities, net of current portion		2,438			2,876
Total liabilities		16,145			15,008
Commitments and contingencies (Note 9):
Stockholders’ equity:
Convertible preferred stock, $0.001 par value; Authorized: 5,000 at June 30, 2007 and December 31, 2006; Issued and Outstanding: none at June 30, 2007 and December 31, 2006		—			—
Common stock, $0.001 par value; Authorized: 200,000 at June 30, 2007 and December 31, 2006; Issued and Outstanding: 22,912 at June 30, 2007 and 22,974 at December 31, 2006, respectively		23			23
Additional paid-in capital		275,800			274,484
Other equity		515			517
Accumulated deficit		(222,968	)		(217,475	)
Total stockholders’ equity		53,370			57,549
Total liabilities and stockholders’ equity	$	69,515		$	72,557

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

3

LOOKSMART, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share data)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Revenue	$	14,624		$	11,130		$	27,850		$	21,673
Cost of revenue		8,181			7,251			15,835			14,339
Gross profit		6,443			3,879			12,015			7,334
Operating expenses:
Sales and marketing		2,223			2,096			4,351			3,839
Product development		3,889			4,094			8,062			8,377
General and administrative		2,929			2,570			5,937			4,997
Total operating expenses		9,041			8,760			18,350			17,213
Other operating income (loss), net		74			—			(123	)		—
Loss from operations		(2,524	)		(4,881	)		(6,458	)		(9,879	)
Non-operating income, net		518			482			1,033			961
Loss from continuing operations before income taxes		(2,006	)		(4,399	)		(5,425	)		(8,918	)
Income tax expense		—			—			(6	)		—
Loss from continuing operations		(2,006	)		(4,399	)		(5,431	)		(8,918	)
Loss from discontinued operations, net of tax		(62	)		—			(62	)		—
Net loss	$	(2,068	)	$	(4,399	)	$	(5,493	)	$	(8,918	)
Basic and diluted net loss per common share:
Loss from continuing operations	$	(0.09	)	$	(0.19	)	$	(0.24	)	$	(0.39	)
Gain (loss) from discontinued operations, net of tax		—			—			—			—
Net loss	$	(0.09	)	$	(0.19	)	$	(0.24	)	$	(0.39	)
Weighted average shares outstanding used in per share calculation		22,900			22,815			22,893			22,810

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

4

LOOKSMART, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended June 30,
	2007			2006
Cash flows from operating activities:
Net loss	$	(5,493	)	$	(8,918	)
Adjustments to reconcile net loss to net cash used in operating activities:
Share of joint venture (income) loss		(22	)		—
Depreciation and amortization		2,613			3,437
Share-based compensation		1,105			1,020
Loss from sale of assets and other non-cash charges, net		251			82
Changes in operating assets and liabilities:
Trade accounts receivable, net		(972	)		(554	)
Prepaid expenses		57			(77	)
Other assets		(762	)		(216	)
Trade accounts payable		1,166			201
Accrued expenses and other current liabilities		957			(23	)
Other long term liabilities		(427	)		(767	)
Deferred revenue and customer deposits		(361	)		(109	)
Net cash used in operating activities	$	(1,888	)	$	(5,924	)
Cash flows from investing activities:
Purchase of investments		(16,646	)		(1,996	)
Proceeds from sale and maturity of investments		10,347			6,410
Payments for property, equipment and capitalized software development		(1,332	)		(2,276	)
Net cash provided by (used in) investing activities:	$	(7,631	)	$	2,138
Cash flows from financing activities:
Repayment of notes		(28	)		(26	)
Principal payments under capital lease obligations		(21	)		—
Proceeds from the sale and lease back of equipment		211			—
Proceeds from issuance of common stock		159			84
Net cash provided by financing activities	$	321		$	58
Decrease in cash and cash equivalents		(9,198	)		(3,728	)
Cash and cash equivalents, beginning of period		32,901			33,436
Cash and cash equivalents, end of period	$	23,703		$	29,708

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

5

LOOKSMART, LTD.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business and Principles of Consolidation

LookSmart is an online advertising and technology company that provides relevant solutions for advertisers, publishers and consumers. LookSmart offers advertisers targeted, pay-per-click (PPC) search advertising and banners via a monitored ad distribution network; a customizable set of private-label solutions for publishers; and consumer websites and web tools.

The Unaudited Condensed Consolidated Financial Statements as of June 30, 2007 and for the three and six months ended June 30, 2007 include the accounts of the Company and its subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.

Unaudited Interim Financial Information

The accompanying Unaudited Condensed Consolidated Financial Statements as of June 30, 2007 and for the three and six months ended June 30, 2007 reflect all adjustments that are normal and recurring in nature and, in the opinion of management, are necessary for a fair statement of the results of operations for the periods shown. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006. The Unaudited Condensed Consolidated Balance Sheet as of December 31, 2006 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The results of operations for the interim period ended June 30, 2007 are not necessarily indicative of results to be expected for the full year.

Use of Estimates and Assumptions

The Unaudited Condensed Consolidated 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, revenue, expenses, and contingent assets and liabilities during the reporting period. The Company bases its estimates on various factors and information which may include, but are not limited to, history and prior experience, experience of other enterprises in the same industry, new related events, current economic conditions and information from third party professionals that is believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk comprise all or portions of cash equivalents, short-term investments, long-term investments and accounts receivable. As of June 30, 2007 and December 31, 2006, substantially all of the Company’s cash, cash equivalents and investments were managed by one financial institution. The fair value of these investments is subject to fluctuation based on market prices.

Credit Risk, Customer and Vendor Concentrations

Accounts receivable are typically unsecured and are derived from revenue earned from customers. The Company performs ongoing credit evaluations of its customers and maintains allowances for estimated credit losses. The Company applies judgment as to its ability to collect outstanding receivables based primarily on management’s evaluation of the customer’s financial condition and past collection history and records a specific allowance. In addition, the Company records an allowance based on the length of time the accounts receivables are past due. Historically, such losses have been within management’s expectations.

As of June 30, 2007, one customer accounted for 29% and another customer accounted for 17% of accounts receivable. As of December 31, 2006, one customer accounted for 22% of accounts receivable.

The Company derives its revenue primarily from its relationships with significant distribution network partners. For the period ended June 30, 2007, two vendors each accounted for over 10% of total traffic acquisition costs, with these two vendors accounting for a total of 28% of the total traffic acquisition costs. For the period ended June 30, 2006, two vendors each accounted for more than 10% of the total traffic acquisition costs, with these two vendors accounting for a total of 27% of the total traffic acquisition costs.

6

Revenue Concentrations

One customer represented 15% and 8% and another represented 11% and 12% of total revenue, respectively, for the three and six months ended June 30, 2007. For the three and six months ended June 30, 2006 another customer represented 12% and 12% of total revenue, respectively.

Net Loss per Common Share

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

Share-Based Compensation

Share-based compensation expense recognized under SFAS 123R for the three and six months ended June 30, 2007 and 2006 was approximately $0.6 million and $1.2 million, respectively, and approximately $0.8 million and $1.1 million for the three and six months ended June 30, 2006, respectively, which was related to stock options and employee stock purchases.

SFAS 123R requires companies to estimate the fair value of share-based payment awards on the grant date using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense in the Company’s Unaudited Condensed Consolidated Statements of Operations over the requisite service periods.

SFAS 123R requires forfeitures to be estimated at the time of grant in order to estimate the amount of share-based awards that will ultimately vest. The forfeiture rate is determined at the beginning of each fiscal year, based on historical rates, and reviewed on a periodic basis. Share-based compensation expense recognized in the Company’s Unaudited Condensed Consolidated Statements of Operations for the three and six month ended June 30, 2007 includes (i) compensation expense for share-based payment awards granted prior to, but not yet fully vested as of December 31, 2005, based on the grant-date fair value estimated in accordance with the pro forma provisions of SFAS 123 and (ii) compensation expense for the share-based payment awards granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R.

Under the provisions of SFAS 123R, the Company continues its use of the Black-Scholes method of valuation for share-based awards granted beginning in fiscal 2006, which was previously used for the Company’s pro forma information required under SFAS 123. On November 10, 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. SFAS 123R-3, Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards (“SFASR-3”). The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee share-based compensation, and to determine the subsequent impact on the APIC pool and Unaudited Condensed Consolidated Statements of Cash Flows of the tax effects of employee share-based compensation awards that are outstanding upon adoption of SFAS 123R. The Company has elected to adopt the alternative transition method provided in this FASB Staff Position for calculating the tax effects of share-based compensation pursuant to SFAS 123R-3.

Recently Issued Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measures (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS No. 157 is effective as of the beginning of the Company’s 2008 fiscal year. We are currently reviewing the provisions of SFAS 157 to determine the impact for the Company.

In February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115 . SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value, with changes in fair value recognized in earnings each reporting period. The election, called the fair value option, will enable entities to achieve an offset accounting effect for changes in fair value of certain related assets and liabilities without having to apply complex hedge accounting provisions. SFAS 159 is effective as of the beginning of the Company’s 2008 fiscal year. We are currently reviewing the provisions of SFAS 159 to determine the impact for the Company.

7

2. DISPOSITIONS

On January 22, 2007, the Company completed the sale of Net Nanny to Content Watch, Inc. The Company recorded $248 thousand loss on the sale of Net Nanny in the first quarter of 2007, which is offset by $50 thousand income from the revenue sharing agreement with Content Watch. The sale proceeds are comprised of contingent purchase consideration of up to $3.5 million, which may be realized at future dates based on the amount of revenue of the buyer. As a result of the sale the following assets and liabilities were removed from the Company’s books:

(In thousands:)
Other current assets	30
Intangible assets	1,450
Accumulated amortization	(910	)
Deferred revenue and customer deposits	(322	)
Loss on the sale of Net Nanny	248

The loss on sale at date of sale and contingent purchase consideration realized in future periods are included in other operating income (loss), net in the Condensed Consolidated Statements of Operations.

3. PROPERTY AND EQUIPMENT

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

	June 30, 2007			December 31, 2006
Computer Equipment	$	17,924		$	17,393
Furniture and fixtures		1,126			1,126
Software		3,770			3,761
Leasehold improvements		2,718			2,718
Total		25,538			24,998
Less accumulated depreciation and amortization		(21,675	)		(20,410	)
Property and equipment, net	$	3,863		$	4,588

Depreciation and amortization expense on property and equipment for the three and six months ended June 30, 2007, including property and equipment under capital lease, was $0.6 million and $1.3 million, respectively. Depreciation and amortization expense on property and equipment for the three and six months ended June 30, 2006 was $0.8 million and $1.6 million, respectively. Equipment under capital lease amounted to $0.3 million as of June 30, 2007 and $0 million as of December 31, 2006. Depreciation expense on equipment under capital lease for the three and six months ended June 30, 2007 was $24 thousand. Additionally, accumulated depreciation on equipment under capital lease was $24 thousand as of June 30, 2007 and $0 as of December 31, 2006.

8

4. GOODWILL AND INTANGIBLE ASSETS

The Company’s intangible assets consist primarily of purchased technology and have estimated useful lives of two to seven years. Goodwill and intangible assets are as follows (in thousands):

	June 30, 2007			December 31, 2006
Goodwill	$	14,422		$	14,422
Intangible assets:
Purchased technology	$	9,669		$	10,179
Less accumulated amortization		(8,027	)		(7,743	)
Net purchased technology		1,642			2,436
Trade names		1,063			1,743
Less accumulated amortization		(750	)		(912	)
Net trade names		313			831
Other intangibles		1,910			2,170
Less accumulated amortization		(1,896	)		(2,073	)
Net other intangibles		14			97
Intangible assets, net	$	1,969		$	3,364

Intangible asset amortization expense was $0.4 million and $0.8 million for the three and six months ended June 30, 2007, and $0.6 million and $1.2 million for the three and six months ended 2006, respectively, and was recorded primarily in product development expense.

5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following (in thousands):

	June 30, 2007		December 31, 2006
Accrued compensation and related expenses	$	1,868	$	1,620
Accrued distribution and partner costs		2,846		2,631
Accrued professional services		1,231		497
Customer refunds		226		93
Accrued equipment purchases		38		336
City business and personal property tax payable		92		136
Capital lease obligation, current portion		89		—
Other		170		311
Total accrued expenses and other current liabilities	$	6,560	$	5,624

6. INCOME TAXES

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109, (“FIN 48”), on January 1, 2007. The Company did not have any unrecognized tax benefits and there was no effect on the Company’s financial condition or results of operations as a result of implementing FIN 48 or during the current period.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years before 2003. State jurisdictions that remain subject to examination range from 2002 to 2003. Certain foreign jurisdictions remain open to examination by the major taxing jurisdictions for the tax years 2000 through 2006.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48, the Company did not have any accrued interest or penalties associated with unrecognized tax benefits, nor was any interest expense or penalties recognized during the three and six months ended June 30, 2007.

9

7. LEASE RESTRUCTURING AND OTHER LONG-TERM LIABILITIES

Other Long-Term Liabilities

Other long-term liabilities consist of the following (in thousands):

	June 30, 2007			December 31, 2006
Long-term liabilities	$	3,589		$	4,267
Capital lease obligation, net of current portion		222			—
Total other liabilities		3,811			4,267
Less: current portion		(1,373	)		(1,391	)
Lease restructuring and other long term liabilities	$	2,438		$	2,876

Long-term liabilities consist of lease restructuring liability, notes payable and sublease deposits.

On April 6, 2007, the Company entered into a master equipment lease agreement with City National Bank (“CNB”) for an amount of up to $5 million for the purchase of technical equipment. This lease line of credit expires on January 30, 2008 and is available for equipment leases with rental terms from 36 to 48 months. Interest on the capital lease is calculated using an interest rate of 7.76% per annum. As of June 30, 2007 the Company drew down approximately $0.3 million on the lease line and repaid approximately $21 thousand for the three months ended June 30, 2007.

Restructuring Charges

During 2003, the Company vacated portions of its leased headquarter office facilities, and incurred lease restructuring costs related to closing these facilities. These costs are classified as restructuring charges on the Unaudited Condensed Consolidated Statements of Operations, and are included in operating expenses.

As of June 30, 2007 and December 31, 2006, the lease restructuring liability was $3.3 million and $3.8 million, respectively. Of this amount, $1.4 million and $1.4 million were included in current portion of lease restructuring and other long-term liabilities as of June 30, 2007 and December 31, 2006, respectively. The Company does not currently expect to incur significant further restructuring charges or receive additional benefits related to closing redundant leased facilities in 2007 as it has sublet most of its unused space.

The following table sets forth lease restructuring activity during the period ended June 30, 2007 (in thousands):

	Lease Restructuring Costs
Balance at December 31, 2006	$	3,858
Amounts paid and charged against the liability		(260	)
Balance at March 31, 2007	$	3,598
Amounts paid and charged against the liability		(257	)
Balance at June 30, 2007	$	3,341

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8. COMMITMENTS AND CONTINGENCIES

Capital and Operating Leases

The Company leases office space under a non-terminable operating lease that expires in 2009.

Future minimum payments under all capital and operating leases and minimum sublease rental income, at June 30, 2007 are as follows (in thousands):

Period	Capital Lease		Operating Leases		Minimum Sublease Rental Income
Six months ending December 31, 2007	$	55	$	2,348	$	450
Fiscal years ending December 31:
2008		110		4,751		931
2009		110		4,412		866
Thereafter		78		—		—
Total	$	353	$	11,511	$	2,247

The Company has outstanding standby letters of credit (“SBLC”) related to security of its building lease and security for payroll processing services of $1.0 million at June 30, 2007. The SBLC contains two financial covenants. As of June 30, 2007, the Company was in compliance with all required covenants.

Guarantees and Indemnities

During its normal course of business, the Company has made certain guarantees, indemnities and commitments under which it may be required to make payments in relation to certain transactions. These indemnities include intellectual property and other indemnities to the Company’s customers and distribution network partners in connection with the sales of its products, and indemnities to various lessors in connection with facility and other leases for certain claims arising from such facility or lease. Further, the Company has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was, serving, at the Company’s request, in such capacity, to the maximum extent permitted under the laws of the State of Delaware. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. However, the Company maintains directors and officers insurance coverage that may contribute, up to certain limits, a portion of any future amounts paid, for indemnification of directors and officers. The Company believes the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal. Historically, the Company has not incurred any losses or recorded any liabilities related to performance under these types of indemnities.

Other

On July 27, 2007, David Hills, the President, Chief Executive Officer and a member of the board of directors of the Company, resigned as an employee and director of the Company effective as of August 1, 2007, related to which the Company incurred obligations under a severance agreement. (See footnote 12, Subsequent Events, for further details).

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Legal Proceedings

The Company is involved, from time to time, in various legal proceedings arising from the normal course of business activities. Although the results of litigation and claims cannot be predicted with certainty, the Company does not expect resolution of these matters to have a material adverse impact on its consolidated results of operations, cash flows or financial position unless stated otherwise. However, an unfavorable resolution of a matter could, depending on its amount and timing, materially affect its future results of operations, cash flows or financial position in a future period. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense costs, diversion of management resources and other factors.

Cisneros v. Yahoo! Inc

On August 3, 2004, Mario Cisneros and Michael Voight filed a private attorney general lawsuit on behalf of a proposed class in Superior Court in San Francisco County, California. The complaint names thirteen search engines or Web publishers as defendants, including the Company, and alleges unfair business practices, unlawful business practices, and other causes of action in connection with the display of advertisements from Internet gambling companies. The complaint seeks restitution, unspecified compensatory damages, declaratory and injunctive relief, and attorneys’ fees. Plaintiffs also filed a motion for preliminary injunction on August 3, 2004.

On January 3, 2005, the Company filed a demurrer to the complaint, which was overruled on January 27, 2005. On January 3, 2005, the Company also filed a motion to strike certain allegations regarding claims for restitution, which was denied in part and granted in part on May 9, 2005. The Company filed an answer to the complaint on February 28, 2005, consisting of a general denial of all allegations. On October 11, 2005, the court conducted a trial on two of the Company’s affirmative defenses. The court held that California public policy bars the plaintiffs from receiving a portion of their requested damages.

On December 2, 2005, plaintiffs filed a renewed motion for a preliminary injunction. Defendants responded on or around February 27, 2006. The Court has allowed certain discovery to proceed with respect to plaintiffs’ renewed motion. On or about May 23, 2006, plaintiffs were granted leave to amend their complaint to name additional plaintiffs. On or about September 8, 2006, plaintiffs served an amended complaint naming additional plaintiffs. The Company has since filed a general denial to the amended complaint. On April 13, 2007 the Court heard argument on defendants’ motion to dismiss for lack of subject matter jurisdiction and plaintiffs’ motion to allow non-restitutionary disgorgement. Both motions were denied. Plaintiffs’ counsel has indicated verbal agreement to a settlement whereby (i) the Company would make a payment of $15,000 to a designated charitable organization and continue its current policies banning acceptance of ads from gambling websites, and (ii) all plaintiffs would dismiss their claims against the Company with prejudice. This potential settlement has not yet been finalized between the parties and would also be subject to final court approval.

The nature of litigation is inherently uncertain and therefore the Company cannot predict the outcome of these proceedings or estimate the possible effects on our financial position, results of operations or cashflows.

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Lane’s Gifts and Collectibles, L.L.C., v. Yahoo! Inc

On March 14, 2005 the Company was served with the second amended complaint in a class action lawsuit in the Circuit Court of Miller County, Arkansas. The complaint names eleven search engines and web publishers as defendants, including the Company, and alleges breach of contract, restitution/unjust enrichment/money had and received, and civil conspiracy claims in connection with contracts allegedly entered into with plaintiffs for Internet pay-per-click advertising. The named plaintiffs on the second amended complaint are Lane’s Gifts and Collectibles, L.L.C., U.S. Citizens for Fair Credit Card Terms, Inc., Savings 4 Merchants, Inc., and Max Caulfield d/b/a Caulfield Investigations.

On March 30, 2005 the case was removed to United States District Court for the Western District of Arkansas. On April 4, 2005 plaintiffs U.S. Citizens for Fair Credit Card Terms, Inc. and Savings 4 Merchants, Inc. filed a motion of voluntary dismissal without prejudice. The motion was granted on April 7, 2005. Plaintiffs Lane’s Gifts and Collectibles, L.L.C. and Max Caulfield d/b/a Caulfield Investigations filed a motion to remand the case to state court on April 13, 2005, which was granted in June 2005. In July 2005, defendants, including the Company, petitioned the Eighth Circuit Court of Appeals for an appeal of the remand order, and moved to stay the proceedings while the appeal is pending. The petition was denied on September 8, 2005 and the case was remanded to the Circuit Court of Miller County, Arkansas. The Company was served with discovery requests on October 7, 2005. The Company has filed and/or joined motions to dismiss on the basis of failure to state a claim upon which relief can be granted, lack of personal jurisdiction, and improper venue. Pursuant to the court’s initial scheduling order, plaintiffs had until January 27, 2006 to respond to the motions to dismiss for lack of personal jurisdiction and improper venue; and until June 9, 2006 to respond to the motion to dismiss on the basis of failure to state a claim upon which relief can be granted. However the court entered an order staying all proceedings for a period of 60 days on January 9, 2006. On March 8, 2006, the Court entered an order extending the stay until March 31, 2006. On April 1, 2006, the Court further extended the stay until April 20, 2006. On April 20, 2006 the Court preliminarily approved a class settlement among plaintiffs, defendant Google, Inc., and certain defendants who display Google advertisements on their networks (the “Google Settlement”). The Google Settlement purports to release Google of all claims and also purports to release certain defendants, including the Company, for any claims associated with the display of Google advertisements on their networks. On July 24 and 25, 2006, the Court had a final settlement hearing on the Google Settlement, and on July 26, 2006, the Court approved the settlement. On April 21, 2006, the Court ordered the remaining defendants, including the Company, to mediation and further stayed the proceedings to June 21, 2006. The Court further extended the stay as to LookSmart until August 16, 2006. The parties thereafter stipulated that the stay would remain in effect while the parties continue to comply with the Court’s order regarding mediation. On January 10, 2007, the Court further extended the stay until May 1, 2007. Plaintiffs’ counsel have stipulated to extend the stay as to LookSmart. In April 2007, the Plaintiffs and the Company came to an agreement in principle to settle the matter in its entirety. The precise terms of the agreement, including the amount and form of any payments to the Class, have not yet been agreed to. Any eventual settlement with plaintiffs will be subject to court approval. The Company has recorded an estimate of the amount of the loss on settlement which management has determined is probable and estimable during the quarter ended March 31, 2007. This estimate may change as a result of the final settlement arrangement. In addition, because recovery from the insurance carriers is probable, a receivable was also recorded for the same amount. Accordingly, there is no impact to the statement of operations because the amounts of the settlement and the insurance recovery offset each other.

The nature of litigation is inherently uncertain and therefore the Company cannot predict the outcome of these proceedings or estimate the possible effects on our financial position, results of operations or cashflows.

JV Funding

Pursuant to the settlement agreement with British Telecommunications (“BT”) for the dissolution of the joint venture, LookSmart and BT are jointly liable for the costs incurred to shut down operations of the joint venture. The Company does not expect to incur significant additional expenses to shut down the joint venture. The Company expects to record income or loss from its share of the joint venture as it moves to finalize its wind-down activities in 2007.

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9. SHARE-BASED COMPENSATION

Stock Option Plans

In December 1997, the Company approved the 1998 Stock Option Plan (the “Plan”). The 1998 Plan will expire on December 17, 2007. On June 19, 2007, the stockholders approved the LookSmart 2007 Equity Incentive Plan (the “2007 Plan”). In October 2000, the Company acquired Zeal Media, Inc. and assumed all the stock options outstanding under the 1999 Zeal Media, Inc. Stock Plan (the “Zeal Plan”). In April 2002, the Company acquired WiseNut, Inc. and assumed all the stock options outstanding under the WiseNut, Inc. 1999 Stock Incentive Plan (the “WiseNut Plan”). The Company has reserved 8,289,843 and 4,647,731 shares of common stock for issuance under its stock option plans at June 30, 2007 and 2006, respectively. Outstanding stock options generally become exercisable over a three or four year period from the grant date and have a term of ten years. Under the Plan and the 2007 Plan, the Company may grant incentive stock options, nonqualified stock options, stock appreciation rights and stock rights to employees, directors and consultants.

As of June 30, 2007, 3,388,018 options were outstanding and 4,901,825 shares remained available for grant under the Company’s plans.

Employee Stock Purchase Plan

In July 1999, the stockholders approved the 1999 Employee Stock Purchase Plan (the “ESPP Plan”). At June 30, 2007, a total of 520,000 shares of common stock were reserved for issuance under the ESPP Plan, plus annual increases at the Board’s discretion effective on January 1 of each year, beginning in 2000. As of June 30, 2007, 439,211 shares have been issued under the ESPP Plan and 80,789 shares remain available for issuance.

The Company accounts for employee stock options under SFAS 123R and related interpretations. For the three and six months ended June 30, 2007, the Company recorded share-based compensation of approximately $0.6 million and $1.2 million, respectively, and approximately $0.8 million and $1.1 million for the three and six months ended June 30, 2006. Of these amounts, approximately $35 thousand and $53 thousand, and $25 thousand and $35 thousand, respectively, was capitalized related to the development of internal-use software in accordance with American Institute of Certified Public Accountants (“AICPA”) Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (“SOP 98-1”).

Valuation Assumptions

As share-based compensation expense recognized in the Unaudited Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2007 and 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Volatility: The volatility factor was based on the Company’s historical stock prices over the most recent period commensurate with the estimated expected term of the stock options.

Risk-Free Interest Rate: The Company bases the risk-free interest rate used in the Black-Scholes valuation method on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term.

Expected Term: The Company’s expected term represents the period that the Company’s share-based awards are expected to be outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the share-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its share-based awards.

Expected Dividend: The Black-Scholes valuation model calls for a single expected dividend yield as an input. The Company has not issued any dividends, and does not expect to issue dividends in the foreseeable future.

Annual Forfeiture Rate: When estimating pre-vesting forfeitures, the Company considers voluntary termination behavior as well as potential future workforce reduction programs.

The weighted average grant-date fair value of options granted in the three and six months ended June 30, 2007 was $2.77 and $2.51, respectively, and $2.77 and $2.96 for the three and six months ended June 30, 2006.

The aggregate intrinsic value of options exercised for the three and six months ended June 30, 2007 was approximately $6 thousand and $49 thousand, respectively, and approximately $2 thousand and $17 thousand for the three and six months ended June 30, 2006. The Company issues new shares of common stock upon exercise of stock options. No income tax benefits have been realized from exercised stock options.

Total unrecognized share-based compensation expense was approximately $10.6 million as of June 30, 2007, and the weighted average period over which it is expected to be recognized is 4.8 years.

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Stock option activity under the plans during the periods indicated is as follows:

	Outstanding Options Number of Shares		Weighted Average Exercise Price Per Share
Balance at December 31, 2006	2,741		$	5.84
Granted	910			4.32
Exercised	(28	)		3.42
Expired/forfeited	(160	)		5.05
Balance at March 31, 2007	3,463		$	5.50
Granted	80			3.93
Exercised	(7	)		3.13
Expired/forfeited	(148	)		6.09
Balance at June 30, 2007	3,388		$	5.44

The following table summarizes information about stock options outstanding at June 30, 2007:

				Outstanding						Exercisable
Range of Exercise Prices				Number Outstanding As of 06/30/07	Weighted Average Remaining Contractual	Weighted Average Exercise Price		Aggregate Intrinsic Value		Number Exercisable As of 06/30/07	Weighted Average Exercise Price		Aggregate Intrinsic Value
$	1.25	$	4.31	787,830	8.59	$	3.36	$	457,323	417,105	$	3.31	$	251,529
$	4.32	$	4.33	752,175	9.34	$	4.32			64,157	$	4.33
$	4.36	$	14.00	1,777,367	7.64	$	6.38			955,841	$	7.09
$	14.31	$	20.55	70,646	5.33	$	16.78			70,437	$	16.78
$	1.25	$	20.55	3,388,018	8.19	$	5.44			1,507,540	$	6.38

Aggregate intrinsic value represents the total pretax intrinsic value, based on the Company’s closing stock price on June 30, 2007 $(3.90), which would have been received by option holders had all option holders exercised their options on that date.

As of June 30, 2006, there were 2,834,816 options outstanding and 880,283 options exercisable.

10. DISCONTINUED OPERATIONS

As the Company finalizes the liquidation process of its Australian subsidiary, it expects to record additional income related to the reversal of the cumulative translation adjustment of approximately $0.5 million. The Company also recorded additional amounts relating to the finalization of the liquidation of various foreign operations in the second quarter of 2007. The Company expects to finalize the dissolution of these entities during 2007.

Revenue and pretax net loss from the discontinued international operations (excluding gain on disposal), previously included in the online advertising business, reported in discontinued operations were as follows (in thousands):

	Three Months Ended June 30,					Six Months Ended June 30,
	2007			2006		2007			2006
Revenue	$	—		$	—	$	—		$	—
Pretax net loss (excluding gain on disposal)		—			—		—			—
Tax benefit		—			—		—			—
Loss on disposal		(62	)		—		(62	)		—
Net loss from discontinued operations, net of tax	$	(62	)	$	—	$	(62	)	$	—

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11. COMPREHENSIVE LOSS

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Net loss	$	(2,068	)	$	(4,399	)	$	(5,493	)	$	(8,918	)
Other comprehensive loss:
Change in unrealized gain on securities, net		(8	)		38			(2	)		69
Comprehensive loss	$	(2,076	)	$	(4,361	)	$	(5,495	)	$	(8,849	)

12. RELATED PARTY TRANSACTIONS

The Company has a related party investment in the BT LookSmart joint venture, which both the Company and British Telecommunications agreed to dissolve in December 2002. The remaining investment balance is $0.5 million at June 30, 2007, which reflects the current estimated value upon final liquidation of the joint venture.

13. SUBSEQUENT EVENTS

As filed within an 8-K on August 7, 2007, on July 27, 2007, David Hills, the President, Chief Executive Officer and a member of the board of directors of the Company, resigned as an employee and director of the Company effective as of August 1, 2007. Mr. Hills did not resign as a result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices. The Company’s board of directors has appointed Edward F. West, the Company’s current Chair of the Board of Directors, as interim President and Chief Executive Officer of the Company, to replace Mr. Hills, effective as of August 1, 2007.

On August 2, 2007, Mr. Hills and the Company entered into a Severance Agreement and General Release (the “Release Agreement”). The Release Agreement set forth the terms and provisions of termination of Mr. Hills’s employment with the Company as well as certain severance payments by the Company to Mr. Hills following such termination. Pursuant to the Release Agreement, among other terms and conditions, Mr. Hills executed a release with respect to any claims or causes of action relating to Mr. Hills’s employment by the Company, to the termination thereof or to the offer letter dated as of September 24, 2004 (the “Offer Letter”) under which Mr. Hills was employed. Further, the parties agreed to a twelve month non-solicitation agreement and a twelve month consulting arrangement. In consideration of a full and final settlement of any and all claims related to Mr. Hills’s employment at the Company, and subject to certain additional conditions which the Company expects will be satisfied, the Company has agreed to pay Mr. Hills a total sum of $496,640, less required withholdings and authorized deductions, representing twelve months of his annual base salary plus his actual, earned incentive bonus for the 2006 fiscal year.

Mr. Hills and the Company have also agreed that Mr. Hills will provide up to twelve months of consulting services to the Company to assist in the Company’s sales efforts. Pursuant to such agreement, Mr. Hills will be paid as follows for such consulting services: (a) a monthly retainer of $10,000, (b) a $5,000 per-transaction-closed fee for mutually agreed upon transactions in each quarter of the consulting period beginning with the third mutually agreed upon transaction in each quarter, and (c) for the first six months of the consulting period, a transaction fee equal to 2.5% of the Company's net revenues realized in the initial term of those transactions that Mr. Hills provides substantial assistance to the Company in identifying, bringing to the Company and closing. In the second six months of the consulting period, the 2.5% transaction fee referenced above will be modified based on mutual agreement, to an amount between 1% and 2%.

During the consulting period, Mr. Hills’s stock options will continue to vest, and in the event there is a change of control of the Company during the consulting period, and within twelve (12) months thereafter the Mr. Hills’s consulting arrangement is terminated by the Company or a successor, then Mr. Hills shall be entitled to receive the accelerated vesting of the Options as originally set forth in his offer letter. However, upon any expiration of the consulting period without the Company’s (or its successor’s) termination thereof, and/or the expiration or termination of Mr. Hills’s options by their terms, Mr. Hills shall not receive any acceleration benefits.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and the Notes to those statements which appear elsewhere in this Quarterly Report on Form 10-Q.

The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believes,” “intends,” “expects,” “anticipates,” “plans,” “may,” “will” and similar expressions to identify forward-looking statements. Discussions containing forward-looking statements may be found in the material set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other sections of this report. All forward-looking statements, including, but not limited to, projections, expectations or estimates concerning our business, including demand for our products and services, mix of revenue sources, ability to control and/or reduce operating expenses, anticipated gross margins and operating results, cost savings, product development efforts, general outlook of our business and industry, future profits or losses, competitive position, share-based compensation, and adequate liquidity to fund our operations and meet our other cash requirements, are inherently uncertain as they are based on our expectations and assumptions concerning future events. These forward-looking statements are subject to numerous known and unknown risks and uncertainties. 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 but not limited to, the possibility that we may fail to preserve our expertise in online advertising, consumer website and social bookmarking product development, that existing and potential distribution partners may opt to work with, or favor the products of, competitors if our competitors offer more favorable products or pricing terms, that we may be unable to grow sources of revenue other than our listings revenue, that we may be unable to increase growth in our owned-and- operated sites, that we may be unable to license compelling content at reasonable costs, that we may be unable to attain or maintain customer acceptance of our publisher services products, that changes in the distribution network composition may lead to decreases in traffic volumes, that we may be unable to improve our match rate, average revenue per click, conversion rate or other advertiser metrics, that we may be unable to achieve operating profitability, that we may be unable to attract and retain key personnel, that we may have unexpected increases in costs and expenses, or that one or more of the other risks described below in the section entitled “Risk Factors” and elsewhere in this report may occur. All forward-looking statements in this report are made as of the date hereof, based on information available to us as of the date hereof, and except as required by applicable law, we assume no obligation to update any forward-looking statements.

BUSINESS OVERVIEW

LookSmart is an online advertising and technology company that provides relevant solutions for advertisers, publishers and consumers. LookSmart offers advertisers targeted, pay-per-click (PPC) search advertising and banners via a monitored ad distribution network; a customizable set of private-label solutions for publishers; and consumer websites and web tools.

The Company’s extensive ad distribution network includes proprietary websites, syndicated publishers and search partners. The Company’s application programming interface (API) allows advertisers and agencies to connect any type of marketing or reporting software with minimal effort, for easier access and management of ad campaigns.

LookSmart’s publisher solutions consist of a hosted advertising sales and service platform with an ad backfill capability, which allows search engines, media companies, social networking sites, retail sites, directories, ISPs and portals to manage their advertiser relationships and accounts.

The Company’s consumer sites and web tools offer users essential information sources and the ability to find, save and share articles and other web content.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our financial condition and results of operations are based upon certain critical accounting policies, which include estimates, assumptions, and judgments on the part of management. We base our estimates on various factors and information which may include, but are not limited to, history and prior experience, experience of other enterprises in the same industry, new related events, current economic conditions and information from third party professionals that is believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the period presented. Actual results may differ from those estimates. The following discussion highlights those policies and the underlying estimates and assumptions, which we consider critical to an understanding of the financial information in this report.

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Revenue Recognition

Our online advertising revenue is primarily composed of per-click fees that we charge customers. Customers set the per-click fee charged for inclusion-targeted listings when their account is established. The per-click fee charged for keyword-targeted listings is calculated based on the results of online bidding for keywords or page content, up to a maximum cost per keyword or page content set by the customer. Revenue also includes impression-based revenue from banner advertisements, as well as revenue share from licensing of private-labeled versions of our products.

Revenues associated with online advertising products, including Advertiser Solutions, FindArticles, our other consumer sites, and banner advertisements are generally recognized once collectibility is established, delivery of services has occurred, all performance obligations have been satisfied, and no refund obligations exist. We pay distribution network partners based on clicks on the advertiser’s ad that are displayed on the websites of these distribution network partners. These payments are called traffic acquisition costs and are included in cost of revenues. In accordance with Emerging Issues Task Force Issue No. 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent (“ EITF 99-19”), the revenue derived from these arrangements that involve traffic supplied by distribution network partners is reported gross of the payment to the distribution network partners. This revenue is reported gross due to the fact that we are the primary obligor to the advertisers who are the customers of the advertising service.

Affiliate revenue is included in online advertising revenue and is based on commissions received for participation in affiliate programs. Affiliate programs are programs operated by affiliate network services or online merchants, in which merchants pay traffic providers on a cost-per-acquisition basis. By participating in affiliate programs, we generate revenue when Internet consumers make a purchase from a participating merchant’s website after clicking on the merchant’s listing in our search results. Revenues from affiliates are earned on a per-sale basis or as a percentage of sales rather than a per-click basis. Revenue is recognized in the period in which a merchant finalizes a sale and reports to us via our affiliate network.

We also enter into agreements to provide private-labeled versions of our products, including the AdCenter for Publishers. These arrangements include multiple elements: revenue-sharing based on the publishers’ customer’s monthly revenue generated through the AdCenter application; upfront fees; and license fees. We recognize revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements (“SAB 104”), and Financial Accounting Standards Board Emerging Issues Task Force No. 00-21, Revenue Arrangements with Multiple Deliverables (“EITF 00-21”). We recognize upfront fees over the term of the arrangement or the expected period of performance, license fees over the term of the license, and revenue-sharing portions over the period in which such revenue is earned. In all cases, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectibility of the resulting receivable is reasonably assured.

We provide a provision against revenue for estimated reductions resulting from billing adjustments and customer refunds. The amounts of these provisions are evaluated periodically based upon customer experience and historical trends.

Deferred revenue is recorded when payments are received in advance of performance in underlying agreements. Customer deposits are recorded when customers make prepayments for online advertising.

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Allowance for Doubtful Accounts

Determination of collectibility of payments requires significant judgment on the part of management and includes performing initial and ongoing credit evaluations of customers. We maintain an allowance for doubtful accounts for estimated losses resulting from the failure of our customers to make required payments. This valuation allowance is reviewed on a periodic basis to determine whether a provision or reversal is required. The review is based on factors including the application of historical collection rates to current receivables. We will record a reduction of our allowance for doubtful accounts if there is a significant improvement in collection rates or economic conditions are more favorable than we anticipated. Additional allowances for doubtful accounts may be required if there is deterioration in past due balances, if economic conditions are less favorable than we anticipated or for customer-specific circumstances, such as bankruptcy. Management’s judgment is required in the periodic review of whether a provision or reversal is warranted.

Valuation of Goodwill and Intangible Assets

We have recorded goodwill and intangible assets in connection with our business acquisitions. Management exercises judgment in the assessment of the related useful lives, fair value and recoverability of these assets. The majority of intangible assets are amortized over three to seven years, the period of expected benefit. Goodwill is not amortized. In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), we periodically re-assess the valuation and asset lives of intangible assets to conform to changes in management’s estimates of future performance. Management considers existing and anticipated competitive and economic conditions in such assessments. Goodwill is reviewed for impairment at least annually and as a result of any event that significantly changes our business. The Company uses market capitalization, as well as cash flow forecasts and other market value indicators to review goodwill for impairment. Cash flow forecasts used in evaluation of goodwill are based on trends of historical performance and management’s estimate of future performance.

Deferred Taxes

We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying values and the tax bases of assets and liabilities. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. If we operate at a loss or are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to increase the valuation allowance against all or a significant portion of our deferred tax assets which could substantially increase our effective tax rate for such period. Alternatively, if our future taxable income is significantly higher than expected and/or we are able to utilize our tax credits, we may be required to reverse all or a significant part of our valuation allowance against such deferred tax assets which could substantially reduce our effective tax rate for such period. Therefore, any significant changes in statutory tax rates or the amount of our valuation allowance could have a material impact on the value of our deferred tax assets and liabilities, and our reported financial results.

Internal Use Software Development Costs

We account for internal use software in accordance with American Institute of Certified Public Accountants (“AICPA”) Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (“SOP 98-1”). In accordance with the capitalization criteria of SOP 98-1, we have capitalized external direct costs of materials and services consumed in developing and obtaining internal-use computer software and the payroll and payroll-related costs of employees who devote time to the internal use computer software project.

Management’s judgment is required in determining the point at which various projects enter the stages at which costs may be capitalized, in assessing the ongoing value of the capitalized costs, and in determining the estimated useful lives over which the costs are amortized. We expect to continue to invest in internally developed software and to capitalize costs in accordance with SOP 98-1.

Restructuring Charges

We have recorded a restructuring accrual related to closing certain leased facilities in accordance with Statement of Financial Accounting Standard No. 146, Accounting for Costs Associated with Exit or Disposal of Activities (“SFAS 146”). Management’s judgment is required in estimating when the redundant facilities will be subleased and at what rate they will be subleased.

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Share-Based Compensation

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004) (SFAS 123R), Share-Based Payment , which revised SFAS 123, Accounting for Share-based Compensation . SFAS 123R requires all share-based payment transactions with employees, including grants of employee stock options and employee stock purchases related to the Employee Stock Purchase Plan to be recognized as compensation expense over the requisite service period based on their relative fair values. SFAS 123R is a very complex accounting standard, the application of which requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility and expected option lives, as well as expected option forfeiture rates, to value equity-based compensation. SFAS 123R requires the recognition of the fair value of stock compensation in net income (loss).

Recent Accounting Pronouncements

For a description of recent accounting pronouncements, see Note 1 (Summary of Significant Accounting Policies) in the Notes to the Unaudited Condensed Consolidated Financial Statements.

RESULTS OF OPERATIONS

Overview of the Three and Six Months Ended June 30, 2007

During the three months ended June 30, 2007 we continued to focus on the following primary operating priorities:

• Growing our ad network. Total paid clicks for the second quarter of 2007 were 122 million compared to 87 million in the second quarter of 2006, an increase of 40%. On a year-to-date basis total paid clicks were 215 million in 2007 compared to 161 million in 2006. In the second quarter of 2007, our average revenue per click (“RPC”) was $0.10 per click, compared to $0.10 per click for the second quarter of 2006. On a year-to-date basis our average RPC for 2007 was $0.11 per click, compared to $0.11 per click for 2006. We continue to drive growth in paid clicks through our ad sales efforts and through our ongoing ad network optimization efforts as well as growth in our advertiser base.

• Distributing syndicated solutions for publishers. We continue to focus on improving our private-labeled AdCenter for Publishers, and providing a tailored version of our Furl online book marking system for publishers. The release of LookSmart contextual allowing listings ads to be contextually targeted, as well as a recent release of a solution for publishers’ unsold ad inventory known as “Platform Backfill,” are both part of our improvement of the private-labeled AdCenter for Publishers.

• Focusing on developing a consumer audience. We leveraged our core expertise in directories, database structures, algorithmic searches and communities by integrating Furl and other LookSmart technologies to provide a compelling environment for both customers and advertisers. We focused on aggregating these, and newly developed products, to provide a compelling user experience on the web to allow users to find, save and share articles and other web content and links to them.

Revenues

(in thousands)	Three Months Ended June 30,				Change		Six Months Ended June 30,				Change
	2007		2006				2007		2006
Revenues	$	14,624	$	11,130	31	%	$	27,850	$	21,673	28	%

Online advertising revenues are derived from Advertiser Solutions, Publisher Solutions, and Consumer Sites. Online advertising revenues increased in the second quarter of 2007 by approximately $3.3 million, primarily as a result of increased volume of total paid clicks, 122 million for the second quarter of 2007, as compared to 87 million for the second quarter of 2006. Average RPC remained constant over the same period. On a year-to-date basis, online advertising revenue increased by approximately $5.5 million. Total paid clicks increased 34% and average RPC remained constant at $0.11 during the six month period. Growth in page views and page view yield for FindArticles also contributed to an increase in online advertising revenues.

Revenues for the second half of fiscal year 2007 are expected to increase 15% to 20% compared to 2006 as a result of revenue growth across all three revenue sources.

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Cost of Revenues

(in thousands)	Three Months Ended June 30,						Change		Six Months Ended June 30,						Change
	2007			2006					2007			2006
Traffic acquisition costs	$	7,060		$	5,862		20	%	$	13,392		$	11,413		17	%
Percentage of online advertising revenue		58	%		66	%				59	%		66	%
Content costs		351			251		40	%		800			616		30	%
Other costs		770			1,138		(32	)%		1,643			2,310		(29	)%
Total cost of revenues	$	8,181		$	7,251		13	%	$	15,835		$	14,339		10	%
Percentage of total revenue		56	%		65	%				57	%		67	%

For the three and six months ended June 30, 2007 and 2006, approximately $0 and $0 thousand and $5 thousand and $6 thousand, respectively, of share-based compensation was included in cost of revenues.

Gross margin of 44% in the second quarter of 2007 was higher than gross margin of 35% in the second quarter of 2006. On a year-to-date basis gross margin improved to 43% compared to 34% for the same period in 2006. Traffic acquisition costs (TAC), the costs paid to our distribution network partners, increased in the second quarter of 2007 compared to the second quarter of 2006, due to an increase in online advertising revenue. Traffic acquisition costs improved as a percentage of online advertising revenue in the second quarter of 2007 and for the six months ended 2007, compared to the same periods in 2006, due to effective TAC management strategies. The presentation of traffic acquisition costs as a percentage of revenue in the above table was changed to conform to the current year’s presentation.

Content costs represent amounts paid to license searchable content that is displayed on our network of owned-and-operated consumer sites, primarily FindArticles. Content costs increased in the second quarter and first half of 2007 as compared to the second quarter and first half of 2006, due to higher content costs in the second quarter and first half of 2007 caused by the overall traffic increase on the Company’s consumer sites.

Other costs of revenue consist of connectivity costs, equipment depreciation, expenses relating to hosting advertising operations, commissions paid to advertising agencies and amortization of intangible assets. These costs decreased in the second quarter and first half of 2007 compared to the second quarter and first half of 2006 primarily due to a reduction in bank and credit card fees, as well as continuous, slight decline in connectivity costs resulting from cost efficiency efforts.

We expect gross margin to remain at approximately 42% to 44% throughout the second half of 2007 as improvements in revenue mix are expected to be offset by slightly higher traffic acquisition cost levels throughout the rest of 2007.

Operating Expenses

Operating expenses consist of sales and marketing, product development, general and administrative, restructuring charges and share-based compensation.

Sales and Marketing

(in thousands)	Three Months Ended June 30,						Change		Six Months Ended June 30,						Change
	2007			2006					2007			2006
Sales and marketing	$	2,223		$	2,096		6	%	$	4,351		$	3,839		13	%
Percentage of revenues		15	%		18	%				16	%		18	%

For the three and six months ended June 30, 2007 and 2006, approximately $59 thousand and $89 thousand and $112 thousand and $138 thousand, respectively, of share-based compensation was included in sales and marketing costs.

Sales and marketing expenses include salaries, commissions, share-based compensation and other costs of employment for our sales force, sales administration, customer service staff and marketing personnel, overhead, facilities, allocation of depreciation and the provision for doubtful trade receivables. Sales and marketing expenses also include the costs of advertising, trade shows, public relations activities and various other activities supporting our customer acquisition efforts.

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Sales and marketing expenses in the second quarter of 2007 increased compared to the second quarter of 2006 primarily due to higher labor costs of approximately $0.1 million associated with the hiring of two new sales VPs, as well as increases in online promotional and marketing expenses of $26 thousand and travel costs of $22 thousand. For the six months ended June 30, 2007, sales and marketing expenses increased compared to the same period in 2006 as a result of increased labor costs of approximately $0.3 million and online promotional and marketing costs of approximately $0.4 million. These increases are partially offset by decreases in temporary staff costs and other expenses of approximately $0.1 million.

Sales and marketing expenses are expected to slightly increase for the second half of 2007 as we support ongoing revenue growth.

Product Development

(in thousands)	Three Months Ended June 30,						Change		Six Months Ended June 30,						Change
	2007			2006					2007			2006
Capitalized software development costs	$	(477	)	$	(513	)	(7	)%	$	(805	)	$	(1,169	)	(31	)%
Other product development costs		4,366			4,607		(5	)%		8,867			9,546		(7	)%
Total product development expenses	$	3,889		$	4,094		(5	)%	$	8,062		$	8,377		(4	)%
Percentage of revenues		27	%		37	%				29	%		39	%

For the three and six months ended June 30, 2007 and 2006, approximately $173 thousand and $318 thousand, and $253 thousand and $314 thousand, respectively of share-based compensation was included in product development costs.

Product development costs include all costs related to the development and enhancement of our core technology products such as the Ad Center for Publishers, Furl.net and FindArticles.com. These costs include salaries and associated costs of employment, including share-based compensation, overhead, facilities and amortization of intangible assets. Costs related to the development of software for internal use in the business, including salaries and associated costs of employment are capitalized after certain milestones have been achieved. Software licensing and computer equipment depreciation related to supporting product development functions are also included in product development expenses.

Capitalized software development costs include the costs to develop software for internal use, excluding costs associated with research and development, training and testing. The decrease in the amount capitalized for the second quarter of 2007 compared to the second quarter of 2006 was primarily related to a decrease in new product development as the magnitude and number of ongoing capitalizable projects decreased in 2007. For the same reasons year-to-date expenses also decreased.

The decrease in other product development expenses in the second quarter of 2007 compared to the second quarter of 2006 primarily relates to the decrease in depreciation expense of approximately $0.2 million. The decrease is partially offset by an increase in labor costs of approximately $0.1 million. On a year-to-date basis other product development expenses decreased due to a decrease in depreciation of approximately $0.5 million due to a decrease in capital expenditures and a decrease in professional services of approximately $0.1 million due to a lower use of outside consultants. These increases were partially offset by an increase in labor costs of $65 thousand.

Both capitalized software development costs and other product development costs are expected to increase slightly for the second half of 2007 as we continue with product enhancements to drive revenue.

General and Administrative

(in thousands)	Three Months Ended June 30,						Change		Six Months Ended June 30,						Change
	2007			2006					2007			2006
General and administrative	$	2,929		$	2,570		14	%	$	5,937		$	4,997		19	%
Percentage of revenues		20	%		23	%				21	%		23	%

For the three and six months ended June 30, 2007 and 2006, approximately $379 thousand and $698 thousand and $365 thousand and $562 thousand, respectively, of share-based compensation was included in general and administrative costs.

General and administrative expenses include costs of executive management, human resources, finance, legal and facilities personnel. These costs include salaries and associated costs of employment, including share-based compensation, overhead, facilities and allocation of depreciation. General and administrative expenses also include legal, insurance, tax and accounting, consulting and professional services fees.

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The increase in general and administrative expenses in the second quarter of 2007 compared to the second quarter of 2006 was driven by an approximate $0.4 million increase in labor costs due to various staffing requirements. This was partially offset by approximately $0.1 million decrease in other expenses. In the second quarter of 2007 general and administrative expenses included professional and legal costs related to our planned delisting from the Australian Stock Exchange and costs associated with the preparation of the proxy, as well as exploration of corporate development opportunities. On a year-to-date basis general and administrative expenses increased primarily due to an increase in labor costs of $1.0 million due to replacement of temporary help with permanent employees within the finance department, as well as approximately $0.1 million increase in other professional services due to the increased use of outside consultants. The increases were partially offset by a decrease in other expenses of approximately $0.2 million, as well as approximately $0.1 million decrease in temporary help. Other causes for the increase in general and administrative expenses on a year-to-date basis are the same as the increases in the second quarter of 2007.

Compared with the first half of 2007, general and administrative expenses are expected to increase slightly during the second half of 2007.

Other Operating Income

(in thousands)	Three Months Ended June 30,				Change		Six Months Ended June 30,				Change
	2007		2006				2007		2006
Other operating income (loss), net	$	74	$	—	100	%	(123	)	$	—	(100	)%

Other operating income increased in second quarter of 2007 compared to the second quarter of 2006 due to contingent purchase consideration earned from revenue sharing under the sale agreement with Content Watch. On a year-to-date basis other operating income (loss) consists of $248 thousand loss on the sale of Net Nanny to Content Watch in the first quarter of 2007 offset by the contingent purchase consideration earned from revenue sharing under the sale agreement with Content Watch of $124 thousand from the date of sale through June 30, 2007.

Non-Operating Income, net

(in thousands)	Three Months Ended June 30,				Change		Six Months Ended June 30,			Change
	2007		2006				2007	2006
Non-operating income, net	$	518	$	482	7	%	1,033	$	961	8	%

Non-operating income, net is primarily comprised of interest income.

Interest income increased in the second quarter and first half of 2007 compared to the second quarter and first half of 2006 primarily due to higher interest rates. The other cause for the increase in non-operating income is the $22 thousand share of JV income recorded in the second quarter of 2007.

Income Tax Expense

(in thousands)	Three Months Ended June 30,				Change		Six Months Ended June 30,					Change
	2007		2006				2007			2006
Income tax income (expense)	$	—	$	—	0	%	$	(6	)	$	—	(100	)%

We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109 (“FIN 48”) on January 1, 2007. We did not have any unrecognized tax benefits and there was no effect on our financial condition or results of operations as a result of implementing FIN 48 or during the current period.

The effective tax rate in upcoming quarters and for the year ending December 31, 2007 may vary due to a variety of factors, including, but not limited to, the relative income contribution by tax jurisdiction, changes in statutory tax rates, the amount of tax exempt interest income generated during the year and any non-deductible items related to acquisitions or other non-recurring charges.

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Liquidity and Capital Resources

The following table presents our cash flows provided by (used in) operating, investing and financing activities for the six months ended June 30, 2007, and 2006 (in thousands):

	Six Months Ended June 30,
	2007			2006
Cash flows used in operating activities	$	(1,715	)	$	(5,924	)
Cash flows provided by (used in) investing activities	$	(7,631	)	$	2,138
Cash flows provided by financing activities	$	321		$	58

Our primary source of cash is receipts from revenue. The primary uses of cash are labor costs (salaries, benefits, and other employee compensation), general operating expenses (office rent, utilities, insurance and supplies), payments to distribution network partners related to traffic acquisition and content costs associated with our consumer sites, and professional services fees related to legal and audit costs. We ended the second quarter of 2007 with $38.3 million in cash, cash equivalents, and short and long-term investments, a decrease of $2.9 million from December 31, 2006 of $41.2 million.

The decrease in cash used in operating activities for the first half of 2007 compared to the first half of 2006 was primarily due to a decrease in net loss of approximately $3.4 million, a decrease of approximately $1.1 million in cash paid for accounts payable, a decrease in depreciation and amortization of approximately $0.8 million, as well as a decrease of approximately $0.4 million in cash collected from accounts receivable.

Net cash used in investing activities for the first half of 2007 was higher than net cash provided by investing activities for the first half of 2006. We purchased approximately $14.6 million more investments during the first half of 2007. Further we sold $10.0 million more investments in the first half of 2007 than the first half of 2006. Additionally, we invested approximately $1.3 million in property, equipment and capitalized software development during the first half of 2007 compared to the same period in 2006, of which approximately $0.3 million was financed through a capital lease. Capital expenditure levels are expected to increase by approximately $1 million in 2007 from approximately $2.2 million spent in 2006 to accommodate required investments that were deferred during 2005 and 2006. We expect capital expenditures for technical equipment for the remainder of 2007 will be financed through a $5 million capital lease line of credit.

Net cash provided by financing activities during the first half of 2007 was higher than the same period of 2006 primarily due to approximately $75 thousand more in proceeds for the issuance of common stock related to our employee stock plans, as well as $0.2 million from the sale and lease back of equipment. This was offset by a $28 thousand of cash used in repayment of notes and $21 thousand of cash used in repayment of our capital lease obligation.

We have outstanding standby letters of credit (“SBLC”) of $1.0 million at June 30, 2007 related to security of a building lease and security for payroll processing services. The SBLC contains two financial covenants. As of June 30, 2007, we were in compliance with all required covenants.

We believe that our working capital will provide adequate liquidity to fund our operations and meet other cash requirements for at least the next 12 months. We may seek to raise additional capital through public or private debt or equity financings in order to fund our operations and capital expenditures, take advantage of favorable business opportunities, develop and upgrade our technology infrastructure, develop new product and service offerings, take advantage of favorable conditions in capital markets or respond to competitive pressures. In addition, unanticipated developments in the short term, such as the entry into agreements requiring large cash payments or the acquisition of businesses with negative cash flows, may necessitate additional financing. We cannot be assured that additional financing will be available on terms favorable to us, or at all. If we issue additional equity or convertible debt securities, our existing stockholders may experience substantial dilution.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined in Regulation S-K Item 303(a)(4), investments in special-purpose entities or undisclosed borrowings or debt. Additionally, we are not a party to any derivative contracts or synthetic leases.

Contractual Obligations and Commercial Commitments

On April 6, 2007, the Company entered into a master lease agreement with City National Bank (“CNB”) for an amount of up to $5 million for the purchase of technical equipment. This lease line of credit expires on January 30, 2008 and is available for capital leases with rental terms from 36 to 48 months. Interest on capital leases is calculated using an interest rate of 7.76%. As of June 30, 2007 the Company drew down approximately $0.3 million on the capital lease line and repaid approximately $21 thousand for the three months ended June 30, 2007.

On July 27, 2007, David Hills, the President, Chief Executive Officer and a member of the board of directors of the Company, resigned as an employee and director of the Company effective as of August 1, 2007, related to which the Company incurred obligations under a severance agreement. (See footnote 12, Subsequent Events, for further details).

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our exposure to market risk for interest rate changes relates primarily to our short-term and any long-term investments. We had no derivative financial instruments as of June 30, 2007 or December 31, 2006. We invest our excess cash in debt and equity instruments of high-quality corporate issuers with original maturities greater than three months and effective maturities less than two years. The amount of credit exposure to any one issue, issuer and type of instrument is limited. These securities are subject to interest rate risk and vary in value as market interest rates fluctuate. During the three and six months ended June 30, 2007, the effects of changes in interest rates on the fair market value of our marketable investment securities and our earnings were not material. Further, we believe that the impact on the fair market value of our securities and our net income/(loss) from a hypothetical 10% change in interest rates would not be significant.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining “disclosure controls and procedures” (as defined in rules promulgated under the Securities Exchange Act of 1934, as amended) for our company. Based on their evaluation as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in this Quarterly Report on Form 10-Q is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and Form 10-Q, and (ii) is accumulated and communicated to the Company’s management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in internal controls. During the period covered by this report, there were no changes in the Company’s internal control over financial reporting that have materially affected, or could be reasonably likely to materially affect, the registrant’s internal control over financial reporting. During the course of our general evaluation of internal controls and the 2006 close process, there were six significant deficiencies identified in the design and operation of our internal controls. We are in the process of remediating these significant deficiencies and will continue our work to reduce the occurrence of future significant deficiencies; however, our independent registered public accounting firm’s testing of the effectiveness of our remediation efforts has not been completed as of June 30, 2007.

(c) Limitations on the effectiveness of controls. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the Chief Executive Officer and the Chief Financial Officer have concluded that these controls and procedures are effective at the “reasonable assurance” level.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Cisneros v. Yahoo! Inc

On August 3, 2004, Mario Cisneros and Michael Voight filed a private attorney general lawsuit on behalf of a proposed class in Superior Court in San Francisco County, California. The complaint names thirteen search engines or Web publishers as defendants, including the Company, and alleges unfair business practices, unlawful business practices, and other causes of action in connection with the display of advertisements from Internet gambling companies. The complaint seeks restitution, unspecified compensatory damages, declaratory and injunctive relief, and attorneys’ fees. Plaintiffs also filed a motion for preliminary injunction on August 3, 2004.

On January 3, 2005, the Company filed a demurrer to the complaint, which was overruled on January 27, 2005. On January 3, 2005, the Company also filed a motion to strike certain allegations regarding claims for restitution, which was denied in part and granted in part on May 9, 2005. The Company filed an answer to the complaint on February 28, 2005, consisting of a general denial of all allegations. On October 11, 2005, the court conducted a trial on two of the Company’s affirmative defenses. The court held that California public policy bars the plaintiffs from receiving a portion of their requested damages.

On December 2, 2005, plaintiffs filed a renewed motion for a preliminary injunction. Defendants responded on or around February 27, 2006. The Court has allowed certain discovery to proceed with respect to plaintiffs’ renewed motion. On or about May 23, 2006, plaintiffs were granted leave to amend their complaint to name additional plaintiffs. On or about September 8, 2006, plaintiffs served an amended complaint naming additional plaintiffs. The Company has since filed a general denial to the amended complaint. On April 13, 2007 the Court heard argument on defendants’ motion to dismiss for lack of subject matter jurisdiction and plaintiffs’ motion to allow non-restitutionary disgorgement, both motions were denied. Plaintiffs’ counsel has indicated verbal agreement to a settlement whereby (i) the Company would make a payment of $15,000 to a designated charitable organization and continue its current policies banning acceptance of ads from gambling websites, and (ii) all plaintiffs would dismiss their claims against the Company with prejudice. This potential settlement has not yet been finalized between the parties and would also be subject to final court approval.

The nature of litigation is inherently uncertain and therefore the Company cannot predict the outcome of these proceedings or estimate the possible effects on our financial position, results of operations or cashflows.

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Lane’s Gifts and Collectibles, L.L.C., v. Yahoo! Inc

On March 14, 2005 the Company was served with the second amended complaint in a class action lawsuit in the Circuit Court of Miller County, Arkansas. The complaint names eleven search engines and web publishers as defendants, including the Company, and alleges breach of contract, restitution/unjust enrichment/money had and received, and civil conspiracy claims in connection with contracts allegedly entered into with plaintiffs for Internet pay-per-click advertising. The named plaintiffs on the second amended complaint are Lane’s Gifts and Collectibles, L.L.C., U.S. Citizens for Fair Credit Card Terms, Inc., Savings 4 Merchants, Inc., and Max Caulfield d/b/a Caulfield Investigations.

On March 30, 2005 the case was removed to United States District Court for the Western District of Arkansas. On April 4, 2005 plaintiffs U.S. Citizens for Fair Credit Card Terms, Inc. and Savings 4 Merchants, Inc. filed a motion of voluntary dismissal without prejudice. The motion was granted on April 7, 2005. Plaintiffs Lane’s Gifts and Collectibles, L.L.C. and Max Caulfield d/b/a Caulfield Investigations filed a motion to remand the case to state court on April 13, 2005, which was granted in June 2005. In July 2005, defendants, including the Company, petitioned the Eighth Circuit Court of Appeals for an appeal of the remand order, and moved to stay the proceedings while the appeal is pending. The petition was denied on September 8, 2005 and the case was remanded to the Circuit Court of Miller County, Arkansas. The Company was served with discovery requests on October 7, 2005. The Company has filed and/or joined motions to dismiss on the basis of failure to state a claim upon which relief can be granted, lack of personal jurisdiction, and improper venue. Pursuant to the court’s initial scheduling order, plaintiffs had until January 27, 2006 to respond to the motions to dismiss for lack of personal jurisdiction and improper venue; and until June 9, 2006 to respond to the motion to dismiss on the basis of failure to state a claim upon which relief can be granted. However the court entered an order staying all proceedings for a period of 60 days on January 9, 2006. On March 8, 2006, the Court entered an order extending the stay until March 31, 2006. On April 1, 2006, the Court further extended the stay until April 20, 2006. On April 20, 2006 the Court preliminarily approved a class settlement among plaintiffs, defendant Google, Inc., and certain defendants who display Google advertisements on their networks (the “Google Settlement”). The Google Settlement purports to release Google of all claims and also purports to release certain defendants, including the Company, for any claims associated with the display of Google advertisements on their networks. On July 24 and 25, 2006, the Court had a final settlement hearing on the Google Settlement, and on July 26, 2006, the Court approved the settlement. On April 21, 2006, the Court ordered the remaining defendants, including the Company, to mediation and further stayed the proceedings to June 21, 2006. The Court further extended the stay as to LookSmart until August 16, 2006. The parties thereafter stipulated that the stay would remain in effect while the parties continue to comply with the Court’s order regarding mediation. On January 10, 2007, the Court further extended the stay until May 1, 2007. Plaintiffs’ counsel have stipulated to extend the stay as to LookSmart. In April 2007 the Plaintiffs and the Company came to an agreement in principle to settle the matter in its entirety. The precise terms of the agreement, including the amount and form of any payments to the Class, have not yet been agreed to. Any eventual settlement with plaintiffs will be subject to court approval. The Company has recorded an estimate of the amount of the loss on settlement which management has determined is probable and estimable during the quarter ended March 31, 2007. This estimate may change as a result of the final settlement arrangement. In addition, because recovery from the insurance carriers is probable, a receivable was also recorded for the same amount. Accordingly, there is no impact to the statement of operations because the amounts of the settlement and the insurance recovery offset each other.

The nature of litigation is inherently uncertain and therefore the Company cannot predict the outcome of these proceedings or estimate the possible effects on our financial position, results of operations or cashflows.

Additionally, we are involved, from time to time, in various legal proceedings arising from the normal course of business activities. Although the results of litigation and claims cannot be predicted with certainty, we do not expect resolution of these matters to have a material adverse impact on our consolidated results of operations, cash flows or financial position unless stated otherwise. However, an unfavorable resolution of a matter could, depending on its amount and timing, materially affect our future results of operations, cash flows or financial position in a future period. Regardless of the outcome, litigation can have an adverse impact on us because of defense costs, diversion of management resources and other factors.

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ITEM 1A. RISK FACTORS

Other than certain updates to our risk factors, including our risk factors regarding our ability to attract and retain key personnel, our potential liability for claims related to our products and services, and accounting for employee stock options using the fair value method as set forth below, there have been no material changes to the risk factors that are included in our Annual Report on Form 10-K for the year ended December 31, 2006 that could affect our business, results of operations or financial condition.

You should carefully consider the risks described below before making an investment decision regarding our common stock. If any of the following risks actually occur, our business, financial condition and results of operations could be harmed. In that case, the trading price of our common stock could decline and our investors could lose all or part of their investment. Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations.

Risks Related to our Business

Our financial results are highly concentrated in the online advertising business; if we are unable to grow online advertising revenues and find alternative sources of revenue, our financial results will suffer

The display of listings advertisements accounted for substantially all of our revenues for the three and six months ended June 30, 2007. Our success depends upon advertisers choosing to use, and distribution network partners choosing to distribute, our listings products. Advertisers and distribution network partners may not adopt our listings products at projected rates, or changes in market conditions may adversely affect the use or distribution of listings advertisements. Because of our revenue concentration in the online advertising business, such shortfalls or changes could have a negative impact on our financial results. Also, many of our products are offered to website publishers who use them to display or generate revenue from their online advertisements. Our overall revenue is concentrated with one advertiser representing 15% and another representing 11% of overall revenue for the three months ended June 30, 2007. For the six months ended June 30, 2007 the same advertisers represented 8% and 12% of total revenue, respectively. If we are unable to generate significant revenue from our online advertising business, or if market conditions adversely affect the use or distribution of online advertisements generally, our results of operations, financial condition and/or liquidity will suffer.

We rely primarily on our network of distribution network partners to generate paid clicks; if we are unable to maintain or expand this network, our ability to generate revenue may be seriously harmed

The success of our online advertisement products depends in large part on the size and quality of our distribution network. We may be unable to maintain or add distribution network partners of satisfactory quality in our distribution network at reasonable revenue-sharing rates, or at all. Our distribution network is concentrated, with our two largest distribution network partners each accounting for approximately 11% and 10% and 11% and 9%, respectively, of our revenue for the three and six months ended June 30, 2007. If we lose any significant portion of our distribution network, we would need to find alternative sources of quality click traffic to replace the lost paid clicks. In the past, we have lost portions of our distribution network, such as when our contract with Microsoft’s MSN expired in the first quarter of 2004. Although alternate sources of click traffic are currently available in the market, they may not be available at reasonable prices, they will likely be subject to competition from various paid search providers, and they may be of lower quality. There is fierce competition among search providers to sign agreements with traffic providers. We may be unable to negotiate and sign agreements with quality traffic providers on favorable terms, if at all. If we are unsuccessful in maintaining and expanding our distribution network, then our ability to generate revenue may be seriously harmed.

We rely on our AdCenter for Publisher customers to generate paid clicks; if we are unable to maintain these relationships or add additional customers, our ability to generate revenue may be seriously harmed

The success of our Company depends in large part on our ability to sign and maintain license and revenue share arrangements with our AdCenter for Publisher customers. We may be unable to maintain or add AdCenter for Publisher customers of satisfactory quality at reasonable revenue-sharing rates, or at all. Our overall revenue is concentrated, with one AdCenter for Publisher customer accounting for approximately 9% and 9%, respectively of our revenue for the three and six months ended June 30, 2007. If we lose this AdCenter for Publisher customer, we would need to find alternative sources of revenue to replace the lost revenue share on paid clicks. Other publishers who become our customers may not be available at reasonable revenue share rates, they will likely be subject to competition from various other online advertising service providers, and they have smaller audiences or viewers that respond less to online advertisements. If we are unable to maintain or generate new AdCenter for Publisher arrangements, then our ability to generate revenue may be seriously harmed.

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We have generated significant losses in the past and we may be unable to achieve operating profitability in the foreseeable future, and if we achieve profitability, we may be unable to maintain it, which could result in a decline in our stock price

We had a net loss of approximately $2.1 million and $5.5 million for the three and six months ended June 30, 2007 and as of June 30, 2007 our accumulated deficit was approximately $223.0 million. We may be unable to achieve profitability in the foreseeable future and, if we regain profitability, we may be unable to maintain it. Our ability to achieve and maintain profitability will depend on our ability to generate additional revenue and contain our expenses. In order to generate additional revenue, we will need to expand our network of distribution network partners, expand our proprietary traffic sources such as our owned-and-operated consumer sites, offer our publisher products to publisher customers and expand our advertiser base. We may be unable to accomplish some or any of these goals because of the risks identified in this report or for unforeseen reasons. Also, we may be unable to contain our costs due to the need to make revenue sharing payments to our distribution network partners, to invest in product development, marketing and search technologies (exemplified by our renewed focus on our vertical search business), and enhance our search services. Because of the foregoing factors, and others outlined in this report, we may be unable to achieve profitability in the future, which could result in a decline in our stock price.

If we experience downward pressure on our revenue per click and/or match rate, or we are unable to rebuild our revenue per click and/or match rate, our financial results will suffer

We have experienced, and may in the future experience, downward pressure on our average revenue per click and average match rate, or rate at which paid listings are matched against search queries, due to various factors. In the three and six months ended June 30, 2007, for example, our average revenue per click was consistent with three and six months ended June 30, 2006. We may experience decreases in revenue per click or average match rate in the future for many reasons, including the erosion of our advertiser base, the reduction in average advertiser spend, the reduction in the number of listings purchased by advertisers, or for other reasons. If our revenue per click or average match rate falls for any reason, or if we are unable to grow our revenue per click and average match rate, then we may be unable to achieve our financial projections and our stock price would likely suffer.

Our growth depends on our ability to retain and grow our advertiser base; if our advertiser base and average advertiser spend falls, our financial results will suffer

Our growth depends on our ability to build an advertiser base that corresponds with the characteristics of our distribution network. Our distribution network, which currently consists of a diversified network of small distribution sources, may change as new distribution sources are added and old distribution sources are removed. Advertisers may view these changes to the distribution network negatively, and existing or potential advertisers may elect to purchase fewer or no listings advertisements for display on our distribution network. If this occurs, it is likely that our average revenue per click and average match rate may decline, we may be unable to meet our financial guidance, and our stock price would likely suffer.

Our growth depends upon our ability to retain and grow our audience for our consumer sites, and there are risks associated with introducing new products and services

To maintain and grow our revenue, part of our strategy is to increase the amount, frequency and page views by consumers of our consumer sites. Our development, testing and implementation efforts for these products and services have required, and are expected to continue to require, substantial investments of our time. We recently began owning and operating our own consumer sites, and we may not gain enough of an audience for our consumer sites to generate any, or sufficient, revenue to justify our efforts, or we may gain a sufficient audience but be unable to gain advertiser acceptance of our consumer sites. Also, if we do not improve and enhance our consumer sites in a timely manner, we may lose existing users to our competitors or fail to attract new customers, which may adversely affect our performance and results of operations.

If we are unable to license or acquire compelling content at reasonable costs, we may be unable to increase traffic to and revenue of our vertical search sites

Our future success depends in part upon our ability to aggregate compelling content and search results and deliver them through our online properties. We license much of the content on our online properties, such as journal articles and news items, from third parties. Our ability to maintain and build relationships with third-party content providers will be important for our success. Also, as competition for compelling content increases both domestically and internationally, our content providers may increase the prices at which they offer their content to us and potential content providers may not offer their content on terms agreeable to us. An increase in the prices charged to us by third-party content providers could harm our operating results and financial condition. If we are unable to license or acquire compelling content at reasonable prices, if other companies broadcast content that is similar to or the same as that provided by us, the number of consumers of our services may not grow at all or may grow at a slower rate than anticipated, which could harm our operating results.

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Our growth depends upon our ability to offer and support our technology services to online publishers, and there are risks associated with introducing new products and services

To maintain and grow our revenue, part of our strategy is to offer and host syndicated technology services to online publishers. Our development, testing and implementation efforts for these products and services have required, and are expected to continue to require, substantial investments of our time. Also, we do not have significant experience offering services to online publishers, and we may not gain publisher acceptance of our offerings. We may be unable to successfully implement syndicated publisher solutions, or our implementation of a solution may interfere with our ability to operate our other products and services or other implementations, or a publisher customer may decide not to use or continue to use our solution. These failures could have an adverse effect on our business and results of operations.

If we do not introduce new and upgraded products and services and successfully adapt to our rapidly changing industry, our financial condition may suffer

The Internet search industry is rapidly evolving and very turbulent, and we will need to continue developing new and upgraded products and services, adapt to new business environments and competition, and generate traffic to our consumer web properties in order to maintain and grow revenue and reach our profitability goals. New search and advertising technologies could emerge that make our services comparatively less useful or new business methods could otherwise emerge that divert web traffic away from our search network and consumer web properties. Competition from other web businesses may prevent us from attracting substantial traffic to our services. Also, we may inaccurately predict the direction of search technologies or the advertising market, which could lead us to make investments in technologies and products that do not generate sufficient returns. We may face platform and resource constraints that prevent us from developing upgraded products and services. We may fail to successfully identify new products or services, or fail to bring new products or services to market in a timely and efficient manner. Rapid industry change makes it difficult for us to forecast our results accurately, particularly over longer periods. We face the risk that we may be unable to adapt to new developments in the search industry, or that our new consumer products and services may not be broadly adopted by customers, which could have an adverse effect on our business and results of operations.

We face intense competitive pressures, which could materially and adversely affect our financial results

We compete in the relatively new and rapidly evolving paid search industry, which presents many uncertainties that could require us to further refine our business model. We compete with companies that provide paid placement products, paid inclusion products, and other forms of search marketing. We compete for advertisers on the basis of the relevance of our search results, the price per click charged to advertisers, the volume of clicks that we can deliver to advertisers, tracking and reporting of campaign results, customer service and other factors. We also compete for distribution network partners and for ad placement on those partners’ sites on the basis of the relevance of our search results and the price per click charged to advertisers. We also experience competition for our owned-and-operated consumer sites and for offering our technology to website publishers. Some of our competitors have larger distribution networks and proprietary traffic bases, longer operating histories, greater brand recognition higher price per clicks, better relevance and conversion rates, or better products and services than we have.

Our acquisition of businesses and technologies may be costly and time-consuming; acquisitions may also dilute our existing stockholders

From time to time we evaluate corporate development opportunities, and when appropriate, we intend to make acquisitions of, or significant investments in, complementary companies 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. It may be difficult to retain key management and technical personnel of the acquired company during the transition period following an acquisition. Acquisitions or other strategic transactions 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 intangible assets, record impairment of goodwill in connection with future or past acquisitions, or divest non-performing assets at below-market prices, which would adversely affect our operating results.

We have acquired businesses and technologies in recent years, including the acquisition of Net Nanny from BioNet Systems, LLC in the second quarter of 2004, (which was sold in the first quarter of 2007) and from Furl, LLC in the third quarter of 2004. Integration of acquired companies and technologies into LookSmart is likely to be expensive, time-consuming and strain our managerial resources. We may not be successful in integrating any acquired businesses or technologies and these transactions may not achieve anticipated business benefits.

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Our success depends on our ability to attract and retain key personnel; if we were unable to attract and retain key personnel in the future, our business could be materially and adversely impacted

Our success depends on our ability to identify, attract, retain and motivate highly skilled development, technical, sales, and management personnel. We have a limited number of key development, technical, sales and management personnel performing critical company functions, and the loss of the services of any of our key employees, particularly any of our executive team members or key technical personnel, could adversely affect our business. In recent years, we have experienced significant turnover in our management team. For example, our Chief Executive Officer resigned in August 2007 and in June 2007 our Chief Financial Officer and Chief Operating Officer announced his intention to resign. It is not known when these positions will be permanently filled. In addition, our interim CEO joined us in August 2007 and two of our sales vice presidents joined us in April 2007. Other members of management have also joined us in the last year, and the management team as a whole has had only a limited time to work together. 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.

We face capacity constraints on our software and infrastructure systems that may be costly and time-consuming to resolve

We use proprietary and licensed software and databases to crawl the web and index web pages, create and edit listings, compile and distribute our search results, track paid clicks, and detect click fraud. Any of these software systems 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 distribution network partners:

• customization of our search results for distribution to particular distribution network partners,

• substantial increases in the number of queries to our database,

• substantial increases in the number of listings in our search databases, or

• the addition of new products or new features or changes to our products.

If we experience difficulties with our software and infrastructure systems or if we fail to address these difficulties in a timely manner, we may lose the confidence of advertisers and distribution network partners, our revenue may decline and our business could suffer. In addition, as we expand our service offerings and enter into new business areas, we may be required to significantly modify and expand our software and infrastructure systems. If we fail to accomplish these tasks in a timely manner, our business will likely suffer.

Risks Related to Operating in our Industry

If we fail to prevent, detect and remove invalid clicks, we could lose the confidence of our advertisers, thereby causing our business to suffer

Invalid clicks, most often due to “click fraud”, are an ongoing problem for the Internet advertising industry, and we are exposed to the risk of invalid clicks on our paid listings. Invalid clicks occur when a person or robotic software causes a click on a paid listing to occur for some reason other than to view the underlying content. We invest significant time and resources in preventing, detecting and eliminating invalid traffic from our distribution network. However, the perpetrators of click fraud have developed sophisticated methods to evade detection, and we are unlikely to detect and remove all invalid traffic from our search network. We are subject to advertiser complaints and litigation regarding invalid clicks, and we may be subject to advertiser complaints, claims, litigation or inquiries in the future. We have from time to time credited invoices or refunded revenue to our customers due to suspicious traffic, and we expect to continue to do so in the future. If our systems to detect invalid traffic are insufficient, or if we find new evidence of past invalid clicks, we may have to issue credits or refunds retroactively to our advertisers, and we may still have to pay revenue share to our distribution network partners. This could negatively affect our profitability and hurt our brand. If traffic consisting of invalid clicks is not detected and removed from our search network, the affected advertisers may experience a reduced return on their investment in our online advertising because the invalid clicks will not lead to actual sales for the advertisers. This could lead the advertisers to become dissatisfied with our products, which could lead to loss of advertisers and revenue and could materially and adversely affect our financial results.

Any failure in the performance of our key operating systems could materially and adversely affect our revenues

Any system failure that interrupts our hosted products or services, including our search service, whether caused by computer viruses, software failure, power interruptions, intruders and hackers, or other causes, could harm our financial results. For example, our system for tracking and invoicing clicks is dependent upon a proprietary software platform. If we lose key personnel or experience a failure of software, this system may fail. In such event, we may be unable to track paid clicks and invoice our customers, which would materially and adversely affect our financial results and business reputation.

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The occurrence of a natural disaster or unanticipated problems at our principal headquarters or at a third-party facility could cause interruptions or delays in our business, loss of data or could render us unable to provide some services. Our California facilities exist on or near known earthquake fault zones and a significant earthquake could cause an interruption in our services. We do not have back-up sites for our main customer operations center, which is located at our San Francisco, California office. An interruption in our ability to serve search results, track paid clicks, and provide customer support would materially and adversely affect our financial results.

Our business and operations depend on Internet service providers and third party technology providers, and any failure or system downtime experienced by these companies could materially and adversely affect our revenues

Our consumers, distribution network partners and customers depend on Internet service providers, online service providers and other third parties for access to our search results. These service providers have experienced significant outages in the past and could experience outages, delays and other operating difficulties in the future. The occurrence of any or all of these events could adversely affect our reputation, brand and business, which could have a material adverse effect on our financial results.

We have an agreement with Savvis Communications, Inc. to house equipment for web serving and networking and to provide network connectivity services. We also have agreements with third-party click tracking and ad-serving technology providers. We also have an agreement with AboveNet Communications, Inc. to provide network connectivity services. We do not presently maintain fully redundant click tracking, customer account and web serving systems at separate locations. Accordingly, our operations depend on Savvis and AboveNet to protect the systems in their data centers from system failures, earthquake, fire, power loss, water damage, telecommunications failure, hackers, vandalism and similar events. Neither Savvis nor AboveNet guarantees that our Internet access will be uninterrupted, error-free or secure. We have developed a 30-day disaster recovery plan to respond in the event of a catastrophic loss of our critical, revenue-generating systems. We have an agreement with Raging Wire, Inc. in Sacramento, California to provide co-location and networking services for our critical systems in such an event. Although we maintain property insurance 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 a catastrophic system failure. Also, if our third-party click tracking or ad-serving technology providers experience service interruptions, errors or security breaches, our ability to track, realize and record revenue would suffer.

We may face liability for claims related to our products and services, and these claims may be costly to resolve

Internet users, advertisers and other customers, and companies in the Internet, technology and media industries frequently enter into litigation based on allegations related to defamation, negligence, personal injury, breach of contract, unfair advertising, unfair competition, invasion of privacy or other claims. Lawsuits are filed against us from time to time, and we are currently subject to two purported class action lawsuits in connection with our listings services. In addition, we are obligated in some cases to indemnify our customers or distribution network partners in the event that they are subject to claims that our services infringe on the rights of others.

Litigating these claims could consume significant amounts of time and money, divert management’s attention and resources, cause delays in integrating acquired technology or releasing new products, or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may not be available on acceptable terms, if at all. Our insurance may not adequately cover claims of this type, if at all. If a court were to determine that some aspect of our search services or listings infringed upon or violated the rights of others, we could be prevented from offering some or all of our services, which would negatively impact our revenue and business. For any of the foregoing reasons, litigation involving our listings business and technology could have a material adverse effect on our business, operating results and financial condition.

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We could be subject to infringement claims that may be costly to defend, result in the payment of settlements or damages or lead us to change the way we conduct our business

Internet, technology, media companies and patent holding companies often possess a significant number of patents. Further, many of these companies and other parties are actively developing search, indexing, electronic commerce and other Web-related technologies, as well as a variety of online business models and methods. We believe that these parties will continue to take steps to protect these technologies, including, but not limited to, seeking patent protection. As a result, we may face claims of infringement of patents and other intellectual property rights held by others. Also, as we expand our business, license or acquire content and develop new technologies, products and services, we may become increasingly subject to intellectual property infringement claims. In the event that there is a determination that we have infringed third-party proprietary rights such as patents, copyrights, trademark rights, trade secret rights or other third party rights such as publicity and privacy rights, we could incur substantial monetary liability, be required to enter into costly royalty or licensing agreements or be prevented from using the rights, which could require us to change our business practices in the future and limit our ability to compete effectively. We may also incur substantial expenses in defending against third-party infringement claims regardless of the merit of such claims. In addition, many of our agreements with our customers or affiliates require us to indemnify them for certain third-party intellectual property infringement claims, which could increase our costs in defending such claims and our damages. The occurrence of any of these results could harm our brand and negatively impact our operating results.

Litigation, regulation, legislation or enforcement actions directed at or materially affecting us may adversely affect the commercial use of our products and services and our financial results

New lawsuits, laws, regulations and enforcement actions applicable to the online industry may limit the delivery, appearance and content of our advertising or consumer sites or otherwise adversely affect our business. If such laws are enacted, or if existing laws are interpreted to restrict the types and placements of advertisements we can carry, it could have a material and adverse effect on our financial results. For example, in 2002, the Federal Trade Commission, in response to a petition from a private organization, reviewed the way in which search engines disclose paid placement or paid inclusion practices to Internet consumers and issued guidance on what disclosures are necessary to avoid misleading consumers about the possible effects of paid placement or paid inclusion listings on the search results. In 2003, the United States Department of Justice issued statements indicating its belief that displaying advertisements for online gambling might be construed as aiding and abetting an illegal activity under federal law. In 2004, the United States Congress considered new laws regarding sale of pharmaceutical products over the Internet and the use of adware to distribute advertisements on the Internet, any of which could, if enacted, adversely affect our business. If any new law or government agency were to require changes in the labeling, delivery or content of our advertisements, or if we are subject to legal proceedings regarding these issues, it may reduce the desirability of our services or the types of advertisements that we can run, and our business could be materially and adversely harmed.

In addition, legislation or regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), present ongoing compliance risks, and a failure to comply with these new laws and regulations could materially harm our business. For example, in the course of our general evaluation of our internal controls we identified certain deficiencies in the design and operation of such controls. We continue the process of remediating such deficiencies. It is possible that as we continue our Section 404 compliance efforts we will identify significant deficiencies, or material weaknesses, in the design and operation of our internal controls. We may be unable to remediate any of these matters in a timely fashion, and/or our independent registered public accounting firm may not agree with our remediation efforts in connection with their Section 404 attestation. Such failures could impact our ability to record, process, summarize and report financial information, and could impact market perception of the quality of our financial reporting, which could adversely affect our business and our stock price.

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

Internet user privacy has become an issue both in the United States and abroad. The United States Congress is considering new legislation to regulate Internet privacy, and the Federal Trade Commission and government agencies in some states and countries have investigated some Internet companies, and lawsuits have been filed against some Internet companies, regarding their handling or use of personal information. Any laws imposed to protect the privacy of Internet consumers may affect the way in which we collect and use personal information. We could incur additional expenses if new laws or court judgments, in the United States or abroad, regarding the use of personal information are introduced or if any agency chooses to investigate our privacy practices.

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Our search engine places information, known as cookies, on a user’s hard drive, generally without the user’s knowledge or consent. This technology enables web site operators to target specific consumers with a particular advertisement, to limit the number of times a user is shown a particular advertisement, and to track certain behavioral data. Although some Internet browsers allow consumers 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 aware of this option or are not knowledgeable enough to use this option. Some 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 revenue.

We and some of our distribution network partners or advertisers retain information about our consumers. If others were able to penetrate the network security of these user databases and access or misappropriate this information, we and our distribution network partners or advertisers could be subject to liability. These claims may result in litigation, our involvement in which, regardless of the outcome, could require us to expend significant time and financial resources.

Online commerce security risks, including security breaches, identity theft, service disrupting attacks and viruses, could harm our reputation and the conduct of our business, which could have a material adverse effect on our financial results

A fundamental requirement for online commerce and communications is the secure storage, and transmission over public networks of confidential information. Although we have developed and use systems and processes that are designed to protect consumer information and prevent fraudulent credit card transactions and other security breaches, our security measures may not prevent security breaches or identity theft that could harm our reputation and business. Currently, a significant number of our consumers provide credit card and other financial information and authorize us to bill their credit card accounts directly for all transaction fees charged by us. We rely on encryption and authentication technology to provide the security and authentication to effect secure transmission of confidential information, including customer credit card numbers. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in a compromise or breach of the technology used by us to protect transaction data. In addition, any party who is able to illicitly obtain a user’s password could access the user’s transaction data. An increasing number of websites have reported breaches of their security. Any compromise of our security could damage our reputation and expose us to a risk of loss or litigation and possible liability. The coverage limits of our insurance policies may not be adequate to reimburse us for losses caused by security breaches.

Additionally, our servers are vulnerable to computer viruses, physical or electronic break-ins, and similar disruptions, and we have experienced “denial-of-service” type attacks on our system that have made all or portions of our consumer sites unavailable for periods of time. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. Disruptions in our services and damage caused by viruses and other attacks could cause a loss of user confidence in our systems and services, which could lead to reduced usage of our products and services and materially adversely affect our business and financial results.

New tax treatment of companies engaged in Internet commerce may adversely affect the commercial use of our search service and our financial results

Tax authorities at 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 or our advertisers 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. New or revised taxes and, in particular, sales taxes, would likely increase the cost of doing business online and decrease the attractiveness of advertising and selling goods and services over the Internet. Any of these events could have an adverse effect on our business and results of operations.

Risks Related to Accounting Matters

Accounting for employee stock options using the fair value method could significantly reduce (increase) our GAAP net income (loss)

As described in Note 1 (Summary of Significant Accounting Policies) to the Unaudited Condensed Consolidated Financial Statements in this report, we adopted SFAS 123R starting January 1, 2006. Under SFAS 123R, we are required to account for the fair value of stock options granted to employees as compensation expense, which is likely to have a significant adverse impact on our GAAP results of operations and net income (loss) per share. If we reduce or alter our use of share-based compensation to minimize the recognition of these expenses, our ability to recruit, motivate and retain employees may be impaired, which could put us at a competitive disadvantage in the marketplace. In order to prevent any net decrease in their overall compensation packages, we might decide to make corresponding increases in the cash compensation we pay to current and prospective new employees. An increase in employee wages and salaries would diminish our cash available for marketing, product development and other uses and might adversely impact our GAAP results of operations.

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Risks Related to the Capital Market

Our quarterly revenues and operating results may fluctuate for many reasons, each of which may negatively affect our stock price

Our revenues and operating results will likely fluctuate significantly from quarter to quarter as a result of a variety of factors, including:

• change in the composition of our AdCenter customer base,

• change in composition of our AdCenter for Publishers customer base,

• changes in our distribution network, particularly the gain or loss of key distribution network partners, or changes in the implementation of search results on partner websites,

• changes in the number of advertisers who purchase our listings, or the amount of spending per customer,

• changes in the amount, frequency and page views by consumers of our consumer sites,

• the revenue-per-click we receive from advertisers, or other factors that affect the demand for, and prevailing prices of, Internet advertising and marketing services,

• systems downtime on our AdCenter, our website or the websites of our distribution network partners,

• fluctuations in audience and page impressions, or

• the effect of SFAS 123R, which became effective January 1, 2006, and requires that we account for the fair value of stock awards granted to employees as compensation expense.

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

Our stock price is extremely volatile, and such volatility may hinder investors’ ability to resell their shares for a profit or avoid loss

The stock market has experienced significant price and volume fluctuations in recent years, and the stock prices of Internet companies have been extremely volatile. The low trading volume of our common stock may adversely affect its liquidity and reduce the number of market makers and/or large investors willing to trade in our common stock, making wider fluctuations in the quoted price of our common stock more likely to occur. Also, because of our limited operating history and the significant changes we experienced as a result of the expiration of our contractual relationship with Microsoft’s MSN in the first quarter of 2004, it is extremely difficult to evaluate our business and prospects. Should our stock price drop below our book value for a sustained period, it may become necessary to record an impairment charge to goodwill which would reduce our results of operations. You should evaluate our business in light of the risks, uncertainties, expenses, delays and difficulties associated with managing and growing a relatively new business, many of which are beyond our control.

Our stock price may fluctuate, and you may not be able to sell your shares for a profit, as a result of a number of factors including:

• changes in the market valuations of Internet companies in general and comparable companies in particular,

• quarterly fluctuations in our operating results,

• the termination or expiration of our distribution agreements,

• our potential failure to meet our forecasts or analyst expectations on a quarterly basis,

• the relatively thinly traded volume of our publicly traded shares, which means that small changes in the volume of trades may have a disproportionate impact on our stock price,

• the loss of key personnel, or our inability to recruit experienced personnel to fill key positions,

• changes in ratings or financial estimates by analysts or the inclusion/removal of our stock from certain stock market indices used to drive investment choices,

• announcements of new distribution network partnerships, technological innovations, acquisitions or products or services by us or our competitors,

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• the sales of substantial amounts of our common stock in the public market by our stockholders, or the perception that such sales could occur,

• the exchange by Chess Depositary Interest (CDI) holders of CDIs for shares of common stock at a ratio of 1:1, and resale of such shares in the Nasdaq National Market (as of May 7, 2007, the CDIs registered for trading on the Australian Stock Exchange were exchangeable into an aggregate of approximately 1.0 million shares of common stock), which may be more likely to occur leading up to and after we cease our listing on the Australian Stock Exchange for the trading of CDIs 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 merits or outcome of the case.

We may need additional capital in the future to support our operations and, if such additional financing is not available to us, on reasonable terms or at all, our liquidity and results of operations will be materially and adversely impacted

Although we believe that our working capital will provide adequate liquidity to fund our operations and meet our other cash requirements for the foreseeable future, unanticipated developments in the short term, such as the entry into agreements that require large cash payments or the acquisition of businesses with negative cash flows, may necessitate additional financing. We may seek to raise additional capital through public or private debt or equity financings in order to:

• fund the additional 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 beyond current plans,

• 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 Internet companies, have historically 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 will be available on terms favorable to us, or at all. If we issue additional equity or convertible debt securities, our existing stockholders may experience substantial dilution.

Provisions of Delaware corporate 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 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, prohibiting certain business combinations with an interested stockholder, could discourage potential acquisition proposals and could delay or prevent a change of control.

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

On June 19, 2007, we held our annual stockholder meeting. At the meeting, a quorum of our stockholders considered a proposal to re-elect Anthony Castagna, Teresa Dial and Mark Sanders to the Board of Directors. The following votes were cast by stockholders:

Director	For	Withheld	Abstain
Anthony Castagna	18,036,162	263,815	N/A
Teresa Dial	17,761,640	538,337	N/A
Mark Sanders	17,632,914	667,063	N/A

Directors Edward F. West, Timothy J. Wright, Jean-Yves Dexmier, and David B. Hills continued their terms thereafter, except that Mr. Hills resigned as a director effective August 1, 2007.

At the same meeting, the stockholders also considered a proposal to approve the LookSmart 2007 Equity Incentive Plan. The following votes were cast by stockholders:

For	Against	Abstain
8,954,058	685,164	1,436,488

At the same meeting, the stockholders also considered a proposal to ratify the Board’s selection of PricewaterhouseCoopers, LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2007. The following votes were cast by stockholders:

For	Against	Abstain
18,093,232	38,445	168,300

ITEM 6. EXHIBITS

Please see the exhibit index following the signature page of this report.

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SIGNATURE

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

LOOKSMART, LTD.
By:	/s/ JOHN SIMONELLI
	John Simonelli, Chief Financial Officer
	(Principal Financial Officer)

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EXHIBIT INDEX

Exhibit Number	Description of Document
3.1	Restated Certificate of Incorporation (Filed with the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 14, 2005).
3.2	Bylaws (Filed with the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 14, 2000).
4.1	Form of Specimen Stock Certificate (Filed with the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 14, 2005).
4.2	Forms of Stock Option Agreement used by the Registrant in connection with grants of stock options to employees, directors and other service providers in connection with the Amended and Restated 1998 Stock Plan (Filed with the Company’s Current Report on Form 8-K filed with the SEC on October 22, 2004).
4.3	Form of cover sheet for use with Stock Option Agreement for grants of stock options to executives in connection with the Company’s Executive Team Incentive Plan, Plan Year 2006 (Filed with the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2006).
4.4	Form of Indemnification Agreement entered into between the Registrant and each of its directors and officers (Filed with the Company’s Registration Statement on Form S-1 (File No. 333-80581) filed with the SEC on June 14, 1999).
4.5	Form of cover sheet for use with stock option agreement for grants of stock options to executives in connection with the Company’s Executive Team Incentive Plan, Plan Year 2007 (Filed with the Company’s Current Report on Form 8-K filed with the SEC on March 2, 2007).
10.1	Form of Indemnification Agreement entered into between the Registrant and each of its directors and officers (Filed with the Company’s Registration Statement on Form S-1 (File No. 333-80581) filed with the SEC on June 14, 1999).
10.2	Amended and Restated 1998 Stock Plan (Filed with the Company’s Registration Statement on Form S-1 (File No. 333-80581) filed with the SEC on June 14, 1999).
10.3	1999 Employee Stock Purchase Plan as amended (Filed with the Company’s Registration Statement on Form S-8 (File No. 333-129987) filed with the SEC on November 29, 2005).
10.4	LookSmart, Ltd. Executive Team Incentive Plan, Plan Year 2006 (Filed with the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2006).
10.5	LookSmart, Ltd. Executive Team Incentive Plan, Plan Year 2007 (Filed with the Company’s Current Report on Form 8-K filed with the SEC on March 2, 2007).
10.7	Zeal Media, Inc. 1999 Stock Plan (Filed with the Company’s Registration Statement on Form S-8 filed with the SEC on December 7, 2000).
10.8	WiseNut, Inc. 1999 Stock Incentive Plan (Filed with the Company’s Registration Statement on Form S-8 filed with the SEC on April 18, 2002).
10.9	LookSmart 2007 Equity Incentive Plan (Filed with the Company’s Definitive Proxy Statement and Amended Definitive Proxy Statement with the SEC on April 30 and June 11, 2007, respectively).
10.12	Lease Agreement with Rosenberg SOMA Investments III, LLC for property located at 625 Second Street, San Francisco, California, dated May 5, 1999 (Filed with the Company’s Registration Statement on Form S-1 (File No. 333-80581) filed with the SEC on June 14, 1999).
10.31*	Fourth Addendum to AdCenter License, Hosting and Support Agreement between the Registrant and IAC Search & Media dated June 14, 2007.
10.32*	Sponsored Links Master Terms and Conditions between the Registrant and eBay, Inc. dated March 12, 2007.
10.33‡	LookSmart Reseller Terms and Conditions with MeziMedia dated September 7, 2005.(Filed with the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2007).
10.34+	Co-Location Services Agreement between the Registrant and Savvis Communications Corporation dated February 19, 2004 (Filed with the Company’s Quarterly Report on Form 10-Q/A filed with the SEC on November 7, 2003).
10.35+	Second Addendum to AdCenter License, Hosting and Support Agreement between the Registrant and IAC Search & Media dated May 16, 2006 (Filed with the Company’s Form 10-Q with the SEC on August 8, 2006).
10.36‡	Third Addendum to AdCenter License, Hosting and Support Agreement between the Registrant and IAC Search & Media dated January 1, 2007. (Filed with the Company’s Annual Report on Form 10-K on March 16, 2007).
10.37+	AdCenter License, Hosting and Support Agreement between the Registrant and Ask Jeeves, Inc. dated May 16, 2005 (Filed with the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2006).
10.38+	Addendum to AdCenter License, Hosting and Support Agreement between the Registrant and Ask Jeeves, Inc. dated January 20, 2006 (Filed with the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2006).
10.39+	Paid Listings License Agreement between the Registrant and SearchFeed.com dated April 15, 2006 (Filed with the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2006).
10.40+	License Agreement between the Registrant and SearchFeed.com dated November 23, 2003, as Amended on March 29, 2004 and March 21, 2005 (Filed with the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2006).
10.41	Separation Agreement and General Release between the Registrant and its former General Counsel dated August 20, 2005 (Filed with the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2006).
10.43	Employment offer letter between the Registrant and its Vice President, East Coast dated March 22, 2007 (Filed with the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2007).
10.44	Employment offer letter between the Registrant and its Vice President, Publisher Sales dated March 23, 2007 (Filed with the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2007).
10.45	Promotion letter between the Registrant and its Vice President, Finance and Principal Accounting Officer dated July 10, 2007. (Filed with the Company’s Current Report on Form 8-K filed with the SEC on July 16, 2007).
10.46	Severance Agreement and General Release between the Company and Dave Hills dated August 2, 2007 (Filed with the Company’s Current Report on Form 8-K filed with the SEC on August 7, 2007).

39

10.57	Employment offer letter between the Registrant and its Senior Vice President and Chief Technology Officer dated April 18, 2005 (Filed with the Company’s Current Report on Form 8-K filed with the SEC on April 25, 2005).
10.58	Amendment to employment offer letter between the Registrant and its Chief Executive Officer dated June 21, 2005 (Filed with the Company’s Current Report on Form 8-K filed with the SEC on June 21, 2005).
10.59	Employment offer letter between the Registrant and its General Counsel and Senior Vice President dated as of July 11, 2005 (Filed with the Company’s Current Report on Form 8-K filed with the SEC on July 14, 2005).
10.60	Employment offer letter between the Registrant and its Vice President, Publisher Products dated as of August 8, 2005 (Filed with the Company’s Current Report on Form 8-K filed with the SEC on August 10, 2005).
10.61	Employment offer letter between the Registrant and its Chief Financial Officer dated October 20, 2005 (Filed with the Company’s Current Report on Form 8-K filed with the SEC on October 27, 2005).
10.62	Employment offer letter between the Registrant and its Vice President, Marketing dated as of December 4, 2005 (Filed with the Company’s Current Report on Form 8-K filed with the SEC on December 23, 2005).
10.63	Promotion letter between the Registrant and its Vice-President, Advertising Sales dated November 15, 2006 (Filed with the Company’s Current Report on Form 8-K filed with the SEC on November 21, 2006).
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(*) Filed herewith

(‡) Material in the exhibit marked with a “‡” has been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Securities and Exchange Commission.

(+) Confidential treatment has been granted with respect to portions of the exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

40

EX-10.31

Exhibit 10.31

FOURTH ADDENDUM TO

ADCENTER LICENSE, HOSTING AND SUPPORT AGREEMENT

This Addendum is entered into between IAC Search & Media, a Delaware corporation (“Partner”) and LookSmart, Ltd., a Delaware corporation (“LookSmart”) and is the fourth addendum to that certain AdCenter License, Hosting and Support Agreement by and between Partner and LookSmart entered into as of May 16, 2005, as amended by the parties in three addenda effective January 2006, May 2006, and January 2007, respectively (the “Agreement”).

This Fourth Addendum is effective as of June 11, 2007.

Whereas, LookSmart has developed additional functionality to its AdCenter to enable the serving of advertisements in response to the content of viewed web pages (“Contextual Ad Serving”); and

Whereas, pursuant to Section 5(c) of the Agreement, LookSmart wishes to provide this Contextual Ad Serving functionality to Partner;

Therefore, Partner and LookSmart agree as follows:

1. Delivery: LookSmart agrees that it will make Contextual Ad Serving available to Partner on June 11, 2007.

2. Service Levels: The Service Level Agreement attached to the Agreement as Exhibit A will apply to Contextual Ad Serving, except when the AdCenter is required to retrieve content from Partner Network in order to have a copy or refresh a copy of the content.

3. Contextual Ad Serving Metrics: LookSmart will develop a system for measuring latency for those contextual ad calls that require LookSmart to retrieve content from Partner Network in order to have a copy or refresh a copy of the content (excluding the time required for LookSmart to retrieve the content from Partner Network) (the “Contextual Ad Serving Metrics”) by August 1, 2007. The Contextual Ad Serving Metrics will not be subject to the existing Service Level Agreement.

4. Except as modified herein, the Agreement shall remain in full force and effect.

Partner		LookSmart, Ltd.
By:	/s/ Dominic Butera	By:	/s/ Michael Schoen
Name:	Dominic Butera	Name:	Michael Schoen
Title:	Chief Financial Officer	Title:	Vice President, Product and Technology

EX-10.32

Exhibit 10.32

Sponsored Links Master Terms and Conditions

These Sponsored Links Master Terms and Conditions (“Master Terms”) are entered into between LookSmart, Ltd. with its principal office at 625 2^nd Street, San Francisco, California 94107 (“Service Provider” or “SP”) and eBay Inc. with its principal office at 2145 Hamilton Avenue, San Jose, California 95125 (“eBay”), and will govern all Insertion Orders placed for the Services by eBay or any of its Affiliates, as applicable. These Master Terms and any Insertion Orders issued hereunder are collectively referred to as the “Agreement.”

1. DEFINITIONS

1.1 “Ad” means an advertisement provided by eBay to SP in connection with an IO, which may include text, trade or service marks or names, graphical image files, links to eBay-designated URLs (which may include search results pages), or any other content provided by Customer for display by SP in accordance with these Master Terms.

1.2 “Affiliate” means any entity that eBay controls, is controlled by, or is under common control with, where “control” means the ability to control corporate decisions or the ownership of at least twenty percent (20%) interest.

1.3 “Click” means that an Internet user has (a) clicked on an Ad displayed on an SP Network Property in connection with the Services and (b) successfully linked to the original (i.e., not a cached, mirrored, or other stored version) eBay-designated URL specified in the Ad.

1.4 “Insertion Order” or “IO” means the eBay insertion order for delivery of the Services in accordance with these Master Terms end the instructions printed or written on the face of such insertion order.

1.5 “Negative Keyword” means any keyword designated as such in writing by eBay for which SP will prevent Ads from displaying in response to a search query that includes such keyword.

1.6 “Selected Keyword” means any keyword designated as such in writing by eBay for which SP will cause an applicable Ad to display on the SP Network Property in response to a search query (on the SP Network Property) that includes such keyword, subject to any Negative Keyword blocking described in Section 3.1 below.

1.7 “Services” means the services provided by SP hereunder, as specified in an IO, related to the placement and display of Ads on SP Network Properties either (i) in response to Internet users’ search queries on those SP Network Properties which queries include one or more Selected Keywords (and do not include any Negative Keywords), or (ii) in connection with eBay’s purchase of run-of-network Ad placements.

1.8 “SP Network Property” means SP’s owned and operated web sites as well as SP’s distribution partner network sites for which SP has all the necessary rights and licenses to deliver Ads or perform the Services; all SP Network Property sites on which eBay’s Ad will appear shall be listed in the applicable IO(s).

2. SCOPE OF RELATIONSHIP

2.1 Services for eBay & Affiliates. SP will provide the Services in accordance with the Agreement to eBay and any Affiliate submitting an IO in accordance with these Master Terms. Each Affiliate will be entitled to all the benefits and protections, and will be subject to all the obligations, of the Agreement with respect to IOs placed by such Affiliate, and all Ads related thereto, as if it were eBay. Any IO submitted by an Affiliate under these Master Terms will create rights and obligations solely between such Affiliate and SP; eBay and its other Affiliates shall not have any obligations or liability hereunder with respect to such IO. Nothing in these Master Terms will obligate eBay or any Affiliate to enter into any IO with SP. Each Affiliate will be entitled to receive from SP its own Ad Management Account (defined in Section 3.4 below) and manage Affiliate’s advertising campaigns to the same extent as eBay, including setting its own Spending Caps (defined in Section 3.4 below), in accordance with these Master Terms.

2.2 No Additional Terms; Conflict. All IOs will be governed by these Master Terms. eBay’s failure to object to provisions contained in any communication from SP will not be deemed a waiver of any provision herein. Any additional or different terms proposed by SP (regardless of the form of writing or agreement (including any posted terms or clickthroughs required as part of using the Service) and notwithstanding any contrary terms contained therein) will be deemed material, are objected to, and are hereby rejected unless specifically accepted by eBay in a hardcopy signed writing. In the event of any conflict between the terms of any IO and these Master Terms, the Master Terms will control except for provisions that are expressly indicated on the face of such IO as superseding their counterpart(s) in the Master Terms.

2.3 Insertion Orders. Separate IOs will be executed by eBay or any of its Affiliates, as applicable, and SP, for each advertising campaign placed by eBay or such Affiliate. Each IO will specify the applicable eBay entity (eBay or an Affiliate) buying the Selected Keywords (and/or Negative Keywords, if applicable) and/or run-of-network advertisements, the applicable URLs to which such Ads will link, the beginning and end dates for the advertising campaign, and the cost-per-ClicK (“CPC”) for the duration of such advertising campaign.

2.4 Independent Contractors. The parties are independent contractors, and nothing in the Agreement will be deemed to place the parties in the relationship of employer-employee, principal-agent, partners or joint venturers.

3. SP OBLIGATIONS

3.1 Selected Keywords; Negative Keywords. Except as otherwise set forth in this Section, SP will provide the Services to display Ads on SP Network Properties in response to an internet user’s submission on any SP Network Property of a search query that includes one or more Selected Keywords. If SP is capable of providing negative keyword matching services, eBay may request, and SP will provide, negative keyword matching as part of the Services such that SP will provide Services to prevent the display of Ads in response to an Internet user’s search query that includes any Negative Keywords, even if such search query also includes a Selected Keyword.

3.2 Run-of-Network Placements. SP will provide Services, in accordance with these Master Terms, to display Ads on SP Network Properties in connection with any run-of-network advertising requested by eBay under the applicable IO.

3.3 Ad Delivery. SP represents and warrants that it owns or has the necessary rights and licenses to the SP Network Properties on which SP delivers the Ads or performs the

Services, in accordance with the Agreement. Unless otherwise expressly set forth in an IO, no Ad will be delivered to Internet users located outside the U.S. SP will display the Ad exactly as provided by eBay, and will not modify, truncate or otherwise alter the Ad in any manner without eBay’s prior written approval on a case-by-case basis. eBay may submit multiple Ads and SP will display the applicable Ad (or version thereof) indicated by eBay as corresponding to the Selected Keyword (subject to any Negative Keywords, if applicable) or run-of-network placement. Without limiting the foregoing, SP DISCLAIMS ALL GUARANTEES REGARDING ANY CONVERSIONS OR OTHER RESULTS FOR ANY ADS (INCLUDING ANY RETURN ON INVESTMENTS RELATING TO ANY ADS).

3.4 Spending Caps. In addition to Customer's ability to set maximum cost-per-Click rates for Selected Keywords, Customer will be entitled to set, and alter, at any time and in its sole discretion, spending caps (“Spending Caps”) for the Services applicable to any IO via an online account interface to the Services (“Ad Management Account”). SP will not exceed the Spending Caps specified by eBay through the Ad Management Account and, notwithstanding anything in the Agreement, eBay will not be liable to pay any fees or charges in excess of the Spending Caps (measured on Pacific Time).

3.5 Compliance with Laws. SP represents and warrants that it will maintain high standards of professionalism and will at ail times comply with all applicable laws and regulations in the performance of the Services and its obligations under the Agreement.

4. LICENSE.

4.1 Grant. Subject to the terms and conditions of this Agreement, eBay hereby grants to SP a limited, non-exclusive, non-transferable license to reproduce, distribute, publicly display, and publicly perform, the Ads solely on SP Network Properties in connection with the Services and solely in accordance with the Agreement.

4.2 Restrictions. SP may not, without the prior written approval of eBay, modify or create derivative works from the Ads or any content contained therein.

4.3 No Implied Rights. All rights not expressly granted hereunder are reserved to eBay and/or its Affiliates.

5. AD CONTENT

5.1 Delivery. eBay will provide its lists of Selected Keywords (and Negative Keywords, if applicable) to SP via excel spreadsheets or other mutually agreeable format. eBay will provide Ads and all content therein via a mutually agreeable format. SP may reject any of eBay’s Selected Keywords or Customer Ads that do not meet SP’s generally-applicable (and generally-enforced) editorial policies.

5.2 Management. eBay will be entitled to login in to the Ad Management Account to manage its advertising campaigns, including: (i) cancelling at any time all or any part of an IO, provided such cancellation shall be effective within 48 hours following such notice; and (ii) making changes, at any time, to Spending Caps as described in Section 3.4. SP will ensure that the Ad Management Account provided to eBay shall contain features and functionality that is equal to or better than the features or functionality of ad management accounts provided by SP to SP’s other customers.

5.3 Ownership. SP acknowledges that eBay and its Affiliates, as applicable, retain all right, title and interest in and to the Ads and content therein submitted by eBay or its Affiliates, as applicable, including any intellectual property rights therein. All usage of such content, and any goodwill established by such use, will inure to the exclusive benefit of eBay or its Affiliates, as applicable, and the Agreement does not confer any goodwill or other interests in such content to SP. SP will not adopt or attempt to register any content that is confusingly similar to any such content

6. TRACKING; INVOICES; PAYMENT TERMS.

SP will invoice eBay or its Affiliates monthly for Clicks on eBay’s Ads in accordance with the Agreement, and subject to any Spending Caps set Forth in the applicable IO(s). SP win send invoices to the address identified in the applicable IO for the applicable eBay entity, and will indicate on the face of such invoice the applicable eBay PO number (if provided by eBay) and eBay entity. eBay may separately track the number of Clicks on Ads delivered during each month that Services are performed. Any tracking discrepancies between the parties’ respective records shall be resolved as follows:

• 10% or less: In the event of a discrepancy of 10% or less between the parties’ tracking data for a given month, eBay shall pay off of SP's tracking data for Clicks delivered in accordance with this Agreement, subject to the applicable Spending Caps set by eBay under the relevant lO(s).

• Greater than 10%: Should there be a discrepancy of more than 10% between SP’s statistics and eBay’s statistics for a given month, the parties shall attempt to promptly resolve such discrepancy in good faith, and shall implement any mutually-agreed upon adjustments. In the event of an unresolved tracking discrepancy greater than 10%, eBay will pay the average between the parties’ respective tracking data for such month up to a cap of 10% higher than the data reported under eBay’s tracking statistics, and subject further to the applicable Spending Caps set by eBay under the relevant IO(s). To be clear, in no event will eBay be obligated to pay fees in excess of 10% higher than those reported under its own tracking data.

• Invoices. SP will issue any revised invoices required under the above-described discrepancy resolution formula.

• Payment timing. Payments of undisputed sums will be due within thirty days following receipt of correct invoice.

7. CONFIDENTIALITY. Each party (“Disclosing Party”) may from time to time during the term of these Master Terms disclose to the other party (“Receiving Party”) certain information regarding the Disclosing Party’s business that shall be considered the Disclosing Party’s Confidential Information as defined herein. “Confidential Information” means any and all information disclosed by the Disclosing Party that is labeled as “confidential” or “proprietary”, or if disclosed orally is identified as confidential at the time of disclosure and is confirmed in writing as “confidential” or “proprietary” within fifteen (15) days after such oral disclosure. Regardless of whether or not labeled or identified as “confidential” or “proprietary”, the following items are hereby deemed eBay’s “Confidential Information:” Selected Keywords, Negative Keywords, the CPC rates of Ads, Selected Keywords, and Negative Keywords, fees paid to SP hereunder, and any Spending Caps specified by eBay. The terms and conditions of the Agreement shall be deemed the “Confidential Information” of both parties. During the term of these Master Terms

and at all times thereafter, the Receiving Party will (a) hold all Confidential Information of the Disclosing Party in strict trust and confidence, (b) refrain from using or permitting others to use the Disclosing Party’s Confidential Information in any manner or for any purpose not expressly permitted or required by the Agreement, (c) refrain from disclosing or permitting others to disclose any Confidential information of the Disclosing Party to any third party without obtaining the Disclosing Party’s prior written consent on a case-by-case basis, and (d) limit access to the Disclosing Party’s Confidential Information to employees or contractors of the Receiving Party who have a reasonable need to have such access in order to perform the Services and are under a duty of confidentiality no less restrictive than that set forth herein. The Receiving Party will protect the Disclosing Party’s Confidential Information from unauthorized use, access, or disclosure in the same manner as the Receiving Party protects its own confidential or proprietary information of a similar nature and with no less than the greater of reasonable care and industry-standard care. Upon termination or expiration of these Master Terms, or earlier upon the Disclosing Party’s request, the Receiving Party will return or destroy all Confidential Information of the Disclosing Party, including any copies thereof, and certify in writing to the Disclosing Party that it has complied with the provisions of this sentence. If the Receiving Party is compelled by law, rule, regulation or a court order to disclose the Disclosing Party’s Confidential information, the Receiving Party will give prompt written notice to the Disclosing Party and assist the Disclosing Party in seeking protective treatment far such Confidential Information. “Confidential Information” does not include Information that the Receiving Party can prove (a) is lawfully known by the Receiving Party at the time of disclosure by the Disclosing Party to the Receiving Party, (b) becomes, through no act or fault of the Receiving Party, publicly known, or is generally made available without restriction by the Disclosing Party, (c) is rightfully disclosed to the Receiving Party by a third party without a restriction on disclosure or use, or (d) is independently developed by the Receiving Party without access to, or use of, the Disclosing Party’s Confidential Information.

8. LIMITATION OF LIABILITY. EXCEPT FOR EITHER PARTY’S (OR ANY AFFILIATE’S) BREACH OF SECTION 7, OR A PARTY’S (OR ANY AFFILIATE’S) OBLIGATION UNDER SECTION 9, (A) IN NO EVENT WILL EITHER PARTY (OR ANY AFFILIATE) BE LIABLE TO THE OTHER PARTY (OR ANY AFFILIATE) FOR ANY INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES, INCLUDING LOST PROFITS OR .GOODWILL, FOR ANY MATTER ARISING OUT OF OR RELATING TO THE AGREEMENT, WHETHER IN CONTRACT, TORT OR OTHERWISE EVEN IF SUCH PARTY (OR THE APPLICABLE AFFILIATE) HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, AND (B) EACH PARTY’S (OR ANY AFFILIATE’S) MAXIMUM CUMULATIVE LIABILITY FOR ANY CLAIMS ARISING OUT OF OR RELATED TO THIS AGREEMENT WILL BE LIMITED TO THE AMOUNT PAID OR PAYABLE BY SUCH PARTY (OR THE APPLICABLE AFFILIATE) UNDER THE IO GIVING RISE TO THE LIABILITY.

9. INDEMNIFICATION

9.1 By SP. SP will indemnify, hold harmless and defend eBay, its Affiliates, and their directors, officers, employees and agents from and against any and all actions, claims, losses, damages, liabilities, costs, and expenses (including reasonable attorneys’ fees) brought by a third party (including any Internet user) arising from or relating to: (i) any breach by SP of any of its obligations, duties, or covenants under the Agreement; (ii) the Services (excluding claims solely to the extent indemnified by eBay under Section 9.2 below).

9.2 By eBay. eBay will Indemnify, hold harmless and defend SP, its Affiliates, and their directors, officers, employees and agents from and against any and all actions, claims,

losses, damages, liabilities, costs, and expenses (including reasonable attorneys’ fees) brought by a third party (including any Internet user) arising from or relating to (i) any breach by eBay of any obligations, duties, or covenants under the Agreement; (ii) any allegation that the contents of eBay’s Ads, where displayed in accordance with the Agreement, violate or infringe upon any U.S. patent, copyright, trademark right or other intellectual property right of a third party, except where such eBay Ad(s) has been modified without authorization, and such modification is the basis of the Claim. Notwithstanding the foregoing, eBay will have no obligation under this Section if the applicable Ad was (i) modified without eBay’s prior written authorization, or (ii) used other than in accordance with these Master Terms: THIS SECTION SETS FORTH EBAY’S ENTIRE LIABILITY AND SP’S SOLE AND EXCLUSIVE REMEDY FOR INFRINGEMENT CLAIMS AND ACTIONS.

9.3 PREREQUISITES TO INDEMNIFICATION. The obligations set forth in Sections 9.1 and 9.2 are conditioned on the indemnified party: (i) giving the indemnifying party prompt written notice of any such claim, (ii) cooperating with the indemnifying party, at the indemnifying party’s reasonable expense, in the defense of such claim, and (iii) giving the indemnifying party the sole right to control the investigation, defense, and settlement of any such claim, provided that the indemnifying party will not enter into any settlement that affects the indemnified party’s rights or interest without the indemnified party’s prior written approval. Without limiting the foregoing, the indemnified party will have the right to participate, at its expense, in the defense of any claim.

10. TERM; TERMINATION; IO SUSPENSION AND CANCELLATION

10.1 Term. The term of these Master Terms will commence on the date of the last signature hereof and will continue in effect until terminated as provided in Section 10.2.

10.2 Termination. These Master Terms may be terminated by eBay; (i) for any breach by SP of these Master Terms or an IO that is not cured within ten (10) days after receipt of a written notice from eBay; or (ii) for any or no reason upon ten (10) days written notice to SP. These Master Terms may be terminated by SP: (a) for eBay’s failure to pay any undisputed amounts hereunder that is not cured within thirty (30) days after receipt of a written notice from SP; or (b) for any or no reason upon ten (10) days prior written notice to eBay.

10.3 IO Suspension and Cancellation. SP may immediately suspend or terminate any IO upon written notice to eBay or the applicable Affiliate which entered into such IO with SP, provided eBay or such Affiliate has failed to make any modifications to any Ad within fifteen (15) days after receipt by eBay or such Affiliate, as applicable, of SP’s written notice stating reasonable reasons why such Ad is inappropriate or potentially unlawful. If an Affiliate fails to pay any undisputed amount within thirty (30) days of such Affiliate’s receipt of SP’s notice, SP may reject any future lOs, in whole or in part, from, or suspend or cancel performance of any unperformed Services under any existing lOs entered into with, any Affiliate until payment is made.

10.4 Effect of Termination; Effect of IO Suspension or Cancellation. Upon any termination of these Master Terms as provided in Section 10.2, all existing lOs shall automatically terminate. The suspension or cancellation of any IO shall not terminate these Master Terms. Notwithstanding anything contained in these Master Terms, no Affiliate may terminate these Master Terms. Upon any termination of these Master Terms, eBay (and each applicable Affiliate) will, within a reasonable period after termination (not to exceed thirty (30) days following receipt of final, correct invoice), pay any undisputed fees due hereunder from eBay or the Affiliate, respectively. The following Sections will survive any termination of these Master Terms or any IO: 1, 2.4, 5.3, 5.4, 7, 8, 9, 10.4, and 11.

11. General

11.1 Assignment. SP may not assign or transfer, by operation of law or otherwise, any of its rights or delegate any of its duties under the Agreement to any third party without eBay’s prior written consent. Any attempted assignment or transfer in violation of the foregoing will be void.

11.2 Governing Law. The Agreement will be governed exclusively by and construed in accordance with the laws of the United States and the State- of California, without giving effect to any principles that would require me application of the laws of a different jurisdiction. The parties hereby submit to the exclusive jurisdiction of, and waive any venue objections against, state and federal courts in Santa Clara County. California.

11.3 Construction. The headings of Sections of these Master Terms are for convenience and are not to be used in interpreting these Master Terms. As used in these Master Terms, the word “including” means “including but not limited to.”

11.4 Force Majeure. Neither party will be responsible for failure of performance due to any cause beyond such party’s reasonable control or due to acts of god, acts of civil or military authorities, fires, labor disturbances, floods, epidemics, governmental rules or regulations, war, riot, delays in transportation, shortages of raw materials, shortages of services, power outages, unauthorized hacking on or through the internet, or other unavailability of the Internet including either party’s network, provided that the affected party uses reasonable efforts, under the circumstances, to notify the other party of the circumstances causing the delay and to resume performance as soon as possible.

11.5 Waiver; Severability. All waivers hereunder must be in writing. The waiver of any one breach, default or right granted hereunder will not constitute a waiver of any other breach, default or right granted. Any provision or part of this Agreement held to be illegal or unenforceable will be stricken and the remainder will continue in full force and effect. If any provision or part is stricken in accordance with this Section, such provision or part will be replaced, to the extent possible, with a valid, legal, and enforceable provision that is as similar in tenor to the stricken provision or part as is possible.

11.6 No Press Releases. SP will not issue any press release nor make any public statement regarding these Master Terms or any lOs or the relationship between the parties without eBay’s prior written approval which may be withheld in eBay’s sole discretion.

11.7 Complete Agreement. These Master Terms, including all IOs executed hereunder, constitute the entire agreement between the parties with respect to the subject matter hereof, and supersedes and replaces all prior or contemporaneous understandings or agreements, written or oral, regarding such subject matter. No amendment to or modification of these Master Terms or any IO will be binding unless in writing and signed by a duly authorized representative of both parties (and in the case of IOs, by the applicable Affiliate).

IN WITNESS WHEREOF, the parties have agreed to these Master Terms by their duly authorized representatives.

LookSmart, Ltd. (“SP”)		eBav Inc. (“eBay”)
Signature:	/s/ Yolanda Loh	Signature:	/s/ Matt Ackley
Name/Title:	Yolanda Loh/VP Sales	Name/Title:	Matt Ackley, VP Internet Marketing
Date:	3/12/2007	Date:	3/13/07

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Edward West, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of LookSmart, Ltd.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 9, 2007

/s/ Edward F. West

Interim Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, John Simonelli, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of LookSmart, Ltd.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 9, 2007

/s/ John Simonelli

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Edward West, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of LookSmart, Ltd. on Form 10-Q for the fiscal quarter ended June 30, 2007 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of LookSmart, Ltd.

Date: August 9, 2007

By:	/s/ Edward F. West
Name:	Edward F. West
Title:	Interim Chief Executive Officer

I, John Simonelli, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of LookSmart, Ltd. on Form 10-Q for the fiscal quarter ended June 30, 2007 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of LookSmart, Ltd.

Date: August 9, 2007

By:	/s/ John Simonelli
Name:	John Simonelli
Title:	Chief Financial Officer