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as high speed Internet access, server equipment depreciation, and content license fees. Cost of revenues were $41.8 million, or 26% of revenue
for the year ended December 31, 2001 compared to $35.6 million, or 17% of revenue for the year ended December 31, 2000 and $13.5 million
or 19% of revenue for the year ended December 31, 1999. The absolute dollar increase of cost of revenue for the year ended December 31,
2001 was primarily attributable to increases in the cost of data licenses from expanding and enhancing our licensed content and delivery and
increases in depreciation and non capitalized equipment. The absolute dollar increase in cost of revenue for the year ended December 31, 2000
compared to the year ended December 31, 1999 was primarily attributable to personnel costs and other costs incurred in order to support
greatly increased delivery of our products and application services, including communication lines, data licenses and equipment. In the near
term, the majority of our expenses in cost of revenue are fixed. Therefore, we expect cost of revenue as a percentage of revenue to decrease as
our revenues increase.
Product Development Expenses.
Product development expenses consist principally of personnel costs for research, development,
support and ongoing enhancements of the proprietary products and application services we deliver to our customers across wireline, wireless
and broadband networks. Product development expenses were $39.3 million, or 24% of revenue, for the year ended December 31, 2001
compared with $40.6 million, or 19% of revenue, for the year ended December 31, 2000 and $15.6 million or 22% of revenue for the year
ended December 31, 1999. In accordance with Statement of Position 98 1, certain product development expenses are capitalized as internally
developed software. We capitalized $2.6 million of salaries and benefits from personnel associated with internally developed software in 2001.
This compares to $279,000 in 2000 and $478,000 in 1999 of capitalized costs. With these costs included in product development expenses, net
of amortization of previously capitalized internally developed software, 2001 product development expenses would have been $41.6 million,
2000 product development expenses would have been $40.8 million and 1999 product development expenses would have been $16.1 million.
The 2001 expenses include approximately $1.5 million in one time payments, including one time payments to certain employees for retention
obligations from acquisitions and to the employees for accelerated vesting of our contribution to the InfoSpace Venture Capital Fund 2000,
LLC ( Venture Fund ) on their behalf that occurred in the first quarter of 2001. Generally, product development costs are not consistent with
changes in revenue as they represent key infrastructure costs to develop and enhance service offerings and are not directly associated with
current period revenue. We believe that continued significant investments in technology are necessary to remain competitive.
Sales, General and Administrative Expenses.
Sales, general and administrative expenses consist primarily of salaries and related
benefits, carriage fees, professional service fees, occupancy and general office expenses, business development and management travel
expenses and advertising and promotion expenses. Sales, general and administrative expenses were $118.3 million, or 73% of revenues, for the
year ended December 31, 2001 compared to $131.1 million, or 61% of revenues, for the year ended December 31, 2000 and $77.8 million or
108% of revenues for the year ended December 31, 1999. The absolute dollar decrease for the year ended December 31, 2001 is attributable to
reduced salaries and benefits from our realignments in the first quarter and third quarter of 2001, reduced advertising and promotions expenses
and lower bad debt expense. These decreases were partially offset by increased occupancy expenses from the leases for our headquarters
facility, which began in July 2000, and our Montreal facility from our acquisition of Locus Dialogue in January 2001 and higher carriage
expenses. The increase in sales, general and administrative expenses in 2000 from 1999 was a result of increased personnel expenses from
larger staffing levels and greater occupancy expenses, depreciation and equipment costs from our move to our new Bellevue, Washington
facilities in July 2000 and from our international expansion into Brazil and Australia. We expect sales, general and administrative expenses to
continue to decline in absolute dollars in 2002 compared to 2001.
2001 sales, general and administrative expense includes $1.5 million of charges for an allowance of a note receivable from an officer of
the Company. 2000 sales, general and administrative expense includes $3.1 million of charges for an allowance of a note receivable from one
of our executive officers. In October 2000, we loaned this officer $4.0 million. The promissory note matured on December 31, 2001. The note
was secured by a pledge of 200,000 shares of our common stock, valued at $410,000 on the date of maturity. The terms of the note provided,
however, that if the officer remained employed by us through December 31, 2001, then we would