**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 WASHINGTON,
        D.C. 20549
 
 **FORM
        10-QSB**
 
 x QUARTERLY
        REPORT UNDER SECTION 13 OR 15(d) OF THE
 SECURITIES
        EXCHANGE ACT OF 1934
 
 FOR
        THE
        QUARTERLY PERIOD ENDED JUNE 30, 2006
 
 o TRANSITION
        REPORT UNDER SECTION 13 OR 15(d) OF THE
 SECURITIES
        EXCHANGE ACT OF 1934
 
 COMMISSION
        FILE NUMBER 001-32255
 
 **ANSWERS
        CORPORATION**
 (EXACT
        NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
 
 DELAWARE
              98-0202855(STATE
                  OR OTHER JURISDICTION OF
              (I.R.S.
                  EMPLOYER IDENTIFICATION NO.)INCORPORATION
                  OR ORGANIZATION)
 
 Jerusalem
        Technology Park
 The
        Tower
 Jerusalem
        91481 Israel
 (ADDRESS
        INCLUDING ZIP CODE OF PRINCIPAL EXECUTIVE OFFICES)
 
 +972-2-649-5000
 (REGISTRANT'S
        TELEPHONE NUMBER, INCLUDING AREA CODE)
 
 Indicate
        by an (X) whether the registrant: (1) has filed all reports required to be
        filed
        by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days. Yes x NO o
  Indicate
          by check mark whether registrant is a shell company (as defined in rule
          12b-2 of
          the Exchange Act): Yes oNOx
 
 As
        of
        August 8, 2006, the registrant had outstanding 7,780,946 shares of Common
        Stock,
        $0.001 par value per share.




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**PART
                I. FINANCIAL
                INFORMATION****Item
                1. FINANCIAL STATEMENTS**Consolidated
                Balance Sheets as of June 30, 2006
                (unaudited) and December 31, 2005.
            1Consolidated
                Statements of Operations (unaudited)
                for the three and six months ended June 30, 2006 and 2005 and cumulative
                from December 22, 1998 (inception) through June 30, 2006
            2Consolidated
                Statements of Cash Flows
                (unaudited) for the six months ended June 30, 2006 and 2005 and cumulative
                from December 22, 1998 (inception) through June 30,
                2006
            3Notes
                to unaudited Consolidated Financial
                Statements
            4Item
                2. Management's Discussion and Analysis of Financial
                Condition or Plan of Operation
            16Item
                3. Controls and Procedures
            29**PART
                II. OTHER INFORMATION**Item
                1. Legal Proceedings
            29Item
                2. Unregistered Sales of Equity Securities and Use
                of Proceeds
            30Item
                3. Defaults Upon Senior Securities
            30Item
                4. Submission of Matters to a Vote of Security
                Holders
            30Item
                5. Other Information
            31Item
                6. Exhibits
            31Signatures
            32





**Cautionary
      Note regarding Forward-Looking Statements**


In
      addition to historical information, this Quarterly Report on Form 10-QSB
      contains forward-looking statements within the meaning of Section 27A of
      the Securities Act and Section 21E of the Exchange Act. Forward-looking
      statements are those that predict or describe future events. You can generally
      identify forward-looking statements as statements containing the words
“believe,” “expect,” “will,” “anticipate,” “intend,” “estimate,” “project,” or
      other similar expressions, although not all forward-looking statements contain
      these identifying words. All statements in this report regarding our future
      strategy and operations, projected financial position, estimated future
      revenues, projected costs, future prospects are forward-looking statements.
      You
      should not place undue reliance on our forward-looking statements because the
      matters they describe are subject to known and unknown risks, many of which
      are
      beyond our control. Our forward-looking statements are based on the information
      currently available to us and speak only as of the date on which this report
      was
      filed with the SEC. We expressly disclaim any obligation to issue any updates
      or
      revisions to our forward-looking statements, even if subsequent events cause
      our
      expectations to change regarding the matters discussed in those statements.
      Over
      time, our actual results, performance or achievements will likely differ from
      the anticipated results, performance or achievements that are expressed or
      implied by our forward-looking statements, and such difference might be
      significant and materially adverse to our stockholders. Factors that may cause
      such differences include, but are not limited to, those discussed under "Risk
      Factors" set forth in our registration statement on Form S-3/A, as filed with
      the Securities and Exchange Commission in May 2006 and declared effective in
      June 2006, including among others the uncertainties associated with our ability
      to increase the number of users visiting our Website, our ability to increase
      the number of partners who will generate increased traffic to our Website,
      our
      ability to improve the monetization of our products, ** a
      decision by Google to stop directing user traffic to Answers.com through its
      definition link, a decision by Google, currently the provider of almost all
      of
      our search engine traffic, and other search engines, to change the algorithms
      responsible for directing search queries to the web pages that are most likely
      to contain the information being sought by Internet users or restrict the flow
      of users visiting our Website, our ability to renew current contracts with
      content providers on commercially acceptable terms or that our costs with
      respect to these contracts will not increase prohibitively following any
      renewal, the risks of litigation relating to our intellectual property, the
      risks associated with dependence upon key personnel and the need ** for
      additional financing. Please consider our forward-looking statements in light
      of
      those risks as you read this report.




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**PART
      I. FINANCIAL INFORMATION**




**ITEM
        1. FINANCIAL STATEMENTS**





Answers
      Corporation (formerly GuruNet Corporation) and Subsidiary


**Consolidated
      Balance Sheets****(in
      thousands except share data)**








**June
                30**
            
            **December
                31****2006**
            
            **2005**$
            
            $**Assets****Current
                assets:**Cash
                and cash equivalents
            
            
            **4,528**
            
            
            2,840Investment
                securities
            
            
            **7,435**
            
            
            11,163Accounts
                receivable
            
            
            **791**
            
            
            451Other
                prepaid expenses and other current assets
            
            
            **409**
            
            
            349**Total
                current assets**
            
            
            **13,163**
            
            
            14,803**Long-term
                deposits (restricted)**
            
            
            **214**
            
            
            211**Deposits
                in respect of employee severance obligations**
            
            
            **705**
            
            
            610**Property
                and equipment, net**
            
            
            **786**
            
            
            597**Other
                assets:**Intangible
                assets, net
            
            
            **5,000**
            
            
            5,384Prepaid
                expenses, long-term
            
            
            **362**
            
            
            254Deferred
                tax asset, long-term
            
            
            **15**
            
            
            13**Total
                other assets**
            
            
            **5,377**
            
            
            5,651**Total
                assets**
            
            
            **20,245**
            
            
            21,872**Liabilities
                and stockholders' equity****Current
                liabilities:**Accounts
                payable
            
            
            **339**
            
            
            305Accrued
                expenses
            
            
            **666**
            
            
            673Accrued
                compensation
            
            
            **526**
            
            
            322Deferred
                revenues, short-term
            
            
            **33**
            
            
            67**Total
                current liabilities**
            
            
            **1,564**
            
            
            1,367**Long-term
                liabilities:**Liability
                in respect of employee severance obligations
            
            
            **707**
            
            
            622Deferred
                tax liability, long-term
            
            
            **120**
            
            
            98Deferred
                revenues, long-term
            
            
            **430**
            
            
            442**Total
                long-term liabilities**
            
            
            **1,257**
            
            
            1,162**Commitments
                and contingencies****Stockholders'
                equity:**Preferred
                stock: $0.01 par value; 1,000,000 shares authorized and
                undesignated
            
            
            **-**
            
            
            -Common
                stock; $0.001 par value; 30,000,000 shares authorized;7,780,946 and
                7,664,969
              shares
                issued and outstanding as of June 30, 2006 and December 31, 2005,
                respectively
            
            
            **8**
            
            
            8Additional
                paid-in capital
            
            
            **70,492**
            
            
            69,492Deferred
                compensation
            
            
            **-**
            
            
            (3,518
            )Accumulated
                other comprehensive loss
            
            
            **(28**
            **)**
            
            (29
            )Accumulated
                deficit
            
            
            **(53,048**
            **)**
            
            (46,610
            )**Total
                stockholders' equity**
            
            
            **17,424**
            
            
            19,343**Total
                liabilities and stockholders' equity**
            
            
            **20,245**
            
            
            21,872








See
      accompanying notes to the interim consolidated financial statements


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Answers
      Corporation (formerly GuruNet Corporation) and Subsidiary








**Consolidated
      Statements of Operations****(in
      thousands except share and per share data)**








**Three
                months ended June 30**
            
            **Six
                months ended June 30****2006**
            
            **2005**
            
            **2006**
            
            **2005**$
            
            $
            
            $
            
            $**Revenues:**Answers.com
                advertising revenue
            
            
            **1,457**
            
            
            357
            
            
            **2,547**
            
            
            463Answers
                service licensing
            
            
            **46**
            
            
            28
            
            
            **99**
            
            
            12Subscriptions
            
            
            **8**
            
            
            40
            
            
            **19**
            
            
            125**1,511**
            
            
            425
            
            
            **2,665**
            
            
            600**Costs
                and expenses:**Cost
                of revenue
            
            
            **808**
            
            
            286
            
            
            **1,492**
            
            
            528Research
                and development
            
            
            **1,951**
            
            
            344
            
            
            **4,588**
            
            
            640Sales
                and marketing
            
            
            **678**
            
            
            451
            
            
            **1,320**
            
            
            812General
                and administrative
            
            
            **965**
            
            
            1,078
            
            
            **1,765**
            
            
            1,931**Total
                operating expenses**
            
            
            **4,402**
            
            
            2,159
            
            
            **9,165**
            
            
            3,911**Operating
                loss**
            
            
            **(2,891**
            **)**
            
            (1,734
            )
            
            **(6,500**
            **)**
            
            (3,311
            )Interest
                income, net
            
            
            **145**
            
            
            145
            
            
            **286**
            
            
            231Other
                expenses, net
            
            
            **(201**
            **)**
            
            (21
            )
            
            **(204**
            **)**
            
            (21
            )**Loss
                before income taxes**
            
            
            **(2,947**
            **)**
            
            (1,610
            )
            
            **(6,418**
            **)**
            
            (3,101
            )Income
                taxes
            
            
            **(11**
            **)**
            
            9
            
            
            **(20**
            **)**
            
            (6
            )**Net
                loss**
            
            
            **(2,958**
            **)**
            
            (1,601
            )
            
            **(6,438**
            **)**
            
            (3,107
            )**Basic
                and diluted net loss per common share**
            
            
            **(0.39**
            **)**
            
            (0.23
            )
            
            **(0.85**
            **)**
            
            (0.48
            )**Weighted
                average shares used in computing basic and**
              **diluted
                net loss per common share**
            
            
            **7,678,328**
            
            
            6,986,768
            
            
            **7,555,185**
            
            
            6,512,508







See
      accompanying notes to the interim consolidated
      financial statements


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Answers
      Corporation (formerly GuruNet Corporation) and Subsidiary








**Consolidated
      Statements of Cash Flows****(in
      thousands)**








**Six
                months ended June 30****2006**
            
            **2005**$
            
            $**Cash
                flows from operating activities:****Net
                loss**
            
            
            **(6,438**
            **)**
            
            (3,107
            )**Adjustments
                to reconcile net loss to net cash used in operating
                activities:**Depreciation
                and amortization
            
            
            **594**
            
            
            115Deposits
                in respect of employee severance obligations
            
            
            **(95**
            **)**
            
            (28
            )Increase
                in liability in respect of employee severance obligations
            
            
            **85**
            
            
            46Deferred
                income taxes
            
            
            **20**
            
            
            3Stock-based
                compensation to non-employees for services rendered
            
            
            **-**
            
            
            809Stock-based
                compensation to employees and directors
            
            
            **856**
            
            
            121Stock-based
                compensation in connection with the Brainboost transaction (see Note
                4)
            
            
            **3,489**
            
            
            -Exchange
                rate losses
            
            
            **(23**
            **)**
            
            12**Changes
                in operating assets and liabilities:**Increase
                in accounts receivable and other current assets
            
            
            **(400**
            **)**
            
            (174
            )Increase
                (decrease) in long-term prepaid expenses and current
                assets
            
            
            **(108**
            **)**
            
            35Increase
                in accounts payable
            
            
            **34**
            
            
            176Increase
                in accrued expenses and other current liabilities
            
            
            **197**
            
            
            461Decrease
                in short-term deferred revenues
            
            
            **(34**
            **)**
            
            (96
            )Decrease
                in long-term deferred revenues
            
            
            **(12**
            **)**
            
            -**Net
                cash used in operating activities**
            
            
            **(1,835**
            **)**
            
            (1,627
            )**Cash
                flows from investing activities:**Capital
                expenditures
            
            
            **(308**
            **)**
            
            (161
            )Capitalization
                of software development costs
            
            
            **(36**
            **)**
            
            -Purchase
                of intangible assets
            
            
            **(55**
            **)**
            
            -Increase
                in long-term deposits
            
            
            **(3**
            **)**
            
            (13
            )Purchases
                of investment securities
            
            
            **(8,816**
            **)**
            
            (16,150
            )Proceeds
                from sales of investment securities
            
            
            **12,545**
            
            
            5,200**Net
                cash provided by (used in) investing activities**
            
            
            **3,327**
            
            
            (11,124
            )**Cash
                flows from financing activities:**Exercise
                of common stock options and warrants
            
            
            **173**
            
            
            13,828**Net
                cash provided by financing activities**
            
            
            **173**
            
            
            13,828Effect
                of exchange rate changes on cash and cash equivalents
            
            
            **23**
            
            
            (12
            )**Net
                increase in cash and cash equivalents**
            
            
            **1,688**
            
            
            1,065Cash
                and cash equivalents at beginning of period
            
            
            **2,840**
            
            
            1,565**Cash
                and cash equivalents at end of period**
            
            
            **4,528**
            
            
            2,630




**Supplemental
                disclosures of cash flow information:**Income
                taxes paid
            
            
            **4**
            
            
            3**Non-cash
                investing activities:**Unrealized
                net loss from securities
            
            
            **1**
            
            
            -





See
      accompanying notes to the interim consolidated financial statements


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**Note
      1** **- Business**





Answers
      Corporation (“the Parent”), formerly GuruNet Corporation, was founded as a Texas
      corporation on December 22, 1998, and reorganized as a Delaware corporation
      in
      April 1999. On December 27, 1998 the Parent formed a subsidiary based in Israel
      (“the Subsidiary”), primarily for the purpose of providing research and
      development services to the Parent. On December 1, 2005, the Parent acquired
      all
      of the limited liability interests of Brainboost Technology, LLC for $4 million
      in cash and 439,000 shares of restricted stock (“Brainboost” - see Note 4). On
      April 20, 2006, Brainboost Technology, LLC filed a certificate of dissolution
      with the state of Delaware and all of its assets were absorbed into the Parent.
      Answers Corporation and its wholly owned Subsidiary are collectively referred
      to
      as “the Company”. The Company operates an answer-based search service to users
      through its Web site, Answers.com, downloadable applications and
      co-brands.





The
      Company began trading on NASDAQ under the symbol ANSW on August 2, 2005. Prior
      to such date, the Company’s shares were traded on the American Stock Exchange
      under the symbol GRU. On October 17, 2005, the Company changed its corporate
      name from GuruNet Corporation to Answers Corporation.





The
      accompanying unaudited interim consolidated financial statements were prepared
      in accordance with the instructions for Form 10-QSB and, therefore, do not
      include all disclosures necessary for a complete presentation of financial
      condition, results of operations, and cash flows in conformity with generally
      accepted accounting principles. All adjustments, which are, in the opinion
      of
      management, of a normal recurring nature and are necessary for a fair
      presentation of the interim financial statements, have been included.
      Nevertheless, these financial statements should be read in conjunction with
      the
      consolidated financial statements and related notes included in the Company’s
      Annual Report on Form 10-KSB/A for the year ended December 31, 2005. The results
      of operations for the three and six months ended June 30, 2006 are not
      necessarily indicative of the results that may be expected for the entire fiscal
      year or any other interim period.


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**Note
      2 - Revenue Recognition**





The
      Company, through its website Answers.com and co-branded sub-domains of
      Answers.com, generates revenues via advertising in the form of sponsored links
      and image ads. This includes both pay-per-performance ads and
      paid-for-impression advertising. In the pay-for performance model, the Company
      earns revenue based on the number of clicks associated with such ads; in the
      paid-for-impression model, the Company’s revenue is derived from the display of
      ads.





The
      Company incentivizes third-party sites for traffic they send to Answers.com
      or
      co-branded sub-domains of Answers.com. The fees paid to such partners are calculated
      based upon a percentage of the reve nue
      the
      Company earns from such traffic and are included in cost of
      revenues.





Generally,
      the Company does not contract directly with advertisers, but rather, obtains
      those advertisers through the efforts of third parties. The third party is
      obligated to pay the Company a portion of the revenue it receives from
      advertisers, as compensation for the Company’s sale of promotional space on its
      Internet properties. Amounts received from such third parties are reflected
      as
      revenue in the period in which such advertising services are
      provided.





The
      Company also provides its answers-based search services to third parties that
      include the service in their own websites. Revenues from the provision of such
      services are recognized in the period the services are provided.





The
      Company recognizes revenues from sales of subscriptions over the life of the
      subscription, which is generally one year, in accordance with Statement of
      Position (SOP) No. 97-2, “Software Revenue Recognition”, issued by the American
      Institute of Certified Public Accountants (AICPA). Sales that do not yet meet
      the criteria for revenue recognition, are classified as “Deferred Revenues” on
      the balance sheet, and are amortized over the subscription period.





In
      2003,
      the Company sold lifetime subscriptions to its consumer product, which had
      no
      defined termination date. Cash received from such lifetime subscriptions was
      recorded as deferred revenues. Beginning April 2004, certain users who purchased
      lifetime subscriptions in 2003, exchanged their lifetime subscriptions for
      free
      two-year subscriptions to a newer enhanced version of the GuruNet product.
      The
      cash previously received from such users is recognized over the new two-year
      subscription. Lifetime subscriptions, which were not exchanged for subscriptions
      with defined termination dates, continue to be deferred and amounted to $425,000
      as of June 30, 2006.


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**Note
      3 - Accounting for Stock-Based
      Compensation**





**Adoption
      of Statement of Financial Accounting Standards No. 123 (revised
      2004)**





Prior
      to
      January 1, 2006, the Company accounted for stock-based awards to employees
      and
      directors under the intrinsic value method, which followed the recognition
      and
      measurement principles of Accounting Principles Board (APB) Opinion No. 25,
      “ *Accounting
      for Stock Issued to Employees”* (APB
      25). The intrinsic value method of accounting resulted in compensation expense
      for stock options to the extent option exercise prices were set below the market
      value of the Company’s stock on the date of grant. To the extent stock option
      awards were forfeited prior to vesting, the previously recognized expense was
      reversed and recorded as a reduction to operating expenses.





Additionally,
      prior to January 1, 2006, the Company adopted the disclosure requirements of
      Statement of Financial Accounting Standards (SFAS) No. 123, *“Accounting
      for Stock-based Compensation”* (SFAS
      123) and SFAS No. 148, “ *Accounting
      for Stock-Based Compensation—Transition and Disclosure”* (SFAS
      148) *,* for
      awards to its directors and employees. The fair
      value of options granted to employees and directors prior to May 12, 2004,
      the
      date of the Company’s first filing with the U.S. Securities and Exchange
      Commission (SEC), in connection with its Initial Public Offering (IPO), was
      estimated on the date of grant using the minimum-value method. The fair value
      of
      options granted to employees and directors subsequent to May 12, 2004, was
      measured according to the Black-Scholes option-pricing model.





The
      fair
      value of options and warrants granted to non-employees prior to January 1,
      2006,
      has been computed and accounted for in accordance with SFAS 123 and Emerging
      Issues Task Force (EITF) 96-18, *“Accounting
      for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
      or
      in Conjunction with Selling, Goods or Services”* ,
      and was
      measured according to the Black-Scholes option-pricing model.





As
      of
      January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), *“Share-Based
      Payments”* (SFAS
      123R) using the modified prospective method, which requires measurement of
      compensation cost for all stock-based awards based upon the fair value on date
      of grant and recognition of such compensation cost over the service period
      for
      awards expected to vest. Under
      this method, the Company recognizes compensation cost for awards granted on
      or
      after January 1, 2006, based on the Black-Scholes option-pricing model.
      Furthermore, with the exception of stock options granted to employees prior
      to
      May 12, 2004, the date of the Company’s first filing with the SEC in connection
      with its IPO,  the
      Company will recognize cost for unvested share-based awards as of January 1,
      2006 based on the grant date fair value of those awards, adjusted for estimated
      forfeitures, if any, as previously calculated and reported for pro-forma
      disclosure purposes. The Company will recognize cost for unvested share-based
      awards as of January 1, 2006 and that were granted prior to May 12, 2004, based
      on the intrinsic value of such grants on their grant date. The
      value
      of stock options, as noted, is recognized as compensation expense on a
      straight-line basis, over the requisite service period of the entire award,
      net
      of estimated forfeitures. Based on its decision to use the modified prospective
      method in adopting SFAS 123R, the Company did not need to adjust the
      corresponding 2005 amounts included in these financial statements.





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**Note
      3 - Accounting for Stock-Based Compensation
      (cont’d)**





**Valuation
      Assumptions for Stock Options**





The
      fair
      value for each stock option granted to employees and directors during the six
      months ended June 30, 2006 and 2005, was estimated at the date of grant using
      the Black-Scholes option-pricing model, assuming no dividends and the following
      assumptions:





**Six
                months ended June 30****2006**
            
            **2005**Weighted
                average risk-free interest rate
            
            
            4.64
            %
            
            3.84
            %Expected
                life (in years)
            
            
            4.08
            
            
            3.97Weighted
                average expected volatility
            
            
            40.86
            %
            
            53.06
            %








The
      fair
      value for each stock option granted to non-employees during the six months
      ended
      June 30, 2005, was estimated at the date of grant using the Black-Scholes
      option-pricing model, assuming no dividends and the following assumptions (no
      such options were granted during the six months ended June 30, 2006):





**Six
                months ended June 30****2006**
            
            **2005**Weighted
                average risk-free interest rate
            
            
            N/A
            
            
            4.01
            %Contractual
                term (in years)
            
            
            N/A
            
            
            9.87Weighted
                average expected volatility
            
            
            N/A
            
            
            72.36
            %








The
      risk-free interest rate is based on the U.S. Treasury yield curve in effect
      at
      the time of grant for periods corresponding with the expected life of the
      option.





The
      expected life represents the weighted average period of time that options
      granted are expected to be outstanding. The expected life of the options granted
      to employees and directors  during
      the six months ended June 30, 2006, is calculated based on the Simplified Method
      as allowed under Staff Accounting Bulletin No. 107 (SAB 107), giving
      consideration to the contractual term of the options and their vesting
      schedules. The expected life of the options granted to non-employees equals
      their contractual term.





Due
      to
      the lack of sufficient history of the Company’s own stock volatility, the
      Company estimates its own expected stock volatility based on the historical
      stock volatility of three other companies, which are similar to the Company.


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**Note
      3 - Accounting for Stock-Based Compensation (cont’d)**





**Fair
      Value Disclosures — Prior to SFAS 123(R) Adoption**





Prior
      to
      January 1, 2006, as allowed by SFAS 123, the Company accounted for stock-based
      awards to employees and directors under the intrinsic value method, and adopted
      the disclosure requirements of SFAS 123 and SFAS 148, for
      awards to its directors and employees.





The
      following table illustrates the effect on net loss and net loss per share,
      as if
      the Company had applied the fair value methods of SFAS
      No.
      123 for
      accounting purposes:





**Three
                months ended June 30, 2005**
            
            **Six
                months ended**
              **June
                30, 2005****$
                (in thousands, except for per share data)**
            
            **$
                (in thousands, except for per share data)****(Unaudited)**
            
            
            **(Unaudited**)****





Net
                loss, as reported
            
            
            (1,601
            )
            
            (3,107
            )Add:Stock-based
                compensation expense to employees and directors included
              in
                reported net loss, net of related tax effects
            
            
            111
            
            
            121Deduct:Stock-based
                compensation expense to employees and directors determined
              under
                fair value based method for all awards, net of related tax
                effects
            
            
            (263
            )
            
            (335
            )Pro-forma
                net loss
            
            
            (1,753
            )
            
            (3,321
            )Net
                loss per common share, basic and diluted:As
                reported
            
            
            (0.23
            )
            
            (0.48
            )Pro-forma
            
            
            (0.25
            )
            
            (0.51
            )





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**Note
      4 - Acquisition of Brainboost**





On
      December 1, 2005, (the “Acquisition Closing Date”) the Company entered into a
      purchase agreement (the “Purchase Agreement”) to acquire all of the limited
      liability interests of Brainboost Technology, LLC, (“Brainboost”), a Delaware
      limited liability company, from the Brainboost Partnership (the “Seller”). The
      Company, as a result of the acquisition, took title to, and possession of,
      all
      assets owned by Brainboost, primarily, all intellectual property rights
      associated with a functionality known as the Brainboost Answer Engine, an
      artificial intelligence technology targeting natural language search on the
      World-Wide-Web. The Company has integrated a beta version of the Brainboost
      Answer Engine into its website to enable natural language search through
      Answers.com. The Company intends to further develop the technology in the
      future.





Pursuant
      to the Purchase Agreement, the Company paid the Seller an aggregate of
      $4,000,000 in cash and 439,000 shares of restricted common stock (the “Stock
      Consideration”) in the Company. The number of shares issued was determined based
      upon the average share price of $10.2575 over a 20 consecutive day period that
      was designated by the Company and the Seller prior to the Acquisition Closing
      Date. The fair value of the Stock Consideration was determined to be
      approximately $5.6 million, or $12.716 per share, based upon an average share
      price within 2 days before and after the Acquisition Closing Date. The Stock
      Consideration is subject to certain lock-up agreements that limit its
      transferability during the year subsequent to the Acquisition Closing
      Date.





Furthermore,
      on the date of acquisition, the Company entered into an Employment Agreement
      with one of the principals of the Seller (the “Principal”), with an effective
      date of December 5, 2005 (the “ Employment
      Agreement ”).
      Pursuant to the Employment Agreement, the Principal joined the Company as
      Director of Natural Language Research and took charge of the integration and
      further development of the acquired technology within the Company’s systems and
      proprietary products.





In
      connection with the Purchase Agreement and the Employment Agreement, the Company
      entered into an escrow agreement on the acquisition date whereby 50%, 25%,
      and
      25% of the Stock Consideration was scheduled to be released on March 1, June
      1,
      and December 1, 2006, respectively, subject to certain performance and
      non-performance obligations. On March 1 and June 1, 2006, the Company released
      50% and 25% of the Stock Consideration, respectively. Because the Stock
      Consideration released in March and June 2006, a total of 329,250 shares, was
      originally subject to forfeiture based on the Principal’s employment, the value
      of such escrowed shares, in the amount of $4,186,743 on the date of acquisition,
      has been recognized as research and development expense over the six-month
      requisite service period, beginning December 2005. The remaining 25% of shares
      that release from escrow on December 1, 2006, a total of 109,750 shares, are
      not
      subject to the Principal’s employment.


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**Note
      4 - Acquisition of Brainboost (cont’d)**





In
      addition, the Seller received certain non-transferable price protection rights,
      whereby a decline in the Company’s average stock price for the 20 consecutive
      trading days immediately preceding the one-year anniversary of the Acquisition
      Closing Date below $10.2575, would trigger the Seller’s right to receive from
      the Company compensation for the reduction in the Stock Consideration’s value
      (the “Price Protection”). In such an event, the Company would either pay the
      Seller cash for the difference between the $10.2575 and the average stock price,
      or repurchase the shares at $10.2575, for the remaining Stock Consideration
      held
      by the Seller on the one-year anniversary of the acquisition close (see Note
      7
      d). The Price Protection is also subject to cancellation at the cumulative
      occurrence of certain conditions relating to the market price of the Stock
      Consideration, the registration of the Stock Consideration, and other criteria
      including termination of the Principal from the Company prior to the one-year
      anniversary of the Acquisition Closing Date. Any cash consideration payable
      pursuant to the Price Protection will be accounted for upon settlement as an
      adjustment to the value of the shares issued at closing. Upon adoption of SFAS
      123R, the value of the portion of the Price Protection that relates to the
      Stock
      Consideration that was deemed compensation expense (see above), has been charged
      as stock-based compensation over the requisite six-month employment service
      period ended May 31, 2006. As a result, the Company recorded additional
      stock-based compensation expense of $55,000 during the six months ending June
      30, 2006.





The
      transaction was accounted for as an asset acquisition. The allocation of the
      purchase price to the assets acquired was as follows:


**$
                (in thousands)**Acquired
                Technology - Brainboost Answer Engine
            
            
            **5,355**In-Process
                Research & Development
            
            
            **97**Total
                Assets Acquired
            
            
            **5,452**Value
                of escrowed shares being charged to compensation expense
              over
                the six months ending May 31, 2006
            
            
            **4,187**Total
                Purchase Price
            
            
            **9,639**





The
      Acquired Technology is included on the accompanying balance sheets in intangible
      assets, net, and is being amortized on a straight-line basis over an estimated
      useful life of six years. During the six months ending June 30, 2006, $446,000
      of the Acquired Technology has been amortized and recorded as cost of
      revenue.





The
      In-Process Research and Development relates to projects that were substantive,
      yet incomplete as of the acquisition date. Accordingly, it was not recorded
      as a
      separate asset on the balance sheet but as additional research and development
      expense as of the Acquisition Closing Date.





The
      value
      of escrowed shares relates to the Stock Consideration, associated with the
      March
      and June escrow release dates, and has been recorded as equity and charged
      to
      expenses on a straight-line basis over the six months ended May 31, 2006. During
      the six months ending June 30, 2006, $3,489,000 of such value has been amortized
      and recorded as research and development compensation expense.


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**Note
      5 - Stockholders’ Equity**





**General**





The
      following table summarizes the changes in the Company’s stockholders’ equity
      during the six-month period ending June 30, 2006:





**$
                (in thousands)****December
                31, 2005 (Audited)**
            
            
            **19,343**Exercise
                of stock options
            
            
            **173**Stock-based
                compensation
            
            
            **856**Other
                comprehensive income
            
            
            **1**Stock-based
                compensation in connection with the Brainboost transaction
              (see
                Note 4)
            
            
            **3,489**Net
                loss for the period
            
            
            **(6,438**
            **)****June
                30, 2006 (Unaudited)**
            
            
            **17,424**





Additionally,
      upon the adoption of SFAS 123R effective January 1, 2006, the balance of
      deferred compensation as of December 31, 2005, amounting to $3,517,844, was
      reversed against additional paid-in capital, and will be recorded based on
      the
      vesting terms of the stock-based awards for which this deferred compensation
      has
      been recorded in the past.





**Common
      Stock**





During
      the six months ended June 30, 2006, the Company issued a total of 115,977 shares
      of common stock due to the exercise of 115,977 of the Company’s outstanding
      stock options, for a total consideration of approximately $173,000.





On
      March
      21, 2006, and as a part of the Brainboost Purchase Agreement (see Note 4),
      the
      Company filed an amended Registration Statement, to register the Brainboost
      Shares (the "Registration Statement") with the SEC. The Registration Statement
      had been declared effective by the SEC on June 9, 2006.





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**Note
      5 - Stockholders’ Equity (cont’d)**





**Stock
      Warrants**





As
      of
      June 30, 2006, there were 1,157,763 outstanding stock warrants with a weighted
      average exercise price of $16.21. All warrants are exercisable immediately.
      No
      warrants were granted, exercised or forfeited during the six months ended June
      30, 2006.





On
      February 4, 2005 the Company entered into an agreement (the "Warrants
      Agreement"), with certain holders of stock warrants, pursuant to which such
      holders exercised an aggregate of 1,871,783 stock warrants at the stated
      exercise price thereof. As a result, the Company issued an aggregate of
      1,871,783 shares of its common stock, for aggregate gross consideration of
      $12,559,700. Under the terms of the Warrants Agreement, in order to provide
      incentive to the warrant holders to exercise their stock warrants , for every
      share of common stock purchased by the holders through the exercise of stock
      warrants, the Company issued to the warrant holders new warrants, dated February
      4, 2005, to purchase such number of shares of common stock equal to 55% of
      the
      number of shares of common stock underlying their respective stock warrants
      (the
      "New Warrants"). As a result, the Company issued 1,029,488 of New Warrants
      at an
      exercise price of $17.27 per share. The New Warrants are immediately exercisable
      and expire on February 4, 2010.





**Stock
      Compensation Plans**





The
      Company provides for direct grants or sales of common stock, and common stock
      options to employees and non-employees through the following: the 1999 Stock
      Option Plan (the 1999 Plan), the 2000 Stock Option Plan (the 2000 Plan) and
      the
      2003 Stock Option Plan (the 2003 Plan) (thereafter collectively “Prior Option
      Plans”), the 2004 Stock Option Plan (the 2004 Plan) and the 2005 Incentive
      Compensation Plan (the 2005 Plan). In addition, prior to 2006, the Company
      had
      granted stock options outside of its stock options plans, to certain individuals
      and entities. As of June 30, 2006, 35,651 options were issued and outstanding
      outside of the Company’s stock option plans.





The
      2005
      Plan was approved by the Company’s stockholders in July 2005, following the
      earlier adoption by the Company’s board of directors. Under the 2005 Plan, the
      Company may grant stock options, stock appreciation rights, restricted stock,
      deferred stock, other stock-related awards and performance awards to officers,
      directors, employees, consultants and other persons who provide services to
      the
      Company. The
      total
      number of Company shares of common stock allowed for under the 2005 Plan was
      set
      at 850,000, upon its adoption, and was increased by 250,000 on June 21, 2006,
      following the approval of the Company’s stockholders.





Under
      all
      of the Company’s option plans, options generally vest 25%, with respect to the
      number granted, upon the first anniversary date of the option grant, and the
      remainder vest in equal monthly installments over the 36 months thereafter.
      Vested options are exercisable immediately. The Company issues new shares upon
      share option exercises.





The
      options generally expire between six to ten years after grant date. Except
      for
      grants to certain executives, employee options are generally forfeited, if
      not
      exercised, within three months of termination of employment.





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**Note
      5 - Stockholders’ Equity (cont’d)**





**Stock
      Options**





During
      the six months ended June 30, 2006, the Company granted a total of 527,350
      stock
      options to its employees and officers, of which 516,350 stock options were
      granted under the Company’s 2005 Compensation
      Plan ,
      and
      11,000 stock options under its 2004 Stock
      Option Plan .





The
      following table summarizes the Company’s stock option activity during the six
      months ended June 30, 2006:





**Number
                of**
              **stock
                options**
            
            **Weighted**
              **average
                exercise**
              **price****Outstanding
                as of December 31, 2005**
            
            
            **1,429,521**
            
            $
            8.27Granted
                (2005 and 2004 Plans)
            
            
            527,350
            
            
            12.74Exercised
            
            
            (115,977
            )
            
            1.49Forfeited
            
            
            (10,700
            )
            
            11.36**Outstanding
                as of June 30, 2006**
            
            
            **1,830,194**
            
            $
            10.51**Vested
                as of June 30, 2006**
            
            
            **536,982**
            
            $
            7.18





The
      weighted average fair value of options granted during the six months ended
      June
      30, 2006 and 2005, was $4.96 and $9.25 per option, respectively. The aggregate
      intrinsic value of options exercised during the six months ended June 30, 2006
      and 2005, was approximately $1,150,000 and $1,410,000, respectively, at the
      date
      of exercise.





As
      of
      June 30, 2006, 536,650 and 3,952 options were available for grant under the
      2005
      Plan and the 2004 Plan, respectively. All Prior Option Plans are closed for
      future grants.





The
      following table summarizes information about stock options outstanding as of
      June 30, 2006:





**Options
                outstanding**
            
            **Options
                exercisable****Range
                of exercise price**
            
            **Number**
              **outstanding**
            
            **Weighted**
              **average**
              **remaining**
              **contractual
                life**
              **(years)**
            
            **Weighted**
              **average**
              **exercise**
              **price**
            
            **Number**
              **outstanding**
            
            **Weighted**
              **average**
              **remaining**
              **contractual
                life**
              **(years)**
            
            **Weighted**
              **average**
              **exercise**
              **price**$0.69
                - 5.00
            
            **223,706******
            
            6.46
            
            $3.40
            
            **156,895******
            
            5.97
            
            $3.055.06
                - 9.65
            
            **627,278******
            
            8.21
            
            6.04
            
            **267,638******
            
            7.65
            
            5.3810.54
                - 14.49
            
            **643,010******
            
            6.57
            
            13.11
            
            **33,376******
            
            5.37
            
            11.5115.35
                - 20.35
            
            **336,200******
            
            8.81
            
            18.59
            
            **79,073**
            
            8.74
            
            19.61$0.69
                - 20.35
            
            **1,830,194******
            
            7.53
            
            $10.51
            
            **536,982******
            
            6.84
            
            $7.18





The
      aggregate intrinsic value of stock options outstanding as of June 30, 2006,
      was
      $3,557,000, of which $2,122,000 relates to vested awards. Intrinsic value for
      stock options is calculated based on the exercise price of the underlying awards
      and the quoted price of the Company’s common stock as of the reporting
      date.


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**Note
      5 - Stockholders’ Equity (cont’d)**





**Stock
      Options (cont’d)**





The
      total
      fair value of stock options vested during the six months ending June 30, 2006,
      amounts to $856,000, net of estimated forfeitures of $7,000, and was recorded
      as
      stock-based compensation expense following the adoption of SFAS 123R (see Note
      3). Such stock-based compensation expense includes $55,000, related to
      Brainboost’s Price Protection (see Note 4).





As
      of
      June 30, 2006, there was $5,586,000 of unrecognized compensation cost, net
      of
      estimated forfeitures of $7,000, related to nonvested stock options granted
      under the Company’s various stock option plans. That cost is expected to be
      recognized as follows:





**Year
                ending December 31**
            
            **$
                (in thousands)**2006
            
            8932007
            
            1,8012008
            
            1,7582009
            
            1,0362010
            
            985,586








**Note
      6 - Other Expenses**





On
      December 1, 2005, the Company acquired Brainboost Technology, LLC for $4 million
      in cash and 439,000 shares of common stock (see Note 4). The stock component
      of
      the consideration is subject to a Registration Rights Agreement pursuant to
      which the Company agreed that if such registration statement was not declared
      effective by April 1, 2006, it would pay the sellers a penalty of $100,000
      per
      month, pro rated per day. The registration statement was declared effective
      as
      of June 9, 2006, therefore the Company paid the Seller $227 thousand in the
      second quarter of 2006. Such amount was paid in cash and is reflected in other
      expenses in the three and six months ended June 30, 2006.





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**Note
      7 - Commitments and Contingencies**





(a)
            Futureminimum lease payments under non-cancelable operating leases for
                office
                space and cars, as of June 30, 2006 are as
                follows:





**Year
                ending December 31**
            
            **$
                (in thousands)**2006
                (six months ending December 31)
            
            2102007
            
            4152008
            
            3682009
            
            3282010
            
            2071,528




Rental expense for operating leases
              for
              the six months ended June 30, 2006 and 2005 was $185,000 and $123,000,
              respectively.  (b)
            All
                of the Subsidiary’s obligations to its bank, including the bank guarantee
                given to the Subsidiary’s landlord, are secured by a lien on all of the
                Subsidiary’s deposits at such bank. As of June 30, 2006, deposits at such
                bank amounted to $498,000, including a restricted long-term deposit
                of$94,000
                as mentioned above.





(c)
            In
                the ordinary course of business, the Company enters into various
                arrangements with vendors and other business partners,principally
                for content, web-hosting, marketing and investor relations
                arrangements.
                As of June 30, 2006, the
                total future commitments under these arrangements amount to approximately
                $663,000.





(d)
            As
                part of the acquisition of Brainboost (see Note 4), the Company agreed
                that in the event that the average closing price of its common stock
                for
                the 20 consecutive trading days (“Average Closing Price”) immediately
                preceding December 1, 2006 is less than $10.2575, at the Company’s option,
                it will either repurchase the common stock held by the sellers at
                such
                date for $10.2575 per share or pay the sellers the difference between
                $10.2575 per share and the Average Closing Price for shares they
                are still
                holding, subject to certain conditions in the Purchase Agreement.
                In the
                event that the Average Closing Price of the Company’s common stock is
                below $10.2575 on December 1, 2006 and the sellers have not sold
                a
                significant amount of the common stock issued to them, the Company
                may be
                obligated to pay the sellers a significant amount of additional cash.
                As
                of June 30, 2006, 434,200 shares of common stock remain subject to
                the
                Price Protection.





(e)
            On
                March 8, 2006 the Company submitted a statement of claim with the
                Tel-Aviv, Israel District Court against Babylon Ltd., for infringement
                of
                Israel Patent Number 121,457. The patent, entitled "Computerized
                Dictionary and Thesaurus Applications," covers a computerized searching
                process of indicating a target word on a display screen and employing
                at
                least one word appearing in the vicinity of the target word in order
                to
                eliminate ambiguity in the meaning of the target word. The patent
                was
                first filed in 1997 and was granted in 2004. The remedies that the
                Company
                seeks, initially, are damages in the sum of NIS 1,000,000 (approximately
                $210,000), an accounting of revenues derived from the infringing
                use and
                an injunction.Currently, the Company is negotiating a possible settlement agreement
                and
                the legal proceedings have temporarily been suspended. While it
                is the Company's belief that the current negotiations will lead to a
                definitive resolution of the dispute, such an outcome cannot be
                guaranteed.


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ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      OR PLAN OF OPERATION






*The
      following discussion of our financial condition and results of operations should
      be read in conjunction with the financial statements and the notes to those
      statements included elsewhere in this filing. This discussion includes
      forward-looking statements that involve risks and uncertainties. Our actual
      results may differ materially from those anticipated in these forward-looking
      statements.*




**Overview**




We
      own,
      operate and provide an online answer-based information-retrieval service that
      offers Internet users conveniently formatted snapshot, multi-faceted definitions
      and explanations, integrated into a single consolidated browser view. Our
      flagship site, Answers.com, is a leading aggregator of information and reference
      content, on more than 3 million topics, covering general reference, business,
      arts and culture, legal, medical, science and technology, people, places, music
      and many others. Our topic library contains over 60 titles from brand-name
      publishers. Additionally, we offer "1-Click Answers" - a software tool that
      facilitates more efficient access to Answers.com by allowing users working
      in
      almost any application such as e-mail, spreadsheet or word processing to click
      on a word or phrase within a document and access Answers.com’s online library
      via an instant, pop-up AnswerTip. Our common stock is listed on the Nasdaq
      Global Market under the symbol "ANSW".




In
      January 2005, we launched Answers.com. The launch of the Website represented
      our
      migration to a new ad-based revenue model, as opposed to our previous
      subscription-based model. Prior to January 2005, we sold subscriptions to our
      answer engine product, GuruNet. Prior to December 2003, we sold lifetime
      subscriptions to GuruNet, generally for $40. In December 2003, we decided to
      alter our pricing model and moved to an annual subscription model, generally,
      $30 per year. A desire to grow revenues led to our current implementation,
      in
      January 2005, of a free-to-customer product, Answers.com and "1-Click Answers"
      software. Since the launch of Answers.com in January 2005, we have ceased
      offering new subscriptions to GuruNet.




**Company
      Internet Site and Availability of SEC Filings**




Our
      corporate Internet site is located at www.answers.com. We make available on
      that
      site our Annual Reports on Form 10-KSB, Quarterly Reports on Form 10-QSB and
      Current Reports on Form 8-K from October 2004, the month we became a public
      company, through the current period, as well as any amendments to those filings,
      and other filings we make electronically with the U.S. Securities and Exchange
      Commission (the “SEC”). The filings can be found in the Investor Relations
      section of our site and are available free of charge. Information on our
      Internet site is not part of this Form 10-QSB. In addition, the SEC maintains
      an
      Internet site at www.sec.gov that contains reports, proxy and information
      statements, and other information regarding us and other issuers that file
      electronically with the SEC.




**Answers.com
      Traffic, Monetization and Licensing of Answers Service**




*Answers.com
      Traffic and Monetization*




Our
      revenue is primarily driven by the query traffic generated by Answers.com and
      our ability to effectively monetize that traffic. Our current traffic is
      primarily based on: (i) *Search
      engines* (currently almost all of which is provided by Google), meaning, when our pages
      rank very high in the search engines’ algorithmic systems, Answers.com results
      are more likely to be accessed by users; (ii) *Google’s
      definition link* :
      our
      informal, non-contractual relationship, in which Google links to our pages
      for
      definitions; and (iii) *Answers.com
      direct users* :
      users
      visiting our site directly or via “1-Click Answers”. Our primary revenue model
      for Answers.com traffic is based on advertising. Most of our ad revenue is
      earned from performance-based ads, whereby we earn revenue based on number
      of
      clicks associated with such ads (e.g., sponsored links), and paid-per-impression
      advertising, whereby revenues are derived from the display of ads (e.g., graphic
      ads). Generally, we do not contract directly with advertisers, but rather,
      obtain advertisements through the efforts of third parties that contract with
      advertisers seeking to advertise in their network of web sites, including our
      web site. We refer to such third parties as “Monetization Partners”.
      Monetization Partners generally compensate us by paying Answers a portion of
      the
      revenue they earn from advertisers for our provision of promotional space on
      our
      web site.




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The
      more
      users to whom we deliver answer-based search services results, the more revenues
      we can potentially earn. Thus, we approach third-party sites and incentivize
      them for traffic they send to Answers.com or co-branded sub-domains of
      Answers.com. The fees we pay to such partners are calculated based upon a
      percentage of the revenue we earn from such traffic.




*Licensing
      of Answers Services*




We
      also
      earn revenues from partners that pay us for providing them with our answer-based
      services that they then use in their own products, via co-branded web pages.
      These arrangements are based on various formulas, including a percentage of
      the
      revenues they earn by delivering our services to their users, fees based on
      the
      number of user queries and fixed periodic fees.




**Brainboost
      Answer Engine**




On
      December 1, 2005, we acquired Brainboost Technology, LLC, creators of the
      Brainboost Answer Engine (“BAE”) - artificial intelligence technology enabling
      natural language search on the Web - for $4 million in cash and 439,000 shares
      of restricted stock (including certain price protection rights), valued at
      approximately $5.6 million. As a result of the purchase we acquired software
      technology, the BAE, valued at approximately $5.4 million. In connection with
      the transaction, the developer of the BAE joined our company as Director of
      Natural Language Research.




The
      BAE
      delivers answers to end-user generated natural language questions by identifying
      pages on the web that contain sentences or phrases that appear to answer such
      specific questions. In June 2006, we completed our initial beta integration
      of
      the BAE into Answers.com. As we further integrate Answers from the Web into
      Answers.com, it is our plan to further develop the technology through
      enhancements to its accuracy, range and speed.




**Results
      of Operations**




***Revenues***




Revenues
      in the three months ended June 30, 2006 were $1,511 thousand compared to $425
      thousand during the same period in 2005, an increase of $1,086 thousand or
      256%.
      Revenues in the three months ended June 30, 2006 consisted of Answers.com
      advertising revenues of $1,457 thousand, revenues from licensing Answers
      services to third parties that make use of our service in their own products,
      via co-branded web pages, of $46 thousand, and subscription revenue of $8
      thousand. In contrast, revenues during the same period in 2005 resulted from
      Answers.com advertising revenues of $357 thousand, subscription revenue of
      $40
      thousand, and revenues from licensing Answers Services and other revenues,
      of
      $28 thousand.




Revenues
      in the six months ended June 30, 2006 were $2,665 thousand compared to $600
      thousand during the same period in 2005, an increase of $2,065 thousand or
      344%.
      Revenues in the six months ended June 30, 2006 consisted of Answers.com
      advertising revenues of $2,547 thousand, revenues from licensing Answers
      services to third parties that make use of our service in their own products,
      via co-branded web pages, of $99 thousand, and subscription revenue of $19
      thousand. In contrast, revenues during the same period in 2005 resulted from
      Answers.com advertising revenues of $463 thousand, subscription revenue of
      $89
      thousand, and revenues from licensing Answers Services and other revenues,
      of
      $48 thousand.




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Approximately
      $40,000 and $65,000 of the Answers.com advertising revenues generated during
      the
      three months and six months ended June 30, 2006, respectively, resulted from
      traffic that partners, such as Mozilla Corporation, the owner of the Mozilla
      Firefox web property, sends us. We paid those partners approximately $18,000
      and
      $30,000, during the three months and six months ended June 30, 2006,
      respectively, for that traffic, and such amount is reflected in cost of goods
      sold.




As
      noted
      above, in January 2005, we launched Answers.com and embarked on a new ad-based
      revenue model. Generally, we do not contract directly with advertisers, but
      rather, obtain advertisements through the efforts of Monetization Partners.
      While we receive monetization services from various Monetization Partners,
      two
      of the providers, Google and Shopping.com, accounted for approximately 65%
      and
      14%, respectively, of our total revenue in the first half of 2006. In addition
      to Google and Shopping.com, we utilize the services of other Monetization
      Partners that provide us with ads that are served on our Website.




Our
      Answers.com advertising revenue is a function of various factors, the most
      basic
      of which are the level of our traffic or queries, and how effectively we
      monetize such traffic. We gauge the effectiveness of our monetization efforts
      and trends by measuring our revenue per one thousand queries, or RPM. Our
      objective is to increase both traffic and RPMs in a manner that values the
      critical impact that each has on the outcome of our advertising revenue. We
      need
      to increase our RPMs while ensuring that we do not alienate our current and
      potential users and partners.




Our
      Answers.com average daily queries and RPMs have grown significantly since our
      launch in January 2005, as follows:




***Average
                Daily Queries***
            
            **Advertising
                Revenues (thousands)**
            
            **RPM**Q-1
                2005
            900,000
            
            $107
            
            $1.32Q-2
                2005
            1,780,000
            
            $357
            
            $2.20Q-3
                2005
            1,770,000
            
            $500
            
            $3.07Q-4
                2005
            2,100,000
            
            $807
            
            $4.18Q-1
                2006
            2,590,000
            
            $1,090
            
            $4.67Q-2
                2006
            2,690,000
            
            $1,457
            
            $5.95




*Query
      Traffic*




As
      discussed at greater length above, our current query traffic is primarily based
      on traffic from search engines (currently, almost all from Google), Google's
      definition link and Answers.com direct users.




Naturally,
      we are interested in causing users to experience longer visits and perform
      more
      queries once they discover our site. This is what we refer to as increasing
      the
      "stickiness" of our site. Additionally, our objective is to satisfy our users
      so
      as to cause them to "bookmark" our site and become regular users. This is what
      we refer to as "user-retention". Our efforts and resources invested in
      increasing stickiness and user-retention are manifested by our constant and
      continuous development of our site via new features, enhanced user interface
      and
      newly added content.




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Our
      average daily query traffic grew by 100,000 in the second quarter of 2006 as
      compared to the previous quarter. We attribute this level of growth, which
      was
      significantly lower than in prior quarters, due to the following factors: (i)
      the amount of content we added this quarter, as compared to earlier quarters,
      (ii) the success of our various marketing activities and (iii) the popularity
      of
      our website amongst the population of Internet users.




Finally,
      our online services have historically been affected by seasonal fluctuations
      in
      Internet usage, which generally declines in the summer months and rises in
      the
      fall.




*Monetization*




Our
      RPMs
      have risen since the launch of Answers.com due to various initiatives,
      including, changes to our site design, adding or switching Monetization
      Partners, increases in the revenue-share percentage offered by Monetization
      Partners, the location and number of ads on our Answer pages and the types
      of
      ads we present. In fact, towards the end of the Q2 2006 we found that a change
      in the position of certain of our ads had a significant positive impact on
      our
      RPM’s. We plan to continue focusing on optimizing our monetization and improving
      RPM’s, utilizing and expanding on many of the techniques we’ve used in the past.
      Additionally, we plan to focus more on selling our own advertising, rather
      than
      obtaining such advertising from Monetization Partners. Ad revenue from this
      type
      of channel has to date been insignificant, and we believe that it has the
      potential of contributing to continued RPM growth in the future.




There
      are
      many companies in the market that provide Internet ad services similar to those
      provided by our own Monetization Partners, including Google and Shopping.com.
      Thus, while Google and Shopping.com contributed most of our revenue in the
      first
      half of 2006, we do not feel that our ad revenue strategy is dependent on any
      one provider. Our strategy is to work with Monetization Partners that we believe
      maximize the average amount of revenue we earn per page view.




*Subscription
      Revenue*




Subscription
      revenue during the three months and six months ended June 30, 2006, of $8
      thousand and $19 thousand, respectively, resulted from recognition of previously
      deferred subscription license revenue. We have not sold subscriptions since
      January 2005. The 2006 subscription revenue relates to fixed-term subscriptions
      we sold prior to such date. As of June 30, 2006, we still have $5 thousand
      of
      deferred revenue from fixed-term subscriptions that will be recognized over
      the
      remainder of 2006. Additionally, as of June 30, 2006, we have approximately
      $425,000 of long-term deferred revenues, relating to subscriptions, which had
      no
      defined term, which we sold in 2003. We have not yet determined what the
      ultimate disposition of such long-term deferred revenues will be, and when
      it
      will impact our Statement of Operations.




***Cost
      of Revenues***




Cost
      of
      revenues is comprised almost entirely of fees to third party providers of
      content, web search service fees, amortization of the cost of acquired software
      used in our products, data center costs (including depreciation of information
      technology assets), traffic acquisition costs (contractual revenue sharing
      fees
      to various web site operators for visitors directed to Answers.com or co-branded
      sub-domains of Answers.com) and the salaries, benefits, travel and overhead
      costs relating to personnel who are responsible for content editing and
      integration, production operations and customer support.





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Cost
      of
      revenues for the three months ended June 30, 2006 was $808 thousand compared
      to
      $286 thousand during the same period in 2005, a net increase of $522 thousand
      or
      183%. This net increase was due, primarily, to certain expenses we incurred
      in
      the second quarter of 2006 that we did not experience during the same period
      of
      the prior year, as well as increases in certain expenses. During the second
      quarter of 2006 we incurred $223 thousand of amortization resulting from the
      acquisition of the BAE; stock-based compensation of $33 thousand; and traffic
      acquisition costs of $18 thousand. We did not incur any similar costs in the
      same quarter of 2005. The remaining net increase in costs was due to increases
      in compensation costs (excluding stock-based compensation) of $94 thousand
      as a
      result of staffing additions in our production operations, content and customer
      support departments, and January raises; increases in data center costs
      (including depreciation of information technology assets) required to manage
      more Internet traffic of $76 thousand; increase in fees we pay Google for the
      web search results they provide us of $9 thousand; and increases in content
      licensing costs of $47 thousand.




Cost
      of
      revenues for the six months ended June 30, 2006 was $1,492 thousand compared
      to
      $528 thousand during the same period in 2005, a net increase of $964 thousand
      or
      183%. This net increase was due primarily to certain expenses we incurred in
      the
      first half of 2006 that we did not experience during the same period of the
      prior year, as well as increases in certain expenses. During the first half
      of
      2006 we incurred $446 thousand of amortization resulting from the acquisition
      of
      the BAE; stock-based compensation of $61 thousand; and traffic acquisition
      costs
      of $30 thousand. We did not incur any similar costs in the same period of 2005.
      The remaining net increase in costs was due to increases in compensation costs
      (excluding stock-based compensation) of $163 thousand as a result of staffing
      additions in our production operations, content and customer support
      departments, and January raises; increases in data center costs (including
      depreciation of information technology assets) required to manage more Internet
      traffic of $150 thousand; increase in fees we pay Google for the web search
      results they provide us of $26 thousand; and increases in content licensing
      costs of $69 thousand.




***Research
      and Development Expenses***





The
      salaries, benefits, travel and overhead costs of personnel conducting research
      and development of our products and services, and consulting costs, comprise
      practically all of our research and development expenses. In the first half
      of
      2006, the research and development team handled projects related mostly to
      user
      interface improvements and enhanced product functionality and features.




Research
      and development expenses in the three months ended June 30, 2006 were $1,951
      thousand compared to $344 thousand during the same period in 2005, a net
      increase of $1,607 thousand or 467%. The net increase is due, primarily, to
      compensation charges resulting from the acquisition of Brainboost Technology,
      LLC, discussed further below, and increases in compensation-related expenses,
      excluding stock-based compensation, of approximately $148 thousand, due to
      growth in our research and development team and January salary increases.
      Additionally, stock-based compensation increased by $63 thousand.




Research
      and development expenses in the six months ended June 30, 2006 were $4,588
      thousand compared to $640 thousand during the same period in 2005, a net
      increase of $3,948 thousand or 617%. The net increase is due, primarily, to
      compensation charges resulting from the acquisition of Brainboost Technology,
      LLC, discussed further below, and increases in compensation-related expenses,
      excluding stock-based compensation, of approximately $316 thousand, due to
      growth in our research and development team and January salary increases.
      Additionally, stock-based compensation increased by $152 thousand.




As
      noted
      earlier, in December 2005 we purchased Brainboost Technology, LLC. A portion
      of
      the purchase price was deemed to be compensation for services to be performed
      by
      one of the principals of the seller over the six-month period ending May 31,
      2006. Under the terms of the Brainboost purchase, 50% and 25% of the shares
      of
      restricted stock were held in escrow for 3 and 6 months after the purchase
      date,
      respectively. Release from escrow was contingent upon our continued employment
      of one of the principals of the general partnership which formerly owned
      Brainboost Technology, LLC, an expert in artificial intelligence and natural
      language search technology. Because the escrow criteria were met, such shares
      were released from escrow, as scheduled, on March 1, 2006 and June 1, 2006.
      The
      value of such shares, of approximately $4.2 million, was charged to compensation
      expense, on a straight-line basis, over the requisite six-month employment
      commitment period. As a result, we recorded $1,396 thousand and $3,489 thousand
      of compensation expense, in Research and Development, in the three months and
      six months ended June 30, 2006, respectively.




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***Sales
      and Marketing Expenses***




The
      salaries, benefits, travel and overhead costs of sales and marketing personnel,
      marketing consulting, public relations and marketing services and advertising
      costs, comprise substantially all of sales and marketing expenses.




Sales
      and
      marketing expenses in the three months ended June 30, 2006 were $678 thousand
      compared to $451 thousand during the same period in 2005, a net increase of
      $227
      thousand or 50%. The net increase is primarily due to increases in
      compensation-related expenses, excluding stock-based compensation, of
      approximately $112 thousand, due to growth in our sales and marketing team
      and
      January salary increases. Additionally, stock-based employee compensation
      increased by $159 thousand. Advertising and promotion expenses rose from $95
      thousand to $135 thousand, and our overhead expenses rose from $23 thousand
      to
      $59 thousand. The aforementioned increases were offset, to some extent, by
      the
      non-recurrence, in the second quarter of 2006, of an expense that took place
      in
      the same quarter of 2005. In the second quarter of 2005, we incurred
      approximately $116 thousand in consulting costs, including $106 thousand that
      was stock-based compensation, relating to a strategic consultant who assisted
      us
      in formulating our product and marketing strategy.




Sales
      and
      marketing expenses in the six months ended June 30, 2006 were $1,320 thousand
      compared to $812 thousand during the same period in 2005, a net increase of
      $508
      thousand or 63%. The net increase is primarily due to a number of factors.
      Compensation-related expenses, excluding stock-based compensation, rose
      approximately $352 thousand, due to growth in our sales and marketing team,
      January 2006 salary increases, and the fact that we hired our Chief Revenue
      Officer at the end of the first quarter of 2005; therefore, the first half
      of
      2005 does not include a full six months of his compensation. Additionally,
      we
      recorded stock-based employee compensation of $311 thousand in the second half
      of 2006. Advertising and promotion expenses rose from $198 thousand to $258
      thousand, and our overhead expenses rose from $43 thousand to $105 thousand.
      The
      aforementioned increases were offset, to some extent, by the non-recurrence,
      in
      the first half of 2006, of two expenses that took place in the first half of
      2005. In the first half of 2005, we incurred approximately $248 thousand in
      consulting costs, including $213 thousand that was stock-based compensation,
      relating to a strategic consultant who assisted us in formulating our product
      and marketing strategy, and we incurred $35,000 in recruiting fees.




***General
      and Administrative Expenses***




General
      and administrative expenses consist primarily of salaries, benefits, travel
      costs for financial, legal and administrative personnel, overhead, insurance
      fees, fees for professional services, including investor relations, legal,
      accounting and other consulting fees, investment banking fees, and other general
      corporate expenses. Overhead costs consist primarily of rent,
      telecommunications, utilities and depreciation expenses.




General
      and administrative expenses in the three months ended June 30, 2006 were $965
      thousand compared to $1,078 thousand during the same period in 2005, a net
      decrease of $113 thousand or 10%. General and administrative expenses in the
      six
      months ended June 30, 2006 were $1,765 thousand compared to $1,931 thousand
      during the same period in 2005, a net decrease of $166 thousand or 9%. The
      net
      decreases are comprised of many individual line expenses, the most significant
      of which follow:





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·
            On
                January 20, 2005, we entered into an agreement with an investment-banking
                firm, which also acted as one of the underwriters of our IPO, to
                provide
                general financial advisory and investment banking services for a
                minimum
                term of six months. Further, upon signing of the contract, the underwriter
                received fully vested warrants to acquire 100,000 shares of Common
                Stock
                at an exercise price of $11.00. This agreement was terminated in
                September
                2005. As a result of this agreement, in the three months and six
                months
                ended June 30, 2005, we recorded $15 thousand and $40 thousand,
                respectively, of cash compensation and $289 thousand and $514 thousand,
                respectively, in stock-based compensation, which represents the
                amortization of the fair value of the warrants on the date of their
                issuance, over the minimum term of the agreement. This expense did
                not
                recur in 2006.






·
            In
                December 2004, we entered into an agreement with an investor relations
                firm pursuant to which we incurred $100 thousand of fees over a one-year
                period for investor relations services. Additionally, pursuant to
                the
                agreement, in March 2005, we issued 7,800 shares of common stock
                to such
                firm. As a result, in the three months and six months ended June
                30, 2005,
                we recorded $38 thousand and $82 thousand, respectively, of stock-based
                compensation, which represents the amortization of the fair value
                of the
                stock on the date of its issuance, over the expected life of the
                agreement. This agreement was renewed for an additional year, at
                $8
                thousand per month, with no stock component; therefore there was
                no
                recurrence of stock-based compensation to our investor relations
                firm in
                2006.






·
            Legal
                fees decreased by $110 thousand and $226 thousand during the three
                and six
                months ended June 30, 2006, respectively. Legal fees in 2005 were
                high due
                to legal services relating to a registration statement and merger
                and
                acquisition activities.






·
            The
                aforementioned decreases during the three months ended June 30, 2006,
                were
                offset, to a large extent, by increased compensation expense of $165
                thousand, due to stock-based compensation of $81 thousand, increases
                in
                the number of employees in the general and administrative department
                and
                January salary increases. The aforementioned decreases were further
                offset
                by other net increases in general and administrative expenses, of
                approximately $175 thousand during the three months ended June 30,
                2006,
                mostly from increases in accounting, travel, overhead costs and board
                fees.






·
            The
                aforementioned decreases during the six months ended June 30, 2006,
                were
                offset, to a large extent, by increased compensation expense of $409
                thousand, due to stock-based compensation of $211 thousand, increases
                in
                the number of employees in the general and administrative department
                and
                January salary increases. The aforementioned decreases were further
                offset
                by other net increases in general and administrative expenses, of
                approximately $290 thousand during the three months ended June 30,
                2006,
                mostly from increases in accounting, travel, overhead costs and board
                fees.




***Interest
      Income, Net***




Interest
      income in the three months ended June 30, 2006 and 2005, was $145 thousand.
      Interest income in the six months ended June 30, 2006, was $286 thousand
      compared to $231 thousand during the same period in 2005, an increase of $55
      thousand. The increase during the first half of 2006 as compared to the same
      period in 2005, stems from higher average cash and investment securities
      balances during 2006 as well as higher short-term interest rates.




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***Other
      Expenses***




Other
      expenses in the three months ended June 30, 2006, were $201 thousand compared
      to
      $21 thousand during the same period in 2005, an increase of $180 thousand.
      Other
      expenses in the six months ended June 30, 2006, were $204 thousand compared
      to
      $21 thousand during the same period in 2005, an increase of $183 thousand.
      The
      net increases resulted, primarily, from the payment of $227 thousand to the
      sellers of Brainboost Technology, LLC because the registration of their Answers
      common shares did not take place before April 1, 2006, as explained further.
      On
      December 1, 2005, we acquired Brainboost Technology, LLC for $4 million in
      cash
      and 439,000 shares of common stock. The stock component of the consideration
      is
      subject to a Registration Rights Agreement pursuant to which we agreed that
      if
      our registration statement was not effective with the Securities and Exchange
      Commission by April 1, 2006, we would pay the sellers a penalty of $100,000
      per
      month, pro rated per day. Our registration statement was declared effective
      as
      of June 9, 2006; therefore we paid the sellers $227 thousand in the second
      quarter of 2006.




***Income
      Tax Expense***




Our
      effective tax rate differs from the statutory federal rate due to differences
      between income and expense recognition prescribed by income tax regulations
      and
      Generally Accepted Accounting Principles. We utilize different methods and
      useful lives for depreciating and amortizing property, equipment and intangible
      assets and differ in the methods and timing for calculating and recording stock
      compensation expense. Furthermore, permanent differences arise from certain
      income and expense items recorded for financial reporting purposes but not
      recognizable for income tax purposes. In addition, our income tax expense has
      been adjusted for the effect state and local taxes and foreign income from
      our
      wholly owned subsidiary. Our deferred tax assets are mostly offset by a
      valuation allowance because realization depends on generating future taxable
      income, which, in our estimation, is not more likely than not to
      transpire.




We
      had
      net operating loss carryforwards for federal and state income tax purposes
      of
      approximately $44 million at June 30, 2006 and $38 million at June 30, 2005.
      The
      federal and state net operating losses will expire if not utilized on various
      dates from 2009 through 2025. Section 382 of the Internal Revenue Code of 1986
      generally imposes an annual limitation on the amount of net operating loss
      carryforwards that may be used to offset taxable income where a corporation
      has
      undergone significant changes in its stock ownership. In January 2006, we
      completed an analysis to determine the potential applicability of any annual
      limitations imposed by Section 382 using assumptions regarding the respective
      values of our stock. Based upon our analysis, we estimate two significant
      changes of ownership, as defined under Section 382 of the Internal Revenue
      Code
      of 1986 that would trigger the limitations. The first took place in September
      1999 in connection with our Preferred Stock Class C issuance and the second
      took
      place in October 2004 with respect to our Initial Public Offering. Based on
      our
      current estimates and assumptions, we may utilize approximately $840 thousand
      for the period prior to September 1999 and approximately $1.8 million in net
      operating loss carryforwards on an annual basis attributable to the NOL
      carryforwards originating between 2000 through 2004, assuming we generate
      sufficient taxable income in any given year to utilize such amounts. Any unused
      annual limitation may be carried over to future years. Our Israeli subsidiary
      has capital loss carryforwards of approximately $600,000 that can be applied
      to
      future capital gains for an unlimited period of time under current tax
      rules.




Our
      Israeli subsidiary had income during the three and six months ending June 30,
      2006 and 2005, resulting from its cost plus agreement with the parent company,
      whereby it charges it for research and development services it provides to
      us,
      plus 12.5%. However, the subsidiary is an “approved enterprise” under Israeli
      law, which means that income arising from the subsidiary’s approved activities
      is subject to zero tax under the “alternative benefit” path for a period of ten
      years. In the event of distribution by the subsidiary of a cash dividend out
      of
      retained earnings which were tax exempt due to the “approved enterprise” status,
      the subsidiary would have to pay a 10% corporate tax on the amount distributed,
      and the recipient would have to pay a 15% tax (to be withheld at source) on
      the
      amounts of such distribution received.




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As
      of
      June 30, 2006, we accrued approximately $105 thousand, net of deferred tax
      assets, to reflect the estimated taxes that our subsidiary would have to pay
      if
      it distributed its accumulated earnings to us. Should the subsidiary derive
      income from sources other than the approved enterprise during the relevant
      period of benefits, this income will be taxable at the tax rate in effect at
      that time (currently 31%, gradually being reduced to 25% in 2010). Through
      June
      30, 2006, our Israeli subsidiary received tax benefits of approximately $825
      thousand.




***Net
      Loss***




Our
      net
      loss increased to $2,958 thousand and $6,438 thousand in the three and six
      months ended June 30, 2006, respectively, from $1,601 thousand and $3,107
      thousand for the same periods in 2005, as a result of the changes in our
      revenues, costs and expenses as described above.




**Critical
      Accounting Judgments and Estimates**




While
      our
      significant accounting policies are more fully described in the notes to our
      audited consolidated financial statements for the years ended December 31,
      2005
      and 2004, and our consolidated interim financial statements for the three and
      six months ended June 30, 2006 and 2005, we believe the following accounting
      policies to be the most critical in understanding the judgments and estimates
      we
      use in preparing our consolidated financial statements.




***Revenue
      Recognition***




In
      2003,
      we sold lifetime subscriptions to our consumer product and did not recognize
      revenue from those sales since the obligation to continue serving such content
      had no defined termination date and adequate history to estimate the life of
      the
      customer relationship was not available. Cash received from such lifetime
      licenses is reflected as long-term deferred revenues on the accompanying balance
      sheets. Those deferred lifetime subscriptions amount to approximately $425,000
      as of June 30, 2006. We have not yet determined what the ultimate disposition
      of
      such deferred revenues will be, and when it will impact our Statement of
      Operations. Beginning December 2003 and throughout 2004, we generally, sold
      consumers one-year subscriptions to GuruNet. We recognized the amounts we
      received from those subscriptions over the life of the related subscription.
      Beginning April 2004, certain users who purchased lifetime subscriptions in
      2003
      exchanged their lifetime subscriptions for free two-year subscriptions to a
      newer, enhanced version of the GuruNet product. The cash previously received
      from such users is being recognized as revenues over the new two-year
      subscription.




Beginning
      January 2005, we no longer offered subscriptions to our consumer products and/or
      websites. Since then, our business model is primarily an advertising model.
      Generally, we do not contract directly with advertisers, but rather, obtain
      advertisements through the efforts of third parties. The third parties are
      obligated to pay us a portion of the revenue they earn from advertisers as
      compensation for our sale of promotional space on our Internet properties.
      Amounts earned from such third parties are reflected as revenue on our statement
      of operations in the period in which such advertising services were provided.




***Accounting
      for Stock-based Compensation***




As
      of
      January 1, 2006, we adopted SFAS No. 123 (revised 2004), *“Share-Based
      Payments”* (“SFAS
      123R”) using the modified prospective method, which requires measurement of
      compensation cost for all stock-based awards at fair value on date of grant
      and
      recognition of compensation over the service period for awards expected to
      vest.
      The estimation of stock awards that will ultimately vest requires judgment,
      and
      to the extent actual results differ from our estimates, such amounts will be
      recorded as a cumulative adjustment in the period estimates are revised. We
      consider various factors when estimating expected forfeitures, including
      historical experience. Actual results may differ substantially from these
      estimates.




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With
      the
      exception of stock options granted to employees prior to May 12, 2004, the
      date
      of our first filing with the U.S. Securities and Exchange Commission in
      connection with our IPO, we determine the fair value of stock options (for
      disclosure purposes prior to January 1, 2006, and for accounting purposes
      beginning January 1, 2006) granted to employees and directors using the
      Black-Scholes valuation model, which considers the exercise price relative
      to
      the market value of the underlying stock, the expected stock price volatility,
      the risk-free interest rate and the dividend yield, and the estimated period
      of
      time option grants will be outstanding before they are ultimately exercised.
      We
      also determine the fair value of stock options and warrants granted to
      non-employees, for accounting purposes, using the Black-Scholes valuation model.
      Prior to our IPO, in October 2004, the market value of the underlying stock
      was
      based on estimates, including volatility estimates that are inherently highly
      uncertain and subjective, since prior to our IPO there had been no public market
      for our stock. Subsequent to our IPO we have not had sufficient history to
      actually predict our volatility, therefore, our assumptions about stock price
      volatility are based on the volatility rates of comparable publicly held
      companies. These rates may or may not reflect our actual stock price volatility.
      Had we made different assumptions about the market value of our stock, stock
      price volatility or the estimated time option and warrant grants will be
      outstanding before they are ultimately exercised, the related stock based
      compensation expense and our net loss and net loss per share amounts could
      have
      been significantly different, in the first and second quarters of 2006, as
      well
      as in periods prior to our adoption of SFAS 123R.




***Accounting
      for Income Taxes***




As
      part
      of the process of preparing our consolidated financial statements, we are
      required to estimate our income taxes in each of the jurisdictions in which
      we
      operate. This process involves management estimating our actual current tax
      exposure together with assessing temporary differences resulting from differing
      treatment of items for tax and accounting purposes. These differences result
      in
      deferred tax assets and liabilities, which are included within our consolidated
      balance sheet. We must then assess the likelihood that our deferred tax assets
      will be recovered from future taxable income and, to the extent we believe
      that
      recovery is not likely, we must establish a valuation allowance. To the extent
      we establish a valuation allowance or increase this allowance in a period,
      we
      must include an expense within the tax item in the statement of operations.
      Significant management judgment is required in determining our provision for
      income taxes, our deferred tax assets and liabilities and any valuation
      allowance recorded against our net deferred tax assets. We have fully offset
      our
      US deferred tax asset with a valuation allowance. Our lack of earnings history
      and the uncertainty surrounding our ability to generate taxable income prior
      to
      the expiration of such deferred tax assets were the primary factors considered
      by management in establishing the valuation allowance. Deferred tax assets
      and
      liabilities in the financial statements result from the tax amounts that would
      result if our Israeli subsidiary distributed its retained earnings to us. This
      subsidiary is entitled to a tax holiday, as described above, yet continues
      to
      generate taxable income in respect of services provided to us, and therefore
      were the subsidiary to distribute its retained earnings to us, we believe that
      the deferred tax asset relating to the Israeli subsidiary would be realized.
      In
      the event that our subsidiary’s products would not generate such taxable income,
      we would need to write off the deferred tax asset as an expense in the statement
      of operations. It should be noted that as the income is derived from us, it
      is
      eliminated upon consolidation.




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**Recently
      Issued Accounting Pronouncements**




***FIN
      48 - Accounting for Uncertainty in Income Taxes***




In
      July
      2006, FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes - an Interpretation of FASB Statement 109” (FIN 48) effective for
      fiscal years beginning after December 15, 2006.  FIN 48 prescribes how a
      company should recognize, measure, present and disclose in its financial
      statements uncertain tax positions that the company has taken or expects to
      take
      on a tax return.  Additionally, for tax positions to qualify for deferred
      tax benefit recognition under FIN 48, the position must have at least a “more
      likely than not” chance of being sustained upon challenge by the respective
      taxing authorities, otherwise, the company must increase the valuation allowance
      correspondingly.  We do not expect this interpretation to have a material
      impact on our financial statements as we are almost fully reserved against
      our
      deferred tax benefit.




***SFAS
      123R - Share-Based Payments***




In
      December 2004, the Financial Accounting Standards Board (FASB) issued Statement
      of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based
      Payments” (SFAS 123R). SFAS 123R requires entities to measure the cost of
      employee and director services received in exchange for an award of equity
      instruments based on the grant-date fair value of the award and recognize the
      cost over the period during which an employee is required to provide service
      in
      exchange for the award. SFAS 123R does not change the accounting guidance for
      share-based payment transactions with parties other than employees and
      directors, provided in SFAS 123 as originally issued and EITF Issue No. 96-18,
      “Accounting for Equity Instruments That Are Issued to Other Than Employees for
      Acquiring, or in Conjunction with Selling, Goods or Services”. We were required
      to implement SFAS 123R as of the beginning of the first interim or annual
      reporting period that begins after December 15, 2005.




As
      of
      January 1, 2006, we adopted SFAS 123R using the modified prospective method,
      thus there was no impact on the prior period financial statements. Under this
      method, we began recognizing compensation cost for new awards and to awards
      modified, repurchased or cancelled, based on the SFAS 123R fair value model,
      after January 1, 2006. Furthermore, we began recognizing cost for unvested
      share-based awards as of January 1, 2006 based on the grant date fair value
      of
      those awards, adjusted for estimated forfeitures, if any, as previously
      calculated and reported for pro-forma disclosure purposes.




The
      total
      fair value of stock options vested during the three and six months ending June
      30, 2006, which amounts to $447 thousand and $856 thousand net of estimated
      forfeitures, respectively, was recorded as stock-based compensation expense.
      Had
      we accounted for stock-based awards to employees and directors under the
      intrinsic value method of APB 25, the method used in periods prior to January
      1,
      2006, the stock-based compensation expenses would have amounted to $8 thousand
      and $4 thousand in the three months and six months ended June 30, 2006,
      respectively.




As
      of
      June 30, 2006, there was $5,586 thousand of unrecognized compensation cost,
      net
      of estimated forfeitures of $7 thousand, related to non-vested stock options
      granted under our various stock option plans. That cost is expected to be
      recognized as follows:




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**Year
                ending December 31**
            
            **$**
              **(in
                thousands)**Remainder
                2006
            
            8932007
            
            1,8012008
            
            1,7582009
            
            1,0362010
            
            985,586




**Liquidity
      and Capital Resources**




Our
      principal sources of liquidity are our cash and cash equivalents, and investment
      securities that we raised through various financing events that took place
      in
      2004 and 2005, and cash inflows from revenues. In October 2004, we raised
      approximately $10.8 million, net of underwriting fees and offering expenses,
      through our IPO and the exercise of the over-allotment option. After repaying
      the portion of bridge notes that did not convert to common shares, of
      $3,160,000, approximately $7.6 million remained. In 2005, we raised
      approximately $15.4 million from the exercise of warrants and options. We have
      incurred negative cash flow from operations since our inception. We have spent,
      and expect to continue to spend, substantial amounts in connection with
      implementing our business strategy.




Cash
      flows for the six months ended June 30, 2006 and 2005 were as follows (in
      thousands):




**2006**
            
            **2005**$
            
            $Net
                cash used in operating activities
            
            
            (1,835
            )
            
            (1,627
            )Net
                cash provided by (used in) investing activities
            
            
            3,327
            
            
            (11,124
            )Net
                cash provided by financing activities
            
            
            173
            
            
            13,828




Despite
      a
      net loss of $6,438 thousand in the first half of 2006, our net cash used in
      operations was $1,835 thousand. The primary reason for the large difference
      is
      that $856 thousand of our operating expenses were the result of non-cash,
      stock-based compensation to employees and directors, and $3,489 thousand of
      our
      operating expenses were the result of non-cash, stock-based compensation that
      resulted from the Brainboost transaction (see Research and Development
      discussion above for further details). In the first half of 2005, despite a
      net
      loss of $3,107 thousand, our net cash used in operations was $1,627 thousand.
      The primary reasons for the difference is that $930 thousand of our operating
      expenses were the result of non-cash, stock-based compensation, and various
      changes in our operating assets and liabilities.




Net
      cash
      provided by and used in investing activities in the first half of 2006 and
      2005,
      respectively, is attributable primarily to purchases of investment securities
      less the proceeds from the sale of investment securities, as delineated in
      our
      Interim Consolidated Statement of Cash Flows. Investment securities consist
      mostly of investments in auction rate, investment grade, corporate and municipal
      debt instruments, and auction rate preferred shares of closed-end investment
      funds that invest in long-term fixed income securities, with auction reset
      periods of 28 days, classified as available-for-sale securities and stated
      at
      fair value.




Cash
      flow
      from financing activities during the first half of 2006 and 2005 relates to
      the
      net proceeds from the exercise of stock warrants and stock options.




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On
      December 1, 2005, we acquired Brainboost Technology, LLC for $4 million in
      cash
      and 439,000 shares of common stock. As part of the acquisition, we granted
      the
      sellers certain price protection rights. We agreed that in the event that the
      average closing price of our common stock for the 20 consecutive trading days
      (“Average Closing Price”) immediately preceding December 1, 2006 is less than
      $10.2575, at our option we will either repurchase the common stock held by
      the
      sellers at such date for $10.2575 per share or pay the sellers the difference
      between $10.2575 per share and the Average Closing Price for shares they are
      still holding (the “Brainboost Price Protection”). The Brainboost Price
      Protection is subject to cancellation at the cumulative occurrence of certain
      conditions relating to the market price of our common stock and other factors
      that have not yet transpired, and may never transpire. In the event that the
      Average Closing Price of our common stock is below $10.2575 on December 1,
      2006,
      the Brainboost Price Protection is not cancelled, and the sellers have not
      sold
      a significant amount of the common stock issued to them, we may be obligated
      to
      pay the sellers a significant amount of additional cash.  Even if there is
      a significant decrease in our stock price, we believe we have sufficient cash
      to
      pay the sellers of Brainboost, LLC the amount owed to them as described above,
      and meet our planned operating needs for the next twelve months.
      Notwithstanding, our business strategy includes growth
      through business combinations and licensing or acquiring products and
      technologies complementary to our business, which could require use of a
      significant amount of our available cash.  We may therefore need to
      raise additional capital through future debt or equity financing to finance
      such
      initiatives and to finance growth.  We cannot be certain that
      additional financing will be available on acceptable terms, or at
      all.  To the extent that we raise additional funds by issuing equity
      securities, our stockholders may experience significant dilution.




**Off-Balance
      Sheet Arrangements**




Except
      for the Brainboost Price Protection discussed immediately above, we have not
      entered into any transactions with unconsolidated entities in which we have
      financial guarantees, subordinated retained interests, derivative instruments
      or
      other contingent arrangements that expose us to material continuing risks,
      contingent liabilities or any other obligations under a variable interest in
      an
      unconsolidated entity that provides us with financing, liquidity, market risk
      or
      credit risk support.




**Contractual
      Obligations and Commitments**




As
      of
      June 30, 2006, we had the following known contractual obligations and
      commitments:




**$
                (in thousands)****Purchase
                Contracts**
            
            **Operating
                Leases**
            
            **Total**Remainder
                2006
            271
            
            210
            
            4812007
            249
            
            415
            
            6642008
            93
            
            368
            
            4612009
            25
            
            328
            
            3532010
            25
            
            207
            
            232**Total**
            **663**
            
            **1,528**
            
            **2,191**




**Other
      Commitments**




In
      the
      ordinary course of business, we may provide indemnifications of varying scope
      and terms to customers, vendors, lessors, business partners and other parties
      with respect to certain matters, including, but not limited to, losses arising
      out of our breach of such agreements, services to be provided by us, or from
      intellectual property infringement claims made by third parties. In addition,
      we
      have entered into indemnification agreements with our directors, officers and
      certain employees that will require us, among other things, to indemnify them
      against certain liabilities that may arise by reason of their status or service
      to us. We maintain director and officer insurance, which may cover certain
      liabilities arising from our obligation to indemnify our directors, officers
      and
      certain employees.




It
      is not
      possible to determine the maximum potential amount under these indemnification
      agreements due to the limited history of prior indemnification claims and the
      unique facts and circumstances involved in each particular agreement. Such
      indemnification agreements may not be subject to maximum loss clauses. To date,
      we have not incurred costs as a result of obligations under these agreements
      and
      we have not accrued any liabilities related to such indemnification obligations
      in our financial statements.




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ITEM
      3. CONTROLS AND PROCEDURES





Our
      Chief
      Executive Officer and Chief Financial Officer, based on evaluation of our
      disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
      of the Securities Exchange Act of 1934, as amended) required by paragraph (b)
      of
      Rule 13a-15 or Rule 15d-15, as of June 30, 2006, have concluded that our
      disclosure controls and procedures were effective in ensuring that information
      required to be disclosed by us in the reports that we file or submit under
      the
      Exchange Act is recorded, processed, summarized and reported within the time
      periods specified in the Commission’s rules and forms. Our Chief
      Executive Officer and Chief Financial Officer also concluded that, as of
      June 30, 2006, our disclosure controls and procedures are effective in ensuring
      that information required to be disclosed by us in the reports that we file
      or
      submit under the Exchange Act is accumulated and communicated to our management,
      including our Chief Executive Officer and Chief Financial Officer, to allow
      timely decisions regarding required disclosure.





We
      believe that a controls system, no matter how well designed and operated, is
      based in part upon certain assumptions about the likelihood of future events,
      and therefore can only provide, reasonable, not absolute, assurance that the
      objectives of the controls system are met, and no evaluation of controls can
      provide absolute assurance that all control issues and instances of fraud,
      if
      any, within a company have been detected.





There
      were no changes in our internal controls over financial reporting that occurred
      during the quarter ended June 30, 2006 that materially affected or are
      reasonably likely to materially affect our internal controls over financial
      reporting.




**PART
      II. OTHER INFORMATION**





ITEM
      1. LEGAL PROCEEDINGS





*Steven
      Tover Litigation*





On
      July
      14, 2005, Mr. Steven Tover (“Tover”), former Vice President, Business
      Development & Sales of the Company, filed a statement of claim with the
      Regional Labor Court in Jerusalem, Israel (the “Court”), against (i) us, (ii)
      our Israeli subsidiary, GuruNet Israel Ltd., (iii) Mr. Robert Rosenschein (our
      CEO and Chairman of the Board), and (iv) Mr. Steven Steinberg (our CFO) in
      the
      amount of approximately US$50,000, for deferred salary, severance pay and
      allegedly unpaid commissions. Tover’s action further claimed that he is entitled
      to certain additional and future commissions pursuant to various business
      transactions and to exercise stock options granted to him, which, according
      to
      us, have expired at the close of fiscal year 2004. The stock options discussed
      in Tover’s claim consist of 43,441 options to purchase such number of our shares
      of common stock, with an exercise price of $2.76 per share.


On
      September 28, 2005 the Court accepted the named defendants’ motion and ordered
      Tover to re-file his statement of claim, for lack of facts substantiating his
      claims and for lack of clarity in describing the damages sought. On December
      6,
      2005 Tover filed his amended statement of claim, in which he raised the amount
      of damages sought to $70,000, in addition to aforementioned declaratory redress
      pertaining to future commissions and stock options. The named defendants
      completely reject the validity of Tover’s claims and on February 1, 2006, filed
      a joint statement of defense together with a motion to dismiss the amended
      statement of claim on the grounds that Tover did not pay the full Court fees
      and
      for lack of cause.





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Following
      a pre-trial hearing that took place on March 5, 2006, the Court recommended
      that
      the litigants explore the possibility of resolving the dispute through
      mediation. The parties participated in several mediation meetings; however,
      to
      date the parties have failed to bridge their differences through this process
      and will, in all likelihood, revert to the Court in order to continue the
      proceedings. Alternatively, we may commence arbitration proceedings. We estimate
      that the probability of Tover prevailing in the Claim is low, although we cannot
      guarantee how any court will rule on a given matter.




*Babylon
      Litigation*





On
      March
      8, 2006, we submitted a statement of claim with the Tel-Aviv District Court
      against Babylon Ltd., for infringement of Israel Patent Number 121,457. The
      remedies that we sought were damages in the sum of NIS 1,000,000 (approximately
      $210,000), an accounting and an injunction. Prior to Babylon Ltd.'s filing
      of
      its statement of defense, we entered into settlement negotiations aimed at
      dismissing the infringement claim. Currently, the parties continue to negotiate
      a possible settlement agreement and the legal proceedings are temporarily
      suspended. While it is our belief that the current negotiations will lead to
      a
      definitive resolution of the dispute, we can not guarantee such an outcome,
      and
      we may be forced to return to legal proceedings.




ITEM
      2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF
      PROCEEDS





Not
      applicable





ITEM
      3. DEFAULTS UPON SENIOR SECURITIES





Not
      applicable.





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





At
      Answers Corporation’s Annual Meeting of Stockholders held on June 21, 2006,
      two matters were voted upon and management's proposals were both approved.
      A
      description of each matter and a tabulation of the votes for each of the matters
      follow:




1.
                Proposal
                    to elect two Class II directors to hold office for a three year
                    term or
                    until their respective successors are duly elected and
                    qualified:




VotesFor
            
            Withheld
            
            %
                Votes For**Nominee**Edward
                G. Sim
            
            
            7,061,073
            
            
            53,885
            
            
            91.37Jerry
                Colonna
            
            
            7,059,843
            
            
            55,115
            
            
            91.35





2.
              Proposal
                  for the approval of the amendment to Answers Corporation’s 2005 Incentive
                  Compensation Plan to increase the number of shares available for
                  grant
                  under such plan from 850,000 shares to 1,100,000
                  shares:




VotesFor
              
              Against
              
              Abstain1,904,568
              
              1,270,441
              
              4,821
 
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 ITEM
      5. OTHER INFORMATION





Not
      applicable.





ITEM
      6. EXHIBITS





31.1
            Certification
                of Principal Executive Officer required under Rule 13a-14(a) or Rule
                15d-14(a) of the Securities and Exchange Act of 1934, as
                amended.





31.2
            Certification
                of Principal Financial Officer required under Rule 13a-14(a) or Rule
                15d-14(a) of the Securities and Exchange Act of 1934, as
                amended.





32
            Certification
                of Principal Executive Officer and Principal Financial Officer required
                under 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
                the Sarbanes-Oxley Act of 2002.








*
            The
                certifications attached as Exhibit 32 accompany this Quarterly Report
                on Form 10-QSB pursuant to Section 906 of the Sarbanes-Oxley Act
                of 2002 and shall not be deemed "filed" by Answers Corporation for
                purposes of Section 18 of the Securities Exchange Act of 1934, as
                amended.





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SIGNATURES





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.




ANSWERS
              CORPORATIONDate:
              August 10, 2006
            By:
            /s/ Robert
              S.
              RosenscheinRobert
              S. RosenscheinChief
              Executive Officer(Principal Executive
              Officer)


Date: August
              10, 2006
            By:
            /s/ Steven
              SteinbergSteven
              SteinbergChief
              Financial Officer(Principal Financial and Accounting
              Officer)


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EXHIBIT
      INDEX











31.1
            Certification
                of Principal Executive Officer required under Rule 13a-14(a) or Rule
                15d-14(a) of the Securities and Exchange Act of 1934, as
                amended.





31.2
            Certification
                of Principal Financial Officer required under Rule 13a-14(a) or Rule
                15d-14(a) of the Securities and Exchange Act of 1934, as
                amended.





32*
            Certification
                of Principal Executive Officer and Principal Financial Officer required
                under 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
                the Sarbanes-Oxley Act of 2002.








*
            The
                certifications attached as Exhibit 32 accompany this Quarterly Report
                on Form 10-QSB pursuant to Section 906 of the Sarbanes-Oxley Act
                of 2002 and shall not be deemed "filed" by Answers Corporation for
                purposes of Section 18 of the Securities Exchange Act of 1934, as
                amended.





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