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 SEPTEMBER 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
o NO
x





As
      of
      November 13, 2006, the registrant had outstanding 7,784,946 shares of Common
      Stock, $0.001 par value per share.







**Back
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          Contents**


PART
                I. FINANCIAL INFORMATIONItem
                1. Financial StatementsConsolidated
                Balance Sheets (unaudited) as of September
                30, 2006 and December 31, 2005.
            1Consolidated
                Statements of Operations (unaudited) for the
                three and nine months ended September 30, 2006 and 2005
            2Consolidated
                Statements of Cash Flows (unaudited) for the
                nine months ended September 30, 2006 and 2005
            3Notes
                to unaudited Consolidated Financial
                Statements
            4Item
                2. Management's Discussion and Analysis of Financial
                Condition or Plan of Operation
            18Item
                3. Controls and Procedures
            30PART
                II. OTHER INFORMATIONItem
                1. Legal Proceedings
            31Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            32Item
                3. Defaults Upon Senior Securities
            32Item
                4. Submission of Matters to a Vote of Security
                Holders
            32Item
                5. Other Information
            32Item
                6. Exhibits
            32Signatures
            33





**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 the vast
      majority 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.


i
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**PART
      I. FINANCIAL INFORMATION**


**ITEM
        1.FINANCIAL STATEMENTS**




Answers
      Corporation and Subsidiary






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








**September
                30**
            
            **December
                31****2006**
            
            **2005**$
            
            $**Assets****Current
                assets:**Cash
                and cash equivalents
            
            
            **2,927**
            
            
            2,840Investment
                securities
            
            
            **7,896**
            
            
            11,163Accounts
                receivable
            
            
            **1,246**
            
            
            451Prepaid
                expenses and other current assets
            
            
            **419**
            
            
            349**Total
                current assets**
            
            
            **12,488**
            
            
            14,803**Long-term
                deposits (restricted)**
            
            
            **215**
            
            
            211**Deposits
                in respect of employee severance obligations**
            
            
            **800**
            
            
            610**Property
                and equipment, net**
            
            
            **961**
            
            
            597**Other
                assets:**Intangible
                assets, net
            
            
            **4,764**
            
            
            5,384Prepaid
                expenses
            
            
            **304**
            
            
            254Deferred
                tax asset
            
            
            **11**
            
            
            13**Total
                other assets**
            
            
            **5,079**
            
            
            5,651**Total
                assets**
            
            
            **19,543**
            
            
            21,872**Liabilities
                and stockholders' equity****Current
                liabilities:**Accounts
                payable
            
            
            **167**
            
            
            305Accrued
                expenses
            
            
            **711**
            
            
            673Accrued
                compensation
            
            
            **530**
            
            
            322Deferred
                revenues
            
            
            **45**
            
            
            67**Total
                current liabilities**
            
            
            **1,453**
            
            
            1,367**Long-term
                liabilities:**Liability
                in respect of employee severance obligations
            
            
            **786**
            
            
            622Deferred
                tax liability
            
            
            **187**
            
            
            98Deferred
                revenues
            
            
            **426**
            
            
            442**Total
                long-term liabilities**
            
            
            **1,399**
            
            
            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; 7,784,946
                and
                7,664,969
              shares
                issued and outstanding as of September 30, 2006 and December 31,
                2005,
                respectively
            
            
            **8**
            
            
            8Additional
                paid-in capital
            
            
            **70,953**
            
            
            69,492Deferred
                compensation
            
            
            **—**
            
            
            (3,518
            )Accumulated
                other comprehensive loss
            
            
            **(32**
            **)**
            
            (29
            )Accumulated
                deficit
            
            
            **(54,238**
            **)**
            
            (46,610
            )**Total
                stockholders' equity**
            
            
            **16,691**
            
            
            19,343**Total
                liabilities and stockholders' equity**
            
            
            **19,543**
            
            
            21,872








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


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Answers
      Corporation and Subsidiary








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








**Three
                months ended September 30**
            
            **Nine
                months ended September 30****2006**
            
            **2005**
            
            **2006**
            
            **2005**$
            
            $
            
            $
            
            $**Revenues:**Answers.com
                advertising revenue
            
            
            **1,810**
            
            
            500
            
            
            **4,357**
            
            
            964Answers
                service licensing
            
            
            **44**
            
            
            45
            
            
            **143**
            
            
            57Subscriptions
            
            
            **4**
            
            
            19
            
            
            **23**
            
            
            143**1,858**
            
            
            564
            
            
            **4,523**
            
            
            1,164**Costs
                and expenses:**Cost
                of revenue
            
            
            **844**
            
            
            304
            
            
            **2,336**
            
            
            832Research
                and development
            
            
            **621**
            
            
            275
            
            
            **5,209**
            
            
            915Sales
                and marketing
            
            
            **924**
            
            
            519
            
            
            **2,244**
            
            
            1,331General
                and administrative
            
            
            **765**
            
            
            693
            
            
            **2,530**
            
            
            2,624**Total
                operating expenses**
            
            
            **3,154**
            
            
            1,791
            
            
            **12,319**
            
            
            5,702**Operating
                loss**
            
            
            **(1,296**
            **)**
            
            (1,227
            )
            
            **(7,796**
            **)**
            
            (4,538
            )Interest
                income, net
            
            
            **144**
            
            
            157
            
            
            **430**
            
            
            387Other
                expenses, net
            
            
            **(17**
            **)**
            
            (15
            )
            
            **(220**
            **)**
            
            (35
            )**Loss
                before income taxes**
            
            
            **(1,169**
            **)**
            
            (1,085
            )
            
            **(7,586**
            **)**
            
            (4,186
            )Income
                taxes
            
            
            **(22**
            **)**
            
            (5
            )
            
            **(42**
            **)**
            
            (11
            )**Net
                loss**
            
            
            **(1,191**
            **)**
            
            (1,090
            )
            
            **(7,628**
            **)**
            
            (4,197
            )**Basic
                and diluted net loss per common share**
            
            
            **(0.15**
            **)**
            
            (0.15
            )
            
            **(1.00**
            **)**
            
            (0.63
            )**Weighted
                average shares used in computing basic**
              **and
                diluted net loss per common share**
            
            
            **7,782,820**
            
            
            7,069,553
            
            
            **7,632,283**
            
            
            6,703,989




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




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          Contents**


Answers
      Corporation and Subsidiary








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








**Nine
                months ended September 30****2006**
            
            **2005**$
            
            $**Cash
                flows from operating activities:**
            
            
            **(7,628**
            **)**
            
            (4,197
            )**Net
                loss****Adjustments
                to reconcile net loss to net cash used in operating
                activities:**Depreciation
                and amortization
            
            
            **239**
            
            
            133Amortization
                of Brainboost Answers Engine (see Note 4)
            
            
            **669**
            
            
            —Deposits
                in respect of employee severance obligations
            
            
            **(190**
            **)**
            
            (26
            )Increase
                in liability in respect of employee severance obligations
            
            
            **164**
            
            
            37Deferred
                income taxes
            
            
            **91**
            
            
            7Stock-based
                compensation to non-employees for services rendered
            
            
            **—**
            
            
            911Stock-based
                compensation to employees and directors
            
            
            **1,315**
            
            
            125Stock-based
                compensation in connection with the Brainboost transaction (see Note
                4)
            
            
            **3,489**
            
            
            —Exchange
                rate differences
            
            
            **(6**
            **)**
            
            24**Changes
                in operating assets and liabilities:**Increase
                in accounts receivable and other current assets
            
            
            **(865**
            **)**
            
            (261
            )Increase
                (decrease) in long-term prepaid expenses and current
                assets
            
            
            **(50**
            **)**
            
            55Increase
                (decrease) in accounts payable
            
            
            **(138**
            **)**
            
            233Increase
                in accrued expenses and other current liabilities
            
            
            **246**
            
            
            95Decrease
                in short-term deferred revenues
            
            
            **(22**
            **)**
            
            (108
            )Decrease
                in long-term deferred revenues
            
            
            **(16**
            **)**
            
            —**Net
                cash used in operating activities**
            
            
            **(2,702**
            **)**
            
            (2,970
            )**Cash
                flows from investing activities:**Capital
                expenditures
            
            
            **(562**
            **)**
            
            (408
            )Capitalization
                of software development costs
            
            
            **(36**
            **)**
            
            —Purchase
                of intangible assets
            
            
            **(54**
            **)**
            
            —Increase
                in long-term deposits
            
            
            **(4**
            **)**
            
            (143
            )Purchases
                of investment securities
            
            
            **(14,236**
            **)**
            
            (26,750
            )Proceeds
                from sales of investment securities
            
            
            **17,500**
            
            
            16,350**Net
                cash provided by (used in) investing activities**
            
            
            **2,608**
            
            
            (10,951
            )**Cash
                flows from financing activities:**Exercise
                of common stock options and warrants
            
            
            **175**
            
            
            15,015**Net
                cash provided by financing activities**
            
            
            **175**
            
            
            15,015Effect
                of exchange rate changes on cash and cash equivalents
            
            
            **6**
            
            
            (24
            )**Net
                increase in cash and cash equivalents**
            
            
            **87**
            
            
            1,070Cash
                and cash equivalents at beginning of period
            
            
            **2,840**
            
            
            1,565**Cash
                and cash equivalents at end of period**
            
            
            **2,927**
            
            
            2,635




**Supplemental
                disclosures of cash flow information:**Income
                taxes paid
            
            
            **6**
            
            
            3**Non-cash
                investing activities:**Unrealized
                net loss from securities
            
            
            **3**
            
            
            —







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


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**Notes
      to the Conslidated Financial Statements as of September 30, 2006
      (unaudited)**


Answers
      Corporation and Subsidiary





**Note
      1** **- The Company and Summary of Significant Accounting
      Policies**





**The
      Company**





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.





**Basis
      of Presentation**





The
      preparation of consolidated financial statements in conformity with generally
      accepted accounting principles in the United States of America requires
      management to make certain estimates and assumptions that affect the reported
      amounts of assets and liabilities and disclosure of contingent assets and
      liabilities at the date of the consolidated financial statements and the
      reported results of operations during the reporting periods. Actual results
      could differ from those estimates.





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 nine months ended September 30, 2006 are not
      necessarily indicative of the results that may be expected for the entire fiscal
      year or any other interim period.





**Recently
      Issued Accounting Pronouncements**





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. The Company is evaluating the impact, if any, that adoption
      of
      FIN 48 will have on its financial statements.


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Answers
      Corporation and Subsidiary





**Note
      1 - The Company and Summary of Significant Accounting Policies
      (cont’d)**





**Recently
      Issued Accounting Pronouncements (cont’d)**





In
      September 2006, the FASB issues Statement No. 157, *“Fair
      Value Measurements”* ,
      (SFAS
      No. 157). SFAS No. 157 defines fair value (replacing all prior definitions)
      and
      creates a framework to measure fair value, but does not create any new fair
      value measurements. SFAS No. 157 is effective in the first quarter of fiscal
      years beginning after November 15, 2007. The Company is currently evaluating
      what affect, if any, SFAS No. 157 will have on its consolidated financial
      statements.





In
      September 2006, the Securities and Exchange Commission (SEC) released Staff
      Accounting Bulletin No. 108, (SAB 108). SAB 108, in addition to providing
      guidance relative to quantifying the effect of misstatements on financial
      statements, also provides guidance on the correction of misstatements, including
      correcting prior year financial statements for immaterial errors. SAB 108 is
      effective for fiscal years ending on or after November 15, 2006. The Company
      is
      currently evaluating what affect, if any, SAB 108 will have on its consolidated
      financial statements.


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Answers
      Corporation and Subsidiary





**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.





To
      date,
      practically all of the Company’s advertising revenue has been obtained through
      the efforts of third parties, and has not been the result of direct contracts
      with advertisers. 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.





In
      prior
      years, the Company sold subscriptions to its GuruNet product. 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 September 30, 2006.


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Answers
      Corporation and Subsidiary





**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 recognizes compensation 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, as previously calculated and reported for pro-forma
      disclosure purposes. The Company recognizes compensation cost for unvested
      share-based awards as of January 1, 2006 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.





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.





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      Corporation and Subsidiary





**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 nine
      months ended September 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:





**Nine
                months ended September 30****2006**
            
            **2005**Weighted
                average risk-free interest rate
            
            
            4.66
            %
            
            3.95
            %Expected
                life (in years)
            
            
            4.08
            
            
            3.98Weighted
                average expected volatility
            
            
            41.28
            %
            
            50.23
            %








The
      fair
      value for each stock option granted to non-employees during the nine months
      ended September 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 nine months ended September
      30, 2006):





**Nine
                months ended September 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 nine months ended September 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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      Corporation and Subsidiary





**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 September 30, 2005**
            
            
            **Nine
                months ended**
              **September
                30, 2005****$
                (in thousands, except for per share data)**
            
            
            **$
                (in thousands, except for per share data)**Net
                loss, as reported
            
            
            (1,090
            )
            
            (4,197
            )Add:Stock-based
                compensation expense to employees and directors included
              in
                reported net loss, net of related tax effects
            
            
            4
            
            
            125Deduct:Stock-based
                compensation expense to employees and directors determined
              under
                fair value based method for all awards, net of related tax
                effects
            
            
            (226
            )
            
            (561
            )Pro-forma
                net loss
            
            
            (1,312
            )
            
            (4,633
            )Net
                loss per common share, basic and diluted:As
                reported
            
            
            (0.15
            )
            
            (0.63
            )Pro-forma
            
            
            (0.19
            )
            
            (0.69
            )





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      Corporation and Subsidiary





**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 Acquisition Closing Date, 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 Closing 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, 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 nine months ending
      September 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 nine months ending September 30, 2006,
      $669,000 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 Closing 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 nine months ending September 30, 2006, $3,489,000 of such value has been
      amortized and recorded as research and development compensation
      expense.


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      Corporation and Subsidiary





**Note
      5 - Stockholders’ Equity**





**General**





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





**$
                (in thousands)****December
                31, 2005**
            
            
            **19,343**Exercise
                of stock options
            
            
            **175**Stock-based
                compensation
            
            
            **1,315**Other
                comprehensive loss
            
            
            **(3**
            **)**Stock-based
                compensation in connection with the Brainboost transaction
              (see
                Note 4)
            
            
            **3,489**Net
                loss for the period
            
            
            **(7,628**
            **)****September
                30, 2006**
            
            
            **16,691**




**Common
      Stock**





During
      the nine months ended September 30, 2006, the Company issued a total of 119,977
      shares of common stock due to the exercise of 119,977 of the Company’s
      outstanding stock options, for a total consideration of approximately
      $175,000.





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 439,000
      Brainboost Shares (the "Registration Statement") with the SEC. The Registration
      Statement was declared effective by the SEC on June 9, 2006.


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      Corporation and Subsidiary





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





**Stock
      Warrants**





As
      of
      September 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 exercised during the nine months ended September
      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 September 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 its
      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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      Corporation and Subsidiary





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





**Stock
      Options**





During
      the nine months ended September 30, 2006, the Company granted a total of 632,350
      stock options to its employees and officers, of which 621,350 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 nine
      months ended September 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)
            
            
            632,350
            
            
            $12.29Exercised
            
            
            (119,977
            )
            
            $1.46Forfeited
            
            
            (17,700
            )
            
            $11.62**Outstanding
                as of September 30, 2006**
            
            
            **1,924,194**
            
            
            $10.50**Vested
                as of September 30, 2006**
            
            
            **662,977**
            
            
            $8.02





The
      weighted average fair value of options granted during the nine months ended
      September 30, 2006 and 2005, was $4.78 and $7.34 per option, respectively.
      The
      aggregate intrinsic value of options exercised during the nine months ended
      September 30, 2006 and 2005, was approximately $1,180,000 and $1,520,000,
      respectively, at the date of exercise.





As
      of
      September 30, 2006, 431,650 and 10,952 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
      September 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
            
            
            **219,706**
            
            
            6.20
            
            
            $3.45
            
            
            **164,015**
            
            
            5.80
            
            
            $3.155.06
                - 9.71
            
            
            **702,278**
            
            
            8.16
            
            
            $6.43
            
            
            **300,387**
            
            
            7.43
            
            
            $5.3710.54
                - 14.49
            
            
            **666,010**
            
            
            6.27
            
            
            $13.02
            
            
            **81,301**
            
            
            5.63
            
            
            $12.0515.35
                - 20.35
            
            
            **336,200**
            
            
            8.56
            
            
            $18.59
            
            
            **117,274**
            
            
            8.55
            
            
            $18.81$0.69
                - 20.35
            
            
            **1,924,194**
            
            
            7.35
            
            
            $10.50
            
            
            **662,977**
            
            
            6.82
            
            
            $8.02





The
      aggregate intrinsic value of stock options outstanding as of September 30,
      2006,
      was approximately $4,780,000, of which approximately $2,930,000 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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      Corporation and Subsidiary





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





**Stock
      Options (cont’d)**





The
      total
      fair value of stock options vested during the nine months ending September
      30,
      2006, amounts to $1,316,000, net of estimated forfeitures of $8,000, 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
      September 30, 2006, there was $5,536,000 of unrecognized compensation cost,
      net
      of estimated forfeitures of $4,000, related to non-vested 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
                (three months ending December 31)
            
            
            4772007
            
            
            1,8932008
            
            
            1,8602009
            
            
            1,1382010
            
            
            1685,536








**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 was 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 Seller 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 nine months ended September 30, 2006.





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**Note
      7 - Commitments and Contingencies**





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





**Year
                ending December 31**
            
            **$
                (in thousands)**2006
                (three months ending December 31)
            
            
            1182007
            
            
            4382008
            
            
            3972009
            
            
            3462010
            
            
            2071,506





Rental
      expense for operating leases for the nine months ended September 30, 2006 and
      2005 was $292,000 and $204,000, 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 September 30, 2006, deposits at
                such bank amounted to $279,000, 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
                September 30, 2006, the
                total future cash commitments under these arrangements amount to
                approximately $1,070,000.





(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 September 30, 2006, 362,619 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
                $230,000), 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.




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**Note
      7 - Commitments and Contingencies (cont’d)**





(f)
            On
                July 14, 2005, a former marketing employee of the Company (“the
                Employee”), filed a statement of claim (“the Claim) with the Regional
                Labor Court in Jerusalem, Israel (“the Court”), against the Company, the
                Subsidiary, the Company’s Chief Executive Officer and its Chief Financial
                Officer, in the amount of approximately US$50,000, for deferred salary,
                severance pay and unpaid commissions, as well as 43,441 options to
                purchase such number of our shares of common stock, with an exercise
                price
                of $2.76 per share. Following failed attempts to mediate the dispute,
                the
                Company will be reverting to the Court in order to continue the
                proceedings.The
                Company denies the Claim, but nonetheless has included a provision
                in its
                financial statements for an amount it believes is sufficient, based
                on
                consultation with its legal
                counsel.





**Note
      8 - Major Customer**





During
      the first nine months of 2006, practically all of the Company's advertising
      revenue was generated through the efforts of third party suppliers (the
“Monetization Partners”). During the three and nine months ending September 30,
      2006, the Company earned approximately 70% and 67% of its revenue, respectively,
      through one of its Monetization Partners.





**Note
      9 - Subsequent Events**





On
      November 2, 2006, the Company, Interesting.com, Inc. (“Seller”) and the sole
      shareholder of Seller, entered into an asset purchase agreement, pursuant to
      which the Company acquired from Seller for an aggregate of $2,000,000 in cash,
      the domain name known as www.faqfarm.com , a questions and answers website
      collaboratively written and edited by its visitors (“Acquired Website”),
      together with certain other assets, including, software utilized for the
      operation of the Acquired Website, other domain names, certain trade names,
      trademarks and other related intellectual property rights, certain databases
      of
      questions and answers accumulated to date by the Acquired Website and the
      goodwill associated with the Acquired Website.


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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 launched in January 2005, Answers.com, is a leading aggregator
      of
      information and reference content on almost 4 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 100
      reference titles, many 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
      information bubble. Our common stock is listed on the Nasdaq Global Market
      under
      the symbol "ANSW".





The
      launch of Answers.com 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 http://www.answers.com. Our filings with
      the U.S. Securities and Exchange Commission (the “SEC”), including our Annual
      Reports on Form 10-KSB, Quarterly Reports on Form 10-QSB and Current Reports
      on
      Form 8-K are available on that site, as well as any amendments to those filings,
      and other filings we make electronically with the SEC. The filings can be found
      in the Investor Relations section of our site (http://ir.answers.com) 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
      http://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 primarily
      comes from: (i) *Search
      engines* (currently the vast majority 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 certain of its
      search results pages 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). Through
      the date of this report, it has generally been our practice not to 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. We
      recently hired a vice president who has been tasked with developing direct
      ad
      sales capabilities within our organization. Therefore, we expect that commencing
      Q4 2006, and more so in Q1 2007 and onward, direct ad sales will become a more
      significant part of our ad sales strategy.





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The
      more
      users to whom we expose and deliver our answer-based search services results,
      the more traffic and 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.





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 “Answers from the Web”. 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.





**Acquisition
      of FaqFarm.com and Related Assets**





On
      November 2, 2006, we entered into an asset purchase agreement with
      Interesting.com, Inc. (the “Seller”) and Chris Whitten, the sole shareholder of
      the Seller, pursuant to which we acquired from the Seller for an aggregate
      of
      $2,000,000 in cash, the domain name and business known as www.faqfarm.com ,
      a
      questions and answers website collaboratively written and edited by its visitors
      (the “Acquired Website”), together with certain other assets, including,
      software utilized for the operation of the Acquired Website, other domain names,
      certain trade names, trademarks and other related intellectual property rights,
      certain databases of questions and answers accumulated to date by the Acquired
      Website and the goodwill associated with the Acquired Website.





**Results
      of Operations**





***Revenues***





Revenues
      in the three and nine months ended September 30, 2006 increased by $1,294 and
      $3,359 thousand or 229% and 289%, respectively, compared to the comparable
      periods in 2005. The table below sets forth the composite details of our
      revenues for these periods ( *in*  *thousands* ):




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**Three
                Months Ended September 30**
            
            **Nine
                Months Ended September 30*****2006***
            
            ***2005***
            
            ***2006***
            
            ***2005***Answers.com
                Advertising
            
            
            $1,810
            
            
            $500
            
            
            $4,357
            
            
            $964Answers
                Service Licensing
            
            
            44
            
            
            45
            
            
            143
            
            
            57Subscriptions
            
            
            4
            
            
            19
            
            
            23
            
            
            143**$1,858**
            
            
            **$564**
            
            
            **$4,523**
            
            
            **$**1,164







*Answers.com
      Advertising Revenues and Monetization*





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.





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
      and increase their brand awareness so as to cause them to access our site
      directly and become loyal, 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.








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)
            
            RPMQ-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
            
            
            $5.95Q-3
                2006
            
            
            3,020,000
            
            
            $1,810
            
            
            $6.48





In
      the
      third quarter of 2006, our average daily query traffic grew by approximately
      330,000 as compared to the previous quarter. We attribute this growth 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,
      (iii)
      more traffic from Yahoo! search engine and (iv) 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 after Labor Day.





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 site’s pages, the types of ads
      we present and the type of content we present in our website. We plan to
      continue focusing on optimizing our monetization, utilizing and expanding on
      many of the techniques we’ve used in the past. Historically we have not
      contracted directly with advertisers, but rather, obtained advertisements
      through the efforts of Monetization Partners. Going forward, we plan to focus
      more on selling our own advertising. We expect that this type of ad revenue
      has
      the potential to contribute to continued RPM growth.





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While
      we
      receive monetization services from various Monetization Partners, two of the
      providers, Google and Shopping.com, accounted for approximately 70% and 15%,
      respectively, of our total revenue in the three months ending September 30,
      2006, and approximately 67% and 15%, respectively, of our total revenue in
      the
      first nine months 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. 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 nine months ending September 30, 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.





Approximately
      $41 thousand and $107 thousand of the Answers.com advertising revenues generated
      during the three months and nine months ended September 30, 2006, respectively,
      resulted from traffic which partners, such as Mozilla Corporation, the owner
      of
      the Mozilla Firefox web property, sent us. We incurred fees to those partners
      of
      approximately $19 thousand and $49 thousand, during the three months and nine
      months ended September 30, 2006, respectively, for such traffic. Such amount
      is
      reflected in cost of goods sold and we refer to this as traffic acquisition
      costs.





*Subscription
      Revenue*





We
      have
      not sold subscriptions since January 2005. Subscription revenue relates to
      fixed-term subscriptions we sold prior to such date and whose revenues had
      been
      deferred. As of September 30, 2006, we only have $1 thousand of deferred revenue
      from fixed-term subscriptions. Additionally, as of September 30, 2006, we have
      approximately $425 thousand 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), as well as the salaries, benefits, travel and
      overhead costs relating to personnel who are responsible for content editing
      and
      integration, production operations and customer support.





Cost
      of
      revenues for the three months ended September 30, 2006 was $844 thousand
      compared to $304 thousand during the same period in 2005, a net increase of
      $540
      thousand or 178%. This net increase was due, in part, to certain expenses we
      incurred in the third 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
      third quarter of 2006 we incurred $223 thousand of amortization resulting from
      the acquisition of the BAE; stock-based compensation of $33 thousand as a result
      of adopting SFAS 123R; and traffic acquisition costs of $19 thousand. We did
      not
      incur similar costs in the same quarter of 2005. The remaining net increase
      in
      costs was due primarily to increases in compensation costs (excluding
      stock-based compensation) of $70 thousand as a result of staffing additions
      in
      our production operations, content and customer support departments and January
      2006 salary increases; increases in data center costs required to manage more
      Internet traffic of $102 thousand, an increase of $13 thousand in fees we pay
      to
      Google for the web search services, and increases in content licensing costs
      of
      $59 thousand.





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Cost
      of
      revenues for the nine months ended September 30, 2006 was $2,336 thousand
      compared to $832 thousand during the same period in 2005, a net increase of
      $1,504 thousand or 181%. This net increase was partially due to certain expenses
      we incurred in the first nine months 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 nine months of 2006 we incurred $669 thousand of amortization
      resulting from the acquisition of the BAE; stock-based compensation of $94
      thousand as a result of adopting SFAS 123R; and traffic acquisition costs of
      $49
      thousand. We did not incur similar costs in the same period of 2005. The
      remaining net increase in costs was due primarily to increases in compensation
      costs (excluding stock-based compensation) of $233 thousand as a result of
      staffing additions in our production operations, content and customer support
      departments, and January 2006 salary increases; increases in data center costs
      (including depreciation of information technology assets) required to manage
      more Internet traffic of $237 thousand; increase in fees we pay Google for
      web
      search services they provide to us of $39 thousand; and increases in content
      licensing costs of $128 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 nine
      months of 2006, the research and development team worked on development projects
      related mostly to user interface improvements, enhanced product
      functionality, and other development related to increasing traffic,
      monetization and site retention. In addition, the team continued to work
      on projects to ensure increased scalability and
      performance.





Research
      and development expenses in the three months ended September 30, 2006 were
      $621
      thousand compared to $275 thousand during the same period in 2005, a net
      increase of $346 thousand or 126%. The net increase is due, primarily, to
      increases in compensation-related expenses, excluding stock-based compensation,
      of approximately $222 thousand, due to growth in our research and development
      team including the addition of a Director of Natural Language Research
      (developer of the BAE) and January 2006 salary increases. Additionally, as
      a
      result of adopting SFAS 123R, stock-based compensation in the three months
      ending September 30, 2006 was $79 thousand compared to $1 thousand during the
      same period in 2005. Finally, overhead costs during the three months ending
      September 30, 2006, were $26 thousand higher than the same period in
      2005.





Research
      and development expenses in the nine months ended September 30, 2006 were $5,209
      thousand compared to $915 thousand during the same period in 2005, a net
      increase of $4,294 thousand or 469%. The net increase is due, primarily, to
      compensation charges resulting from the acquisition of Brainboost Technology,
      LLC, discussed below, and increases in compensation-related expenses, excluding
      stock-based compensation, of approximately $539 thousand, due to growth in
      our
      research and development team including the addition of a Director of Natural
      Language Research (developer of the BAE) and January 2006 salary increases.
      Additionally, as a result of adopting SFAS 123R, stock-based compensation in
      the
      nine months ending September 30, 2006 was $261 thousand compared to $31 thousand
      during the same period in 2005.





As
      noted
      earlier, in December 2005 we purchased Brainboost Technology, LLC for $4 million
      in cash and 439,000 shares of restricted stock. 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 $3,489 thousand of compensation
      expense, in Research and Development, in the nine months ended September 30,
      2006.





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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 September 30, 2006 were $924
      thousand compared to $519 thousand during the same period in 2005, a net
      increase of $405 thousand or 78%. The net increase is partially due to increases
      in compensation-related expenses, excluding stock-based compensation, of
      approximately $128 thousand, due to growth in our sales and marketing team
      and
      salary increases. Further, as a result of adopting SFAS 123R, stock-based
      compensation during the three months ending September 30, 2006 was $168 thousand
      compared to under $1 thousand during the same period in 2005. Additionally,
      other marketing-related expenses, including an accrual relating to a lawsuit
      from a former marketing employee, travel and third-party marketing services
      rose
      $132 thousand. The aforementioned increases were offset, to some extent, by
      a
      decrease of $25 thousand in our advertising and promotion expenses.







Sales
      and
      marketing expenses in the nine months ended September 30, 2006 were $2,244
      thousand compared to $1,331 thousand during the same period in 2005, a net
      increase of $913 thousand or 69%. The net increase is due to a number of
      factors. Compensation-related expenses, excluding stock-based compensation,
      rose
      approximately $479 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 nine
      months of 2005 does not include a full nine months of his compensation.
      Additionally, as a result of adopting SFAS 123R, we recorded stock-based
      employee compensation of $479 thousand during the first nine months of 2006.
      We
      had practically no stock-based employee compensation during the same period
      in
      2005. Additionally, other marketing-related expenses, including an accrual
      relating to a lawsuit from a former marketing employee, advertising and
      promotion, travel and third-party marketing services rose $175 thousand and
      overhead rose $64 thousand. The aforementioned increases were offset, to some
      extent, by the non-recurrence, in the first nine months of 2006, of two expenses
      that took place in the first nine months of 2005. In the first nine months
      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 thousand 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 September 30, 2006 were
      $765 thousand compared to $693 thousand during the same period in 2005, a net
      increase of $72 thousand or 10%. General and administrative expenses in the
      nine
      months ended September 30, 2006 were $2,530 thousand compared to $2,624 thousand
      during the same period in 2005, a net decrease of $94 thousand or 4%. The net
      increase during the three months ending September 30, 2006, and the net decrease
      during the nine months ending September 30, 2006, is comprised of many
      individual line expenses, the most significant of which follow:





·
            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 nine
                months
                ended September 30, 2005, we recorded $10 thousand and $50 thousand,
                respectively, of cash compensation, and $63 thousand and $577 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.





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·
            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 nine months ended September
                30,
                2005, we recorded $38 thousand and $120 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.





·
            During
                the three months ended September 30, 2006, employee compensation
                rose
                approximately $226 thousand, due to stock-based compensation of $180
                thousand as a result of adopting SFAS 123R, increases in the number
                of
                employees in the general and administrative department and January
                2006
                salary increases. Stock-based employee compensation during the three
                months ending September 30, 2005 was
                insignificant.





·
            During
                the nine months ended September 30, 2006, employee compensation rose
                approximately $635 thousand, due to increases in stock-based compensation
                of $389 thousand as a result of adopting SFAS 123R, increases in
                the
                number of employees in the general and administrative department
                and
                January 2006 salary increases.


***Interest
      Income, Net***





Interest
      income, net, in the three months ended September 30, 2006 and 2005, was $144
      thousand and $157 thousand, respectively. Interest income, net, in the nine
      months ended September 30, 2006 and 2005, was $430 thousand and $387 thousand,
      respectively. The decrease during the three months ending September 30, 2006,
      as
      compared to the same period in 2005, stems from lower average cash and
      investment securities balances, offset, to some extent, by higher short-term
      interest rates. The increase during the nine months ending September 30, 2006,
      as compared to the same period in 2005, stems from higher short-term interest
      rates offset, to some extent, by lower average cash and investment securities
      balances.





***Other
      Expenses***





Other
      expenses in the three months ended September 30, 2006, were $17 thousand
      compared to $15 thousand during the same period in 2005, an increase of $2
      thousand. Other expenses during the three months ending September 30, 2006
      and
      2005 are comprised primarily of foreign currency exchange net
      losses.





Other
      expenses in the nine months ended September 30, 2006, were $220 thousand
      compared to $35 thousand during the same period in 2005, an increase of $185
      thousand. Other expenses in the nine months ended September 30, 2006 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. 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. Other expenses
      in
      the nine months ended September 30, 2005 resulted, primarily, from foreign
      currency exchange net losses and write-offs of withholding taxes that we did
      not
      expect to realize.





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***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 of 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 $46 million at September 30, 2006 and $38.5 million at September
      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 carryforward 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 $650 thousand 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 nine months ending September
      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.


As
      of
      September 30, 2006, we accrued approximately $175 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
      September 30, 2006, our Israeli subsidiary received tax benefits of
      approximately $840 thousand.





***Net
      Loss***





Our
      net
      loss increased to $1,191 thousand and $7,628 thousand in the three and nine
      months ended September 30, 2006, respectively, from $1,090 thousand and $4,197
      thousand for the same periods in 2005, as a result of the changes in our
      revenues, costs and expenses as described above.





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**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
      nine months ended September 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
      thousand as of September 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.





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





As
      of
      January 1, 2006, we adopted SFAS No. 123 (revised 2004), *“Share-Based
      Payments”* (“SFAS
      123R”) 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, using the modified prospective
      method. 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.




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 nine months ending September 30, 2006,
      as
      well as in periods prior to our adoption of SFAS 123R.





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***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.




**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 are currently evaluating the impact, if any, that adoption
      of FIN 48 will have on our financial statements.





***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.





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The
      total
      fair value of stock options vested during the three and nine months ending
      September 30, 2006, which amounts to $459 thousand and $1,315 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 $4
      thousand and $12 thousand in the three months and nine months ended September
      30, 2006, respectively.





As
      of
      September 30, 2006, there was $5,536 thousand of unrecognized compensation
      cost,
      net of estimated forfeitures of $4 thousand, related to non-vested stock options
      granted under our various stock option plans. That cost is expected to be
      recognized as follows:





**Year
                ending December 31**
            
            **$
                (in thousands)**Remainder
                2006
            
            
            4772007
            
            
            1,8932008
            
            
            1,8602009
            
            
            1,1382010
            
            
            1685,536





***SEC
      SAB 108***





In
      September 2006, the Securities and Exchange Commission (SEC) released Staff
      Accounting Bulletin No. 108, (SAB 108). SAB 108, in addition to providing
      guidance relative to quantifying the effect of misstatements on financial
      statements, also provides guidance on the correction of misstatements, including
      correcting prior year financial statements for immaterial errors. SAB 108 is
      effective for fiscal years ending on or after November 15, 2006. We are
      currently evaluating what affect, if any, SAB 108 will have on our financial
      statements.





***SFAS
      157 - Fair Value Measurements***





In
      September 2006, the FASB issued Statement No. 157, “Fair Value Measurements”,
      (SFAS No. 157). SFAS No. 157 defines fair value (replacing all prior
      definitions) and creates a framework to measure fair value, but does not create
      any new fair value measurements. SFAS No. 157 is effective in the first quarter
      of fiscal years beginning after November 15, 2007. We are currently evaluating
      what affect, if any, SFAS No. 157 will have on our financial statements.





**Liquidity
      and Capital Resources**





Our
      principal sources of liquidity are our cash and cash equivalents, and investment
      securities, which amounted to approximately $10.8 million, as of September
      30,
      2006, and were 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.





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





**2006**
            
            **2005**$
            
            $Net
                cash used in operating activities
            
            
            (2,702
            )
            
            (2,970
            )Net
                cash provided by (used in) investing activities
            
            
            2,608
            
            
            (10,951
            )Net
                cash provided by financing activities
            
            
            175
            
            
            15,015








Despite
      a
      net loss of $7,628 thousand in the first nine months of 2006, our net cash
      used
      in operations was $2,702 thousand. The primary reason for the large difference
      is that $1,315 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 nine months of 2005, despite
      a net loss of $4,197 thousand, our net cash used in operations was $2,970
      thousand. The primary reason for the difference is that $1,036 thousand of
      our
      operating expenses were the result of non-cash, stock-based compensation.
      Changes to the balances of our various operating assets and liabilities, also
      impacted the net cash used in operations during the periods.





Net
      cash
      provided by and used in investing activities in the first nine months 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 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 nine months of 2006 and 2005 relates
      to the net proceeds from the exercise of stock warrants and stock
      options.





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
      immediately preceding December 1, 2006 (“Average Closing Price”) 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. As of September 30,
      2006,
      the sellers held approximately 363,000 of the original 439,000 shares of common
      stock that they received in December 2005. 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.




Further,
      as discussed above in detail, on November 2, 2006, we acquired the domain
      name and business known as www.faqfarm.com ,
      and
      related assets, for an aggregate of $2,000,000 in cash. Despite the outlay
      of $2
      million in cash for www.faqfarm.com ,
      and
      related assets, in the fourth quarter of 2006, and even if there is a
      significant decrease in our stock price that triggers the Brainboost Price
      Protection, 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 additional 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.





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**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
      September 30, 2006, we had the following known contractual obligations and
      commitments:





**$
                (in thousands)****Purchase
                Contracts**
            
            **Operating
                Leases**
            
            **Total**Remainder
                2006
            
            
            147
            
            
            118
            
            
            2652007
            
            
            496
            
            
            438
            
            
            9342008
            
            
            285
            
            
            397
            
            
            6822009
            
            
            115
            
            
            346
            
            
            4612010
            
            
            25
            
            
            207
            
            
            232**Total**
            
            
            1,068
            
            
            1,506
            
            
            2,574








**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.





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 September 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
      September 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.





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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 September 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 $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.





At
      a
      pre-trial hearing that took place on March 5, 2006, the Court recommended that
      we explore the possibility of resolving the dispute through mediation. Following
      our failed attempt to mediate the dispute, we will be reverting to the Court
      in
      order to continue the proceedings. Due to the inherent uncertainties of
      litigation, we cannot accurately predict the ultimate outcome of the litigation.
      An unfavorable outcome of the litigation could have an adverse impact on our
      financial condition and results of operations.





*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
      $230,000), 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 are near to reaching
      a
      possible settlement agreement and the legal proceedings are temporarily
      suspended.





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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





Not
      applicable.





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: November
              13, 2006
            By:
            /s/ Robert
              S.
              RosenscheinRobert
              S. RosenscheinChief
              Executive Officer(Principal Executive
              Officer)


Date: November
              13, 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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