UNITED
STATES OF AMERICA




SECURITIES
AND EXCHANGE COMMISSION




WASHINGTON,
DC 20549




FORM
10-Q




(Mark
One)




xQUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934




FOR
THE QUARTERLY PERIOD ENDED: MARCH 31, 2009




oTRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
the transition period from ___ to ____




Commission
File Number: 001-32255




ANSWERS
CORPORATION


(Exact
name of Registrant as specified in its charter)





Delaware
                  98-0202855(State
      or Other Jurisdiction of Incorporation or Organization)
                  (I.R.S.
      Employer Identification No.)237
      West 35th
      Street, Suite 1101, New York, New York
                  10001(Address
      of principal executive offices)
                  (Zip
      Code)(646)
      502-4777(Registrant’s
      telephone number)(Former
      Name, Former Address and Former Fiscal Year, if changed since last
      report)






Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.


Yes
     x
                     
No      o




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
 Yes
     o                      
No      o


Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer", "accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):




Large
accelerated Filer   o
         Accelerated
filer         o
           Non-accelerated
filer           o




Smaller
reporting company          
x




Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).


Yes
     o
                     
No       x




The
number of the registrant’s shares of common stock outstanding was 7,876,270 as
of May 5, 2009.




















ANSWERS
CORPORATION




FORM
10-Q




TABLE OF CONTENTS





PART I — FINANCIAL
      INFORMATIONItem 1.
                                                                                                                                              Consolidated Financial Statements
      (unaudited)Consolidated Balance Sheets as of
      March 31, 2009 and December 31, 2008Consolidated Statements of
      Operations for the three months ended March 31, 2009 and
      2008Consolidated Statements of Cash
      Flows for the three months ended March 31, 2009 and
      2008Notes to Consolidated Financial
      StatementsItem 2.
                                                                                                                                              Management’s Discussion and
      Analysis of Financial Condition and Results of
      OperationsItem 3.
                                                                                                                                              Quantitative and Qualitative
      Disclosures About Market RiskItem 4.
                                                                                                                                              Controls and
      ProceduresPART II — OTHER
      INFORMATIONItem 1.
                                                                                                                                              Legal
      ProceedingsItem 1A.
                                                                                                                                              Risk
      FactorsItem 2.
                                                                                                                                              Unregistered Sales of Equity
      Securities and Use of ProceedsItem 3.
                                                                                                                                              Defaults Upon Senior
      SecuritiesItem 4.
                                                                                                                                              Submission of Matters to a
      Vote of Security HoldersItem 5.
                                                                                                                                              Other
      InformationItem 6.
                                                                                                                                              ExhibitsSignatures









INTRODUCTORY
NOTE




This Report on Form 10-Q for
Answers Corporation (“Answers” or the “Company”) may contain
forward-looking statements. You can identify these statements by forward-looking
words such as “may,” “will,” “expect,” “intend,” “anticipate,” believe,”
“estimate” and “continue” or similar words. Forward-looking statements include
information concerning possible or assumed future business success or financial
results. You should read statements that contain these words carefully because
they discuss future expectations and plans, which contain projections of future
results of operations or financial condition or state other forward-looking
information.  We believe that it is important to communicate future
expectations to investors. The forward-looking statements included herein are
based on current expectations that involve a number of risks and uncertainties,
which are discussed in Item 1A, “Risk Factors” and in other sections of
this Form 10-Q and in our other filings with the Securities and Exchange
Commission.  These risks and uncertainties could cause actual results
or events to differ materially from the forward-looking statements that we
make.




Although, there
may be events in the future that we are not able to accurately predict or
control, we do not undertake any obligation to update any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.  Accordingly, to the
extent that this Form 10-Q contains forward-looking statements regarding the
financial condition, operating results, business prospects or any other aspect
of the Company, please be advised that Answers' actual financial condition,
operating results and business performance may differ materially from that
projected or estimated by the Company in forward-looking
statements.


Table of Contents




PART
I - FINANCIAL INFORMATION




Answers Corporation and Subsidiary


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





March
      31, 2009
                                          
                                          December
      31, 2008$
                                          
                                          $AssetsCurrent
      assets:Cash
      and cash equivalents
                                          12,644
                                          
                                          11,739Accounts
      receivable
                                          1,842
                                          
                                          1,680Prepaid
      expenses and other current assets
                                          832
                                          
                                          818Total
      current assets
                                          15,318
                                          
                                          14,237Long-term
      deposits (restricted)
                                          263
                                          
                                          257Deposits
      in respect of employee severance obligations
                                          1,302
                                          
                                          1,337Property
      and equipment, net of $2,253 and $2,083 accumulated depreciation as
      ofMarch
      31, 2009 and December 31, 2008, respectively
                                          1,332
                                          
                                          1,234Other
      assets:Intangible
      assets, net of  $780 and $769 accumulated amortization as of
      March 31, 2009and
      December 31, 2008, respectively
                                          934
                                          
                                          994Goodwill
                                          437
                                          
                                          437Prepaid
      expenses, long-term, and other assets
                                          285
                                          
                                          220Total
      other assets
                                          1,656
                                          
                                          1,651Total
      assets
                                          19,871
                                          
                                          18,716Liabilities
      and stockholders' equityCurrent
      liabilities:Accounts
      payable
                                          357
                                          
                                          537Accrued
      expenses and other current liabilities
                                          720
                                          
                                          751Accrued
      compensation
                                          734
                                          
                                          628Warrant
      to purchase units of Series B preferred stock and warrants
                                          7,170
                                          
                                          8,698Capital
      lease obligation – current portion
                                          80
                                          
                                          78Deferred
      revenues
                                          10
                                          
                                          16Total
      current liabilities
                                          9,071
                                          
                                          10,708Long-term
      liabilities:Liability
      in respect of employee severance obligations
                                          1,481
                                          
                                          1,534Capital
      lease obligation, net of current portion
                                          85
                                          
                                          106Deferred
      tax liability
                                          29
                                          
                                          26Series
      A Warrants
                                          3,072
                                          
                                          -Total
      long-term liabilities
                                          4,667
                                          
                                          1,666Commitments
      and contingenciesSeries A convertible preferred
      stock: $0.01 par value; stated value and liquidation
      preferenceof
      $100 per share; 6% cumulative annual dividend; 60,000 shares
      authorized,issued
      and outstanding as of March 31, 2009 and December 31, 2008
                                          888
                                          
                                          624Stockholders'
      equity:Preferred
      stock: $0.01 par value; 940,000 shares authorized, none
    issued
                                          -
                                          
                                          -Common
      stock; $0.001 par value; 100,000,000 shares authorized; 7,876,270 and
      7,870,538 sharesissued
      and outstanding as of March 31, 2009 and December 31, 2008
                                          8
                                          
                                          8Additional
      paid-in capital
                                          75,492
                                          
                                          77,091Accumulated
      other comprehensive loss
                                          (28)
                                          
                                          (28)Accumulated
      deficit
                                          (70,227)
                                          
                                          (71,353)Total
      stockholders' equity
                                          5,245
                                          
                                          5,718Total
      liabilities and stockholders' equity
                                          19,871
                                          
                                          18,716





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




1
 Table of Contents







Answers Corporation and Subsidiary


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





Three
      months ended March 312009
                        
                        2008$
                        
                        $Revenues:Advertising
      revenue
                        4,729
                        
                        3,013Answers
      service licensing
                        18
                        
                        184,747
                        
                        3,031Costs
      and expenses:Cost
      of revenue
                        1,059
                        
                        1,393Research
      and development
                        873
                        
                        875Community
      development, sales and marketing
                        499
                        
                        762General
      and administrative
                        1,219
                        
                        1,131Termination
      fees and write-off of costs relating to the terminatedLexico
      acquisition and abandoned follow-on offering
                        -
                        
                        2,543Total
      operating expenses
                        3,650
                        
                        6,704Operating
      income (loss)
                        1,097
                        
                        (3,673)Interest
      income (expense), net
                        (87)
                        
                        55Other
      income (expense), net
                        15
                        
                        (38)Gain
      resulting from fair value adjustment of Series A Warrants andwarrant
      to purchase units of Series B preferred stock and
      warrants
                        2,010
                        
                        -Income
      (loss) before income taxes
                        3,035
                        
                        (3,656)Income
      tax benefit (expense), net
                        6
                        
                        (11)Net
      income (loss)
                        3,041
                        
                        (3,667)Basic
      and diluted net earnings (loss) per common shareBasic
                        $0.34
                        
                        $(0.47)Diluted
                        $0.08
                        
                        $(0.47)Number
      of shares used in computing net earnings (loss) per common
      shareBasic
                        7,871,097
                        
                        7,859,890Diluted
                        8,861,905
                        
                        7,859,890




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


2
 Table of Contents





Answers Corporation and Subsidiary


Consolidated
Statements of Cash Flows (unaudited, in thousands)


Three
      months ended March 312009
                          
                          2008$
                          
                          $Cash
      flows from operating activities:Net
      income (loss)
                          3,041
                          
                          (3,667)Adjustments
      to reconcile net income (loss) to net cash flows from operating
      activities:Depreciation
      and amortization
                          256
                          
                          448Decrease
      (increase) in deposits in respect of employee severance
      obligations
                          34
                          
                          (179)(Decrease)
      increase in liability in respect of employee severance
      obligations
                          (35)
                          
                          311Stock-based
      compensation to employees and directors
                          386
                          
                          501Write-off
      of amounts paid in prior periods, relating to the terminated Lexico
      acquisitionand
      abandoned follow-on offering
                          -
                          
                          663Fair value adjustment ofSeries A Warrants and warrant to purchase units of
                            Series
      B preferred stock and warrants
                          (2,010)
                          
                          -Loss
      on disposal of property and equipment
                          6
                          
                          3Decrease
      in deferred tax asset
                          3
                          
                          3Loss
      (gains) from exchange rate forward contracts, net
                          11
                          
                          (38)Exchange
      rate losses
                          (15)
                          
                          38Changes
      in operating assets and liabilities:Increase
      in accounts receivable, and prepaid expenses and other current
      assets
                          (182)
                          
                          (22)(Increase)
      decrease in prepaid expenses and other  assets
                          (79)
                          
                          33(Decrease)
      increase in accounts payable
                          (260)
                          
                          (176)Increase
      in accrued expenses and accrued compensation
                          91
                          
                          280Decrease
      in deferred revenues
                          (6)
                          
                          (6)Net
      cash provided by (used in) operating activities
                          1,241
                          
                          (1,808)Cash
      flows from investing activities:Capital
      expenditures
                          (212)
                          
                          (231)Increase
      in long-term deposits
                          (7)
                          
                          (13)Proceeds
      from sales of  investment securities
                          -
                          
                          700Net
      cash (used in) provided by investing activities
                          (219)
                          
                          456Cash
      flows from financing activities:Repayment
      of capital lease obligation
                          (19)
                          
                          -Dividends
      paid
                          (91)
                          
                          -Exercise
      of common stock options
                          8
                          
                          -Net
      cash used in financing activities
                          (102)
                          
                          -Effect
      of exchange rate changes on cash and cash equivalents
                          (15)
                          
                          36Net
      increase (decrease) in cash and cash equivalents
                          905
                          
                          (1,316)Cash
      and cash equivalents at beginning of period
                          11,739
                          
                          6,778Cash
      and cash equivalents at end of period
                          12,644
                          
                          5,462Supplemental
      disclosures of cash flow information:Non-cash
      investing activities:Capital
      expenditures on account
                          89
                          
                          -Non-cash
      financing activities:Amortization
      of discounts from the Redpoint financing
                          247
                          
                          -




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


3
 Table of Contents


ANSWERS CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





Note
1 - Business




Answers
Corporation (“the Parent”) 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. The Parent and its wholly owned Subsidiary are collectively referred to
as “the Company.” The Parent is a public company and trades on the Nasdaq
Capital Market under the symbol “ANSW”.





As of
March 31, 2009, approximately $630 thousand of the Company’s net assets were
located outside of the United States.





The
Company provides answer-based search services to users primarily through its
websites, WikiAnswers.com and Answers.com.




On
June 16, 2008, the Company raised $6,000,000, before related fees and
costs, in a private placement offering. See Note 3 for further
details.





In the
first quarter of 2008, the Company’s planned acquisition of Lexico Publishing
Group LLC and the related planned offering of securities were terminated due to
unfavorable market conditions. As a result, the Company recorded a charge to its
statement of operations, amounting to approximately $2.54 million.





Note
2 - Summary of Significant Accounting Policies





Basis
of Presentation





The
accompanying consolidated financial statements include the accounts of Answers
Corporation and its Subsidiary and are presented in accordance with accounting
principles generally accepted in the United States of America (“U.S. GAAP”). All
significant intercompany balances and transactions have been eliminated in
consolidation.





The
accompanying unaudited consolidated financial statements were prepared in
accordance with the instructions for Form 10-Q 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-K for the year ended December 31, 2008. The results of operations for the
three months ended March 31, 2009 are not necessarily indicative of the results
that may be expected for the entire fiscal year or any other interim
period.





Use
of Estimates





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.


4
 Table of Contents








ANSWERS
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(UNAUDITED)








Note
2 - Summary of Significant Accounting Policies (cont’d)





Revenue
Recognition





The
Company, through its websites WikiAnswers.com and Answers.com, generates
revenues via advertising in the form of pay-per-performance ads and
paid-for-impression advertising. In the pay-per-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.





Almost
all of the Company’s advertising revenue is currently obtained through the
efforts of third parties and is not 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 earns revenues from partners that pay the Company for providing
them with answer-based services that they then use in their own products, via
co-branded web pages.





The
Company earned advertising revenue from its two web properties, as
follows:





Three
      months
                            ended
      March 312009
                          
                          2008Advertising
      revenueWikiAnswers.com
                          3,162
                          
                          1,185Answers.com
                          1,567
                          
                          1,8284,729
                          
                          3,013





Accounting
for Stock-Based Compensation





Stock-based
compensation is accounted for in accordance with Statement of Financial
Accounting Standards 123R, “Share-Based Payment”. The
fair value of stock options granted to employees and directors, is estimated at
the date of grant using the Black-Scholes option-pricing model, which takes into
consideration the share price at the date of grant, the exercise price of the
option, the expected life of the option, expected interest rates and the
expected volatility.


5
 Table of Contents


ANSWERS
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(UNAUDITED)





Note
2 - Summary of Significant Accounting Policies (cont’d)





Net
Earnings (Loss) per Common Share





Basic net
earnings (loss) per share is presented in conformity with Statement of Financial
Accounting Standards No. 128, “Earnings per Share”, and
computed using the weighted average common shares outstanding during the period.
Diluted earnings per share includes the effects of dilutive common stock
equivalents, consisting of the Series A Warrants, the Series B Unit Warrant,
outstanding share-based awards and unrecognized compensation expense and tax
benefits, to the extent the effect is not antidilutive, using the treasury stock
method. The Series A Convertible Preferred Stock has been excluded from the
computation of the diluted earnings per common share for the three months ended
March 31, 2009, as the inclusion of 1,356,786 common shares issuable upon its
conversion would have been anti-dilutive. Diluted net loss per share for the
three months ended March 31, 2008 is the same as basic net loss per share as the
inclusion of the Company’s outstanding common stock equivalents would have been
anti-dilutive.


The table
below presents the computation of basic and diluted net earnings (loss) per
common share:


Three
      months ended March 312009
                          
                          2008(in
      thousands, except share
                            and
      per share data)Basic net earnings (loss) per common share
      computationNumerator:Net
      income (loss)
                          $3,041
                          
                          $(3,667)Series
      A Convertible Preferred Stock dividends
                          (91)
                          
                          -Amortization
      of Series A Convertible Preferred Stock discounts
                          (247)
                          
                          -Net
      income (loss) attributable to common shares (basic)
                          $2,703
                          
                          $(3,667)Denominator:Weighted
      average number of common shares outstanding during the
    period
                          7,871,097
                          
                          7,859,890Basic
      net earnings (loss) per common share
                          $0.34
                          
                          $(0.47)Diluted net earnings (loss) per common share
      computationNumerator:Net
      income (loss)
                          $3,041
                          
                          $(3,667)Series
      A Convertible Preferred Stock dividends
                          (91)
                          
                          -Amortization
      of Series A Convertible Preferred Stock discounts
                          (247)
                          
                          -Gain
      resulting from fair value adjustment of Series A Warrants andwarrant to purchase units of Series B preferred stock and
      warrants
                          (2,010)
                          
                          -Net
      income (loss) attributable to common shares (diluted)
                          $693
                          
                          $(3,667)Denominator:Weighted
      average number of common shares outstanding during the
    period
                          7,871,097
                          
                          7,859,890Dilutive
      shares related to Series B Unit Warrant
                          462,514
                          
                          -Dilutive
      shares related to Series A Warrants
                          226,744
                          
                          -Dilutive
      shares related to options and warrants
                          301,550
                          
                          -Diluted
      common shares outstanding
                          8,861,905
                          
                          7,859,890Diluted
      net earnings (loss) per common share
                          $0.08
                          
                          $(0.47)


6
 Table of Contents


ANSWERS
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(UNAUDITED)





Note
2 - Summary of Significant Accounting Policies (cont’d)




Derivatives
and hedging




The
Company accounts for derivatives and hedging based on Statement of Financial
Accounting Standards 133,“Accounting for Derivative Instruments and Hedging Activities” (SFAS
133). SFAS 133 requires the Company to recognize all derivatives on the balance
sheet at fair value. If the derivatives
meet the definition of a hedge and are so designated, depending on the nature of
the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings, or recognized in other comprehensive
income until the hedged item is recognized in earnings. The ineffective portion
of a derivative’s change in fair value is recognized in earnings.




During
the three months ended March 31, 2009 and 2008, the Subsidiary exercised forward
contracts and entered into new option and forward contracts to hedge certain
foreign currency denominated expenses. Forward contracts exercised during the
three months ended March 31, 2009, amounted to $1,450,000 and forward and option
contracts open as of March 31, 2009, amounted to $1,300,000.




These
derivatives were not designated as hedging instruments under the rules of
SFAS 133 and, therefore, the net gains (losses) are recognized in earnings
as they occur. Such gains (losses) are included in operating expenses as
follows:





Three
      monthsended
      March 312009
                  
                  2008$
      (in thousands)Cost
      of revenue
                  (15)
                  
                  5Research
      and development
                  (61)
                  
                  20Sales
      and marketing
                  (15)
                  
                  2General
      and administrative
                  (36)
                  
                  11(127)
                  
                  38







Note
2 - Summary of Significant Accounting Policies (cont’d)





Recently
Issued Accounting Standards





On April
9, 2009, the Financial Accounting Standards Board (“FASB”) issued FSP FAS 157-4,
”Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly”. FSP FAS 157-4 provides additional guidance for estimating fair value
in accordance with SFAS 157, “Fair Value Measurements”, when the volume and
level of activity for the asset or liability have significantly decreased and
provides additional guidance on the Statement No. 157 disclosure requirements.
This FSP also includes guidance on identifying circumstances that indicate a
transaction is not orderly. FSP FAS 157-4 is effective for interim and annual
reporting periods ending after June 15, 2009, and should be applied
prospectively. Early adoption is permitted for periods ending after March 15,
2009. The adoption of FSP FAS 157-4 is not expected to have a material impact on
the Company’s consolidated financial position, results of operations or cash
flows.





On April
9, 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair
Value of Financial Instruments”. FSP FAS 107-1 and APB 28-1 apply to all
financial instruments within the scope of SFAS No. 107, “Disclosure about Fair Value of
Financial Instruments”, held by publicly traded companies. This FSP
amends SFAS 107, to require disclosures about fair value of financial
instruments for interim reporting periods of publicly traded companies as well
as in annual financial statements. This FSP also amends APB Opinion No. 28,
”Interim Financial
Reporting”, to require those disclosures in summarized financial
information at interim reporting periods. FSP FAS 107-1 and APB 28-1 is
effective for interim reporting periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. The adoption of FSP
FAS 107-1 and APB 28-1 is not expected to have a material impact on the
Company’s consolidated financial position, results of operations or cash
flows.


7
 Table of Contents


ANSWERS
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(UNAUDITED)





Note
3 – Redpoint Financing





General




On
June 16, 2008 (the “Closing Date”), pursuant to a private placement of the
Company’s securities, Redpoint Omega, L.P. and Redpoint Omega Associates, LLC
(collectively, “Redpoint”) purchased $6,000,000 of the Company’s Series A
Convertible Preferred Stock, convertible into 1,333,333 shares of common stock
at an initial conversion price of $4.50 per share, and Common Stock Purchase
Warrants exercisable for 666,667 shares of common stock at an exercise price of
$4.95 per share (“Series A Warrants”). Redpoint also received a warrant,
exercisable until June 16, 2009, to purchase units of up to $7 million of
Series B Convertible Preferred Stock and Common Stock Purchase Warrants
exercisable for 636,364 shares of common stock (“Series B Warrants”). The
Series B Convertible Preferred Stock is convertible into 1,272,727 shares
of common stock at an initial conversion price of $5.50 per share. The
Series B Warrants have an exercise price of $6.05 per share. After
deducting placement agent fees and legal expenses, the Company’s net proceeds
from the private placement were approximately $5,380,000. The Series A
Convertible Preferred Stock, the Series B Convertible Preferred Stock, the
Series A Warrants and the Series B Warrants are collectively referred to as the
“Redpoint Securities”. The warrant to purchase units of Series B Convertible
Preferred Stock and Series B Warrants is referred to as the “Series B Unit
Warrant”.




The
$6,000,000 of proceeds from the Redpoint Financing were first allocated to the
Series B Unit Warrant, which was classified as a liability, based on its fair
value, and the residual amount was allocated among the Series A Convertible
Preferred Stock and the Series A Warrants based on their relative fair values,
all in accordance with the guidance in SFAS 150, “Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity”, and
EITF 00-19, ”Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock”. The Series A Convertible Preferred Stock has been
classified as temporary equity, in accordance with the guidance in EITF D-98,
“Classification and
Measurement of Redeemable Securities”, and, prior to January 1, 2009, the
Series A Warrants were classified in permanent equity.




Transaction
costs were allocated on a pro rata basis, based on the amounts allocated to each
of the components of the transaction. Transaction costs relating to the Series A
Convertible Preferred Stock and Series A Warrants have been reflected as a
reduction to the proceeds from the issuance of such instruments. Transaction
costs relating to the Series B Unit Warrant were deferred and are being
amortized to interest expense over one year, which is the life of the
warrant.




Series
B Unit Warrant




The
Series B Unit Warrant is revalued each reporting date. The Company assessed the
value of the Series B Unit Warrant as of March 31, 2009, as compared to its
value, as reported, as of December 31, 2008. The decline in value of the Series
B Unit Warrant, which amounted to $1,528,000, has been included in the statement
of operations as gain resulting from fair value adjustment of Series A Warrants
and warrant to purchase units of Series B preferred stock and warrants for the
three months ended March 31, 2009.




Series
A Warrants




In 2008,
the relative fair value of the Series A Warrants, as explained above, was
recorded and classified as additional paid in capital in permanent equity, with
a corresponding discount to the Series A Convertible Preferred
Stock.




In June
2008, the FASB ratified the consensus of EITF Issue No. 07-5, “Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own
Stock”.  EITF 07-5 responded to practice questions about
whether an instrument or embedded feature is indexed to the reporting company’s
own stock by establishing a framework for the determinations and by nullifying
some previous requirements. The adoption of EITF 07-5’s requirements affects
issuers’ accounting for warrants and many convertible instruments with
provisions that protect holders from declines in the stock price (“Down-Round”
provisions). Warrants with such provisions are no longer recorded in equity, and
many of the convertible instruments with such provisions will have to be
“bifurcated,” with the conversion option separately accounted for as a
derivative under SFAS 133.


8
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ANSWERS
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(UNAUDITED)





Note
3 – Redpoint Financing (cont’d)





As a
result of the adoption of EITF 07-5, effective January 1, 2009, and due to the
Down-Round protection of the Series A Warrants, such warrants are separately
accounted for as a derivative under SFAS 133 and are no longer recorded in
equity but rather as a liability to be revalued at each reporting
date.





EITF 07-5
was initially applied by recording a cumulative-effect adjustment to opening
retained earnings as of January 1, 2009, for the effect of accounting for the
Series A Warrants as a liability. The following table summarizes the Redpoint
allocation had the Company been subject to the provisions of EITF 07-5 at the
Redpoint Closing Date:







Series
      A Convertible Preferred Stock
                    
                    Series
      A Warrants
                    
                    Series
      B Unit Warrant
                    
                    Total$
      (in thousands)Allocated
      amount
                    661
                    
                    1,828
                    
                    3,511
                    
                    6,000Less:
      Transaction costs
                    (69)
                    
                    (188)
                    
                    (363)
                    
                    (620)592
                    
                    1,640
                    
                    3,148
                    
                    5,380





On
January 1, 2009, the Company recorded a cumulative effect of change in
accounting principle as reflected in the following table (in
thousands):





December
      31, 2008
                        
                        Effect
      of
                          Adoption
      of EITF 07-5
                        
                        January
      1, 2009$
                        
                        $
                        
                        $Additional
      paid-in capital
                        77,091
                        
                        (1,657)(1)
                        
                        75,434Accumulated
      deficit
                        (71,353)
                        
                        (1,726)(2)
                        
                        (73,267)(188)(3)Long-term
      liability – Series A Warrants
                        -
                        
                        3,554(4)
                        
                        3,554Series
      A convertible preferred stock
                        624
                        
                        17(5)
                        
                        641-





(1)
            Reflects
      the re-allocation of the Series A Warrants from equity to liabilities and
      the reduction of the discount relating to the Beneficial Conversion
      Feature.


(2)
            Reflects
      the cumulative change in the fair value of the Series A Warrants between
      June 16, 2008 and December 31,
2008.


(3)
            Reflects
      the deferred charges attributable to the Series A Warrants that would have
      been expensed at the Redpoint Closing
Date.


(4)
            Reflects
      the fair value of the Series A Warrants as of December 31,
      2008.


(5)
            Reflects
      the increased amortization due to change in
  discounts.





The
Company assessed the value of the Series A Warrants as of March 31, 2009, as
compared to its value as of January 1, 2009. The decline in value of $482,000
has been included in the statement of operations as gain resulting from fair
value adjustment of Series A Warrants and warrant to purchase units of Series B
preferred stock and warrants for the three months ended March 31,
2009.


9
 Table of Contents


ANSWERS
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(UNAUDITED)





Note
4 – Fair Value Measurements




The
Company measures fair value in accordance with Statement of Financial Accounting
Standards 157,“Fair Value
Measurements”(SFAS 157). SFAS 157 clarifies that fair value is an exit
price, representing the amount that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants.
As such, fair value is a market-based measurement that should be determined
based on assumptions that market participants would use in pricing an asset or a
liability. As a basis for considering such assumptions, SFAS 157 establishes a
three-tier value hierarchy, which prioritizes the inputs used in the valuation
methodologies in measuring fair value:







Level 1 - Observable
inputs that reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets.


Level 2 - Include other
inputs that are directly or indirectly observable in the
marketplace.


Level 3 - Unobservable
inputs which are supported by little or no market activity.





The fair
value hierarchy also requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair
value.





The
Company measures its cash equivalents, foreign currency derivative contracts,
Series A Warrants and Series B Unit Warrant, at fair value. In accordance with
SFAS 157, the Company’s cash equivalents and foreign currency derivative
contracts are classified within Level 1 or Level 2. This is because the cash
equivalents and foreign currency derivative contracts are valued using quoted
market prices or alternative pricing sources and models utilizing market
observable inputs. The Series A Warrants and the Series B Unit Warrant are
classified within Level 3 because they are valued using the Black-Scholes model
in the case of the Series A Warrants and a combination of Monte-Carlo simulation
and the Black-Scholes model in the case of the Series B Unit Warrant. Some of
the inputs to these valuations are unobservable in the market and are
significant.




Assets
and liabilities measured at fair value are summarized below:







Fair value measurement at reporting date usingDescription
                                      
                                      March31,
    2009
                                      
                                      Quoted Prices in
                                        Active Markets for
                                        Identical Assets
                                        (Level
      1)
                                      
                                      Significant Other
                                        Observable Inputs
                                        (Level
      2)
                                      
                                      Significant
                                        Unobservable Inputs
                                        (Level
      3)$
      (in thousands)AssetsCash
      Equivalents  - Money Market Funds
                                      
                                      10,638
                                      
                                      10,638
                                      
                                      -
                                      
                                      -Total
      Assets
                                      
                                      10,638
                                      
                                      10,638
                                      
                                      -
                                      
                                      -LiabilitiesForeign
      currency derivative contracts
                                      
                                      11
                                      
                                      -
                                      
                                      11
                                      
                                      -Series
      A Warrants
                                      
                                      3,072
                                      
                                      -
                                      
                                      -
                                      
                                      3,072Warrant
      to purchase units ofSeries
      B preferred stock and warrants
                                      
                                      7,170
                                      
                                      -
                                      
                                      -
                                      
                                      7,170Total
      Liabilities
                                      
                                      10,253
                                      
                                      -
                                      
                                      11
                                      
                                      10,242





10
 Table of Contents


ANSWERS
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(UNAUDITED)





Note
4 – Fair Value Measurements (cont’d)




The
following table presents the Company’s liabilities measured at fair value using
significant unobservable inputs (Level 3) as defined in SFAS 157, as of
March 31, 2009:







Level
      3$
      (in thousands)Balance
      at December 31, 2008
                    8,698Cumulative
      effect of change in accounting principle – adoption of EITF
      07-5
                    3,554Decline
      in fair value between January 1, 2009 and March 31, 2009
                    (2,010)Balance
      at March 31, 2009
                    10,242







Note
5 - Series A Convertible Preferred Stock





As a
result of the Redpoint Financing (see Note 3), the Company’s Amended and
Restated Certificate of Incorporation has been amended to provide for the
issuance of up to 60,000 shares of Series A Convertible Preferred Stock
with a stated value of $100 per share (the “Stated Value”) pursuant to the
Certificate of Designations, Number, Voting Powers, Preferences and Rights of
Series A Convertible Preferred Stock filed with the State of Delaware on
June 16, 2008 (the “Certificate of Designations”).





The
following table summarizes the changes in the Series A Convertible Preferred
Stock resulting from issuance through March 31, 2009:





$
      (in thousands)Gross
      proceeds
                    6,000Issuance
      costs
                    (204)Discount
      resulting from the issuance of the Series A Warrants
                    (517)Discount
      resulting from the issuance of the Series B Unit Warrant
                    (3,511)Discount
      resulting from the Beneficial Conversion Feature
                    (1,768)Cumulative
      effect of change in accounting principle - adoption of EITF 07-5 (see Note
      3)
                    17Amortizations
      of discounts from closing through March 31, 2009
                    765Accrued
      dividends
                    106888





The
Series A Convertible Preferred Stock accrues cumulative dividends at a rate
of 6% per annum whether or not dividends have been declared by the Company’s
Board of Directors and whether or not there are profits, surplus or other funds
available for the payment of such dividends. Due to the Company’s decision to
pay dividends accrued through September 30, 2008, in the form of additional
shares of Series A Convertible Preferred Stock, the dividend accrual through
such date is reflected as an increase in the stated value of the Series A
Convertible Preferred Stock with a corresponding decrease in the additional
paid-in capital. Dividends for the six months ending March 31, 2009, were paid
in cash.


11
 Table of Contents


ANSWERS
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(UNAUDITED)





Note
6 – Stockholders’ Equity





General





The
following table summarizes the changes in the Company’s stockholders’ equity
during the three-month period ending March 31, 2009:





$
      (in thousands)December
      31, 2008
                  5,718Stock-based
      compensation
                  386Amortizations
      of discounts for the three months ended March 31, 2009
                  (247)Dividends
                  (91)Cumulative
      effect of change in accounting principle - adoption of EITF
      07-5
                  (3,570)Exercise
      of stock options
                  8Net
      income for the period
                  3,041March
      31, 2009
                  5,245








Common
Stock





During
the three months ended March 31, 2009, the Company issued a total of 5,732
shares of common stock due to the exercise of 5,732 outstanding stock options,
for total consideration of approximately $8,000.





Stock
Warrants





As of
March 31, 2009, there were 1,824,430 outstanding stock warrants with a weighted
average exercise price of $12.09. All warrants are exercisable immediately. No
warrants were exercised during the three months ended March 31,
2009.





Stock
Options





During
the three months ended March 31, 2009, the Company granted a total of 10,000
stock options to its employees at an exercise price of $6.51 per option.
Additionally, during the same period, 5,732 stock options were
exercised.





The total
fair value of stock options vested during the three months ended March 31,
2009, amounted to $386 thousand and was recorded as stock-based
compensation expense.





As of
March 31, 2009, 257,863 and 156,788 options were available for grant under the
2005 Plan and the 2004 Stock Plan, respectively. All Prior Option Plans are
closed for future grants.


12
 Table of Contents


ANSWERS
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(UNAUDITED)





Note
7 - Commitments and Contingencies






(a) Future minimum lease
payments under non-cancelable operating leases for office space and cars, as of
March 31, 2009, are as follows:




Year
      ending December 31
                          $
      (in thousands)2009
      (nine months ending December 31, 2009)
                          3462010
                          2752011
                          13634




Rental expense for operating
leases for the three months ended March 31, 2009 and 2008 was approximately
$139,000, and $133,000, respectively.




(b) Future
minimum lease payments under non-cancelable capital leases for computer
equipment, as of March 31, 2009, are as follows:




Principal
                    
                    InterestYear
      ending December 31
                    $
      (in thousands)2009
      (nine months ending December 31, 2009)
                    59
                    
                    62010
                    82
                    
                    32011
                    24
                    
                    1165
                    
                    10






(c) A
bank guarantee given to the Subsidiary’s landlord, is secured by a lien on some
of the Subsidiary’s bank deposits. As of March 31, 2009, such deposits amounted
to $431,000, including a restricted long-term deposit of
$140,000




(d)In
connection with the Redpoint Financing the Company entered into a registration
rights agreement with Redpoint, pursuant to which the Company agreed to register
with the SEC for resale the common stock underlying the Redpoint Securities. In
connection with the registration rights agreement, the Company agreed to pay a
penalty of 1.0% per month, on a daily pro rata basis, up to a maximum of 8.0%,
of the aggregate purchase price, as partial liquidated damages, for certain
default events and subject to certain circumstances. The partial liquidated
damages may trigger if the registration statement, which the Company filed on
July 30, 2008, and which was declared effective by the SEC on September 16,
2008, ceases to remain continuously effective.




(e) 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 various consulting arrangements. As of March 31, 2009, the total
future commitments under these arrangements amounted to approximately
$950,000.


13
 Table of Contents


ANSWERS
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(UNAUDITED)





Note
7 - Commitments and Contingencies (cont’d)




(f) In
the ordinary course of business, the Company 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 its breach of agreements, services to be provided by it,
or from intellectual property infringement claims made by third parties.
Additionally, the Company, through its operating agreement, has indemnified its
members, officers, employees, and agents serving at the request of the Company
to the fullest extent permitted by applicable law. It is not possible to
determine the maximum potential amount of liability 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,
the Company has not incurred costs as a result of obligations under these
agreements and has not accrued any liabilities related to such indemnification
obligations in its accompanying financial statements.






(g)From
time to time, the Company receives various legal claims incidental to its normal
business activities, such as intellectual property infringement claims and
claims of defamation and invasion of privacy. Although the results of claims
cannot be predicted with certainty, the Company believes the final outcome of
such matters will not have a material adverse effect on its financial position,
results of operations, or cash flows.







Note
8 – Risks and Uncertainties




(a)Practically all of
the Company's advertising revenue was generated through the efforts of third
party suppliers (the “Monetization Partners”). During the three months ending
March 31, 2009, the Company earned approximately 92% of its advertising revenue
through one of its Monetization Partners, Google Inc. (“Google”), compared to
76% of advertising revenue from Google during the first quarter of
2008.
  (b)Search engines serve as
origination Web properties for users in search of information, and the Company’s
Websites’ topic pages often appear as one of the top links on the pages returned
by search engines in response to users’ search queries. Thus, in addition to the
ads the Company receives through Google, its traffic is mostly driven by search
engine traffic, mostly from the Google search engine. For the three months ended
March 31, 2009, according to the Company’s internal estimates, search engine
traffic represented approximately 81% of traffic. Search engines, at any time
and for any reason, could change their algorithms that direct queries to the
Company’s Web properties or could restrict the flow of users visiting the
Company’s Web properties specifically. In fact, on occasion the Company’s Web
properties have experienced decreases in traffic, and consequently in revenue,
due to these search engine actions. The Company cannot guarantee that it will
successfully react to these actions in the future and recover lost traffic.
Accordingly, a change in algorithms that search engines use to identify Web
pages towards which traffic will ultimately be directed, or a restriction on the
flow of users visiting the Company’s Web properties from search engines, could
cause a significant decrease in traffic and revenues.
  (c) A significant
portion of the Company’s expenses are denominated in NIS. The Company expects
the amount of NIS expenses to increase in the foreseeable future. Although the
average value of the dollar during the first quarter of 2009 increased 6.2% as
compared to its value in the fourth quarter of 2008, it still has not recovered
the declines in its average value during the years 2008 and 2007 (12.7% and
7.8%, respectively, as compared to its value in the years immediately preceding
such years). If the value of the U.S. dollar weakens against the value of
NIS, there will be a negative impact on the Company’s operating costs. In
addition, to the extent the Company holds monetary assets and liabilities that
are denominated in currencies other than the U.S. dollar, the Company will
be subject to the risk of exchange rate fluctuations. The Company uses various
hedging tools, including forward contracts and options, to lessen the effect of
currency fluctuations on its results of operations.


14
 Table of Contents





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





The following discussion and
analysis should be read in conjunction with, and is qualified in its entirety
by, our financial statements (and notes related thereto) and other more detailed
financial information appearing elsewhere in this report. Consequently,
you should read the following
discussion and analysis of our financial condition and results of operations
together with such financial statements and other financial data included
elsewhere in this report. Some of the information contained in this discussion
and analysis or set forth elsewhere in this report, including information with
respect to our plans and strategy for our business, includes forward-looking
statements that involve risks and uncertainties. You should review the “Risk
Factors” section of this report for a discussion of important factors that could
cause actual results to differ materially from the results described in or
implied by the forward-looking statements contained in the following discussion
and analysis. See also “Risk Factors” in Part II, Item 1A, of this
report.





Overview





We own
and operate two leading Web properties dedicated to providing useful answers in
thousands of categories. WikiAnswers.com is a community-based social knowledge
Q&A platform, leveraging wiki-based technologies. Through the contributions
of WikiAnswers.com's user-community and dedicated volunteer supervisors, answers
to the site’s growing database of questions are added and improved over time.
Our award-winning reference site, Answers.comAnswers.com, includes reference
content on millions of topics from over 250 licensed sources. According to
comScore, our Web properties had approximately 26.5 million unique visitors in
the U.S. in March 2009, ranking Answers Corporation number 28 in the top
U.S. Web properties for that month. Also according to comScore, our Web
properties had approximately 50.2 million unique worldwide visitors in March
2009, ranking Answers Corporation number 47 worldwide. Our goal is to
become the leading online provider of answers about anything and the best place
for people to share answers to questions.





Revenue





Traffic





Our
revenue is driven by the traffic generated by our Web properties and our ability
to effectively monetize that traffic. Our current sources of traffic include the
following:





•
            Search
      engines:  Users submit queries and search engines respond by
      generating a list of Web pages that they deem likely to offer the most
      relevant content. When our pages rank high in the algorithmic systems of
      search engines, our results are more likely to be accessed by users. For
      the first quarter of 2009, according to our internal estimates, this
      source of traffic represented approximately 81% of our overall
      traffic.





•
            Direct
      users:  Users visiting and returning to our home pages. For the
      first quarter of 2009, according to our internal estimates, direct users
      represented approximately 14% of our overall
  traffic.





•
            Google’s
      definition link:  We have an informal, non-contractual
      relationship with Google under which Google links certain search results
      related to definitional queries to Answers.com. For the first quarter of
      2009, according to our internal estimates, this source of traffic
      represented approximately 5% of our overall
  traffic.





Since
most of our traffic originates from search engines, we expend considerable
resources improving the volume of this traffic. The industry commonly refers to
such efforts as search engine optimization, or SEO. Our Web properties have at
times experienced decreases in traffic, and consequently decreases in revenue,
due to search engine actions, including actions by Google.





Monetization





Advertising
Revenue.  We earn practically all of our revenue from
advertising. There are two primary categories of Internet advertising:
pay-per-performance, also known as cost-per-click, or CPC, and
pay-per-impression, also known as display ads or cost per 1,000 impressions, or
CPM. In the pay-per-performance model, we earn revenue based on the number of
clicks associated with an ad; in the pay-per-impression model, we derive revenue
from the display of ads. The overwhelming majority of our advertising revenue is
earned from CPC advertising. We obtain CPC and CPM advertisements from
third-party ad networks. These ad networks compensate us by paying us a portion
of the revenue they earn from advertisers for our provision of promotional space
on our Web properties.


15
 Table of Contents


We gauge
the effectiveness of our monetization efforts and trends by measuring our
revenue per thousand page views, or RPM. Throughout this annual report, we refer
to estimates of traffic, or page views. In our Management’s Discussion and
Analysis of Financial Condition and Results of Operations prior to our quarterly
report on Form 10-Q for the quarterly period ended June 30, 2008, we tracked the
traffic on our Answers.com and WikiAnswers.com Web properties using two separate
systems:





·
            Answers.com
      traffic was measured using our internally developed server-side, log-based
      system (“Internal Data Warehouse”). This system was designed to identify
      traffic from search engine robots and other known Web robots, commonly
      referred to as Web spiders or Web crawlers, as well as from suspected
      automated spidering scripts, and excluded such traffic from the traffic
      activity measurements.





·
            WikiAnswers.com
      traffic was tracked using HBX Analytics, a tag-based web analytics system
      offered by Omniture, Inc. Traffic measurements from this system are
      generated by our placement of tags on our WikiAnswers.com pages. The HBX
      Analytics system then independently generates traffic
    metrics.





Beginning
with the Management’s Discussion and Analysis of Financial Condition and Results
of Operations contained in our quarterly report on Form 10-Q for the quarterly
period ended June 30, 2008, all traffic measurements (including measurements
previously reported in past filings using our Internal Data Warehouse) for
Answers.com are also presented based on the HBX Analytics data. We estimate that
the historical page views for Answers.com pursuant to HBX Analytics data, as set
forth in our reports beginning with our  quarterly report on Form 10-Q
for the quarterly period ended June 30, 2008, are approximately 11% lower than
the traffic measurements reported in previous filings. Consequently, our
Answers.com RPMs, as reported in our current reports, reflect higher values than
those presented in previous filings.





We also
use Google, Inc.’s Google Analytics measurement services and Google AdSense data
for various internal analyses. Our breakdown of our traffic sources, noted
above, is based on such data. Google Analytics measurements are generated by our
placement of tags on our Web properties’ pages, which Google Analytics uses to
count and report audience metrics independently.





In this
Quarterly Report, statistics gathered from HBX Analytics and Google Analytics
are also referred to as “internal estimates”.





Third
party services measuring traffic audiences may provide different estimates than
the estimates reported by other similar services and our internal estimates.
These discrepancies may result from differences in methodologies applied or the
sampling approaches used by each measuring service.





We also
generate WikiAnswers.com community-related statistics, including total number of
questions, answers and users, from our own systems contained in the
WikiAnswers.com Web property.





Our
primary third party ad network, Google AdSense, accounted for approximately 91%
of our total revenue in the first quarter of 2009 as compared to approximately
76% of our total revenue in the first quarter of 2008 and as compared to 88% of
our total revenue in the fourth quarter of 2008. We obtain CPC ads from Google.
In addition to Google, we utilize the services of other third party ad networks
that provide us with CPM ads. We expect that for the foreseeable future, CPC ads
will continue to generate the overwhelming majority of our revenue, and we have
no plans to reduce our reliance on CPC ads. The Google Services Agreement (GSA)
is set to expire on January 31, 2010, unless renewed prior to such date.
Although there are many companies that provide third party ad networks, the loss
of Google as a third party ad network could have a material adverse impact on
our financial condition and results of operations, as we may not succeed in
receiving terms and ad services as favorable as those provided under our
GSA.





Direct Ad
Sales.  In an effort to improve monetization, in the fourth
quarter of 2006, we began marketing directly to advertisers and generating
additional advertising revenue through an in-house team of direct ads
salespeople. However, at the end of the second quarter of 2008 we decided to
suspend this business initiative, and by the end of the third quarter of 2008 we
no longer employed a sales staff. We initially saw promise in this area, with
the belief that our Web properties would see RPM increases as a result of direct
ad sales. However, at the end of the second quarter of 2008, we decided not to
pursue that strategy and to instead focus on selling ads through advertising
networks, primarily Google AdSense. This decision allowed us to focus on our
core competency – growing the WikiAnswers.com community, growing traffic to our
Web properties and monetizing via Google and other ad networks.





Licensing
Revenue.  We earn an immaterial portion of our 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. Revenue from these
arrangements are based on various formulas, including fees based on the number
of user queries and fixed periodic fees.


16
 Table of Contents





Costs
and Expenses





Cost
of Revenue





Cost of
revenue consists of fees to third parties to license content, data center costs,
including depreciation of information technology assets, compensation, travel
and overhead costs relating to personnel who are engaged in content editing,
content integration and production operations ,Web search service fees, ad
serving fees, amortization of the cost of acquired software used in our
products, and contractual revenue sharing fees to various Web property operators
for visitors directed to our Web properties, or traffic acquisition costs. Our
cost of revenue, as a percentage of revenue, is expected to increase over the
next several quarters as we add our second colocation facility, sometime in the
second quarter of 2009. Thereafter, as revenues increase, we generally expect
our cost of revenue as a percentage of revenue to decrease, since many of its
components, such as content licensing, are not directly tied to
revenue.





Research
and Development Expenses





Research
and development expenses consist of compensation, travel and overhead costs of
personnel conducting research and development of our products and services, and
consulting costs. Our research and development team works primarily on projects
to improve and enhance product functionality, quality, performance, user
interface, and monetization. We generally expect that our research and
development expenses will decline as a percentage of revenue as we grow our
revenue.





Community
Development, Sales and Marketing Expenses





Community
development, sales and marketing expenses consist of compensation, travel and
overhead costs of personnel in-charge of developing and encouraging the
WikiAnswers.com community of users asking and answering questions and volunteer
supervisors, sales and marketing, product management, marketing and market
information services, public relations and promotional costs. As a result of our
termination of direct ad sales in 2008, we expect that the primary future growth
in this expense line item will be in the area of WikiAnswers.com community
development. We generally expect that our sales, marketing and community
development expenses will decline as a percentage of revenue as we grow our
revenue.





General
and Administrative Expenses





General
and administrative expenses consist primarily of compensation, travel and
overhead costs for financial, legal, human resource, and other administrative
personnel, professional services, including investor relations, legal,
accounting, payroll and other consulting fees, insurance fees, amortization of
domain names, and other general corporate expenses. We generally expect that our
general and administrative expenses will decline as a percentage of revenue as
we grow our revenue.




Overhead
Costs





Overhead
costs consist primarily of rent, telecommunications, utilities and depreciation
expenses.





Stock-Based
Compensation





New
employees typically receive stock option awards within three months of their
start date. From time-to-time, we also grant additional stock option awards to
existing employees and directors. We account for stock-based awards under
SFAS No. 123 (revised 2004), “Share-Based Payment”,or
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 awards are expected to vest. Costs
resulting from stock-based compensation are part of our compensation expense and
are included in the operating expense categories in our Statements of
Operations.




Impact
of Currency Fluctuations





The
dollar cost of our operations in Israel is heavily influenced by changes in the
value of the dollar in relation to the New Israeli Shekel (“NIS”), mostly due to
the NIS-based salaries of our Israel-based employees. In the first quarter of
2009, the average value of the dollar increased 12%, as compared to its value in
the same quarter in the prior year, which should have resulted in lower dollar
value of expenses. However, we entered into option and forward contracts to
hedge some of our NIS-based expenses. These derivatives were not designated as
hedging instruments under the rules of SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities”, or SFAS 133, and therefore, the
net gains (losses) arising from these derivatives are recognized in operating
expenses as they occur. Such gains (losses) amounted to a loss of $127 thousand
in the first quarter of 2009 and a gain of $38 thousand in the first quarter of
2008.





We expect
our NIS-based expenses in 2009, to at least remain at 2008 levels, which
approximated $6.5 million, thus, if the dollar continues to fluctuate as
compared to the NIS, we will experience further fluctuation in the dollar amount
of our NIS-based expenses.





Termination
fees and write-off of cost relating to the terminated Lexico acquisition and
abandoned follow-on offering





In the
first quarter of 2008, we recorded a charge of $2,543 thousand consisting of
$1,618 thousand of accounting, legal, banking, consulting and travel costs we
incurred in 2007 and in the first quarter of 2008, in connection with the
terminated acquisition of Lexico and abandoned follow-on offering of securities,
and $925 thousand relating to termination fees we paid as a result of the
termination of the acquisition and a Securities Purchase Agreement with an
institutional investor, for the optional purchase and sale of $8.5 million
of our senior secured convertible notes. A summary of the events that led to the
termination of the acquisition and financing follows:





On
July 13, 2007, we entered into a Purchase Agreement that we subsequently
amended on July 31, 2007 and November 12, 2007; and on January 15, 2008 we
entered into an Amended and Restated Purchase Agreement, which we subsequently
amended on February 8, 2008, to acquire all of the outstanding limited liability
interests of Lexico Publishing Group, LLC for an aggregate purchase price of
$100 million in cash, subject to adjustments for closing net working
capital.  Consummation of the acquisition of Lexico was subject to our
ability to secure financing for the acquisition.





On July
17, 2007, we filed a universal shelf registration statement on Form S-3 with the
Securities and Exchange Commission which was declared effective on August 6,
2007.  The registration statement covers up to an aggregate of $140
million of common stock, preferred stock, warrants, debt securities, units or
any combination thereof. On January 16, 2008, we filed a prospectus supplement
for a proposed public offering which we later amended on February 8,
2008.  On February 13, 2008 we canceled our proposed public offering
due to unfavorable market conditions. On March 1, 2008, the members of Lexico
terminated the purchase agreement, due to our inability to finance the
acquisition.  Additionally, in connection with the Lexico transaction,
on January 15, 2008, we entered into a Securities Purchase Agreement with
an institutional investor, or the senior notes investor, for the optional
purchase and sale of $8.5 million of our senior secured convertible notes.
Our intent was to close the senior secured convertible notes financing in
conjunction with our follow-on offering, if we needed such funds to close the
Lexico acquisition. Since our purchase agreement with Lexico was terminated, the
Securities Purchase Agreement also terminated.





Interest
Income (Expense), Net





Interest
income (expense), net, is comprised of interest income earned on cash, cash
equivalents and investment security balances, interest expense on capital
leases, and amortization of deferred costs we incurred in connection with the
issuance of the Series B Unit Warrant, in June 2008.





Other
Income (Expense), Net





Other
income (expense), net, is comprised of foreign currency gains and
losses.





Loss
Resulting from Fair Value Adjustment of Series A Warrants and Warrant to
Purchase Units of Series B Preferred Stock and Warrants





The
Series A Warrants and the Series B Unit Warrant, which are components of a
transaction with Redpoint Omega, L.P. and Redpoint Omega Associates, LLC
(collectively, “Redpoint”) that took place on June 16, 2008, are revalued
each reporting date. Any change to their fair value is recorded as a gain or
loss in the statement of operations. Background regarding the transaction with
Redpoint follows.





17
 Table of Contents






Redpoint
Financing




On
June 16, 2008, pursuant to a private placement of our securities, Redpoint
purchased $6,000,000 of our Series A Convertible Preferred Stock (60,000
shares), convertible into 1,333,333 shares of common stock at an initial
conversion price of $4.50 per share, along with Common Stock Purchase Warrants
exercisable for 666,667 shares of common stock at an exercise price of $4.95 per
share (“Series A Warrants”). In conjunction therewith, Redpoint also received a
warrant, exercisable until June 16, 2009, to purchase units of up to $7
million of Series B Convertible Preferred Stock (70,000 shares) and Common
Stock Purchase Warrants exercisable for 636,364 shares of common stock (“Series
B Warrants”). The warrant to purchase units of Series B Convertible
Preferred Stock and Series B Warrants is referred to as the “Series B Unit
Warrant”. The Series B Convertible Preferred Stock is initially convertible
into 1,272,727 shares of common stock at an initial conversion price of $5.50
per share. The Series B Warrants have an exercise price of $6.05 per
share.  After deducting placement agent fees and legal expenses, our net
proceeds from the private placement were $5,380,000. This transaction is
collectively referred to as the “Redpoint Financing”. The Series A Convertible
Preferred Stock, the Series B Convertible Preferred Stock, the Series A Warrants
and the Series B Warrants are collectively referred to as the “Redpoint
Securities”.




The
Series A Convertible Preferred Stock has the rights and preferences set
forth in our Certificate of Designations, Number, Voting Powers, Preferences and
Rights of Series A Convertible Preferred Stock, which, as of its date of filing
on June 16, 2008, amended our Amended and Restated Certificate of Incorporation.
The Series B Convertible Preferred Stock, if purchased by Redpoint pursuant
to the Series B Unit Warrant, will have similar rights and preferences as the
Series A Convertible Preferred Stock. For a detailed description of the
rights and preferences of the Series A Convertible Preferred Stock, we refer you
to the notes to the financial statements included in our annual report on form
10-K filed on March 9, 2009.




In
connection with the Redpoint Financing, Redpoint received the right to appoint
an individual to serve as a voting member of our board of directors. If
Redpoint exercises the Series B Unit Warrant and meets certain ownership
requirements, it will be entitled to appoint a second member to our
board.




In
connection with the private placement, we entered into a registration rights
agreement with Redpoint, pursuant to which we agreed to register with the SEC,
for resale, the common stock underlying the Series A Convertible Preferred Stock
and the Series A Purchase Warrants. In connection with the registration rights
agreement, we agreed to pay a penalty of 1.0% per month, on a daily pro rata
basis, up to a maximum of 8.0%, of the aggregate purchase price, as partial
liquidated damages, for certain default events and subject to certain
circumstances. The partial liquidated damages will trigger if the registration
statement filed with the SEC on July 30, 2008, and declared effective on
September 16, 2008, ceases to remain continuously effective.





Income
Tax Benefit (Expense), Net





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 different methods and timing for certain expenses. 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. At March 31,
2009, our deferred tax assets were almost entirely fully 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.





Our
Israeli subsidiary had net income in 2008 and 2007, resulting from services we
receive from the Israeli subsidiary. The Israeli subsidiary charges us for
research & development and certain management services it provides us, plus
a profit margin ranging from 6.3% to 12.5%. However, the subsidiary is an
“approved enterprise” (and a “beneficiary enterprise” as later amended in
amendment No. 60 to the Investment Law) under Israeli law, which means that
income arising from the subsidiary’s approved research & development
activities, is subject to zero tax under the “alternative benefit” path for a
period of ten years. Management services are taxable at the Israeli corporate
tax rate in effect at the time (26 % and 27% in 2009 and 2008, respectively).
Currently, the subsidiary operates under two separate “approved enterprise”
plans, ending December 31, 2009 and December 31, 2014, respectively and a
“beneficiary enterprise” plan ending December 31, 2017.  After the
close of the first approved enterprise plan in 2009, the subsidiary will have to
pay taxes at the regular corporate income tax rate on the relative proportion of
taxable income attributable to the first approved enterprise plan. In the event
of distributions by the subsidiary to the parent, 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. At present, we do not plan on having the subsidiary distribute a
dividend to Answers Corporation.





Revenue





Three
      Months Ended March 31,2009
                                    
                                    2008
                                    
                                    Change($
      - in thousands)WikiAnswers.com
      advertising revenue
                                    3,162
                                    
                                    1,185
                                    
                                    1,977Answers.com
      advertising revenue
                                    1,567
                                    
                                    1,828
                                    
                                    (261)Answers
      services licensing revenue
                                    18
                                    
                                    18
                                    
                                    -4,747
                                    
                                    3,031
                                    
                                    1,716





Revenue
increased $1,716 thousand, or 57%, to $4,747 thousand for the quarter ended
March 31, 2009 from $3,031 thousand for the quarter ended March 31,
2008.





WikiAnswers.com
advertising revenue in the first quarter of 2009 increased $1,977 thousand, or
167%, compared to the same quarter in 2008, due to increases in
traffic.  WikiAnswers.com average daily page views in the first
quarter of 2009 were 5,337,000, an increase of 183% compared to the average
daily page views of 1,885,000 in the same quarter in 2008. We believe that the
dramatic growth that WikiAnswers.com has experienced is primarily due to the
unique dynamics of the site. As our database of questions and answers grows, we
draw new traffic, primarily from SEO, which in turn results in the creation of
new questions and answers, or new content, which in turn drives additional
growth. This is a self-perpetuating growth model. Notwithstanding our belief in
this growth model, we believe that as WikiAnswers.com grows larger, our rate of
growth will decelerate as compared to the rates we have experienced to date. The
growth in revenue from traffic growth that we experienced in the first quarter
of 2009 as compared to the same quarter in 2008 was partially offset by a
decrease in our RPM. The WikiAnswers.com RPM in the first quarter of
2009  was $6.58, a decrease of 5% compared to the RPM of $6.91 in the
same quarter in 2008. We have found that this metric often moves up or down
moderately due to many factors including how we are evaluated by our advertising
partners. Further, we believe, the general economic downturn has also influenced
the RPM.


18
 Table of Contents








Answers.com
advertising revenue in the first quarter of 2009 decreased $261 thousand, or
14%, compared to the same quarter in 2008. The decrease was the result of
decreased traffic and lower RPM.  Answers.com average daily page views
in the first quarter of 2009 were 2,982,000, a decline of 8% compared to the
average daily page views of 3,225,000 in the same quarter in 2008. The decline
in traffic is primarily due to the fact that we have not added significant
amounts of new content into Answers.com since July 2007, the date that Google
made a change to its search algorithm that significantly impacted Answers.com
traffic, reducing our overall traffic by approximately 28% based on the average
traffic directed to Answers.com from Google for the week prior to the adjustment
as compared to the week after. Prior to such Google algorithm change, we
operated on the premise that adding rich unique content to Answers.com
positively impacted the site’s traffic growth, guided by the principle that rich
unique content was highly valued by the search engines and their content
indexing programs. While Answers.com still receives significant SEO traffic to
its rich content pages, the Google algorithm change caused us to doubt whether
licensing additional content would yield a positive return. Thus, we have not
added any significant new content into Answers.com since the Google algorithm
change. However, since such time, we ran certain tests on Answers.com that have
led us to believe that adding content may, once again, be a viable way to grow
traffic, thus, we are planning on licensing new content in order to grow
Answers.com. Notwithstanding, given the significance of the opportunity we
believe we have with WikiAnswers.com, we do not expect to invest significant
amounts of resources, above current levels, to implement a strategy of licensing
new content.





The
Answers.com RPM in the first quarter of 2009 was $5.84, a decrease of 6%,
compared to the RPM of $6.23 in the same quarter in 2008. The elimination of
direct ad sales, which were $231 thousand in the first quarter of 2008, at the
end of the third quarter of 2008, caused the RPM to decline, however eliminating
direct ad sales also contributed to expense savings that is discussed further,
later in this report. Additionally, we believe, the general economic downturn
also influenced the RPM. Finally, we have found that this metric often moves up
or down moderately due to many factors including how we are evaluated by our
advertising partners.





Revenue
Trends by Web Property




The
following table illustrates the historical trends of our two Web properties’
average daily page views, revenues and RPMs, by quarter, beginning the first
quarter of 2008:





2008
                    
                    2009Q1
                    
                    Q2
                    
                    Q3
                    
                    Q4
                    
                    Q1Ad
      Revenue ($ - in thousands)Answers.com
                    1,828
                    
                    1,485
                    
                    1,579
                    
                    1,730
                    
                    1,567WikiAnswers.com
                    1,185
                    
                    1,500
                    
                    1,960
                    
                    2,879
                    
                    3,162Total
                    3,013
                    
                    2,985
                    
                    3,539
                    
                    4,609
                    
                    4,729Answers.com
                    61%
                    
                    50%
                    
                    45%
                    
                    38%
                    
                    33%WikiAnswers.com
                    39%
                    
                    50%
                    
                    55%
                    
                    62%
                    
                    67%Total
                    100%
                    
                    100%
                    
                    100%
                    
                    100%
                    
                    100%Traffic
      – Average Daily Page ViewsAnswers.com
                    3,225,000
                    
                    2,641,000
                    
                    2,666,000
                    
                    3,027,000
                    
                    2,982,000WikiAnswers.com
                    1,885,000
                    
                    2,318,000
                    
                    3,094,000
                    
                    4,350,000
                    
                    5,337,000Total
                    5,110,000
                    
                    4,959,000
                    
                    5,760,000
                    
                    7,377,000
                    
                    8,319,000Answers.com
                    63%
                    
                    53%
                    
                    46%
                    
                    41%
                    
                    36%WikiAnswers.com
                    37%
                    
                    47%
                    
                    54%
                    
                    59%
                    
                    64%Total
                    100%
                    
                    100%
                    
                    100%
                    
                    100%
                    
                    100%RPMAnswers.com
                    $6.23
                    
                    $6.18
                    
                    $6.44
                    
                    $6.21
                    
                    $5.84WikiAnswers.com
                    $6.91
                    
                    $7.11
                    
                    $6.89
                    
                    $7.19
                    
                    $6.58






Since we
purchased WikiAnswers.com in November 2006, the website has grown significantly,
each quarter, both in terms of traffic and revenue. Conversely, beginning the
third quarter of 2007, when we experienced a drop in our traffic to Answers.com
due to a search engine algorithm adjustment by Google, Answers.com’s traffic and
revenue have been in decline. We expect the aforesaid trends of our individual
Web properties to continue in 2009.


19
 Table of Contents




The
current general economic downturn may result in fewer page views that result in
commercial activities by our users, and may cause advertisers to reduce the
amount they spend on online advertising. These potential developments could have
a significant negative impact on the RPM of both our Web properties. In fact,
our RPM has shown some decline in the first quarter of 2009, as compared to the
preceding quarter. We attribute the decline early in the quarter to seasonality,
with weakness later in the quarter, we believe, related to the
economy.   Further, in April 2009, we experienced further
downward pressure on our RPMs. As a result of the aforesaid trend, we anticipate
a decline in RPMs in the second quarter as compared to the first quarter of
2009. Notwithstanding, we believe that, to date, we have been better insulated
from the economic downturn than many other content websites due to the fact that
the overwhelming majority of our ad revenue is earned from CPC ads, which appear
to have been less negatively impacted by the economic downturn than CPM
ads.





Additionally,
our CPC revenue, which is earned through Google, is governed by our GSA, which
is scheduled to expire on January 31, 2010. Renewal of the GSA on terms
less favorable to us than the current terms, including the revenue-share
percentage, could result in a significant reduction in CPC ad
revenue.





We do not
expect the current general economic downturn to affect our expected overall
growth in traffic.





Costs
and Expenses





Cost
of Revenue





Three
      Months Ended March 31,2009
                  
                  2008
                  
                  Change($
      - in thousands)Cost
      of revenue
                  1,059
                  
                  1,393
                  
                  (334)





Cost of
revenue decreased $334 thousand, or 24%, to $1,059 in the first quarter of 2009,
from $1,393 in the first quarter of 2008. The change in cost of revenue was due
primarily to the following factors: Amortization expense from intangible
technology assets we purchased in connection with the Brainboost acquisition
that took place in December 2005 decreased $223 thousand, because we wrote off
the Brainboost Answer Engine on May 25, 2008, thus there was no amortization in
the first quarter of 2009. Additionally, there was a decrease in data center
costs, including depreciation of information technology assets, of $202
thousand, due to migrating to our first, colocation facility during the latter
half of 2008, rather than managed hosting. In a colocation facility, many of the
tasks that were handled by the managed hosting provider are now handled by our
employees, thus the fees we pay are lower. There was also a $14 thousand
decrease in compensation costs, excluding stock based compensation, and a $12
thousand decrease in stock based compensation. The aforesaid decreases were
partially offset by increases in content licensing costs of $106 thousand and
increases in recruitment fees of $28 thousand. The increase in content fees was
mostly due to unusually low content expense in the first quarter of 2008, as a
result of the resolution of a contingency, at such time.





Our
intentions have always been to operate two colocation facilities. The fact that
only our first facility was operational in the first quarter of 2009 resulted in
compensation and data center expense levels which were lower than the levels
that we anticipate once the second facility is operational, sometime in the
second quarter of 2009.





Research
and Development Expenses





Three
      Months Ended March 31,2009
                
                2008
                
                Change($
      - in thousands)Research
      and development
                873
                
                875
                
                (2)





Research
and development expenses decreased $2 thousand to $873 thousand in the first
quarter of 2009 from $875 thousand in the first quarter of 2008. The change in
research and development expenses was due primarily to a decrease of $25
thousand in stock based compensation offset by increased compensation costs,
excluding stock based compensation, of $6 thousand, and increased travel and
conferences of $11 thousand.





Community
Development, Sales and Marketing Expenses





Three
      Months Ended March 31,2009
                
                2008
                
                Change($
      - in thousands)Community
      development, sales and marketing
                499
                
                762
                
                (263)





20
 Table of Contents




Community
development, sales and marketing expenses decreased $263 thousand or 35%, to
$499, in the first quarter of 2009, from $762 in the first quarter of 2008. The
primary reason for the decrease was that compensation related expenses,
excluding  stock based compensation, decreased $214 thousand, and
stock based compensation decreased $56 thousand, due to the termination of our
direct ad sales team in the second and third quarters of 2008. At the end of the
second quarter of 2008 we decided to abandon direct ad sales, and by the end of
the third quarter of 2008, all of our direct sales staff left the Company. On
the other hand, due the growth we are experiencing in WikiAnswers.com, over the
second half of 2008 we hired 5 employees in the area of Community Development,
and in the first quarter of 2009, we hired one additional employee in this
area.  We expect that the primary future growth in this expense line
item will be in the area of WikiAnswers.com community development.





General
and Administrative Expenses


Three
      Months Ended March 31,2009
                
                2008
                
                Change($
      - in thousands)General
      and administrative
                1,219
                
                1,131
                
                88





General
and administrative expenses increased $88 thousand, or 8%, to $1,219 thousand in
the first quarter of 2009 from $1,131 thousand in the first quarter of 2008. The
change in general and administrative expenses was due primarily to the following
factors: Compensation costs, excluding stock based compensation, increased by
$79 thousand mainly due to a management bonus accrual of $55 thousand, while
stock based compensation increased by $22 thousand. The aforesaid increase was
partially offset by a decrease of $38 thousand in accounting and legal
fees.





Termination
fees and write-off of costs relating to the terminated Lexico acquisition and
abandoned follow-on offering





Three
      Months Ended March 31,2009
                
                2008
                
                Change($
      - in thousands)Termination
      fees and write-off of costs relating to theterminated
      Lexico acquisition and abandonedfollow-on
      offering
                -
                
                2,543
                
                (2,543)





In the
first quarter of 2008, we recorded a charge of $2,543 thousand for various costs
and fees we incurred in connection with the terminated acquisition of Lexico and
the abandoned follow-on offering of securities.





Interest
Income (Expense), Net





Three
      Months Ended March 31,2009
                
                2008
                
                Change($
      - in thousands)Interest
      income (expense), net
                (87)
                
                55
                
                (142)





Interest
income (expense), net decreased $142 thousand to $(87) thousand expense, net, in
the first quarter of 2009, from $55 thousand income, net, in the first quarter
of 2008. The change in interest income (expense), net, resulted from the
amortization of $363 thousand of transaction costs that we incurred in
connection with the Series B Unit Warrant in June 2008. In the first quarter of
2009, the amortization of such transaction costs amounted to $90 thousand.
Further, interest earned from our cash balance in the first quarter of 2009 was
$6 thousand, compared to interest of $55 thousand earned, during the first
quarter of 2008. The reduction in interest income earned on our cash balances
was the result of lower short-term interest rates.





Other
Income (Expenses), Net





Three
      Months Ended March 31,2009
                  
                  2008
                  
                  Change($
      - in thousands)Other
      income (expense), net
                  15
                  
                  (38)
                  
                  53





Other
income (expense), net, in the first quarter of 2009 was $15 thousand income,
net, compared to $(38) thousand expense, net, in the first quarter of 2008.
Other income (expense), net, results from foreign currency net gains and
losses.





Gain
Resulting from Fair Value Adjustment of Series A Warrants and Warrant to
Purchase Units of Series B Preferred Stock and Warrants








Three
      Months Ended March 31,2009
                  
                  2008
                  
                  Change($
      - in thousands)Gain
      Resulting from Fair Value Adjustment of Series A Warrants and Series B
      Unit Warrant
                  2,010
                  
                  -
                  
                  2,010





The
Series A Warrants and the Series B Unit Warrant are revalued each reporting
date, and any change to their fair value is recorded in the statement of
operations. The primary reason for the decrease in the value of these
liabilities in the first quarter of 2009 was the decrease in the market value of
our common stock between December 31, 2008, and March 31, 2009, from $7.13 to
$6.37.





Income
Tax Benefit (Expense), Net








Three
      Months Ended December 31,2009
                
                2008
                
                Change($
      - in thousands)Income
      tax benefit (expense), net
                6
                
                (11)
                
                17





Income
tax benefit (expense), net increased by $17 thousand for the quarter ended March
31, 2009, as compared to the same period in 2008. The tax benefit for the
quarter ended March 31, 2009 was primarily the result of the recognition of a
$52 thousand deferred tax asset on behalf of our Israeli subsidiary. This tax
benefit was primarily offset by an income tax expense of $30 thousand related to
estimated alternative minimum income taxes for U.S. federal taxes as well as the
additional recording of approximately $5 thousand of Israel current tax expense
as compared to the same period last year.





We had
net operating loss carryforwards, or NOLs, for federal income tax purposes of
approximately $59 million at December 31, 2008, and approximately $54 million at
December 31, 2007. The federal net operating losses will expire if not utilized
on various dates from 2019 through 2028. Because we have experienced one or more
ownership changes, within the meaning of Section 382 of the Internal
Revenue Code of 1986, as amended, an annual limitation is imposed on our ability
to use at least $32 million of these carryforwards. We estimate that the
annual limitation on the use of such $32 million of our NOLs is
approximately $1.8 million per year. Any unused portion of the
$1.8 million annual limitation applicable to our restricted NOLs is
available for use in future years until such NOLs are scheduled to expire. The
recent Redpoint Financing and other financing events that transpired since
October 2004 may further impact our ability to use our NOLs, however, since we
have not conducted a Section 382 Study since October 2004 we cannot make that
determination. At December 31, 2008, our Israeli subsidiary has capital loss
carryforwards of approximately $775 thousand that can be applied to future
capital gains for an unlimited period of time under current tax
rules.





We file
U.S. federal, various state & local and foreign income tax returns. Answers
Corporation is no longer subject to U.S. federal income tax examinations by tax
authorities for years prior to 2005 and New York State and City income tax
examinations for years prior to 2006. In September 2008, the Israeli income tax
authorities completed its audit of our Israeli subsidiary for the tax years 2004
through 2006, resulting in no adjustments.


21
 Table of Contents




Liquidity
and Capital Resources





Historically,
our principal sources of liquidity were our cash inflows from revenues and funds
that were raised through various financing events that took place through June
2008. In the first quarter of 2009, our principal source of liquidity was our
cash inflows from operations, and we also expect that to be our principal source
of liquidity going forward. We further expect that such cash inflows from
operations will be sufficient to fund our capital expenditures. Further, if
Redpoint exercises their Series B Unit Warrant, of up to $7 million, between now
and June 16, 2009, our liquidity will be further strengthened in
2009.





Three
      Months Ended March 31,2009
                  
                  2008($
      - in thousands)Net
      cash provided by (used in) operating activities
                  1,241
                  
                  (1,808)Net
      cash (used in) provided by investing activities
                  (219)
                  
                  456Net
      cash used in financing activities
                  (102)
                  
                  -





Operating
Activities





Net
income in the first quarter of 2009 was $3,041 thousand, and net cash provided
by operations was $1,241 thousand. The adjustments to reconcile the two amounts,
including changes to the balances of our various operating assets and
liabilities, are noted in detail on the accompanying statement of cash flows.
The largest reconciling item is the non-cash gain resulting from the fair value
adjustment of the Series A Purchase Warrants and Series B Unit Warrant of $2,010
thousand.





Despite a
net loss of $3,667 thousand in the first quarter of 2008, net cash used in
operations was $1,808 thousand. The adjustments to reconcile the two amounts,
including changes to the balances of our various operating assets and
liabilities, are noted in detail on the accompanying statement of cash flows.
The largest reconciling items are the write-off of amounts relating to the
terminated Lexico acquisition and abandoned follow-on offering, paid in prior
periods of $663 thousand, $501 thousand of operating expenses that were the
result of non-cash, stock-based compensation to employees and directors, and
depreciation and amortization of $448 thousand.





Investing
Activities





Net cash
used in investing activities of $219 thousand, in the first quarter of 2009, is
attributable to cash used for capital expenditures of $212 thousand, and cash
used to increase long-term deposits of $7 thousand.





Net cash
provided by investing activities of $456 thousand, in the first quarter of 2008,
is attributable to the proceeds from the sale of investment securities of $700
thousand, less cash used for capital expenditures of $231 thousand, and cash
used to increase long-term deposits of $13 thousand.





Financing
Activities





Cash flow
used in financing activities of $102 thousand in the first quarter of 2009,
stems from a $91 thousand dividend payment and a $19 thousand repayment of a
capital lease obligation, less $8 thousand of net proceeds from the exercise of
stock options.





There was
no cash flow from financing activities in the first quarter of
2008.


22
 Table of Contents




Future
Operations




Based on
our current cash and cash equivalent levels and expected cash flow from
operations, we believe we have sufficient cash and cash equivalents to meet our
working capital and operating requirements for the next twelve months,
irrespective of whether we receive additional funding upon exercise of the
Series B Unit Warrant. Further, in estimating our expected cash flow during the
next twelve months, we have considered the current general economic downturn and
its impact on our future revenue, as discussed in the earlier revenue
discussion.




We assess
acquisition opportunities as they arise. Financing in excess of our current cash
and cash equivalents may be required if we decide to make additional
acquisitions. There can be no assurance, however, that any such opportunities
may arise, or that any such acquisitions may be consummated. Additional
financing may not be available on satisfactory terms when required. To the
extent that we raise additional funds by issuing equity securities, our
stockholders may experience significant dilution.




As a
result of the Redpoint Financing in June 2008, we raised net proceeds of
approximately $5.4 million, significantly improving our cash position. As part
of the Redpoint Financing, Redpoint received the Series B Unit Warrant, which is
exercisable at any time until June 16, 2009, for up to $7 million of
Series B Convertible Preferred Stock (70,000 shares) and Series B Purchase
Warrants. The Series A Preferred Stock contains a redemption provision which
allows the holder of a majority of the Series A Preferred Stock to request
redemption, at any time on or after June 16, 2014, of all or any part of the
outstanding Series A Preferred Stock. If issued, the Series B Preferred Stock
would have a similar redemption provision.





Off-Balance
Sheet Arrangements





Except
for the Series A Warrants described in the footnotes to the accompanying
financial statements, 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.





Critical
Accounting 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,
2008 and 2007, and our unaudited consolidated financial statements for the
quarters ended March 31, 2009 and 2008, 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.


23
 Table of Contents


Goodwill,
Intangibles and Other Long-Lived Assets





We
account for our purchases of acquired companies (for those acquired before
December 31, 2008) in accordance with SFAS No. 141, “Business Combinations”, or
SFAS 141, and for goodwill and other identifiable definite and
indefinite-lived acquired intangible assets in accordance with
SFAS No. 142, “Goodwill and Other Intangible
Assets”, or SFAS 142. Additionally, we review our long-lived assets
for recoverability in accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”, or SFAS 144.





The
identification and valuation of intangible assets and the determination of the
estimated useful lives at the time of acquisition are based on various valuation
methodologies including reviews of projected future cash flows. The use of
alternative estimates and assumptions could increase or decrease the estimated
fair value of our goodwill and other intangible assets, and potentially result
in a different impact to our results of operations. Further, changes in business
strategy and/or market conditions may significantly impact these judgments
thereby impacting the fair value of these assets, which could result in an
impairment of the goodwill and acquired intangible assets.





We
evaluate our long-lived tangible and intangible assets for impairment in
accordance with SFAS 142, with the annual goodwill impairment testing date
set at September 30. Further, in accordance with SFAS 144, we also evaluate
our long-lived tangible and intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.  If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. While we use
available information to prepare our estimates and to perform impairment
evaluations, the completion of annual impairment tests requires significant
management judgments and estimates.





As of
March 31, 2009, we determined that there were no events or changes in
circumstances indicating that the carrying amount of an asset may not be
recoverable; therefore, there was no need to evaluate the recoverability or
compute impairment of our long-lived assets.





Accounting
for Stock-based Compensation





We
account for stock-based awards under SFAS 123R, which requires measurement
of compensation cost for stock-based awards at fair value on date of grant and
recognition of compensation over the service period awards are expected to vest.
The estimation of stock-based 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.





We
determine the fair value of stock options granted to employees and directors
using the Black-Scholes valuation model, which requires significant assumptions
regarding to 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 estimate our expected stock
volatility based on our own historical stock volatility rates. Had we made
different assumptions about our 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 income
(loss) and net earnings (loss) per share amounts could have been significantly
different, in the first quarters of 2009 and 2008.





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 more likely than not, we must establish a valuation allowance.
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. At March 31, 2009, we
have fully offset our U.S. net deferred tax asset with a valuation
allowance. Our lack of earnings history and the uncertainty surrounding our
ability to generate US taxable income prior to the expiration of such deferred
tax assets were the primary factors considered by management in establishing the
valuation allowance.





FASB
Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes — an Interpretation of FASB Statement 109”, or
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.


24
 Table of Contents




Redpoint
Financing





In
accounting for the Redpoint Financing, the proceeds were first allocated to the
Series B Unit Warrant, which was classified as a current liability, based on its
fair value, and the residual amount was allocated among the Series A Convertible
Preferred Stock and the Series A Warrants based on their relative fair values,
all in accordance with the guidance in SFAS 150, “Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity”, and
EITF 00-19, ”Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock”. The Series B Unit Warrant has been revalued at each
reporting date, since its inception, and will continue to be revalued until such
time that it is exercised or expires. Additionally, as a result of the adoption
of EITF 07-5, effective January 1, 2009 (see Recently Issued Accounting
Pronouncements below, for further details), and due to the down-round protection
of the Series A Warrants, such warrants are to be separately accounted for as a
derivative under SFAS 133 and will no longer be recorded in equity but rather as
a liability.





We used
various valuation models and techniques to determine the individual values of
the three components, including Monte Carlo and Black-Scholes. Inputs used in
the models include our stock price and risk-free interest rate. Additionally,
significant assumptions used in applying these techniques include redemption
behavior estimates (including likelihood of forced conversion, and timing of
liquidation event if such event transpires) and expected volatility of our stock
price. While we believe we have applied appropriate judgment in the aforesaid
assumptions , variations in judgment could have a material effect upon the
valuation results, and thus, on our financial statements.





The
Series A Convertible Preferred Stock issued as part of the Redpoint
Financing contains an embedded conversion option which could possibly require
separate accounting under SFAS No. 133 – “Accounting for Derivative
Instruments and Hedging Activities”(SFAS
133). According to paragraph 12(a) of SFAS 133, in order to determine
whether separate accounting is required, one has to evaluate whether the
economic characteristics and risks of the conversion option are closely related
to the host contract, and the nature of the host contract.  We
exercised judgment and evaluated this matter in accordance with EITF Topic
D-109, "Determining the Nature
of a Host Contract Related to a Hybrid Financial Instrument Issued in the Form
of a Share under FASB Statement No.133" (Topic D-109). Topic D-109
conveys the SEC staff's views on determining whether the characteristics of a
host contract in a hybrid financial instrument issued in the form of a share is
more akin to debt or equity. In evaluating an embedded derivative feature for
separation under SFAS 133, the consideration of the economic characteristics and
risks of the host contract should not ignore the stated or implied substantive
terms and features of the hybrid financial instrument. We considered various
factors including, redemption provisions, stated rate, voting rights, whether
returns are discretionary or mandatory, collateral requirements, participation
in residual earnings and liquidation preferences, in making our determination
that the host contract was more akin to equity. The most important factor that
led us to the conclusion that the host contract was more akin to equity was the
fact that the redemption feature was not mandatory or likely to occur. Had we
determined that the host contract was more akin to debt and not equity it would
have impacted the accounting for the host contract and the embedded conversion
option and could have had a material impact on our financial
statements.





Recently
Issued Accounting Pronouncements





On April
9, 2009, the Financial Accounting Standards Board (FASB) issued FSP FAS 157-4,
”Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly”. FSP FAS
157-4 provides additional guidance for estimating fair value in accordance with
SFAS No. 157, “Fair Value
Measurements” (SFAS 157), when the volume and level of activity for the
asset or liability have significantly decreased and provides additional guidance
on the SFAS 157 disclosure requirements. This FSP also includes guidance on
identifying circumstances that indicate a transaction is not orderly. FSP FAS
157-4 is effective for interim and annual reporting periods ending after June
15, 2009, and should be applied prospectively. Early adoption is permitted for
periods ending after March 15, 2009. The adoption of FSP FAS 157-4 is not
expected to have a material impact on our consolidated financial position,
results of operations or cash flows





On April
9, 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair
Value of Financial Instruments”. FSP FAS 107-1 and APB 28-1 apply to all
financial instruments within the scope of SFAS No. 107, “Disclosure about Fair Value of
Financial Instruments” (SFAS 107), held by publicly traded companies.
This FSP amends SFAS 107, to require disclosures about fair value of financial
instruments for interim reporting periods of publicly traded companies as well
as in annual financial statements. This FSP also amends APB Opinion No. 28,
”Interim Financial
Reporting”, to require those disclosures in summarized financial
information at interim reporting periods. FSP FAS 107-1 and APB 28-1 is
effective for interim reporting periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. The adoption of FSP
FAS 107-1 and APB 28-1 is not expected to have a material impact on our
consolidated financial position, results of operations or cash
flows




25
 Table
of Content




Quarterly
Results





The
following table sets forth our historical quarterly consolidated statement of
operations data and certain non-GAAP financial measures beginning 2008. You
should read this information together with our consolidated financial statements
and the related notes appearing elsewhere in our filings. The results of
historical periods are not necessarily indicative of the results of operations
for a full year or any future period.





Quarter
      EndedMar.
      31,2008
                                                    
                                                    Jun.
      30,2008
                                                    
                                                    Sep.
      30,2008
                                                    
                                                    Dec.
      31,2008
                                                    
                                                    Mar.
      31,2009(in
      thousands, except page view and RPM data)Revenues:Advertising
      revenue
                                                    $3,013
                                                    
                                                    $2,985
                                                    
                                                    $3,539
                                                    
                                                    $4,609
                                                    
                                                    $4,729Answers
      services licensing
                                                    18
                                                    
                                                    18
                                                    
                                                    24
                                                    
                                                    21
                                                    
                                                    183,031
                                                    
                                                    3,003
                                                    
                                                    3,563
                                                    
                                                    4,630
                                                    
                                                    4,747Costs
      and expenses:Cost
      of revenue
                                                    1,393
                                                    
                                                    1,416
                                                    
                                                    945
                                                    
                                                    887
                                                    
                                                    1,059Research
      and development
                                                    875
                                                    
                                                    929
                                                    
                                                    866
                                                    
                                                    812
                                                    
                                                    873Sales
      and marketing
                                                    762
                                                    
                                                    933
                                                    
                                                    563
                                                    
                                                    476
                                                    
                                                    499General
      and administrative
                                                    1,131
                                                    
                                                    1,198
                                                    
                                                    1,311
                                                    
                                                    1,159
                                                    
                                                    1,219Write-off
      of the Brainboost Answers Engine
                                                    —
                                                    
                                                    3,138
                                                    
                                                    —
                                                    
                                                    —
                                                    
                                                    —Termination
      fees and write-off of costs relatingto
      the terminated Lexico acquisition andabandoned
      follow-on offering
                                                    2,543
                                                    
                                                    —
                                                    
                                                    —
                                                    
                                                    —
                                                    
                                                    —Total
      operating expenses
                                                    6,704
                                                    
                                                    7,614
                                                    
                                                    3,685
                                                    
                                                    3,334
                                                    
                                                    3,650Operating
      loss
                                                    (3,673)
                                                    
                                                    (4,611)
                                                    
                                                    (131)
                                                    
                                                    1,296
                                                    
                                                    1,097Interest
      income (expense), net
                                                    55
                                                    
                                                    18
                                                    
                                                    (43)
                                                    
                                                    (86)
                                                    
                                                    (87)Other
      income (expense), net
                                                    (38)
                                                    
                                                    (11)
                                                    
                                                    11
                                                    
                                                    57
                                                    
                                                    15Gain
      (loss) resulting from fair value adjustment ofSeries
      A Warrants and warrant to purchase units ofSeries B
      preferred stock and warrants
                                                    —
                                                    
                                                    —
                                                    
                                                    (2,056)
                                                    
                                                    (3,131)
                                                    
                                                    2,010Loss
      before income taxes
                                                    (3,655)
                                                    
                                                    (4,604)
                                                    
                                                    (2,210)
                                                    
                                                    (1,864)
                                                    
                                                    3,035Income
      tax benefit (expense), net
                                                    (11)
                                                    
                                                    (15)
                                                    
                                                    91
                                                    
                                                    17
                                                    
                                                    6Net
      income (loss)
                                                    $(3,667)
                                                    
                                                    $(4,619)
                                                    
                                                    $(2,119)
                                                    
                                                    $(1,847)
                                                    
                                                    $3,041Other
      Data:Adjusted
      EBITDA(1)
                                                    $(181)
                                                    
                                                    $(670)
                                                    
                                                    $520
                                                    
                                                    $1,950
                                                    
                                                    $1,744Answers.com
      average daily page views
                                                    3,225,000
                                                    
                                                    2,641,000
                                                    
                                                    2,666,000
                                                    
                                                    3,027.000
                                                    
                                                    2,982,000WikiAnswers.com
      average daily page views
                                                    1,885,000
                                                    
                                                    2,318,000
                                                    
                                                    3,094,000
                                                    
                                                    4,350,000
                                                    
                                                    5,337,000Answers.com
      RPM
                                                    $6.23
                                                    
                                                    $6.18
                                                    
                                                    $6.44
                                                    
                                                    $6.21
                                                    
                                                    $5.84WikiAnswers.com
      RPM
                                                    $6.91
                                                    
                                                    $7.11
                                                    
                                                    $6.89
                                                    
                                                    $7.19
                                                    
                                                    $6.58





26
 Table of Contents





(1)       We
define Adjusted EBITDA as net earnings before interest, gain (loss) resulting
from fair value adjustment of Series A Warrants and warrant to purchase units of
Series B preferred stock and warrants, taxes, depreciation, amortization,
stock-based compensation, foreign currency exchange rate differences and certain
non-recurring revenues and expenses.





We use
Adjusted EBITDA as an additional measure of our overall performance for purposes
of business decision-making, developing budgets and managing expenditures. It is
useful because it removes the impact of our capital structure (interest expense
and gain (loss) resulting from fair value adjustment of Series A Warrants and
warrant to purchase units of Series B preferred stock and warrants), asset base
(amortization and depreciation), stock-based compensation expenses, taxes,
foreign currency exchange rate differences and certain non-recurring revenues
and expenses from our results of operations. We believe that the presentation of
Adjusted EBITDA provides useful information to investors in their analysis of
our results of operations for reasons similar to the reasons why we find it
useful and because these measures enhance their overall understanding of the
financial performance and prospects of our ongoing business operations. By
reporting Adjusted EBITDA, we provide a basis for comparison of our business
operations between current, past and future periods, and peer companies in our
industry.





More
specifically, we believe that removing these impacts is important for several
reasons:





·
            Amortization
      of Intangible Assets. Adjusted EBITDA disregards amortization of
      intangible assets. Specifically, we exclude (a) amortization, and the
      write-off, of acquired technology from the acquisition of Brainboost
      Technology, LLC, developer of the Brainboost Answer Engine in December
      2005; and (b) amortization of intangible assets resulting from the
      acquisition of WikiAnswers and other related assets in November 2006.
      These acquisitions resulted in operating expenses that would not otherwise
      have been incurred. We believe that excluding such expenses is significant
      to investors, due to the fact that they derive from prior acquisition
      decisions and are not necessarily indicative of future cash operating
      costs. In addition, we believe that the amount of such expenses in any
      specific period may not directly correlate to the underlying performance
      of our business operations. While we exclude the aforesaid expenses from
      Adjusted EBITDA we do not exclude revenues derived as a result of such
      acquisitions. The amount of revenue that resulted from the acquisition of
      WikiAnswers and other related assets is disclosed in the revenue
      discussion of this Item 2. The amount of revenue that resulted from the
      acquisition of technology from Brainboost is not quantifiable due to the
      nature of its integration.




·
            Stock-based
      Compensation Expense. Adjusted EBITDA disregards expenses associated with
      stock-based compensation, a non-cash expense arising from the grant of
      stock-based awards to employees and directors. We believe that, because of
      the variety of equity awards used by companies, the varying methodologies
      for determining stock-based compensation expense, and the subjective
      assumptions involved in those determinations, excluding stock-based
      compensation from Adjusted EBITDA enhances the ability of management and
      investors to compare financial results over multiple
    periods.




·
            Depreciation,
      Interest, Loss Resulting from Fair Value Adjustment of Warrant to Purchase
      Units of Series B Preferred Stock and Warrants, Taxes and Exchange Rate
      Differences. We believe that, excluding these items from the Adjusted
      EBITDA measure provides investors with additional information to measure
      our performance, by excluding potential differences caused by variations
      in capital structures (affecting interest expense), asset composition, and
      tax positions.




·
            Terminated
      Lexico Acquisition and Follow-On Offering. Adjusted EBITDA disregards
      $2,543 thousand in costs associated with our terminated acquisition of
      Lexico and the cancellation of our follow-on offering. We believe that,
      excluding these costs provides investors with additional information to
      measure our performance, by excluding events that are of a non-recurring
      nature.  27
 Table of Contents





Adjusted
EBITDA is not a measure of liquidity or financial performance under generally
accepted accounting principles and should not be considered in isolation from,
or as a substitute for, a measure of financial performance prepared in
accordance with GAAP. Investors are cautioned that there are inherent
limitations associated with the use of Adjusted EBITDA as an analytical tool.
Some of these limitations are:





·
            Non-GAAP
      financial measures are not based on a comprehensive set of accounting
      rules or principles;





·
            Many
      of the adjustments to Adjusted EBITDA reflect the exclusion of items that
      are recurring and will be reflected in our financial results for the
      foreseeable future;





·
            Other
      companies, including other companies in our industry, may calculate
      Adjusted EBITDA differently than us, thus limiting its usefulness as a
      comparative tool;





·
            Adjusted
      EBITDA does not reflect the periodic costs of certain tangible and
      intangible assets used in generating revenues in our
    business;





·
            Adjusted
      EBITDA does not reflect interest income from our investments in cash and
      investment securities;





·
            Adjusted
      EBITDA does not reflect foreign exchange net gains and
    losses;





·
            Adjusted
      EBITDA does not reflect interest expense and other cost relating to
      financing our business, including gains and losses resulting from fair
      value adjustment of Redpoint Venture’s Series A Warrants and their Warrant
      to Purchase Units of Series B Preferred Stock and
  Warrants;





·
            Adjusted
      EBITDA excludes taxes, which are an integral cost of doing
      business; and





·
            Because
      Adjusted EBITDA does not include stock-based compensation, it does not
      reflect the cost of granting employees equity awards, a key factor in
      management’s ability to hire and retain
  employees.




We
compensate for these limitations by providing specific information in the
reconciliation to the GAAP amounts excluded from Adjusted EBITDA, as
follows:







Quarter
      EndedMar. 31,2008
                            
                            Jun. 30,2008
                            
                            Sep. 30,2008
                            
                            Dec. 31,2008
                            
                            Mar. 31,2009(in
      thousands)Net
      income (loss)
                            $(3,667)
                            
                            $(4,619)
                            
                            $(2,119)
                            
                            $(1,847)
                            
                            $3,041Interest
      (income) expense, net
                            (55)
                            
                            (18)
                            
                            43
                            
                            86
                            
                            87Foreign
      currency (gains) losses
                            38
                            
                            11
                            
                            (11)
                            
                            (57)
                            
                            (15)Income
      tax (benefit) expense, net
                            11
                            
                            15
                            
                            (91)
                            
                            (17)
                            
                            (6)Depreciation
      and amortization
                            448
                            
                            383
                            
                            250
                            
                            248
                            
                            261Stock-based
      compensation
                            501
                            
                            420
                            
                            392
                            
                            406
                            
                            386Write-off
      of the Brainboost Answers Engine
                            —
                            
                            3,138
                            
                            —
                            
                            —
                            
                            —Termination
      fees and write-off of costs relatingto
      the terminated Lexico acquisition and abandonedfollow-on
      offering
                            2,543
                            
                            —
                            
                            —
                            
                            —
                            
                            —(Gain)
      loss resulting from fair value adjustmentof
      Series A Warrants and warrant to purchaseunits
      of Series B preferred stock and warrants
                            —
                            
                            —
                            
                            2,056
                            
                            3,131
                            
                            (2,010)Adjusted
      EBITDA
                            $(181)
                            
                            $(670)
                            
                            $520
                            
                            $1,950
                            
                            $1,744





28
 Table of Contents





ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK







Currency Risk. Our revenue is
denominated solely in U.S. dollars. However, close to half of our expenses
(excluding non-cash items such as stock-based compensation and gain (loss) from
valuation of Series A Warrants and Series B Warrants) are denominated in New
Israel Shekels (NIS). We expect the amount of such NIS denominated expenses to
grow in the foreseeable future. If the value of the U.S. dollar weakens against
the value of NIS, there will be a negative impact on our results of operations.
In addition, to the extent we hold cash and cash equivalents that are
denominated in currencies other than the U.S. dollar; we are subject to the risk
of exchange rate fluctuations. We often hedge our foreign currency commitments.
Such transactions are mainly designed to hedge short term cash flows related to
anticipated expenses.





Other
MarketRisk.We invest
our excess cash in highly liquid investments with an original maturity of three
months or less.  Due to the short-term nature of these investments, we
believe that there is no material exposure to interest rate risk arising from
our investments. Based on our investment policy, such instruments are highly
rated by rating agencies and therefore we believe that there is no material
exposure to the principal amount from our investments.








ITEM 4. CONTROLS AND PROCEDURES





Based on
an 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 March 31, 2009, our Chief Executive Officer and
Principal Financial Officer 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 Principal
Financial Officer also concluded that, as of March 31, 2009, 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 accumulated and communicated to our management, including our Chief Executive
Officer and Principal Financial Officer, to allow timely decisions regarding
required disclosure.





During
the three months ended March 31, 2009, there were no changes in our internal
control over financial reporting identified in connection with the evaluation
required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.


29
 Table of Contents




PART II. OTHER
INFORMATION


ITEM 1. LEGAL
PROCEEDINGS





We are not currently involved in any legal proceedings. However, from
time to time, we may receive various legal claims incidental to our normal
business activities, such as intellectual property infringement claims and
claims of defamation and invasion of privacy. Although the results of claims
cannot be predicted with certainty, we believe the final outcome of such matters
will not have a material adverse effect on our financial position, results of
operations, or cash flows.




ITEM 1A.RISK FACTORS





There have been no material changes in our risk factors from those
disclosed in Part 1, Item 1A of our 2008 Annual Report on
Form 10-K.





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





N/A





ITEM 3.  DEFAULTS UPON SENIOR
SECURITIES





N/A




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




N/A




ITEM 5.  OTHER
INFORMATION




N/A




ITEM 6.  EXHIBITS





31.1
            
            Certification of Chief Executive Officer
      required under Rule 13a-14(a)/15d-14(a) under the Exchange
      Act.31.2
            
            Certification of Principal Financial
      Officer required under Rule 13a-14(a)/15d-14(a) under the
      Exchange Act.32.1
            
            Certification of Chief Executive Officer
      pursuant to 18 U.S.C Section 1350, as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002.32.2
            
            Certification of Principal Financial
      Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002.





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
      CORPORATION(Registrant)Date:
      May 6, 2009
                        By:
                        /s/
      Robert S. RosenscheinRobert
      S. RosenscheinChief
      Executive OfficerDate:
      May 6, 2009
                        By:
                        /s/
      Steven SteinbergSteven
      SteinbergChief
      Financial Officer(Principal
      Financial
Officer)