** **

**UNITED STATES OF AMERICA**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

**FORM10-Q**

** **

**(Mark One)**

** **

| **x**                                                   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE   SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------|-----------------------------------------------------------------------------------------------------------|
| ** **                                              | ** **                                                                                                |
| **FOR THE QUARTERLY PERIOD ENDED:  SEPTEMBER 30, 2007** |
| ** **                                              |
| **o**                                                   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE   SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition period from           to**

**CommissionFile Number: 001-32255**

**ANSWERSCORPORATION**

(Exact name of Registrantas 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) |

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

Yes     x                     No      o

Indicate by check mark whether the Registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act. (Check one):

 Large accelerated Filer   o         Acceleratedfiler         o           Non-acceleratedfiler           x

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

Yes     o                     No       x

The number of the registrant’s shares of common stockoutstanding was 7,854,890 as of November 8, 2007.

 

 

 

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**ANSWERSCORPORATION**

**FORM10-Q**

**CONTENTS**

 
| **PART I — FINANCIAL INFORMATION** |
|----------------------------------------------|
|                                         |   |
| Item 1.                                      | Consolidated Financial  Statements (unaudited) |
|                                         |   |
|                                         | Consolidated  Balance Sheets as of September 30, 2007 (unaudited) and December 31, 2006 |
|                                         |   |
|                                         | Consolidated  Statements of Operations (unaudited) for the three and nine months ended  September 30, 2007 and 2006 |
|                                         |   |
|                                         | Consolidated  Statements of Cash Flows (unaudited) for the nine months ended September 30,  2007 and 2006 |
|                                         |   |
|                                         | Notes  to Unaudited Consolidated Financial Statements |
|                                         |   |
| Item 2.                                      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                                         |   |
| Item 3.                                      | Quantitative  and Qualitative Disclosures About Market Risk |
|                                         |   |
| Item 4.                                      | Controls and  Procedures |
| ** **                                   | ** ** |
| **PART II — OTHER  INFORMATION**   |
|                                         |   |
| Item 1.                                      | Legal Proceedings |
|                                         |   |
| Item 1A.                                     | Risk Factors |
|                                         |   |
| Item 4                                       | Submission of  Matters to a Vote of Security Holders |
|                                         |   |
| Item 6.                                      | Exhibits |
|                                         |   |
| Signatures                                   |

 

2

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**INTRODUCTORYNOTE**

**This Report on Form 10-Q forAnswers Corporation (“Answers” or the “Company”) may containforward-looking statements. You can identify these statements byforward-looking words such as “may,” “will,” “expect,” “intend,” “anticipate,”believe,” “estimate” and “continue” or similar words. Forward-lookingstatements include information concerning possible or assumed future businesssuccess or financial results. You should read statements that contain thesewords carefully because they discuss future expectations and plans, whichcontain projections of future results of operations or financial condition orstate other forward-looking information.  We believe that it is importantto communicate future expectations to investors. The forward-looking statementsincluded herein are based on current expectations that involve a number ofrisks 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 theSecurities and Exchange Commission. These risks and uncertainties could causeactual results or events to differ materially from the forward-lookingstatements that we make**.

**Although, there may be events inthe future that we are not able to accurately predict or control, we do notundertake any obligation to update any forward-looking statements for anyreason, even if new information becomes available or other events occur in thefuture.****Accordingly, to the extent that this Form 10-Q containsforward-looking statements regarding the financial condition, operatingresults, business prospects or any other aspect of the Company, please beadvised that Answers’ actual financial condition, operating results andbusiness performance may differ materially from that projected orestimated by the Company in forward-looking statements.**

 

3

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**PART I - FINANCIAL INFORMATION**

** **

**ITEM 1.CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

** **

Answers Corporation and Subsidiary

 

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

 
| ** **                                                                                                                                                                        | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|-----------------|------------|
| ** **                                                                                                                                                                        | ** ** | **2007**         | ** ** | **2006**        | ** ** |
|                                                                                                                                                                              | ** ** | **$**            | ** ** | **$**           | ** ** |
| **Assets**                                                                                                                                                                        | ** ** | ** **       | ** ** | ** **      | ** ** |
|                                                                                                                                                                              |       |             |       |            |       |
| **Current assets:**                                                                                                                                                               | ** ** | ** **       | ** ** | ** **      | ** ** |
| Cash and cash equivalents                                                                                                                                                         | ** ** | **5,293**        |       | 4,976           |       |
| Investment securities                                                                                                                                                             | ** ** | **2,223**        |       | 4,102           |       |
| Accounts receivable                                                                                                                                                               | ** ** | **1,035**        |       | 1,304           |       |
| Prepaid expenses and other current assets                                                                                                                                         | ** ** | **539**          |       | 416             |       |
| **Total current assets**                                                                                                                                                          | ** ** | **9,090**        |       | 10,798          |       |
|                                                                                                                                                                              |       |             |       |            |       |
| **Long-term deposits (restricted)**                                                                                                                                               | ** ** | **497**          |       | 218             |       |
| ** **                                                                                                                                                                        | ** ** | ** **       | ** ** | ** **      | ** ** |
| **Deposits in respect of employee  severance obligations**                                                                                                                        | ** ** | **1,052**        |       | 856             |       |
| ** **                                                                                                                                                                        | ** ** | ** **       | ** ** | ** **      | ** ** |
| **Property and equipment, net of  $1,834 and $1,425 accumulated depreciation as of********September 30, 2007 and December 31, 2006,  respectively**                               | ** ** | **1,096**        |       | 998             |       |
|                                                                                                                                                                              |       |             |       |            |       |
| **Other assets:**                                                                                                                                                                 | ** ** | ** **       | ** ** | ** **      | ** ** |
| Intangible assets, net of $1,965 and $1,051  accumulated amortization as of September 30, 2007and December 31, 2006, respectively                                                 | ** ** | **5,069**        |       | 6,010           |       |
| Goodwill                                                                                                                                                                          | ** ** | **437**          |       | 437             |       |
| Prepaid expenses, long-term, and other assets                                                                                                                                     | ** ** | **245**          |       | 362             |       |
| Deferred charges                                                                                                                                                                  | ** ** | **882**          |       | —          |       |
| **Total other assets**                                                                                                                                                            | ** ** | **6,633**        |       | 6,809           |       |
|                                                                                                                                                                              |       |             |       |            |       |
| **Total assets**                                                                                                                                                                  | ** ** | **18,368**       |       | 19,679          |       |
| ** **                                                                                                                                                                        | ** ** | ** **       | ** ** | ** **      | ** ** |
| **Liabilities and stockholders’  equity**                                                                                                                                    | ** ** | ** **       | ** ** | ** **      | ** ** |
| ** **                                                                                                                                                                        | ** ** | ** **       | ** ** | ** **      | ** ** |
| **Current liabilities:**                                                                                                                                                          | ** ** | ** **       | ** ** | ** **      | ** ** |
| Accounts payable                                                                                                                                                                  | ** ** | **392**          |       | 366             |       |
| Accrued expenses                                                                                                                                                                  | ** ** | **1,250**        |       | 805             |       |
| Accrued compensation                                                                                                                                                              | ** ** | **610**          |       | 623             |       |
| Deferred revenues, short-term                                                                                                                                                     | ** ** | **22**           |       | 465             |       |
| **Total  current liabilities**                                                                                                                                                    | ** ** | **2,274**        |       | 2,259           |       |
|                                                                                                                                                                              |       |             |       |            |       |
| **Long-term liabilities:**                                                                                                                                                        | ** ** | ** **       | ** ** | ** **      | ** ** |
| Liability in respect of employee severance  obligations                                                                                                                           | ** ** | **1,147**        |       | 828             |       |
| Deferred tax liability                                                                                                                                                            | ** ** | **11**           |       | —          |       |
| **Total long-term liabilities**                                                                                                                                                   | ** ** | **1,158**        |       | 828             |       |
| ** **                                                                                                                                                                        | ** ** | ** **       |       |            |       |
| **Commitments and contingencies**                                                                                                                                                 |       |             |       |            |       |
| ** **                                                                                                                                                                        | ** ** | ** **       | ** ** | ** **      | ** ** |
| **Stockholders’ equity:**                                                                                                                                                    | ** ** | ** **       | ** ** | ** **      | ** ** |
| Preferred stock: $0.01 par value; 1,000,000  shares authorized, none issued                                                                                                       | ** ** | **—**       |       | —          |       |
| Common stock; $0.001 par value; 30,000,000  shares authorized; 7,854,053 and 7,809,394shares issued and outstanding as of September 30, 2007 and December 31,  2006, respectively | ** ** | **8**            |       | 8               |       |
| Additional paid-in capital                                                                                                                                                        | ** ** | **73,441**       |       | 71,599          |       |
| Accumulated other comprehensive loss                                                                                                                                              | ** ** | **(28**          | **)**      | (31             | )          |
| Accumulated deficit                                                                                                                                                               | ** ** | **(58,485**      | **)**      | (54,984         | )          |
| **Total stockholders’ equity**                                                                                                                                               | ** ** | **14,936**       |       | 16,592          |       |
|                                                                                                                                                                              |       |             |       |            |       |
| **Total liabilities and  stockholders’ equity**                                                                                                                              | ** ** | **18,368**       |       | 19,679          |       |

 

The accompanying notes are an integral part ofthese consolidated financial statements.

 

4

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Answers Corporation andSubsidiary

 

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

 
| ** **                                                                                         | ** ** | **Three months ended September 30** | ** ** | **Nine months ended September 30** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                         | ** ** | **2007**                            | ** ** | **2006**                           | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                                               | ** ** | **$**                               | ** ** | **$**                              | ** ** | **$** | ** ** | **$** | ** ** |
| **Revenues:**                                                                                      | ** ** | ** **                          | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Advertising revenue                                                                                | ** ** | **2,165**                           |       | 1,810                              | ** ** | **7,777** |   | 4,357 |   |
| Answers service licensing                                                                          | ** ** | **43**                              |       | 44                                 | ** ** | **202** |   | 143 |   |
| Subscriptions                                                                                      | ** ** | **—**                          |       | 4                                  | ** ** | **425** |   | 23 |   |
| ** **                                                                                         | ** ** | **2,208**                           |       | 1,858                              | ** ** | **8,404** |   | 4,523 |   |
|                                                                                               |       |                                |       |                               |       |   |   |   |   |
| **Costs and expenses:**                                                                            | ** ** | ** **                          | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of revenue                                                                                    | ** ** | **1,179**                           |       | 844                                | ** ** | **3,643** |   | 2,336 |   |
| Research and development                                                                           | ** ** | **769**                             |       | 621                                | ** ** | **2,239** |   | 5,209 |   |
| Sales and marketing                                                                                | ** ** | **1,221**                           |       | 924                                | ** ** | **3,275** |   | 2,244 |   |
| General and administrative                                                                         | ** ** | **1,058**                           |       | 765                                | ** ** | **3,003** |   | 2,530 |   |
| **Total operating expenses**                                                                       | ** ** | **4,227**                           |       | 3,154                              | ** ** | **12,160** |   | 12,319 |   |
|                                                                                               |       |                                |       |                               |       |   |   |   |   |
| **Operating loss**                                                                                 | ** ** | **(2,019**                          | **)**      | (1,296                             | **)**      | **(3,756** | **)** | (7,796 | ) |
|                                                                                               |       |                                |       |                               |       |   | ** ** |   |   |
| Interest income, net                                                                               | ** ** | **88**                              |       | 144                                | ** ** | **299** | ** ** | 430 |   |
| Other income (expenses), net                                                                       | ** ** | **—**                          |       | (17                                | **)**      | **(11** | **)** | (220 | ) |
|                                                                                               |       |                                |       |                               |       |   | ** ** |   |   |
| **Loss before income taxes**                                                                       | ** ** | **(1,931**                          | **)**      | (1,169                             | **)**      | **(3,468** | **)** | (7,586 | ) |
|                                                                                               |       |                                | ** ** |                               |       |   | ** ** |   |   |
| Income tax expense                                                                                 | ** ** | **(19**                             | **)**      | (12                                | **)**      | **(33** | **)** | (9 | ) |
|                                                                                               |       |                                | ** ** |                               |       |   | ** ** |   |   |
| **Net loss**                                                                                       | ** ** | **(1,950**                          | **)**      | (1,181                             | **)**      | **(3,501** | **)** | (7,595 | ) |
|                                                                                               |       |                                | ** ** |                               |       |   | ** ** |   |   |
| **Basic and diluted net loss per  common share**                                                   | ** ** | **(0.25**                           | **)**      | (0.15                              | **)**      | **(0.45** | **)** | (1.00 | ) |
| ** **                                                                                         | ** ** | ** **                          | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Weighted average shares used in  computing basic********and  diluted net loss per common share** | ** ** | **7,854,053**                       |       | 7,782,820                          | ** ** | **7,844,900** |   | 7,632,283 |   |

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

5

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Answers Corporation and Subsidiary

 

**Interim Consolidated Statements ofCash Flows****(unaudited, in thousands)**

 
| ** **                                                                       | ** ** | **Nine months ended September 30** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                       | ** ** | **2007**                           | ** ** | **2006** | ** ** |
| ** **                                                                       | ** ** | **$**                              | ** ** | **$** | ** ** |
| **Cash flows from operating  activities:**                                       | ** ** | ** **                         | ** ** | ** ** | ** ** |
| **Net loss**                                                                     | ** ** | **(3,501**                         | **)**      | (7,595 | ) |
| **Adjustments to reconcile net  loss to net cash used in operating activities:** | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Depreciation and amortization                                                    | ** ** | **1,356**                          |       | 908 |   |
| Deposits in respect of employee severance  obligations                           | ** ** | **(196**                           | **)**      | (190 | ) |
| Increase in liability in respect of employee  severance obligations              | ** ** | **310**                            |       | 164 |   |
| Deferred income taxes, net                                                       | ** ** | **33**                             |       | 58 |   |
| Stock-based compensation to employees and  directors                             | ** ** | **1,698**                          |       | 1,315 |   |
| Stock-based compensation in connection with  the Brainboost transaction          | ** ** | **—**                         |       | 3,489 |   |
| Capital loss                                                                     | ** ** | **3**                              |       | — |   |
| Gains from foreign exchange rate forward  contracts                              | ** ** | **(19**                            | **)**      | — |   |
| Exchange rate losses (gains)                                                     | ** ** | **11**                             |       | (6 | ) |
| **Changes in operating assets and  liabilities:**                                | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Decrease (increase) in accounts receivable                                       | ** ** | **270**                            |       | (865 | ) |
| Increase in prepaid expenses and other  current assets                           | ** ** | **(29**                            | **)**      | (50 | ) |
| Increase (decrease) in accounts payable                                          | ** ** | **28**                             |       | (138 | ) |
| Increase in accrued expenses and other  current liabilities                      | ** ** | **57**                             |       | 246 |   |
| Decrease in short-term deferred revenues                                         | ** ** | **(443**                           | **)**      | (22 | ) |
| Decrease in long-term deferred revenues                                          |       | —                             | ** ** | (16 | ) |
| **Net cash used in operating  activities**                                       | ** ** | **(422**                           | **)**      | (2,702 | ) |
|                                                                             |       |                               | ** ** |   |   |
| **Cash flows from investing  activities:**                                       | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Capital expenditures                                                             | ** ** | **(515**                           | **)**      | (562 | ) |
| Capitalization of software development costs                                     |       | —                             | ** ** | (36 | ) |
| Purchase of intangible assets                                                    |       | —                             | ** ** | (54 | ) |
| Increase in long-term deposits                                                   | ** ** | **(265**                           | **)**      | (4 | ) |
| Deferred charges relating to planned  acquisition                                | ** ** | **(398**                           | **)**      | — |   |
| Purchases of investment securities                                               | ** ** | **(4,166**                         | **)**      | (14,236 | ) |
| Proceeds from sales of investment securities                                     | ** ** | **6,047**                          |       | 17,500 |   |
| **Net cash provided by investing  activities**                                   | ** ** | **703**                            |       | 2,608 |   |
|                                                                             |       |                               |       |   |   |
| **Cash flows from financing  activities:**                                       | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Deferred charges relating to planned  financings                                 | ** ** | **(109**                           | **)**      | — |   |
| Exercise of common stock options                                                 | ** ** | **145**                            |       | 175 |   |
| **Net cash provided by financing  activities**                                   | ** ** | **36**                             |       | 175 |   |
|                                                                             |       |                               |       |   |   |
| Effect of exchange rate changes on cash and  cash equivalents                    |       | —                             |       | 6 |   |
| **Net increase in cash and cash  equivalents**                                   | ** ** | **317**                            |       | 87 |   |
|                                                                             |       |                               |       |   |   |
| Cash and cash equivalents at beginning of  period                                | ** ** | **4,976**                          |       | 2,840 |   |
|                                                                             |       |                               |       |   |   |
| Cash and cash equivalents at end of period                                       | ** ** | **5,293**                          |       | 2,927 |   |
|                                                                             | ** ** | ** **                         |       |   |   |
| **Supplemental disclosures of  cash flow information:**                          | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Income taxes paid                                                                | ** ** | **6**                              |       | 6 |   |
|                                                                             |       |                               |       |   |   |
| **Non-cash investing activities:**                                               | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Deferred charges relating to planned acquisition                                 | ** ** | **100**                            |       | — |   |
| Exchange rate gains from forward contracts                                       | ** ** | **49**                             |       | — |   |
| Unrealized net loss from securities                                              | ** ** | **2**                              |       | 3 |   |
|                                                                             |       |                               |       |   |   |
| **Non-cash financing activities:**                                               | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Deferred charges relating to planned  financing                                  | ** ** | **275**                            |       | — |   |
|                                                                                  |            |                                    |            |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

6

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Answers Corporation and Subsidiary

 

**Notes to the Consolidated FinancialStatements as of September 30, 2007 (unaudited)**

 

**Note 1 — Business and Summary of Significant AccountingPolicies**

 

**TheCompany**

 

Answers Corporation (“theParent”), formerly GuruNet Corporation, was founded as a Texas corporation onDecember 22, 1998, and reorganized as a Delaware corporation in April 1999. OnDecember 27, 1998, the Parent formed a subsidiary based in Israel (“theSubsidiary”), primarily for the purpose of providing research and developmentservices to the Parent. The Parent and its wholly owned Subsidiary arecollectively referred to as “the Company.”

 

As of September 30, 2007,approximately $985,000 of the Company’s net assets were located outside of theUnited States.

 

The Company is an onlineanswer engine.  Its web propertiescurrently consist of Answers.com and WikiAnswers.com.

 

**Basis ofPresentation**

 

The accompanying consolidated financialstatements include the accounts of Answers Corporation and its Subsidiary andare presented in accordance with accounting principles generally accepted inthe United States. All significant intercompany balances and transactions havebeen eliminated in consolidation.

 

According to item 10 of Regulation S-B, commencingJanuary 1, 2007, the Company is no longer considered a “small business issuer”.

 

The accompanying unaudited interim consolidatedfinancial statements were prepared in accordance with the instructions for Form10-Q and, therefore, do not include all disclosures necessary for a completepresentation of financial condition, results of operations, and cash flows inconformity with generally accepted accounting principles. All adjustments,which are, in the opinion of management, of a normal recurring nature and arenecessary for a fair presentation of the interim financial statements, havebeen included. Nevertheless, these financial statements should be read in conjunctionwith the consolidated financial statements and related notes included in theCompany’s Annual Report on Form 10-KSB for the year ended December 31, 2006.The results of operations for the three and nine months ended September 30,2007 are not necessarily indicative of the results that may be expected for theentire fiscal year or any other interim period.

 

**Use of Estimates**

 

The preparation ofconsolidated financial statements in conformity with generally acceptedaccounting principles in the United States of America requires management tomake certain estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosure of contingent assets and liabilities atthe date of the consolidated financial statements and the reported results ofoperations during the reporting periods. Actual results could differ from thoseestimates.

 

**Revenue Recognition**

 

The Company, through itswebsites Answers.com and WikiAnswers.com, generates revenues via advertising inthe form of sponsored links and image ads. This includes bothpay-per-performance ads and paid-for-impression advertising. In thepay-per-performance model, the Company earns revenue based on the number ofclicks associated with such ads; in the paid-for-impression model, the Company’srevenue is derived from the display of ads.

 

To date, the vastmajority of the Company’s advertising revenue has been obtained through theefforts of third party ad networks. Third party ad networks generally compensatethe Company by paying the Company a portion of the revenue they earn fromadertisers for provision of promotional space on the Company's web properties.Amounts received from such third party ad networks are reflected as revenue inthe period in which such advertising services are provided. In the fourthquarter of 2006, the Company begain marketing directly to advertisers andgenerating direct advertising revenue

 

In 2003, the Company soldlifetime subscriptions to its GuruNet product, which had no defined terminationdate. Cash received from such lifetime subscriptions was recorded as deferredrevenues and amounted to $425,000 as of December 31, 2006. In February 2007, inaccordance with the Company’s rights under the agreements it previously enteredinto with such lifetime subscribers, the Company terminated its GuruNet serviceand thereby extinguished its service obligation to such subscribers. Thus, theCompany recognized the $425,000 previously deferred, as revenue in the firstquarter of 2007.

 

The Company also earnsrevenues from partners that pay the Company for providing them withanswer-based services that they then use in their own products, via co-brandedweb pages.

 

7

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**Derivativesand Hedging**

 

TheCompany accounts for derivatives and hedging based on Statement of FinancialAccounting Standards (SFAS) No. 133, *“Accountingfor Derivative Instruments and Hedging Activities”*(SFAS 133). SFASNo. 133 requires the Company to recognize all derivatives on the balance sheetat fair value. If the derivatives meet the definition of a hedge and are sodesignated, depending on the nature of the hedge, changes in the fair value ofderivatives will either be offset against the change in fair value of thehedged assets, liabilities, or firm commitments through earnings, or recognizedin other comprehensive income until the hedged item is recognized in earnings.The ineffective portion of a derivative’s change in fair value is recognized inearnings.

 

In June2007, and during the third quarter of 2007, the Subsidiary entered into severalforward contracts to hedge certain foreign currency denominated expenses. Thesederivatives were not designated as hedging instruments under the rules of SFAS133 and therefore the net gains (losses) are recognized in earnings. During thethree and nine months ended September 30, 2007, such gains amounted to $69,000,and are included in operating expenses as follows:

 

| ** **                 | ** ** | **$ (in thousands)** | ** ** |
|----------------------------|------------|---------------------------|------------|
|                       |       |                      |       |
| Cost of revenue            |       | 8                         |       |
| Research and development   |       | 23                        |       |
| Sales and marketing        |       | 22                        |       |
| General and administrative |       | 16                        |       |
| ** **                 |       | 69                        |       |

 

 

**RecentlyIssued Accounting Standards**

 

In September 2006, theFinancial Accounting Standards Board issued SFAS No. 157,*“Fair Value Measurements,”* (SFAS 157).SFAS 157 establishes a framework for measuring fair value and expandsdisclosures about fair value measurements. The changes in current practiceresulting from the application of the Statement relate to the definition offair value, the methods used to measure fair value, and the expanded disclosuresabout fair value remeasurement. The statement is effective for fiscal yearsbeginning after November 15, 2007 and interim periods within those fiscalyears. The Company does not believe that the adoption of the provisions of SFAS157 will have a material impact on its consolidated financial position andresults of operations.

 

In February 2007, the FASB issued SFAS No. 159, *“The Fair Value Option for Financial Assets andFinancial Liabilities,”*(SFAS 159), which permits entities to chooseto measure many financial instruments and certain other items at fair valuethat are not currently required to be measured at fair value. SFAS 159 willbecome effective on January 1, 2008. The Company is currently evaluating theimpact of adopting SFAS 159 on its financial position, cash flows, and resultsof operations.

 

8

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**Note 2 — Stockholders’ Equity**

 

**General**

 

The following tablesummarizes the changes in the Company’s stockholders’ equity during thenine-month period ending September 30, 2007:

 

| ** **                | ** ** | **$ (in thousands)** | ** ** |
|---------------------------|------------|---------------------------|------------|
|                      |       |                      |       |
| **December 31, 2006**     | ** ** | **16,592**                | ** ** |
|                      |       |                      |       |
| Exercise of stock options |       | 145                       |       |
| Stock-based compensation  |       | 1,698                     |       |
| Other comprehensive loss  |       | 2                         |       |
| Net loss for the period   |       | (3,501                    | )          |
|                      |       |                      |       |
| **September 30, 2007**    | ** ** | **14,936**                | ** ** |

 

**CommonStock**

 

During the nine months ended September 30, 2007,the Company issued a total of 44,659 shares of common stock due to the exerciseof 44,659 of the Company’s outstanding stock options, for a total considerationof approximately $145,000.

 

**StockWarrants**

 

As of September 30, 2007 there were 1,157,763outstanding stock warrants with a weighted average exercise price of $16.21 perwarrant. All warrants are exercisable immediately. No warrants were exercisedduring the nine months ended September 30, 2007.

 

**Stock Options**

 

During the ninemonths ended September 30, 2007, the Company granted a total of 384,650 stockoptions to its employees, officers and directors at an average exercise priceof $11.79 per option. All such options were granted under the Company’s 2005Plan. Additionally, during the same period, 181,331 stock options wereforfeited.

 

As of September 30, 2007, 101,707 and 96,754options were available for grant under the 2005 Plan and the 2004 Stock Plan,respectively. All prior option plans are closed for future grants.

 

Thetotal fair value of stock options vesting during the nine months endedSeptember 30, 2007, amounted to $1,698,000 and was recorded as stock-basedcompensation expense.

 

9

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**Note3 — Commitments and Contingencies**

 

(a)                                               Future minimum lease payments underoperating leases for office space and cars, as of September 30, 2007, are asfollows:

 

| **Year ending December 31**            | ** ** | **$ (in thousands)** | ** ** |
|----------------------------------------|------------|---------------------------|------------|
|                                   |       |                      |       |
| 2007 (three months ending December 31) |       | 116                       |       |
| 2008                                   |       | 433                       |       |
| 2009                                   |       | 383                       |       |
| 2010                                   |       | 220                       |       |
|                                   |       |                      |       |
|                                   |       | 1,152                     |       |

 

                                                          Rental expense for operating leases forthe three months ended September 30, 2007 and 2006 was $126,000 and $83,000,respectively. Rental expense for operating leases for the nine months endedSeptember 30, 2007 and 2006 was $370,000 and $292,000, respectively.

 

(b)                                           All of the Subsidiary’s obligations toits bank, including the bank guarantee given to the Subsidiary’s landlord, aresecured by a lien on all of the Subsidiary’s deposits at such bank. As ofSeptember 30, 2007, deposits at such bank amounted to $995,000, including arestricted long-term deposit of $95,000.

 

(c)                                            In the ordinary course of business, theCompany enters into various arrangements with vendors and other business partners,principally for content, web-hosting, marketing and investor relationsarrangements. As of September 30, 2007, the total future cash commitments underthese arrangements amount to approximately $1,205,000.

 

(d)                                           On November 2, 2006 (the “Closing Date”),the Parent acquired certain assets of Interesting.com, Inc. including thedomain names www.faqfarm.com and www.wikianswers.com in exchange for $2,000,000in cash (the “Acquisition Costs”). For a period commencing on the Closing Dateand ending one year thereafter, the parties to the agreement have agreed toindemnify each other for damages resulting from any breach of their respectiverepresentations, warranties and covenants provided under the agreement.

 

(e)                                            On July 14, 2005, a former marketingemployee of the Company (“the Employee”), filed a statement of claim (“theClaim) with the Regional Labor Court in Jerusalem, Israel (“the Court”),against the Parent, the Subsidiary, the Parent’s Chief Executive Officer andits Chief Financial Officer, in the amount of approximately US$50,000, fordeferred salary, severance pay and unpaid commissions, as well as 43,441options to purchase such number of our shares of common stock, with an exerciseprice of $2.76 per share. On June 27, 2007, the Company and the Employeeentered into a settlement agreement. As a result of this settlement agreement,the Company paid the Employee $130,000, including the Employee’s legal fees,and the claim was dismissed without prejudice.

 

(f)                                                From time to time, the Company receivesvarious legal claims incidental to its normal business activities, such asintellectual property infringement claims and claims of defamation and invasionof privacy. Although the results of claims cannot be predicted with certainty,the Company believes the final outcome of such matters will not have a materialadverse effect on its financial position, results of operations, or cash flows.

 

10

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(g)                                             On July 13, 2007, the Companyentered into a purchase agreement to acquire all of the outstandinglimited liability interests of Lexico Publishing Group, LLC for an aggregatepurchase price of $100 million in cash, subject to adjustments for closing networking capital and transaction costs. Transaction costs  incurred in connection with this acquisition areestimated to be approximately $2.2 million. According to the terms of theagreement, $10 million, ****which is referred to as the Lexico Employee Bonuses,****may be paid****to theemployees of Lexico, subject to certain terms and conditions and apre-determined payout schedule. In the event that such terms and conditions arenot met, the portion of the Lexico Employee Bonuses not paid to employees willbe due to the members of Lexico.****In addition, $10million of the purchase price will be placed in escrow for 12 months tosecure the indemnification obligations of the members under the agreement, aswell as any post-closing purchase price adjustments for net working capital ortransaction expenses.

 

In connection with the initial allocation of thepurchase price, Lexico Employee Bonuses paid to Lexico employees will berecorded as compensation expense during the contracted service period, which inmost cases is one year.  The remainingpurchase price will be recorded as intangible assets, with estimated usefullives of one to ten years, and goodwill.

 

Consummation of the acquisition of Lexico is subjectto the Company's ability to secure financing for the acquisition, as well ascustomary conditions to closing, including absence of any legal prohibition onconsummation of the acquisition, obtaining governmental and third partyconsents, the accuracy of the representations and warranties, and delivery ofcustomary closing documents. The Company intends to use approximately $100million of the net proceeds from a public offering to acquire Lexico.

 

The purchase agreement may be terminated under thefollowing circumstances, subject to the limitations described in the purchaseagreement: (i) by mutual written consent; (ii) by either the Company or thesellers if the acquisition is not consummated by January 13, 2008 subject tocertain extensions; (iii) by either the Company or the sellers if there is afinal, non-appealable order restraining, enjoining or otherwise prohibiting theconsummation of the acquisition; or (iv) by either the Company or the sellersupon an incurable material breach of the purchase agreement by the other party,which breach would result in the failure of the terminating party’s closingconditions to be fulfilled.  The purchaseagreement provides that, upon termination for an incurable material breach ofthe purchase agreement by the Company, which breach would result in the failureof the Company's closing conditions to be fulfilled, the Company will be requiredto pay the sellers a $2.0 million termination fee. Similarly, the purchaseagreement provides that, upon termination of the purchase agreement for anincurable material breach by the sellers, which breach would result in thefailure of their closing conditions to be fulfilled, they will be required topay the Company a $2.0 million termination fee. In addition, if the purchaseagreement is terminated for failure of the financing condition, the Companywill be required to reimburse the out-of-pocket transaction expenses of thesellers up to $400,000.

 

As of September 30, 2007, the Company incurredapproximately $498,000 in legal, accounting and investment banking fees thatwould have to be charged to operations, rather than capitalized as purchaseprice, in the event the Company does not close the transaction. Additionally,as of September 30, 2007, the Company incurred approximately $384,000 infinancing costs that would have to be charged to operations, rather thancharged to shareholders' equity, in the event we do not close the transaction.

 

**Note 4 — Income Tax**

 

(a)                                              In June 2006, the FASB issuedInterpretation No. 48, *“Accounting forUncertainty in Income Taxes - An Interpretation of FASB Statement No. 109”*(FIN 48). FIN 48 clarifies the accounting for uncertainties in income taxesrecognized in a company’s financial statements in accordance with SFAS No. 109,*“Accounting for Income Taxes”*.FIN 48 prescribes a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. The Company adopted the provisions of FIN48 as of January 1, 2007. Interest and penalties related to unrecognized taxbenefits are recognized as a component of income tax expense.

 

Since the date of adoption, as a result of taxpositions taken in the current year, including associated estimated interestand penalties which were not material, the Company’s unrecognized tax benefitsincreased by $50,000, to a total of $230,000. Of the total unrecognized taxbenefits at adoption date, approximately $90,000, if recognized, would impactthe effective tax rate in 2007.

 

The Parent or its Subsidiary file income tax returnsin the U.S. federal jurisdiction, and various state & local, and foreignjurisdictions. The Parent is no longer subject to U.S. federal, state and localincome tax examinations by tax authorities for years prior to 2003, whereas theSubsidiary is no longer subject to foreign examinations by its tax authorityfor years prior to 2004. The New York State Department of Taxation and Financecommenced an examination of the Company’s New York State income tax returns for2003 through 2005 but has not yet reached any conclusions. The Company does notanticipate that their examination would result in a material change to theCompany’s financial position.

 

11

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(b)                                           The 2006 financial statements aspreviously presented by the Company in reports and SEC filings, have beenmodified to account for an immaterial error in the income tax expense in theConsolidated Statements of Operations and deferred taxes on the ConsolidatedBalance Sheets involving an over-accrual of deferred income taxes relating tothe Subsidiary’s accumulated earnings, as a result of applying the distributedtax rate as opposed to the undistributed tax rate.

 

**Note5 — Major Customers**

 

During the nine months ended September 30, 2007,the vast majority of the Company’s advertising revenue was generated throughthe efforts of third party ad networks. Additionally, during the three monthsended September 30, 2007, the Company earned approximately 67% and 8% of itstotal revenue through two of its third party ad networks, Google andShopping.com, comparedto 70% and 15%, respectively, of the total revenue during the third quarter of2006.Of the total revenue during the nine months endedSeptember 30, 2007, Google and Shopping.com accounted for approximately 65% and9%, compared to 67% and 15% of our total revenue during the same period in2006.

 

**Note6 — Risks and Uncertainties**

 

In July 2007, a search engine algorithm adjustment by Google led to a dropin Google directed traffic to Answers.com. As a result, overall traffic andrevenue on Answers.com dropped by approximately 28% from levels immediatelyprior to the change. The Company has not been able to reverse the impact ofthis adjustment, and it does not anticipate that it will recover the losttraffic and revenue.

 

In response to the Google algorithm adjustment, the Company reduced itsheadcount and related recurring compensation costs by approximately 12%. As aresult, the Company recorded a one-time charge of approximately $250 thousandin the third quarter of 2007.

 

As a result of the search engine algorithm adjustment by Google, the Companyexamined what impact the aforesaid event might have on the recoverability ofits long-lived assets in accordance with the guidance contained in SFAS 142 and144. As a result of the analysis, the Company concluded that the carrying valueof its assets has not been impaired. However, while theCompany uses available information to prepare its estimates and to performimpairment evaluations, the recoverability calculations and impairment testsrequire significant management judgment and estimates.  Such estimates include projections ofundiscounted cash flows and assumptions used in calculating projected growth ofRPM’s, page-views, and expenses.  Inaddition, a certain degree of judgment was exercised in determining assetgroups in accordance with generally accepted accounting principles.  Had the Company's estimates and assumptionsdiffered, the accounting treatment might have resulted differently.  Future actual results could significantlydiffer from the anticipated results as reflected in the Company's analysis.

 

The Company continues to rely heavily on search engines for a substantialportion of the users visiting its Web properties. From time to time, searchengines change their algorithms that direct search queries to Internet Websites, including the Company’s Web properties. Search engines may also restrictthe flow of users visiting the Company’s Web properties specifically. TheCompany cannot guarantee that it will successfully react to these actions andrecover any lost traffic.  Accordingly, changes in search enginealgorithms or a restriction on the flow of users visiting the Company’s Webproperties from the search engines, could cause a significant decrease intraffic and revenues.

 

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

*Thefollowing discussion and analysis should be read together with our financialstatements and the notes to those statements that appear elsewhere in this QuarterlyReport. This discussion contains forward-looking statements reflecting ourcurrent expectations and involves risks and uncertainties. In some cases, youcan identify forward-looking statements by terminology such as “may,” “will,” “should,”“expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential,”or “continue” or the negative of these terms or other comparableterminology.  For example, statementsregarding our expectations as to future financial performance, expense levelsand liquidity sources are forward-looking statements.  Actual results and the timing of events coulddiffer materially from those discussed in our forward-looking statements as aresult of many factors, including those set forth under “Risk Factors” andelsewhere in this Quarterly Report.*

 

**Overview**

 

We are a leading online answer engine. Our Webproperties currently consist of Answers.com and WikiAnswers.com. We offerinformation related to over 4 million topics based on content from brand-namepublishers, our WikiAnswers community and our proprietary natural languagesearch technology, which we refer to as Answers from the Web. Answers.comcombines and presents targeted information from disparate sources and deliversanswers to users’ questions in a single consolidated view.  WikiAnswers.com is a user-generated content,or UGC, community-based question and answer site. According to comScore, aglobal Internet information provider, our Web properties had approximately 14million unique visitors in September 2007, which ranks Answers Corporationnumber 62 in the top U.S. Web properties. Our goal is to become the premieronline provider of and leading destination for answers on any topic.

 

Prior to January2005, we sold subscriptions to our reference-based product, GuruNet. After thelaunch of Answers.com in January 2005, we ceased offering new subscriptions toGuruNet. In February 2007, we terminated the GuruNet service.

 

**Recent Events**

 

In July 2007, a searchengine algorithm adjustment by Google led to a drop in Google directed trafficto Answers.com. This adjustment reduced our overall traffic by approximately28% based on the average traffic directed to Answers.com from Google for theweek prior to the adjustment as compared to the week after.****Asa result,****our revenue also declinedproportionately. We have not been able to reverse the impact of thisadjustment, and we do not anticipate that we will recover the lost traffic andrevenue. In response to the Google algorithm adjustment, we reduced ourheadcount and related compensation costs, reducing our base payroll expenses byapproximately 12%. As a result, we recorded a charge of approximately $250thousand in the third quarter of 2007, related to this restructuring.

 

In September 2007, Yahoo!dropped our content from its search index, which reduced our Yahoo! directedtraffic. This action was reversed within a week, and we have recovered all ofour Yahoo! directed traffic.

 

***Planned LexicoAcquisition***

 

On July 13, 2007, we entered into apurchase agreement to acquire all of the outstanding limited liabilityinterests of Lexico Publishing Group, LLC for an aggregate purchase price of$100 million in cash, subject to adjustments for closing net working capitaland transaction expenses. Our transaction expenses incurred in connection withthis acquisition are estimated to be approximately $2.2 million. According tothe terms of our agreement, $10 million, ****which we refer to as the Lexico Employee Bonuses,****may be paid****to theemployees of Lexico, subject to certain terms and conditions and apre-determined payout schedule. In the event that such terms and conditions arenot met, the portion of the Lexico Employee Bonuses not paid to employees willbe due to the members of Lexico.****In addition, $10million of the purchase price will be placed in escrow for 12 months tosecure the indemnification obligations of the members under the agreement, aswell as any post-closing purchase price adjustments for net working capital ortransaction expenses.

 

In connection with the initial allocation of thepurchase price, Lexico Employee Bonuses paid to Lexico employees will berecorded as compensation expense during the contracted service period, which inmost cases is one year.  The remainingpurchase price will be recorded as intangible assets, with estimated usefullives of one to ten years, and goodwill.

 

Consummation of the acquisition of Lexico is subjectto our ability to secure financing for the acquisition, as well as customaryconditions to closing, including absence of any legal prohibition onconsummation of the acquisition, obtaining governmental and third partyconsents, the accuracy of the representations and warranties, and delivery ofcustomary closing documents. We intend to use approximately $100 million of thenet proceeds from a public offering to acquire Lexico.

 

The purchase agreement may be terminated under thefollowing circumstances, subject to the limitations described in the purchaseagreement: (i) by mutual written consent; (ii) by either us or the sellers ifthe acquisition is not consummated by January 13, 2008 subject to certainextensions; (iii) by either us or the sellers if there is a final,non-appealable order restraining, enjoining or otherwise prohibiting theconsummation of the acquisition; or (iv) by either us or the sellers upon anincurable material breach of the purchase agreement by the other party, whichbreach would result in the failure of the terminating party’s closingconditions to be fulfilled.  The purchaseagreement provides that, upon termination for an incurable material breach ofthe purchase agreement by us, which breach would result in the failure of ourclosing 

 

 

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conditions to be fulfilled, we will be required to pay the sellers a$2.0 million termination fee. Similarly, the purchase agreement provides that,upon termination of the purchase agreement for an incurable material breach bythe sellers, which breach would result in the failure of their closingconditions to be fulfilled, they will be required to pay us a $2.0 milliontermination fee. In addition, if the purchase agreement is terminated forfailure of the financing condition, we will be required to reimburse theout-of-pocket transaction expenses of the sellers up to $400,000.

 

***Shelf Registration Statement***

 

On July 17, 2007, we filed a universal shelfregistration statement with the Securities and Exchange Commission (SEC). Theregistration statement covers up to an aggregate of $140,000,000 of commonstock, preferred stock, warrants, debt securities, units or any combinationthereof. On August 6, 2007, the universal shelf registration statement wasdeclared effective by the SEC.

 

**Acquisitions**

 

**WikiAnswers**

 

On November 2,2006, we acquired WikiAnswers and certain other assets for an aggregate of $2.0million in cash. In connection with the allocation of the purchase price, werecorded goodwill of approximately $437 thousand and intangible assets, withestimated useful lives of three to ten years, of approximately $1,563 thousand.Since the date of the acquisition the revenues and operating expenses ofWikiAnswers have been included in our results of operations.

 

**Brainboost**

 

On December 1, 2005, we acquired BrainboostTechnology, LLC, developer of the Brainboost Answer Engine which we haveintegrated into our Answers from the Web technology, an artificial intelligencetechnology enabling natural language search on the Web. As consideration forthe acquisition, we paid $4.0 million in cash and issued 439,000 shares of our commonstock, valued at approximately $5.6 million at the time of the acquisition. Inconnection with the allocation of the purchase price, we recorded an intangibleasset related to the Brainboost technology of approximately $5.4 million, withan estimated useful life of six years, and recognized compensation expense ofapproximately $4.2 million.

 

Under the terms ofthe acquisition, 50% and 25% of the shares of common stock were held in escrowfor 3 and 6 months after the purchase date, respectively. Release from escrowwas contingent upon our continued employment of one of the principals of thegeneral partnership that formerly owned Brainboost. The escrowed shares weredeemed to be compensation for services to be performed by the principal of theseller over the six-month period ending May 31, 2006. Because the escrowcriteria were met, the shares were released from escrow, as scheduled, on March1, 2006 and June 1, 2006. As a result, we recorded a compensation expensecharge of approximately $4.2 million, which represented the value of theseshares, on a straight-line basis, over the requisite six-month employmentcommitment period.

 

The stockcomponent of the consideration was subject to a registration rights agreementpursuant to which we agreed that if our registration statement was noteffective with the Securities and Exchange Commission by April 1, 2006, wewould pay the sellers a penalty of $100,000 per month, pro-rated daily.  Our registration statement was declaredeffective on June 9, 2006; consequently, we paid the sellers $227 thousand inthe second quarter of 2006.

 

In June 2006, wecompleted our initial beta integration of the Brainboost technology intoAnswers.com as Answers from the Web. We plan to further develop the technologythrough enhancements to its accuracy, range and speed.

 

**Revenue**

 

*Traffic*

 

Our revenue isprimarily driven by the traffic generated by our Web properties and our abilityto effectively monetize that traffic. Our current sources of traffic includethe following:

 

•                  *Search engines*: Users submit queries and algorithmsearch engines respond by generating a list of Web pages that are likely tooffer the most relevant content. When our pages rank high in the algorithmicsystems of search engines, our results are more likely to be accessed by users.According to our internal estimates, for September 2007, this source of trafficrepresented approximately 60% of our traffic.

 

•                  *Google’s definition link*: We have an informal, non-contractual relationship with Google underwhich Google links search results related to certain definitional queries toAnswers.com.  According to our internalestimates, for September 2007, this source of traffic represented approximately15% of our traffic.

 

 

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•                  *Direct users*: Users visiting our Web propertiesdirectly.  According to our internalestimates, for September 2007, direct users represented approximately 25% ofour traffic.

 

Since most of our traffic originates from searchengines, we expend considerable resources improving the volume and optimizingthe monetization of this traffic. The industry commonly refers to such effortsas search engine optimization, or SEO. Our Web properties have at timesexperienced decreases in traffic, and consequently decreases in revenue, due tosearch engine actions, including the recent actions by Google and Yahoo! 

 

We continuouslyseek to improve the user experience of visitors to our Web properties, which webelieve leads to increased pages per visit, or stickiness, and return visits,or user-retention. We seek to increase stickiness and user-retention by addingnew features, enhancing user interfaces and adding new content to our Webproperties.

 

Our Web propertiesreceive direct traffic to their respective home pages. Answers.com alsoreceives direct traffic through partner Web properties or through softwaredownloads and access tools, 1-Click Answers and AnswerTips. 1-Click Answers andAnswerTips are tools that allow users to click on a word or phrase and gainaccess to Answers.com’s online content through a pop-up information bubble.

 

*Monetization*

 

*AdvertisingRevenue.*We earnmost of our revenue from advertising. There are two primary categories ofInternet advertising, pay-per-performance, or most commonly cost per click, orCPC, and pay-per-impression, or cost per 1,000 impressions, or CPM.In the pay-for-performance model we earnrevenue based on the number of clicks associated with such ads; in the paid-for-impressionmodel we derive revenue from the display of ads. We also work with third party ad networks that we believe optimize theaverage amount of revenue we earn per page view. Third party ad networks generally compensate us bypaying us a portion of the revenue they earn from advertisers for our provisionof promotional space on our Web properties. Additionally, in the fourth quarterof 2006, we began marketing directly to advertisers and generating directadvertising revenue. We expect direct advertising revenue to become a greaterpart of our overall revenue during the remainder of 2007.

 

We gauge the effectiveness of our monetization effortsand trends by measuring our revenue per one thousand page views, or RPM. In ourManagement’s Discussion and Analysis of Financial Condition and Results of Operationsprior to our quarterly report on Form 10-Q for the quarterly period ended June30, 2007, we reported RPM based on website queries, or traffic directly to one of our Answers.com topicpages. Beginning with the Management’s Discussion and Analysis of FinancialCondition and Results of Operations contained in our quarterly report on Form10-Q for the quarterly period ended June 30, 2007, we refer to RPM based on page views. Page views include trafficdirectly to the Answers.com home page, but exclude lookups conducted through 1-Click Answers,AnswerTips and traffic from partners who pay us for providing them ouranswer-based services. Page views are the more widely recognizedindustry standard traffic metric. Based upon our internal analysis, we estimatethe number of Answers.com page views to be approximately**13%higher than the number of our previously reported Answers.com queries. Thisdifference is primarily attributable to home page visits in the page viewtraffic estimates. Historical RPM in this Form 10-Q for the quarter endedSeptember 30, 2007have been modified to conform to the new methodology and  are approximately**13% lower than amounts reported prior to ourquarterly report on Form 10-Q for the quarterly period ended June 30, 2007. The following table sets forth ourAnswers.com average daily page views and RPM, since our launch ofAnswers.com:

 

| ** ** | ** ** | **Average Daily Page Views** | ** ** | **Ad Revenue  (Thousands)** | ** ** | **RPM** | ** ** |
|------------|------------|------------------------------|------------|-----------------------------|------------|---------|------------|
| Q-1 2005   |       | 1,010,000                    |       | $                           | 107        |    | $          | 1.17 |   |
| Q-2 2005   |       | 2,000,000                    |       | $                           | 357        |    | $          | 1.96 |   |
| Q-3 2005   |       | 1,990,000                    |       | $                           | 500        |    | $          | 2.73 |   |
| Q-4 2005   |       | 2,370,000                    |       | $                           | 807        |    | $          | 3.71 |   |
| Q-1 2006   |       | 2,920,000                    |       | $                           | 1,090      |    | $          | 4.15 |   |
| Q-2 2006   |       | 3,030,000                    |       | $                           | 1,457      |    | $          | 5.29 |   |
| Q-3 2006   |       | 3,400,000                    |       | $                           | 1,810      |    | $          | 5.79 |   |
| Q-4 2006   |       | 4,340,000                    |       | $                           | 2,400      |    | $          | 6.02 |   |
| Q-1 2007   |       | 5,470,000                    |       | $                           | 2,768      |    | $          | 5.62 |   |
| Q-2 2007   |       | 4,890,000                    |       | $                           | 2,551      |    | $          | 5.73 |   |
| Q-3 2007   |       | 3,730,000                    |       | $                           | 1,861      |    | $          | 5.41 |   |

 

 

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Our Answers.comRPM increased significantly since we launched the Web property through the endof 2006 due to the implementation of various optimization methods, including:

 

•                  modifying the user interface;

•                  modifying the color, background and placement of adsdisplayed;

•                  modifying the size of ads;

•                  changing the number of ads per page;

•                  adding or switching third party ad networks;

•                  increasing the revenue-share percentage offered bythird party ad networks;

•                  modifying the types of ads introduced;

•                  modifying the content displayed; and

•                  introducing direct advertising sales.

 

While we plan tocontinue focusing on optimizing our monetization, utilizing and expanding onmany of the techniques we have used in the past, we believe that the primaryfactor that will improve our Answers.com RPM is selling ads directly throughour own sales force. Excluding expected growth in direct ad sales revenue, weanticipate that our Answers.com RPM will fluctuate around current levels. Inthe second half of 2006, we hired our Vice President of Advertising Sales.During the second quarter of 2007, we hired three additional salespersons. Asour direct advertising sales grow and become a more significant part of ourrevenue, we expect to see additional growth in our Answers.com RPM.

 

Two of our third party ad networks, Google andShopping.com, accounted for approximately 67% and 8%, respectively, of ourtotal revenue during the three months ending September 30, 2007, compared toapproximately 70% and 15%, respectively, of our total revenue in the same periodin 2006.  Google and Shopping.com accounted forapproximately 65% and 9%, respectively, of our total revenue during the ninemonths ending September 30, 2007, compared to approximately 67% and 15%,respectively, of our total revenue in the same period in 2006. In addition to Google and Shopping.com,we utilize the services of other third party ad networks that provide us withads.  Although there are many companiesthat provide third party ad networks, the loss of Google as a third party adnetwork could have a material adverse impact on our financial condition, as wemay not succeed in receiving terms and ad services as favorable as thoseprovided under our Google Services Agreement (GSA), the contractualrelationship pursuant to which Google serves our Web properties withadvertisements. While the drop in traffic due to the July 2007Google search engine algorithm adjustment impacted our aggregate advertisingrevenue, it did not impact the GSA.

 

*LicensingRevenue.*We alsoearn revenues from partners that pay us for providing them with ouranswer-based services that they then use in their own products, via co-brandedWeb pages. Revenue from these arrangements are based on various formulas,including a percentage of the revenues these parties earn by delivering ourservices to their users, fees based on the number of user queries and fixedperiodic fees.

 

*SubscriptionRevenue.*Prior toDecember 2003, we sold lifetime subscriptions to GuruNet, generally for $40 persubscription. In December 2003, we decided to alter our pricing model and movedto an annual subscription model, for which we generally charged our subscribers$30 per year. We have not sold subscriptions since our launch of Answers.com inJanuary 2005. As of February 2007, we terminated the GuruNet service.Subscription revenue in periods subsequent to January 2005 reflects therecognition of revenue from subscriptions that we sold prior to our launch ofAnswers.com in January 2005.

 

**Costsand Expenses**

 

*Cost ofRevenue*

 

Cost of revenueconsists of fees to third party providers of content, Web search service fees,ad serving fees, amortization of the cost of acquired software used in ourproducts, data center costs including depreciation of information technologyassets, contractual revenue sharing fees to various Web property operators forvisitors directed to our Web properties, or traffic acquisition costs, as wellas the compensation, travel and overhead costs relating to personnel who areresponsible for content editing and integration, production operations andcustomer support. As revenue increases, we expect our cost of revenues as apercentage of revenue to decrease, however, we may experience an increase inour cost of revenues as a percentage of revenue, during the transition periodin 2008 related to our anticipated shift to a co-location facility for hostingour web properties, rather than our current managed hosting facility.

 

*Researchand Development Expenses*

 

Research anddevelopment expenses consist of compensation, travel and overhead costs ofpersonnel conducting research and development of our products and services, andconsulting costs. Our research and development team works primarily on projectsto improve and enhance user interface, product functionality, disambiguation,scalability and performance. We generally expect that our research and developmentexpenses will decline as a percentage of revenue as we grow our revenue.

 

 

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*Salesand Marketing Expenses*

 

Sales and marketing expenses consist of compensation,travel and overhead costs of sales and marketing and product managementpersonnel, public relations, marketing and market information services, andadvertising and promotional costs. We generally expect that our sales andmarketing**expenses will declineas a percentage of revenue as we grow our revenue.

 

*Generaland Administrative Expenses*

 

General andadministrative expenses consist primarily of compensation, travel and overheadcosts for financial, legal and administrative personnel, insurance fees, feesfor professional services, including investor relations, legal, accounting andother consulting fees, investment banking fees, amortization of domain names,and other general corporate expenses. Overhead costs consist primarily of rent,telecommunications, utilities and depreciation expenses. We generally expectthat our general and administrative expenses will decline as a percentage ofrevenue as we grow our revenue.

 

*Stock-BasedCompensation*

 

New employeestypically receive stock option awards within three months of their start date.We also grant additional stock option awards to existing employees anddirectors, usually once a year. As of January 1, 2006, we adopted SFAS No. 123(revised 2004), *“Share-Based Payments”,*or SFAS 123R, which requires measurement of compensation cost for all stock-basedawards at fair value on date of grant and recognition of compensation over theservice period awards are expected to vest. Such costs are part of ourcompensation expense and are included in the operating expense categories inour Statement of Operations.

 

*OtherCompensation Charges*

 

In connection with our purchase of Brainboost, we issued shares of common stock, valued atapproximately $4.2 million, which were deemed to be compensation forservices.  Accordingly, $4.2 million wascharged to compensation expense over the six-month period ending May 31, 2006.

 

In connection with our pending acquisition of Lexico, we will pay theLexico Employee Bonuses****to the employees of Lexico,subject to certain terms and conditions and a pre-determined payout schedule.In the event that such terms and conditions are not met, the portion of the $10million not paid to employees will be due to the members. ****In connection with the initial allocation of thepurchase price, Lexico Employee Bonuses paid to Lexico employees will berecorded as compensation expense during the contracted service period, which inmost cases is one year.

 

**Other**

 

*InterestIncome (Net)*

 

Interest income (net)primarily consists of interest income earned on cash, cash equivalent andinvestment securities balances.

 

*OtherExpenses*

 

Other expensesconsists primarily of foreign currency exchange gains and losses. In the ninemonths ended September 30, 2006, other expenses included a payment of $227thousand to the sellers of Brainboost as a result of our delay registering withthe SEC shares we issued as consideration in the transaction.

 

 

17

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*IncomeTax Expense*

 

Our effective taxrate differs from the statutory federal rate due to differences between incomeand expense recognition prescribed by income tax regulations and GenerallyAccepted Accounting Principles. We utilize different methods and useful livesfor depreciating and amortizing property, equipment and intangible assets anddifferent methods and timing for calculating and recording stock compensationexpense. Furthermore, permanent differences arise from certain income andexpense items recorded for financial reporting purposes but not recognizablefor income tax purposes. In addition, our income tax expense has been adjustedfor the effect of state and local taxes and foreign income from our whollyowned subsidiary. Our deferred tax assets are offset by a valuation allowancebecause realization depends on generating future taxable income, which, in ourestimation, is not more likely than not to transpire.

 

Our Israeli subsidiary had income during the ninemonths ending September 30, 2007 and 2006, resulting from the servicesagreement we entered into with such Israeli subsidiary. Pursuant to this agreement,the Israeli subsidiary charges us for research and development services itprovides us, plus 12.5%. However, the subsidiary is an “approved enterprise”under Israeli law, which means that income arising from the subsidiary’sapproved activities is subject to zero tax under the “alternative benefit” pathfor a period of ten years. In the event of distributions bythe subsidiary to the parent, the subsidiary would have to pay a 10% corporatetax on the amount distributed, and the recipient would have to pay a 15% tax tobe withheld at source on the amounts of such distribution received.

 

                The following table sets forth the historicaloperating results as a percentage of revenue for the periods indicated:

** **

| ** **                   | ** ** | **Three months ended  September 30** | ** ** | **Nine months ended  September 30** | ** ** |
|------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                   | ** ** | **2007**                             | ** ** | **2006**                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                         |       |                                 |       |                                |       |   |   |   |   |
| **Revenue**                  |       | 100                                  | %          | 100                                 | %          | 100 | % | 100 | % |
|                         |       |                                 |       |                                |       |   |   |   |   |
| **Costs and expenses:**      | ** ** | ** **                           | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of revenue              |       | 53                                   |       | 46                                  |       | 43 |   | 52 |   |
| Research and development     |       | 35                                   |       | 33                                  |       | 27 |   | 115 |   |
| Sales and marketing          |       | 55                                   |       | 50                                  |       | 39 |   | 50 |   |
| General and administrative   |       | 48                                   |       | 41                                  |       | 36 |   | 56 |   |
| **Total operating expenses** |       | 191                                  |       | 170                                 |       | 145 |   | 273 |   |
|                         |       |                                 |       |                                |       |   |   |   |   |
| **Operating loss**           |       | (91                                  | )          | (70                                 | )          | (45 | ) | (173 | ) |
|                         |       |                                 |       |                                |       |   |   |   |   |
| Interest income, net         |       | 4                                    |       | 8                                   |       | 3 |   | 10 |   |
| Other expense, net           |       | —                               |       | (1                                  | )          | — |   | (5 | ) |
|                         |       |                                 |       |                                |       |   |   |   |   |
| **Loss before income taxes** |       | (87                                  | )          | (63                                 | )          | (42 | ) | (168 | ) |
|                         |       |                                 |       |                                |       |   |   |   |   |
| Income taxes                 |       | (1                                   | )          | (1                                  | )          | — |   | — |   |
|                         |       |                                 |       |                                |       |   |   |   |   |
| **Net loss**                 |       | (88                                  | )%         | (64                                 | )%         | (42 | )% | (168 | )% |

 

 

18

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***Three Months and Nine Months Ended September 30, 2007 and2006***

 

**Revenue**

 

 

| ** **                        | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                        | ** ** | **2007**                             | ** ** | **2006**                            | ** ** | ** ** | ** ** | **2007** | ** ** | **2006** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **(in thousands)**                   | ** ** | **Change**                          | ** ** | **(in thousands)** | ** ** | **Change** | ** ** |
|                              |       |                                 |       |                                |       |   |   |   |   |   |   |   |   |
| Answers.com advertising revenue   |       | $                                    | 1,861      |                                | $          | 1,810 |   | $ | 51 |   | $ | 7,179 |   | $ | 4,357 |   | $ | 2,822 |   |
| WikiAnswers advertising revenue   |       | $                                    | 304        |                                | $          | — |   | $ | 304 |   | $ | 598 |   | $ | — |   | $ | 598 |   |
| Answers service licensing revenue |       | $                                    | 43         |                                | $          | 48 |   | $ | (5 | ) | $ | 202 |   | $ | 143 |   | $ | 59 |   |
| Subscription revenue              |       | $                                    | —     |                                | $          | — |   | $ | — |   | $ | 425 |   | $ | 23 |   | $ | 402 |   |
|                              |       |                                 |       |                                |       |   |   |   |   |   |   |   |   |
|                              |       | $                                    | 2,208      |                                | $          | 1,858 |   | $ | 350 |   | $ | 8,404 |   | $ | 4,523 |   | $ | 3,881 |   |

 

Revenue increased $350 thousand, or 19%, to $2,208 thousand for the three monthsended September 30, 2007 from $1,858 thousand for the three months endedSeptember 30, 2006. The increase in our revenue was primarily the result of$304 thousand of advertising revenue generated through WikiAnswers.com, awebsite we did not own during the same period in 2006, and increases in ourAnswers.com advertising revenue, of $51 thousand. Average daily page views forAnswers.com in the three months ended September 30, 2007 were approximately3,730,000, compared to approximately 3,400,000 in the same period in 2006. RPM forAnswers.com was $5.41 in the three months ended September 30, 2007, compared to$5.79 in the same period in 2006. In future periods we expect thatWikiAnswers will comprise a larger percentage of our advertising revenue. 

 

Revenue increased $3,881 thousand, or 86%, to $8,404 thousand for the nine monthsended September 30, 2007 from $4,523 thousand for the nine months endedSeptember 30, 2006. The majority of the increase in our revenue was due to anincrease in Answers.com advertising revenue of $2,822 thousand, which was theresult of increases in our Answers.com traffic and monetization rates. Averagedaily page views for Answers.com in the nine months ended September 30, 2007were approximately 4,700,000 compared to approximately 3,120,000 in the sameperiod in 2006. RPM for Answers.com was $5.59 in the nine months endedSeptember 30, 2007, compared to $5.07 in the same period in 2006. In addition,advertising revenues in the nine months ended September 30, 2007 includes $598 thousand generated fromWikiAnswers, a website we did not own during the same period in 2006. 

 

In July 2007, a searchengine algorithm adjustment by Google led to a drop in Google directed trafficto Answers.com. This adjustment reduced our overall traffic by approximately28% based on the average traffic directed to Answers.com from Google for theweek prior to the adjustment as compared to the week after.****Asa result,****our revenue also declinedproportionately. We have not been able to reverse the impact of thisadjustment, and we do not anticipate that we will recover the lost traffic andrevenue. In response to the Google algorithm adjustment, we reduced ourheadcount and related compensation costs, reducing our base payroll expenses byapproximately 12%.  In September 2007,Yahoo! dropped our content from its search index. This action was reversedwithin a week, and we have recovered all of our Yahoo! directed traffic.

 

Approximately $256thousand and $415 thousand of our advertising revenue in the three and ninemonths ending September 30, 2007, respectively, resulted from the efforts ofour direct ad sales force. We had no direct ad sales during the three and ninemonths ending September 30, 2006.

 

Subscription revenue inthe nine months ended September 30, 2007 of $425 thousand resulted from the recognition ofrevenue from the sale of lifetime subscriptions of our GuruNet service prior toDecember 2003. As of December 31, 2006, we had approximately $425 thousand of deferred revenuerelating to these subscriptions.  Priorto the nine months ended September 30, 2007, we did not recognize any revenuefrom the lifetime subscriptions to our GuruNet service because thesubscriptions had no defined term. On February 2, 2007, in accordance with ourrights under the agreements we entered into with such subscribers, we terminatedthe GuruNet service and thereby extinguished our service obligations to oursubscribers.  As a result, we recognizedthe entire $425 thousand previouslydeferred, as revenue, in the first quarter of 2007. We had no additionalsubscription revenue in 2007. Subscription revenue of $4 thousand and $23 thousand in the three and ninemonths ended September 30, 2006, respectively, related to fixed-termsubscriptions we sold prior to January 2005, as we recognized the revenue fromfixed term subscriptions over the lives of such subscriptions.

 

 

19

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**Costs and Expenses**

 

*Cost of Revenue*

* *

| ** **      | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **      | ** ** | **2007**                             | ** ** | **2006**                            | ** ** | ** ** | ** ** | **2007** | ** ** | **2006** | ** ** | ** ** | ** ** |
| ** **      | ** ** | **(in thousands)**                   | ** ** | **Change**                          | ** ** | **(in thousands)** | ** ** | **Change** | ** ** |
|            |       |                                 |       |                                |       |   |   |   |   |   |   |   |   |
| Cost of revenue |       | $                                    | 1,179      |                                | $          | 844 |   | $ | 335 |   | $ | 3,643 |   | $ | 2,336 |   | $ | 1,307 |   |
|                 |            |                                      |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Cost of revenue increased $335 thousand, or 40%, to $1,179 thousand for thethree months ended September 30, 2007 from $844 thousand for the three monthsended September 30, 2006. The increase in cost of revenue was due primarily toincreases in data center costs of $164 thousand, including depreciation ofinformation technology assets, increases in content licensing costs of $118 thousand, and increases in fees we pay toGoogle for web search and ad serving fees of $34 thousand.Additionally, in the three months ended September 30, 2007 we incurred $32 thousand of amortization expensesrelating to intangible assets we purchased in connection with the WikiAnswersacquisition in November 2006.  We did notincur any similar expenses for the three months ended September 30, 2006. Theseincreases were offset, to some extent by decreases in compensation costs of $61thousand.

 

Cost of revenue increased $1,307 thousand, or 56%, to $3,643 thousand forthe nine months ended September 30, 2007 from $2,336 thousand for the ninemonths ended September 30, 2006. The increase in cost of revenue was dueprimarily to increases in data center costs of $503 thousand, including depreciation ofinformation technology assets, increases in content licensing costs of $369 thousand, increases in fees we pay toGoogle for web search and ad serving fees of $160 thousand, and increasesin compensation costs of $77 thousand  as a result of staffing additions in ourproduction operations and content departments and salary increases which tookeffect in March 2007. Additionally, in the nine months ended September 30, 2007we incurred $97 thousand ofamortization expenses relating to intangible assets we purchased in connectionwith the WikiAnswers acquisition in November 2006.  We did not incur any similar expenses for thenine months ended September 30, 2006.

 

20

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*Researchand Development Expenses*

* *

| ** **               | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **               | ** ** | **2007**                             | ** ** | **2006**                            | ** ** | ** ** | ** ** | **2007** | ** ** | **2006** | ** ** | ** ** | ** ** |
| ** **               | ** ** | **(in thousands)**                   | ** ** | **Change**                          | ** ** | **(in thousands)** | ** ** | **Change** | ** ** |
|                     |       |                                 |       |                                |       |   |   |   |   |   |   |   |   |
| Research and development |       | $                                    | 769        |                                | $          | 621 |   | $ | 148 |   | $ | 2,239 |   | $ | 5,209 |   | $ | (2,970 | ) |
|                          |            |                                      |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Research and development expenses increased $148 thousand, or 24%, to $769 thousand for the three monthsended September 30, 2007 from $621 thousand for the three months endedSeptember 30, 2006. The increase in research and development expenses was dueprimarily to increases in compensation-related expenses of $119 thousand due to growth in ourresearch and development team and salary increases which took effect in March2007, and increased overhead of $27 thousand.

 

Research and development expenses decreased $2,970 thousand, or 57%, to $2,239 thousand for the nine monthsended September 30, 2007 from $5,209 thousand for the nine months endedSeptember 30, 2006. The decrease in research and development expenses was dueprimarily to compensation charges of $3.5 million for the nine months endedSeptember 30, 2006, resulting from the acquisition of Brainboost.  We did not incur any similar charges in thesame period of 2007. This decrease was partially offset by increases incompensation-related expenses of $413 thousand due to growth in our researchand development team and salary increases which took effect in March 2007, andincreases in overhead of $81 thousand.

 

*Sales and Marketing Expenses*

 

|                | ** ** | **Three  Months Ended September 30,** |       | **Nine  Months Ended September 30,** |       |
|---------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
|                | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | ** ** | ** ** | **2007** | ** ** | **2006** |   |   |   |
|                | ** ** | **(in thousands)**                    | ** ** | **Change**                           | ** ** | **(in  thousands)** |   | **Change** |   |
|                |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |
| Sales and marketing |       | $                                     | 1,221      |                                 | $          | 924 |   | $ | 297 |   | $ | 3,275 |   | $ | 2,244 |   | $ | 1,031 |   |
|                     |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Sales and marketing expenses increased $297 thousand, or 32%, to $1,221 thousand for the three monthsended September 30, 2007 from $924 thousand for the three months endedSeptember 30, 2006. Compensation related expenses increased $230 thousand, primarily due to growthin our sales and marketing team, including the hiring of three ad salesmanagers during the second quarter of 2007. We also incurred a one-timeseverance charge of approximately $220 thousand in the three months endedSeptember 30, 2007, as the result of the termination of employment of our ChiefRevenue Officer in August 2007 as part of the reduction in headcount due to theimpact on us of the Google search engine adjustment in July 2007. Additionally,expenses relating to Internet and marketing metrics software and informationservices increased approximately $40 thousand, and overhead rose approximately$26 thousand, in thethree months ended September 30, 2007 as compared to the same period in 2006.These increases were offset, in part, by decreases in advertising and promotionexpenses of approximately $116 thousand and by a decrease inmarketing-related expenses due to an accrual of $75 thousand relating to alawsuit from a former marketing employee incurred in the three months endedSeptember 30, 2006. There was no such expense in the same period of 2007.

 

Sales and marketing expenses increased $1,031 thousand, or 46%, to $3,275 thousand for the nine months endedSeptember 30, 2007 from $2,244 thousand for the nine months endedSeptember 30, 2006. Compensation related expenses increased $843 thousand, primarily due to growthin our sales and marketing team, including the hiring of three ad salesmanagers during the second quarter of 2007. We also incurred a one-timeseverance charge of approximately $220 thousand in the nine months endedSeptember 30, 2007, as the result of the termination of employment of our ChiefRevenue Officer in August 2007 as part of the reduction in headcount due to theimpact on us of the Google search engine adjustment in July 2007. Additionally,expenses relating to Internet and marketing metrics software and informationservices increased approximately $160 thousand, and overhead rose approximately$80 thousand, in thenine months ended September 30, 2007 as compared to the same period in 2006.Finally, in the nine months ended September 30, 2007, we incurred recruitingfees of approximately $50 thousand to fill certain ad sales position openings, fees we didnot incur during the same period in 2006. These increases were offset, in part,by a decrease in advertising and promotion expenses of approximately $235 thousand and by a decreasein marketing-related expenses due to an accrual of $75 thousand relating to alawsuit from a former marketing employee incurred in the nine months endedSeptember 30, 2006. There was no such expense in the same period of 2007.

 

 

21

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*General and Administrative Expenses*

 

| ** **                 | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                 | ** ** | **2007**                             | ** ** | **2006**                            | ** ** | ** ** | ** ** | **2007** | ** ** | **2006** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **(in thousands)**                   | ** ** | **Change**                          | ** ** | **(in thousands)** | ** ** | **Change** | ** ** |
|                       |       |                                 |       |                                |       |   |   |   |   |   |   |   |   |
| General and administrative |       | $                                    | 1,058      |                                | $          | 765 |   | $ | 293 |   | $ | 3,003 |   | $ | 2,530 |   | $ | 473 |   |
|                            |            |                                      |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

General andadministrative expenses increased $293 thousand, or 38%, to $1,058 thousand for the three monthsended September 30, 2007 from $765 thousand for the three months endedSeptember 30, 2006. The increase in general and administration expenses was dueprimarily to increases in compensation costs of $189 thousand, amortization expenses of$50 thousand relating tothe WikiAnswers intangible assets and accounting and legal fees of $32 thousand

 

General andadministrative expenses increased $473 thousand, or 19%, to $3,003 thousand for the nine monthsended September 30, 2007 from $2,530 thousand for the nine months endedSeptember 30, 2006. The increase in general and administration expenses was dueprimarily to increases in compensation costs of $454 thousand and amortization expenses of$150 thousand relating tothe WikiAnswers intangible assets. These increases were offset, in part, bydecreases in various expenses, including stock administration of $98 thousandand insurance of $40 thousand.  The stockadministration costs declined because in the nine months ended September 30,2006 we incurred costs relating to the registration of the Brainboost shares,costs that we did not incur in the same period in 2007.

 

*Interest Income, Net*

 

|                 | ** ** | **Three  Months Ended September 30,** |       | **Nine  Months Ended September 30,** |       |
|----------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
|                 | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | ** ** | ** ** | **2007** | ** ** | **2006** |   |   |   |
|                 | ** ** | **(in  thousands)**                   | ** ** | **Change**                           | ** ** | **(in thousands)** |   | **Change** |   |
|                 |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |
| Interest income, net |       | $                                     | 88         |                                 | $          | 144 |   | $ | 56 |   | $ | 299 |   | $ | 430 |   | $ | (131 | ) |
|                      |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Interest income, netdecreased $56 thousand, or 39%, to $88 thousand for the three months endedSeptember 30, 2007 from $144 thousand for the three months ended September 30,2006. The decrease in interest income resulted primarily from lower averagecash and investment securities balances during the three months ended September30, 2007 as compared to the same period in 2006.

 

Interest income, net decreased$131 thousand, or 30%, to $299 thousand for the nine months ended September 30,2007 from $430 thousand for the nine months ended September 30, 2006. Thedecrease in interest income resulted primarily from lower average cash andinvestment securities balances during the nine months ended September 30, 2007as compared to the same period in 2006.

 

*Other Expenses, Net*

 

|                        | ** ** | **Three  Months Ended September 30,** |       | **Nine  Months Ended September 30,** |       |
|-----------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
|                        | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | ** ** | ** ** | **2007** | ** ** | **2006** |   |   |   |
|                        | ** ** | **(in  thousands)**                   | ** ** | **Change**                           | ** ** | **(in thousands)** |   | **Change** |   |
|                        |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |
| Other income (expense), net |       | $                                     | —     |                                 | $          | (17 | ) | $ | 17 |   | $ | (11 | ) | $ | (220 | ) | $ | 209 |   |
|                             |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Other income (expense),net increased $17 thousand, to $0 for the three months ended September 30,2007, from negative $17 thousand for the three months ended September 30, 2006.Other expenses during the three months ended September 30, 2007 and 2006resulted from foreign currency exchange net losses.

 

Other expense, netincreased $209 thousand, or 95%, to negative $11 thousand for the nine monthsended September 30, 2007, from negative $220 thousand for the nine months endedSeptember 30, 2006. Other expenses in the nine months ended September 30, 2006resulted, primarily, from the payment of $227 thousand to the sellers of Brainboostas a result of our delay registering with the SEC shares we issued asconsideration in the transaction. Other expenses during the nine months endedSeptember 30, 2006, resulted from foreign currency exchange net losses.

 

 

22

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*Income Tax (Expense) Benefit*

 

We had net operating loss carryforwards, or NOLs, forfederal income tax purposes of approximately $49 million at December 31, 2006.The federal net operating losses will expire if not utilized on various datesfrom 2019 through 2026. Because we have experienced one or more ownershipchanges, within the meaning of Section 382 of the Internal Revenue Code of1986, as amended, an annual limitation is imposed on our ability to use $32million of these carryforwards. Our best estimate at this time is that theannual limitation on the use of $32 million of our NOLs is approximately $1.8million per year. Any unused portion of the $1.8 million annual limitationapplicable to our restricted NOLs is available for use in future years untilsuch NOLs are scheduled to expire. Our remaining NOLs are not currently subjectto such limitations. We expect that this offering will result in an additionalownership change within the meaning of Section 382 of the Internal Revenue Codeof 1986, as amended, and that additional limitations will be placed on ourability to use our NOLs. Our Israeli subsidiary has capital loss carryforwardsof approximately $680 thousand that can be applied to future capital gains foran unlimited period of time under current tax rules.

 

**Liquidityand Capital Resources**

 

Our principalsources of liquidity are cash, cash equivalents, and investment securities,which were $7,516 thousand as of September 30, 2007. In the ninemonths ended September 30, 2007 we used $422 thousand in cash from our operations.  Previously, we used cash in our operations inevery year since our inception. Our ability to generate cash from operations inthe future will depend primarily on our ability to produce net income beforenon-cash expenses such as depreciation and amortization and stock-basedcompensation.

 

| ** **                                | ** ** | **Nine Months Ended September 30** | ** ** |
|-------------------------------------------|------------|------------------------------------|------------|
| ** **                                | ** ** | **2007**                           | ** ** | **2006** | ** ** |
|                                      |       |                               |       |   |   |
| Net cash used in operating activities     |       | $                                  | (422       | ) | $ | (2,702 | ) |
| Net cash provided by investing activities |       | 703                                |       | 2,608 |   |
| Net cash provided by financing activities |       | 36                                 |       | 175 |   |
|                                           |            |                                    |            |  |  |  |  |

 

*Operating Activities*

 

Despite a net loss of $3,501 thousand in the nine months endingSeptember 30, 2007, net cash used by operations was $422 thousand. We incurred $1,698 thousand of operating expensesthat were the result of non-cash, stock-based compensation to employees anddirectors, depreciation and amortization of $1,356 thousand, while recognizing $425 thousand of previously deferredrevenue from lifetime subscriptions we sold for our GuruNet service in 2003.

 

*InvestingActivities*

 

Net cash provided byinvesting activities in the nine months ending September 30, 2007 and 2006,respectively, is attributable mostly to the proceeds from the sale ofinvestment securities less cash used from purchases of investment securities,and cash used for capital expenditures, long-term deposits and deferred costsrelating to the Lexico acquisition, as delineated in our Consolidated Statementof Cash Flows.

 

*FinancingActivities*

 

Cash flow fromfinancing activities for the nine months ending September 30,2007 relates to thenet proceeds from the exercise of stock options and deferred costs relatingto the Lexico financing.

 

We believe we have sufficient cash to meet our plannedoperating needs for the next twelve months; however, we need to raise capitalfrom a private and/or public offering to fund the costs of our plannedacquisition of Lexico.

 

Our business strategy includes growth throughadditional business combinations and licensing or acquiring products andtechnologies complementary to our business, which could require use of asignificant amount of our available cash and raising additional capital. We maytherefore need to raise additional capital through future debt or equityfinancing to finance such initiatives. However, we cannot be certain thatadditional financing will be available on acceptable terms, or at all. To theextent that we raise additional funds by issuing equity securities, ourstockholders may experience significant dilution.

 

 

23

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**ContractualObligations and Commitments**

 

As of September30, 2007, we had the following known contractual obligations and commitments(in thousands):

 

| ** **        | ** ** | **Purchase Contracts** | ** ** | **Operating Leases** | ** ** | **Total**********(1)**** | ** ** |
|-------------------|------------|------------------------|------------|----------------------|------------|--------------------------|------------|
|              |       |                   |       |                 |       |                     |       |
| Remainder of 2007 |       | $                      | 215        |                 | $          | 116                      |       | $ | 331 |   |
| 2008              |       | 595                    |       | 433                  |       | 1,028                    |       |
| 2009              |       | 350                    |       | 383                  |       | 733                      |       |
| 2010              |       | 45                     |       | 220                  |       | 265                      |       |
|              |       |                   |       |                 |       |                     |       |
|              |       | $                      | 1,205      |                 | $          | 1,152                    |       | $ | 2,357 |   |

 

----

(1) The above table does not include unrecognized taxbenefits of $230 thousand.

 

On July 13, 2007 we enteredinto a purchase agreement with members of Lexico to acquire all of theoutstanding limited liability interests of Lexico for anaggregate purchase price of $100 million in cash, subject to adjustments forclosing net working capital and transaction expenses. As of September 30, 2007,we incurred approximately $498 thousand in legal, accounting and investmentbanking fees, that would have to be charged to operations, rather thancapitalized as purchase price, in the event we do not close the transaction.Additionally, as of September 30, 2007, we incurred approximately $384 thousandin financing costs that would have to be charged to operations, rather thancharged to shareholders' equity, in the event we do not close the transaction. 

 

**Off-BalanceSheet Arrangements**

 

We have notentered into any transactions with unconsolidated entities in which we havefinancial guarantees, subordinated retained interests, derivative instrumentsor other contingent arrangements that expose us to material continuing risks,contingent liabilities or any other obligations under a variable interest in anunconsolidated entity that provides us with financing, liquidity, market riskor credit risk support.

 

**Quantitativeand Qualitative Disclosures about Market Risk**

*Currency Risk.* Our revenue is denominated solely inU.S. dollars. Most of our expenses are also based in U.S. dollars; however, weare subject to a significant amount of expenses that are denominated in NewIsraeli Shekels, or NIS. We expect this level of NIS expenses to continue inthe near future. If the value of the U.S. dollar weakens against the value ofNIS, 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 incurrencies other than the U.S. dollar, we are subject to the risk of exchangerate fluctuations. We use various hedging tools, including forward contractsand options, to minimize the effect of currency fluctuations on our income.

*OtherMarket Risk.*Weinvest most of our excess cash in highly liquid investments with an originalmaturity of three months or less, and in investmentsecurities that consist mostly of investments in auction rate, investmentgrade, corporate and municipal debt instruments, and auction rate preferredshares of closed-end investment funds that invest in long-term fixed incomesecurities, with auction reset periods of 28 days. Due to the short-term natureof these investments, we believe that there is no material exposure to interestrate risk arising from our investments. We invest some of the excess cash wehave for terms in excess of three months in order to achieve a higher yield.Based on our 

 

 

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investment policy, suchinstruments are highly rated by rating agencies and therefore we believe thatthere is no material exposure to the principal amount nor to interest raterisks arising from these longer-term investments

 

**CriticalAccounting Policies**

 

While oursignificant accounting policies are more fully described in the notes to ouraudited consolidated financial statements for the years ended December 31, 2006and 2005, and our consolidated interim financial statements for the three andnine months ended September 30, 2007 and 2006, we believe the followingaccounting policies to be the most critical in understanding the judgments andestimates we use in preparing our consolidated financial statements.

 

**Goodwill, Intangibles and OtherLong-Lived Assets**

 

We account for our purchases of acquired companies inaccordance with SFAS No. 141, “Business Combinations,” or SFAS 141, and forgoodwill and other identifiable definite and indefinite-lived acquiredintangible assets in accordance with SFAS No. 142, “Goodwill and Other IntangibleAssets,**”****or**SFAS142. Additionally, we review our long-lived assets for recoverability inaccordance with SFAS No. 144, **“**Accounting for the Impairment orDisposal of Long-Lived Assets,” or SFAS 144.

 

The identification and valuation of intangible assetsand the determination of the estimated useful lives at the time of acquisitionare based on various valuation methodologies including reviews of projectedfuture cash flows.  The use of alternative estimates and assumptions couldincrease or decrease the estimated fair value of our goodwill and otherintangible assets, and potentially result in a different impact to our resultsof operations.  Further, changes in business strategy and/or marketconditions may significantly impact these judgments thereby impacting the fairvalue of these assets, which could result in an impairment of the goodwill andacquired intangible assets.

 

We evaluate our long-lived tangible and intangibleassets for impairment in accordance with SFAS 142, “Goodwill and Other IntangibleAssets,” and SFAS 144, “Accounting for the Impairment or Disposal of Long-LivedAssets,” whenever events or changes in circumstances indicate that the carryingamount of an asset may not be recoverable. Goodwill is subject to an annualtest for impairment. If such assets are considered to be impaired, theimpairment to be recognized is measured by the amount by which the carryingamount of the assets exceeds the fair value of the assets. While we useavailable information to prepare our estimates and to perform impairmentevaluations, the completion of annual impairment tests requires significantmanagement judgments and estimates.

 

In response to the search enginealgorithm adjustment by Google in July 2007, we examined what impact this eventmight have on the recoverability of our long-lived assets in accordance withthe guidance contained in SFAS 142 and 144. As a result of our analysis, weconcluded that the carrying value of our assets has not been impaired.  However, while we use available information to prepare our estimatesand to perform impairment evaluations, our recoverability calculations andimpairment tests require significant management judgment and estimates.  These estimates include our projections ofundiscounted cash flows and assumptions used in calculating projected RPMgrowth, page-views, and expenses.  Inaddition, a certain degree of judgment was exercised in determining assetgroups in accordance with generally accepted accounting principles.  Had our estimates and assumptions differed,the accounting treatment might have resulted differently.  Future actual results could significantlydiffer from the anticipated results as reflected in our analysis.

 

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

 

As of January 1,2006, we adopted SFAS No. 123R which requires measurement of compensation costfor all stock-based awards at fair value on date of grant and recognition ofcompensation over the service period for awards expected to vest, using themodified prospective method. The estimation of stock awards that willultimately vest requires judgment, and to the extent actual results differ fromour estimates, such amounts will be recorded as a cumulative adjustment in theperiod estimates are revised. We consider various factors when estimatingexpected forfeitures, including historical experience. Actual results maydiffer substantially from these estimates.

 

With the exceptionof stock options granted to employees prior to May 12, 2004, the date of ourfirst filing with the U.S. Securities and Exchange Commission in connectionwith our initial public offering, or IPO, we determine the fair value of stockoptions granted to employees and directors using the Black-Scholes valuationmodel, which considers the exercise price relative to the market value of theunderlying stock, the expected stock price volatility, the risk-free interestrate and the dividend yield, and the estimated period of time option grantswill be outstanding before they are ultimately exercised. We also determine thefair value of stock options and warrants granted to non-employees, foraccounting purposes, using the Black-Scholes valuation model. Prior to our IPO,in October 2004, the market value of the underlying stock was based onestimates, including volatility estimates that are inherently highly uncertainand subjective, since prior to our IPO there had been no public market for ourstock. Subsequent to our IPO, we did not have sufficient history to actuallypredict our volatility, therefore, our assumptions about stock price volatilityare based on the volatility rates of comparable publicly held companies. Theserates may or may not reflect our actual stock price volatility. Had we madedifferent assumptions about the market value of our stock, stock pricevolatility or the estimated time option and warrant grants will be outstandingbefore they are ultimately exercised, the related stock based compensationexpense and our net loss and net loss per share amounts could have beensignificantly different, in the year ended December 31, 2006, and in the ninemonths ended September 30, 2007 and 2006, as well as in periods prior to our adoption of SFAS123R.

 

 

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***Accounting for Income Taxes***

 

As part of the process of preparing our consolidatedfinancial statements, we are required to estimate our income taxes in each ofthe jurisdictions in which we operate. This process involves managementestimating our actual current tax exposure together with assessing temporarydifferences resulting from differing treatment of items for tax and accountingpurposes. These differences result in deferred tax assets and liabilities,which are included within our consolidated balance sheet. We must then assessthe likelihood that our deferred tax assets will be recovered from futuretaxable income and, to the extent we believe that recovery is not more likelythan not, we must establish a valuation allowance. Significant managementjudgment is required in determining our provision for income taxes, ourdeferred tax assets and liabilities and any valuation allowance recordedagainst our net deferred tax assets. We have fully offset our U.S. deferred taxasset with a valuation allowance. Our lack of earnings history and theuncertainty surrounding our ability to generate US taxable income prior to theexpiration of such deferred tax assets were the primary factors considered bymanagement in establishing the valuation allowance.

 

In July 2006, FASBreleased FASB Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes - an Interpretation of FASB Statement 109,” or FIN 48, effective forfiscal years beginning after December 15, 2006. FIN 48 prescribes how a companyshould recognize, measure, present and disclose in its financial statements uncertaintax positions that the company has taken or expects to take on a tax return.Additionally, for tax positions to qualify for deferred tax benefit recognitionunder FIN 48, the position must have at least a “more likely than not” chanceof being sustained upon challenge by the respective taxing authorities. Weadopted the provisions of FIN 48 as of January 1, 2007 and it has not had amaterial impact on our financial statements.

 

**RecentlyIssued Accounting Pronouncements**

 

In September 2006, theFASB issued SFAS No. 157, *“Fair Value Measurements,”* or SFAS 157. SFAS 157establishes a framework for measuring fair value and expands disclosures aboutfair value measurements. The changes in current practice resulting from theapplication of the Statement relate to the definition of fair value, themethods used to measure fair value, and the expanded disclosures about fairvalue remeasurement. The statement is effective for fiscal years beginningafter November 15, 2007 and interim periods within those fiscal years. We donot believe that the adoption of the provisions of SFAS 157 will have amaterial impact on our consolidated financial position and results ofoperations.

 

In February 2007, the FASB issued SFAS No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities,” or SFAS No.159, which permits entities to choose to measure many financial instruments andcertain other items at fair value that are not currently required to bemeasured at fair value. SFAS No.159 will be effective for us on January 1,2008. We are currently evaluating the impact of adopting SFAS No. 159 on ourfinancial position, cash flows, and results of operations.

 

 

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**ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

*CurrencyRisk.* Our revenueis denominated solely in U.S. dollars. Most of our expenses are also based inU.S. dollars; however, we are subject to a significant amount of expenses thatare denominated in New Israeli Shekels (NIS). We expect this level of NISexpenses to continue in the near future. If the value of the U.S. dollarweakens against the value of NIS, there will be a negative impact on ourresults of operations. In addition, to the extent we hold cash and cashequivalents that are denominated in currencies other than the U.S. dollar, weare subject to the risk of exchange rate fluctuations. We hedge a portion ofour foreign currency commitments. Our derivative transactions are mainlydesigned to hedge short term cash flows related to anticipated expenses.

*Other Market Risk.*We invest most of our excess cash inhighly liquid investments with an original maturity of three months or less,and in investment securities that consist mostly ofinvestments in auction rate, investment grade, corporate and municipal debtinstruments, and auction rate preferred shares of closed-end investment fundsthat invest in long-term fixed income securities, with auction reset periods of28 days. Due to the short-term nature of these investments, we believe thatthere is no material exposure to interest rate risk arising from ourinvestments. We invest some of the excess cash we have for terms in excess ofthree months in order to achieve a higher yield. Based on our investmentpolicy, such instruments are highly rated by rating agencies and therefore webelieve that there is no material exposure to the principal amount nor tointerest rate risks arising from these longer-term investments.

**ITEM 4.CONTROLS AND PROCEDURES**

Basedon an evaluation of our disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of1934, as amended) required by paragraph (b) of Rule 13a-15 orRule 15d-15, as of September 30, 2007, our Chief Executive Officer andPrincipal Financial Officer have concluded that our disclosure controls andprocedures were effective in ensuring that information required to be disclosedby 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 theCommission’s rules and forms. Our Chief Executive Officer and PrincipalFinancial Officer also concluded that, as of September 30, 2007, our disclosurecontrols and procedures were effective in ensuring that information required tobe disclosed by us in the reports that we file or submit under the Exchange Actis accumulated and communicated to our management, including our ChiefExecutive Officer and Principal Financial Officer, to allow timely decisionsregarding required disclosure.

During the three months ended September 30, 2007,there were no changes in our internal control over financial reportingidentified in connection with the evaluation required by paragraph (d) of Rule13a-15 or Rule 15d-15 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

 

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**PARTII. OTHER INFORMATION**

**ITEM 1. LEGAL PROCEEDINGS**

 

From time to time, we receive various legal claimsincidental to our normal business activities, such as intellectual propertyinfringement claims and claims of defamation and invasion of privacy. Althoughthe results of claims cannot be predicted with certainty, we believe the finaloutcome of such matters will not have a material adverse effect on ourfinancial position, results of operations, or cash flows.

 

**ITEM 1A. RISK FACTORS**

 

The following important factors, among others, couldcause our actual operating results to differ materially from those indicated orsuggested by forward-looking statements made in this Form 10-Q or presentedelsewhere by management from time to time.

 

****Risks Related to the Acquisition of Lexico PublishingGroup, LLC****

 

**On July13, 2007, we entered into a Purchase Agreement, pursuant to which wewill acquire all of the outstanding limited liability interests of LexicoPublishing Group, LLC.****Consummation of the acquisition is subject to our ability to securefinancing for the acquisition, as well as customary conditions to closing.****The following riskfactors relate specifically to this acquisition.**

 

**If wefail to increase Lexico's traffic monetization rates, it may have a materiallyadverse impact on the anticipated benefits of this acquisition.**

 

We currently monetize ourWeb traffic more effectively than Lexico, resulting in comparatively greaterrevenue per page. During the third quarter of 2007, our RPM was $5.41 comparedto Lexico’s RPM of $1.87. We expect to improve Lexico’s monetization rates byusing the same techniques we have used to increase the monetization of oursites, including, changing site design, changing the color, background,placement and number of textual ads displayed, increasing the size and numberof display ads per page, and adding or switching ad providers or types of adsintroduced. However, our assumptions may be incorrect and we may not be able toimprove Lexico’s monetization rates for several reasons, including:

 

•      theusers of Lexico’s Web properties may behave differently than the users of ourWeb properties;

•      ourassumptions regarding the probability of Lexico’s users clicking on the adsdisplayed on the Lexico Web properties may be incorrect; or

•      wemay make a modification to the Lexico Web properties that damages the look orexperience for their users.

 

Our failure to increase Lexico’s monetization ratesmay have a material adverse impact on the anticipated benefits of the Lexicoacquisition.

 

**We maynot be able to maintain or grow Lexico’s traffic.**

 

In 2006, Lexico’s Webproperties generated overall traffic of approximately 3.9 billion page views,which is approximately three times the number of page views generated by ourexisting Web properties. For the nine months ended September 30, 2007, Lexico’sWeb properties generated overall traffic of approximately 3.5 billion pageviews. Although we expect that this traffic will grow under our management ofLexico’s Web properties, we cannot assure you that we will be successful inincreasing the traffic to the Lexico Web properties, nor can we assure you thatwe will be able to maintain Lexico’s current levels of traffic, which maymaterially adversely affect our business and financial results.

 

**If Google does not amend our GoogleServices Agreement to include the Lexico Web properties after the acquisitionor consent to the transfer of Lexico’s Google Services Agreement to us afterthe acquisition, we may suffer a material reduction in our anticipated adrevenues, which would adversely affect our business and financial results.**

 

Our business is dependent on our Google ServicesAgreement, or GSA, under which we obtain most of the advertisements displayedon our Web properties and earn most of our ad revenues. Lexico is dependent toa lesser extent on their GSA. Lexico’s GSA requires Google’s consent for the transferof Lexico's GSA. If we are unable to incorporate the Lexico Web properties intoour GSA, obtain consent for the transfer of Lexico’s GSA to us, or enter into anew GSA with respect to the Lexico Web properties we will have to obtainlistings and advertisements from alternative providers. In addition, we may notbe able to negotiate terms and ad services as favorable as those that ourcurrent GSA provides. This may result in a material reduction in ouranticipated ad revenues from the Lexico web properties which may adverselyaffect our business and financial results.

 

**We may not be able to realize otherintended benefits of the acquisition of Lexico, which could adversely affectour financial condition.**

 

               Thesuccess of the acquisition will depend, in part, on our ability to realize theassumed benefits of the acquisition, including, among others, increased directtraffic to our Web properties (as opposed to traffic directed by searchengines), improved Lexicotraffic monetization, increasedoperating scale and broadened portfolio of Web properties.However, our assumptions and rationale for the acquisition may be

 

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incorrect and we may not be able to realize suchbenefits. As a result, we cannot assure you that the acquisition will besuccessful or will not harm our current business. Failure to achieve thesebenefits could adversely affect our financial results.

 

**TheLexico acquisition will result in significant costs to us, and in certaincircumstances we may be required to pay a termination fee to Lexico if we donot complete the acquisition. Payment of the termination fee would materiallyadversely affect our business and financial results.**

 

The acquisition will result in significant costs tous. Transaction costs will be substantial, and additional unanticipated costsmay be incurred. Some of these costs will be incurred whether or not the acquisitionis completed. Under certain circumstances, if we do not complete theacquisition, under the terms of the purchase agreement, we may be required topay Lexico a termination fee of $2 million. Under the terms of the purchaseagreement, we may also be obligated to reimburse Lexico’s costs up to a maximumof $400,000. Should the purchase agreement be terminated in circumstances underwhich this termination fee is payable, the payment of the fee would materiallyadversely affect our business and financial results.

 

**Completion of the Lexico acquisitionis subject to conditions to closing in the purchase agreement that could delaycompletion of the acquisition or impose conditions that could have a materialadverse effect on us or that could cause abandonment of the acquisition.**

 

The closing of the acquisition is subject to certainclosing conditions as set forth in the purchase agreement, such as obtainingthe financing for the acquisition, receipt of certain closing deliveries andobtaining all necessary approvals and consents. If any of the closingconditions to the acquisition are not satisfied or, where permissible, notwaived, the acquisition will not be consummated. Failure to consummate theacquisition could negatively impact our stock price, future business andoperations, and financial condition. Any delay in the consummation of theacquisition or any uncertainty about the consummation of the acquisition couldalso adversely affect our business, growth, revenue and results of operations.

 

**We may notbe able to successfully integrate Lexico’s operations, which could adverselyaffect our financial condition and results of operations.**

 

Our ability to integratethe operations of Lexico will depend, in part, on our ability to overcome oraddress a number of challenges, including:

 

•      the difficulties of assimilating the operations ofLexico in our ongoing operations;

•      the potential loss of key employees of Lexicosubsequent to the acquisition;

•      the successful incorporation of the acquired Webproperties into our products and services;

•      the acquired Web properties may not perform as well aswe anticipate due to various factors, such as disruptions caused by theintegration of operations with us and changes in economic conditions;

•      the possible impairment of relationships with currentemployees, users or advertisers as a result of the integration of newmanagement or operations;

•      the diversion of management attention to theintegration of operations could have a negative impact on our existingbusiness; and

•      we may experience greater than expected costs ordifficulties relating to the integration of Lexico or may not realize theexpected revenues from the transaction within the expected timeframe, if atall.

 

We cannot assure you thatwe will be able to integrate Lexico’s operations without encounteringdifficulties or that any such difficulties will not have a material adverseeffect on us.

 

**If theliabilities we assume in the Lexico acquisition are greater than expected, orif there are unknown liabilities, our business could be materially andadversely affected.**

 

We intend to acquire theoutstanding equity interests in Lexico through an acquisition. Lexico may besubject to liabilities unknown to us that, if asserted, could have a materialadverse effect on us, including:

 

•      claimsof vendors or other persons dealing with Lexico;

•      liabilities,claims and litigation, whether or not incurred in the ordinary course ofbusiness, relating to periods prior to the acquisition of Lexico, includingwith respect to the intellectual property used by Lexico in its business;

•      claimsfor indemnification by members or employees and others who may be indemnifiedby Lexico; and

•      liabilitiesfor taxes relating to periods prior to the acquisition.

 

Although the purchase agreementprovides us with indemnification protection, the indemnification is limited andmay be insufficient if any significant liabilities are found, depending on theamount, timing and nature of any claim. As a result, we cannot assure you thatthe acquisition will be successful or will not, in fact, harm our business.Among other things, if the liabilities we have assumed are greater thanexpected and are not covered by the sellers’ indemnification, the acquisitioncould have a material adverse effect on us. In addition, if we learn ofinformation with respect to Lexico, after completion of the acquisition, thatprevents us from making the certifications required by the

 

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Sarbanes-Oxley Act of 2002, investors’ confidence inour reporting capabilities could be reduced, and our business could bematerially adversely affected.

 

****Risks Related toour Business****

 

****We have incurred significant and continuing net lossessince our inception and may continue to incur losses.****

 

We incurred net losses of approximately $8.6 millionand $6.0 million for the years ended December 31, 2006 and 2005, respectively.As of September 30, 2007, we had an accumulated deficit of approximately $58.5million. We cannot assure you that we will be able to achieve net income on aquarterly or annual basis. If our revenues do not increase, or if our operatingexpenses exceed expectations or cannot be reduced, we will continue to incursubstantial losses, which would materially adversely affect our business andfinancial results.

 

****If search engines alter their algorithms or methods orotherwise restrict the flow of users visiting our Web properties, our businessand financial results could suffer.****

 

Search engines serve as origination Web properties forusers in search of information, and our topic pages often appear as one of thetop links on the pages returned by search engines in response to users’ searchqueries. As a result, we rely heavily on search engines for a substantialportion of the users visiting our Web properties. According to our internalestimates traffic to our Web properties originating from search engines duringSeptember 2007, excluding Google-directed definition link traffic, wasapproximately 60% of the overall traffic to our Web properties, the majority ofwhich originated from Google and, to a lesser but still significant extent,Yahoo!. Our WikiAnswers search engine traffic during the same period was evenmore significant, amounting to approximately 85% of its overall traffic.According to Lexico’s internal data, Lexico’s traffic originating from searchengines during September 2007 was approximately 15% of Lexico’s overalltraffic. After the closing of the acquisition, we believe that, on a combinedaggregated basis, we would have traffic originating from search engines ofapproximately 25% of our overall traffic. If our traffic from search enginesdeclines for any reason, we would suffer a significant decline in overalltraffic and revenue. For example, In July 2007, a search engine algorithmadjustment by Google led to a drop in Google directed traffic to Answers.com.This adjustment reduced our overall traffic by approximately 28% based on theaverage traffic directed to Answers.com from Google for the week prior to theadjustment as compared to the week after. As a result, our revenue declinedproportionately. We have not been able to reverse the impact of thisadjustment, and we do not anticipate that we will recover the lost traffic andrevenue. In response to the Google algorithm adjustment, we reduced ourheadcount and related compensation costs, reducing our base payroll expenses byapproximately 12%. In September 2007, Yahoo! dropped our content from itssearch index, which led to a drop in our Yahoo! directed traffic. This actionwas reversed within a week, and we have recovered all of our Yahoo! directedtraffic. Search engines, at any time and for any reason, could change theiralgorithms that direct search queries to our Web properties or could restrictthe flow of users visiting our Web properties specifically. In fact, asillustrated above, on occasion our Web properties have experienced decreases intraffic, and consequently in revenue, due to these search engine actions. Wecannot guarantee that we will successfully react to these actions in the futureand recover the lost traffic. Accordingly, a change in algorithms that searchengines use to identify Web pages towards which traffic will ultimately bedirected, or a restriction on the flow of users visiting our Web propertiesfrom the search engines, could cause a significant decrease in traffic andrevenues, which could adversely affect our business and financial results.

 

**Componentsof our business and operations are experiencing rapid growth. If we fail to effectivelymanage our growth, our business and operating results could be harmed.**

 

We have experienced rapid growth in our headcount andoperations over the past several years, which has placed, and will continue toplace, significant demands on our management, operational and financialinfrastructure. If we do not effectively manage our growth, the quality of ourproducts and services could suffer, which could negatively affect our brand andoperating results. To effectively manage this growth, we will need to continueto improve our operational, financial and management controls and our reportingsystems and procedures. These systems enhancements and improvements willrequire significant capital expenditures and management resources. Failure toimplement these improvements could hurt our ability to manage our growth andour financial position.

 

**Wehave a short operating history and a relatively new business model in anemerging and rapidly evolving market. This makes it difficult to evaluate ourfuture prospects and may increase the risks that we will not continue to besuccessful and that our financial results could suffer.**

 

There are two primary categories of Internetadvertising, pay-per-performance, or most commonly cost per click, or CPC, andpay-per-impression, or cost per 1,000 impressions, or CPM. In the case ofperformance-based advertising, the advertiser only pays when a user clicks onan ad, as opposed to viewing the ad, as in impression-based advertising. Wefirst derived advertising revenue in the first quarter of 2005, and we haveonly a short operating history with our CPC and CPM advertising model. As aresult, we have very little operating history to aid in assessing our futureprospects. Also, we derive nearly all of our revenues from online advertising,which is an immature industry that has undergone rapid and dramatic changes inits short history. We will encounter risks and difficulties as a growingcompany in a new and rapidly evolving market. We may not be able tosuccessfully address these risks and difficulties, which could materially harmour business and operating results.

 

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**We depend on Google to direct trafficto Answers.com through its definition link, and the loss of this source oftraffic could reduce our ad revenues and adversely affect our business andfinancial results.**

 

A significant percentage of our direct traffic isdirected to Answers.com by the definition link appearing on Google’s websiteresult pages. As an additional result of this arrangement, a significant numberof secondary users visit Web properties via the definition link and performadditional searches. We refer to these users as secondary traffic. Thedefinition link traffic is the result of a unilateral decision by Google tolink certain definitions to Answers.com, and not any contractual relationship.Google may change these links at any time, in its sole discretion. According toour internal estimates, for September, 2007, the primary and secondary trafficfrom the Google definition link accounted for approximately 15% of the trafficto our Web properties. If Google stops directing traffic to Answers.com throughits definition link, we would experience a significant reduction in our trafficand the corresponding ad revenues, which would adversely affect our businessand financial results.

 

**If our GSA is terminated by Google,we would have to seek an alternative provider of listings and advertisements,which could adversely affect our business and financial results.**

 

Our business is dependent on the GSA, under which weobtain most of the advertisements displayed on our Web properties and earn mostof our ad revenues. Google may terminate the GSA with no advance notice if we:

 

•      take certain prohibited actions including, among otherthings:

-        editing or modifying the order of search results,

-        redirecting end users, producing or distributing anysoftware which prevents the display of ads by Google,

-        modifying, adapting or otherwise attempting to obtainsource code from Google technology, content, software and documentation or

-        engaging in any action or practice that reflectspoorly on Google or otherwise disparaging or devaluing Google’s reputation orgoodwill;

•      breach the grant of a license to us by Google of certaintrade names, trademarks, service marks, logos, domain names and otherdistinctive brand features of Google;

•      breach the confidentiality provisions of the GSA;

•      breach the exclusivity provisions of the GSA; or

•      materially breach the GSA more than two times,irrespective of any cure to such breaches.

 

The GSA is scheduled to expire on January 31, 2010, unless renewed uponmutual written consent.

 

Google’s termination of the GSA would result in ourneed to replace this relationship and obtain listings and advertisements fromalternative providers, and we may not succeed in receiving equally favorable asthose provided in the GSA. Termination of the GSA and our failure to replace iton equally favorable terms could result in a material reduction in our adrevenues and could adversely affect our business and financial results.

 

**Our direct ad sales efforts maysuffer if advertisers do not find our Web properties to be effective forpromoting their products and services, which could have an adverse effect onour business and financial results.**

 

In late 2006, our advertising sales team beganmarketing directly to advertisers. However, we cannot assure you that theseadvertisers will find our Web properties to be as effective as other Webproperties or traditional media for promoting their products and services. Failureon our part to convince advertisers of the suitability of our Web propertiesfor their needs, or our inability to generate the advertisers’ desired levelsof traffic, could make it difficult to attract new advertisers and may cause usto lose relationships with existing advertisers, which could have an adverseeffect on our business and financial results.

 

**The failure of WikiAnswers to grow inaccordance with our expectations could have an adverse impact on our businessand financial results.**

 

We are spending increasing amounts of money anddevoting greater resources to the development of WikiAnswers. We expect toderive an increasingly significant portion of our revenues from WikiAnswers. Weintend to utilize the strategies we have used with Answers.com to increasemonetization of our WikiAnswers Web property. If WikiAnswers fails to performas well as we anticipate, our business and financial results could be adverselyaffected.

**IfInternet users do not interact with our WikiAnswers Web property frequently orif we fail to attract new users to the service, our business and financialresults will suffer.**

Thesuccess of our WikiAnswers Web property is largely dependent upon usersconstantly interacting with the community by asking questions, posting answersand improving upon both. We need to attract users to register as communitymembers, visit the Web property frequently and spend increasing amounts of timeon the Web property when they visit. In addition, only a very small number ofusers actually post information

 

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on the site on a regularbasis and are engaged in improving the information it contains. If we areunable to encourage users to interact more frequently with our WikiAnswers Webproperty and to increase the amount of user generated content they provide, ourability to attract new users to the Web property, increase the number ofregistered users loyal to the community and attract advertisers to WikiAnswers willbe diminished and adversely affected. As a result, our business and financialresults will suffer, and we will not be able to grow our business as planned.

**Ifwe are unable to improve and maintain the quality of content being contributedto WikiAnswers, the Web property will become less valuable to the users, lesspopular as a destination for obtaining answers to questions and its growth willbe negatively affected, which in turn could adversely impact our financialresults.**

It is criticalthat we ensure that the quality of content being posted on WikiAnswers, bothquestions and answers, is maintained and improved over time. The better thequality of the content generated on the Web property, the more valuable the Webproperty will be for users in search of answers, which in turn will lead tostronger growth in the community size. We will need to closely monitor thecontent being contributed by users and constantly be on the alert for andfilter out content that does not add value, or even worse, damages the userexperience. If we fail to maintain and improve the quality of the Web property’scontent, the appeal of WikiAnswers to users may diminish and the growth of theWeb property may be negatively affected, which in turn could cause ourfinancial results to suffer.

**Ifwe are unable to attract and retain dedicated supervisors for WikiAnswers forthe administration of the Web property and the encouragement of the community’sexpansion, our plans for growing WikiAnswers may fail and our results ofoperations may be adversely affected.**

Muchof the effort of administering WikiAnswers, monitoring its activity andensuring its steady growth and development is borne by a large group ofexternal supervisors, the vast majority of whom are not employed by us and notcompensated for their efforts. The supervisors are in charge of monitoringquestions and answers in specific categories in an effort to ensure questionsare being answered timely, prevent vandalism, improve consistency and encouragehigh-quality contributions. As of October 31, 2007, the community enjoyed thebenefit of over 100 such supervisors. The success of WikiAnswers is dependant,to a certain extent, on the continued attention of these supervisors toWikiAnswers. If we are not able to attract and maintain enough supervisors, theWikiAnswers Web property will suffer and the Web property will become lessattractive to users, which in turn will adversely affect the site’s growth andour business and financial results.

 

**We generate our revenue almostentirely from advertising so uncertainties in the Internet advertising marketand our failure to increase advertising inventory on our Web properties couldadversely affect our ad revenues.**

 

We generated approximately 86%, 97% and 93%, respectively,of our revenues in 2005, 2006 and for the nine months ended September 30, 2007from our advertisers. Although worldwide online advertising spending is growingsteadily, it represents only a small percentage of total advertisingexpenditures. Our advertisers can generally terminate their contracts with usat any time. Advertisers will not continue to do business with us if theirinvestment in Internet advertising with us does not generate sales leads, andultimately customers, or if we do not deliver their advertisements in anappropriate and effective manner. If the Internet does not continue to be awidely accepted as a medium for advertising and the rate of advertising on theInternet increase, our ability to generate increased revenues could beadversely affected. We believe that growth in our ad revenues will also dependon our ability to increase the number of pages on our Web properties to providemore advertising inventory. If we fail to increase our advertising inventory ata sufficient rate, our ad revenues could grow more slowly than we expect, whichcould have an adverse effect on our financial results.

 

**New technologies could block Internetads, which could harm our financial results.**

 

Technologies have been developed, and are likely tocontinue to be developed, that can block the display of Internet ads. Most ofour revenues are derived from fees paid to us by advertisers in connection withthe display of their ads. Ad-blocking technology may cause a decrease in thenumber of ads that we can display on our Web properties, which could adverselyaffect our ad revenues and our financial results.

 

**We face significant competition fromsearch engines, destination portals and other free reference andindustry-specific Web properties that could adversely impact our competitiveposition.**

 

We face significant competition from a wide variety ofWeb properties, including traditional search engines, such as Google, Yahoo!and Ask.com, destination portals and other free online answer engines, such as About.com,TheFreeDictionary.com and Wikipedia.org. We also compete with industry-specificWeb properties, such as Bankrate.com and WebMD.com, as well as with otherpopular question and answer sites, such as Yahoo! Answers and Answerbag.com.Many of our competitors have longer operating histories, more extensivemanagement experience, an employee base with more extensive experience, bettergeographic coverage, larger consumer bases, greater brand recognition andsignificantly greater financial, marketing and other resource than we do. Weexpect competition to intensify in the future. If our competitors are moresuccessful than we are in developing compelling products or attracting andretaining users or advertisers, then our competitive position and financialresults could be adversely affected.

 

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**Our failure to generate directtraffic to our Web properties could adversely affect our business and financialresults.**

 

In addition to search engine traffic and trafficdirected by the Google definition link, our traffic also originates fromInternet users arriving at our Web properties directly by typing our websiteaddress directly into their Web browser, bookmarking our Web properties, usingAnswerTips and visiting sites that direct users to our Web properties. Giventhe wide availability of free search engines and reference content sites, wemay not be able to retain current Internet users or attract new Internet usersin this direct fashion. If we are unable to retain our direct Internet users orattract new direct Internet users, our ability to generate revenues would beadversely impacted, which could adversely affect our business and financialresults.

 

**Trafficto our Web properties and advertising demand fluctuates significantly on aseasonal basis, which impacts our operations from quarter to quarter.**

 

Many of our usersare students that utilize our Web properties as reference sources. Our trafficfluctuates with the academic school year, rising from February through May,falling to its lowest levels during the summer months, rising again inSeptember and falling again in December through January. We expect traffic toour Web properties to continue to fluctuate seasonally in the future. Thisseasonal fluctuation in traffic results in a fluctuation in our quarterlyrevenues, since fewer users to our Web properties translates into fewer usersviewing or clicking on the advertisements on our Web properties. In addition,the demand for our advertising inventory fluctuates during the yearbased on the seasonal needs of our advertisers, rising to its highest levelsduring the fourth quarter and falling to its lowest levels in the first quarter. Accordingly, our revenue fluctuates basedon the seasonality of our traffic and advertising demand. The effect of thisseasonality makes it difficult to estimate future operating results based onthe results of any specific quarter. As a result, we may be unable to forecastour revenue accurately, and a failure to meet our revenue or expense forecastscould have an immediate and negative impact on the market price of our commonstock.

 

**Ouroperating results may fluctuate, which makes our results difficult to predictand could cause our results to fall short of expectations.**

 

Our operating results may fluctuate as a result of anumber of factors, many outside of our control. As a result, comparing ouroperating results on a period-to-period basis may not be meaningful, and youshould not rely on our past results as an indication of our future performance.Our quarterly, year-to-date and annual expenses as a percentage of our revenuesmay differ significantly from our historical or projected rates. Our operatingresults in future quarters may fall below expectations. Any of these eventscould cause our stock price to fall.

 

**Our partnerships and revenue-sharingarrangements with third-parties may not be renewed or continued, which couldimpact our credibility in the marketplace, which in turn could adversely affectour traffic and revenues.**

 

We have entered into revenue-sharing and otherarrangements with third parties that direct traffic to our Web properties andlicense our online answer engine services, and we plan to enter into similararrangements in the future. Although these arrangements have not had asubstantial impact on our revenues to date, they have provided us with thirdparty validation of our product offerings. We believe these arrangements andsimilar arrangements may result in significant revenues in the future. These arrangementsmay be terminated or discontinued by the third parties upon varying noticeperiods. If these arrangements and similar arrangements impact our revenuessubstantially in the future, then termination of any of these arrangementswould result in the loss of ad revenue and adversely affect our financialcondition. Further, termination of any of these arrangements could impact ourcredibility in the marketplace, which could adversely affect our traffic andrevenues.

 

**We may not be successful in expandingour business through acquisitions, business combinations and othertransactions, and, even if we are successful, our operations may be adverselyaffected as a result of these transactions.**

 

We intend to pursue acquisitions, businesscombinations and joint ventures, which we refer to as extraordinarytransactions. Our ability to implement this business strategy depends in largepart on our ability to compete successfully with other entities for acquisitioncandidates and joint venture partners. Factors affecting our ability to competesuccessfully include:

 

•      our financial condition and resources relative to thefinancial condition and resources of competitors;

•      our ability to issue common stock as consideration;

•      the attractiveness of our common stock as potentialconsideration relative to the common stock of competitors;

•      our ability to obtain financing; and

•      our available cash, which depends upon our results ofoperations and our cash demands.

 

In addition, we may not be able to find suitableacquisition candidates and we may not be able to complete acquisitions onfavorable terms, if at all. If we do complete acquisitions, we may notultimately strengthen our competitive position or achieve our goals, or suchacquisitions may be viewed negatively by customers, financial markets orinvestors. In addition, any acquisitions that we make could lead todifficulties in integrating personnel and operations from the acquiredbusinesses and in retaining and motivating key personnel from these businesses.Acquisitions may disrupt our ongoing operations, divert management fromday-to-day responsibilities, increase our expenses or adversely affect ourbusiness, operating results and financial condition. Future acquisitions mayreduce our cash available for operations and

 

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other uses and could result in an increase in amortization expenserelated to identifiable assets acquired, potentially dilutive issuances ofequity securities or the incurrence of debt, which could harm our business,financial condition and operating results.

 

**If we fail to maintain and enhanceawareness of our Web properties, our business and financial results could beadversely affected.**

 

We believe that maintaining and enhancing awareness ofour Web properties is critical to achieving widespread acceptance of ourservices and to the success of our business. We also believe that theimportance of brand recognition will increase due to the relatively lowbarriers to entry in our market. Maintaining and enhancing our Web propertiesmay require us to spend increasing amounts of money on, and devote greaterresources to, advertising, marketing and other brand-building efforts, andthese investments may not be successful. Further, even if these efforts aresuccessful, they may not be cost-effective. If we are unable to continuouslymaintain and enhance our Web properties, our traffic may decrease and we mayfail to attract advertisers, which could in turn result in lost revenues andadversely affect our business and financial results.

 

**Our failure to license compellingcontent and provide our users with quality reference information could resultin lost revenue, as a result of a loss of users and advertisers.**

 

We believe our future success depends in part upon ourability to deliver content through our Web properties. We are heavily dependenton licensed content. We cannot guarantee that we will be able to enter into newor renew current or future content agreements on commercially acceptable termsor at all. If we are unable to maintain and enhance our existing relationshipswith content providers or develop new relationships with alternative providersof content, our service may become less attractive to Internet users, resultingin decreased traffic to our Web properties, which could have an adverse effecton our ad revenues and a negative impact on our business. Accordingly, ourinability to retain our existing users and attract new Internet users wouldlead to a loss of revenues and adversely affect our business and financialresults.

 

**If we are unable to maintain andexpand our computer and communications systems, then interruptions and failuresin our services could result, making our services less attractive to consumersand subjecting us to lost revenue from the loss of users and advertisers.**

 

Our ability to provide high quality user experiencedepends on the efficient and uninterrupted operation of our computer andcommunications systems. Over time, our Web properties have experiencedsignificant increases in traffic, and we continuously seek to further increaseour user base. Accordingly, our Internet servers must accommodate spikes indemand for our Web pages in addition to potential significant growth intraffic. Delays and interruptions could frustrate users and reduce traffic onour Web properties, adversely affecting our operations and growth prospects.

 

We outsource our Web hosting services to DataReturn LLC. As our business grows and we require more servers, we believe thatthe economic justification of outsourcing our Web hosting services diminishes.We are planning to migrate our Web properties to co-location facilities andmanage the operations with our own staff. This change may be technologicallychallenging to implement, take time to test and deploy, cause us to incursubstantial costs or data loss, and cause users, advertisers, and affiliates toexperience delays or interruptions in our service. These changes, delays orinterruptions in our service could cause users and advertisers to becomedissatisfied with our service and move to competing providers of onlineservices, reducing the traffic on our Web properties and adversely affectingour business and financial results.

 

**If we were to lose the services ofour key personnel, we may not be able to execute our business plan and ourbusiness could be adversely affected.**

 

Our ability to execute our business plan depends uponthe continued service of our executive officers and other key technology,marketing, sales and support personnel. Our employment agreements with ourexecutive officers and key employees are terminable by either party upon 30-90days notice. If we lose the services of one or more of our key employees, or ifone or more of our executive officers or key employees joined a competitor orotherwise competed with us, our business could be adversely affected. We cannotassure you that we will be able to retain or replace our key personnel and theservices of key members of our research and development team, in particular,would be difficult to replace. If we do not succeed in retaining or replacingour key personnel, we may be unable to execute our business plan and, as aresult, our stock price may decline.

 

**Ourbusiness depends on increasing use of the Internet by users searching forinformation, advertisers marketing products and services and Web propertiesseeking to earn revenue to support their web content. If the Internetinfrastructure does not grow and is not maintained to support these activities,our business will be harmed.**

 

Our success will depend on the continued growth andmaintenance of the Internet infrastructure. This includes maintenance of areliable network backbone with the necessary speed, data capacity and securityfor providing reliable Internet services. Internet infrastructure may be unableto support the demands placed on it if the number of Internet users continuesto increase, or if existing or future Internet users access the Internet moreoften or increase their bandwidth requirements. In addition, viruses, worms andsimilar programs may harm the

 

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performance of theInternet. The Internet has experienced a variety of outages and other delays asa result of damage to portions of its infrastructure, and could face outagesand delays in the future. These outages and delays could reduce the level ofInternet usage as well as our ability to provide our solutions.

**Rules established by the FinancialAccounting Standards Board, or FASB, require us to expense equity compensationgiven to our employees and may impact our ability to effectively utilize equitycompensation to attract and retain employees.**

 

The FASB has adopted changes that require companies torecord a charge to earnings for employee stock option grants and other equityincentives effective January 1, 2006, which we have adopted. Theseaccounting changes may cause us to reduce the availability and amount of equityincentives provided to employees, which may make it more difficult for us to attract,retain and motivate key personnel. Additionally, it may be difficult for us toestimate the impact of such compensation charges on future operating resultsbecause they will be based upon the fair market value of our common stock andother assumptions at future dates.

 

**Wemay not be able to obtain capital when desired on favorable terms, if at all,or without dilution to our stockholders.**

We anticipate that our current cash (including the net proceeds wereceive from this offering) and cash equivalents will be sufficient to meet ourcurrent needs for general corporate purposes for at least the next 12 months.However, we may need or desire additional financing to execute on our currentor future business strategies, including to:

•      improvetraffic monetization and expand content on our Web properties;

•      enhanceour operating infrastructure;

•      acquirebusinesses or technologies; or

•      otherwiserespond to competitive pressures.

If we raise additional funds through the issuance of equity orconvertible debt securities, the percentage ownership of our stockholders couldbe significantly diluted, and these newly issued securities may have rights,preferences or privileges senior to those of existing stockholders. We cannotassure you that additional financing will be available on terms favorable tous, or at all. If adequate funds are not available or are not available onacceptable terms, when we desire them, our ability to fund our operations, takeadvantage of unanticipated opportunities, develop or enhance our services, orotherwise respond to competitive pressures would be significantly limited.

**We maybe subject to liability for online services, which may not be limited by thesafe harbors in The Digital Millennium Copyright Act, or DMCA, TheCommunications Decency Act, or CDA, or the U.S. Children’s Online PrivacyProtection Act, or COPPA. If we do not meet the safe harbor requirements, or ifit is otherwise determined that our Web properties contain actionable content,we could be subject to claims, which could be costly and time-consuming todefend.**

We host certain services that enable individuals togenerate content and engage in various online activities.  The lawrelating to the liability of providers of these online services for activitiesof their users is currently unsettled both within the United States andinternationally.  Claims have been threatened and may in the future bebrought against us for defamation, invasion of privacy, negligence, copyrightor trademark infringement, unlawful activity, tort, including personal injury,fraud, or other theories based on the nature and content of information towhich we provide links, or that may be posted online or generated by the usersof our Web properties.  Our defense of any of these actions could be costlyand involve significant time and attention of our management and otherresources.

 

The DMCA is intended, among other things, to reducethe liability of online service providers for listing or linking to third partyWeb properties that include materials that infringe copyrights or rights ofothers. Additionally, portions of the CDA are intended to provide statutoryprotections to online service providers who distribute third partycontent.  A safe harbor for copyright infringement is also available underthe DMCA to certain online service providers that provide specificservices, if the providers take certain affirmative steps as set forth inthe DMCA. Important questions regarding the safe harbor under the DMCA and theCDA have yet to be litigated, and we can not guarantee that we will meet thesafe harbor requirements of the DMCA or of the CDA. If we are not covered by asafe harbor, for any reason, we could be exposed to claims, which could becostly and time-consuming to defend.

 

In addition, COPPA was enacted in October 1998. COPPAimposes civil and criminal penalties on persons distributing material harmfulto minors over the Internet to persons under the age of 17 or collectingpersonal information from children under the age of 13. We do not knowinglycollect and disclose personal information from minors. The manner in whichCOPPA may be interpreted and enforced cannot yet be determined. Moreover, theapplicability to the Internet of existing laws governing issues such asproperty ownership, copyright, defamation, obscenity and personal privacy isuncertain. We may be subject to claims that our content violates such laws,which could damage our business and cause our stock price to decline.

 

We also periodically enter into arrangements to offerthird party products, services or content under the Answers brand or throughour Web properties.  We may be subject to claims concerning theseproducts, services or content by virtue of our involvement in marketing,branding, broadcasting or providing access to them, even if we do not ourselveshost, operate, provide, or provide access to them.

 

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It is also possible that, if any information provideddirectly by us contains errors or is otherwise negligently provided to users,third parties could make claims against us.  While it is our belief thatthe Terms of Use governing the use of our Web properties covers us againstthese types of claims, there are no assurances as to the final determination ofthese types of claims by any court of law. Furthermore, investigating anddefending any of these types of claims is expensive, even to the extent thatthe claims are without merit or do not ultimately result in liability.

 

**Third parties may claim that we areinfringing on their patents, trademarks or copyrights, which could result insubstantial costs, diversion of significant managerial resources andsignificant harm to our reputation.**

 

The industry in which we operate is characterized bythe existence of a large number of patents and frequent litigation based onallegations of patent infringement. We expect that Internet technologies,software products and services may be increasingly subject to third partypatent infringement claims as the number of competitors in our industry segmentgrows and the functionality of products in different industry segmentsoverlaps. From time to time, third parties may assert patent infringementclaims against us in various jurisdictions that are important to our business.Additionally, third parties may assert trademark infringement claims withrespect to brand names we use from time to time and content we display on ourWeb properties. For example, a third party may make claims against us over thedisplay of search results triggered by search terms that include trademarkterms. Furthermore, we may be faced with copyright infringement claims. We havereceived, and are likely to continue to receive, “cease and desist” lettersdemanding that we remove infringing content from our Web properties based on atheory of copyright and trademark infringement.

 

A successful patent, trademark or copyright infringement claim againstus by any third party, could subject us to:

 

•      substantial liability for damages and litigationcosts, including attorneys’ fees;

•      lawsuits that prevent us from further use ofintellectual property and require us to permanently cease and desist fromselling or marketing products that use the intellectual property;

•      licensing intellectual property from a third party,which could include significant licensing and royalty fees not presently paidby us, adding materially to the our costs of operations;

•      developing new intellectual property, as anon-infringing alternative, that could delay projects, add materially to ourcosts of operations and be unacceptable to our users, which in turn couldadversely affect our traffic and revenues; and

•      indemnifying third parties who have entered intoagreements with us with respect to losses they incurred as a result of theinfringement, which could include consequential and incidental damages that arematerial in amount.

 

Regardless of the merit of third party infringementclaims, these claims could result in substantial costs, diversion ofsignificant resources and management attention, termination of customercontracts, loss of customers and significant harm to our reputation.

 

Finally, many of our agreements with advertisers,distribution partners, and other third party partners require us to indemnifythese partners for certain third party intellectual property infringementclaims, which could increase our costs as a result of defending the claims andmay require that we pay damages if there were an adverse ruling in any of theclaims. An adverse determination could also prevent us from offering ourproducts and services to others and may require that we procure substituteproducts or services, which could adversely affect our business and financialresults.

 

**Misappropriation of our intellectualproperty could harm our reputation, adversely affecting our competitiveposition and financial results.**

 

Our ability to compete depends in part upon thestrength of our proprietary rights in our technologies, brands and content. Werely on a combination of U.S. and foreign patents, copyrights, trademark, tradesecret laws and license agreements to establish and protect our intellectualproperty and proprietary rights. The efforts we have taken to protect ourintellectual property and proprietary rights may not be sufficient or effectiveat stopping unauthorized use of our intellectual property and proprietaryrights. In addition, effective trademark, patent, copyright and trade secretprotection may not be available or cost-effective in every country in which ourservices are made available through the Internet. There may be instances wherewe are not able to fully protect or utilize our intellectual property in amanner that maximizes competitive advantage. If we are unable to protect ourintellectual property and proprietary rights from unauthorized use, the valueof our Web properties may be reduced, which could negatively impact ourbusiness. In addition, protecting our intellectual property and otherproprietary rights is expensive and diverts critical managerial resources. Ifany of the foregoing were to occur, or if we are otherwise unable to protectour intellectual property and proprietary rights, our business and financialresults could be adversely affected.

 

**New government regulation and legaluncertainties could require us to incur significant expenses.**

 

The laws and regulations applicable to the Internet,and to our products and services, are evolving and unclear and could damage ourbusiness. In addition, we will be subject to any new laws and regulationsdirectly applicable to our products and services. It is possible that laws andregulations may be adopted covering issues such as user privacy, pricing,taxation, content regulation, quality of products and services, andintellectual property ownership and infringement. This legislation could exposeus to substantial liability as well as dampen the

 

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growth in use of the Internet generally, decrease the acceptance of theInternet as a communications and commercial medium, or require us to incursignificant compliance expenses. Compliance with these laws and regulations mayalso cause us to change or limit our business practices in a manner adverse toour business.

 

Increased regulation or the imposition of access feescould substantially increase the costs of communicating on the Internet,potentially decreasing the demand for our products. A number of proposals havebeen made at the federal, state and local level that would impose additionaltaxes on the sale of goods and services through the Internet. Such proposals,if adopted, could substantially impair the growth of electronic commerce andcould adversely affect us.

 

Due to the global nature of the Internet, it ispossible that the governments of other states and foreign countries might attemptto regulate its transmissions or prosecute us for violations of their laws. Wemight unintentionally violate these laws. Such laws may be modified, or newlaws may be enacted, in the future. Our business may be negatively affected bya variety of new or existing laws and regulations, which may expose us tosubstantial compliance costs and liabilities and may impede the growth in useof the Internet generally.

 

**Risks Related to our Common Stock**

**Our common stock may be affected bylimited trading volume and may fluctuate significantly.**

 

Our common stock is traded on the Nasdaq GlobalMarket. Although an active trading market has developed for our common stock,there can be no assurance that an active trading market for our common stockwill be sustained. Failure to maintain an active trading market for our commonstock may adversely affect our shareholders’ ability to sell our common stockin short time periods, or at all. Our common stock has experienced, and mayexperience in the future, significant price and volume fluctuations, whichcould adversely affect the market price of our common stock.

 

**There may be substantial sales of ourcommon stock, which could cause our stock price to fall.**

 

All of our issued and outstanding shares areimmediately available for sale in the public market without registration underRule 144. Sales of a substantial number of shares of our common stock couldcause the price of our securities to fall and could impair our ability to raisecapital by selling additional securities.

 

We do not intendto pay dividends on our common stock.

 

We have never declared or paid any cash dividend onour capital stock. We currently intend to retain any future earnings and do notexpect to pay any dividends in the foreseeable future.

 

**We could issue “blank check”preferred stock without stockholder approval with the effect of diluting thencurrent stockholder interests.**

 

Our certificate of incorporation authorizes theissuance of up to 1,000,000 shares of “blank check” preferred stock with designations,rights and preferences as may be determined from time to time by our board ofdirectors. Accordingly, our board of directors is empowered, withoutstockholder approval, to issue a series of preferred stock with dividend,liquidation, conversion, voting or other rights, which could dilute theinterest of, or impair the voting power of, our stockholders. The issuance of aseries of preferred stock could be used as a method of discouraging, delayingor preventing a change in control. Although we do not presently intend to issueany shares of preferred stock, we may do so in the future.

 

**Provisions in our charter documentsand under Delaware law could discourage a takeover that stockholders mayconsider favorable.**

 

Provisions of our Amended and Restated Certificate ofIncorporation and Bylaws could make it more difficult for a third party toacquire us, even if doing so would be beneficial to our stockholders. Forexample, our board of directors is divided into three classes, with one classbeing elected each year by our stockholders, which generally makes it moredifficult for stockholders to replace a majority of directors and obtaincontrol of our board. In addition, stockholder meetings may be called only byour board of directors, the chairman of the board and the president, advancenotice is required prior to stockholder proposals and stockholders may not actby written consent. Furthermore, we have authorized preferred stock that isundesignated, making it possible for our board of directors to issue preferredstock with voting or other rights or preferences that could impede the successof any attempt to change control of our company.

 

Delaware law also could make it more difficult for athird party to acquire us. Specifically, Section 203 of the Delaware GeneralCorporation Law, to which our company is subject, may have an anti-takeovereffect with respect to transactions not approved in advance by our board ofdirectors, including discouraging attempts that might result in a premium overthe market price for the shares of common stock held by our stockholders.

 

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**We are at risk of securities classaction litigation.**

 

Securities class action litigation has often beenbrought against a company following a decline in the market price of itssecurities. This risk is especially relevant for us because Internet companiesoften experience significant stock price volatility. If we faced suchlitigation, it could result in substantial costs and diversion of management’sattention and resources, which could adversely affect our business.

 

**Failure to develop or maintain effective internal controls inaccordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have amaterial adverse effect on our stock price****.**

 

Section 404 of the Sarbanes-Oxley Act of 2002 andthe related rules and regulations of the SEC require annual managementassessments of the effectiveness of our internal control over financialreporting and a report by our independent registered public accounting firmattesting to and reporting on these controls. If we fail to adequately maintaincompliance with, or maintain, the adequacy of our internal control overfinancial reporting, as such standards are modified, supplemented or amendedfrom time to time, we may not be able to ensure that we can conclude on anongoing basis that we have effective internal control over financial reportingin accordance with Section 404 of the Sarbanes-Oxley Act of 2002 and therelated rules and regulations of the SEC. If we cannot favorably assess theeffectiveness of our internal control over financial reporting, investorconfidence in the reliability of our financial reports may be adverselyaffected, which could have a material adverse effect on our stock price.

 

In addition, we will be transitioning Lexico’sseparate accounting system to our accounting system. This transition couldresult in corruption or loss of data or other problems that could adverselyaffect our ability to produce accurate and timely financial statements. If weare unable to produce accurate and timely financial statements, our stock pricemay be adversely affected and we may be unable to maintain compliance with thelisting requirements of the Nasdaq Global Market.

 

Any future disclosure regarding our internal controlsor investors’ perceptions that our internal controls are inadequate or that weare unable to produce accurate financial statements may also adversely affectour stock price

 

Any future material weaknesses in our internal controlsmay impede our ability to produce timely and accurate financial statements,which could cause us to fail to file our periodic reports timely, result ininaccurate financial reporting or restatements of our financial statements,subject our stock to delisting and materially harm our business reputation andstock price.

 

As a public company, we are required to file annualand quarterly periodic reports containing our financial statements with theSecurities and Exchange Commission within prescribed time periods. As part ofthe Nasdaq Global Market listing requirements, we are also required to provideour periodic reports, or make them available, to our shareholders withinprescribed time periods. If we are required to restate our financial statementsin the future, any specific adjustment may be adverse and may cause ouroperating results and financial condition, as restated, on an overall basis tobe materially and adversely impacted. As a result, we or members of ourmanagement could be the subject of adverse publicity, investigations andsanctions by such regulatory authorities as the Securities and ExchangeCommission and subject to shareholder lawsuits. Any of the above consequencescould cause our stock price to decline materially and could impose significantunanticipated costs on us.

 

As of each year endbeginning with the year ending December 31, 2007, our management will berequired to evaluate our internal control over financial reporting and toprovide in our Form 10-K its assessment of our internal controls to ourshareholders. To the extent we have material weaknesses in our internalcontrols, we may determine that we have ineffective internal controls as ofDecember 31, 2007 or any subsequent year end.

 

If we are not able to issue our financial statementsin a timely manner, or if we are not able to obtain the required audit orreview of our financial statements by our registered independent publicaccounting firm in a timely manner, we will not be able to comply with theperiodic reporting requirements of the Securities and Exchange Commission andthe listing requirements of the Nasdaq Global Market. If these events occur,our common stock listing on the Nasdaq Global Market could be suspended orterminated and our stock price could materially suffer. In addition, we ormembers of our management could be subject to investigation and sanction by theSecurities and Exchange Commission and other regulatory authorities and toshareholder lawsuits, which could impose significant additional costs on us, divertmanagement attention and materially harm our operating results, financialcondition, business reputation and stock price.

 

**Risks Related to our Location inIsrael**

**Conditionsin Israel may limit our ability to produce and sell our product, which wouldlead to a decrease in revenues.**

 

Because most of our operations are conducted inIsrael, our operations are directly affected by economic, political andmilitary conditions affecting Israel. Specifically, we could be adverselyaffected by:

 

•            any major hostilities involving Israel;

•            a full or partial mobilization of the reserve forcesof the Israeli army;

 

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•            the interruption or curtailment of trade betweenIsrael and its present trading partners;

•            risks associated with the fact that a certain numberof our key employees and one officer reside in what are commonly referred to asoccupied territories;

•            risks associated with outages and disruptions ofcommunications networks due to any hostilities involving Israel; and

•            a significant downturn in the economic or financialconditions in Israel.

 

Since the establishment of the State of Israel in1948, a number of armed conflicts have taken place between Israel and its Arabneighbors and a state of hostility, varying in degree and intensity, has led tosecurity and economic problems for Israel. Despite negotiations to effect peacebetween Israel and its Arab neighbors, the future of these peace efforts isuncertain. Since October 2000, there has been a significant increase inviolence, civil unrest and hostility, including armed clashes between the Stateof Israel and the Palestinians, and acts of terror have been committed insideIsrael and against Israeli targets in the West Bank and Gaza Strip. In addition,the recent armed conflict with Hezbollah on the northern border of Israelnegatively affected business conditions in Israel. There is no indication as tohow long the current hostilities will last or whether there will be any furtherescalation. Any further escalation in these hostilities or any future conflict,political instability or violence in the region may have a negative effect onour business, harm our results of operations and adversely affect our shareprice.

 

Furthermore, there are a number of countries thatrestrict business with Israel or with Israeli companies, which may limit ourability to promote our products and services those countries.

 

**We may not be able to enforcecovenants not-to-compete under current Israeli law that might result in addedcompetition for our products.**

 

We have non-competition agreements with all of ouremployees, almost all of which are governed by Israeli law. These agreementsprohibit our employees from competing with or working for our competitors,generally during and for up to 12 months after termination of their employment.However, Israeli courts are reluctant to enforce non-compete undertakings offormer employees and tend, if at all, to enforce those provisions forrelatively brief periods of time in restricted geographical areas and only whenthe employee has obtained unique value to the employer specific to thatemployer’s business and not just regarding the professional development of theemployee. If we are not able to enforce non-compete covenants, we may be facedwith added competition.

 

**The Israeli government tax benefitsprogram in which we currently participate and from which we receive benefitsrequires us to meet several conditions. These programs or benefits may beterminated or reduced in the future, which may result in an increase in our taxliability.**

 

Our Israeli subsidiary receives tax benefitsauthorized under Israeli law for capital investments that are designated as “ApprovedEnterprises.” To be eligible for these tax benefits, we must meet certainconditions. If we fail to meet such conditions, these tax benefits could becancelled, and we could be required to pay increased taxes or refund the amountof tax benefits we received, together with interest and penalties. Israeligovernmental authorities have indicated that the government may in the futurereduce or eliminate the benefits of such programs. The termination or reductionof these programs and tax benefits could increase our Israeli tax rates, andthereby reduce our net profits or increase our net losses.

 

U.S. and Israeli tax authorities may interpret taxissues in manners other than those which we have adopted, which may expose usto tax liabilities.

We operate in the U.S. and in Israel and our earningsare subject to taxation in both jurisdictions, at different rates. Relevant taxauthorities may disagree with our interpretation and application in practice oftax laws and may dispute various assumptions we make during our tax planningprocess. Further, the tax authorities in the U.S. and/or Israel may takeexception with the transfer price of transactions between Answers Corporationand its wholly owned Israeli subsidiary. If there is a successful tax challengeof our tax position, our interpretation and/or application of tax laws in practice,we may be forced to recognize additional tax liabilities, which may includeinterest and penalties. This may harm our results of operations and adverselyaffect our financial condition. Our unrecognized tax benefits disclosed in thenotes to our financial statements for the period ending September 30, 2007,include amounts relating to this risk factor.

**Our business may be impacted by NISexchange rate fluctuations, which may negatively affect our earnings.**

Exchange rate fluctuations between the U.S. dollar andthe NIS may negatively affect our earnings. Our revenues and most of ourexpenses are denominated in U.S. dollars. However, a significant portion of theexpenses associated with our Israeli operations, including personnel andfacilities related expenses, are incurred in NIS. Consequently, a devaluationof the U.S. dollar in comparison to the NIS will have the effect of increasingthe dollar cost of our operations in Israel. In 2006, the U.S. dollardepreciated against the NIS by 8.2% and from January 1, 2007 to September 30,2007, the U.S. dollar depreciated against the NIS by 5.0%. We cannot predictany future trends in the rate of devaluation or appreciation of the NIS againstthe U.S. dollar or of the U.S. dollar against the NIS. Despite the fact that weuse various hedging tools, including forward contracts and options, to minimizethe effect of currency fluctuations on our income, if the U.S. dollar cost ofour operations in Israel increases, our dollar-measured consolidated results ofoperations will be adversely affected.

 

39

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**ITEM 4.* *SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

**None.**

**ITEM 6. EXHIBITS**

 
| 10.1       |   | Amendment to Robert S.  Rosenschein’s Amended and Restated Employment Agreement, dated  November 6, 2007                                           |
|------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                              |
| 10.2       |   | Amendment to Steven  Steinberg’s Employment Agreement, dated November 6, 2007                                                                      |
|       |   |                                                                                                                                                              |
| 10.3       |   | Amendment to Jeff  Schneiderman’s Employment Agreement, dated November 6, 2007                                                                     |
|       |   |                                                                                                                                                              |
| 10.4       |   | Amendment to Bruce D.  Smith’s Employment Agreement, dated November 6, 2007                                                                        |
|       |   |                                                                                                                                                              |
| 10.5+      |   | Amendment No. 5 to  Google Order Form and Google Services Agreement, dated September 21, 2007.                                                                    |
|       |   |                                                                                                                                                              |
|  31.1 |   | Certification of Chief  Executive Officer required under Rule 13a-15(e)/15d-15(e) under the  Exchange Act.                                              |
|       |   |                                                                                                                                                              |
| 31.2       |   | Certification of  Principal Financial Officer required under Rule 13a-15(e)/15d-15(e) 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. |
|       |   |                                                                                                                                                              |

----

| ****+****Portions of this exhibit were omitted and filed  separately with the U.S. Securities and Exchange Commission pursuant to  a request for confidential treatment. |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|                    | **ANSWERS  CORPORATION** |
|-------------------------|--------------------------|
|                    | (Registrant)             |
|                    |                     |
|                    |                     |
| Date: November 9,  2007 | By:                      | /s/ Robert S.  Rosenschein |
|                    |                     |
|                    |                     | Robert S.  Rosenschein |
|                    |                     | Chief Executive  Officer |
|                    |                     |
|                    |                     |
| Date: November 9,  2007 | By:                      | /s/ Steven  Steinberg |
|                    |                     |
|                    |                     | Steven Steinberg |
|                    |                     | Chief Financial  Officer |
|                    |                     | (Principal  Financial Officer) |

 

41

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