**UNITED
      STATES OF AMERICA**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**




**FORM
      10-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: JUNE 30, 2007**




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




**For
      the transition period from ___ to ____**




**Commission
      File Number: 001-32255**




**ANSWERS
      CORPORATION**


(Exact
      name of Registrant as specified in its charter)





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




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




Yes x No o




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




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




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




Yes o No x




The
      number of the registrant’s shares of common stock outstanding was 7,854,053 as
      of August 10, 2007.









**ANSWERS
      CORPORATION**




**FORM
      10-Q**




**CONTENTS**





**PART I
                — FINANCIAL INFORMATION**Item
                1.
            
            Consolidated
                Financial Statements(unaudited)
            4Consolidated
                Balance Sheets as of June 30, 2007 (unaudited)
                and December 31, 2006
            4Consolidated
                Statements of Operations (unaudited) for the three and six months
                ended
                June 30, 2007 and2006
            5Consolidated
                Statements of Cash Flows (unaudited) for the six
                months ended June 30, 2007 and 2006
            6Notes
                to Unaudited Consolidated Financial
                Statements
            7Item
                2.
            
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations
            13Item
                3.
            
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            26Item
                4.
            
            Controls
                and Procedures
            26**PART II
                — OTHER INFORMATION**Item
                1.
            
            Legal
                Proceedings
            27Item
                1A.
            
            Risk
                Factors
            27Item
                4
            
            Submission
                of Matters to a Vote of Security
                Holders
            38Item
                6.
            
            Exhibits
            38Signatures




2




**INTRODUCTORY
      NOTE**




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




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




3




**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)**








**June
                30**
            
            **December
                31****2007**
            
            **2006****$**
            
            
            **$****Assets****Current
                assets:**Cash
                and cash equivalents
            
            
            **4,540**
            
            
            4,976Investment
                securities
            
            
            **3,985**
            
            
            4,102Accounts
                receivable
            
            
            **1,279**
            
            
            1,304Prepaid
                expenses and other current assets
            
            
            **847**
            
            
            416**Total
                current assets**
            
            
            **10,651**
            
            
            10,798**Long-term
                deposits (restricted)**
            
            
            **333**
            
            
            218**Deposits
                in respect of employee severance obligations**
            
            
            **975**
            
            
            856**Property
                and equipment, net of $1,690 and $1,425 accumulated depreciation
                as of****June
                30, 2007 and December 31, 2006, respectively**
            
            
            **1,182**
            
            
            998**Other
                assets:**Intangible
                assets, net of $1,736 and $1,108 accumulated amortization as of June
                30,
                2007and
                December 31, 2006, respectively
            
            
            **5,382**
            
            
            6,010Goodwill
            
            
            **437**
            
            
            437Prepaid
                expenses, long-term, and other assets
            
            
            **312**
            
            
            362**Total
                other assets**
            
            
            **6,131**
            
            
            6,809**Total
                assets**
            
            
            **19,272**
            
            
            19,679**Liabilities
                and stockholders' equity****Current
                liabilities:**Accounts
                payable
            
            
            **317**
            
            
            366Accrued
                expenses
            
            
            **873**
            
            
            805Accrued
                compensation
            
            
            **717**
            
            
            623Deferred
                revenues, short-term
            
            
            **8**
            
            
            465**Total
                current liabilities**
            
            
            **1,915**
            
            
            2,259**Liability
                in respect of employee severance obligations**
            
            
            **1,046**
            
            
            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 June 30, 2007 and December 31, 2006,
                respectively
            
            
            **8**
            
            
            8Additional
                paid-in capital
            
            
            **72,867**
            
            
            71,599Accumulated
                other comprehensive loss
            
            
            **(30**
            **)**
            
            (31
            )Accumulated
                deficit
            
            
            **(56,534**
            **)**
            
            (54,984
            )**Total
                stockholders' equity**
            
            
            **16,311**
            
            
            16,592**Total
                liabilities and stockholders' equity**
            
            
            **19,272**
            
            
            19,679





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




4


Answers
      Corporation and Subsidiary





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







Three
                months ended June 30
            
            Six
                months ended June 30**2007**
            
            **2006**
            
            **2007**
            
            **2006****$**
            
            **$**
            
            **$**
            
            **$****Revenues:**Answers.com
                aAdvertising
                revenue
            
            
            **2,728**
            
            
            1,457
            
            
            **5,612**
            
            
            2,547Answers
                service licensing
            
            
            **82**
            
            
            46
            
            
            **159**
            
            
            99Subscriptions
            
            
            **-**
            
            
            8
            
            
            **425**
            
            
            19**2,810**
            
            
            1,511
            
            
            **6,196**
            
            
            2,665**Costs
                and expenses:**Cost
                of revenue
            
            
            **1,320**
            
            
            808
            
            
            **2,464**
            
            
            1,492Research
                and development
            
            
            **748**
            
            
            1,951
            
            
            **1,469**
            
            
            4,588Sales
                and marketing
            
            
            **1,072**
            
            
            678
            
            
            **2,054**
            
            
            1,320General
                and administrative
            
            
            **1,019**
            
            
            965
            
            
            **1,945**
            
            
            1,765**Total
                operating expenses**
            
            
            **4,159**
            
            
            4,402
            
            
            **7,932**
            
            
            9,165**Operating
                loss**
            
            
            **(1,349**
            **)**
            
            (2,891
            )
            
            **(1,736**
            **)**
            
            (6,500
            )Interest
                income, net
            
            
            **112**
            
            
            145
            
            
            **212**
            
            
            286Other
                income (expenses), net
            
            
            **4**
            
            
            (201
            )
            
            **(12**
            **)**
            
            (204
            )**Loss
                before income taxes**
            
            
            **(1,233**
            **)**
            
            (2,947
            )
            
            **(1,536**
            **)**
            
            (6,418
            )Income
                tax (expense) benefit
            
            
            **(14**
            **)**
            
            5
            
            
            **(14**
            **)**
            
            3**Net
                loss**
            
            
            **(1,247**
            **)**
            
            (2,942
            )
            
            **(1,550**
            **)**
            
            (6,415
            )**Basic
                and diluted net loss per common share**
            
            
            **(0.16**
            **)**
            
            (0.38
            )
            
            **(0.20**
            **)**
            
            (0.85
            )**Weighted
                average shares used in computing basic and****diluted
                net loss per common share**
            
            
            **7,853,818**
            
            
            7,678,328
            
            
            **7,840,140**
            
            
            7,555,185


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


5


Answers
      Corporation and Subsidiary





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







**Six
                months ended June 30****2007**
            
            **2006**$
            
            $**Cash
                flows from operating activities:****Net
                loss**
            
            
            **(1,550**
            **)**
            
            (6,415
            )**Adjustments
                to reconcile net loss to net cash used in operating
                activities:**Depreciation
                and amortization
            
            
            **892**
            
            
            594Deposits
                in respect of employee severance obligations
            
            
            **(119**
            **)**
            
            (95
            )Increase
                in liability in respect of employee severance obligations
            
            
            **214**
            
            
            85Stock-based
                compensation to employees and directors
            
            
            **1,123**
            
            
            856Stock-based
                compensation in connection with the Brainboost transaction
            
            
            **-**
            
            
            3,489Exchange
                rate losses (gains)
            
            
            **12**
            
            
            (23
            )**Changes
                in operating assets and liabilities:**Decrease
                (increase) in accounts receivable
            
            
            **24**
            
            
            (400
            )Increase
                in prepaid expenses and other assets
            
            
            **(78**
            **)**
            
            (111
            )Increase
                (decrease) in accounts payable
            
            
            **(49**
            **)**
            
            34Increase
                in accrued expenses and other current liabilities
            
            
            **(20**
            **)**
            
            197Decrease
                in short-term deferred revenues
            
            
            **(457**
            **)**
            
            (34
            )Decrease
                in long-term deferred revenues
            
            
            **-**
            
            
            (12
            )**Net
                cash used in operating activities**
            
            
            **(8**
            **)**
            
            (1,835
            )**Cash
                flows from investing activities:**Capital
                expenditures
            
            
            **(448**
            **)**
            
            (308
            )Capitalization
                of software development costs
            
            
            **-**
            
            
            (36
            )Purchase
                of intangible assets
            
            
            **-**
            
            
            (55
            )Increase
                in long-term deposits
            
            
            **(100**
            **)**
            
            (3
            )Deferred
                charges relating to planned acquisition
            
            
            **(114**
            **)**
            
            **-**Purchases
                of investment securities
            
            
            **(3,205**
            **)**
            
            (8,816
            )Proceeds
                from sales of investment securities
            
            
            **3,321**
            
            
            12,545**Net
                cash (used in) provided by investing activities**
            
            
            **(546**
            **)**
            
            3,327**Cash
                flows from financing activities:**Exercise
                of common stock options
            
            
            **145**
            
            
            173**Net
                cash provided by financing activities**
            
            
            **145**
            
            
            173Effect
                of exchange rate changes on cash and cash equivalents
            
            
            **(27**
            **)**
            
            23**Net
                increase (decrease) in cash and cash equivalents**
            
            
            **(436**
            **)**
            
            1,688Cash
                and cash equivalents at beginning of period
            
            
            **4,976**
            
            
            2,840**Cash
                and cash equivalents at end of period**
            
            
            **4,540**
            
            
            4,528


**Supplemental
                disclosures of cash flow information:**Income
                taxes paid
            
            
            **5**
            
            
            4**Non-cash
                investing activities:**Deferred
                charges relating to planned acquisition
            
            
            **190**
            
            
            **-**Unrealized
                net loss from securities
            
            
            **1**
            
            
            1




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




6


**ANSWERS
      CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**





**Note
      1** **- Business and Summary of Significant Accounting Policies**





**The
      Company**





Answers
      Corporation (“the Parent”), formerly GuruNet Corporation, was founded as a Texas
      corporation on December 22, 1998, and reorganized as a Delaware corporation
      in
      April 1999. On December 27, 1998, the Parent formed a wholly owned subsidiary
      based in Israel (“the Subsidiary”), primarily for the purpose of providing
      research and development services to the Parent. The Parent and the Subsidiary
      are collectively referred to as “the Company.” The Company provides answer-based
      search services to users through its flagship Web property, Answers.com, its
      Q&A platform, WikiAnswers.com, downloadable applications and
      co-brands.





**Basis
      of Presentation**





The
      accompanying consolidated financial statements include the accounts of Answers
      Corporation and its Subsidiary and are presented in accordance with accounting
      principles generally accepted in the United States. All significant
      inter-company balances and transactions have been eliminated in
      consolidation.





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





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





**Use
      of Estimates**





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




7


**ANSWERS
      CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**


**(UNAUDITED)**





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





**Revenue
      Recognition**





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





To
      date,
      the vast majority of the Company’s advertising revenue has been obtained through
      the efforts of third parties and has not been the result of direct contracts
      with advertisers. The third party is obligated to pay the Company a portion
      of
      the revenue it receives from advertisers, as compensation for the Company’s sale
      of promotional space on its Internet properties. Amounts received from such
      third parties are reflected as revenue in the period in which such advertising
      services are provided.





In
      2003,
      the Company sold lifetime subscriptions to its GuruNet product, which had no
      defined termination date. Cash received from such lifetime subscriptions was
      recorded as deferred revenues and amounted to $425,000 as of December 31, 2006.
      In February 2007, in accordance with the Company’s rights under the agreements
      it previously entered into with such lifetime subscribers, the Company
      terminated its GuruNet service and thereby extinguished its service obligation
      to such subscribers. Thus, the Company recognized the $425,000 previously
      deferred, as revenue in the first quarter of 2007.





**Derivatives
      and hedging**





The
      Company accounts for derivatives and hedging based on Statement of Financial
      Accounting Standards (SFAS) No. 133, *"Accounting
      for Derivative Instruments and Hedging Activities"* (SFAS
      133). SFAS No. 133 requires the Company to recognize all derivatives on the
      balance sheet at fair value. If the derivatives meet the definition of a hedge
      and are so designated, depending on the nature of the hedge, changes in the
      fair
      value of derivatives will either be offset against the change in fair value
      of
      the hedged assets, liabilities, or firm commitments through earnings, or
      recognized in other comprehensive income until the hedged item is recognized
      in
      earnings. The ineffective portion of a derivative's change in fair value is
      recognized in earnings.





In
      June
      2007, the Subsidiary entered into several forward exchange contracts to hedge
      certain foreign currency denominated expenses. These derivatives were not
      designated as hedging instruments under the rules of SFAS 133 and therefore
      the
      net gains (losses) are recognized in earnings. During the three and six months
      ended June 30, 2007, such losses amounted to $2,500, and are included in Other
      expenses, net.





**Recently
      Issued Accounting Standards**





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





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




8


**ANSWERS
      CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**


**(UNAUDITED)**





**Note
      2 - Stockholders’ Equity**





**General**





The
      following table summarizes the changes in the Company’s stockholders’ equity
      during the six-month period ending June 30, 2007:





**$
                (in thousands)****December
                31, 2006**
            
            
            **16,592**Exercise
                of stock options
            
            
            **145**Stock-based
                compensation
            
            
            **1,123**Other
                comprehensive loss
            
            
            **1**Net
                loss for the period
            
            
            **(1,550**
            **)****June
                30, 2007**
            
            
            **16,311**





**Common
      Stock**





During
      the six months ended June 30, 2007, the Company issued a total of 44,659 shares
      of common stock due to the exercise of 44,659 of the Company’s outstanding stock
      options, for a total consideration of approximately $145,000.





**Stock
      Warrants**





As
      of
      June 30, 2007 there were 1,157,763 outstanding stock warrants with a weighted
      average exercise price of $16.21 per warrant. All warrants are exercisable
      immediately. No warrants were exercised during the six months ended June 30,
      2007.





**Stock
      Options**





During
      the six months ended June 30, 2007, the Company granted a total of 375,150
      stock
      options to its employees, officers and directors at an average exercise price
      of
      $11.90 per option. All such options were granted under the Company’s 2005 Plan.
      Additionally, during the same period, 23,400 stock options were
      forfeited.





As
      of
      June 30, 2007, 43,400 and 6,703 options were available for grant under the
      2005
      Plan and the 2004 Stock Plan, respectively. All Prior Option Plans are closed
      for future grants.




The
      total
      fair value of stock options vesting during the six months ended June 30, 2007,
      amounted to $1,123,000 and was recorded as stock-based compensation
      expense.




9


**ANSWERS
      CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**


**(UNAUDITED)**





**Note
      3 - Commitments and Contingencies**





(a)
            Future
                minimum lease payments under operating leases for office space and
                cars,
                as of June 30, 2007, are as
                follows:





**Year
                ending December 31**
            
            **$
                (in thousands)**2007
                (six months ending December 31)
            
            
            2322008
            
            
            4362009
            
            
            3822010
            
            
            2171,267





Rental
      expense for operating leases for the three months ended June 30, 2007 and 2006
      was $122,000 and $98,000, respectively. Rental expense for operating leases
      for
      the six months ended June 30, 2007 and 2006 was $240,000 and $185,000,
      respectively.





(b)
            All
                of the Subsidiary’s obligations to its bank, including the bank guarantee
                given to the Subsidiary’s landlord, are secured by a lien on all of the
                Subsidiary’s deposits at such bank. As of June 30, 2007, deposits at such
                bank amounted to $890,000, including a restricted long-term deposit
                of
                $95,000.





(c)
            In
                the ordinary course of business, the Company enters into various
                arrangements with vendors and other business partners, principally
                for
                content, web-hosting, marketing and investor relations arrangements.
                As of
                June 30, 2007, the total future cash commitments under these arrangements
                amount to approximately $1,228,000.





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





(e)
            On
                July 14, 2005, a former marketing employee of the Company (“the
                Employee”), filed a statement of claim (“the Claim) with the Regional
                Labor Court in Jerusalem, Israel (“the Court”), against the Parent, the
                Subsidiary, the Parent’s Chief Executive Officer and its Chief Financial
                Officer, in the amount of approximately US$50,000, for deferred salary,
                severance pay and unpaid commissions, as well as 43,441 options to
                purchase such number of our shares of common stock, with an exercise
                price
                of $2.76 per share.On
                June 27, 2007, the Company and the Employee entered 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 receives various legal claims incidental
                to its
                normal business activities, such as intellectual property infringement
                claims and claims of defamation and invasion of privacy. Although
                the
                results of claims cannot be predicted with certainty, the Company
                believes
                the final outcome of such matters will not have a material adverse
                effect
                on its financial position, results of operations, or cash
                flows.




10


**ANSWERS
      CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**


**(UNAUDITED)**





**Note
      4 - Income Tax**





(a)
            In
                June 2006, the FASB issued Interpretation No. 48,*"Accounting
                for Uncertainty in Income Taxes - An Interpretation of FASB Statement
                No.
                109"*(FIN 48). FIN 48 clarifies the accounting for uncertainties in income
                taxes recognized 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
                the financial statement recognition and measurement of a tax position
                taken or expected to be taken in a tax return. The Company adopted
                the
                provisions of FIN 48 as of January 1, 2007. Interest and penalties
                related
                to unrecognized
                tax benefits are recognized as a component of income tax expense.





As
      of the
      adoption date, the Company had unrecognized tax benefits of approximately
      $180,000, including associated estimated interest and penalties which were
      not
      material, both of which did not change significantly during the six months
      ended
      June 30, 2007. Of such amount, approximately $90,000, if recognized, would
      impact the effective tax rate in 2007. We do not reasonably estimate that the
      unrecognized tax benefit will change significantly within twelve months from
      the
      adoption date.





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





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




**Note
      5 - Major Customers**





During
      the six months ended June 30, 2007, substantially all of the Company's
      advertising revenue was generated through the efforts of third party suppliers
      (the “Monetization Partners”). Additionally, during the three months ended June
      30, 2007, the Company earned approximately 71% and 10% of its total revenue
      through two of its Monetization Partners, compared
      to 64% and 14%, respectively, of the total revenue during the second quarter
      of
      2006.  Of
      the
      total revenue during the six months ended June 30, 2007, the Monetization
      Partners accounted for approximately 65% and 10%, compared to 65% and 14% of
      our
      total revenue during the same period in 2006.




11


**ANSWERS
      CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**


**(UNAUDITED)**





**Note
      6 - Subsequent Events**





(a)
            On
                July 13, 2007, the Company entered into a purchase agreement, pursuant
                to
                which it will acquire all of the outstanding limited liability interests
                of Lexico Publishing Group, LLC (the "Lexico Agreement"). The Company
                will
                pay an aggregate amount of up to of $100 million in cash, subject
                to
                adjustment for closing net working capital and transaction expenses,
                $10
                million of which may be paid to the employees of Lexico, and recorded
                as
                compensation expense, subject to certain terms and conditions and
                a
                pre-determined payout schedule.





Consummation
      of the acquisition of Lexico is subject to the Company’s ability to secure
      financing for the acquisition, as well as customary conditions to closing.





The
      Agreement may be terminated under certain circumstances, subject to limitations
      described in the Lexico Agreement, including in the event the Lexico Agreement
      shall not have been consummated by 180 days from the date of filing the
      registration statement relating to the financing condition (subject to certain
      extensions), which registration statement was filed by the Company on July
      17,
      2007. Additionally, the Lexico Agreement may be terminated by either the Company
      or Lexico upon material breach of the Lexico Agreement by the other party,
      which
      breach would result in the failure of the terminating party’s closing conditions
      to be fulfilled. In such case, the Lexico Agreement provides that the breaching
      party will be required to pay the other party a $2,000,000 termination fee.
      In
      addition, if the Lexico Agreement is terminated for failure of the financing
      condition, the Company will be required to reimburse Lexico for up to $400,000
      of out-of-pocket transaction expenses. Also, deferred costs related to the
      acquisition would be charged to expense upon termination, which amount was
      $304,000 at June 30, 2007.





(b)
            On
                August 2, 2007, the Company announced that due to a search engine
                algorithmic adjustment by Google, Answers.com has seen a drop in
                search
                engine traffic. As a result, overall traffic and revenue on Answers.com
                dropped by approximately 28% from levels immediately prior to the
                change.
                The Company is currently working to analyze and address the recent
                algorithm change, however, it may not successfully react to this
                or other
                future actions, and it may not recover the lost traffic and associated
                revenue. The Company’s current reaction to this event has been to reduce
                headcount and related recurring compensation costs, however it also
                expects to record a charge in the third quarter of 2007, in respect
                of
                termination-related costs. Further, the Company is currently assessing,
                what impact this event might have on the recoverability of its intangible
                assets.




12




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





*The
      following discussion and analysis should be read together with our financial
      statements and the notes to those statements that appear elsewhere in this
      Quarterly Report. This discussion contains forward-looking statements reflecting
      our current expectations and involves risks and uncertainties. In some cases,
      you can 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 comparable terminology. For example, statements regarding our
      expectations as to future financial performance, expense levels and liquidity
      sources are forward-looking statements. Actual results and the timing of events
      could differ materially from those discussed in our forward-looking statements
      as a result of many factors, including those set forth under “Risk Factors” and
      elsewhere in this Quarterly Report.*





**Overview**





We
      are an
      online publisher and aggregator of a wide range of information in categories
      including health & medical, business & finance, legal, science &
technology, history and reference & language. Our technology aggregates and
      presents targeted information from disparate sources and delivers results to
      users’ queries in a single consolidated view. Our content library contains over
      180 reference titles, spanning over 4 million topics, many from brand-name
      publishers including Houghton Mifflin Company, Oxford University Press and
      Gale.
      Our goal is to become the Internet's leading free destination site for users
      searching for any type of information and the premier online provider of answers
      to questions on any topic.





Prior
      to
      January 2005, we sold subscriptions to our reference-based product, GuruNet.
      Since the launch of Answers.com in January 2005, we have ceased offering new
      subscriptions to GuruNet and as of February 2007, we terminated the GuruNet
      service.





Our
      common stock is listed on the Nasdaq Global Market under the symbol
      "ANSW".





**Recent
      Events**





***Google
      Search Engine Traffic***





As
      we
      announced in an August 2, 2007 press release, a search engine algorithmic
      adjustment by Google in July 2007 led to a drop in Answers.com search engine
      traffic of approximately 28%. Our Answers.com revenues also dropped
      approximately 28%. We are still investigating the recent algorithm change,
      however, we may not successfully react to this or other future actions, and
      we
      may not recover the lost traffic and associated revenue. Our current reaction
      to
      this event has been to reduce our headcount and related recurring compensation
      costs; however we also expect to record a charge in the third quarter of 2007,
      in respect of termination-related costs. Further, we are currently assessing
      what impact this event might have on the realizability of our intangible assets.





***Planned
      Acquisition***





On July
      13, 2007, we entered into a purchase agreement, pursuant to which we
      agreed to acquire all of the outstanding limited liability interests of Lexico
      Publishing Group, LLC from (i) Brian Kariger, as trustee of the Brian Patrick
      Kariger Charitable Remainder Unitrust Trust dated April 9, 2007, (ii) Brian
      Kariger, as trustee of the Brian Patrick Kariger Revocable Trust dated February
      9, 2007 and (iii) Daniel Fierro, for an aggregate amount of up to $100 million
      in cash, subject to adjustment for closing net working capital and transaction
      expenses. $10 million of the aforesaid amount may be paid to the
      employees of Lexico, and recorded as compensation expense, subject to certain
      terms and conditions and a pre-determined payout schedule. In
      addition, $10 million of the purchase price will be placed in escrow for
      12 months to secure the indemnification obligations of the sellers under
      the purchase agreement as well as any post-closing purchase price adjustments
      for net working capital or transaction expenses. Consummation of the acquisition
      of Lexico is subject to our ability to secure financing for the acquisition,
      as
      well as customary conditions to closing, including absence of any legal
      prohibition on consummation of the acquisition, obtaining governmental and
      third-party consents, the accuracy of the representations and warranties,
      subject generally to a material adverse effect standard, and delivery of
      customary closing documents. We intend to use approximately $100 million of
      the
      net proceeds from a public or private offering of securities to finance the
      acquisition of Lexico.





***Shelf
      Registration Statement***





On
      July
      17, 2007, we filed a universal shelf registration statement with the Securities
      and Exchange Commission (SEC). The registration statement covers up to an
      aggregate of $140,000,000 of common stock, preferred stock, warrants, debt
      securities, units or any combination thereof. On August 6, 2007, the universal
      shelf registration statement was declared effective by the SEC.




13





**Recent
      Acquisitions**





*WikiAnswers,
      formerly FAQ Farm and Related Assets*





On
      November 2, 2006, we acquired WikiAnswers, formerly FAQ Farm, and certain other
      assets including, software utilized for the operation of the WikiAnswers Web
      property, other domain names, certain trade names, trademarks and other related
      intellectual property rights, certain databases of questions and answers
      accumulated to date by the Web property and the goodwill associated with the
      Web
      property, for an aggregate of $2 million in cash. In connection with the initial
      allocation of the purchase price, we recorded goodwill of approximately $437
      thousand and intangible assets of approximately $1,563 thousand, with estimated
      useful lives of three to ten years. Since the date of the acquisition, the
      revenues and operating expenses of WikiAnswers have been included in our results
      of operations.





*Brainboost
      Answer Engine*





On
      December 1, 2005, we acquired Brainboost Technology, LLC, developer of the
      Brainboost Answer Engine, or the BAE, an artificial intelligence technology
      enabling natural language search on the Web, for $4.0 million in cash and
      439,000 shares of our restricted stock, valued at approximately $5.6 million
      at
      the time of the acquisition. In connection with the allocation of the purchase
      price, we recorded an intangible asset, the BAE, with an estimated useful life
      of six years, valued at approximately $5.4 million, and we recognized
      compensation expense of approximately $4.2 million, on a straight-line basis,
      over the six-month period ending May 31, 2006.





Under
      the
      terms of the BAE acquisition, 50% and 25% of the shares of restricted stock
      were
      held in escrow for 3 and 6 months after the purchase date, respectively. Release
      from escrow was contingent upon our continued employment of one of the
      principals of the general partnership that formerly owned the BAE. The escrowed
      shares were deemed to be compensation for services to be performed by the
      principal of the seller over the six-month period ending May 31, 2006. Because
      the escrow criteria were met, such shares were released from escrow, as
      scheduled, on March 1, 2006 and June 1, 2006. The value of such shares, of
      approximately $4.2 million, was charged to compensation expense, on a
      straight-line basis, over the requisite six-month employment commitment
      period.





The
      stock
      component of the consideration was subject to a registration rights agreement,
      pursuant to which we agreed that if our registration statement was not effective
      with the Securities and Exchange Commission by April 1, 2006, we would pay
      the
      sellers a penalty of $100,000 per month, pro rated per day. Our registration
      statement was declared effective as of June 9, 2006; consequently, we paid
      the
      sellers $227 thousand in the second quarter of 2006.





In
      June
      2006, we completed our initial beta integration of the BAE into Answers.com
      as
“Answers from the Web.” We continue to further develop the technology through
      enhancements to its accuracy, range and speed.




**Revenues**





*Traffic*





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





·
            *Search
                engines*:
                Users submit queries and the algorithmic search engines respond by
                generating a list of Web pages that are likely to offer the most
                relevant
                content. When our pages rank very high in the search engines’ algorithmic
                systems, our results are more likely to be accessed by
                users. Currently, this source of traffic represents the majority of
                our traffic.


·
            *Google’s
                definition link*:
                Our informal, non-contractual relationship, pursuant to which Google
                currently links to our Answers.com pages for definitions based on
                a list
                of trigger words we have provided Google. At present, this
                source of traffic represents between 25% and 30% of our
                traffic.


·
            *Direct
                users*:
                Users visiting our Web properties directly.





Since
      most of our traffic originates from search engines, we expend considerable
      resources on improving and optimizing the volume of this traffic. The industry
      commonly refers to such efforts as search engine optimization, or SEO. On
      occasion, our Web properties have experienced temporary decreases in traffic,
      and consequently in revenue, due to these search engine actions. Further, a
      search engine algorithmic adjustment by Google in July 2007 led to a significant
      drop in search engine traffic directed to Answers.com. We are currently working
      to analyze and address the recent algorithm change, however, we may not
      successfully react to this or other future actions, and we may not recover
      the
      lost traffic and associated revenue.





We
      continuously invest in improving our visitors’ user experience, which we believe
      leads to increased pages per visit, or stickiness, and improved return visits,
      or user-retention. We seek to increase stickiness and user-retention by adding
      new features, enhancing user interfaces and adding new content to our Web
      properties.




14





Our
      Web
      properties receive direct traffic to their respective home pages. Answers.com
      also receives direct traffic through partner websites or through software
      downloads and access tools, 1-Click Answers and AnswerTips. 1-Click Answers
      and
      AnswerTips are tools that allow users to click on a word or phrase and gain
      access to Answers.com’s online library through a pop-up information bubble.





*Revenue*




*Advertising
      Revenue.* We
      earn
      most of our revenue from advertising. Our advertising revenue is earned from
      both pay-per-performance, or, cost per click, or CPC, and pay-per-impression,
      or
      cost per 1,000 impressions, or CPM. Our
      strategy is to work with third
      parties that contract with advertisers seeking to advertise in their network
      of
      Web properties, including our Web properties. We believe these third parties,
      or
      Monetization Partners, maximize
      the average amount of revenue we earn per page view. Monetization
      Partners generally compensate us by paying us a portion of the revenue they
      earn
      from advertisers for our provision of promotional space on our Web properties.
      Additionally, in the fourth quarter of 2006, we began selling directly to
      advertisers and generating direct advertising revenue. We expect direct
      advertising revenue to become a greater part of our overall revenue starting
      in
      the second half of 2007.





We
      gauge
      the effectiveness of our monetization efforts and trends by measuring our
      revenue per one thousand page views, or RPMs. In our previous Management's
      Discussion and Analysis of Financial Condition and Results of Operations, we
      reported RPMs based on website queries or traffic directly to one of our
      Answers.com topic pages. Beginning with the Management's Discussion and Analysis
      of Financial Condition and Results of Operations contained in this *Quarterly
      Report* ,
      we
      refer to RPMs based on page views, or traffic directly to Answers.com including
      visits to the home page, excluding lookups conducted via AnswerTips and traffic
      from partners who pay us for providing them our answer-based services. Page
      views are the more widely recognized industry standard traffic metric. Based
      upon our internal analysis, we estimate the number of Answers.com page views
      to
      be approximately ** 13%
      higher than the number of our previously reported Answers.com queries, the
      difference being accounted for mostly due to home page visits excluded from
      the
      query-count. Therefore, our historical Answers.com RPMs in this *Quarterly
      Report,* which
      have been modified to conform to the new methodology, will be
      approximately ** 13%
      lower
      than we have previously reported. The following table sets forth our
      Answers.com average daily page views and RPM, since our launch of
      Answers.com:




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








Our
      Answers.com RPMs have increased significantly since its launch due to the
      implementation of various optimization methods, including:





·
            modifying
                the user interface;


·
            modifying
                the color, background and placement of ads
                displayed;


·
            modifying
                the size of ads;


·
            changing
                the number of ads per page;


·
            adding
                or switching Monetization Partners;


·
            increasing
                the revenue-share percentage offered by Monetization
                Partners;


·
            modifying
                the types of ads introduced;


·
            modifying
                the content displayed; and


·
            introducing
                direct advertising sales.





We
      continue to monitor and adjust these, and potentially other, optimization
      techniques to maximize our RPMs.





In
      the
      first quarter of 2007 we experienced a decline in our Answers.com RPMs, as
      compared to the fourth quarter of 2006. The decline was due to a very large
      advertising campaign that generated approximately $240,000 of our total direct
      ad sales revenue of $291,000 in the fourth quarter of 2006, which was not
      repeated in the first half of 2007. In the first quarter and second quarter
      of
      2007, our total direct ad sales revenue was $94,000 and $64,000, respectively,
      and was comprised of many small and moderately sized campaigns. While we plan
      to
      continue focusing on optimizing our monetization, utilizing and expanding on
      many of the techniques we have used in the past, we believe that the primary
      factor that will improve our Answers.com RPMs is selling ads directly through
      our own sales force. Excluding expected growth in direct ad sales revenue,
      we
      anticipate that our Answers.com RPMs will fluctuate around current levels.
      In
      the second half of 2006 we hired our Vice President of Advertising Sales. During
      the second quarter of 2007 we hired three additional salespersons. As our direct
      advertising sales grow and become a more significant part of our revenue, we
      expect to see additional growth in our Answers.com RPMs.




Two
      of
      our Monetization Partners, Google and Shopping.com, accounted for approximately
      71% and 10%, respectively, of our total revenue in the three months ended June
      30, 2007, compared to approximately 64% and 14%, respectively, of our total
      revenue, in the same period in 2006. Google and Shopping.com accounted for
      approximately 65% and 10%, respectively, of our total revenue during the six
      months ended June 30, 2007, compared to 65% and 14%, respectively, of our total
      revenue during the same period in 2006. In addition to Google and Shopping.com,
      we utilize the services of other Monetization Partners that provide us with
      ads.
      Although there are many companies that provide Internet ad services similar
      to
      those provided by our Monetization Partners, the loss of Google as a
      Monetization Partner could have a material adverse impact on our financial
      condition, as we may not succeed in receiving terms and ad services as favorable
      as those provided under our agreement with Google.





*Subscription
      Revenue.* Prior
      to
      December 2003, we sold lifetime subscriptions to GuruNet, generally for $40.
      In
      December 2003, we decided to alter our pricing model and moved to an annual
      subscription model, generally, $30 per year. We have not sold subscriptions
      since our launch of Answers.com in January 2005. As of February 2007 we
      terminated the GuruNet service. Subscription revenue in periods subsequent
      to
      January 2005 reflects the recognition of revenue from subscriptions that we
      sold
      through January 2005.




15





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





**Cost
      of Revenue**





Cost
      of
      revenue consists of fees to third party providers of content, Web search service
      fees, ad serving fees, amortization of the cost of acquired software used in
      our
      products, data center costs including depreciation of information technology
      assets, contractual revenue sharing fees to various Web site operators for
      visitors directed to our Web properties, or traffic acquisition costs, as well
      as the compensation, travel and overhead costs relating to personnel who are
      responsible for content editing and integration, production operations and
      customer support. Over the long term we expect our cost of revenues as a
      percentage of revenue to decrease, however, we may experience an increase in
      our
      cost of revenues as a percentage of revenue, over the next twelve months due
      to
      our anticipated shift to a co-location facility for hosting our web properties,
      rather than our current managed hosting facility.





**Operating
      Expenses**





*Research
      and Development Expenses*





Research
      and development expenses consist of compensation, travel and overhead costs
      of
      personnel conducting research and development of our products and services,
      and
      consulting costs. Our research and development team works mostly on projects
      to
      improve and enhance user interface, product functionality, disambiguation,
      scalability and performance. As revenue grows, we generally expect that our
      R&D expenses will decline, as a percentage of revenue.





*Sales
      and Marketing Expenses*





Sales
      and
      marketing expenses consist of compensation, travel and overhead costs of sales
      and marketing and product management personnel, public relations, marketing
      and
      market information services, and advertising and promotional costs. While we
      generally expect that our Sales and Marketing ** expenses
      will decline, as a percentage of revenue, as we grow; in the second quarter
      of
      2007 we began investing in our direct ad sales infrastructure by hiring four
      persons as well as increases in other expenses. Thus, we may experience an
      increase in our sales and marketing as a percentage of revenue, over the next
      six months.





*General
      and Administrative Expenses*





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





*Stock-Based
      Compensation*





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





*Other
      Compensation Charges*





The
      shares of restricted stock, valued at approximately $4.2 million, that were
      part
      of the consideration for the purchase of the BAE, but were held in escrow
      contingent upon the employment of one of the principals of the general
      partnership that formerly owned the BAE, were deemed to be compensation for
      services performed by such principal over the requisite six-month employment
      period ending May 31, 2006.





**Other**





*Interest
      Income*





Interest
      income primarily consists of interest income earned on cash, cash equivalent
      and
      investment securities balances.




16





*Other
      Expenses*





Other
      Expenses consists primarily of foreign currency exchange gains and losses.
      In
      the second quarter of 2006, other expenses included a payment of $227,000 to
      the
      sellers of BAE because the registration of their shares of our common stock
      did
      not take effect by the prescribed date.





*Income
      Tax Expense*





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





Our
      Israeli subsidiary had income during the three and six months ending June 30,
      2007 and 2006, resulting from its cost plus agreement with the parent company.
      Pursuant to such agreement, the Israeli subsidiary charges Answers for research
      and development services it provides Answers, plus 12.5%. However, the
      subsidiary is an “approved enterprise” under Israeli law, which means that
      income arising from the subsidiary’s approved activities is subject to zero tax
      under the “alternative benefit” path for a period of ten years. In the event of
      distributions by the subsidiary to the parent, the subsidiary would have to
      pay
      a 10% corporate tax on the amount distributed, and the recipient would have
      to
      pay a 15% tax (to be withheld at source) on the amounts of such distribution
      received.





**Critical
      Accounting Policies**





While
      our
      significant accounting policies are more fully described in the notes to our
      audited consolidated financial statements for the years ended December 31,
      2006
      and 2005, and our consolidated interim financial statements for the quarters
      ended June 30, 2007 and 2006, we believe the following accounting policies
      to be
      the most critical in understanding the judgments and estimates we use in
      preparing our consolidated financial statements.





***Goodwill,
      Intangibles and Other Long-Lived Assets***





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




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





We
      evaluate our long-lived tangible and intangible assets for impairment in
      accordance with SFAS 142, “Goodwill and Other Intangible Assets,” and SFAS 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” whenever
      events or changes in circumstances indicate that the carrying amount of an
      asset
      may not be recoverable. Goodwill is subject to an annual test for
      impairment. If such assets are considered to be impaired, the impairment to
      be recognized is measured by the amount by which the carrying amount of the
      assets exceeds the fair value of the assets. While we use available
      information to prepare our estimates and to perform impairment evaluations,
      the
      completion of annual impairment tests requires significant management judgments
      and estimates.





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





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




17





With
      the
      exception of stock options granted to employees prior to May 12, 2004, the
      date
      of our first filing with the SEC in connection with our initial public offering,
      or IPO, we determine the fair value of stock options (for disclosure purposes
      prior to January 1, 2006, and for accounting purposes beginning January 1,
      2006)
      granted to employees and directors using the Black-Scholes valuation model,
      which considers the exercise price relative to the market value of the
      underlying stock, the expected stock price volatility, the risk-free interest
      rate and the dividend yield, and the estimated period of time option grants
      will
      be outstanding before they are ultimately exercised. We also determine the
      fair
      value of stock options and warrants granted to non-employees, for accounting
      purposes, using the Black-Scholes valuation model. Prior to our IPO, in October
      2004, the market value of the underlying stock was based on estimates, including
      volatility estimates that are inherently highly uncertain and subjective, since
      prior to our IPO there had been no public market for our stock. Subsequent
      to
      our IPO, we have not had sufficient history to actually predict our volatility,
      therefore, our assumptions about stock price volatility are based on the
      volatility rates of comparable publicly held companies. These rates may or
      may
      not reflect our actual stock price volatility. Had we made different assumptions
      about the market value of our stock, stock price volatility or the estimated
      time option and warrant grants will be outstanding before they are ultimately
      exercised, the related stock based compensation expense and our net loss and
      net
      loss per share amounts could have been significantly different, in the three
      and
      six months ended June 30, 2007 and 2006.





***Accounting
      for Income Taxes***





As
      part
      of the process of preparing our consolidated financial statements, we are
      required to estimate our income taxes in each of the jurisdictions in which
      we
      operate. This process involves management estimating our actual current tax
      exposure together with assessing temporary differences resulting from differing
      treatment of items for tax and accounting purposes. These differences result
      in
      deferred tax assets and liabilities, which are included within our consolidated
      balance sheet. We must then assess the likelihood that our deferred tax assets
      will be recovered from future taxable income and, to the extent we believe
      that
      recovery is not more likely than not, we must establish a valuation allowance.
      Significant management judgment is required in determining our provision for
      income taxes, our deferred tax assets and liabilities and any valuation
      allowance recorded against our net deferred tax assets. We have fully offset
      our
      US deferred tax asset with a valuation allowance. Our lack of earnings history
      and the uncertainty surrounding our ability to generate US taxable income prior
      to the expiration of such deferred tax assets were the primary factors
      considered by management in establishing the valuation allowance.





In
      July
      2006, FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes - an Interpretation of FASB Statement 109” (FIN 48) effective for
      fiscal years beginning after December 15, 2006. FIN 48 prescribes how a company
      should recognize, measure, present and disclose in its financial statements
      uncertain tax positions that the company has taken or expects to take on a
      tax
      return. Additionally, for tax positions to qualify for deferred tax benefit
      recognition under FIN 48, the position must have at least a “more likely than
      not” chance of being sustained upon challenge by the respective taxing
      authorities, otherwise, the company must increase the valuation allowance
      correspondingly. We adopted the provisions of FIN 48 as of January 1, 2007
      and
      it has not had a material impact on our financial statements.




18





**Results
      of Operations**





**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2007**
            
            **2006**
            
            **2007**
            
            **2006****(in
                thousands)**
            
            **(in
                thousands)****Revenues:**Advertising
                revenue
            
            $
            2,728
            
            $
            1,457
            
            $
            5,612
            
            $
            2,547Answers
                serviceslicensing
            
            
            82
            
            
            46
            
            
            159
            
            
            99Subscriptions
            
            
            -
            
            
            8
            
            
            425
            
            
            192,810
            
            
            1,511
            
            
            6,196
            
            
            2,665**Costs
                and expenses:**Cost
                of revenue
            
            
            1,320
            
            
            808
            
            
            2,464
            
            
            1,492Research
                and development
            
            
            748
            
            
            1,951
            
            
            1,469
            
            
            4,588Sales
                and marketing
            
            
            1,072
            
            
            678
            
            
            2,054
            
            
            1,320General
                and administrative
            
            
            1,019
            
            
            965
            
            
            1,945
            
            
            1,765**Total
                operating expenses**
            
            
            4,159
            
            
            4,402
            
            
            7,932
            
            
            9,165**Operating
                loss**
            
            
            (1,349
            )
            
            (2,891
            )
            
            (1,736
            )
            
            (6,500
            )Interest
                income, net
            
            
            112
            
            
            145
            
            
            212
            
            
            286Other
                income (expenses), net
            
            
            4
            
            
            (201
            )
            
            (12
            )
            
            (204
            )**Loss
                before income taxes**
            
            
            (1,233
            )
            
            (2,947
            )
            
            (1,536
            )
            
            (6,418
            )Income
                tax (expense) benefit
            
            
            (14
            )
            
            5
            
            
            (14
            )
            
            3**Net
                loss**
            
            $
            (1,247
            )
            $
            (2,942
            )
            $
            (1,550
            )
            $
            (6,415
            )





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





**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****Statement
                of Operations Data**
            
            **2007**
            
            **2006**
            
            **2007**
            
            **2006****Revenues**
            
            
            100
            %
            
            100
            %
            
            100
            %
            
            100
            %**Costs
                and expenses:**Cost
                of revenue
            
            
            47
            
            
            53
            
            
            40
            
            
            56Research
                and development
            
            
            27
            
            
            129
            
            
            24
            
            
            172Sales
                and marketing
            
            
            38
            
            
            45
            
            
            33
            
            
            50General
                and administrative
            
            
            36
            
            
            64
            
            
            31
            
            
            66**Total
                operating expenses**
            
            
            148
            
            
            291
            
            
            128
            
            
            344**Operating
                loss**
            
            
            (48
            )
            
            (191
            )
            
            (28
            )
            
            (244
            )Interest
                income, net
            
            
            4
            
            
            10
            
            
            3
            
            
            10Other
                income (expense), net
            
            
            0
            
            
            (14
            )
            
            0
            
            
            (8
            )**Loss
                before income taxes**
            
            
            (44
            )
            
            (195
            )
            
            (25
            )
            
            (242
            )Income
                tax (expense) benefit
            
            
            -
            
            
            -
            
            
            -
            
            
            -**Net
                loss**
            
            
            (44
            )%
            
            (195
            )%
            
            (25
            )%
            
            (242
            )%





19


***Three
      Months and Six Months Ended June 30, 2007 and
      2006***





**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2007**
            
            **2006**
            
            
            
            **2007**
            
            **2006****(in
                thousands)**
            
            **Change**
            
            **(in
                thousands)**
            
            **Change**Advertising
                Revenue
            
            $
            2,728
            
            $
            1,457
            
            $
            1,271
            
            $
            5,612
            
            $
            2,547
            
            $
            3,065Answers
                Service Licensing
            
            
            82
            
            
            46
            
            
            36
            
            
            159
            
            
            99
            
            
            60Subscriptions
            
            
            -
            
            
            8
            
            
            (8
            )
            
            425
            
            
            19
            
            
            406$
            2,810
            
            $
            1,511
            
            $
            1,299
            
            $
            6,196
            
            $
            2,665
            
            $
            3,531





Revenue
      increased $1,299 thousand, or 86%, to $2,810 thousand for the three months
      ended
      June 30, 2007 from $1,511 thousand for the three months ended June 30, 2006.
      The
      majority of the increase in our revenue was due to an increase in advertising
      revenue, which was primarily the result of increases in our Answers.com traffic
      and monetization. Average daily page views and RPMs for Answers.com in the
      second quarter of 2007 were approximately 4,890,000 and $5.73, respectively,
      compared to approximately 3,030,000 and $5.29, respectively, in the same period
      in 2006. Additionally, advertising revenues in the second quarter of 2007
      includes $177 thousand generated from WikiAnswers, a website we did not own
      in
      the second quarter of 2006. As noted earlier, a search engine algorithmic
      adjustment by Google in July 2007 led to a significant drop in search engine
      traffic directed to Answers.com. We are currently working to analyze and address
      the recent algorithm change, however, we may not successfully react to this
      or
      other future actions, and we may not recover the lost traffic and associated
      revenue.





Revenue
      increased $3,531 thousand, or 132%, to $6,196 thousand for the six months ended
      June 30, 2007 from $2,665 thousand for the six months ended June 30, 2006.
      The
      majority of the increase in our revenue was due to an increase in advertising
      revenue, which was primarily the result of increases in our Answers.com traffic
      and monetization. Average daily page views and RPMs for Answers.com in the
      six
      months ended June 30, 2007 were approximately 5,180,000 and $5.67, respectively,
      compared to approximately 2,970,000 and $4.72, respectively, in the same period
      in 2006. Additionally, advertising revenues in the six months ended June 30,
      2007 includes $294 thousand generated from WikiAnswers, a website we did not
      own
      during the same period in 2006. Going forward, we expect that WikiAnswers will
      comprise a larger percentage of our advertising revenue.





We
      earned
      no, or an immaterial amount, of subscription revenue during the three months
      ended June 30, 2007 and 2006.





Subscription
      Revenue in the six months ended June 30, 2007, of $425 thousand, resulted from
      the recognition of revenue from the sale of lifetime subscriptions prior to
      December 2003, as explained further. As of December 31, 2006, we had
      approximately $425 thousand of deferred revenues, relating to subscriptions,
      which had no defined term, which we sold in 2003. Prior to the six months ended
      June 30, 2007, we did not recognize any revenue from the lifetime subscriptions
      we previously sold since such subscriptions had no defined term. On February
      2,
      2007, in accordance with our rights under the agreements we entered into with
      such subscribers, we terminated the GuruNet service and thereby extinguished
      our
      service obligation to such subscribers; thus, we recognized the entire $425
      thousand previously deferred, as revenue, in the three months ended March 31,
      2007. Subscription Revenue in the six months ended June 30, 2006, of $19
      thousand, relates to fixed-term subscriptions we sold prior to January 2005,
      as
      we recognized the revenue from fixed term subscriptions over the lives of such
      subscriptions.





**Costs
      and Expenses**





*Cost
      of Revenue*





**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2007**
            
            **2006**
            
            
            
            **2007**
            
            **2006****(in
                thousands)**
            
            **Change**
            
            **(in
                thousands)**
            
            **Change**Cost
                of revenue
            
            $
            1,320
            
            $
            808
            
            $
            512
            
            $
            2,464
            
            $
            1,492
            
            $
            972





Cost
      of
      revenue increased $512 thousand, or 63%, to $1,320 thousand for the three months
      ended June 30, 2007 from $808 thousand for the three months ended June 30,
      2006.
      The increase in cost of revenue was due mostly to increases in compensation
      costs of $78 thousand as a result of staffing additions in our production
      operations, and content departments, and March 2007 salary increases; increases
      in data center costs of $160 thousand (including depreciation of information
      technology assets) required to manage more Internet traffic; and increases
      in
      content licensing costs of $159 thousand. Additionally, during the three months
      ended June 30, 2007 we incurred approximately $50 thousand in ad serving service
      costs, costs which were insignificant during the three months ended June 30,
      2006, since we only began using third-party ad serving services in June 2006,
      to
      assist us in managing the multiple monetization partners we utilize. Finally,
      in
      the three months ended June 30, 2007 we incurred $32 thousand of amortization
      relating to WikiAnswers intangible assets we purchased in November 2006, costs
      we did not incur in the three months ended June 30, 2006.




20





Cost
      of
      revenue increased $972 thousand, or 65%, to $2,464 thousand for the six months
      ended June 30, 2007 from $1,492 thousand for the six months ended June 30,
      2006.
      The increase in cost of revenue was due mostly to increases in compensation
      costs of $157 thousand as a result of staffing additions in our production
      operations, and content departments, and March 2007 salary increases; increases
      in data center costs of $326 thousand (including depreciation of information
      technology assets) required to manage more Internet traffic; and increases
      in
      content licensing costs of $251 thousand. Additionally, during the six months
      ended June 30, 2007 we incurred approximately $105 thousand in ad serving
      service costs, costs which were insignificant during the six months ended June
      30, 2006, since we only began using third-party ad serving services in June
      2006, to assist us in managing the multiple monetization partners we utilize.
      Finally, in the six months ended June 30, 2007 we incurred $64 thousand of
      amortization relating to WikiAnswers intangible assets we purchased in November
      2006, costs we did not incur in the six months ended June 30, 2006.





*Research
      and Development Expenses*





**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2007**
            
            **2006**
            
            
            
            **2007**
            
            **2006****(in
                thousands)**
            
            **Change**
            
            **(in
                thousands)**
            
            **Change**Research
                and development
            
            $
            748
            
            $
            1,951
            
            
            ($1,203
            )
            $
            1,469
            
            $
            4,588
            
            
            ($3,119
            )




Research
      and development expenses decreased $1,203 thousand, or 62%, to $748 thousand
      for
      the three months ended June 30, 2007 from $1,951 thousand for the three months
      ended June 30, 2006. The decrease is due, primarily, to compensation charges
      resulting from the acquisition of THE BAE of approximately $1.4 million in
      the
      second quarter of 2006 that did not recur in the second quarter of 2007. This
      decrease was partially offset by increases in compensation-related expenses,
      of
      $179 thousand, due to growth in our research and development team and March
      2007
      salary increases.





Research
      and development expenses decreased $3,119 thousand, or 68%, to $1,469 thousand
      for the six months ended June 30, 2007 from $4,588 thousand for the six months
      ended June 30, 2006. The decrease is due, primarily, to compensation charges
      resulting from the acquisition of the BAE of approximately $3.5 million in
      the
      six months ended June 30, 2006 that did not recur in the same period of 2007.
      This decrease was partially offset by increases in compensation-related
      expenses, of $294 thousand, due to growth in our research and development team
      and March 2007 salary increases.





*Sales
      and Marketing Expenses*





**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2007**
            
            **2006**
            
            
            
            **2007**
            
            **2006****(in
                thousands)**
            
            **Change**
            
            **(in
                thousands)**
            
            **Change**Sales
                and marketing
            
            $
            1,072
            
            $
            678
            
            $
            394
            
            $
            2,054
            
            $
            1,320
            
            $
            734





Sales
      and
      marketing increased $394 thousand, or 58%, to $1,072 thousand for the three
      months ended June 30, 2007 from $678 thousand for the three months ended June
      30, 2006. The increase is due to a number of factors. Compensation related
      expenses increased $308 thousand, from $468 thousand to $776 thousand, primarily
      due to growth in our sales and marketing team, including the hiring of a Vice
      President of Advertising Sales, three ad sales managers and a business
      development manager. Expenses relating to Internet and marketing metrics
      software and information services increased approximately $50 thousand in the
      second quarter of 2007, as compared to the same period in 2006. We also incurred
      recruiter fees of approximately $50 thousand, in the second quarter of 2007
      to
      fill some of the ad sales positions, fees we did not incur during the second
      quarter of 2006. These increases were offset, in part, by decreases in
      advertising and promotion expenses of approximately $37 thousand. Our
      advertising and promotion expenses decreased because we have found that many
      traditional marketing activities do not generate significant amounts of traffic.





Sales
      and
      marketing increased $734 thousand, or 56%, to $2,054 thousand for the six months
      ended June 30, 2007 from $1,320 thousand for the six months ended June 30,
      2006.
      The increase is due to a number of factors. Compensation related expenses
      increased $613 thousand, from $923 thousand to $1,536 thousand, primarily due
      to
      growth in our sales and marketing team, including the hiring of a Vice President
      of Advertising Sales, three ad sales managers and a business development
      manager. Expenses relating to Internet and marketing metrics software and
      information services increased approximately $120 thousand, and overhead rose
      approximately $55 thousand, in the six months ended June 30, 2007, as compared
      to the same period in 2006. Additionally, in the six months ended June 30,
      2007
      we incurred recruiter fees of approximately $50 thousand, to fill some of the
      ad
      sales positions, fees we did not incur during the same period in 2006. These
      increases were offset, in part, by decreases in advertising and promotion
      expenses of approximately $119 thousand. Our advertising and promotion expenses
      decreased because we have found that many traditional marketing activities
      do
      not generate significant amounts of traffic.




21





*General
      and Administrative Expenses*





**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2007**
            
            **2006**
            
            
            
            **2007**
            
            **2006****(in
                thousands)**
            
            **Change**
            
            **(in
                thousands)**
            
            **Change**General
                and administrative
            
            $
            1,019
            
            $
            965
            
            $
            54
            
            $
            1,945
            
            $
            1,765
            
            $
            180





General
      and administrative increased $54 thousand, or 6%, to $1,019 thousand for the
      three months ended June 30, 2007 from $965 thousand for the three months ended
      June 30, 2006. The increase was due mostly to increases in compensation costs
      of
      $125 thousand, amortization of WikiAnswers domain name of $50 thousand, and
      depreciation of $32 thousand. These increases were offset, in part, by decreases
      in overhead of $27 thousand, legal and accounting fees of $37 thousand and
      investor relations and printing services of $48 thousand.





General
      and administrative increased $180 thousand, or 10%, to $1,945 thousand for
      the
      six months ended June 30, 2007 from $1,765 thousand for the six months ended
      June 30, 2006. The increase was due mostly to increases in compensation costs
      of
      $266 thousand, amortization of WikiAnswers domain name of $100 thousand, and
      depreciation of $79 thousand. These increases were offset, in part, by decreases
      in overhead of $98 thousand, legal and accounting fees of $42 thousand and
      investor relations and printing services of $78 thousand.





*Interest
      Income, Net*





**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2007**
            
            **2006**
            
            
            
            **2007**
            
            **2006****(in
                thousands)**
            
            **Change**
            
            **(in
                thousands)**
            
            **Change**Interest
                income, net
            
            $
            112
            
            $
            145
            
            
            ($33
            )
            $
            212
            
            $
            286
            
            
            ($74
            )





Interest
      income, net decreased $33 thousand, or 23%, to $112 thousand for the three
      months ended June 30, 2007 from $145 thousand for the three months ended June
      30, 2006. The decrease resulted primarily from significantly lower average
      cash
      and investment securities balances during the first quarter of 2007 as compared
      to the same quarter in 2006.





Interest
      income, net decreased $74 thousand, or 26%, to $212 thousand for the six months
      ended June 30, 2007 from $286 thousand for the six months ended June 30, 2006.
      The decrease resulted primarily from significantly lower average cash and
      investment securities balances during the six months ended June 30, 2007 as
      compared to the same period in 2006.





*Other
      Income (Expenses), Net*





**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2007**
            
            **2006**
            
            
            
            **2007**
            
            **2006****(in
                thousands)**
            
            **Change**
            
            **(in
                thousands)**
            
            **Change**Other
                income (expense), net
            
            $
            4
            
            
            ($201
            )
            $
            205
            
            
            ($12
            )
            
            ($204
            )
            $
            192





Other
      income (expense), net changed $205 thousand, to net income of $4 thousand for
      the three months ended June 30, 2007, from net expense of $ 201 thousand for
      the
      three months ended June 30, 2006. Other expenses in the three months ended
      June
      30, 2006 resulted, primarily, from the payment of $227 thousand to the sellers
      of the BAE because the registration of their Answers common shares did not
      take
      place before April 1, 2006. This $227 thousand loss was offset by foreign
      currency exchange net gains of $26 thousand. Other income during the three
      months ended June 30, 2007, resulted from foreign currency exchange net
      gains.





Other
      expense, net decreased $192 thousand or, 94%, to $12 thousand for the six months
      ended June 30, 2007, from $ 204 thousand for the six months ended June 30,
      2006.
      Other expenses in the six months ended June 30, 2006 resulted, primarily, from
      the payment of $227 thousand to the sellers of the BAE because the delayed
      registration of their Answers common shares. This $227 thousand loss was offset
      by foreign currency exchange net gains of $23 thousand. Other expenses during
      the six months ended June 30, 2006, resulted from foreign currency exchange
      net
      losses.





22





*Income
      Tax (Expense) Benefit*





We
      had
      net operating loss carryforwards, or NOLs, for federal income tax purposes
      of
      approximately $50 million at June 30, 2007 and $44 million at June 30, 2006.
      The
      federal net operating losses will expire if not utilized on various dates from
      2019 through 2027. Because we have experienced one or more ownership changes,
      within the meaning of Section 382 of the Internal Revenue Code of 1986, as
      amended, an annual limitation is imposed on our ability to use $32 million
      of
      these carryforwards. Our best estimate at this time is that the annual
      limitation on the use of $32 million of our NOLs is approximately $1.8 million
      per year. Any unused portion of the $1.8 million annual limitation applicable
      to
      our restricted NOLs is available for use in future years until such NOLs are
      scheduled to expire. Our other $17 million of NOLs are not currently subject
      to
      such limitations; however, if we complete the planned acquisition of Lexico,
      we
      expect that the associated financing will result in an additional ownership
      change within the meaning of Section 382 of the Internal Revenue Code of 1986,
      as amended, and that additional limitations will be placed on our ability to
      use
      our NOLs. Our Israeli subsidiary has capital loss carryforwards of approximately
      $680 thousand that can be applied to future capital gains for an unlimited
      period of time under current tax rules.





**Liquidity
      and Capital Resources**





Our
      principal sources of liquidity are our cash and cash equivalents, and investment
      securities, which amounted to $8,525 thousand, as of June 30, 2007, and were
      raised through various financing events that took place in 2004 and 2005, and
      cash from operations. In October 2004, we raised approximately $10.8 million,
      net of underwriting fees and offering expenses, through our IPO. In conjunction
      with the IPO, approximately $1.8 million of the $5 million of promissory notes
      we owed to Bridge Note holders, converted into 490,678 shares of common stock
      and the remaining $3.2 million was repaid from the net proceeds of the offering.
      After repaying the notes that did not convert to common shares at the time
      of
      the IPO, approximately $7.6 million remained. In 2005, we raised approximately
      $15.4 million from the exercise of options and warrants issued by us in 2004
      in
      connection with our pre-IPO bridge financing. In the first half of 2007 we
      used
      $8 thousand in cash from our operations. Previously, we used cash in our
      operations in every quarter since our inception. Our ability to generate cash
      from operations in the future will depend primarily on our ability to produce
      net income before non-cash expenses such as depreciation and amortization and
      stock-based compensation.





Cash
      flows were as follows (in thousands):





**Six
                Months Ended June 30,****2007**
            
            **2006****$**
            
            **$**Net
                cash (used in) operating activities
            
            
            (8
            )
            
            (1,835
            )Net
                cash (used in) provided by investing activities
            
            
            (546
            )
            
            3,327Net
                cash provided by financing activities
            
            
            145
            
            
            173





**Operating
      Activities**





Despite
      a
      net loss of $1,550 thousand in the six months ending June 30, 2007, net cash
      used by operations was $8 thousand. The adjustments to reconcile the two
      amounts, including changes to the balances of our various operating assets
      and
      liabilities, are noted in detail on the accompanying statement of cash flows.
      The largest reconciling items are the $1,123 thousand of operating expenses
      that
      were the result of non-cash, stock-based compensation to employees and
      directors, depreciation and amortization of $892 thousand, and the recognition
      of $457 thousand of previously deferred revenue, $425 thousand of which, relates
      to the lifetime subscriptions we sold in 2003. Despite a net loss of $6,415
      thousand in the first half of 2006, our net cash used in operations was $1,835
      thousand. The primary reason for the large difference is that $856 thousand
      of
      our operating expenses were the result of non-cash, stock-based compensation
      to
      employees and directors, and $3,489 thousand of our operating expenses were
      the
      result of non-cash, stock-based compensation that resulted from the BAE
      acquisition.





**Investing
      Activities**





Net
      cash
      used in and provided by investing activities in the six months ending June
      30,
      2007 and 2006, respectively, is attributable mostly to purchases of investment
      securities less the proceeds from the sale of investment securities, as
      delineated in our Consolidated Statement of Cash Flows, and capital expenditures
      of $448 thousand and $308 thousand in the six months ending June 30, 2007 and
      2006, respectively.





**Financing
      Activities**





Cash
      flow
      from financing activities in the six months ending June 30, 2007 and 2006
      relates to the net proceeds from the exercise of stock options.




23





We
      believe we have sufficient cash to meet our planned operating needs for the
      next
      twelve months; however, we need to raise the capital from a private and/or
      public offering in order to fund the costs of our planned acquisition of Lexico.





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





**Contractual
      Obligations and Commitments**





As
      of
      June 30, 2007, we had the following known contractual obligations and
      commitments (in thousands):





**$****Purchase
                Contracts**
            
            **Operating
                Leases**
            
            **Total****1**Remainder
                of 2007
            
            
            355
            
            
            232
            
            
            5872008
            
            
            528
            
            
            436
            
            
            9642009
            
            
            300
            
            
            382
            
            
            6822010
            
            
            45
            
            
            217
            
            
            2621,228
            
            
            1,267
            
            
            2,495




**1** The
      above
      table does not include unrecognized tax benefits of $180 thousand.





The
      Lexico purchase agreement may be terminated in the following circumstances,
      subject to limitations described in the purchase agreement: (i) by mutual
      written consent; (ii) by either us or the sellers if the acquisition shall
      not
      have been consummated by 180 days from the date of filing the registration
      statement relating to the financing condition (subject to certain extensions),
      which registration statement was filed on July 17, 2007; (iii) by either us
      or
      the sellers if there is issued a final, non-appealable order restraining,
      enjoining or otherwise prohibiting the consummation of the acquisition; or
      (iv)
      by either us or the sellers upon an incurable material breach of the purchase
      agreement by the other party, which breach would result in the failure of the
      terminating party’s closing conditions to be fulfilled. The purchase agreement
      provides that, upon termination for an incurable material breach of the purchase
      agreement by us, which breach would result in the failure of our closing
      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 by the
      sellers, which breach would result in the failure of their closing conditions
      to
      be fulfilled, they will be required to pay us a $2.0 million termination fee.
      In
      addition, if the purchase agreement is terminated for failure of the financing
      condition, we will be required to reimburse the out-of-pocket transaction
      expenses of the sellers up to $400,000. Further, as of the date of this report,
      we estimate that we have incurred approximately $600,000 in legal, accounting
      and investment banking fees, including approximately $300,000 incurred
      subsequent to June 30, 2007, that would have to be charged to operations, rather
      than capitalized as purchase price, in the event we do not close this
      transaction.





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





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





**Off-Balance
      Sheet Arrangements**





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




**Quantitative
      and qualitative disclosures about market risk**




*Currency
      Risk.* Our
      revenue is denominated solely in U.S. dollars. Most of our expenses are also
      based in U.S. dollars; however, we are subject to a significant amount of
      expenses that are denominated in New Israeli Shekels (NIS). We expect this
      level
      of NIS expenses to continue in the near future. If the value of the U.S. dollar
      weakens against the value of NIS, there will be a negative impact on our results
      of operations. In addition, to the extent we hold cash and cash equivalents
      that
      are denominated in currencies other than the U.S. dollar, we are subject to
      the
      risk of exchange rate fluctuations. We use various hedging tools, including
      forward contracts and options, to minimize the effect of currency fluctuations
      on our income.




24




*Other
      Market Risk.* We
      invest
      most of our excess cash in highly liquid investments with an original maturity
      of three months or less, and in i nvestment
      securities that consist mostly of investments in auction rate, investment grade,
      corporate and municipal debt instruments, and auction rate preferred shares
      of
      closed-end investment funds that invest in long-term fixed income securities,
      with auction reset periods of 28 days. Due to the short-term nature of these
      investments, we believe that there is no material exposure to interest rate
      risk
      arising from our investments. We invest some of the excess cash we have for
      terms in excess of three months in order to achieve a higher yield. Based on
      our
      investment policy, such instruments are highly rated by rating agencies and
      therefore we believe that there is no material exposure to the principal amount
      nor to interest rate risks arising from these longer-term
      investments





**Recently
      Issued Accounting Pronouncements**





In
      September 2006, the FASB issued SFAS No. 157, *“Fair
      Value Measurements”* ,
      (SFAS
      157). SFAS 157 establishes a framework for measuring fair value and expands
      disclosures about fair value measurements. The changes in current practice
      resulting from the application of the Statement relate to the definition of
      fair
      value, the methods used to measure fair value, and the expanded disclosures
      about fair value remeasurement. The statement is effective for fiscal years
      beginning after November 15, 2007 and interim periods within those fiscal years.
      We do not believe that the adoption of the provisions of SFAS 157 will have
      a
      material impact on our consolidated financial position and results of
      operations.





In
      February 2007, the FASB issued SFAS No. 159, *“The
      Fair Value Option for Financial Assets and Financial
      Liabilities”* (“SFAS
      No. 159”) which permits entities to choose to measure many financial instruments
      and certain other items at fair value that are not currently required to be
      measured 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 our financial
      position, cash flows, and results of operations .




25




**ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**




*Currency
      Risk.* Our
      revenue is denominated solely in U.S. dollars. Most of our expenses are also
      based in U.S. dollars; however, we are subject to a significant amount of
      expenses that are denominated in New Israeli Shekels (NIS). We expect this
      level
      of NIS expenses to continue in the near future. If the value of the U.S. dollar
      weakens against the value of NIS, there will be a negative impact on our results
      of operations. In addition, to the extent we hold cash and cash equivalents
      that
      are denominated in currencies other than the U.S. dollar, we are subject to
      the
      risk of exchange rate fluctuations. We hedge a portion of our foreign currency
      commitments. Our derivative transactions are mainly designed to hedge short
      term
      cash flows related to anticipated expenses.




*Other
      Market Risk.* We
      invest
      most of our excess cash in highly liquid investments with an original maturity
      of three months or less, and in i nvestment
      securities that consist mostly of investments in auction rate, investment grade,
      corporate and municipal debt instruments, and auction rate preferred shares
      of
      closed-end investment funds that invest in long-term fixed income securities,
      with auction reset periods of 28 days. Due to the short-term nature of these
      investments, we believe that there is no material exposure to interest rate
      risk
      arising from our investments. We invest some of the excess cash we have for
      terms in excess of three months in order to achieve a higher yield. Based on
      our
      investment policy, such instruments are highly rated by rating agencies and
      therefore we believe that there is no material exposure to the principal amount
      nor to interest rate risks arising from these longer-term
      investments.




**ITEM
      4. CONTROLS AND PROCEDURES**




Based
      on
      an evaluation of our disclosure controls and procedures (as defined in
      Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
      1934, as amended) required by paragraph (b) of Rule 13a-15 or
      Rule 15d-15, as of March 31, 2007, our Chief Executive Officer and
      Principal Financial Officer have concluded that our disclosure controls and
      procedures were effective in ensuring that information required to be disclosed
      by us in the reports that we file or submit under the Exchange Act is recorded,
      processed, summarized and reported within the time periods specified in the
      Commission’s rules and forms. Our Chief Executive Officer and Principal
      Financial Officer also concluded that, as of June 30, 2007, our disclosure
      controls and procedures were effective in ensuring that information required
      to
      be disclosed by us in the reports that we file or submit under the Exchange
      Act
      is accumulated and communicated to our management, including our Chief Executive
      Officer and Principal Financial Officer, to allow timely decisions regarding
      required disclosure.





During
      the three months ended June 30, 2007, there were no changes in our internal
      control over financial reporting identified in connection with the evaluation
      required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially
      affected, or is reasonably likely to materially affect, our internal control
      over financial reporting.




26




**PART
      II. OTHER INFORMATION**




**ITEM
      1. LEGAL PROCEEDINGS**





On
      June
      27, 2007, we entered into a settlement agreement with Mr. Steven Tover
      (“Tover”), our former Vice President, Business Development & Sales, that
      settled the claim filed by Tover with the Regional Labor Court in Jerusalem,
      Israel, against (i) us, (ii) our Israeli subsidiary, GuruNet Israel Ltd., (iii)
      Mr. Robert Rosenschein, our Chief Executive Officer and Chairman of the Board,
      and (iv) Mr. Steven Steinberg, our Chief Financial Officer. The claim was for
      (a) deferred salary, severance pay and allegedly unpaid commissions in the
      amount of approximately $70,000, (b) certain additional and future commissions
      pursuant to various business transactions, and (c) the right to exercise 43,441
      options to purchase such number of our shares of common stock at an exercise
      price of $2.76 per share. As a result of this settlement agreement, we paid
      Tover $130,000, including Tover’s legal fees, and on July 3, 2007, the claim was
      dismissed without prejudice.




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




**ITEM
      1A. RISK FACTORS**




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





**Risks
      Related to the Acquisition of Lexico Publishing Group, LLC**





**On July
      13, 2007, we entered into a Purchase Agreement, pursuant to which we
      will acquire all of the outstanding limited liability interests of Lexico
      Publishing Group, LLC.** **Consummation
      of the acquisition is subject to our ability to secure financing for the
      acquisition, as well as customary conditions to closing.** **The following risk factors relate specifically to this
      acquisition.**





**If
      we fail to apply our significantly higher monetization rates to the Lexico
      traffic, it may have a materially adverse impact on the anticipated benefits
      of
      this acquisition** **.**





The
      monetization rates of our Web properties are much higher than Lexico's
      monetization rates. During the first quarter of 2007, our revenue per thousand
      page views, or RPM, was approximately $5.62 compared to Lexico's RPM of $1.46.
      It is our expectation that we will be able to significantly improve upon
      Lexico's current monetization rates by using the same techniques we have used
      to
      increase the monetization of our sites, including, changing site design,
      changing the color, background, placement and number of textual ads displayed,
      increasing the size and number of display ads per page, and adding or switching
      ad providers or types of ads introduced. However, our assumptions may be
      incorrect and we may not be able to improve Lexico’s monetization rates for
      several reasons, including:





·
            The
                user base of Lexico’s Web properties may behave differently than the users
                of our Web properties;


·
            Our
                assumptions regarding the probability that Lexico's users will click
                on
                the ads displayed on the Lexico Web properties may be incorrect;
                or


·
            We
                may make a modification to the Lexico Web properties that damages
                the look
                or experience for their user base.





Our
      failure to increase Lexico's current monetization rates may have a material
      adverse impact on the anticipated benefits of the Lexico
      acquisition.





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





Our
      business is dependent to a certain extent on our Google Services Agreement,
      or
      GSA, under which we obtain most of the advertisements displayed on our Web
      properties and earn most of our ad revenues. In addition, Lexico’s GSA requires
      Google’s consent for transfer. If we are unable to incorporate the Lexico Web
      properties into our current GSA, obtain consent for the transfer of Lexico’s GSA
      to us, or enter into a new GSA with respect to the Lexico Web properties we
      will
      have to obtain listings and advertisements from alternative providers. In
      addition, we may not be able to negotiate terms and ad services as favorable
      as
      those that our current GSA provides. This may result in a material reduction
      in
      our anticipated ad revenues and, in turn, may adversely affect our business
      and
      financial results.





27




**We
      may not be able to realize other intended benefits of the acquisition of Lexico,
      which could adversely affect our financial condition.**





The
      success of the acquisition will depend, in part, on our ability to realize
      the
      assumed benefits of the acquisition, including, among others, improved Lexico
      traffic monetization, increased direct traffic to our Web properties (as opposed
      to traffic directed by search engines), increased operating scale and broadened
      portfolio of Web properties. However, our assumptions and rationale for the
      acquisition may be incorrect and we may not be able to realize such benefits.
      As
      a result, we cannot assure you that the acquisition will be successful or will
      not harm our current business. Failure to achieve these benefits could adversely
      affect our financial results.





**The
      Lexico acquisition will result in significant costs to us, and in certain
      circumstances we may be required to pay a termination fee to Lexico if we do
      not
      complete the acquisition. Payment of the termination fee would materially
      adversely affect our business and financial results.**





The
      acquisition will result in significant costs to us. Transaction costs will
      be
      substantial, and additional unanticipated costs may be incurred. These costs
      will be incurred whether or not the acquisition is completed. Although we expect
      that the elimination of duplicative costs, as well as the realization of other
      efficiencies related to the integration of the businesses, may offset these
      incremental transaction and acquisition-related costs over time, this net
      benefit may not be achieved in the near term, or at all. Furthermore, under
      certain circumstances, if we do
      not complete the acquisition, u nder
      the
      terms of the purchase agreement, we may be required to pay Lexico a termination
      fee of $2 million. Under
      the
      terms of the purchase agreement, we may also be obligated to reimburse Lexico's
      costs up to a maximum of $400,000. Further, as of the date of this report,
      we
      estimate that we have incurred approximately $600,000 in legal, accounting
      and
      investment banking fees that we
      would have to charge to operations rather than capitalize as purchase price,
      in
      the event that the acquisition is not consummated. Should the purchase agreement
      be terminated in circumstances under which the aforementioned amounts are
      payable, it would materially adversely affect our business and financial
      results.





**Completion
      of the Lexico acquisition is subject to conditions to closing in the purchase
      agreement that could delay completion of the acquisition or impose conditions
      that could have a material adverse effect on us or that could cause abandonment
      of the acquisition.**





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





**We
      may not be able to successfully integrate Lexico’s operations, which could
      adversely affect our financial condition and results of operations.**





Our
      ability to integrate the operations of Lexico will depend, in part, on our
      ability to overcome or address a number of challenges, including:





·
            the
                difficulties of assimilating the operations of Lexico in our ongoing
                operations;


·
            the
                potential loss of key employees of Lexico subsequent to the
                acquisition;


·
            the
                successful incorporation of the acquired Web properties into our
                products
                and services;


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


·
            the
                possible impairment of relationships with current employees, users
                or
                advertisers as a result of the integration of new management or
                operations;


·
            the
                diversion of management attention to the integration of operations
                could
                have a negative impact on our existing business; and


·
            we
                may experience greater than expected costs or difficulties relating
                to the
                integration of Lexico or may not realize the expected revenues from
                the
                transaction within the expected timeframe, if at all.





We
      cannot
      assure you that we will be able to integrate Lexico's operations without
      encountering difficulties or that any such difficulties will not have a material
      adverse effect on us.





**We
      may not be able to maintain or grow Lexico’s traffic.**





In
      2006,
      Lexico's Web properties generated overall traffic of 3.9 billion page views,
      which is approximately three times the number of page views generated by our
      existing Web properties. Although we expect that this traffic will grow under
      our management of Lexico's Web properties, in the same manner we have increased
      traffic on our Web properties, we cannot assure you that we will be successful
      in increasing the traffic to the Lexico Web properties, nor can we assure you
      that we will be able to maintain Lexico’s current levels of traffic, which may
      materially adversely affect our business and financial results.




28





**If
      the liabilities we assume in the Lexico acquisition are greater than expected,
      or if there are unknown liabilities, our business could be materially and
      adversely affected.**





We
      intend
      to acquire the outstanding equity interests in Lexico through an acquisition.
      Lexico may be subject to liabilities unknown to us that, if asserted, could
      have
      a material adverse effect on us, such as:





·
            unasserted
                claims of vendors or other persons dealing with Lexico;


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


·
            claims
                for indemnification by members or employees and others who may be
                indemnified by Lexico; and


·
            liabilities
                for taxes relating to periods prior to the acquisition.




Although
      the purchase agreement provides us with indemnification protection, the
      indemnification is limited and may be insufficient if any significant
      liabilities are found, depending on the amount, timing and nature of any claim.
      As a result, we cannot assure you that the acquisition will be successful or
      will not, in fact, harm our business. Among other things, if the liabilities
      we
      have assumed are greater than expected and are not covered by the sellers'
      indemnification, the acquisition could have a material adverse effect on us.
      In
      addition, if we learn of information with respect to Lexico, after completion
      of
      the acquisition, that prevents us from making the certifications required by
      the
      Sarbanes-Oxley Act of 2002, investors’ confidence in our reporting capabilities
      could be reduced, and our business could be materially adversely
      affected.





**Risks
      Related to our Business**





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





We
      incurred net losses of approximately $8.6 million and $6.0 million for the
      years
      ended December 31, 2006 and 2005, respectively. As of June 30, 2007, we had
      an
      accumulated deficit of approximately $56.5 million. We
      cannot
      assure you that we will be able to achieve net income on a quarterly or annual
      basis. If our revenues do not increase, or if our operating expenses exceed
      expectations or cannot be reduced, we will continue to incur substantial losses,
      which would materially adversely affect our business and financial
      results.





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





We
      have
      experienced, and continue to experience, rapid growth in our headcount and
      operations, which has placed, and will continue to place, significant demands
      on
      our management, operational and financial infrastructure. If we do not
      effectively manage our growth, the quality of our products and services could
      suffer, which could negatively affect our brand and operating results. To
      effectively manage this growth, we will need to continue to improve our
      operational, financial and management controls and our reporting systems and
      procedures. These systems enhancements and improvements will require significant
      capital expenditures and management resources. Failure to implement these
      improvements could hurt our ability to manage our growth and our financial
      position.





**We
      have a short operating history and a relatively new business model in an
      emerging and rapidly evolving market. This makes it difficult to evaluate our
      future prospects and may increase the risk that we will not continue to be
      successful.**





We
      first
      derived advertising revenue in the first quarter of 2005, and we have only
      a
      short operating history with our CPC and CPM advertising model. As a result,
      we
      have very little operating history to aid in assessing our future prospects.
      Also, we derive nearly all of our revenues from online advertising, which is
      an
      immature industry that has undergone rapid and dramatic changes in its short
      history. We will encounter risks and difficulties as a growing company in a
      new and rapidly evolving market. We may not be able to successfully address
      these risks and difficulties, which could materially harm our business and
      operating results.





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





Search
      engines serve as origination Web properties for users in search of information,
      and our topic pages often appear as one of the top links on the pages returned
      by search engines in response to users’ search queries. As a result, we rely
      heavily on search engines for a substantial portion of the users visiting our
      Web properties. According
      to our unaudited internal data, our present level of traffic originating from
      search engines, excluding Google-directed “definition link traffic,” is
      approximately 50-60% of the overall traffic to our
      Web properties, the majority of which is from Google and, to a lesser but still
      significant extent, Yahoo!. According to our unaudited internal data, Lexico’s
      traffic originating from search engines is currently approximately 15% of
      Lexico’s overall traffic. Assuming we successfully close the Lexico acquisition,
      we believe that, on a combined aggregated basis, we would have traffic
      originating from search engines of approximately 30% of our overall traffic.
      If
      our traffic from search engines declines for any reason, we would suffer a
      significant decline in overall traffic and revenue. Search engines, at any
      time
      and for any reason, could change their algorithms that direct search queries
      to
      our Web properties or could restrict the flow of users visiting our Web
      properties specifically. On occasion, our Web properties have experienced
      decreases in traffic, and consequently in revenue, due to these search engine
      actions. For
      example, as announced in an August 2, 2007 press release issued by us, a search
      engine algorithmic adjustment by Google in July 2007 led to a significant drop
      in search engine traffic directed to Answers.com. We
      cannot
      guarantee that we will successfully react to these actions in the future and
      recover traffic lost due to search engine actions. Accordingly, a change in
      algorithms that search engines use to identify Web pages towards which traffic
      will ultimately be directed, or a restriction on the flow of users visiting
      our
      Web properties from the search engines, could cause a significant decrease
      in
      traffic and revenues, which could adversely affect our business and financial
      results.




29





**We
      depend on Google to direct user traffic to Answers.com through its “definition
      link,” and the loss of this source of user traffic could reduce our ad revenues
      and adversely affect our business and financial results.**





A
      significant percentage of our direct traffic is directed to Answers.com by
      the
“definition link” appearing on Google’s website result pages. As an additional
      result of this arrangement, a significant number of secondary users visit our
      site via the “definition link” and perform additional searches. We refer to
      these users as secondary traffic. The definition link traffic is the result
      of a
      unilateral decision by Google to link certain definitions to Answers.com, and
      not any contractual relationship. Google may change these links at any time,
      in
      its sole discretion. According to our unaudited internal data, the primary
      and
      secondary traffic from the Google definition link at present is approximately
      25-30% of Answers.com's total traffic. If Google stops directing traffic to
      Answers.com through its “definition link”, we would experience a significant
      reduction in our traffic and the corresponding ad revenues, which could
      adversely affect our business and financial results.





**If
      our GSA is terminated or not renewed 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 we obtain most of the
      advertisements displayed on our Web properties and earn most of our ad revenues.
      Google may terminate the GSA with no advance notice if we:





·
            take
                certain prohibited actions including, among other
                things:


·
            editing
                or modifying the order of search results,


·
            redirecting
                end users, producing or distributing any software which prevents
                the
                display of ads by Google,


·
            modifying,
                adapting or otherwise attempting to obtain source code from Google
                technology, content, software and documentation or


·
            engaging
                in any action or practice that reflects poorly on Google or otherwise
                disparaging or devaluing Google’s reputation or
                goodwill;


·
            breach
                the grant of a license to us by Google of certain trade names, trademarks,
                service marks, logos, domain names and other distinctive 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, 2008, unless renewed upon mutual written
      consent.





Google’s
      termination of the GSA, or a decision by Google not to renew the GSA, would
      result in our need to replace this relationship and obtain listings and
      advertisements from alternative providers, and we may not succeed in receiving
      equally favorable as those provided in the GSA. Termination of the GSA and
      our
      failure to replace it on equally favorable terms could result in a material
      reduction in our ad revenues and could adversely affect our business and
      financial results.





**We
      generate our revenue almost entirely from advertising** **so uncertainties in the Internet advertising market and our failure to increase
      advertising inventory on our Web properties could adversely affect our ad
      revenues.** ****





We
      generated approximately 86%, 97% and 90%, respectively, of our revenues in
      2005,
      2006 and for the six months ended June 30, 2007 from our advertisers. Although
      worldwide online advertising spending is growing steadily, it represents only
      a
      small percentage of total advertising expenditures. Our
      advertisers can generally terminate their contracts with us at any time.
      Advertisers will not continue to do business with us if their investment in
      Internet advertising with us does not generate sales leads, and ultimately
      customers, or if we do not deliver their advertisements in an appropriate and
      effective manner. If
      the
      Internet does not become more widely accepted as a medium for advertising,
      our
      ability to generate increased revenues could be adversely affected. We believe
      that growth in our ad revenues will also depend on our ability to increase
      the
      number of pages on our Web properties to provide more advertising inventory.
      If
      we fail to increase our advertising inventory at a sufficient rate, our ad
      revenues could grow more slowly than we expect, which could have an adverse
      effect on our financial condition.





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





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




30





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





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





**The
      failure of WikiAnswers to grow in accordance with our expectations could have
      an
      adverse impact on our business and financial results.**





WikiAnswers,
      our Web property designed to serve a community of people asking and
      collaboratively improving answers to everyday questions, enables individuals
      to
      exchange information and generate content without our input or assistance.
      We
      anticipate spending increasing amounts of money and devoting greater resources
      to the development of WikiAnswers, and we expect to derive an increasingly
      significant portion of our revenues from WikiAnswers. We
      intend
      to utilize the strategies we have used with Answers.com to increase monetization
      of the WikiAnswers Web property. However, if WikiAnswers
      fails to perform as well as we anticipate, our business and financial results
      could be adversely affected.





**We
      face significant competition from search engines, destination portals and other
      free reference and industry-specific Web properties.**





We
      face
      significant competition from a wide variety of Web properties, including
      traditional search engines, such as Google, Yahoo! and Ask.com, destination
      portals and other free reference content sites, such as About.com,
      TheFreeDictionary.com and Wikipedia.org. We also compete with industry-specific
      Web properties, such as Bankrate.com and WebMD.com, as well as with other
      popular Q&A sites, such as Yahoo! Answers and Answerbag.com. Many of our
      competitors have longer operating histories, more extensive management
      experience, an employee base with more extensive experience, better geographic
      coverage, larger consumer bases, greater brand recognition and significantly
      greater financial, marketing and other resource than we do. We expect
      competition to intensify in the future. If our competitors are more successful
      than we are in developing compelling products or attracting and retaining users
      or advertisers, then our competitive position and financial results could be
      adversely affected.





**Our
      failure to generate direct traffic to our Web properties could adversely affect
      our business and financial results.**





In
      addition to search engine traffic and traffic directed by the Google definition
      link, our traffic also originates from Internet users arriving at our Web
      properties directly by typing our website address directly into their Web
      browser, bookmarking our Web properties, using AnswerTips and visiting sites
      that direct users to our Web properties. Given the wide availability of free
      search engines and reference content sites, we may not be able to retain current
      Internet users or attract new Internet users in this direct fashion. If we
      are
      unable to retain our direct Internet users or attract new direct Internet users,
      our ability to generate revenues would be adversely impacted, which could
      adversely affect our business and financial results.





**User
      traffic to our Web properties fluctuates significantly on a seasonal basis,
      which impacts our operations from quarter to quarter.**





We
      expect
      user traffic to our Web properties to continue to fluctuate seasonally in the
      future. Since many of our users are students that utilize our Web properties
      for
      reference materials, user traffic has fluctuated generally according to the
      academic school year, rising from February through May, falling to its lowest
      levels during the summer months, rising again beginning in September and falling
      again in December through January. This seasonal fluctuation in user traffic
      results in a fluctuation in our quarterly revenues, since fewer users to our
      Web
      properties translates into fewer users viewing or clicking on the advertisements
      on our Web properties. This revenue fluctuation also has on impact on the amount
      of cash flow we generate. Typically, our revenue from advertising is lowest
      during the summer, but increases in the third quarter and before the holidays
      during the fourth quarter.





The
      effect of this seasonality makes it difficult to estimate future operating
      results based on the results of any specific quarter. As a result, we may be
      unable to forecast our revenue accurately, and a failure to meet our revenue
      or
      expense forecasts could have an immediate and negative impact on the market
      price of our common stock.





**Our
      operating results may fluctuate, which makes our results difficult to predict
      and could cause our results to fall short of expectations.**





Our
      operating results may fluctuate as a result of a number of factors, many outside
      of our control. As a result, comparing our operating results on a
      period-to-period basis may not be meaningful, and you should 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 revenues may differ
      significantly from our historical or projected rates. Our operating results
      in
      future quarters may fall below expectations. Any of these events could cause
      our
      stock price to fall.




31





**Our
      partnerships and revenue-sharing arrangements with third-parties may not be
      renewed or continued.**





We
      have
      entered into revenue-sharing and other arrangements with third parties that
      direct traffic to our Web properties and license our information portal
      services, and we plan to enter into similar arrangements in the future. Although
      these arrangements have not had a substantial impact on our revenues, they
      have
      provided us with third-party validation of our product offering, and we believe
      these arrangements and similar arrangements may result in significant revenues
      in the future. These arrangements may be terminated or discontinued by the
      third
      parties upon varying notice periods. If these arrangements and similar
      arrangements impact our revenues substantially in the future, then termination
      of any of these arrangements would result in the loss of ad revenue and
      adversely affect our financial condition. Further, termination of any of these
      arrangements could impact our credibility in the marketplace, which could
      adversely affect our user traffic and revenues.





**We
      may not be successful in expanding our business through acquisitions, business
      combinations and other transactions, and, even if we are successful, our
      operations may be adversely affected as a result of these
      transactions.**





Our
      business strategy has included, and we intend to continue to seek, potential
      growth through acquisitions, business combinations and joint ventures, which
      we
      refer to as extraordinary transactions. Our ability to implement this business
      strategy depends in large part on our ability to compete successfully with
      other
      entities for acquisition candidates and joint venture partners. Factors
      affecting our ability to compete successfully in this regard
      include:





·
            our
                financial condition and resources relative to the financial condition
                and
                resources of competitors;


·
            the
                attractiveness of our common stock as potential consideration relative
                to
                the common stock of competitors;


·
            our
                ability to obtain additional financing from investors;
                and


·
            our
                available cash, which depends upon our results of operations and
                our cash
                demands.





In
      addition, if we are successful in entering into extraordinary transactions,
      our
      business, financial condition and results of operations could be adversely
      affected as a result of the accompanying integration of the operations of the
      acquired companies or joint ventures. Our ability to integrate the operations
      of
      the acquired companies or joint ventures will depend, in part, on our ability
      to
      overcome or address:





·
            the
                difficulties of assimilating the operations and personnel of the
                acquired
                companies and the potential disruption of our ongoing
                business;


·
            the
                difficulties of maintaining uniform standards, controls, procedures
                and
                policies;


·
            the
                successful incorporation of the acquired or shared technology or
                content
                and rights into our products and
                services;


·
            the
                difficulties of establishing a new joint venture, including attracting
                qualified personnel, customers and advertisers;
                and


·
            the
                potential impairment of relationships with employees and customers
                as a
                result of any integration of new management personnel or reduction
                of
                personnel.





Furthermore,
      completing extraordinary transactions could require a significant amount of
      our
      available cash as well as require the commitment of significant resources,
      which
      may in turn force us to increase our head count and related costs. Furthermore,
      we may issue equity or equity-linked securities to pay for future acquisitions,
      any of which could be dilutive to existing and future stockholders.
      Extraordinary transactions may also have negative effects on our reported
      results of operations due to acquisition-related charges, amortization of
      acquired technology and other intangibles, and actual or potential liabilities,
      known and unknown, associated with the acquired businesses or joint ventures.
      Any of these extraordinary transaction-related risks or costs could adversely
      affect our business, financial condition and results of operations.





**If
      we fail to maintain and enhance awareness of our family of branded Web
      properties** ***,*** **our business and financial results could be adversely affected.**





We
      believe that maintaining and enhancing awareness of our family of branded Web
      properties is critical to achieving widespread acceptance of our services and
      to
      the success of our business. We also believe that the importance of brand
      recognition will increase due to the relatively low barriers to entry in the
      Internet market. Maintaining and enhancing our family of branded Web properties
      may require us to spend increasing amounts of money on, and devote greater
      resources to, advertising, marketing and other brand-building efforts, and
      these
      investments may not be successful. Further, even if these efforts are
      successful, they may not be cost-effective. If we are unable to continuously
      maintain and enhance our family of branded Web properties, our user traffic
      may
      decrease and we may fail to attract advertisers, which could in turn result
      in
      lost revenues and adversely affect our business and financial
      results.




32





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





We
      believe our future success depends in part upon our ability to aggregate and
      publish compelling content and deliver that content through our Web properties.
      We are heavily dependent on license agreements with content providers, and
      we
      cannot guarantee that we will be able to enter into or subsequently renew these
      agreements on commercially acceptable terms or at all. If we are unable to
      maintain and enhance our existing relationships with content providers or
      develop new relationships with alternative providers of content, our service
      may
      become less attractive to Internet users, resulting in decreased traffic to
      our
      Web properties, which could in turn have an adverse effect on our ad revenues
      and a negative impact on our business. Accordingly, our inability to retain
      our
      existing users and attract new Internet users would lead to a loss of revenues
      and adversely affect our business and financial results.





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





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





We
      primarily outsource our Web hosting services to Data Return LLC. However,
      as our business grows and we require more servers, we believe that the economic
      justification of outsourcing our Web hosting services diminishes. We have
      started to explore the possibility of migrating of our Web properties to
      co-location facilities and managing the operations with our own staff. This
      change may be technologically challenging to implement, take time to test and
      deploy, cause us to incur substantial costs or data loss, and cause users,
      advertisers, and affiliates to experience delays or interruptions in our
      service. These changes, delays or interruptions in our service could cause
      users, advertisers and affiliates to become dissatisfied with our service and
      move to competing providers of online services, reducing the traffic on our
      Web
      properties and adversely affecting our business and financial
      results.





**If
      we were to lose the services of our key personnel, we may not be able to execute
      our business plan.**





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





**Our
      business depends on increasing use of the Internet by users searching for
      information, advertisers marketing products and services and Web properties
      seeking to earn revenue to support their web content. If the Internet
      infrastructure does not grow and is not maintained to support these activities,
      our business will be harmed.**





Our
      success will depend on the continued growth and maintenance of the Internet
      infrastructure. This includes maintenance of a reliable network backbone with
      the necessary speed, data capacity and security for providing reliable Internet
      services. Internet infrastructure may be unable to support the demands placed
      on
      it if the number of Internet users continues to increase, or if existing or
      future Internet users access the Internet more often or increase their bandwidth
      requirements. In addition, viruses, worms and similar programs may harm the
      performance of the Internet. The Internet has experienced a variety of outages
      and other delays as a result of damage to portions of its infrastructure, and
      could face outages and delays in the future. These outages and delays could
      reduce the level of Internet usage as well as our ability to provide our
      solutions.





**Risks
      Related to our Industry**





**We
      may be subject to legal liability for online services, which may not be limited
      by the safe harbors in The Digital Millennium Copyright Act, or DMCA, The
      Communications Decency Act, or CDA, or the U.S. Children’s Online Privacy
      Protection Act, or COPPA. If we do not meet the safe harbor requirements, or
      if
      we are otherwise held to provide illegal content, we could be exposed to
      liability, which could be costly and time-consuming.**




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




33





The DMCA
      i s
      intended, among other things, to reduce the liability of online service
      providers for listing or linking to third party Web properties that include
      materials that infringe copyrights or rights of others. Additionally,
      p ortions
      of the CDA are intended to provide statutory protections to online service
      providers who distribute third party content. A
      safe
      harbor for copyright infringement is also available under the DMCA
      to certain on-line service providers that provide specific services,
      if the providers take certain affirmative steps as set forth in the DMCA.
      Important questions regarding the safe harbor under the DMCA and the CDA have
      yet to be litigated ,
      and we
      can
      not guarantee that we will meet the safe harbor requirements of the DMCA
      or
      of the CDA. If
      we are
      not covered by a safe harbor, for any reason, we could be exposed to liability,
      which could be costly and time-consuming.





In
      addition, COPPA was enacted in October 1998. COPPA imposes civil and criminal
      penalties on persons distributing material harmful to minors (e.g., obscene
      material) over the Internet to persons under the age of 17 or collecting
      personal information from children under the age of 13. We do not knowingly
      collect and disclose personal information from minors. The manner in which
      COPPA
      may be interpreted and enforced cannot yet be determined. Moreover, the
      applicability to the Internet of existing laws governing issues such as property
      ownership, copyright, defamation, obscenity and personal privacy is uncertain.
      We may be subject to claims that our products violate such laws, which could
      damage our business and cause our stock price to decline.





We
      also
      periodically enter into arrangements to offer third-party products, services
      or
      content under the Answers brand or via distribution on our Web properties. 
We may be subject to claims concerning these products, services or content
      by
      virtue of our involvement in marketing, branding, broadcasting or providing
      access to them, even if we do not ourselves host, operate, provide, or provide
      access to them.




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





**Third
      parties may claim that we are infringing on their patents, trademarks or
      copyrights, which could result in substantial costs, diversion of significant
      managerial resources and significant harm to our
      reputation.**





The
      industry in which we operate is characterized by the existence of a large number
      of patents and frequent litigation based on allegations of patent infringement.
      We expect that Internet technologies, software products and services may be
      increasingly subject to third-party patent infringement claims as the number
      of
      competitors in our industry segment grows and the functionality of products
      in
      different industry segments overlaps. From time to time, third parties may
      assert patent infringement claims against us in various jurisdictions that
      are
      important to our business. Additionally, third parties may assert trademark
      infringement claims with respect to brand names we use from time to time and
      content we display on our Web properties. For example, a third party may make
      claims against us over the display of search results triggered by search terms
      that include trademark terms. Furthermore, we may be faced with copyright
      infringement claims. We have received, and are likely to continue to receive,
      "cease and desist" letters demanding that we remove infringing content from
      our
      Web properties based on a theory of copyright and trademark
      infringement.





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





·
            substantial
                liability for damages and litigation costs, including attorneys'
                fees;


·
            lawsuits
                that prevent us from further use of intellectual property and require
                us
                to permanently cease and desist from selling 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 paid by us, adding materially
                to
                the our costs of operations;


·
            developing
                new intellectual property, as a non-infringing alternative, that
                could
                delay projects, add materially to our costs of operations and be
                unacceptable to our users, which in turn could adversely affect our
                user
                traffic and revenues; and


·
            indemnifying
                third parties who have entered into agreements with us with respect
                to
                losses they incurred as a result of the infringement, which could
                include
                consequential and incidental damages that are material in
                amount.





Regardless
      of the merit of third-party infringement claims, these claims could result
      in
      substantial costs, diversion of significant resources and management attention,
      termination of customer contracts, 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 indemnify these partners for certain third-party
      intellectual property infringement claims, which could increase our costs as
      a
      result of defending the claims and may require that we pay damages if there
      were
      an adverse ruling in any of the claims. An adverse determination could also
      prevent us from offering our products and services to others and may require
      that we procure substitute products or services.




34





**Misappropriation
      of our intellectual property could harm our reputation, adversely affecting
      our
      competitive position and financial results.**





Our
      ability to compete depends in part upon the strength of our proprietary rights
      in our technologies, brands and content. We rely on a combination of U.S. and
      foreign patents, copyrights, trademark, trade secret laws and license agreements
      to establish and protect our intellectual property and proprietary rights.
      The
      efforts we have taken to protect our intellectual property and proprietary
      rights may not be sufficient or effective at stopping unauthorized use of those
      rights. In addition, effective trademark, patent, copyright and trade secret
      protection may not be available or cost-effective in every country in which
      our
      services are made available through the Internet. There may be instances where
      we are not able to fully protect or utilize our intellectual property in a
      manner that maximizes competitive advantage. If we are unable to protect our
      proprietary rights from unauthorized use, the brand value of our family of
      Web
      properties may be reduced, which could negatively impact our business. In
      addition, protecting our intellectual property and other proprietary rights
      is
      expensive and diverts critical managerial resources. Further, our methodologies
      may decline in value and our rights to them may become unenforceable. If any
      of
      the foregoing were to occur, or if we are otherwise unable to protect our
      intellectual property and proprietary rights, our business and financial results
      could be adversely affected.





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





The
      laws
      and regulations applicable to the Internet, and to our products, are evolving
      and unclear and could damage our business. In addition, we will be subject
      to
      any new laws and regulations directly applicable to our products and services.
      It is possible that laws and regulations may be adopted covering issues such
      as
      user privacy, pricing, taxation, content regulation, quality of products and
      services, and intellectual property ownership and infringement. This legislation
      could expose us to substantial liability as well as dampen the growth in use
      of
      the Internet generally, decrease the acceptance of the Internet as a
      communications and commercial medium, or require us to incur significant
      compliance expenses. Compliance with these laws and regulations may also cause
      us to change or limit our business practices in a manner adverse to our
      business.





Because
      the increased use of the Internet has burdened the existing telecommunications
      infrastructure, and because many areas with high Internet usage have begun
      to
      experience interruptions in phone services, local telephone carriers have
      petitioned the Federal Communications Commission to regulate the Internet and
      to
      impose access fees. Increased regulation or the imposition of access fees could
      substantially increase the costs of communicating on the Internet, potentially
      decreasing the demand for our products. A number of proposals have been made
      at
      the federal, state and local level that would impose additional taxes on the
      sale of goods and services through the Internet. Such proposals, if adopted,
      could substantially impair the growth of electronic commerce and could adversely
      affect us.





Due
      to
      the global nature of the Internet, it is possible that the governments of other
      states and foreign countries might attempt to regulate its transmissions or
      prosecute us for violations of their laws. We might unintentionally violate
      these laws. Such laws may be modified, or new laws may be enacted, in the
      future. Our business may be negatively affected by a variety of new or existing
      laws and regulations, which may expose us to substantial compliance costs and
      liabilities and may impede the growth in use of the Internet generally.





**Risks
      Related to our Common Stock**




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





Our
      common stock is traded on the Nasdaq Global Market. Although an active trading
      market has developed for our common stock, there can be no assurance that an
      active trading market for our common stock will be sustained. Failure to
      establish and maintain an active trading market for our common stock may
      adversely affect our shareholders' ability to sell our common stock in short
      time periods, or at all. Our common stock has experienced, and may experience
      in
      the future, significant price and volume fluctuations, which could adversely
      affect the market price of our common stock.





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





All
      of
      our issued and outstanding shares are immediately available for sale in the
      public market without registration under Rule 144. Sales of a substantial number
      of shares of our common stock could cause the price of our securities to fall
      and could impair our ability to raise capital by selling additional
      securities.





**We
      do not intend to pay dividends on our common stock.**





We
      have
      never declared or paid any cash dividend on our capital stock. We currently
      intend to retain any future earnings and do not expect to pay any dividends
      in
      the foreseeable future.





35





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





Our
      certificate of incorporation authorizes the issuance 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 of directors. Accordingly,
      our
      board of directors is empowered, without stockholder approval, to issue a series
      of preferred stock with dividend, liquidation, conversion, voting or other
      rights, which could dilute the interest of, or impair the voting power of,
      our
      stockholders. The issuance of a series of preferred stock could be used as
      a
      method of discouraging, delaying or preventing a change in control. Although
      we
      do not presently intend to issue any shares of preferred stock, we may do so
      in
      the future.





**Provisions
      in our charter documents and under Delaware law could discourage a takeover
      that
      stockholders may consider favorable.**





Provisions
      of our Amended and Restated Certificate of Incorporation and Bylaws could make
      it more difficult for a third party to acquire us, even if doing so would be
      beneficial to our stockholders. For example, our board of directors is divided
      into three classes, with one class being elected each year by our stockholders,
      which generally makes it more difficult for stockholders to replace a majority
      of directors and obtain control of our board. In addition, stockholder meetings
      may be called only by our board of directors, the chairman of the board and
      the
      president, advance notice is required prior to stockholder proposals and
      stockholders may not act by written consent. Furthermore, we have authorized
      preferred stock that is undesignated, making it possible for our board of
      directors to issue preferred stock with voting or other rights or preferences
      that could impede the success of any attempt to change control of our
      company.





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





**We
      are at risk of securities class action litigation.**





Securities
      class action litigation has often been brought against a company following
      a
      decline in the market price of its securities. This risk is especially relevant
      for us because Internet companies often experience significant stock price
      volatility. If we faced such litigation, it could result in substantial costs
      and diversion of management’s attention and resources, which could adversely
      affect our business.





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





Section 404
      of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of
      the
      SEC require annual management assessments of the effectiveness of our internal
      control over financial reporting and a report by our independent registered
      public accounting firm attesting to and reporting on these controls. If we
      fail
      to adequately maintain compliance with, or maintain, the adequacy of our
      internal control over financial reporting, as such standards are modified,
      supplemented or amended from time to time, we may not be able to ensure that
      we
      can conclude on an ongoing basis that we have effective internal control over
      financial reporting in accordance with Section 404 of the Sarbanes-Oxley
      Act of 2002 and the related rules and regulations of the SEC. If we cannot
      favorably assess, or our independent registered public accounting firm is unable
      to provide an unqualified attestation report on the effectiveness of our
      internal control over financial reporting, investor confidence in the
      reliability of our financial reports may be adversely affected, which could
      have
      a material adverse effect on our stock price.





In
      addition, we will be transitioning Lexico’s separate accounting system to our
      accounting system. This transition could result in corruption or loss of data
      or
      other problems that could adversely affect our ability to produce accurate
      and
      timely financial statements. If we are unable to produce accurate and timely
      financial statements, our stock price may be adversely affected and we may
      be
      unable to maintain compliance with the listing requirements of the Nasdaq Global
      Market.





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





**Risks
      Related to our Location in Israel**





**Conditions
      in Israel may limit our ability to produce and sell our product, which would
      lead to a decrease in revenues.**





Because
      most of our operations are conducted in Israel, our operations are directly
      affected by economic, political and military conditions affecting Israel.
      Specifically, we could be adversely affected by:





·
            any
                major hostilities involving Israel;


·
            a
                full or partial mobilization of the reserve forces of the Israeli
                army;




36




·
            the
                interruption or curtailment of trade between Israel and its present
                trading partners;


·
            risks
                associated with the fact that a certain number of our key employees
                and
                one officer reside in what are commonly referred to as occupied
                territories;


·
            risks
                associated with outages and disruptions of communications networks
                due to
                any hostilities involving Israel; and


·
            a
                significant downturn in the economic or financial conditions in
                Israel.





Since
      the
      establishment of the State of Israel in 1948, a number of armed conflicts have
      taken place between Israel and its Arab neighbors and a state of hostility,
      varying in degree and intensity, has led to security and economic problems
      for
      Israel. Despite negotiations to effect peace between Israel and its Arab
      neighbors, the future of these peace efforts is uncertain. Since October 2000,
      there has been a significant increase in violence, civil unrest and hostility,
      including armed clashes between the State of Israel and the Palestinians, and
      acts of terror have been committed inside Israel and against Israeli targets
      in
      the West Bank and Gaza Strip. In addition, the recent armed conflict with
      Hezbollah on the northern border of Israel negatively affected business
      conditions in Israel. There is no indication as to how long the current
      hostilities will last or whether there will be any further escalation. Any
      further escalation in these hostilities or any future conflict, political
      instability or violence in the region may have a negative effect on our
      business, harm our results of operations and adversely affect our share
      price.





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





**We
      may not be able to enforce covenants not-to-compete under current Israeli law
      that might result in added competition for our products.**





We
      have
      non-competition agreements with all of our employees, almost all of which are
      governed by Israeli law. These agreements prohibit 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 of former employees and tend, if at all, to
      enforce those provisions for relatively brief periods of time in restricted
      geographical areas and only when the employee has obtained unique value to
      the
      employer specific to that employer’s business and not just regarding the
      professional development of the employee. If we are not able to enforce
      non-compete covenants, we may be faced with added competition.





**The
      Israeli government tax benefits program in which we currently participate and
      from which we receive benefits requires us to meet several conditions. These
      programs or benefits may be terminated or reduced in the future, which may
      result in an increase in our tax liability.**





Our
      Israeli subsidiary receives tax benefits authorized under Israeli law for
      capital investments that are designated as “Approved Enterprises.” To be
      eligible for these tax benefits, we must meet certain conditions. If we fail
      to
      meet such conditions, these tax benefits could be cancelled, and we could be
      required to pay increased taxes or refund the amount of tax benefits we
      received, together with interest and penalties. Israeli governmental authorities
      have indicated that the government may in the future reduce or eliminate the
      benefits of such programs. The termination or reduction of these programs and
      tax benefits could increase our Israeli tax rates, and thereby reduce our net
      profits or increase our net losses.





**U.S.
      and Israeli tax authorities may interpret tax issues in manners other than
      those
      which we have adopted, which may expose us to tax
      liabilities.**




We
      operate in the U.S. and in Israel and our earnings are subject to taxation
      in
      both jurisdictions, at different rates. Relevant tax authorities may disagree
      with our interpretation and application in practice of tax laws and may dispute
      various assumptions we make during our tax planning process. Further, the tax
      authorities in the U.S. and/or Israel may take exception with the transfer
      price
      of transactions between Answers Corporation and its wholly owned Israeli
      subsidiary. If there is a successful tax challenge of our tax position, our
      interpretation and/or application of tax laws in practice, we may be forced
      to
      recognize additional tax liabilities, which may include interest and penalties.
      This may harm our results of operations and adversely affect our financial
      condition.




**Our
      business may be impacted by NIS exchange rate
      fluctuations.**




Exchange
      rate fluctuations between the U.S. dollar and the NIS may negatively affect
      our
      earnings. Our revenues and most of our expenses are denominated in U.S. dollars.
      However, a significant portion of the expenses associated with our Israeli
      operations, including personnel and facilities related expenses, are incurred
      in
      NIS. Consequently, a devaluation of the U.S. dollar in comparison to the NIS
      will have the effect of increasing the dollar cost of our operations in Israel.
      We cannot predict any future trends in the rate of devaluation or appreciation
      of the NIS against the U.S. dollar or of the U.S. dollar against the NIS. While
      we use various hedging tools, including forward contracts and options, to
      minimize the effect of currency fluctuations on our income, a devaluation of
      the
      U.S. dollar in comparison to the NIS will have an adverse impact or our results
      of operations.




37




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




We
      held
      our Annual Meeting of Stockholders on June 26, 2007.




The
      stockholders elected Robert S. Rosenschein, Yehuda Sternlicht and Mark B. Segall
      as Class III directors for a three-year term until the 2010 Annual Meeting
      of
      Stockholders or until their successors are elected and have qualified.




The
      stockholders ratified the appointment of Somekh Chaikin, a member of KPMG
      International, to serve as our independent registered public accounting firm
      for
      the calendar year ending December 31, 2007.




Shares
      of
      common stock were voted as follows:




**Director
                Nominee or Proposal**
            
            **For**
            
            **Against/Withheld**
            
            **Abstentions**Robert
                S. Rosenschein
            
            
            6,524,531
            
            
            64,049
            
            
            -Yehuda
                Sternlicht
            
            
            6,522,000
            
            
            66,580
            
            
            -Mark
                B. Segall
            
            
            6,531,909
            
            
            56,671
            
            
            -Ratification
                of Auditors
            
            
            6,515,918
            
            
            67,638
            
            
            5,024




**ITEM
      6. EXHIBITS**





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




38




**SIGNATURES**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, the Registrant
      has
      duly caused this report to be signed on its behalf by the undersigned, thereunto
      duly authorized.


**ANSWERS
                CORPORATION**
              (Registrant)Date:
                August 14, 2007
            By:
            /s/
                Robert S. RosenscheinRobert
                S. RosenscheinChief
                Executive Officer




Date:
                August 14, 2007
            By:
            /s/
                Steven SteinbergSteven
                SteinbergChief
                Financial Officer
              (Principal
                  Financial Officer)