UNITED
        STATES
 SECURITIES
        AND EXCHANGE COMMISSION
 WASHINGTON,
        D.C. 20549
 
 FORM
        10-QSB
 
 x QUARTERLY
        REPORT
        UNDER SECTION 13 OR 15(d) OF THE
 SECURITIES
        EXCHANGE ACT OF 1934
 
 FOR
        THE
        QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
 
 o TRANSITION
        REPORT
        UNDER SECTION 13 OR 15(d) OF THE
 SECURITIES
        EXCHANGE ACT OF 1934
 
 COMMISSION
        FILE NUMBER 001-32255
 
 ANSWERS
        CORPORATION
 (EXACT
        NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
 
 DELAWARE
              98-0202855(STATE
                  OR OTHER JURISDICTION OF
              (I.R.S.
                  EMPLOYER IDENTIFICATION NO.)INCORPORATION
                  OR ORGANIZATION)
  Jerusalem
        Technology Park
 The
        Tower
 Jerusalem
        91481 Israel
 (ADDRESS
        INCLUDING ZIP CODE OF PRINCIPAL EXECUTIVE OFFICES)
 
 +972-2-649-5000
 (REGISTRANT'S
        TELEPHONE NUMBER, INCLUDING AREA CODE)
 
 Indicate
        by an (X) whether the registrant: (1) has filed all reports required to be
        filed
        by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days. Yes o NO x
 
 Indicate
        by an (X) whether the registrant is an accelerated filer (as defined in Rule
        12b-2 of the Exchange Act). Yes o NO x
 
 As
        of
        November 1, 2005, the registrant had outstanding 7,198,902 shares of Common
        Stock, $0.001 par value per share.
   
  PART
                  I. FINANCIAL INFORMATIONItem
                  1. Financial StatementsInterim
                  Consolidated Balance Sheet as of September 30, 2005 and Consolidated
                  Balance Sheet as ofDecember
                  31, 2004
              2Interim
                  Consolidated Statements of Operations for the three and nine months
                  ended
                  September 30, 2005and
                  2004, and for the cumulative period from December 22, 1998 (inception)
                  through September 30, 2005
              4Interim
                  Consolidated Statements of Cash Flows for the nine months ended
                  September
                  30, 2005 and 2004,and
                  for the cumulative period from December 22, 1998 (inception) through
                  September 30, 2005
              5Notes
                  to the Interim Consolidated Financial Statements
              7Item
                  2. Management's Discussion and Analysis of Financial Condition
                  or Plan of
                  Operation
              16Item
                  3. Controls and Procedures
              25PART
                  II. OTHER INFORMATIONItem
                  1. Legal Proceedings
              26Item
                  2. Unregistered Sales of Equity Securities and Use of
                  Proceeds
              26Item
                  3. Defaults Upon Senior Securities
              26Item
                  4. Submission of Matters to a Vote of Security Holders
              26Item
                  5. Other Information
              27Item
                  6. Exhibits
              27Signatures
              28
  **Cautionary
        Note regarding Forward-Looking Statements**
  In addition to historical information, this Quarterly Report on Form 10-QSB
        contains forward-looking statements within the meaning of Section 27A
        of
        the Securities Act and Section 21E of the Exchange Act. Forward-looking
        statements are those that predict or describe future events or trends and
        that
        do not relate solely to historical matters. You can generally identify
        forward-looking statements as statements containing the words
“believe,”“expect,”“will,”“anticipate,”“intend,”“estimate,”“project,”“assume” or
        other similar expressions, although not all forward-looking statements contain
        these identifying words. All statements in this report regarding our future
        strategy, future operations, projected financial position, estimated future
        revenues, projected costs, future prospects, and results that might be obtained
        by pursuing management’s current plans and objectives are forward-looking
        statements. You should not place undue reliance on our forward-looking
        statements because the matters they describe are subject to known and unknown
        risks, uncertainties and other unpredictable factors, many of which are beyond
        our control. Our forward-looking statements are based on the information
        currently available to us and speak only as of the date on which this report
        was
        filed with the SEC. We expressly disclaim any obligation to issue any updates
        or
        revisions to our forward-looking statements, even if subsequent events cause
        our
        expectations to change regarding the matters discussed in those statements.
        Over
        time, our actual results, performance or achievements will likely differ
        from
        the anticipated results, performance or achievements that are expressed or
        implied by our forward-looking statements, and such difference might be
        significant and materially adverse to our stockholders. Many important factors
        that could cause such a difference, including, but not limited to, our ability
        to increase the number of persons who use our products, our ability to increase
        the number of partners who will generate increased traffic to our sites,
        our
        ability to improve the monetization of our products, a decision by Google,
        Inc.
        to discontinue directing user traffic to www.answers.com through
        its definition link, and other risk factors identified from time to time
        in our
        SEC filings, are described in our most recent registration statement on
        Form SB-2 under the captions “Competition,”“Proprietary Rights” and “Risk
        Factors,” all of which you should review carefully. Please consider our
        forward-looking statements in light of those risks as you read this report.
  i
  Answers
        Corporation (Formerly GuruNet Corporation)
 and
        Subsidiary
 (A
        Development Stage Enterprise)
 
 **Interim
        Consolidated Financial Statements as of September 30, 2005**
  **Contents**
 
 
 
 PageInterim
                  Consolidated Balance Sheet as of September 30, 2005 and Consolidated
                  Balance Sheet as ofDecember
                  31, 2004
              2Interim
                  Consolidated Statements of Operations for the three and nine months
                  ended
                  September 30, 2005and
                  2004 and for the cumulative period from December 22, 1998 (inception)
                  through September 30, 2005
              4Interim
                  Consolidated Statements of Cash Flows for the nine months ended
                  September
                  30, 2005 and 2004,and
                  for the cumulative period from December 22, 1998 (inception) through
                  September 30, 2005
              5Notes
                  to the Interim Consolidated Financial Statements
              7
 
  
  Answers
        Corporation (Formerly GuruNet Corporation)
 and
        Subsidiary
 (A
        Development Stage Enterprise)
 
 **Interim
        Consolidated Balance Sheets**
  **September
                  30**
              
              **December
                  31****2005**
              
              **2004**$
              
              $**(Unaudited)**
              
              **(Audited)****Assets****Current
                  assets:**Cash
                  and cash equivalents
              
              
              **2,635,071**
              
              
              1,565,415Investment
                  securities
              
              
              **16,250,000**
              
              
              5,850,000Receivables
              
              
              **321,128**
              
              
              18,145Prepaid
                  expenses
              
              
              **248,832**
              
              
              259,674**Total
                  current assets**
              
              
              **19,455,031**
              
              
              7,693,234**Long-term
                  deposits (restricted)**
              
              
              **310,651**
              
              
              167,304**Deposits
                  in respect of employee severance obligations**
              
              
              **488,922**
              
              
              462,735**Property
                  and equipment, net**
              
              
              **583,771**
              
              
              305,804**Other
                  assets:**Intangible
                  assets, net
              
              
              **107,861**
              
              
              111,289Prepaid
                  expenses, long-term
              
              
              **91,700**
              
              
              147,000Deferred
                  tax asset, long-term
              
              
              **17,078**
              
              
              19,817**Total
                  other assets**
              
              
              **216,639**
              
              
              278,106**Total
                  assets**
              
              
              **21,055,014**
              
              
              8,907,183
 
  
 See
        accompanying notes to the interim consolidated financial
        statements.
 2
  Answers
        Corporation (Formerly GuruNet Corporation)
 and
        Subsidiary
 (A
        Development Stage Enterprise)
 
 **Interim
        Consolidated Balance Sheets (cont’d)**
 
 
 **September
                  30**
              
              **December
                  31****2005**
              
              **2004**$
              
              $**(Unaudited)**
              
              **(Audited)****Liabilities
                  and stockholders' equity****Current
                  liabilities:**Accounts
                  payable
              
              
              **405,270**
              
              
              172,029Accrued
                  expenses
              
              
              **382,576**
              
              
              422,465Accrued
                  compensation and benefits
              
              
              **394,828**
              
              
              259,872Deferred
                  revenues, short-term
              
              
              **68,282**
              
              
              150,147**Total
                  current liabilities**
              
              
              **1,250,956**
              
              
              1,004,513**Long-term
                  liabilities:**Liability
                  in respect of employee severance obligations
              
              
              **568,729**
              
              
              531,224Deferred
                  tax liability, long-term
              
              
              **99,630**
              
              
              94,965Deferred
                  revenues, long-term
              
              
              **426,604**
              
              
              452,359**Total
                  long-term liabilities**
              
              
              **1,094,963**
              
              
              1,078,548**Commitments
                  and contingencies****Stockholders'
                  equity:**Preferred
                  stock: $0.01 par value; 1,000,000 shares authorized and 0 shares
                  issued as
                  of
                September
                  30, 2005 and December 31, 2004Common
                  stock; $0.001 par value; 30,000,000 shares authorized as of September
                  30,
                  2005 and
                December
                  31, 2004; 7,140,152 and 4,920,551 shares issued and outstanding
                  as of
                September
                  30, 2005 and December 31, 2004, respectively
              
              
              **7,140**
              
              
              4,921Additional
                  paid-in capital
              
              
              **63,555,711**
              
              
              47,488,072Deferred
                  compensation
              
              
              **(32,956**
              **)**
              
              (45,146
              )Accumulated
                  other comprehensive loss
              
              
              **(27,418**
              **)**
              
              (27,608
              )Deficit
                  accumulated during development stage
              
              
              **(44,793,382**
              **)**
              
              (40,596,117
              )**Total
                  stockholders' equity**
              
              
              **18,709,095**
              
              
              6,824,122**Total
                  liabilities and stockholders' equity**
              
              
              **21,055,014**
              
              
              8,907,183
  
 See
        accompanying notes to the interim consolidated financial
        statements.
 
 3
  Answers
        Corporation (Formerly GuruNet Corporation)
 and
        Subsidiary
 (A
        Development Stage Enterprise)
 
 **Interim
        Consolidated Statements of Operations**
  **Cumulative
                  from****Three
                  months ended**
              
              **Nine
                  months ended**
              
              **December
                  22, 1998****September
                  30**
              
              **September
                  30**
              
              **(inception)
                  through****2005**
              
              **2004**
              
              **2005**
              
              **2004**
              
              **September
                  30, 2005**$
              
              $
              
              $
              
              $
              
              **$****(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)****Revenue**
              
              **563,576**
              
              53,163
              
              **1,163,761**
              
              117,038
              
              2,585,558**Costs
                  and expenses**(1)**:**Cost
                  of revenue
              
              
              **251,254**
              
              
              157,854
              
              
              **711,051**
              
              
              433,612
              
              
              4,262,819Research
                  and development
              
              
              **335,650**
              
              
              271,489
              
              
              **1,063,972**
              
              
              789,962
              
              
              19,643,082Sales
                  and marketing
              
              
              **512,707**
              
              
              159,564
              
              
              **1,325,137**
              
              
              700,049
              
              
              10,906,179General
                  and administrative
              
              
              **691,311**
              
              
              221,805
              
              
              **2,602,048**
              
              
              636,335
              
              
              10,116,833Loss
                  in connection with shut-down of operations
              
              
              **-**
              
              
              -
              
              
              **-**
              
              
              -
              
              
              1,048,446**Total
                  costs and expenses**
              
              
              **1,790,922**
              
              
              810,712
              
              
              **5,702,208**
              
              
              2,559,958
              
              
              45,977,359**Operating
                  loss**
              
              
              **(1,227,346**
              **)**
              
              (757,549
              )
              
              **(4,538,447**
              **)**
              
              (2,442,920
              )
              
              (43,391,801
              )Interest
                  income (expense), net
              
              
              **156,536**
              
              
              (1,397,322
              )
              
              **387,130**
              
              
              (3,247,774
              )
              
              (2,187,735
              )Gain
                  on extinguishment of debt
              
              
              -
              
              
              **-**
              
              
              -
              
              
              **-**
              
              
              1,493,445Other
                  expense, net
              
              
              **(14,641**
              **)**
              
              (6,646
              )
              
              **(35,369**
              **)**
              
              (10,671
              )
              
              (621,564
              )**Loss
                  before income taxes**
              
              
              **(1,085,451**
              **)**
              
              (2,161,517
              )
              
              **(4,186,686**
              **)**
              
              (5,701,365
              )
              
              (44,707,655
              )Income
                  tax expenses
              
              
              **(4,904**
              **)**
              
              (7,010
              )
              
              **(10,579**
              **)**
              
              (34,023
              )
              
              (85,727
              )**Net
                  loss**
              
              
              **(1,090,355**
              **)**
              
              (2,168,527
              )
              
              **(4,197,265**
              **)**
              
              (5,735,388
              )
              
              (44,793,382
              )**Basic
                  and diluted net loss per common share**
              
              
              **(0.15**
              **)**
              
              (1.26
              )
              
              **(0.63**
              **)**
              
              (3.64
              )
              
              (27.38
              )**Weighted
                  average shares used in computing**
                **basic
                  and diluted net loss per common share**
              
              
              **7,069,553**
              
              
              1,727,373
              
              
              **6,703,989**
              
              
              1,574,923
              
              
              1,635,803**(1)
                  Includes stock based compensation and costs as
                  follows:**Research
                  and development
              
              
              **944**
              
              
              944
              
              
              **31,207**
              
              
              2,832Sales
                  and marketing
              
              
              **354**
              
              
              354
              
              
              **214,310**
              
              
              10,991General
                  and administrative
              
              
              **103,875**
              
              
              2,435
              
              
              **789,449**
              
              
              23,877**105,173**
              
              
              3,733
              
              
              **1,034,966**
              
              
              37,700
 See
        accompanying notes to the interim consolidated financial
        statements.
  4
  Answers
        Corporation (Formerly GuruNet Corporation)
 and
        Subsidiary
 (A
        Development Stage Enterprise)
  **Interim
        Consolidated Statements of Cash Flows**
 
 **Cumulative
                  from December 22, 1998****(inception)
                  through****Nine
                  months ended September 30**
              
              **September
                  30****2005**
              
              **2004**
              
              **2005**$
              
              $
              
              **$****(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)****Cash
                  flows from operating activities:****Net
                  loss**
              
              
              **(4,197,265**
              **)**
              
              (5,735,388
              )
              
              (44,793,382
              )**Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:**Depreciation
                  and amortization
              
              
              **133,294**
              
              
              92,061
              
              
              2,345,349Loss
                  on sale and write off of property and equipment in connection
                  withshut-down ofoperations
              
              
              **-**
              
              
              -
              
              
              780,475Other
                  loss on sale and write off of property and equipment
              
              
              **-**
              
              
              -
              
              
              549,802Settlement
                  of obligations for other than cash
              
              
              **-**
              
              
              -
              
              
              225,589Increase
                  in liability in respect of employee severance obligations,
                  net
              
              
              **11,318**
              
              
              6,900
              
              
              79,807Deferred
                  income taxes, net
              
              
              **7,404**
              
              
              34,023
              
              
              82,552Stock
                  issued for domain name
              
              
              **-**
              
              
              -
              
              
              1,500Common
                  stock, stock options and warrants to non-employees for services
                  rendered
              
              
              **910,688**
              
              
              16,570
              
              
              1,133,292Revaluation
                  of options issued to non-employees for services rendered
              
              
              -
              
              
              -
              
              
              (42,789
              )Stock-based
                  compensation to employees and directors
              
              
              **125,268**
              
              
              21,624
              
              
              240,477Accrued
                  interest on promissory notes
              
              
              **-**
              
              
              -
              
              
              -Amortization
                  of deferred charges relating to convertible promissory
                  notes
              
              
              **-**
              
              
              660,826
              
              
              889,983Amortization
                  of discounts on promissory notes
              
              
              **-**
              
              
              2,190,008
              
              
              1,577,373Exchange
                  rate differences
              
              
              **24,473**
              
              
              -
              
              
              36,219**Changes
                  in operating assets and liabilities:**Increase
                  in accounts receivable and other current assets
              
              
              **(261,055**
              **)**
              
              (373,346
              )
              
              (537,318
              )Decrease
                  (increase) in long-term prepaid expenses
              
              
              **55,300**
              
              
              -
              
              
              (91,700
              )Increase
                  in accounts payable
              
              
              **233,241**
              
              
              (54,420
              )
              
              405,270Increase
                  in accrued expenses and other current liabilities
              
              
              **95,067**
              
              
              3,458
              
              
              789,088(Decrease)
                  increase in short-term deferred revenues
              
              
              **(107,620**
              **)**
              
              61,037
              
              
              68,282(Decrease)
                  increase in long-term deferred revenues
              
              
              **-**
              
              
              (16,191
              )
              
              426,604**Net
                  cash used in operating activities**
              
              
              **(2,969,887**
              **)**
              
              (3,092,838
              )
              
              (35,833,527
              )**Cash
                  flows from investing activities:**Capital
                  expenditures
              
              
              **(407,833**
              **)**
              
              (115,979
              )
              
              (4,520,734
              )Proceeds
                  from sale of property and equipment
              
              
              **-**
              
              
              -
              
              
              54,415Purchase
                  of intangible assets
              
              
              **-**
              
              
              (80,200
              )
              
              (119,936
              )(Increase)
                  decrease in long-term deposits
              
              
              **(143,347**
              **)**
              
              8,317
              
              
              (303,784
              )Purchases
                  of investment securities
              
              
              **(26,750,000**
              **)**
              
              -
              
              
              (32,600,000
              )Proceeds
                  from sales of investment securities
              
              
              **16,350,000**
              
              
              -
              
              
              16,350,000Other
              
              
              **190**
              
              
              -
              
              
              -**Net
                  cash used in investing activities**
              
              
              **(10,950,990**
              **)**
              
              (187,862
              )
              
              (21,140,039
              )**Cash
                  flows from financing activities:**Repayment
                  of loan
              
              
              **-**
              
              
              -
              
              
              (20,000
              )Proceeds
                  from loan
              
              
              **-**
              
              
              -
              
              
              6,500Proceeds
                  from issuance of convertible preferred stock, net of $130,697 issuance
                  costs
              
              
              **-**
              
              
              -
              
              
              32,669,303Proceeds
                  from issuance of common stock, net of issuance costs
              
              
              **-**
              
              
              (469,671
              )
              
              10,843,790Proceeds
                  from issuance of promissory notes, net of $521,511 issuance
                  costs
              
              
              **-**
              
              
              4,278,490
              
              
              4,323,373Repayment
                  of convertible promissory notes
              
              
              **-**
              
              
              -
              
              
              (3,160,000
              )Exercise
                  of common stock options
              
              
              **1,193,559**
              
              
              -
              
              
              1,193,559Exercise
                  of warrants, net of $338,162 issuance costs
              
              
              **13,821,447**
              
              
              -
              
              
              13,821,447**Net
                  cash provided by financing activities**
              
              
              **15,015,006**
              
              
              3,808,819
              
              
              59,678,972Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              **(24,473**
              **)**
              
              -
              
              
              (70,335
              )**Net
                  increase in cash and cash equivalents**
              
              
              **1,069,656**
              
              
              528,119
              
              
              2,635,071Cash
                  and cash equivalents at beginning of period
              
              
              **1,565,415**
              
              
              123,752
              
              
              -**Cash
                  and cash equivalents at end of period**
              
              
              **2,635,071**
              
              
              651,871
              
              
              2,635,071
 See
        accompanying notes to the interim consolidated financial
        statements.
 5
  Answers
        Corporation (Formerly GuruNet Corporation)
 and
        Subsidiary
 (A
        Development Stage Enterprise)
  **Interim
        Consolidated Statements of Cash Flows (cont’d)**
  **Cumulative
                  from December 22, 1998****(inception)
                  through****Nine
                  months ended September 30**
              
              **September
                  30,****2005**
              
              **2004**
              
              **2005**$
              
              $
              
              **$****(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)****Supplemental
                  disclosures of cash flow information:**Income
                  taxes paid
              
              **3,175**
              
              40,997
              
              94,766**Non-cash
                  investing and financing activities:**Stock
                  issued for domain name
              
              
              **-**
              
              
              -
              
              
              1,500Issuance
                  of common stock in lieu of loan repayments
              
              
              **-**
              
              
              -
              
              
              6,500Common
                  stock issued in exchange for notes receivable
              
              
              **-**
              
              
              -
              
              
              1,842,900Repurchase
                  of stockholders’ common stock and cancellation of notes
                receivable
              
              
              **-**
              
              
              -
              
              
              (1,842,900
              )Amortization
                  of deferred charges relating to warrants
              
              
              **-**
              
              
              147,080
              
              
              147,080Discount
                  on convertible promissory notes
              
              
              **-**
              
              
              644,228
              
              
              1,577.373Conversion
                  of convertible promissory notes into common stock
              
              
              **-**
              
              
              13,720
              
              
              1,840,000Issuance
                  costs related to the converted promissory notes
              
              
              **-**
              
              
              596,047
              
              
              134,255
  See
        accompanying notes to the interim consolidated financial
        statements.
 6
  Answers
        Corporation (Formerly GuruNet Corporation)
 and
        Subsidiary
 (A
        Development Stage Enterprise)
 
 **Notes
        to the Interim Consolidated Financial Statements as of September 30, 2005**
  **Note
        1** **- Business**
 
 Answers
        Corporation (“the Parent”) (formerly GuruNet Corporation), a Development Stage
        Enterprise, was founded as a
        Texas
        corporation on December 22, 1998, and reorganized as a Delaware corporation
        in
        April 1999 .
        On
        December 27, 1998 the Parent formed a subsidiary (“the Subsidiary”) based in
        Israel, primarily for the purpose of providing research and development services
        to the Parent. Answers Corporation and the Subsidiary are collectively referred
        to as “the Company”. The
        Company develops, markets and sells technology that intelligently and
        automatically integrates and retrieves information from disparate sources
        and
        delivers the result in a single consolidated view.
 
 The
        Company began trading on NASDAQ under the symbol ANSW on August 2, 2005.
        Prior
        to such date, the Company’s shares were traded on the American Stock Exchange
        under the symbol GRU. Subsequent
        to the balance sheet date, the
        Company changed its corporate name from GuruNet Corporation to Answers
        Corporation (see Note 6a).
 
 Prior
        to
        2003, the Company focused primarily on enterprise systems for corporate
        customers and large organizations. Beginning in 2003, the Company’s primary
        product has been its consumer product, which, in 2003 and 2004, was sold
        to
        subscribers who paid the Company on a lifetime or annual basis . In January
        2005, the Company introduced a free-to-customer product, Answers.com, containing
        practically all the content that it used to sell via subscriptions and ceased
        selling subscriptions to individual consumers. The Company generates advertising
        revenue from Answers.com and
        other
        third-party sites that pay for the right to deliver the Company’s services to
        their users. Notwithstanding, customers who purchased subscriptions prior to January 2005,
        will continue to be fully supported through the subscription
        periods.
 
 As
        the
        Company has not yet earned significant revenue from its operations, it considers
        itself a development stage enterprise, as defined under Statement of Financial
        Accounting Standards No. 7, *“Accounting
        and Reporting by Development Stage Enterprises”* .
 
 The
        accompanying unaudited interim consolidated financial statements were prepared
        in accordance with the instructions for Form 10-QSB and, therefore, do not
        include all disclosures necessary for a complete presentation of financial
        condition, results of operations, and cash flows in conformity with generally
        accepted accounting principles. All adjustments, which are, in the opinion
        of
        management, of a normal recurring nature and are necessary for a fair
        presentation of the interim financial statements, have been included.
        Nevertheless, these financial statements should be read in conjunction with
        the
        consolidated financial statements and related notes included in the Company’s
        Annual Report on Form 10-KSB for the year ended December 31, 2004. The results
        of operations for the period ended September 30, 2005 are not necessarily
        indicative of the results that may be expected for the entire fiscal year
        or any
        other interim period.
  7
  Answers
        Corporation (Formerly GuruNet Corporation)
 and
        Subsidiary
 (A
        Development Stage Enterprise)
 
 **Notes
        to the Interim Consolidated Financial Statements as of September 30, 2005**
  **Note
        2 - Revenue Recognition**
 
 The
        Company generates advertising revenues, mostly, through pay-per-click keyword
        advertising. When a user searches sponsored keywords, a link to an advertiser’s
        Website is displayed in a premium position and identified as a sponsored
        result
        to the search. Generally, the Company does not contract directly with
        advertisers, but rather, obtains those advertisers through the efforts of
        a
        third party that locates advertisers seeking to display sponsored links in
        our
        product. 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 on the accompanying statement of operations
        in
        the period in which such advertising services were provided.
 
 The
        Company continues to recognize revenues generated from subscriptions that
        were
        sold in prior years since such subscribers will continue to be fully supported
        through their subscription periods (see Note 1).
 
 In
        2003,
        the Company sold lifetime subscriptions to its consumer product and did not
        recognize revenue from those sales since the obligation to continue serving
        such
        content had no defined termination date and adequate history to estimate
        the
        life of the customer relationship was not available. Cash received from such
        lifetime licenses is reflected as long-term deferred revenues on the
        accompanying balance sheets.
 
 8
 
 Answers
        Corporation (Formerly GuruNet Corporation)
 and
        Subsidiary
 (A
        Development Stage Enterprise)
 
 **Notes
        to the Interim Consolidated Financial Statements as of September 30, 2005**
  **Note
        3 - Accounting for Stock-Based Compensation**
 
 As
        allowed by Statement of Financial Accounting Standards (SFAS) No. 123, *“Accounting
        for Stock-based Compensation”* ,
        the
        Company utilizes the intrinsic-value method of accounting prescribed by the
        Accounting Principles Board (APB) Opinion No. 25, *“Accounting
        for Stock Issued to Employees”* (“APB
        25”), and related interpretations, to account for stock option plans for
        employees and directors. Compensation
        cost for stock options, if any, is be measured as the excess of the market
        price
        of the Company’s stock at the date of grant over the amount an employee or
        director must pay to acquire the stock.
 
 The
        fair
        value of options and warrants granted to non-employees, is measured according
        to
        the Black-Scholes option-pricing model with the following weighted average
        assumptions: no dividend yield; risk-free interest rates of 1.69% to 4.48%;
        volatility of between 46.54% and 74.75%; and an expected life of between
        one and
        ten years.
 
 The
        Company has adopted the disclosure requirements of SFAS No. 123 and SFAS
        No.
        148, *“* *Accounting
        for Stock-Based Compensation—Transition and Disclosure”* ,
        for
        awards to its directors and employees. For
        disclosure purposes only, the fair value of options granted to employees
        and
        directors prior to May 12, 2004, the date of the Company’s first filing with the
        U.S. Securities and Exchange Commission (the “SEC”), in connection with its
        initial public offering (the “IPO”), was estimated on the date of grant using
        the minimum-value method with the following weighted average assumptions:
        no
        dividend yield; risk-free interest rates of 2.18% to 6.59%; and an expected
        life
        of three to five years. The fair value of options granted to employees and
        directors subsequent to May 12, 2004, are measured, for disclosure purposes
        only, according to the Black-Scholes option-pricing model with the following
        weighted average assumptions: no dividend yield; risk-free interest rates
        of
        3.19% to 4.18%; volatility of between 38.62% and 66.76%; and the expected
        life
        of the option, generally four years.
 The
        following illustrates the effect on net loss and net loss per share if the
        Company had applied the fair value methods of SFAS
        No.
        123 for
        accounting purposes:
 
 **Three
                  months ended September 30**
              
              **Nine
                  months ended**
                **September
                  30**
              
              **Cumulative
                  from inception through September 30,****2005**
              
              **2004**
              
              **2005**
              
              **2004**
              
              **2005**$
              
              $
              
              $
              
              $
              
              **$****(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)**
              
              **(Unaudited)**Net
                  loss, as reported
              
              
              **(1,090,355**
              **)**
              
              (2,168,527
              )
              
              **(4,197,265**
              **)**
              
              (5,735,388
              )
              
              (44,793,382
              )Add:Stock-based
                  compensation expense to employees
                and
                  directors included in reported net loss, net of
                related
                  tax effects
              
              
              **4,063**
              
              
              4,063
              
              
              **125,268**
              
              
              21,624
              
              
              165,645Deduct:Stock-based
                  compensation expense to employees
                and
                  directors determined under fair value based
                method
                  for all awards, net of related tax effects
              
              
              **(225,546**
              **)**
              
              (24,064
              )
              
              **(560,563**
              **)**
              
              (47,580
              )
              
              (786,280
              )Pro-forma
                  net loss
              
              
              **(1,311,838**
              **)**
              
              (2,188,528
              )
              
              **(4,632,560**
              **)**
              
              (5,761,344
              )
              
              (45,414,017
              )Net
                  loss per common share, basic and diluted:As
                  reported
              
              
              **(0.15**
              **)**
              
              (1.26
              )
              
              **(0.63**
              **)**
              
              (3.64
              )
              
              (27.38
              )Pro-forma
              
              
              **(0.19**
              **)**
              
              (1.27
              )
              
              **(0.69**
              **)**
              
              (3.66
              )
              
              (27.76
              )
 9
  Answers
        Corporation (Formerly GuruNet Corporation)
 and
        Subsidiary
 (A
        Development Stage Enterprise)
 
 **Notes
        to the Interim Consolidated Financial Statements as of September 30, 2005**
  **Note
        3 - Accounting for Stock-Based Compensation (cont’d)**
 
 In
        December 2004, the Financial Accounting Standards Board issued SFAS No. 123
        (revised 2004), “Share-Based Payment”(SFAS No. 123R). This Statement is a
        revision of SFAS No. 123, “Accounting for Stock-Based Compensation”, and it
        establishes standards for the accounting for transactions in which an entity
        exchanges its equity instruments for goods or services. This Statement
        eliminates the option to use APB 25’s intrinsic value method of accounting that
        was provided in SFAS No. 123 as originally issued and it instead requires
        a
        public entity to measure the cost of employee services received in exchange
        for
        an award of equity instruments based on the grant-date fair value of the
        award.
        That cost will be recognized over the period during which an employee is
        required to provide service in exchange for the award, which is usually the
        vesting period. No compensation cost is recognized for equity instruments
        for
        which employees do not render the requisite service. Pursuant to SFAS No.
        123R,
        the Company will apply its provisions beginning the first quarter of 2006.
        SFAS
        123R provides two alternative adoption methods. The first method is a modified
        prospective method whereby a company would recognize share-based employee
        costs
        from the beginning of the fiscal period in which the recognition provisions
        are
        first applied as if the fair-value-based accounting method had been used
        to
        account for all employee awards granted, modified, or settled after the
        effective date and to any awards that were not fully vested as of the effective
        date. Measurement and attribution of compensation cost for awards that are
        unvested as of the effective date of SFAS 123R would be based on the same
        estimate of the grant-date fair value and the same attribution method used
        previously under SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS
        123”). The second adoption method is a modified retrospective transition method
        whereby a company would recognize employee compensation cost for periods
        presented prior to the adoption of SFAS 123R in accordance with the original
        provisions of SFAS 123; that is, an entity would recognize employee compensation
        costs in the amounts previously reported in the pro forma disclosures provided
        in accordance with SFAS 123. A company would not be permitted to make any
        changes to those amounts upon adoption of SFAS 123R unless those changes
        represent a correction of an error. The Company is currently considering
        which
        of the two methods it will adopt, and the effect that the adoption of SFAS
        123R
        will have on its financial statements.
  10
  Answers
        Corporation (Formerly GuruNet Corporation)
 and
        Subsidiary
 (A
        Development Stage Enterprise)
 
 **Notes
        to the Interim Consolidated Financial Statements as of September 30, 2005**
  **Note
        4 - Stockholders’ Equity**
 
 The
        following table summarizes the changes in the Company’s stockholders’ equity
        during the nine month period ending September 30, 2005:
  **$****December
                  31, 2004 (Audited)**
              
              
              **6,824,122**Issuance
                  of common stock, stock warrants and stock options
              
              
              1,054,852Exercise
                  of warrants in connection with a warrant re-load, net of
                issuance
                  costs
              
              
              12,228,737Exercise
                  of other warrants
              
              
              1,592,710Exercise
                  of stock options
              
              
              1,193,559Other
              
              
              12,380Net
                  loss for the period
              
              
              (4,197,265
              )**September
                  30, 2005 (Unaudited)**
              
              
              **18,709,095**
  **(a)**  **Common
        Stock**
 
 On
        March
        13, 2005, the Company issued 7,800 shares of common stock to an investor
        relations firm, pursuant to a one-year agreement that began on December 13,
        2004. The fair value of the shares, of $151,086, is being amortized to general
        and administrative expenses over the life of the service period.
 
 In
        July,
        2005, following the earlier adoption by the Company’s board of directors, the
        Company’s stockholders approved the 2005
        Incentive Compensation Plan (the “2005 Compensation Plan”), under which the
        Company may grant stock options, stock appreciation rights, restricted stock,
        deferred stock, other stock-related awards and performance awards to officers,
        directors, employees, consultants and other persons who provide services
        to the
        Company. The total number of Company shares of common stock reserved
        and available for grant under the 2005 Plan was set at 850,000.
 
 **(b)**  **Stock
        Warrants**
 
 During
        2004, in connection with the issuance of Convertible Promissory Notes in
        January
        and February of 2004, the Company issued warrants to acquire an aggregate
        of
        2,067,316 shares of Common Stock (the “Bridge Warrants”), at an exercise price
        of $7.20 per share, with the exception of 265,837 bridge warrants exercisable
        at
        $3.75 per share.
 
 During
        the first quarter of 2005, 69,432 of the Bridge Warrants were exercised.
        As a
        result, the Company issued an aggregate of 69,432 shares of its Common Stock,
        $0.001 par value (the "Common Stock"), for a total consideration of
        approximately $500,000.
  11
  Answers
        Corporation (Formerly GuruNet Corporation)
 and
        Subsidiary
 (A
        Development Stage Enterprise)
 
 **Notes
        to the Interim Consolidated Financial Statements as of September 30, 2005**
  **Note
        4 - Stockholders’ Equity (cont’d)**
 
 **(b)**  **Stock
        Warrants (cont’d)**
 
 Additionally,
        on February 4, 2005 the Company entered into an agreement (the "Warrants
        Agreement"), with certain holders of Bridge Warrants, pursuant to which such
        holders exercised an aggregate of 1,871,783 Bridge Warrants at the stated
        exercise price thereof. As a result, the Company issued an aggregate of
        1,871,783 shares of its common stock, for aggregate gross consideration of
        $12,559,700. Under the terms of the Warrants Agreement, in order to provide
        incentive to the warrant holders to exercise their Bridge Warrants, for every
        share of common stock purchased by the holders through the exercise of Bridge
        Warrants, the Company issued to the warrant holders new warrants, dated February
        4, 2005, to purchase such number of shares of common stock equal to 55% of
        the
        number of shares of common stock underlying their respective Bridge Warrants
        (the "New Warrants"). As a result, the Company issued 1,029,488 of New Warrants
        at an exercise price of $17.27 per share. The New Warrants are immediately
        exercisable and expire on February 4, 2010. On April 6, 2005, and as a part
        of
        the Warrants Agreement, the Company filed a Registration Statement, to register
        for resale the shares of common stock underlying the new warrants (the
        "Registration Statement") with the SEC. The Registration Statement became
        effective on April 21, 2005. In the Registration Statement, the Company also
        registered 111,016 shares, warrants and stock options that had previously
        not
        been registered.
 
 On
        January 20, 2005, the Company entered into an agreement with an investment
        banking firm, which was also one of the underwriters of the Company’s IPO, to
        provide general financial advisory and investment banking services for $5,000
        per month, and for a minimum service period of six months. Further, upon
        signing
        of the contract, the underwriter received fully vested warrants to acquire
        100,000 shares of Common Stock at an exercise price of $11.00. The fair value
        of
        the warrants, of $577,440, has been amortized to general and administrative
        expenses over the life of the minimum service period. On August 30, 2005,
        all of
        the warrants were exercised. As a result, the Company issued an aggregate
        of
        100,000 shares of its Common Stock, $0.001 par value, for a total consideration
        of $1,100,000.
 
 **(c)**  **Stock
        Options**
 
 During
        the first quarter of 2005, 75,726 of the Company’s outstanding stock options
        were exercised, for total consideration of approximately $804,000. As a result,
        the Company issued an aggregate of 75,726 shares of its common
        stock.
 
 During
        the second quarter of 2005, 81,879 of the Company’s outstanding stock options
        were exercised, for total consideration of approximately $303,000. As a result,
        the Company issued an aggregate of 81,879 shares of its common
        stock.
 
 During
        the third quarter of 2005, 12,981 of the Company’s outstanding stock options
        were exercised, for total consideration of approximately $87,000. As a result,
        the Company issued an aggregate of 12,981 shares of its common
        stock.
  12
  Answers
        Corporation (Formerly GuruNet Corporation)
 and
        Subsidiary
 (A
        Development Stage Enterprise)
 
 **Notes
        to the Interim Consolidated Financial Statements as of September 30, 2005**
  **Note
        4 - Stockholders’ Equity (cont’d)**
 
 **(c)** **Stock
        Options (cont’d)**
 
 During
        the nine months ended September 30, 2005, a strategic consultant of the Company
        earned 15,556 stock options, for services he rendered to the Company. In
        connection therewith, the Company recorded $213,248 of stock based compensation.
        On June 5, 2005, the agreement under which these options were granted, was
        terminated.
 
 On
        March
        15, 2005, the Company granted 200,000 stock options to one of its officers.
        The
        options will vest 25% upon the first anniversary date of the option grant,
        with
        the remainder vesting in equal monthly installments over the 36 months
        thereafter. In the event of a change of control, as defined in the officer’s
        employment agreement, these options may be forfeited by the officer in exchange
        for 50,000 shares of the Company’s common stock.
 
 On
        May
        10, 2005, the Company accelerated the vesting of 7,100 stock options that
        were
        granted to a director , in
        connection with his resignation from the Company’s board of directors. As a result, the Company
        recorded approximately $85,000 of stock based compensation, based on the
        intrinsic value of the options on the date the vesting was
        accelerated.
 
 In
        July
        2005, each non-employee director of the Company was granted a stock option,
        under the Company’s 2004 Stock Plan, to acquire up to 7,175 shares of the
        Company’s Common Stock. The options vest 25% upon the first anniversary date of
        the option grant, and the remainder vest in equal monthly installments over
        the
        36 months thereafter. All options have a maximum term of 10 years measured
        from
        the date of grant, subject to earlier termination, if the director’s service
        with the Company is terminated.
 
 During
        the nine months ended September 30, 2005, the Company granted a total of
        536,650
        stock options to its employees, officers and directors, of which 491,150
        stock
        options were granted under the Company’s 2004 Stock Option Plan, and 45,500
        stock options under its 2005
        Compensation Plan.
 
 **(d)**  **Other
        Comprehensive Income (Loss)**
 
 In
        January 2005, the Company reversed previously recorded unrealized loss on
        securities.
  13
  Answers
        Corporation (Formerly GuruNet Corporation)
 and
        Subsidiary
 (A
        Development Stage Enterprise)
 
 **Notes
        to the Interim Consolidated Financial Statements as of September 30, 2005**
  **Note
        5 - Commitments and Contingencies**
 **(a)**  **Operating
          leases**
 
 The
          Company has entered into various non-cancelable operating lease agreements
          for
          offices and vehicles, for lease periods up to 5 years, expiring between
          2006 and
          2010.
 
 In
          April
          2005, the Company entered into an operating lease for office space in New
          York
          City. The lease commenced on May 1, 2005 and ends on June 30, 2010. Under
          the
          terms of the lease, the Company shall have the right to cancel the lease
          commencing May 1, 2008, upon 90 days prior written notice to the Landlord.
          The
          monthly rental due under the lease begins at $5,500, with a two-month free
          period, and steps up at various stages throughout the lease, up to $6,223.
          The
          Company will recognize the rent expense for this lease on a straight-line
          basis
          over the minimum lease term. In addition to the base rent, the Company
          will be
          responsible for certain costs and charges specified in the lease, including
          real
          estate taxes and utility charges.
 
 In
          July
          2005, the Subsidiary entered into a supplemental agreement to its operating
          lease with its landlord (the “Supplement”) in connection with the relocation of
          the Israeli offices to new office space. The term of the original lease
          was
          extended by 55 additional months beyond its original date of expiration,
          December 31, 2005. According to the Supplement, the Subsidiary will occupy
          the
          new office space commencing September 15, 2005, through July 31, 2010.
          The
          monthly rental due under the lease will be 50,802 New Israeli Shekels (“NIS”)
          ($11,185 based on the exchange rate on July 15, 2005) for the first year,
          and
          NIS 69,483 ($15,298 based on the exchange rate on July 15, 2005) for the
          remaining four years. The Company will recognize the rent expense for this
          lease
          on a straight-line basis over the minimum lease term. The rent payments
          will be
          linked to the Israeli Consumer Price Index. In addition to the base rent,
          the
          Company will be responsible for certain costs and charges specified in
          the
          lease, including maintenance and utility charges. As security for future
          rental
          commitments the Subsidiary provides a bank guarantee in the amount of
          approximately $115,000.
 
 Future
          minimum lease payments under non-cancelable operating leases for office
          space
          and vehicles, as of September 30, 2005 are as follows:
 
 **Year
                    ending December 31**
                
                
                **$**2005
                
                
                78,6452006
                
                
                360,9792007
                
                
                358,7782008
                
                
                324,5992009
                
                
                316,4672010
                
                
                170,3981,609,866
 
 Rental
          expense under operating leases for the nine months ended September 30,
          2005 and
          2004 was approximately $209,000 and $154,000, respectively.
 14
 Answers
          Corporation (Formerly GuruNet Corporation)
 and
          Subsidiary
 (A
          Development Stage Enterprise)
 
 **Notes
          to the Interim Consolidated Financial Statements as of September 30, 2005**
 **Note
        5 - Commitments and Contingencies (cont’d)**
  **(b)**  **Other
        Commitments**
  (i)      
        I n
        the
        ordinary course of business, the Company enters into various arrangements
        with
        vendors and other business partners, principally for content, web-hosting,
        marketing and investor relations arrangements. As of September 30, 2005,
        the
        commitments under such agreements, which are for initial periods between
        one and
        three years, amounted to approximately $160,000.
  (ii)  All
        of
        the Subsidiary’s obligations to its bank, including the bank guarantee that such
        bank made to the Subsidiary’s landlord, are secured by a lien on all of the
        Subsidiary’s deposits at such bank. As of September 30, 2005, deposits at such
        bank amounted to $589,237, including a restricted long-term deposit of $115,000
        as mentioned above.
  (iii)  During
        the nine months ended September 30, 2005, the Company made its final payment
        of
        $25,000, in connection with its December 2002 Reorganization, as described
        further in the notes to the financial statements as of December 31,
        2004.
  **Note
        6 - Subsequent Events**
 
 (a) Further
        to duly obtaining necessary stockholder approval, pursuant to a special meeting
        of the stockholders held on October 11, 2005, the Company changed its corporate
        name from GuruNet Corporation to Answers Corporation, effective October 17,
        2005.
  (b) Subsequent
        to balance sheet date, o ne
        of the
        underwriters of the Company’s IPO, exercised 58,750 stock options that
        they received in conjunction with the IPO ,
        for
        total consideration of approximately $370,000. As a result, the Company issued
        an aggregate of 58,750 shares of its common stock.
  15
  ITEM
        2.
        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
        OPERATION
 
 *The
        following discussion of our financial condition and results of operations
        should
        be read in conjunction with the financial statements and the notes to those
        statements included elsewhere in this filing. This discussion includes
        forward-looking statements that involve risks and uncertainties. Our actual
        results may differ materially from those anticipated in these forward-looking
        statements.*
  **General**
  We
        provide information, answer-based, search services to computer users through
        our
        Web site, Answers.com, downloadable applications and distribution channels.
        We
        provide answer-based search services through our technology, which integrates
        and retrieves online information from disparate sources and delivers the
        result
        in a single consolidated browser view. We seek to differentiate ourselves
        by
        providing our users with relevant reference information that enhances results
        achieved through traditional search engines. Most search engines respond
        to an
        Internet user’s query with a long list of links to more Websites that in some
        way relate to the query term. Our answer engine automatically delivers snapshot,
        multi-faceted definitions and explanations from attributable reference sources
        about numerous topics in our database, without requiring the user to navigate
        a
        list of hyperlinks sequentially.
  On
        October 17, 2005, we changed our corporate name from GuruNet Corporation
        to
        Answers Corporation. On August 2, 2005 we began trading on NASDAQ under the
        symbol ANSW. Prior to such date, our shares were traded on the American Stock
        Exchange under the symbol GRU.
  **Answers.com
        Proprietary Traffic**
  On
        January 3, 2005, we announced the release of Answers.com, a website that
        had
        been launched in August 2004 in beta version. We also released "1-Click Answers"
        - a software tool that facilitates more efficient access to Answers.com.
        1-Click
        Answers allows users working in any application such as e-mail, spreadsheet,
        word processing, database or other program to click on a word or phrase within
        a
        document and access Answers.com’s online library and display information about
        that word or phrase in a pop-up window. While Web users enjoy our integrated
        reference information, our basic Web site does not provide the “1-Click”
        functionality and context analysis that we include in our supplemental "1-Click
        Answers" software version. Our primary revenue model for Answers.com proprietary
        traffic is advertising. Currently, most of our ad revenue is earned from
        keyword-targeted advertisements. When a user searches sponsored keywords,
        a link
        to an advertiser’s Website is displayed.
  In
        contrast to GuruNet, the product we actively marketed prior to January 2005,
        we
        do not generate revenues from selling subscriptions to Answers.com.
  **Distribution
        Channels**
  The
        more
        users to whom we deliver answer-based search services results, the more revenues
        we will potentially earn. Thus, we approach third-party sites offering to
        incentivize them for the right to deliver our services to their users. The
        fees
        we pay to our distribution channels are often calculated as a percentage
        of the
        revenue we earn by delivering services to their users. We also earn revenues
        from channels that pay us for providing our services to their users. 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.
  **Subscriptions**
  Prior
        to
        January 2005, we sold subscriptions to our answer engine product, GuruNet.
        Prior
        to December 2003, we sold lifetime subscriptions to GuruNet, generally for
        $40.
        In December 2003, we decided to alter our pricing model and moved to an annual
        subscription model, generally, $30 per year. In conjunction with selling
        subscriptions, we also offered free access to dictionary, thesaurus,
        encyclopedia and other basic reference information through our products.
        Under
        our business model during those years, our ability to generate revenues was
        dependent upon our ability to increase the number of subscribers. Usage of
        our
        basic free product was our means of encouraging users to upgrade to our
        subscription product and increase our subscription revenue. Although we earned
        some advertising revenue in 2004, from advertising in our subscription and
        free
        products, such amounts were not significant. Our business model at the time
        strongly encouraged subscriptions, and thus we limited the amount of content
        available in our free product. This approach did not facilitate the amount
        of
        traffic we needed to earn significant amounts of revenue from advertising.
        A
        desire to grow revenues led to our current implementation, in January 2005,
        of a
        free-to-customer product, Answers.com and "1-Click Answers" software, containing
        practically all the content that we used to sell via subscriptions. We are
        no
        longer offering new subscriptions to GuruNet. Notwithstanding, users who
        purchased GuruNet subscriptions prior to January 3, 2005, will continue to
        be
        fully supported through their subscription periods. Most of our fixed-term
        subscriptions will terminate by the end of 2005.
  16
  ***Results
        of Operations*** ****
  Due
        to
        the change in our business model in January 2005, our results of operations
        for
        the three months and nine months ending September 30, 2005, are not easily
        comparable to the results for the same periods in 2004.
  ***Revenues***
  Revenues
        during the three months ended September 30, 2005 were $563,576 compared to
        $53,163 for the three months ended September 30, 2004, an increase of $510,413
        or 960%. Revenues for the nine months ended September 30, 2005 were $1,163,761
        compared to $117,038 for the nine months ended September 30, 2004, an increase
        of $1,046,723 or 894%. Revenues during the three and nine months ended September
        30, 2005 consisted of Answers.com proprietary traffic advertising revenues
        of
        approximately $500,000 and $965,000 respectively, revenues from distribution
        channels of approximately $33,000 and $69,000 respectively, and subscription
        and
        other revenue of approximately $31,000 and $130,000, respectively. In contrast,
        revenues during the three and nine months ended September 30, 2004 included
        primarily subscription revenues of approximately $42,000 and $93,000,
        respectively.
  As
        noted
        earlier, on January 3, 2005, we announced the release of Answers.com, whose
        primary revenue model is advertising. The launch of Answers.com, from a revenue
        perspective, has been a multi-tiered process. From launch date until the
        middle
        of January, we ran public service announcements on Answers.com and did not
        display any advertising. In the middle of January we began using and testing
        various advertising network providers, and on February 28, 2005, we began
        using
        Google's contextual AdSense advertising on our Answers.com information pages,
        as
        well as integrating Google search, with paid search advertising into
        Answers.com.
  Our
        Answers.com proprietary traffic advertising revenue is a function of various
        factors, the most basic of which are the level of our traffic or queries,
        and
        how effectively we monetize such traffic. We gauge the effectiveness of our
        monetization efforts by measuring our revenue per one thousand queries, or
        RPM.
        Our objective is to increase both traffic and RPM's in a manner that values
        the
        critical impact that each has on the outcome of our advertising revenue.
        We have
        achieved significant traffic growth from many sources that cite our lack
        of
        obtrusive ads as a reason for embracing us. We need to increase our
        RPM's
        while ensuring that we do not alienate our current and potential users and
        partners.
  Our
        average daily queries during the first, second and third quarters of 2005
        were
        approximately 900,000, 1,780,000, and 1,770,000 respectively. Traditionally,
        there is less Web activity during the summer months, especially in July and
        August, and this impacted our third quarter 2005 average daily queries. Our
        advertising revenue from such traffic, during the first, second and third
        quarters of 2005, was $107,000, $357,000, $500,000, respectively.
  ***Cost
        of Revenues***
  Cost
        of
        revenues is comprised of fees to third party providers of content, web search
        service fees, data center costs (including depreciation of information
        technology assets), production operations and customer support salaries,
        benefits and overhead costs.
  Cost
        of
        revenues for the three months ended September 30, 2005 was $251,254 compared
        to
        $157,854 for the three months ended September 30, 2004, an increase of $93,400
        or 59%. This increase was due primarily to increased compensation costs of
        $44,000, as a result of the addition of staff that manage production operations,
        increases in data center costs (including depreciation of information technology
        assets) required to manage more Internet traffic of $22,000, fees we began
        paying Google for the web search results they provide us of $16,000, and
        increases in overhead costs of $7,000.
  17
  Cost
        of
        revenues for the nine months ended September 30, 2005 was $711,051 compared
        to
        $433,612 for the same period in 2004, an increase of $277,439 or 64%. This
        increase was primarily due to increased compensation costs of $107,000, as
        a
        result of the addition of staff that manage production operations, increases
        in
        data center costs (including depreciation of information technology assets)
        required to manage more Internet traffic of $60,000, fees we began paying
        Google
        for the web search results they provide us of $42,000, increases in our content
        costs of $19,000, and increases in overhead costs of $32,000.
  ***Research
        and Development Expenses***
  The
        salaries, benefits and overhead costs of personnel, conducting research and
        development of software and Internet products comprise research and development
        expenses. In 2005, the projects being conducted by the research and development
        team generally related to advertising and content integration into our services,
        website analytical tools, co-brand development, user interface improvements
        and
        enhanced product functionality and features.
  Research
        and development expenses for the three months ended September 30, 2005 were
        $335,650 compared to $271,489 for the same period in 2004, an increase of
        $64,161 or 24%. Research and development expenses for the nine months ended
        September 30, 2005 were $1,063,972 compared to $789,962 for the same period
        in
        2004, an increase of $274,010 or 35%. The aforesaid increases are due primarily
        to compensation-related expense increases as our research and development
        team
        grew, and due to salary increases and stock-based compensation, in
        2005.
  ***Sales
        and Marketing Expenses***
  The
        salaries, benefits and overhead costs of sales and marketing personnel,
        marketing consulting, public relations services and advertising costs, comprise
        sales and marketing expenses.
  Sales
        and
        marketing expenses in the three months ended September 30, 2005 were $512,707
        compared to $159,564 during the same period in 2004, an increase of $353,143
        or
        221%. The net increase is due primarily to compensation-related expense
        increases of $187,000, as we increased the number of employees in our sales
        and
        marketing department, including the hiring of our Chief Revenue Officer at
        the
        end of the first quarter of 2005, and because our advertising and public
        relations costs during the three months ended September 30, 2005, rose by
        approximately $180,000, as compared to the same period in the prior year,
        due to
        various initiatives including the retention of a public relations firm. The
        aforementioned increases were offset to a certain degree, by the fact that
        during the three months ended September 30, 2004, we incurred approximately
        $54,000 in consulting costs relating to the redesign of our website and
        marketing strategy, and we had no corresponding cost during the same period
        in
        2005.
  Sales
        and
        marketing expenses in the nine months ended September 30, 2005 were $1,325,137
        compared to $700,049 during the same period in 2004, an increase of $625,088
        or
        89%. The net increase is due to a number of factors. Compensation-related
        expense during the nine months ended September 30, 2005 increased by $274,000,
        and recruiting fees increased by $35,000, as we increased the number of
        employees in our sales and marketing department, including the hiring of
        our
        Chief Revenue Officer at the end of the first quarter of 2005. Additionally,
        during the months of January through June of 2005, we retained a strategic
        consultant who assisted us in formulating our product and marketing strategy.
        In
        connection therewith, during the nine months ending September 30, 2005, we
        recorded approximately $35,000 of cash expenses, and $213,000 in stock-based
        compensation. Further, our advertising and public relations costs during
        the
        nine months ended September 30, 2005, rose by approximately $305,000, as
        compared to the prior year, due to various initiatives including the retention
        of a public relations firm. The aforementioned increases were offset to a
        certain degree by various factors, the most significant being that during
        the
        nine months ended September 30, 2004, we incurred approximately $188,000
        in
        consulting costs relating to the redesign of our website, and marketing
        strategy.
  ***General
        and Administrative Expenses***
  General
        and administrative expenses consist primarily of salaries, benefits and overhead
        costs for executive and administrative personnel, insurance fees, fees for
        professional services, including investor relations, legal, accounting and
        other
        consulting fees, travel costs, investment banking fees, and other general
        corporate expenses. Overhead costs are comprised primarily by rent,
        telecommunications, utilities and depreciation.
  18
  General
        and administrative expenses in the three months ended September 30, 2005
        were
        $691,311 compared to $221,805 during the same period in 2004, an increase
        of
        $469,506 or 212%. The increase is comprised of many individual line expenses,
        the most significant of which follow:
  On
        January 20, 2005, we entered into an agreement with an investment-banking
        firm,
        which also acted as one of the underwriters of our IPO, to provide general
        financial advisory and investment banking services for $5,000 per month,
        and for
        a minimum term of six months. Further, upon signing of the contract, the
        underwriter received fully vested warrants to acquire 100,000 shares of Common
        Stock at an exercise price of $11.00. This agreement was terminated in September
        2005. As a result of this agreement, in the three months ended September
        30,
        2005, we recorded approximately $10,000 of cash compensation and $63,000
        in
        stock-based compensation, which represents the amortization, in the third
        quarter of 2005, of the fair value of the warrants on the date of their
        issuance, over the minimum term of the agreement.
  In
        December 2004, we entered into an agreement with an investor relations firm
        pursuant to which they are to receive $100,000 over a one-year period for
        providing us with investor relation services. Additionally, pursuant to the
        agreement, in March 2005, we issued 7,800 shares of common stock to such
        firm.
        As a result of this agreement, in the three months ended September 30, 2005,
        we
        recorded approximately $24,000 of cash compensation and $38,000 in stock-based
        compensation, which represents the amortization, in the third quarter of
        2005,
        of the fair value of the stock on its measurement, over the expected life
        of the
        agreement, through December 2005.
  The
        remaining increase stems primarily from increases in legal and accounting
        costs
        of approximately $82,000; costs relating to stock administration, including
        printing, transfer agent and stock exchange fees aggregating $32,000; increases
        in the number of personnel, and salaries of personnel, which resulted in
        an
        increase, of $83,000; increases in director fees and expenses of $30,000;
        and
        increases in our insurance costs of $34,000. Much of the increase in our
        general
        and administrative expenses, including most of those mentioned previously,
        are
        directly or indirectly, related to the increased costs associated with being
        a
        public company.
  General
        and administrative expenses in the nine months ended September 30, 2005 were
        $2,602,048 compared to $636,335 during the same period in 2004, an increase
        of
        $1,965,713 or 309%. The increase is due to a number factors, as follows:
        Cash
        and stock-based compensation expense in the amount of approximately $115,000
        and
        $697,000, respectively, that we recorded as a result of agreements with an
        investment-banking firm, entered into on January 20, 2005; and with an investor
        relations firm, entered into in December 2004, all described more fully above.
        Additionally, in May 2005, we accelerated the vesting of 7,100 stock options
        that were granted to a director, in connection with his resignation from
        our
        board of directors. As a result, we recorded $85,000 of stock based compensation
        expense; based on the intrinsic value of the options on the date they were
        accelerated. The remaining increase stems primarily from increases in legal
        and
        accounting costs of approximately $475,000; increases in the expenses of
        stock
        administration, including printing, transfer agent and stock exchange fees
        of
        approximately $141,000; increases in the number of personnel, and salaries
        of
        personnel, which resulted in an increase of approximately $182,000; increases
        in
        director fees and expenses of approximately $89,000; and increases in our
        insurance costs of approximately $104,000. Much of the increase to our general
        and administrative expenses, including most of those mentioned previously,
        are
        directly or indirectly, related to the increased costs associated with being
        a
        public company.
  ***Interest
        Income (Expense), Net***
  Interest
        income (expense), net in the three months and nine months ended September
        30,
        2005, was $156,536 and $387,130, respectively, compared to ($1,397,322) and
        ($3,247,774) during the same periods in 2004, representing net increases
        in
        interest income (decrease of expense) of $1,553,858 and $3,634,904,
        respectively. Interest income, net, in the three and nine months ended September
        30, 2005 is comprised almost entirely of interest income earned from cash
        and
        cash equivalents and investment securities. Interest expense, net for the
        three
        and nine months ended September 30, 2004 includes approximately $1,165,000
        and
        $2,852,000, respectively, of amortization of note discounts and deferred
        charges
        relating to convertible promissory notes, which were issued in January and
        February of 2004. The remainder is comprised of 8% interest on the face of
        the
        $5.0 million convertible promissory notes, approximating $235,000 and $403,000
        for the three and nine months ended September 30, 2004, respectively, and
        immaterial amounts of interest income. The convertible promissory notes were
        fully settled upon the conclusion of our IPO in October 2004, therefore there
        is
        no similar expense in 2005.
  19
  ***Other
        Expense, Net***
  Other
        expense, net for the three months ended September 30, 2005 was $14,641 as
        compared to $6,646 for the same period in 2004, representing an increase
        of
        $7,995 or 120%. Other expense, net for the nine months ended September 30,
        2005
        was $35,369 as compared to $10,671 for the nine months ended September 30,
        2004,
        representing an increase in other expenses of $24,698 or 231%. The changes
        in
        other expense, net for the three and nine months ended September 30, 2005
        as
        compared to the same periods in 2004, resulted primarily from differences
        in the
        amount of foreign exchange gains) losses) and the write-off of withholding
        taxes
        that we did not expect to realize, in the respective periods.
  ***Income
        Tax Expense***
  Our
        effective tax rate differs from the statutory federal rate due to differences
        between income and expense recognition prescribed by the United States and
        Israeli tax laws and Generally Accepted Accounting Principles. We utilize
        different methods and useful lives for depreciating property and equipment.
        The
        recording of certain provisions results in expense for financial reporting
        but
        the amount is not deductible for income tax purposes until actually paid.
        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 to transpire, than to not transpire.
  We
        had
        net operating loss carryforwards for federal and state income tax purposes
        of
        approximately $38.5 million at September 30, 2005 and $28.5 million at September
        30, 2004. The federal net operating losses will expire if not utilized on
        various dates from 2019 through 2025. The state net operating losses will
        expire
        if not utilized on various dates from 2009 through 2013. Our Israeli subsidiary
        has capital loss carryforwards of approximately $600,000 that can be applied
        to
        future capital gains for an unlimited period of time under current tax rules.
  The
        Tax
        Reform Act of 1986 imposed substantial restrictions on the utilization of
        net
        operating losses and tax credits in the event of an ownership change of a
        corporation. Thus, in accordance with Internal Revenue Code, Section 382,
        our
        recent Initial Public Offering and other ownership changes that have transpired,
        will significantly limit our ability to utilize net operating losses and
        credit
        carryforwards.
  Our
        subsidiary had income in 2004 and 2003, resulting from its cost plus agreement
        with the parent company, whereby it charges us for research and development
        services it provides to us, plus 12.5%. However, the subsidiary is an “approved
        enterprise” under Israeli law, which means that income arising from the
        subsidiary’s approved activities is subject to zero tax under the “alternative
        benefit” path for a period of ten years. In the event of distribution by the
        subsidiary of a cash dividend out of retained earnings which were tax exempt
        due
        to the “approved enterprise” status, the subsidiary would have to pay a 10%
        corporate tax on the amount distributed, and the recipient would have to
        pay a
        15% tax (to be withheld at source) on the amounts of such distribution received.
  As
        of
        September 30, 2005, we accrued approximately $83,000; net, to reflect the
        estimated taxes that our subsidiary would have to pay if it distributed its
        accumulated earnings to us. Should the subsidiary derive income from sources
        other than the approved enterprise during the relevant period of benefits,
        this
        income will be taxable at the tax rate in effect at that time (currently
        34%,
        gradually being reduced to 30% in 2005-2008). Through September 30, 2005,
        our
        Israeli subsidiary received tax benefits of approximately $700,000.
  ***Net
        Loss***
  Our
        net
        loss decreased to $1,090,355 and $4,197,265 in the three and nine months
        ended
        September 30, 2005, respectively, from $2,168,527 and $5,735,388 for the
        comparable periods in 2004, as a result of the changes in our revenues, income,
        costs and expenses as described above.
  **Critical
        Accounting Estimates**
  While
        our
        significant accounting policies are more fully described in the notes to
        our
        audited consolidated financial statements for the year ended December 31,
        2004,
        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.
  20
  ***Revenue
        Recognition***
  In
        2003,
        we sold lifetime subscriptions to our consumer product and did not recognize
        revenue from those sales since the obligation to continue serving such content
        had no defined termination date and adequate history to estimate the life
        of the
        customer relationship was not available. Cash received from such lifetime
        licenses is reflected as long-term deferred revenues on the accompanying
        balance
        sheets. Those lifetime subscriptions amount to approximately $425,000 as
        of
        September 30, 2005. We have not yet determined what the ultimate disposition
        of
        such deferred Revenues will be, and when it will impact our Statement of
        Operations. Beginning December 2003 and throughout 2004, we generally, sold
        consumers one-year subscriptions to GuruNet. We recognize the amounts we
        received from those subscriptions over the life of the related subscription.
        Beginning April 2004, certain users who purchased lifetime subscriptions
        in 2003
        exchanged their lifetime subscriptions for free two-year subscriptions to
        a
        newer, enhanced version of the GuruNet product. The cash previously received
        from such users is being recognized as revenues over the new two-year
        subscription.
  Beginning
        January 2005, we no longer offered subscriptions to our consumer products
        and/or
        websites. Notwithstanding, we have not terminated fixed-term and lifetime
        subscriptions to GuruNet that we previously sold. This means that those users
        will continue to receive content and will not have to upgrade their software.
        The software they downloaded in conjunction with their subscription is being
        supported. Our accounting treatment relating to those subscriptions has not
        changed, since we continue to honor those subscriptions.
  As
        noted
        earlier, our business model for answers.com is now primarily an advertising-only
        model. There are various pricing plans for Internet advertisements, currently
        available in the industry. Currently, most of our ad revenue is earned from
        keyword-targeted advertisements. When a user searches sponsored keywords,
        a link
        to an advertiser’s Website is displayed. Generally, we do not contract directly
        with advertisers, but rather, obtain those advertisers through the efforts
        of a
        third party that locates advertisers seeking to display sponsored links in
        our
        product. The third party is obligated to pay us a portion of the revenue
        it
        earns from advertisers, as compensation for our sale of promotional space
        on our
        Internet properties. Amounts earned from such third parties are reflected
        as
        revenue on our statement of operations in the period in which such advertising
        services were provided.
  ***Accounting
        for Stock-based Compensation*** **
  In
        January 2003, the Financial Accounting Standards Board ("FASB") issued Statement
        of Financial Accounting Standards No. 148, “Accounting for Stock-Based
        Compensation — Transition and Disclosure, an amendment of FASB Statement No.
        123” (“SFAS 148”), which provides alternative methods of transition for a
        voluntary change to a fair value based method of accounting for stock-based
        employee compensation. In addition, SFAS 148 amends the disclosure requirements
        of Statement of Financial Accounting Standards No. 123 ("SFAS 123") to require
        prominent disclosures in annual financial statements about the method of
        accounting for stock-based employee compensation and the effect of the method
        used on reported results. We account for stock-based compensation for employees
        under APB 25, and elect the disclosure-only alternative under SFAS 123 and
        provide the enhanced disclosures as required by SFAS 148.
  We
        record
        deferred stock-based compensation expense for stock options granted to employees
        and directors if the market value of the stock at the date of grant exceeds
        the
        exercise price of the option. We recognize expenses as we amortize the deferred
        stock-based compensation amounts over the related vesting periods. The market
        value of our stock, so long as we were a private company (prior to our initial
        public offering in October 2004), was determined by us based on a number
        of
        factors including comparisons to private equity investments in us. These
        valuations are inherently highly uncertain and subjective. If we had made
        different assumptions, our deferred stock-based compensation amount, our
        stock-based compensation expense, our net loss and our net loss per share
        could
        have been significantly different. Subsequent to our initial public offering,
        stock-based compensation cost for awards to employees is determined in relation
        to the market value of our public shares.
  The
        fair
        value of stock warrants and stock options granted to non-employees are measured
        throughout the vesting period as they are earned, at which time we recognize
        a
        charge to stock-based compensation. The fair value is determined using the
        Black-Scholes option-pricing 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
        contractual life of the warrant or option. As discussed above, the market
        value
        of the underlying stock was based on assumptions of matters that are inherently
        highly uncertain and subjective. Since, prior to our IPO there had been no
        public market for our stock, and since subsequent to our IPO we have not
        had
        sufficient history to actually predict our volatility, 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 stock price volatility
        following the offering. If we had made different assumptions about the fair
        value of our stock or stock price volatility, or our estimate of the time
        stock
        warrants and stock options 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.
  21
  For
        example, in the first quarter of 2005, we estimated that the fair value of
        100,000 common stock warrants that our investment banker received in connection
        with an agreement pursuant to which it provided us with general financial
        advisory and investment banking services, to be $577,000. Such amount is
        being
        amortized over the minimum life of the agreement, which is six months. One
        of
        the assumptions driving the fair value of the warrants was the estimate of
        the
        date the warrants will be exercised. We assumed the warrants will be exercised
        on the last day before they expire, which is five years after the date the
        warrants were issued. If, for example, we had assumed that the warrants would
        be
        exercised one year after their issuance, their value, and the charge would
        have
        been approximately $146,000, rather than $577,000.
  We
        are
        required in the preparation of the disclosures required under SFAS 148 to
        make
        certain estimates when ascribing a value to employee stock options granted
        during the year. These estimates include, but are not limited to, an estimate
        of
        the average time option grants will be outstanding before they are ultimately
        exercised and converted into common stock. These estimates are integral to
        the
        valuing of these option grants. Any changes in these estimates may have a
        material effect on the value ascribed to these option grants. This would
        in turn
        affect the amortization used in the disclosures we make under SFAS 148, which
        could be material. For disclosure purposes only, the fair value of options
        granted in the past to employees was estimated on the date of grant using
        the
        minimum-value method with the following weighted average assumptions: no
        dividend yield; risk-free interest rates of 2.18% to 6.59%; and an expected
        life
        of three to five years. The fair value of options granted to employees
        subsequent to May 12, 2004, the date of our first filing with the U.S.
        Securities and Exchange Commission in connection with our IPO is measured,
        for
        disclosure purposes only, according to the Black-Scholes option-pricing model,
        with the following weighted average assumptions: no dividend yield; risk-free
        interest rates of 3.19% to 4.18%; volatility between 38.62% and 66.76%, and
        an
        expected life of four years. If we had made different assumptions than those
        noted above, the related disclosures under SFAS 148 could have been
        significantly different.
  Finally,
        the FASB recently enacted Statement of Financial Accounting Standards
        123-revised 2004 ("SFAS 123R"), "Share-Based Payment" which replaces SFAS
        123,
        Accounting for Stock-Based Compensation". The expected impact of SFAS 123R
        on
        future periods is discussed in the section of this Management’s Discussion and
        Analysis titled “Recently Issued Accounting Pronouncements”.
  ***Accounting
        For Income Taxes*** **
  As
        part
        of the process of preparing our consolidated financial statements, we are
        required to estimate our income taxes in each of the jurisdictions in which
        we
        operate. This process involves management estimating our actual current tax
        exposure together with assessing temporary differences resulting from differing
        treatment of items for tax and accounting purposes. These differences result
        in
        deferred tax assets and liabilities, which are included within our consolidated
        balance sheet. We must then assess the likelihood that our deferred tax assets
        will be recovered from future taxable income and, to the extent we believe
        that
        recovery is not likely, we must establish a valuation allowance. To the extent
        we establish a valuation allowance or increase this allowance in a period,
        we
        must include an expense within the tax item in the statement of operations.
        Significant management judgment is required in determining our provision
        for
        income taxes, our deferred tax assets and liabilities and any valuation
        allowance recorded against our net deferred tax assets. We have fully offset
        our
        US deferred tax asset with a valuation allowance. Our lack of earnings history
        and the uncertainty surrounding our ability to generate taxable income prior
        to
        the expiration of such deferred tax assets were the primary factors considered
        by management in establishing the valuation allowance. Deferred tax assets
        and
        liabilities in the financial statements result from the tax amounts that
        would
        result if our Israeli subsidiary distributed its retained earnings to us.
        This
        subsidiary is entitled to a tax holiday, as described above, yet continues
        to
        generate taxable income in respect of services provided to us, and therefore
        were the subsidiary to distribute its retained earning to us, we believe
        that
        the deferred tax asset relating to the Israeli subsidiary would be realized.
        In
        the event that our subsidiary’s products would not generate such taxable income,
        we would need to write off the deferred tax asset as an expense in the statement
        of operations. It should be noted that as the income is derived from us,
        it is
        eliminated upon consolidation.
  22
  ***Foreign
        Currency Translation*** **
  Beginning
        February 2004, our Israeli subsidiary began paying substantially all of its
        salaries linked to the U.S. dollar (“USD”), rather than the New Israeli Shekel
        (“NIS”). Based on this change, and in conjunction with all other relevant
        factors, our management has determined that the subsidiary’s functional
        currency, beginning the first quarter of 2004, is the USD. SFAS 52, Appendix
        A,
        paragraph 42 cites economic factors that, among others, should be considered
        when determining functional currency. We determined that the cash flow, sales
        price and expense factors for our subsidiary, which prior to 2004 all indicated
        functional currency in foreign currency, have changed in 2004 to indicate
        the
        functional currency is the USD.
  Our
        subsidiary’s revenue is calculated based on costs incurred plus a profit margin.
        Prior to 2004, salary expense, its primary expense, was determined in the
        foreign currency resulting in income and expenses being based on foreign
        currency. However, in 2004, a triggering event occurred that, in our opinion,
        warranted a change of the functional currency of our subsidiary to that of
        our
        currency, USD. Salary expense, the primary expense of our subsidiary, began
        to
        be denominated in USD. This led to a change with respect to the currency
        of the
        cash flow, sales price and expense economic factors and resulted in a
        determination that our subsidiary’s functional currency had changed to that of
        our functional currency.
  Had
        we
        determined that our subsidiary’s functional currency was different than what was
        actually used, we believe that the effect of such determination would not
        have
        had a material impact on our financial statements.
  **Recently
        Issued Accounting Pronouncements**
  In
        March
        2004, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No.
        03-01, “ *The
        Meaning of Other-Than-Temporary Impairment and its Application to Certain
        Investments* ”
        (“EITF
        03-1”). EITF 03-1 provides guidance on other-than-temporary impairment models
        for marketable debt and equity securities accounted for under SFAS No. 115,
        “ *Accounting
        for Certain Investments in Debt and Equity Securities* ”
        (“SFAS
        No. 115”), and non-marketable equity securities accounted for under the cost
        method. The EITF developed a basic three-step model to evaluate whether an
        investment is other-than-temporarily impaired. On September 30, 2004, the
        FASB
        issued FSP 03-1-1, “Effective Date of Paragraphs 10-20 of EITF Issue 03-1, ’The
        Meaning of Other-Than-Temporary Impairment and its Application to Certain
        Investments’,” delaying the effective date for the recognition and measurement
        guidance of EITF 03-1, as contained in paragraphs 10-20, until certain
        implementation issues are addressed and a final FSP providing implementation
        guidance is issued. Until new guidance is issued, companies must continue
        to
        comply with the disclosure requirements of EITF 03-1 and all relevant
        measurement and recognition requirements in other accounting literature.
        We do
        not expect the adoption of EITF 03-1 to have a material effect on our financial
        statements.
  In
        December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
        -
        an amendment to APB No. 29 *."* This
        Statement amends Opinion No. 29 to eliminate the exception for nonmonetary
        exchanges of similar productive assets and replaces it with a general exception
        for exchanges of nonmonetary assets that do not have commercial substance.
        A
        nonmonetary exchange has commercial substance if the future cash flows of
        the
        entity are expected to change significantly as a result of the exchange.
        This
        Statement is effective for fiscal periods beginning after June 15, 2005.
        Adoption of this statement is not expected to have a material impact on our
        results of operations and financial condition .
  In
        December 2004, the FASB issued SFAS 123R, which requires the measurement
        of all
        employee share-based payments to employees, including grants of employee
        stock
        options, using a fair-value-based method and the recording of such expense
        in
        our consolidated statements of income. We are required to adopt SFAS 123R
        in the
        first quarter of fiscal 2006. Upon adoption, the pro forma disclosures
        previously permitted under SFAS 123 no longer will be an alternative to
        financial statement recognition. We have not yet determined the impact the
        adoption of SFAS 123R will have on our financial position or results of
        operations.
  In
        May
        2005, the FASB issued SFAS No. 154 “Accounting Changes and Error Corrections”
        (“SFAS 154”), which replaces APB No. 20 “Accounting Changes”, and SFAS No. 3
“Reporting Accounting Changes in Interim Financial Statements”. SFAS 154 changes
        the requirements for the accounting for and reporting of a change in accounting
        principle, and applies to all voluntary changes in accounting principles,
        as
        well as changes required by an accounting pronouncement in the unusual instance
        it does not include specific transition provisions. Specifically, SFAS 154
        requires retrospective application to prior periods’ financial statements,
        unless it is impracticable to determine the period-specific effects or the
        cumulative effect of the change. SFAS 154 is effective for the Company beginning
        January 1, 2006.
  23
  **Liquidity
        and Capital Resources**
  ***General***
  Our
        principal sources of liquidity are our cash, cash equivalents and investment
        securities, and to a lesser extent, cash inflows from revenues.
  As
        of
        September 30, 2005, we had $21,055,014 of assets consisting of $2,635,071
        in
        cash and cash equivalents, $16,250,000 in investment securities, $569,960
        in
        other current assets and the remaining balance in property and equipment
        and
        other long-term assets. Total liabilities as of September 30, 2005, reflect
        current liabilities of $1,250,956, consisting primarily of accounts payable
        and
        accrued expenses and compensation. Long-term liabilities of $1,094,963 are
        comprised primarily of liabilities in respect of employee severance obligations
        and deferred revenues, long-term.
  Cash
        flows for the nine months ended September 30, 2005 and 2004 were as
        follows:
 
 **September
                    30, 2005**
                
                **September
                    30, 2004**Net
                    cash used in operating activities
                
                $
                (2,969,887
                )
                $
                (3,092,838
                )Net
                    cash used in investing activities
                
                $
                (10,950,990
                )
                $
                (187,862
                )Net
                    cash provided by financing activities
                
                $
                15,015,006
                
                $
                3,808,819
  Despite
        a
        net loss of $4,197,265 during the nine months ended September 30, 2005, our
        net
        cash used in operations was $2,969,887. The primary reasons for the large
        difference is that approximately $1,035,000 of our operating expenses was
        the
        result of non-cash, stock-based compensation, and due to various changes
        in our
        operating assets and liabilities. Despite a net loss of $5,735,388 during
        the
        nine months ended September 30, 2004, our net cash used in operations was
        $3,092,838. This was due to many factors, the most significant of which is
        non-cash, amortization of promissory note discounts.
  Cash
        used
        in investing activities of $10,950,990, during the nine months ended September
        30, 2005 is attributable primarily to purchases of investment securities
        of
        $26,750,000, less proceeds from the sale of investment securities, of
        $16,350,000, and to capital expenditures of $408,000. Investment securities
        consist of investments in auction rate, investment grade, corporate and
        municipal debt instruments, and auction rate preferred shares of closed-end
        investment funds that invest in long-term fixed income securities, with auction
        reset periods of 28 days, classified as available-for-sale securities and
        stated
        at fair value. Cash used in investing activities of $187,862 during the nine
        months ended September 30, 2004 resulted primarily from the purchase of the
        Answers.com domain name for $80,200 and capital expenditures of approximately
        $116,000.
  Cash
        flow
        from financing activities during the nine months ended September 30, 2005
        was
        comprised of the net proceeds, of approximately $15,015,000 from the exercise
        of
        warrants via the Warrant Reload Agreement, and from other exercises of stock
        warrants and stock options. Further details regarding such proceeds are noted
        below, in the section titled Current and Future Financing Needs, and in the
        notes to the accompanying financial statements. Cash flow from financing
        activities during the nine months ended September 30, 2004 resulted from
        the net
        proceeds of bridge notes that were issued in January and February 2004, less
        issuance costs incurred in anticipation of our October 2004 IPO.
  ***Current
        and Future Financing Needs***
  We
        have
        incurred negative cash flow from operations since our inception. We have
        spent,
        and expect to continue to spend, substantial amounts in connection with
        implementing our business strategy. We raised approximately $10,786,000,
        net of
        underwriting fees and offering expenses, through our IPO and the exercise
        of the
        over-allotment option in the last quarter of 2004. After repaying the portion
        of
        the bridge notes that did not convert to common shares, of $3,160,000,
        approximately $7.6 million remained.
  24
  In
        February 2005 we entered into the Warrant Reload Agreement with certain holders
        of warrants that were issued by us in 2004 in connection with the bridge
        financing, pursuant to which such holders exercised an aggregate of 1,871,783
        Bridge Warrants. Under the terms of the Warrant Reload Agreement, in order
        to
        provide incentive to the warrant holders to exercise their Bridge Warrants,
        for
        every share of common stock purchased by the holders through the exercise
        of
        Bridge Warrants, the Company issued to the warrant holders new warrants,
        dated
        February 4, 2005, to purchase such number of shares of common stock equal
        to 55%
        of the number of shares of common stock underlying their respective Bridge
        Warrants. As a result, we raised approximately $12.2 million, net of costs
        relating to the exercise. Further, during the nine months ended September
        30,
        2005, we raised approximately $2.8 million, from other exercises of warrants
        and
        options.
  Based
        on
        our current plans, we believe our existing cash resources will be
        sufficient to enable us to meet our planned operating needs for the next
        twelve
        months. Not withstanding the foregoing, our business strategy includes
        growth through business combinations and licensing or acquiring
        products and technologies complementary to our business, which could require
        use
        of a significant amount of our available cash.  We may therefore
        need
        to raise additional capital through future debt or equity financing to finance
        such initiatives and to finance growth.  We cannot be
        certain
        that additional financing will be available on acceptable terms, or
        at
        all.  To the extent that we raise additional funds by issuing equity
        securities, our stockholders may experience significant dilution.
  **Off-Balance
        Sheet Arrangements**
  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.
  **Obligations
        and Commitments**
  ***Operating
          leases:***
 
 We
          have
          entered into various non-cancelable operating lease agreements for offices
          and
          vehicles, for lease periods up to 5 years, expiring between 2006 and
          2010.
 
 Future
          minimum lease payments under such non-cancelable operating leases, as of
          September 30, 2005 are as follows:
 
 **Year
                    ending December 31**
                
                
                **$**2005
                
                
                78,6452006
                
                
                360,9792007
                
                
                358,7782008
                
                
                324,5992009
                
                
                316,4672010
                
                
                170,3981,609,866
  ***Other
          commitments:***
 
 In
          the
          ordinary course of business, we enter into various arrangements with vendors
          and
          other business partners, principally for content, web-hosting, marketing
          and
          investor relations arrangements. As of September 30, 2005, the commitments
          under
          such agreements, which are for initial periods between one and three years,
          amounted to approximately $160,000.
  ITEM
        3.
        CONTROLS AND PROCEDURES
 
 Based
        on
        their evaluations as of the end of the period covered in this report, our
        principal executive officer and principal financial officer have concluded
        that
        our disclosure controls and procedures (as defined in Exchange Act Rules
        13a-15(e) and 15(d)-15(e)) are effective to ensure that information required
        to
        be disclosed by us in reports that we file or submit under the Securities
        Exchange Act is recorded, processed, summarized and reported within the time
        periods specified in the rules and forms of the SEC.
  25
  We
        believe that a controls system, no matter how well designed and operated,
        is
        based in part upon certain assumptions about the likelihood of future events,
        and therefore can only provide, reasonable, not absolute, assurance that
        the
        objectives of the controls system are met, and no evaluation of controls
        can
        provide absolute assurance that all control issues and instances of fraud,
        if
        any, within a company have been detected.
  In
        addition, we have reviewed our internal controls over financial reporting
        and
        have made no changes during the quarter ended September 30, 2005,
        that our
        certifying officers concluded materially affected, or are reasonably likely
        to
        materially affect, our internal control over financial reporting.
 
 **PART
        II. OTHER INFORMATION**
 
 ITEM
        1.
        LEGAL PROCEEDINGS
  On
        July
        14, 2005, Mr. Steven Tover (“Tover”), former Vice President, Business
        Development & Sales of the Company, filed a statement of claim with the
        Regional Labor Court in Jerusalem, Israel, against (i) the Company, (ii)
        Mr.
        Robert Rosenschein (the Company’s CEO and a Chairman of the Board), and (iii)
        Mr. Steven Steinberg (the Company’s CFO) in the amount of approximately
        US$50,000, for deferred salary, severance pay and allegedly unpaid commissions.
        Tover’s action further claims that he is entitled to certain additional and
        future commissions pursuant to various business transactions and to exercise
        stock options granted to him, which, according to the Company, have expired
        at
        the close of fiscal 2004. The stock options discussed in Tover’s claim consist
        of 43,441 options to purchase such number of shares of common stock of the
        Company, with an exercise price of $2.76 per share. After consultation with
        legal counsel, management believes that the probability of Tover’s action
        prevailing is low. The named defendants completely reject the validity of
        Tover’s claims and have filed a preliminary response to the statement of claim.
        By order of the Labor Court, Tover is expected to file an amended statement
        of
        claim in the next several weeks.
 
 ITEM
        2.
        UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 Not
        applicable
  ITEM
        3.
        DEFAULTS UPON SENIOR SECURITIES
  Not
        applicable.
  ITEM
        4.
        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 At
        Answers Corporation’s Annual Meeting of Stockholders held on July 12, 2005,
        three matters were voted upon. A description of each matter and a tabulation
        of
        the votes for each of the matters follow:
 
 1.
              Proposal
                  to elect two Class I directors to hold office for a three year
                  term or
                  until their respective successors are duly elected and
                  qualified:
  VotesNominee
              
              For
              
              WithheldMark
                  A. Tebbe
              
              
              6,294,216
              
              
              44,015Lawrence
                  S. Kramer
              
              
              6,294,027
              
              
              44,204
 
 2.
              Proposal
                  to approve Answers Corporation’s 2005 Incentive Compensation
                  Plan:
 
 VotesFor
              
              Against
              
              Abstain1,202,842
              
              376,719
              
              11,625
 
 
 26
  3.
              Proposal
                  to ratify the appointment by the Audit Committee of Somekh Chaikin,
                  a
                  member of KPMG International, to serve as Answers Corporation’s
                  independent registered public accounting firm for the fiscal year
                  ending
                  December 31, 2005.
 
 VotesFor
              
              Against
              
              Abstain6,136,500
              
              21,117
              
              180,614
 
 
 ITEM
        5.
        OTHER INFORMATION
 
 Not
        applicable. ****
 
 ITEM
        6.
        EXHIBITS
 
 3.1
              Certificate
                  of Amendment dated October 14, 2005 amending the Amended and Restated
                  Certificate of Incorporation of the registrant.31.1
              Certification
                  of Principal Executive Officer required under Rule 13a-14(a) or
                  Rule
                  15d-14(a) of the Securities and Exchange Act of 1934, as
                  amended.31.2
              Certification
                  of Principal Financial Officer required under Rule 13a-14(a) or
                  Rule
                  15d-14(a) of the Securities and Exchange Act of 1934, as
                  amended.32.1*
              Certification
                  of Principal Executive Officer required under Rule 13a-14(a) or
                  Rule
                  15d-14(a) of the Securities and Exchange Act of 1934, as amended,
                  and 18
                  U.S.C. Section 1350.32.2*
              Certification
                  of Principal Financial Officer required under Rule 13a-14(a) or
                  Rule
                  15d-14(a) of the Securities and Exchange Act of 1934, as amended,
                  and 18
                  U.S.C. Section 1350.
 
 *
              The
                  certifications attached as Exhibits 32.1 and 32.2 accompany
                  this
                  Quarterly Report on Form 10-QSB pursuant to Section 906
                  of the
                  Sarbanes-Oxley Act of 2002 and shall not be deemed "filed" by Answers
                  Corporation for purposes of Section 18 of the Securities
                  Exchange Act
                  of 1934, as amended.
  27
  SIGNATURES
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
 
 ANSWERS
                  CORPORATIONDate:
                  November 7th,
                  2005
              /s/
                  Robert S. RosenscheinRobert
                  S. RosenscheinChief
                  Executive Officer(Principal
                  Executive Officer)/s/
                  Steven SteinbergSteven
                  SteinbergChief
                  Financial Officer(Principal
                  Financial and Accounting Officer)
  28
  EXHIBIT
        INDEX
 3.1
                Certificate
                    of Amendment dated October 14, 2005 amending the Amended and
                    Restated
                    Certificate of Incorporation of the registrant.31.1
                Certification
                    of Principal Executive Officer required under Rule 13a-14(a)
                    or Rule
                    15d-14(a) of the Securities and Exchange Act of 1934, as
                    amended.31.2
                Certification
                    of Principal Financial Officer required under Rule 13a-14(a)
                    or Rule
                    15d-14(a) of the Securities and Exchange Act of 1934, as
                    amended.32.1*
                Certification
                    of Principal Executive Officer required under Rule 13a-14(a)
                    or Rule
                    15d-14(a) of the Securities and Exchange Act of 1934, as amended,
                    and 18
                    U.S.C. Section 1350.32.2*
                Certification
                    of Principal Financial Officer required under Rule 13a-14(a)
                    or Rule
                    15d-14(a) of the Securities and Exchange Act of 1934, as amended,
                    and 18
                    U.S.C. Section 1350.
 
 *
                The
                    certifications attached as Exhibits 32.1 and 32.2 accompany
                    this
                    Quarterly Report on Form 10-QSB pursuant to Section 906
                    of the
                    Sarbanes-Oxley Act of 2002 and shall not be deemed "filed" by
                    Answers
                    Corporation for purposes of Section 18 of the Securities
                    Exchange Act
                    of 1934, as amended.
  29