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  As Of               Filer                 Filing     As/For/On Docs:Pgs              Issuer               Agent

10/15/04  Answers CORP                      424B3                  1:100                                    930413

Document/Exhibit                   Description                      Pages   Size 

 1: 424B3       Prospectus                                          HTML    781K 

Pursuant to Rule 424(b)(3)
Registration No. 333-115424

PROSPECTUS

2,350,000 Shares

Common Stock

     This is our initial public offering of 2,350,000 shares of our common stock. The offering price per share of our common stock is $5.00.

     We have granted the underwriters a 45-day option to purchase up to 352,500 additional shares of our common stock solely to cover over-allotments, if any. We also have agreed to sell to the underwriters on completion of the offering, for a total purchase price of $100.00, an option entitling the underwriters or their assigns to purchase up to an aggregate of 117,500 shares of our common stock at a per-share offering price of $6.25.

     There is presently no public market for our securities and we cannot assure you that a market will develop. Our common stock will be listed on the American Stock Exchange under the symbol GRU, on or promptly after the date of this prospectus.

     The registration statement of which this prospectus forms a part also registers up to 2,557,996 shares of our common stock on behalf of certain selling stockholders that may be sold by them for their accounts from time to time in open market transactions. An aggregate of 490,678 of such shares are issuable upon the conversion of $1,840,000 principal amount of promissory notes purchased in our bridge financing in January and February 2004 and an aggregate of 2,067,318 such shares are issuable upon the exercise of outstanding warrants issued in connection with the bridge financing. The shares of our common stock offered by the selling stockholders are not part of the underwritten offering. The selling stockholders may not sell the shares of common stock prior to 12 months from the date of this prospectus without the prior consent of our underwriters or under certain conditions.

     These securities involve a high degree of risk. We are considered to be in unsound financial condition. Persons should not invest unless they can afford to lose their entire investment. See “Risk Factors” beginning on page 5 of this prospectus.

     Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

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Excludes additional compensation consisting of: (i) a non-accountable expense allowance equal to 3% of the gross proceeds of the offering, or $0.15 per share ($352,500 in total), payable to Maxim Group LLC and EarlyBirdCapital, Inc., our underwriters in the offering, and (ii) other expenses of the offering estimated to be approximately $1,050,000.

     We are offering our securities for sale on a firm commitment basis as set forth under “Underwriting.” Our underwriters expect to deliver our common stock to purchasers on or about October 18, 2004.

The date of this prospectus is October 13, 2004

This prospectus contains registered service marks, trademarks and trade names of GuruNet Corporation.

     You should only rely on the information contained in this prospectus in deciding whether to purchase our shares. We have not authorized anyone to provide you with information different from that contained in this prospectus.

     We obtained statistical data, market data and certain other industry data and forecasts used throughout this prospectus from market research, publicly available information and industry publications. Industry publications generally state that they obtain their information from sources that they believe to be reliable, but they do not guarantee the accuracy and completeness of the information. Similarly, while we believe that the statistical data, industry data and forecasts and market research are reliable, we have not independently verified the data, and we do not make any representation as to the accuracy of the information. We have not sought the consent of the sources to refer to their reports in this prospectus.

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PROSPECTUS SUMMARY

     This summary highlights information contained elsewhere in this prospectus. It is not complete and does not contain all of the information that you should consider before investing in our common stock. Before making a decision to purchase our shares, you should read this entire prospectus, including the audited financial statements and related notes and risk factors. Unless otherwise stated in this prospectus, references to “we,” “us” or “our company” refer to GuruNet Corporation and our wholly-owned Israeli subsidiary, Atomica Israel Technologies Ltd.

Overview

     We provide integrated online reference answers and possess the technology that enables rapid delivery of concise information over the Internet. Since our inception in 1998, we have acquired and developed technology that intelligently and automatically integrates and retrieves information from disparate sources and delivers the result in a single consolidated view. We seek to generate revenues by selling subscriptions for our products; licensing and co-branding our technology; establishing partnerships with third-party Websites; and by monetizing visitor traffic to our Website in the form of sponsored links and paid advertisements.

     Our answer engine delivers snapshot, multi-faceted definitions and explanations from credible, attributable reference sources about numerous topics in our database. We seek to differentiate ourselves by providing our users with relevant, high quality reference information that enhances results achieved through traditional search engines. Most search engines respond to an Internet user’s query by displaying a long list of links to other Websites that in some way may be related to the query term. Our answer engine automatically displays relevant, narrative responses to a user’s query without requiring the user to review a list of hyperlinks offered in response to a query. Our answer engine also includes tabs that provide other related information in various formats such as charts, graphs and maps.

We cull our reference information from over 100 reference sources such as:

• Houghton Mifflin’s American Heritage Dictionary (Fourth Edition);
  
• Roget’s II New Thesaurus (Third Edition); and
  
• Columbia University Electronic Encyclopedia (Sixth Edition).
  

     By displaying the source on each web page, we enable our users to make their own independent evaluation as to the reliability of our information.

     Our answer engine works within any Windows-based program by accessing our online library over the Internet using software downloaded on the Microsoft Windows^® operating system. In June 2004, we launched a beta version of our downloadable software that enables global hotkey access from within most applications running on the Apple Macintosh using the OS/X operating system. Once downloaded, a user working in any e-mail, spreadsheet, word processing, database or other program or application need only “alt-click” on a word or phrase within a document and our answer engine will access our online library and display information about that word or phrase in a pop-up window. Our answer engine analyzes surrounding words in context for a more accurate response. For example, Ford Motor Company is different from Henry Ford or Harrison Ford. Our answer engine also may be accessed through a toolbar for query lookup while using Microsoft Internet Explorer for Windows^® or by accessing our destination Website without the need to download any software. While Web users enjoy our integrated reference information, our Web-based product does not provide the “alt-click” command, reference source library tree view and context analysis that we include in our download software version.

Our Strategy

     Our goal is to establish GuruNet as a leading answer engine service provider for reference information on the Internet. We plan to generate revenues by:

• directly selling subscriptions to our products to consumers;
  
• attracting advertising revenues by providing advertisers with focused and targeted audiences for their products;
  
• selling bulk licenses at a discount directly or through resellers to multi-user organizations;
  

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• partnering with other Websites that would place a topic lookup bar inside their own Web pages, thus increasing traffic to our Website, which in turn will enhance our revenues from advertising; and
  
• bundling our products with various computer equipment manufacturers, software vendors and Internet portal properties, thereby increasing the number of users and, potentially, subscribers to our products.
  

The key elements of our strategy are to:

• Continue strengthening the GuruNet brand. Our branding strategy centers on positioning GuruNet as an answer engine rather than a more traditional earch engine for users needing quick, concise and accurate information rather than a long list of links to sift through.
  
• Continue developing our reference information. We intend to continue entering into arrangements with content providers to display their reference information in response to our users’ queries.
  
• Expand our ability to solicit paid advertising by continuing to develop our ability to target our audience. We intend to continue to develop and monitor our subscription base so that our advertisers may effectively reach their target audiences and we may enjoy increased revenues from paid search results.
  
• Develop co-branding partnerships and revenue-sharing arrangements with third-party Websites and service providers seeking to enhance their users’ experience. We believe that opportunities exist for partnering with other Websites and service providers to enhance their users’ experience and our brand and revenues. In August and September 2004, we signed agreements with two partners, pursuant to which we will provide our reference solution to users of their services. One of the agreements is with Comet Systems, Inc., a leader in connected, intelligent desktop software. The second agreement is with A9.com, Inc., a new search engine owned by Amazon.com, Inc. A9.com, Inc. launched their search engine, with GuruNet integrated as a reference source, on September 15, 2004.
  

Bridge Financing

     In January and February 2004, we completed our bridge financing, consisting of $5.0 million aggregate principal amount of bridge notes bearing interest at an annual rate of 8%. The bridge notes are due on the earlier of January or February 2005 and the consummation of this offering. Interest from the date of issuance through September 30, 2004 was paid in cash. Interest is payable in cash each month thereafter until the consummation of this offering. Of the aggregate bridge notes outstanding, $3,160,000 principal amount of the bridge notes will be repaid in cash from the proceeds of this offering and $1,840,000 of the principal amount of the bridge notes will be converted on the date of this prospectus into common stock at a conversion price of $3.75 per share. In connection with the issuance of the bridge notes, we issued bridge warrants to purchase an aggregate of 1,700,013 shares of common stock exercisable commencing on December 31, 2004 at $7.20 per share. In the third quarter of 2004, our board of directors authorized the issuance of an aggregate of 750,002 additional warrants to the bridge noteholders. On the date of this prospectus, each noteholder will receive a pro rata share of these additional warrants (approximately .44 warrant for each bridge warrant held). These additional warrants will contain terms identical to the bridge warrants except for certain expiration provisions. In October 2004, the National Association of Securities Dealers, Inc. determined that shares issuable upon conversion of bridge notes and exercise of bridge warrants held by certain bridge noteholders in our bridge financing constituted underwriter’s compensation, because of the relationship between these noteholders and one of our underwriters. As a result, these noteholders are contractually obligated to surrender their 648,534 warrants to us without consideration and have their $1,350,000 aggregate principal amount of bridge notes entirely repaid instead of partially or completely converted into common stock. See “Description of Securities — Other Outstanding Securities — Bridge Notes — Bridge Warrants” for a more detailed description of the bridge notes and warrants.

     Holders of the bridge notes and bridge warrants entered into lock-up agreements under which they have agreed not to sell or otherwise dispose of their shares of common stock underlying their notes and warrants without the consent of the underwriters except as follows: sales of the shares underlying the bridge notes and bridge warrants following the date of this prospectus through 180 days after the date of this prospectus may be at per share prices of no less than $7.50; and sales of the shares underlying the bridge notes and bridge warrants made following the 180th day after the date of this prospectus through the first anniversary of the date of this prospectus may be made at per share prices of no less than $5.00. The bridge warrants are not exercisable until December 31, 2004. The underwriters have advised us that in determining whether to give or withhold their consent to any sale within the applicable lockup period, they will consider the market price and volume of our stock at such time and whether such

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sale would have an adverse effect on the market for our common stock. See “Description of Securities — Other Outstanding Securities — Lock-Up Agreements” for a more detailed description of the lock-up agreements.

Corporate Information

     We were incorporated as a Texas corporation in December 1998, and reorganized as a Delaware corporation in April 1999. In January 2004, we changed our name from Atomica Corporation to GuruNet Corporation. Our principal executive office is located at Jerusalem Technology Park, Building 98, Jerusalem 91481, Israel, and our telephone number is +972-649-5000. Our Website is located at “http://www.GuruNet.com”. Information contained in our Website shall not be deemed to be a part of this prospectus.

• no exercise of the underwriters’over-allotment option to purchase up to 352,500 shares of our common stock;
  
• no exercise of the underwriters’ purchase option to purchase up to 117,500 shares of our common stock;
  
• the exclusion of 804,249 shares of common stock reserved for issuance upon exercise of outstanding options granted under our stock option plans;
  
• the exclusion of 760,900 shares of common stock reserved for issuance upon exercise of options available for future grant under our 2004 Stock Option Plan;
  
• the exclusion of 35,651 shares of common stock reserved for issuance upon exercise of non-plan options granted to certain consultants;
  
• the exclusion of 2,067,318 shares of common stock issuable upon the exercise of warrants issued or to be issued in connection with our bridge financing;
  

and reflects:

• 490,678 shares of our common stock issuable upon the conversion on the date of this prospectus of $1,840,000 principal amount of bridge notes issued in our bridge financing.
  

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SELECTED SUMMARY FINANCIAL DATA

     The following table summarizes the relevant financial data for our business and should be read with our consolidated financial statements, which are included in this prospectus.

The following table summarizes our balance sheet data as of June 30, 2004.

The as adjusted information gives effect to:

• receipt of net proceeds of approximately $9,290,000 from the sale of 2,350,000 shares of our common stock at an assumed offering price of $5.00 per share;
  
• interest (cash and non-cash charges relating to the bridge note discounts and deferred charges) through September 30, 2004; and
  
• the conversion of $1,840,000 principal amount of our outstanding bridge notes into 490,678 shares of common stock, and the repayment of the other $3,160,000 of bridge notes.
  

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RISK FACTORS

     An investment in our shares involves a high degree of risk, and should not be purchased by anyone who cannot afford to lose their entire investment. You should consider carefully the risks set forth in this section, together with the other information contained in this prospectus, before making a decision to invest in our shares. We believe that the risks and uncertainties described below are all of the material risks that we will face. Our business, operating results and financial condition could be seriously harmed and you could lose your entire investment by the occurrence of any of the following risks.

Risks Related to our Business

We have a limited operating history on which to evaluate our potential for future success. This makes it difficult to evaluate our future prospects and the risk of success or failure of our business.

     We began our operations in 1998 and your evaluation of our business and prospects will be based on our limited operating history. Consequently, our historical results of operations may not give you an accurate indication of our future results of operations or prospects. You must consider our business and prospects in light of the risks and difficulties we will encounter as an early-stage company in a new and rapidly evolving market. We may not be able to successfully address these risks and difficulties, which could materially harm our business and operating results.

We have experienced significant and continuing operating losses. From our inception in 1998 through June 30, 2004, we have incurred accumulated net losses of approximately $37.6 million and negative cash flows from operations of approximately $30.3 million. If such losses continue, we may not be able to continue our operations and you may lose your entire investment.

     We incurred operating losses of $2,762,325 in 2003 and $7,549,011 in 2002. Furthermore, we incurred operating losses of $1,685,371 and $1,468,186 for the six months ended June 30, 2004 and 2003, respectively. In addition, during the remainder of 2004, we will experience non-recurring, non-cash charges of approximately $1,175,537, representing the amortization of the original issue discount in connection with the bridge financing that we completed prior to the offering and amortization of charges related to the warrants we will issue to the noteholders on the date of this prospectus. From our inception in 1998 through June 30, 2004, our operations had been funded almost entirely through the proceeds of approximately $38,000,000 that we received from the issuance of four series of convertible preferred stock between December 1998 and June 2000, and the issuance of the bridge notes in the bridge financing. From our inception through June 30, 2004, we incurred accumulated net losses of $37,572,459. If we continue to experience losses, the value of your investment could decline significantly and if we do not consummate the offering, we may not be able to continue our operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources,” for a more detailed description of our capital resources.

Our most recent independent public accounting firm’s report contains an explanatory paragraph that expresses substantial doubt about our ability to continue as a going concern.

     As of December 31, 2003, our stockholders’ deficit was $1,044,446 and we had a working capital deficit of $752,934. Primarily, as a result of our losses, limited cash balances and debt obligations, our independent auditors have included in their report an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is contingent upon the successful completion of the offering or obtaining alternate financing. If we are not able to complete the offering or obtain alternate financing, we may be forced to cease our operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Current and Future Financing Needs,” for a more detailed description of our financial condition.

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If our sales do not increase substantially, we will need to seek additional financing which we may be unable to obtain on favorable terms when required, or at all, and we may therefore be unable to continue funding our operations.

     We currently anticipate that the net proceeds of the offering, together with our available funds, will be sufficient to meet our anticipated needs for working capital and capital expenditures through at least the next 12 months. However, we may need to raise additional funds prior to the expiration of this period or at a later date. We cannot be certain that additional financing will be available to us on favorable terms when required, or at all.

If we are unable to retain current subscribers and attract new subscribers, we will not be able to generate revenues, which would likely result in our inability to continue our business.

     Given the wide availability of free search and reference sites, we may not be able to retain our current subscribers and attract additional subscribers in a cost-effective manner. If our subscription base does not increase significantly, our business, results of operations and financial condition could be materially adversely affected.

We face risks relating to the duration of, and our dependence on, our content provider agreements. Our failure to maintain commercially acceptable content provider relationships would result in a less attractive product to consumers, and therefore subject us to lost revenue as a result of a loss of consumers and advertisers.

     We are heavily dependent on license agreements with our content providers, which are generally for one-year terms. There can be no assurance that we will be able to renew these contracts at all or on commercially acceptable terms or that our costs with respect to these contracts will not increase prohibitively following any renewal. If we are unable to contain the costs of these agreements or, if renewal is not possible, or we are unable to develop relationships with alternative providers of content or maintain and enhance our existing relationships, our product will be less attractive to subscribers, which could result in a decrease in new subscribers and a reduction in renewals.

We have little control over the content of third-party Websites, and failure to provide users with quality reference information could result in a less attractive product to consumers, and therefore subject us to lost revenue as a result of a loss of consumers and advertisers.

     Our Internet search products are designed to directly link our users to a page within a third-party Website that contains an answer to the user’s question. We have little control over the content of these third-party Websites. If these third-party Websites do not contain quality, current information, the utility of our product to the user will be reduced, which could deter new subscribers from purchasing our products.

We may be prevented from displaying third-party content, which could result in a less attractive product to consumers, and therefore subject us to lost revenue as a result of a loss of consumers and advertisers.

     When our answer engine attempts to direct the user to a page within a third-party’s Website, the company administering the site sometimes automatically redirects users to that company’s own home page. If third-party companies prevent us from directly linking our users to pages within their Websites, and if there are no comparable alternative Websites to which we can direct our users, the utility and attractiveness of our products to users will be reduced. If the utility of our products diminishes, traffic on our Websites will likely fall, which would reduce our ability to charge for subscriptions and attract advertising.

We face risks relating to our use of framing third party Websites inside our Website. If our framing functionality is challenged, we may be subject to litigation which could require us to either cease framing or pay the third party Website owner, either of which could decrease the value of our product to users resulting in lost revenues.

     Unauthorized “framing” creates potential copyright and trademark issues as well as potential false advertising claims. Framing occurs when we bring to our Website someone else’s Website that is being viewed by an Internet user and the other Website becomes “framed” by our site. Though some lawsuits on framing have been filed, to our knowledge none so far has resulted in fully litigated opinions. There can be no assurance that our framing functionality will not be challenged. In the event of a successful challenge, we may be required to cease this functionality, seek a license from the Website owner, pay damages or royalties or otherwise be required

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to change the way we connect to certain other Websites. Any of these actions could have a material adverse effect on our products and revenues.

We are dependent upon maintaining and expanding our computer and communications systems. Failure to do so could result in interruptions and failures of our product which would make our product less attractive to consumers, and therefore subject us to lost revenue as a result of a loss of consumers and advertisers.

     Our ability to provide high quality customer service largely depends on the efficient and uninterrupted operation of our computer and communications systems to accommodate the consumers and advertisers using our products. Our failure to maintain high capacity data transmission without system downtime and improve our network infrastructure would adversely affect our business and results of operations. We believe that our current network infrastructure is insufficient to support a significant increase in the use of our products. Although we are enhancing and expanding our network infrastructure, we have experienced periodic interruptions and failures including problems associated with customers downloading our products, which we believe will continue to occur.

If we were to lose the services of our key personnel, we may not be able to execute our business strategy which could result in the failure of our business.

     Our future ability to execute our business plan depends upon the continued service of our executive officers and other key technology, marketing, sales and support personnel. Except for Robert S. Rosenschein, our Chief Executive Officer, our employment agreements with our officers and key employees are terminable by either party upon 30-90 days notice. If we lost the services of one or more of our key employees, or if one or more of our executive officers or employees joined a competitor or otherwise competed with us, our business may be adversely affected and our stock price may decline. In particular, the services of key members of our research and development team would be difficult to replace. We cannot assure you that we will be able to retain or replace our key personnel. We have key person life insurance in the amount of $1,000,000 for Robert Rosenschein, but not for any of our other officers.

Our ability to utilize net operating loss carryforwards or investment tax credits will be limited by a change in our ownership, which would result in an increase in our tax liability.

     At June 30, 2004 and 2003, we had estimated net operating loss carryforwards of approximately $27.5 million and $21 million, respectively, for U.S. federal and state income tax purposes that will expire on various dates from 2019 through 2024. The bridge financing and the offering are likely to result in a change of control in ownership, as defined in Section 382 of the Internal Revenue Code of 1986, as amended. A change in our ownership is likely to limit our ability to utilize our net operating loss carryforwards, which could adversely affect our results of operations and our share price. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Income Tax Expense,” for a more detailed discussion of net operating loss carryforwards.

Risks Related to our Industry

We are, and may in the future be, subject to intellectual property rights claims, which are costly to defend, could require us to pay damages and could limit our ability to use certain technologies in the future and thereby result in loss of customers and revenue.

     Litigation regarding intellectual property rights is common in the Internet and software industries. We expect that Internet technologies and software products and services may be increasingly subject to third-party infringement claims as the number of competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any claims could result in costly litigation and be time consuming to defend, divert management’s attention and resources, cause delays in releasing new or upgrading existing products or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may not be available on acceptable terms, if at all.

     There can be no assurance that our products do not infringe the intellectual property rights of third parties. A successful claim of infringement against us and our failure or inability to license the infringed or similar technology or content could adversely affect our business.

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We may not be able to protect the intellectual property rights upon which our business relies, including our domain name, patents, proprietary technology and confidential information, which could result in our inabilty to utilize our technology platform, patent or domain name, without which we may not be able to provide our products.

     Our ability to compete with other software companies depends in part upon the strength of our proprietary rights in our technologies. Unauthorized use by others of our proprietary technology could result in an increase in competing products and a reduction in our sales. We rely on patent, trademark, trade secret and copyright laws to protect our technology. We cannot be certain, however, that the steps that we have taken to protect our proprietary rights to date will provide meaningful protection from unauthorized use by others. If we must pursue litigation in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others, we may not prevail and we are likely to incur substantial expenditures and divert valuable resources in the process. In addition, many foreign countries’ laws may not protect us from improper use of our proprietary technologies. Consequently, we may not have adequate remedies if our proprietary rights are breached or our trade secrets are disclosed.

New technologies could block the display of our advertisements, which would diminish the likelihood of generating revenues from advertisements and adversely affect our operating results.

     Technologies may be developed to block the display of our advertisements. We expect that a portion of our net revenues will be derived from fees paid to us by advertisers in connection with the display of advertisements on our destination Website. As a result, ad-blocking technology could, in the future, adversely affect our operating results.

Government regulation and legal uncertainties may require us to incur significant expenses in complying with any new regulations.

     The laws and regulations applicable to the Internet and our products are evolving and unclear and could damage our business. There are currently few laws or regulations directly applicable to access to, or commerce on, the Internet. Due to the increasing popularity and use of the Internet, it is possible that laws and regulations may be adopted, covering issues such as user privacy, pricing, taxation, content regulation, quality of products and services, and intellectual property ownership and infringement. This legislation could expose us to substantial liability as well as dampen the growth in use of the Internet, decrease the acceptance of the Internet as a communications and commercial medium, or require us to incur significant expenses in complying with any new regulations. Because the increased use of the Internet has burdened the existing telecommunications infrastructure and many areas with high Internet usage have begun to experience interruptions in phone services, local telephone carriers have petitioned the FCC to regulate the Internet and to impose access fees. Increased regulation or the imposition of access fees could substantially increase the costs of communicating on the Internet, potentially decreasing the demand for our products. A number of proposals have been made at the federal, state and local level that would impose additional taxes on the sale of goods and services through the Internet. Such proposals, if adopted, could substantially impair the growth of electronic commerce and could adversely affect us. Moreover, the applicability to the Internet of existing laws governing issues such as property ownership, copyright, defamation, obscenity and personal privacy is uncertain. We may be subject to claims that our products violate such laws. Any new legislation or regulation in the United States or abroad or the application of existing laws and regulations to the Internet could damage our business and cause our stock price to decline.

     Due to the global nature of the Internet, it is possible that the governments of other states and foreign countries might attempt to regulate its transmissions or prosecute us for violations of their laws. We might unintentionally violate these laws. Such laws may be modified, or new laws may be enacted, in the future. Any such development could damage our business.

Our long-term financial viability may depend upon the growth and acceptance of Internet advertising as an effective alternative to traditional advertising media. If the market for Internet advertising does not continue to grow, our revenues and operating results could suffer.

     Although we currently derive an insignificant portion of our revenues from advertising sources, we may derive a greater percentage of our revenues from advertising sources in the future and compete with traditional media including television, radio and print, in addition to other Websites, for a share of advertisers’ total advertising

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expenditures. We may face the risk that advertisers might find Internet advertising to be less effective than traditional media at promoting their products or services and may further reduce or eliminate their expenditures on Internet advertising. Many advertisers and advertising agencies have only limited experience advertising on the Internet and have not devoted a significant portion of their advertising expenditures to Internet advertising. Acceptance of the Internet among advertisers will depend, to a large extent, on the perceived effectiveness of Internet advertising and the continued growth of commercial usage of the Internet. Filter software programs that limit or prevent advertising from being displayed on a user’s computer are available. It is unclear whether this type of software will become widely accepted, but if it does, it would negatively affect Internet-based advertising. Our business could be seriously harmed if the market for Internet advertising does not continue to grow.

Risks Related to the Offering

A substantial portion of the net proceeds from the offering will be used to repay our bridge notes and will be unavailable for working capital.

     $3,160,000 of the net proceeds of the offering will be used to repay the principal of a portion of the outstanding bridge notes and will not be available for any other purposes. As a result, only approximately $6,130,000 of the net proceeds from this offering will be available to meet our ongoing operating needs and expansion plans.

Our stock price after the offering could be below the offering price.

     The offering price of our common stock was arbitrarily determined by negotiations between us and our underwriters and does not necessarily bear any relationship to our book value, assets, financial condition, or to any other established criteria of value. Our common stock price after the offering could be below the offering price.

There has previously been no active public market for our common stock and our stockholders may not be able to resell their shares at or above the price at which they purchased their shares, or at all.

     Prior to the offering, there has been no active public market for our common stock. We cannot predict the extent to which a trading market will develop or how liquid that market might become. The initial public offering price may not be indicative of prices that will prevail in the trading market. The trading price of our common stock following the offering is therefore likely to be highly volatile and could be subject to wide fluctuations in price in response to various factors, some of which are beyond our control. These factors include:

• Quarterly variations in our results of operations or those of our competitors;
  
• Announcements by us or our competitors of acquisitions, new products, significant contracts, commercial relationships or capital commitments;
  
• Disruption to our operations or our data centers;
  
• Commencement of, or our involvement in, litigation;
  
• Any major change in our board or management;
  
• Changes in governmental regulations or in the status of our regulatory approvals; and
  
• General market conditions and other factors, including factors unrelated to our own operating performance.
  

     In addition, the stock market in general, and the market for technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Such fluctuations may be even more pronounced in the trading market shortly following this offering. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

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You will suffer an immediate and substantial dilution in the shares you purchase.

     The initial public offering price of $5.00 per share of common stock is substantially higher than the pro forma net tangible book value per share of our outstanding shares immediately after the offering. As a result, investors purchasing shares in the offering will incur immediate and substantial dilution of approximately $3.41 per share or approximately 68.2% of the assumed offering price. See “Dilution” for a more detailed description of dilution you will experience if you purchase our shares in the offering. The exercise of outstanding options and warrants and future equity issuances may result in further dilution to investors.

There may be substantial sales of our common stock after the expiration of lock-up periods, which could cause our stock price to fall.

     After the offering, 4,568,051 shares of our common stock will be outstanding. All of the shares of our common stock sold in the offering will be freely tradable, except for shares purchased by holders subject to lockup agreements or by any of our existing “affiliates” as that term is defined in Rule 144 under the Securities Act, which generally includes officers, directors or 10% stockholders. Of the 4,568,051 shares of our common stock to be outstanding on the closing date of the offering, 1,953,168 shares will be restricted as a result of securities laws and lock-up agreements that holders have signed that restrict their ability to transfer our stock for either 12 or 18 months after the date of this prospectus. Of our outstanding restricted securities, 343,181 shares of restricted stock held by affiliates will be available for sale in the public market 18 months after the date of this prospectus and 1,119,309 out of the 1,372,048 shares of common stock held by investors that converted our preferred stock into common stock will be available for sale in the public market 12 months after the date of this prospectus or 6 months after the date of this prospectus if the stock is trading at $9.00 per share. Further, 490,678 shares of restricted stock held by investors in the bridge financing, representing all of the shares underlying the bridge notes which are converted into common stock on the date of this prospectus, will be available for sale in the public market 12 months after the date of this prospectus or within 180 days of the date of this prospectus and through the first anniversary date of this prospectus if such shares are sold at certain threshold per share prices. In addition, an aggregate of 2,067,318 shares of our common stock are issuable commencing December 31, 2004 upon the exercise of bridge warrants that are subject to the lock-up described in the preceding sentence. The underwriters may waive the terms of these lockups. Sales of a substantial number of shares of our common stock could cause the price of our securities to fall and could impair our ability to raise capital by selling additional securities. See “Other Outstanding Securities — Lock-Up Agreements” for a more detailed description of the lock-up agreements.

You will have limited ability to influence corporate matters, any actions you may not agree with may be implemented by our management.

     After the offering, investors in the offering will hold 2,350,000 shares of our common stock, representing approximately 51.4% of our outstanding shares. Therefore, such investors will not be in a position to control our management and will not, as a result of such ownership, be able to prevent any corporate transactions.

     After the offering, our executive officers, directors and principal stockholders will control approximately 26.0% of our outstanding shares. If these stockholders act together along with investors other than those in the offering, they may be able to exert significant control over our management and affairs requiring stockholder approval, including approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control and might adversely affect the market price of our common stock. This concentration of ownership may not be in the best interests of all our stockholders.

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

     Our certificate of incorporation authorizes the issuance of up to 1,000,000 shares of “blank check” preferred stock with designations, rights and preferences as may be determined from time to time by our board of directors. Accordingly, our board of directors is empowered, without stockholder approval, to issue a series of preferred stock with dividend, liquidation, conversion, voting or other rights which could dilute the interest of, or impair the voting power of, our common stockholders. The issuance of a series of preferred stock could be used as a method of discouraging, delaying or preventing a change in control. Although we do not presently intend to issue any

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shares of preferred stock, we may do so in the future. See “Description of Securities — Preferred Stock,” for a more detailed description.

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

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

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

Maxim Group LLC’s lack of experience in public offerings could result in lack of support for our common stock in the public market resulting in a decline of our stock price.

     Although certain principals of Maxim Group LLC have extensive experience in the securities industry, Maxim Group LLC was formed less than two years ago and thus has limited experience acting as an underwriter in public offerings. This lack of operating history may have an adverse effect on the offering.

Risks Related to our Location in Israel

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

     Because our operations are conducted in Israel and our principal offices and sole research and development facilities are located in Jerusalem, Israel, our operations are directly affected by economic, political and military conditions affecting Israel. Specifically, we could be adversely affected by:

• any major hostilities involving Israel;
  
• a full or partial mobilization of the reserve forces of the Israeli army;
  
• the interruption or curtailment of trade between Israel and its present trading partners;
  
• risks associated with the fact that a significant number of our employees and key officers reside in what are commonly referred to as occupied territories; and
  
• a significant downturn in the economic or financial conditions in Israel.
  

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

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     Furthermore, there are a number of countries that restrict business with Israel or with Israeli companies, which may limit our ability to make sales in those countries. See “Conditions in Israel,” for a more detailed description.

Our operations could be disrupted as a result of the obligation of personnel to perform military service.

     Our key employees and executive officers all reside in Israel, and many of them are obligated to perform annual military reserve duty. Our operations could be disrupted by the absence for a significant period of one or more of our directors, officers or key employees due to military service. Any such disruption could adversely affect our business, results of operations and financial condition.

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

     We have non-competition agreements with all of our employees, almost all of which are governed by Israeli law. These agreements prohibit our employees from competing with or working for our competitors, generally during and for up to 12 months after termination of their employment. However, Israeli courts are reluctant to enforce non-compete undertakings of former employees and tend, if at all, to enforce those provisions for relatively brief periods of time in restricted geographical areas and only when the employee has obtained unique value to the employer specific to that employer’s business and not just regarding the professional development of the employee.

The change in the exchange rate between the United States dollar and foreign currencies is volatile and may negatively impact our costs which could adversely affect our operating results.

     We incur certain of our expenses for our operations in Israel in New Israeli Shekels (NIS) and translate these amounts into United States dollars for purposes of reporting consolidated results. As a result, fluctuations in foreign currency exchange rates may adversely affect our expenses and results of operations as well as the value of our assets and liabilities. Fluctuations may adversely affect the comparability of period-to-period results. In addition, we hold foreign currency balances, primarily NIS, that will create foreign exchange gains or losses, depending upon the relative values of the foreign currency at the beginning and end of the reporting period, which may affect our net income and earnings per share. Although we may use hedging techniques in the future (which we currently do not use), we may not be able to eliminate the effects of currency fluctuations. Thus, exchange rate fluctuations could have a material adverse impact on our operating results and stock price.

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

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

We are subject to certain employee severance obligations, which may result in an increase in our expenditures.

     Under Israeli law, employers are required to make severance payments to dismissed employees and employees leaving employment in certain other circumstances, on the basis of the latest monthly salary for each year of service. This obligation may result in an increase in our expenditures.

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FORWARD-LOOKING STATEMENTS

     Some of the statements in this prospectus are forward-looking statements that involve risks and uncertainties. In some cases, you can identify forward-looking statements by our use of words such as “may,” “could,” “should,” “project,” “believe,” “anticipate,” “expect,” “plan,” “estimate,” “forecast,” “potential,” “intend,” “continue” or the negative or other variations of these words and other similar words. Forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause our actual results, performance, achievements or industry results to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. These risks, uncertainties and other factors include, among others, those discussed in more detail under the heading “Risk Factors” and elsewhere in this prospectus.

     Our forward-looking statements are based on our current expectations, intentions and beliefs as of the date of this prospectus. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements or other future events. You should not place undue reliance on our forward-looking statements. The safe harbors for forward-looking statements provided in the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act do not apply to the offering made in this prospectus because the safe harbors do not apply to forward-looking statements made in connection with an initial public offering.

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USE OF PROCEEDS

     We estimate that we will receive net proceeds of $9,290,000 from the sale of 2,350,000 shares of common stock being offered at an initial public offering price of $5.00 per share after deducting $1,410,000 for underwriting discounts and commissions and our underwriters’ non-accountable expense allowance and estimated expenses of approximately $1,050,000 which includes legal, accounting, printing costs and various fees associated with the registration and listing of our securities. If the underwriters exercise their right to purchase an additional 352,500 shares of common stock, we will receive an additional $1,603,875 after deducting $158,625 for underwriting discounts and commissions. Assuming no exercise of our underwriters’ over-allotment option, we intend to use the net proceeds of the offering as follows:

     Pending any such uses of the proceeds of this offering, we will invest the net proceeds of this offering in short-term, investment grade, interest-bearing instruments. We believe that with the net proceeds from the offering, together with funds generated from operations, we will meet our anticipated capital funding needs for at least the next 12 months.

     The allocation of the net proceeds of the offering set forth above represents our best estimates based upon our current plans and assumptions regarding industry and general economic conditions and our future revenues and expenditures. If any of these factors change, it may be necessary or advisable for us to reallocate some of the proceeds within the above-described categories or to use portions thereof for other purposes, such as the acquisition of other technologies or products. We have no definitive plan with respect to such other possible uses.

     Investors will be relying on the judgment of our management regarding application of the proceeds of the offering.

Dividend Policy

     To date, we have not paid any dividends on our common stock. Any payment of dividends in the future is within the discretion of our board of directors and will depend on our earnings, if any, our capital requirements and financial condition and other relevant factors. Our board of directors does not intend to declare any cash or other dividends in the foreseeable future, but intends instead to retain earnings, if any, for use in our business operations.

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DILUTION

     Dilution is the difference between the $5.00 purchase price you will pay for each share of common stock and the net tangible book value per share of those shares immediately after you purchase them. You will experience an immediate and substantial dilution of $3.41 out of the $5.00 you pay for a share because the net tangible book value of your securities will immediately be reduced to $1.59.

     At June 30, 2004, we had a negative net tangible book value of $1,297,243 or $(0.75) per share of common stock. Net tangible book value per share represents the amount of total tangible assets less liabilities, divided by 1,727,373, the number of shares of common stock outstanding at June 30, 2004. After giving effect to the sale of the shares in the offering and all the other adjustments and assumptions contained in the June 30, 2004, as adjusted amounts, the adjusted net tangible book value at June 30, 2004 would have been $7,254,805 or $1.59 per share. This represents an immediate increase in net tangible book value of $2.34 per share to the existing stockholders and an immediate and substantial dilution to new investors of $3.41 per share or 68.2% of the assumed offering price.

     If the underwriters exercise their over-allotment option in full, the pro forma net tangible book value after the offering would be approximately $1.83 per share (after deducting estimated underwriting discounts and commissions on estimated offering expenses to be paid by us), which would result in dilution to the public investors of approximately $3.17 based on 4,920,551 shares.

     The following table shows the number of shares of our common stock to be owned following the offering by our executive officers, directors, promoters and affiliated persons, existing stockholders, holders of the bridge notes and new investors.

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CAPITALIZATION

The table below sets forth our capitalization:

• on an actual basis as of December 31, 2003; and
  
• on an unaudited actual basis as of June 30, 2004, reflecting (1) our 1-for-23 reverse stock split effective as of January 30, 2004, (2) the issuance of an aggregate of $5.0 million of bridge notes and warrants issued in our bridge financing in January and February 2004, and (3) the conversion in January 2004 of all of our outstanding shares of preferred stock into 1,372,048 shares of common stock.
  

The as adjusted information gives effect to:

• receipt of net proceeds of approximately $9,290,000 from the sale of 2,350,000 shares at an assumed offering price of $5.00;
  
• interest (cash and non-cash charges relating to the bridge note discounts and deferred charges) through September 30, 2004; and
  
• the conversion of $1,840,000 principal amount of our outstanding bridge notes into 490,768 shares of common stock, and the repayment of the other $3,160,000 of bridge notes.
  

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

     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 prospectus. This discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” and elsewhere in this prospectus, our actual results may differ materially from those anticipated in these forward-looking statements.

General

     Since our inception in 1998, we have acquired and developed technology that intelligently and automatically integrates and retrieves online information from disparate sources and delivers the result in a single consolidated browser view. Our technology, combined with relevant reference content that we license from various providers, enabled us to attract thousands of users of our publicly available, free individual reference tool from September 1999 through October 2002. In October 2002, we began charging a fee for our individual reference product.

     In 2000, we began commercializing our technology by creating corporate enterprise software products, which integrated the data of a specific corporate customer into our software so that its users could access customized data using our products. In addition to providing our corporate enterprise users with the same reference information available in our free publicly available product, the reference information our corporate enterprise users received was tailored to include additional information derived from such corporate enterprise user’s own internal database. We achieved 2002 revenues of $1,113,381 from licensing our corporate enterprise software and related professional services to five customers.

     In December 2002, due to a number of factors, including slower than anticipated sales growth, a general slowdown in the corporate enterprise software market and a much longer sales cycle than anticipated, we decided to exit the corporate enterprise software market and focus our resources on commercializing our public product that had been distributed for free through October 2002. Our product was improved and launched in March 2003. We began selling subscriptions to such product primarily to individual consumers. In conjunction with the shift in our business model, we significantly reduced our operating expenses by closing our California office, which had been engaged primarily in corporate enterprise sales and marketing.

     Under our new business model, we seek to generate revenues by directly selling subscriptions to our products to consumers and organizations through our destination Website, GuruNet.com. Beginning in May 2004, we expanded our business model to add the generation of advertising revenues through pay-per-click keyword advertising. We established Answers.com, as an additional destination Website which relies on our paid search advertising revenue model. When a user searches sponsored keywords, an advertiser’s Website is displayed in a premium position and identified as a sponsored result to the search. Unlike GuruNet.com, Answers.com is strictly Web-based and does not feature the downloaded one-click tool. We believe that Answers.com will ultimately help us to attract new users to our services and allow us to explore the viability of the paid search advertising revenue model. We have a contract with InfoSpace in which we display their standard InfoSpace Web search results together with sponsored advertisements. InfoSpace syndicates their Web search results from Yahoo, Ask Jeeves, About.com and others. When a user clicks on a sponsored listing, InfoSpace shares part of the resulting revenue with us.

     In addition to our subscription-based products, we also offer free access to dictionary, thesaurus, encyclopedia and other basic reference information through our products. Under our business model, our ability to generate revenues will depend on our ability to increase the number of users who use our free products. As more consumers use our free products, we will likely generate more revenue from our pay-per-click keyword advertising, as product usage or queries is the basis for paid search revenue. In addition, we anticipate that usage of our basic free product also will encourage users to upgrade to our subscription product and increase our subscription revenue.

     Our financial statements were prepared using principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. We had $123,752 in cash and cash equivalents at December 31, 2003. Our working capital deficiency at December 31, 2003 was $752,934. On January 30, 2004 and February 17, 2004, we issued $5.0 million principal amount of convertible promissory notes that are due on the earlier of one year after their issuance and the consummation of the offering. Beginning in July

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2004, we began making interest payments on the promissory notes. See “Description of Securities — Other Outstanding Securities — Bridge Notes” for a more detailed description of these interest payments. We had $1,952,795 of cash and cash equivalents at June 30, 2004. Our working capital deficit at June 30, 2004 was $973,770. While revenues and cash from revenues may increase during the second half of 2004, we do not expect this growth to be sufficient to alleviate our funding issues described in this prospectus. Thus, our ability to continue as a going concern is contingent upon the successful completion of this offering or obtaining alternate financing. These factors raise substantial doubt as to our ability to continue as a going concern, and our most recent independent auditor’s report contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. The financial statements do not include adjustments to the value or classification of our assets and liabilities that we may need to make if we are unable to continue operating as a going concern.

Results of Operations

     Due to the change in our business strategy and the closing of our California office in December 2002, our results of operations for the year ended December 31, 2003 are not comparable to the results for the same period in 2002.

Revenues

     Revenues for the three months ended June 30, 2004 were $44,244 compared to $3,652 for the three months ended June 30, 2003, an increase of $40,592 or 1,112%. Revenues for the six months ended June 30, 2004 were $63,875 compared to $8,476 for the six months ended June 30, 2003, an increase of $55,399 or 654%. Revenues during the three and six months ended June 30, 2004 resulted primarily from subscriptions of approximately $34,000 and $48,000, maintenance contracts on our corporate enterprise software of approximately $5,000 and $10,000, and advertising revenues of approximately $2,000 and $3,000, respectively. In contrast, revenues during the three and six months ended June 30, 2003 resulted almost entirely from maintenance contracts on the corporate enterprise systems that we sold in 2002. Subscriptions sold in the three and six months ended June 30, 2003 had no impact on those periods’ revenues because we sold lifetime subscriptions. Since the obligation to continue serving content had no defined termination date and we could not estimate the time period over which the service would be provided, we did not recognize revenue from those sales. Beginning in December 2003, we began offering GuruNet subscriptions to the public on an annual subscription basis, rather than a lifetime fee basis. Revenues from such subscriptions are amortized over the life of the related subscription. During the second quarter of 2004, we began offering selected users who purchased lifetime licenses the opportunity to exchange their lifetime license for an initial free defined-term license to a newer enhanced version of GuruNet. The cash received from previous sales of lifetime subscriptions is being recognized over the new defined-term subscription period for users who agree to this offer.

     Revenues for the year ended December 31, 2003 were $28,725 compared to $1,113,381 for the year ended December 31, 2002, a decrease of $1,084,656 or 97.4%. Revenues in 2003 resulted primarily from maintenance contracts on the corporate enterprise systems that we sold in 2002. The launch of our product line in March 2003 had almost no impact on 2003 revenue because during 2003, we sold lifetime subscriptions and did not recognize revenue from these sales since the obligation to continue serving such content had no defined termination date and we do not have adequate operating history to estimate the life of the customer relationship. The cash from those sales, which amounted to approximately $537,000 at December 31, 2003, is reflected on the accompanying balance sheet as “Deferred revenues, long-term.” Beginning in December 2003, we began offering GuruNet subscriptions to the public on an annual subscription basis, rather than a lifetime fee basis. Revenues from such subscriptions are amortized over the life of the related subscription. During the second quarter of 2004, we began offering selected users who purchased lifetime licenses the opportunity to exchange their lifetime license for an initial free defined-term license to a newer enhanced version of GuruNet. The cash received from previous sales of one-time licenses will be recognized over the new defined-term subscription period for users who agree to this offer. Revenues in 2002 are comprised primarily of license and professional services revenue we earned from five corporate enterprise customers. One corporate enterprise customer comprised over 90% of 2002 revenue. Of the total 2002 revenues, approximately 25% resulted from software licensing and the remainder from professional services we provided in connection with the software licenses.

     Cash received from subscriptions sold in the three and six months ended June 30, 2004 was approximately $45,000 and $93,000, respectively, compared to approximately $214,000 and $277,000 for the same periods in 2003. The decrease is due to a number of factors, including the decrease in our product price from $40 to $30, our

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offering one-year subscriptions rather than lifetime subscriptions, and that we are in development stage and are still testing various marketing approaches, which tends to cause variability in subscription volume.

     Cash received from subscriptions sold in the first, second, third and fourth quarters of 2003 was approximately $63,000, $214,000, $183,000 and $77,000, respectively. The second and third quarter increases were due primarily to marketing campaigns, the conversion by a significant number of users of our publicly available free product to a paid subscription of our upgraded product, and a distribution arrangement with another company that sold a co-branded version of our product during that period. Under our arrangement with that company, we earned approximately $55,000, representing half the revenue that they earned from their sales of the co-branded product. The decline in the fourth quarter was due to the limited funds that we invested in marketing, the reduction in the conversion of users from our publicly available free product to paid subscriptions, the absence of any large distribution arrangement, and that we are in development stage and are still testing various marketing approaches, which tends to cause variability in subscription volume.

Cost of Revenues

     Cost of revenues for the three months ended June 30, 2004 was $119,231 compared to $140,979 for the three months ended June 30, 2003, a decrease of $21,748 or 15.4%. The decrease resulted primarily from discontinuation of some of our content providers in the year 2004.

     Cost of revenues for the six months ended June 30, 2004 was $275,758 compared to $388,583 for the six months ended June 30, 2003, a decrease of $112,825 or 29.0%. The decrease is primarily attributable to higher content costs incurred in the first three months of 2003 than we typically incur each quarter as well as discontinuation of some of our content providers in the year 2004, as referenced above.

     Cost of revenues for the year ended December 31, 2003 was $723,349, compared to $1,584,200 for the year ended December 31, 2002, a decrease of $860,851 or 54.3%. The decrease resulted primarily from closing our California office and our exit from the corporate enterprise products in December 2002. Also in December 2002, we terminated all of our professional services personnel because we were no longer selling corporate enterprise product, and we retained a technical support team to support our product. The net reduction in salaries, benefits and overhead costs totaled approximately $817,000.

     Cost of sales is comprised of fees to third party providers of content, web hosting services, technical and customer support and professional services salaries, benefits and overhead costs.

Gross Margin

     Gross margin for the three months ended June 30, 2004 was ($74,987) compared to ($137,327) for the three months ended June 30, 2003, a decrease of $62,340 or 45.4%. Further, our gross margin for the six months ended June 30, 2004 was ($211,883) compared to ($380,107) for the six months ended June 30, 2003, a decrease of $168,224 or 44.3%. The decrease in the loss for the three months and six months ended June 30, 2004 was primarily due to increased subscription revenue recognized and reduced content costs, as discussed above.

     Gross margin for the year ended December 31, 2003 was ($694,624) compared to ($470,819) for the year ended December 31, 2002, an increase in the loss of $223,805 or 47.5%. We are in development stage and have not reached a level of revenue that allows for a positive gross profit based on our business model. Our cost of revenues includes costs that are generally fixed and are only partially impacted by our revenue levels, such as fees to third party providers of content and web hosting services.

Research and Development Expenses

     Research and development expenses for the three months ended June 30, 2004 was $254,685 compared to $289,752 for the three months ended June 30, 2003, a decrease of $35,067 or 12.1%. The decrease is primarily attributable to a reduction in depreciation expense because certain equipment was fully depreciated prior to the beginning of the second quarter of 2004.

     Research and development expenses for the six months ended June 30, 2004 was $518,473 compared to $502,959 for the six months ended June 30, 2003, a decrease of $15,514 or 3.1%. The overall increase in research and development costs was due to an increase in compensation costs as a result of increases in research and

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development personnel added after June 30, 2003, partially offset by the reduction in depreciation expense mentioned above.

     Research and development expenses for the year ended December 31, 2003 were $910,114, compared to $2,659,966 for the year ended December 31, 2002, a decrease of $1,749,852 or 65.8%. The decrease was due to the reduction of our development team by 16 employees at various points between May and December 2002. The salaries, benefits and overhead costs of personnel, conducting research and development of software and Internet products comprise research and development expenses.

Sales and Marketing Expenses

     Sales and marketing expenses for the three months ended June 30, 2004 were $221,556 compared to $123,470 for the three months ended June 30, 2003, an increase of $98,086 or 79.4%. The increase was primarily due to the redesign of our Website and marketing strategy, which resulted in approximately $67,000 of outsourced marketing costs, as well as increased compensation related expenses of approximately $36,000 due to the addition of sales and marketing personnel.

     Sales and marketing expenses for the six months ended June 30, 2004 were $540,485 compared to $208,267 for the six months ended June 30, 2003, an increase of $332,218 or 159.5%. The increase was due to a number of factors including the redesign of our Website and marketing strategy, which resulted in approximately $188,000 of outsourced marketing costs. Further, sales and marketing compensation related expenses during the first six months in 2004 increased by approximately $73,000 as compared to the comparable period in 2003 due to the addition of sales and marketing personnel. Finally, advertising and promotion costs increased by approximately $44,000 during the first six months in 2004 as compared to the comparable period in 2003 due to our increased focus on promoting our product.

     During the three and six months ended June 30, 2004, we allocated significant resources to selling and marketing our GuruNet product. In contrast, at the start of 2003, we had recently exited from the corporate enterprise software space and had not yet launched our new GuruNet product. Such product was only launched in March 2003. More significant sales and marketing efforts for GuruNet began subsequent to the three and six months ended June 30, 2003. In addition, advertising and promotion costs tend to vary from period to period as we are in the development stage and are still testing various sales marketing approaches, which tends to cause variability in costs associated with those activities.

     Sales and marketing expenses for the year ended December 31, 2003 were $478,942, compared to $2,428,939 for the year ended December 31, 2002, a decrease of $1,949,997 or 80.3%. The decrease resulted primarily from the change in our business strategy and the closing of our California office, and the termination of most of our sales and marketing personnel. As a result, we eliminated approximately $1.2 million in annual salaries, benefits and travel costs, and approximately $705,000 in rent and office expenses.

     In 2002, our sales and marketing expenses consisted primarily of salaries and benefits of personnel and overhead costs. In 2003 and in the first half of 2004, salaries, benefits and overhead costs of personnel, and public relations services and advertising programs, including Internet-based keyword-targeted advertising services, comprise sales and marketing expenses.

General and Administrative Expenses

     General and administrative expenses for the three months ended June 30, 2004 were $202,123 compared to $165,492 for the three months ended June 30, 2003, an increase of $36,631 or 22.1%. The increase was primarily due to increases in general and administrative compensation expense. During the three months ended June 30, 2004, compensation expense increased by approximately $33,000 as compared to the comparable period in 2003 due to an increase in personnel and salary increases. Further, additional stock-based compensation expense of approximately $10,000 was recorded in the three months ended June 30, 2004 representing the amortization of deferred compensation that resulted from option grants whose exercise price was below the estimated value of the shares at the time of the grant. However, the increases noted above were offset by one-time compensation related expenses in the amount of approximately $10,000 recorded in the comparable period in 2003.

     General and administrative expenses for the six months ended June 30, 2004 were $414,530 compared to $376,853 for the six months ended June 30, 2003, an increase of $37,677 or 10.0%. The increase was primarily

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related to personnel and salary increases which resulted in increased compensation expense of approximately $72,000, and stock-based compensation expense of approximately $21,000 during the six months ended June 30, 2004, whereas no such expense was incurred in the comparable period in 2003. The aforesaid increases were partially offset by one-time compensation related expenses recorded in the first six months of 2003 in the amount of approximately $58,000.

     General and administrative expenses for the year ended December 31, 2003 were $678,645, compared to $940,841 for the year ended December 31, 2002, a decrease of $262,196 or 27.9%. This decrease was due primarily to the closing of our California office.

     General and administrative expenses consist primarily of salaries, benefits and overhead costs for executive and administrative personnel, credit card fees, insurance, fees for professional services, including consulting, legal, and accounting fees, travel costs, non-cash stock compensation expense for the issuance of stock and stock options as other general corporate expenses.

Loss in connection with closure of operations

     In December 2002, we implemented a reorganization which substantially reduced our expenditures. The reorganization included staff reductions of fifteen persons, or approximately 52% of our work force, including senior management, professional services, sales and marketing, research and development and administrative staff. The reorganization also included the shutdown of our California office and resulted in a loss on the disposal of fixed assets. In total, we incurred a loss of approximately $1,048,000 in connection with the reorganization, including $780,000 related to the disposal of fixed assets, and approximately $265,000 related to salaries, rent and lease expenses which were accrued on our balance sheet as of December 31, 2002.

Interest Income (Expense), Net

     Interest income (expense), net for the three and six months ended June 30, 2004 was ($1,113,418) and ($1,850,452), compared to $1,869 and $4,977 for the comparable periods in 2003, representing net increases in interest expense of $1,115,287 and $1,855,429, respectively. Interest expense, net for the three and six months ended June 30, 2004 is comprised of approximately $1,012,000 and $1,687,000, respectively, of amortization of note discounts and deferred charges relating to the convertible promissory notes, which are described below. The remainder is comprised of the 8% interest on the face of the $5.0 million convertible promissory notes, approximating $103,000 and $168,000 for the three and six months ended June 30, 2004, respectively. Interest income, net for the first three and six months of 2003 consisted of interest income earned.

     In January and February 2004, we issued $5.0 million principal amount of convertible promissory notes. In connection with the issuance of the notes, we also issued warrants to purchase an aggregate 1,700,013 shares of our common stock at an exercise price per share equal to 120% multiplied by the greater of (1) $6.00, and (2) the initial public offering price. We attributed approximately $809,000 of the $5.0 million to the value of the warrants, resulting in a note discount of $809,000. We also recorded an additional note discount, with a corresponding increase in paid-in capital, of approximately $2,476,000 to account for the beneficial conversion terms that the bridge noteholders received, in comparison to the expected initial public offering price. Both note discounts are being amortized over the life of the bridge notes as interest expense. During the three and six months ended June 30, 2004, we recorded interest expense in the amount of $821,253 and $1,368,755, respectively, representing the amortization of such discounts over the life of the bridge notes.

     Issuance costs of $761,748 relating to the bridge notes, are comprised of finders fees, legal, accounting and printing costs. These costs are being amortized over the life of the bridge notes as interest expense. During the three and six months ended June 30, 2004, we recorded interest expense representing the amortization of these deferred charges, of $190,437 and $317,395, respectively.

     Interest income, net for the year ended December 31, 2003 was $719, compared to $9,701 for the year ended December 31, 2002, a net decrease of $8,982 or 92.6%. The decrease resulted primarily from a decrease in our interest-bearing cash deposits.

Other Income (Expense), Net

     Other income (expense), net for the three months ended June 30, 2004 was ($8,347) as compared to $22,031 for the three months ended June 30, 2003, representing an increase in other expenses of $30,378 or 137.9%. Other

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income (expense), net for the six months ended June 30, 2004 was ($4,025) as compared to $27,416 for the six months ended June 30, 2003, representing an increase in other expenses of $31,441 or 114.7%. The changes in other income (expense) net for the three and six months ended June 30, 2004 as compared to the same periods in 2003, resulted primarily from differences in the amount of foreign exchange gains/(losses) in the respective periods.

     Other expenses increased to $12,586 in 2003 from $10,401 in 2002. In 2003, other expenses were comprised of foreign exchange losses of approximately $8,000 and approximately $5,000 relating to the write-off of withholding taxes that we do not expect to realize. In 2002, other expenses were comprised of foreign exchange losses of approximately $10,000.

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 law and Generally Accepted Accounting Principles. We utilize different methods and useful lives for depreciating property and equipment. The recording of certain provisions result in expense for financial reporting but the amount is not deductible for income tax purposes until actually paid. Our deferred tax assets are fully 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 $26 million at December 31, 2003 and $20.1 million at December 31, 2002. The federal net operating losses will expire if not utilized on various dates from 2019 through 2023. 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 $604,000 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. The bridge financing and the offering are likely to result in a change of control in ownership, as defined in Section 382 of the Internal Revenue Code.

Accordingly, our ability to utilize net operating losses and credit carryforwards may be limited as the result of such an ownership change.

     Our subsidiary had income in 2002 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 June 30, 2004, we accrued approximately $62,000 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 35%, gradually being reduced to 30% in 2005-2008). Through June 30, 2004, our Israeli subsidiary received tax benefits of approximately $630,000.

Net Loss

     Our net loss increased to $1,874,149 and $3,566,861 in the three and six months ended June 30, 2004, respectively, from $692,141 and $1,435,793 for the comparable periods in 2003, as a result of the changes in our revenues, cost of sales and expenses as described above. As of June 30, 2004, our accumulated deficit was $37,572,459.

     Our net loss decreased to $2,808,783 in 2003, from $7,549,711 in 2002, as a result of the changes in our revenues, cost of sales and expenses as described above. As of December 31, 2003, our accumulated deficit was $34,005,598.

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Critical Accounting Policies

     While our significant accounting policies are more fully described in the notes to our consolidated financial statements included in this prospectus, 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.

Use of Estimates

     Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, accrued expenses and the fair value of our common and preferred stock particularly as it relates to stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and could have a material impact on our reported results.

Accounting for Stock-based Compensation

     In January 2003, FASB issued SFAS 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 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 have determined that we will continue to 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 fair 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 fair value of our stock was determined by us based on a number of factors including input from our advisors, and 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 income and our net income per share could have been significantly different.

     The fair value of stock options granted to non-employees is 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 fair value of the underlying stock, the expected stock price volatility, the risk-free interest rate and the dividend yield. As discussed above, the fair value of the underlying stock was based on assumptions of matters that are inherently highly uncertain and subjective. As there has been no public market for our stock, 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, the related stock based compensation expense and our net income and net income per share amounts could have been significantly different.

     We are required in the preparation of the disclosures required under SFAS 148 to make certain estimates when ascribing a value to 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. Further, the rules governing accounting for option grants continue to evolve. Should we be required in future periods to include amortization expense of stock option compensation, such amortization would have a material adverse effect on our results of operations.

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Accounting For Income Taxes

     As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves management estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax item in the statement of operations. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have fully offset our US deferred tax asset with a valuation allowance. Our lack of earnings history and the uncertainty surrounding our ability to generate taxable income prior to the expiration of such deferred tax assets were the primary factors considered by management in establishing the valuation allowance. Deferred tax assets and liabilities in the financial statements result from the tax amounts that would result if our Israeli subsidiary distributed its retained earnings to us. This subsidiary continues to generate taxable income in respect of services provided to us, and therefore we believe that the deferred tax asset relating to the Israeli subsidiary will 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.

Foreign Currency Translation

     Beginning February 2004, our Israeli subsidiary began paying substantially all of its salaries linked to the dollar, 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 U.S. dollar (“USD”).

     FAS 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 functional currency in our currency.

     Our subsidiary’s revenue is derived based on a cost plus methodology. 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 the our functional currency.

     Had we determined that our subsidiary’s functional currency was different than what was actually used, whether in the three and six months ended June 30, 2004 or prior periods, we believe that the effect of such determination would not have had a material impact on our financial statements.

Note Discount on Convertible Promissory Notes

     In January and February 2004, we issued, an aggregate of $5.0 million principal amount of 8% convertible promissory notes. We estimate approximately $809,000 of the $5.0 million relates to the value of the warrants, resulting in a note discount of $809,000. In accordance with EITF 00-27, such note discount is being amortized over the life of the bridge notes. The fair value of the warrants was determined by us based on a number of factors including the exercise price, the expected volatility in the share price and input from our advisors. Such valuation is inherently highly uncertain and subjective. Furthermore, the discount on the beneficial conversion feature of the convertible promissory notes was calculated taking into consideration our estimate of the fair value of these warrants. If we had made different assumptions, our note discounts, additional paid in capital, interest expense in respect of the amortization, our net loss and our net loss per share could have been significantly different.

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Recently Issued Accounting Pronouncements

     On May 15, 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. We have applied SFAS 150 to a financial instrument entered into during the second half of 2003 with four investors.

     In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements (“ARB 51”), to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without an additional subordinated financial support from other parties. ARB 51 requires that an enterprise’s consolidated financial statements include subsidiaries in which the enterprise has a controlling financial interest. That requirement usually has been applied to subsidiaries in which an enterprise has a majority voting interest. The voting interest approach is not effective in identifying controlling financial interests in entities that are not controllable through voting interest or in which the equity investors do not bear the residual economic risk. FIN 46 explains how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity to decide whether it is its primary beneficiary and therefore is required to consolidate that entity. FIN 46 also addresses the initial valuation of the assets and liabilities to be consolidated, the treatment of any gain or loss resulting from the initial measurement and disclosures requirements for the primary beneficiary. All entities with variable interest in variable interest entities created after January 31, 2003 shall apply the provisions of FIN 46 immediately. Public entities with a variable interest in variable interest entities created before February 1, 2003 shall apply the provisions of this Interpretation no later than the first interim or annual reporting period beginning after December 15, 2003. On December 24, 2003, the FASB issued an Interpretation which clarified and modified FASB Interpretation No. 46 (FIN 46R). FIN 46R is not expected to have any significant impact on our financial condition or results of operations.

Liquidity and Capital Resources

General

Six Months Ended June 30, 2004 Compared to the Six Months Ended June 30, 2003

     From our inception through June 30, 2004, our operations have been funded almost entirely through the proceeds of approximately $38,000,000 that we received from issuance of four series of convertible preferred stock and convertible promissory notes between December 1998 and February 2004. The amounts raised were used primarily to fund research and development, sales and marketing, business development and general and administrative costs.

     As of June 30, 2004, we had $4,090,930 of assets consisting of $1,952,795 in cash and cash equivalents, $1,302,086 in other current assets and the remaining balance in property and equipment, long-term deposits, domain name, capitalized software development costs and deferred tax asset. Total liabilities as of June 30, 2004 reflect current liabilities of $4,228,651, consisting of convertible promissory notes, net of discounts, of $3,252,020, accounts payable of $274,994, accrued expenses of $269,396, short-term deferred revenue of $101,264 and accrued compensation of $330,977. Long-term liabilities in respect of employee severance obligations, deferred tax liability and deferred revenue were $1,069,322 at June 30, 2004.

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Cash flows for the six months ended June 30, 2004 and 2003 were as follows:

     The increase in net cash used in operating activities during the first six months of 2004 compared to 2003 was primarily related to the overall increase in operating expenses. Cash used in operating activities of $1,695,466 in 2004 consisted of net loss of $3,566,861 adjusted for certain non-cash items of $1,988,201, including non-cash interest expense representing the amortization of deferred charges and discounts on promissory notes and accrued interest, depreciation and amortization, capitalization of software development costs, issuance of options and certain employee severance obligations, and ($116,806) of changes to operating assets and liabilities. Cash used in operating activities in the first six months of 2003 of $669,848 consisted of a net loss of $1,435,793 adjusted for non-cash items of $149,571 and changes to operating assets and liabilities of $616,374.

     Cash used in investing activities of $121,010 in the first six months of 2004 is mainly attributable to the purchase of a domain name for $80,200, capitalization of software development costs of $10,000, and capital expenditures of $39,191, partially offset by a decrease in long-term deposits of $8,381. Cash provided by investing activities during the first six months of 2003 of $47,326 is attributable to a decrease in long-term deposits of $76,902 offset by capital expenditures of $29,576.

     Cash and cash equivalents at December 31, 2003 were insufficient to provide the capital we needed to operate. In January and February, 2004, we issued $5.0 million aggregate principal amount of bridge notes. The bridge notes are due on the earlier of the first anniversary of their issuance or the consummation of this offering. After deducting transaction fees, including finders fees and legal fees, we received approximately $4,325,000 from the issuance of the convertible promissory notes, including the $200,000 received from the sale of shares to four investors in 2003. The proceeds of the convertible promissory notes have enabled us to continue operating in 2004. Net cash provided by financing activities during the first six months of 2004 of $3,645,519 resulted primarily from our receipt of $4,800,000 from the issuance of convertible promissory notes in January and February 2004, offset by $1,154,481 of deferred charges representing costs associated with the convertible promissory notes and the anticipated initial public offering. There were no cash flows from financing activities during the first six months of 2003.

Year Ended December 31, 2003 Compared to the Year Ended December 31, 2002

     From our inception through December 31, 2003, our operations had been funded almost entirely through the proceeds of approximately $33,000,000 that we received from the issuance of four series of convertible preferred stock between December 1998 and June 2000. These funds raised were used primarily to fund research and development, sales and marketing, business development and general and administrative costs.

     As of December 31, 2003, we had $1,043,292 of assets consisting of $123,752 in cash and cash equivalents, $187,531 in other current assets and the remaining balance in property and equipment, long-term deposits, and deferred tax asset. Total liabilities as of December 31, 2003 reflect current liabilities of $1,064,217, consisting primarily of advances on account of shares and stock warrants of $200,000, accounts payable of $215,684, accrued expenses of $326,186, short-term deferred revenue of $29,234 and accrued compensation of $293,113. Long-term liabilities in respect of employee severance obligations, deferred tax liability and deferred revenue were $1,023,521 at December 31, 2003.

Cash flows for the years ended December 31, 2003 and 2002 were as follows:

     The decrease in net cash used in operating activities in 2003 compared to 2002 was primarily related to the overall decrease in expenses. Cash used in operating activities of $1,361,028 in 2003 consisted of net loss of $2,808,783 adjusted for certain non-cash items of $311,198, including depreciation, amortization, deferred

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charges, and certain employee severance obligations, and $1,136,557 of changes to working capital, which included a decrease in accounts receivable balances of approximately $372,657, reflecting the collection in 2003 of accounts receivable of $354,897 from our largest corporate enterprise customer for services performed in 2002. Accounts payable increased $180,413, which reflects a slowdown in the time we paid our bills at the end of 2003. Also included are long-term deferred revenues from lifetime licenses of $537,404 and short-term deferred revenue of $17,234. Cash used in operating activities in 2002 of $6,204,833 consisted primarily of net loss of $7,549,711 adjusted for non-cash items of $1,722,120, partially offset by $377,242 of changes to working capital. The most significant non-cash item in 2002 was loss of $1,006,064 on the sale of property and equipment that transpired in connection with closing our California office in December 2002 and settlement of obligations for other than cash.

     Cash used in investing activities of $35,913 in 2003 and $36,505 in 2002 is attributable to capital expenditures of $48,454 and $51,040 in 2003 and 2002 respectively, less net decreases in deposits with various parties in 2003, and proceeds from the sale of property and equipment in 2002. Capital expenditures have generally comprised purchases of computer hardware, software, and furniture and fixtures.

     Net cash provided by financing activities in 2003 of $45,884 resulted primarily from our receipts of $200,000 from the sale of shares of our common stock to four investors, offset by $155,116 of costs relating to our January and February 2004 bridge financing. Cash provided by financing activities in 2002 of $975,473 resulted from long-term deposits that matured.

Current and Future Financing Needs

     We incurred approximately $37.5 million and $30.3 million of net losses and negative cash flows from operations, respectively, during our initial period of operation through June 30, 2004. We had $1,952,795 of cash and cash equivalents at June 30, 2004. Our working capital deficiency at June 30, 2004 was $973,770. Our ability to continue as a going concern is contingent upon the successful completion of this offering or obtaining additional financing.

     Our financial statements were prepared using principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. Our funding issues we have described raise substantial doubt as to our ability to continue as a going concern if this offering is not successful and our most recent independent auditor’s report contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. The financial statements do not include adjustments to the value or classification of our assets and liabilities that we may need to make if we are unable to continue operating as a going concern.

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.

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Obligations and Commitments

As of June 30, 2004, we had the following known contractual obligations, commitments and contingencies:

     As of December 31, 2003, we have known contractual obligations, commitments and contingencies of $468,503 as delineated below:

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BUSINESS

General

     We provide integrated online reference answers and possess the technology that enables rapid delivery of concise information over the Internet. Since our inception in 1998, we have acquired and developed technology that intelligently and automatically integrates and retrieves information from disparate sources and delivers the result in a single consolidated view. We seek to generate revenues by selling subscriptions for our products; licensing and co-branding our technology; establishing partnerships with third-party Websites; and by monetizing visitor traffic to our Website in the form of sponsored links and paid advertisements.

     Our answer engine delivers snapshot, multi-faceted definitions and explanations from credible, attributable reference sources about numerous topics in our database. We seek to differentiate ourselves by providing our users with relevant, high quality reference information that enhances results achieved through traditional search engines. Most search engines respond to an Internet user’s query by displaying a long list of links to other Websites that in some way may be related to the query term. Our answer engine automatically displays relevant, narrative responses to a user’s query without requiring the user to review a list of hyperlinks offered in response to a query. Our answer engine also includes tabs that provide other related information in various formats such as charts, graphs and maps.

We cull our reference information from over 100 reference sources such as:

• Houghton Mifflin’s American Heritage Dictionary (Fourth Edition);
  
• Roget’s II New Thesaurus, (Third Edition); and
  
• Columbia University Electronic Encyclopedia (Sixth Edition).
  

     By displaying the source of each piece of our information on each web page, we enable our users to make their own independent evaluation as to the reliability of our information.

     There are two versions of the GuruNet answer engine product: a free version with basic reference sources and a premium pay version containing significantly more reference sources. A user who does not want to pay for our full content offering can access those limited content sources we make available as part of our free product offering, either through our Website or by downloading our free software or free toolbar. Alternatively, a user can register for free for a 14 day limited trial period, during which period he or she will have full access to all of the content sources we provide. By purchasing a subscription to our answer engine product at the end of the trial period, a user can continue to access our full content, as updated, during the life of the subscription. Otherwise, the user will only be able to access the content we make available through our free product offering.

     The Windows^® version of our answer engine product works within any Windows-based program by accessing our online library over the Internet using software downloaded, without any fee, on the Microsoft Windows^® operating system. We launched a beta version of GuruNet for Mac in June 2004. Like GuruNet for Windows, this version consists of downloadable software. It enables global hotkey access from within most applications running on the Apple Macintosh using the OS/X operating system. Once a user agrees to the license agreement entered into coincident with the download of the software, the user working in any application such as e-mail, spreadsheet, word processing, database or other program or application need only “alt-click” on a word or phrase within a document and our answer engine will access our online library and display information about that word or phrase in a pop-up window. Our answer engine analyzes surrounding words in context for a more accurate response. For example, Ford Motor Company is different from Henry Ford or Harrison Ford. Our answer engine also may be accessed through a freely downloaded toolbar for query lookup while using Microsoft Internet Explorer for Windows^® or by accessing our destination Website without the need to download any software. While Web users enjoy our integrated reference information, our Web-based product does not provide the “alt-click” command, reference source library tree view and context analysis that we include in our software.

     Our technology, combined with relevant reference content that we license from various providers, enabled us to attract thousands of users of our publicly available, free individual reference tool from September 1999 through October 2002.

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     In 2000, we began commercializing our technology by creating corporate enterprise software products, which integrate the data of a specific corporate customer into our software so that its users may access customized data using our products. In addition to providing our corporate enterprise users with the same reference information available in our free publicly available product, the reference information our corporate enterprise users received was tailored to include additional information derived from such corporate enterprise user’s own internal database. Although we achieved 2002 revenues of $1,113,381 from licensing our corporate enterprise software and related professional services, we found that the pace of revenue growth was slower than what we had originally expected.

     In December 2002, due to a number of factors, including slower than anticipated sales growth, a general slowdown in the corporate enterprise software market and a much longer sales cycle than anticipated, we decided to exit the corporate enterprise software market and focus our resources on commercializing our public product that had been distributed for free through October 2002. Our product was improved and launched in March 2003. We began selling subscriptions to our product primarily to individual consumers. In conjunction with the shift in our business model, we significantly reduced our operating expenses by closing our California office, which had been engaged primarily in corporate enterprise sales and marketing, and professional services.

Industry Background

     The emergence and wide acceptance of the Internet fundamentally has changed how millions of people and businesses find information, shop and purchase goods and services. Web search engines are one of the most popular and useful services on the Internet for people seeking to find information about businesses, goods and services. According to Nielson/NetRatings, approximately 76% of the active online U.S. population used a search engine during January 2004. Also according to Nielson/NetRatings, the 114.5 million unique users each spent nearly forty minutes using search engines during the month, making search sites second only to email providers as the most popular category of Website.

     Search engines provide two critical functions. First, they gather, index and store information about Websites in a database. Second, they present search results in the form of links directly to Websites. Businesses seeking to increase the number of visitors to their Websites have increasingly recognized the value of being included in search results in response to relevant words or phrases. According to Search Engine News Journal, U.S. online advertising revenues were approximately $7.3 billion in 2003, a 21% increase from $6.0 billion in 2002. According to Gartner, Inc., by 2005, U.S. online advertising expenditures are expected to exceed $8.6 billion.

     Historically, companies in the Internet industry have earned money through payment from advertisers for Web space, as well as by charging subscribers for access to Web content. Today, only companies offering superior content have managed to profit through these methods. However, search engine companies are earning revenues through paid search results. According to the eMarketer Search Engine Marketing report, U.S. paid search advertising spending increased by 123% from $923 million in 2002 to over $2 billion in 2004. Estimated to grow by $0.5 billion in 2004 and 2005, paid search will remain a substantial part of online advertising revenues according to eMarketer.

     Internet advertisers can select from a variety of performance-based advertising alternatives, including pay-per-click banner display advertisements, e-mail and pop-up campaigns. However, performance-based, keyword-targeted search-based advertisements, of the type we use and intend to use in conjunction with our products, have grown faster than most other alternatives. One advantage of keyword-targeted advertisements is that they get an advertiser’s message in front of prospects at the time that a prospect has shown he or she is interested in what the advertiser has to offer, either because the prospect has searched for the keyword, clicked on a directory link, or has visited a site that relates to that keyword. Keyword search advertising has showed the strongest growth in advertising revenue in 2003, accounting for 35% of all online advertising revenue in 2003, up from 15% in 2002, according to, a report by the Interactive Advertising Bureau and PricewaterhouseCoopers LLP.

     Many Internet users and advertisers have come to rely on browser applications, customized downloadable applications and Websites that provide Web directories, search engines or contextually relevant listings as ways for potential buyers to find the companies that provide the products and services they seek to purchase. These applications and Websites enable consumers and businesses to find a listing of advertiser Websites matching a descriptive word or phrase, while offering advertisers exposure to a highly relevant Internet audience that has already indicated an interest in their products or services. However, in order to attract and retain users, many of

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these applications and Websites have created additional tools and a vast array of content and services that are costly to build and maintain.

Our Strategy

     Our goal is to establish GuruNet as a leading answer engine service provider for reference information on the Internet. During 2003, we sold approximately 17,000 paid subscriptions to our answer engine product, resulting in approximately $564,000 in fees, which represents over 99% of all fees we received in 2003. The remaining fees, amounting to under $1,000, were derived from our advertising activities. Going forward, we plan to generate revenues by:

• directly selling subscriptions to our products to consumers at the current rate of $30.00 per year;
  
• attracting advertising revenues by providing advertisers with focused and targeted audiences for their products;
  
• selling bulk licenses at a discount directly or through resellers to multi-user organizations;
  
• partnering with other Websites that would place a topic lookup bar inside their own Web pages, thus increasing traffic to our Website, which in turn will enhance our revenues from advertising; and
  
• bundling our products with various computer equipment manufacturers, software vendors and Internet portal properties, thereby increasing the number of users and, potentially, subscribers to our products.
  

The key elements of our strategy are to:

     Continue strengthening the GuruNet brand. To enhance public awareness of our answer engine product, we are pursuing a brand development strategy through mass marketing and targeted advertising and public relations. Our branding strategy centers on positioning GuruNet as an answer engine rather than a more traditional search engine for users needing quick, concise and accurate information rather than a long list of links to sift through. To date, we have received favorable reviews from numerous publications including The Washington Post, The Wall Street Journal and Children’s Software Revue (for our Kids Edition). We believe that building our brand will increase traffic to GuruNet and, as a result, increase revenues by attracting customers and advertisers.

     Continue developing our reference information. To maintain our competitive advantage, we must continue to develop a rich base of reference information. To supplement our ongoing efforts in increasing the depth and breadth of our reference information, we intend to continue entering into arrangements with content providers to display their reference information in response to our users’ queries.

     Expand our ability to solicit paid advertising by continuing to develop our ability to target our audience. We believe that we can serve advertisers on the Internet by effectively targeting interested audiences and consumers. We are able to provide focused sponsored links and advertisements related to a given user’s specific search. This extra relevancy benefits both users and advertisers. We intend to continue to develop and monitor our subscription base so that our advertisers may effectively reach their target audiences and we may enjoy increased revenues from paid search results.

     Develop co-branding partnerships and revenue-sharing arrangements with third-party Websites and service providers seeking to enhance their users’ experience. We believe that opportunities exist for partnering with other Websites and service providers to enhance their users’ experience and our brand and revenues. For example, we may enter into agreements with third-party Websites to place our topic lookup bar inside their Web pages. We believe that this will result in an increase in traffic to our Website, which in turn will enhance our revenues from click-through advertising and upselling to our subscription service.

     In August and September 2004, we signed agreements with two partners, pursuant to which we will provide our reference solution to users of their services. One of the agreements is with Comet Systems, Inc., a leader in connected, intelligent desktop software. The second agreement is with A9.com, Inc., a new search engine owned by Amazon.com, Inc. A9.com, Inc. launched their search engine, with GuruNet integrated as a reference source, on September 15, 2004.

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The GuruNet Experience

     We employ an innovative approach to enhancing our users’ experience. Our Windows product performs three functions:

• identifying the pointed-to terms in context (“screen-scraping”);
  
• communicating automatically with the back-end server over the Internet; and
  
• maintaining the user interface, presentation, menus and dialog boxes.
  

     Most computer applications such as word processing, spreadsheet and e-mail are not integrated with the Internet and require users to open a separate Web browser to obtain information from the Internet. Our answer engine works differently. Assuming the user is connected online to the Internet, a user may click on any text in any e-mail, spreadsheet, word processing or database program or Web page and simultaneously press the alt-key. This “alt-click” will automatically signal our Windows product to determine the context of the clicked-on text and neighboring words and communicate with our answer engine to analyze and process the query. The neighboring words assist in determining the text’s proper context.

     Once the text’s context has been determined, our answer engine automatically will research and determine the best match for the selected word, term, name or phrase. Our answer engine will then open a pop-up window with a fully-contained definition or explanation of that word, term, name or phrase. Our user interface contains numerous tabs, offering our users a multi-faceted reference guide to a particular topic. A “Search Web” tab always appears on the screen, allowing users to search the Internet for other interesting Web pages.

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GuruNet Solutions

     We currently offer two product brands of GuruNet. Our standard brand is geared towards all ages except children, while GuruNet Kids is specifically geared towards elementary school children. GuruNet Kids is reference appropriate for grades 2-6. The two versions of GuruNet are accessible through our software applications that enable consumers and end users to access our answer engine. Our users can look up topics using several different applications:

• GuruNet for Windows;
  
• GuruNet on the Web;
  
• GuruNet IE Toolbar; and
  
• GuruNet for Mac
  

     All of these applications are available as a free version with basic reference sources and as a for-pay premium version containing more reference sources. By purchasing a subscription to our answer engine product, a user can access additional content, as updated, during the life of the subscription. Otherwise, the user only will be able to access the content we make available through our free product offering.

     Subscribers who purchase a subscription to our standard GuruNet brand are entitled to our premium content through GuruNet for Windows, GuruNet on the Web, GuruNet IE Toolbar and GuruNet for Mac. These different applications are simply different ways to access the paid subscription to our premium content. Similarly, subscribers who purchase a subscription to GuruNet Kids are entitled to our premium content for the children’s version of GuruNet, though GuruNet for Windows, GuruNet on the Web, GuruNet IE Toolbar and GuruNet for Mac. Subscriptions to our standard brand of GuruNet and GuruNet Kids are not interchangeable. One subscription allows the user to access one of the two versions, but not both.

     During 2003, we offered a lifetime subscription to our answer engine product for $40.00. In late 2003, we realized that the lifetime pricing model would not support our efforts to continually update and improve the GuruNet answer engine product. Therefore, we decided to alter our pricing model and move to an annual subscription model. Beginning in May 2004, we offered users who purchased lifetime subscriptions the opportunity to convert their lifetime subscription into a free two-year subscription to a newer enhanced version of GuruNet. Users who choose to maintain their lifetime subscriptions will continue to have access to those content sources that were available to GuruNet users in 2003, but will not have access to updated and improved content sources added subsequent to 2003. The cash received from previous sales of one-time subscriptions would be recognized over the new two-year subscription period for users who agree to this offer.

     Under our current annual subscription model, customers may purchase a one-year subscription, the price of which is currently $30.00. By purchasing such a subscription, a customer can access our full content offerings through any one or more of the following products. We offer a discounted rate to groups of at least ten people that wish to purchase our subscriptions.

     GuruNet for Windows. In March 2003, we began offering our GuruNet for Windows software application. Our flagship application delivers single-click reference answers anywhere in Windows. The user can “alt-click” on any word on the screen, in any Windows application such as Office, e-mail or browser, and our answer engine looks it up in its online library and delivers a snapshot answer in an unobtrusive pop-up window on the screen. For example, if a user receives an e-mail and does not understand a word contained in the text of the email or would like more information about a particular topic discussed in the e-mail, a GuruNet for Windows user could just “alt-click” on that word or topic and would receive in a pop-up window relevant information about that word or topic. Our answer engine analyzes surrounding words in context for a more accurate answer. For example, Ford Motor Company is different from Henry Ford or Harrison Ford. GuruNet for Windows also includes a library tree for perusing the reference sources and a convenient “Topicbar” for looking up words or phrases any time. Since its release in March 2003, more than 350,000 copies of GuruNet for Windows have been downloaded and installed.

     GuruNet on the Web. In March 2004, we also released GuruNet on the Web. This version of our search answer product requires no download, but users must visit our destination Website to enter a query. The information is delivered to the user in standard HTML format inside a standard browser. The advantage of this product is that a subscriber may access our information from any computer, rather than just the computer on which GuruNet for Windows is installed. The picture below illustrates our “Topicbar” when a user conducts a search for “Harry Truman.”

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     GuruNet IE Toolbar. In March 2004, we released a toolbar for query lookup, which serves primarily as a convenient way of using GuruNet on the Web. This minimal download is installed and appears as a toolbar in Microsoft Internet Explorer for Windows and gives users an easy way to find information while browsing the Internet.

     GuruNet Beta for Mac. We launched a beta version of GuruNet for Mac in June 2004. Like GuruNet for Windows, this version consists of downloadable software. It enables global hotkey access from within most applications running on the Apple Macintosh using the OS/X operating system.

     Answers.com. This is a destination site similar to GuruNet on the Web. As opposed to GuruNet on the Web, which is based on paid subscriptions and advertising revenue, our revenue model for this product is based solely on advertising revenue, primarily through pay-per-click keyword advertising. When a user searches sponsored keywords, an advertiser’s Website is displayed in a premium position and identified as a sponsored result to the search.

     GuruNet Free. In addition to our subscription-based products, we also offer complementary access to dictionary, thesaurus, and other basic reference information, accessible through any of the products described above.

Future Products and Enhancements

Among the products or markets that we seek to develop are:

• Premium answer engine products containing customized content for vertical markets, or markets limited to a specific area such as education, finance or journalism, to be sold through distributors and resellers focused on and familiar with such specific vertical markets; and
  
• Adding desktop search functionality to the premium GuruNet product, which would allow a user to instantly locate files or email on the user’s computer hard drive, to the premium GuruNet product, thereby increasing the desirability of subscribing to the premium GuruNet product.
  

     All of these future products are in the early stage of development. We hope to begin releasing such products over the next 12 months.

Sales, Marketing and Distribution

     Direct to consumer. We sell subscriptions to our Website and software applications over the Internet directly to consumers and end users. Users who wish to purchase subscriptions go to our Website, www.gurunet.com, and

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purchase a subscription, generally using a major credit card. We attract users to our Website primarily through advertising, press coverage and links from other Websites who partner with us. The primary ways in which we intend to reach our target audience are:

• Public Relations. We have contracted with public relations services and have experienced success in building our brand. We have received multiple favorable reviews from numerous publications including
  USA Today, The Washington Post, The Wall Street Journal and PC Magazine and plan on expanding our public relations efforts.
  
• Electronic Advertising. We have primarily advertised with sites that attract users interested in reference tools and software such as Download.com, Word-of-the-Day and LockerGnome. We plan on continuing to focus our advertising efforts to most effectively reach consumers who are interested in our products and software applications.
  

     Education Channels. We see the educational sector as a key market that could benefit from our products, which provide:

• credible, attributed information; and
  
• filtered results, avoiding offensive or inappropriate materials for students through the use of child friendly search engines.
  

     We help students of all ages focus on finding facts, not surfing web links. Our products offer students and teachers quick, accurate, focused information that comes to the point of need and eliminates potential distractions associated with searching for information on the Internet.

     Our specific target market is parents concerned with filtering and improving the quality of information that their children access on the Internet. In June 2003, we launched a GuruNet Kids Edition specifically geared to students in Grades 2 through 6. It is child-friendly, without the options that allow unrestricted access to live web content.

We intend to access these channels by identifying distributors and resellers that target the education market.

Advertising Revenue

     We have the capacity to monetize two kinds of advertisements and sponsored search. The first is showing sponsored search results in our own “Search Web” tab. The second is to display advertisements and sponsored links in our “Results” tab. This could potentially become a more substantial part of our business model as our query traffic increases. We currently have an agreement with InfoSpace, through which InfoSpace locates advertisers seeking to display sponsored links on our results pages. In 2003, we did not generate significant revenue from advertising.

Content Providers and Hosting Services

     Scope and quality of information. Our library contains over 100 sources of reference information, culled and integrated from both premium subscription-based reference sources such as Houghton Mifflin and the Columbia University Press, and publicly available Web sources, such as The Official Website of The Baseball Hall of Fame.

Our answer engine offers customers access to various topics, including:

• General reference: dictionary, thesaurus, encyclopedia and history;
  
• Language: idioms, translations, new words, acronyms, abbreviations, lexicon, idioms, grammar, sign language, quotes about and quotes by;
  
• Business: company snapshot descriptions, economics, finance, investment terms and currency conversions;
  
• Arts and culture: fine arts, literature, poets, music, instruments and study guide;
  
• Legal: legal dictionary and famous US Supreme Court cases;
  

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• Medical: medical dictionary, medical analysis, health topics and phobias;
  
• Science and technology: conversions, computer encyclopedia, science, genetics, chemistry, mathematics and e-mail shorthand;
  
• People: famous personalities and celebrities, historical figures, musical artists, authors, columnists, royalty and sports biographies;
  
• Food and nutrition: nutritional values, recipes, diets and wine glossary;
  
• Government: US presidents, US cabinet, US congress, political parties (international), national anthems and world leaders;
  
• Leisure: holidays, gardening, movies, TV shows, song lyrics, Harry Potter terms, wood glossary and yoga;
  
• Religion: Bible, Christianity, Judaism, Islam, Hinduism and Buddhism;
  
• Places: countries, states, weather, maps, dialing codes, local times, currencies by country, state parks and universities;
  
• Military: military terms, weapons and bio-terrorism; and
  
• Sports: baseball hall of fame, golf, tennis, MLB, NFL, NHL and NBA.
  

     We may change any of the topics covered from time to time. The information displayed for our users is automatically consolidated from various source references into an easy to read, user-friendly format.

     Content License Agreements. We license content provided through our products pursuant to written agreements with recognized collators of useful information, including, but not limited to, Houghton Mifflin (Dictionaries), Columbia University Press (Encyclopedia) and Wizcom (Word-for-word translations). These agreements are generally for one year or more, renewable by consent of the parties, and give us the right to provide the licensed information to our end users through our product in return for a lump sum amount payable over the life of the agreement. Our product also includes content we license at no cost, and content publicly available from the Web. If we are unable to renew our current license agreements on terms acceptable to us, we will need to develop relationships with alternative providers of content of comparable value to our users.

     Web Hosting. We outsource our Web hosting to SAVVIS Communications Corporation at the rate of $13,500 per month. We use servers operated by SAVVIS to operate our proprietary software developed in our Jerusalem, Israel development facility. The servers receive a user’s query, analyze the query for the best possible match and return a properly formatted result. Our agreement with SAVVIS terminates in December 2004. Web hosting services are generally available from multiple sources and we believe that we can replace SAVVIS if they can no longer supply Web hosting services to us on acceptable terms.

     In addition, the servers host the tools and databases required to maintain our consolidated information sources. We currently utilize ten machines running the Unix^® and Linux operating systems and anticipate that we have the ability to add capacity as required.

Research and Development

     We devote a substantial portion of our resources to inventing and developing new products, maintaining and enhancing existing products, expanding and improving our fundamental technology and strengthening our technological expertise. In fiscal years 2002 and 2003, we spent approximately $2,660,000 and $910,000, respectively, on research and development of our products. Our engineering and production teams are located in our Jerusalem, Israel development facility. We have developed internally, acquired or licensed the products and services we offer.

Competition

     We face formidable competition in every aspect of our business, particularly from search engines and other companies that seek to connect users with information on the Web and provide them with relevant advertising. We operate in the market for Internet products and services, a market that is highly competitive and characterized by rapid change, converging technologies and increased competition from companies offering information

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integrated into other products and media properties. Our ability to compete depends on numerous factors, many of which are outside our control. Some of our primary competitors, such as Google, Ask Jeeves and Yahoo!, as well as potential new competitors, have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. Therefore, they may be able to devote greater resources to the development and promotion of their services than we can to ours. Our competitors may develop products and services that are equal or superior to ours or that achieve greater market acceptance. Many of our competitors offer a wider range of products than we do, which could attract our customers to competitive search sites, and consequently, result in less traffic to our Websites and fewer subscription and advertising-generated revenues.

Our competition can be divided into three primary areas:

• destination portals and search engines including Google, Yahoo!, The Microsoft Network (MSN), Ask Jeeves, Dogpile, MetaCrawler, Time Warner, Inc., and Looksmart;
  
• online reference sites including Britannica.com, WorldBook.com, Groliers.com, Encarta.msn.com and Dictionary.com; and
  
• one-click information access software providers including Babylon and CleverKeys.
  

     We seek to differentiate ourselves by providing our users with information more quickly and simply than traditional search engines. While most search engines respond to an Internet user’s query by displaying a long list of links to other Websites that in some way may be related to the query term, our answer engine product automatically displays relevant, narrative responses to a user’s query. We compete with online reference sites and one-click information access software providers by aggregating significantly greater amounts of content sources to be made available to our users.

     We seek to generate advertising revenues through pay-per-click keyword advertising. The primary method is to attract users with a service on the Web that is perceived to be useful and differentiated enough to generate their query traffic. Once users are using our product and looking up topics in it, we have the opportunity to furnish relevant sponsored links and advertising. We currently have an agreement with Infospace in which we supply our search product and the space on our Website for advertisements. InfoSpace supplies the relevant sponsored links through our service to our users, in exchange for sharing the revenue generated. Our ability to compete for advertising revenue will be dependent on our ability to increase the number of users who use our products and search for keywords that are in demand by the advertisers who advertise through InfoSpace or other internet advertising aggregators that we may choose to work with in the future.

Regulation of the Internet

     There are still relatively few laws or regulations specifically addressed to the Internet. As a result, the manner in which existing laws and regulations should be applied to the Internet in general, and how they relate to our business in particular, is unclear in many cases. Such uncertainty arises under existing laws regulating matters, including user privacy, defamation, pricing, advertising, taxation, gambling, sweepstakes, promotions, content regulation, quality of products and services, and intellectual property ownership and infringement. At the present time there are no requirements that we obtain prior governmental approval in any jurisdiction for our principal products or services.

     However, to resolve some of the current legal uncertainty, we expect new laws and regulations to be adopted that will be directly applicable to our activities. Any existing or new legislation applicable to GuruNet could expose us to substantial liability, including significant expenses necessary to comply with such laws and regulations, and could dampen the growth in use of the Internet in general. Several new federal laws have already been adopted that could have an impact on our business. The CAN-SPAM Act of 2003 is intended to regulate spam and create criminal penalties for unmarked sexually-oriented material and emails containing fraudulent headers. The USA Patriot Act is intended to give the government greater ability to conduct surveillance on the Internet by allowing it to intercept communications regarding terrorism and computer fraud and abuse. The Digital Millennium Copyright Act is intended to reduce the liability of online service providers for listing or linking to third-party Websites that include materials that infringe copyrights or other rights of others. The Children’s Online Protection Act, the Children’s Online Privacy Protection Act, and the Prosecutorial Remedies and Other Tools to End Exploitation of Children Today Act of 2003, are intended to restrict the distribution of certain materials deemed harmful to children and

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impose additional restrictions on the ability of online services to collect user information from minors. In addition, the Protection of Children From Sexual Predators Act of 1998 requires online service providers to report evidence of violations of federal child pornography laws under certain circumstances. Under the U.K. Data Protection Act and the European Union Data Protection Directive, a failure to ensure that personal information is accurate and secure or a transfer of personal information to a country without adequate privacy protections could result in criminal or civil penalties. Such legislation may impose significant additional costs on our business or subject us to additional liabilities. We post our privacy policy and practices concerning the use and disclosure of user data. Any failure by us to comply with our posted privacy policy, Federal Trade Commission requirements or other domestic or international privacy-related laws and regulations could result in proceedings by governmental or regulatory bodies that could potentially harm our business, results of operations and financial condition. In this regard, there are a large number of legislative proposals before the European Union, as well as before the United States Congress and various state legislative bodies regarding privacy issues related to our business. It is not possible to predict whether or when such legislation may be adopted, and certain proposals, if adopted, could harm our business through a decrease in user registrations and revenues. These decreases could be caused by, among other possible provisions, the required use of disclaimers or other requirements before users can utilize our services.

     Due to the global nature of the Web, it is possible that the governments of other states and foreign countries might attempt to regulate its transmissions or prosecute us for violations of their laws. We might unintentionally violate such laws, such laws may be modified and new laws may be enacted in the future. Any such developments could harm our business, operating results and financial condition. We may be subject to legal liability for our online services. We direct users to a wide variety of services that enable individuals to exchange information, generate content, conduct business and engage in various online activities on an international basis, including public message posting, sweepstakes and services relating to online auctions and homesteading. The law relating to the liability of providers of these online services for activities of their users is currently unsettled both within the United States and abroad. Claims may be threatened against us for aiding and abetting defamation, negligence, copyright or trademark infringement, or other theories based on the nature and content of information that we provide links to or that may be posted online.

Intellectual Property

     We have been granted three United States patents and have one patent pending in the United States Patent and Trademark Office for various aspects of our word-based referencing search and Web-wide based information retrieval technologies which power our proprietary Website. The following chart sets forth details concerning our three issued patents.

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     The status of any patent involves complex legal and factual questions, and the breadth of claims allowed is uncertain. Accordingly, we cannot assure you that any patent application filed by us will result in a patent being issued, or that our patents, and any patents that may be issued in the future, will afford adequate protection against competitors with similar technology. We similarly face the risk that any patents issued to us might be infringed or designed around by others.

     While we rely on patent and other intellectual property laws to protect our technology, we also believe that factors such as the technological and creative skills of our personnel, new product developments, frequent product enhancements and reliable product maintenance are essential to establishing and maintaining our market position. We enter into confidentiality agreements, as appropriate, with our employees, consultants and customers, and otherwise seek to control access to, and distribution of, our proprietary information. These measures, however, afford only limited protection. There is no guarantee that these safeguards will protect our technology and other valuable competitive information from being used by competitors.

     From time to time in the ordinary course of business we have been, and we expect to continue to be, subject to claims of alleged infringement of the trademarks and other intellectual property rights of third parties. These claims and any resultant litigation, should it occur, could subject us to significant liability for damages. In addition, even if we prevail, litigation could be time-consuming and expensive to defend, and could result in the diversion of our time and attention. Any claims from third parties may also result in limitations on our ability to use the intellectual property subject to these claims unless we are able to enter into agreements with the third parties making these claims.

Property

     Our corporate headquarters and research and development facility is located in Building 98, Jerusalem Technology Park, P.O. Box 48253, Jerusalem 91481, Israel in approximately 7,000 square feet of space occupied under a lease with a monthly rental rate of approximately $11,000 that expires in December 2005, with an option to extend the term for an additional 47 months thereafter at the same monthly rate (as adjusted for local inflation). We believe that our facilities are in good condition and adequate for our current needs. We also maintain an address for receipt of correspondence at 441 Route 306, Wesley Hills, New York 10952 at no cost. In October 2003 and February 2004, our board of directors granted the tenant of such premises ten year options to purchase 435 and 1,000 shares of our common stock at exercise prices of $2.76 and $6.00, respectively.

Employees

     At September 1, 2004, we had 20 full-time employees and 7 part-time employees, all of who are based at our offices in Jerusalem, Israel. None of our employees are subject to a collective bargaining agreement, and we believe that our relations with our employees are good.

Operations in Israel

     The Law for the Encouragement of Capital Investments, 1959, provides that upon application to the Investment Center of the Ministry of Industry, Commerce and Employment of the State of Israel, a proposed capital investment in eligible capital expenditures may be designated as an Approved Enterprise. Each certificate of approval for an Approved Enterprise relates to a specific investment program delineated both by its financial scope, including its capital sources, and by its physical characteristics, such as the equipment to be purchased and utilized under the program. The tax benefits derived from any certificate of approval relate only to taxable income derived from growth in manufacturing revenues attributable to the specific Approved Enterprise. If a company has more than one approval or only a portion of its capital investments are approved, its effective tax rate is the result of a weighted combination of the applicable rates.

     Taxable income of a company derived from an Approved Enterprise is subject to tax at the maximum rate of 25%, rather than the usual rate of 36%, for the benefit period. This period is ordinarily seven years beginning with the year in which the Approved Enterprise first generates taxable income, and is limited to 12 years from when production begins or 14 years from the date of approval, whichever is earlier. A company owning an Approved Enterprise may elect to receive an alternative package of benefits, which allows the company to receive tax exemptions rather than grants. Under the alternative package, the company’s undistributed income derived from an Approved Enterprise will be exempt from tax for a period of between two and ten years from the first

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year of taxable income, depending on the geographic location of the Approved Enterprise within Israel, and the company will be eligible for the tax benefits under the law for the remainder of the benefit period.

     The Investment Center bases its decision of whether to approve or reject a company’s application for designation as an Approved Enterprise on criteria described in the law and related regulations, the then prevailing policy of the Investment Center and the specific objectives and financial criteria of the applicant. Therefore, a company cannot be certain in advance whether its application will be approved. In addition, the benefits available to an approved enterprise are conditional upon compliance with the conditions stipulated in the law and related regulations and the criteria described in the specific certificate of approval. If a company violates these conditions, in whole or in part, it would be required to refund the amount of tax benefits and any grants received plus an amount linked to the Israeli consumer price index and interest.

     Our Israeli subsidiary currently has two capital investment programs which were granted Approved Enterprise status. Income arising from our Approved Enterprise is tax-free under the alternative package of benefits described above and entitled to reduced tax rates based on the level of foreign ownership for a period of 10 years from the first year in which our Israeli subsidiary generates taxable income from such Approved Enterprise, but not later than certain specified periods. We have begun to generate taxable income for purposes of this law and we have utilized these tax benefits beginning 2000. The law also provides that an Approved Enterprise is entitled to accelerated depreciation on its property and equipment that are included in an approved investment program.

Legal Proceedings

     From time to time in the ordinary course of business, we may be involved in litigation. We are not presently involved in any litigation that is material to our business.

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MANAGEMENT

Directors and Executive Officers

The following table sets forth information about our executive officers and directors:

     Robert S. Rosenschein has been Chairman of our board and President since he founded GuruNet in December 1998. From December 1998 to April 2000 and since May 2001, Mr. Rosenschein has served as our Chief Executive Officer. From May 2000 to April 2001, Mr. Rosenschein served our Chairman. From 1988 to 1997, Mr. Rosenschein was Chief Executive Officer of Accent Software International Ltd. (formerly Kivun), a company that developed multilingual software tools, and from 1997 to 1998, Mr. Rosenschein was Chief Technical Officer of Accent Software International Ltd. Mr. Rosenschein graduated with a B.Sc. in Computer Science from the Massachusetts Institute of Technology and received the Prime Minister of Israel’s Award for Software Achievement in 1997.

     Steven Steinberg joined GuruNet in December 2002 as Vice President of Finance and became our Chief Financial Officer and Secretary in January 2004. From January 2001 to November 2002, he was Vice President of Finance at Percite Information Technologies, Ltd., a supply-chain software company. From November 1998 to December 2000, Mr. Steinberg was Controller of Albar Financial Services Ltd., an automobile finance and leasing company. Previously, he was the Chief Financial Officer of the New York Operations of Health Partners, Inc., and worked for ten years at the New York offices of the accounting firm Coopers and Lybrand where he was an audit manager. Mr. Steinberg graduated with a B.B.A. from Florida International University.

     Jeff Schneiderman has been our Chief Technical Officer since March 2003. From January 1999 until February 2003, Mr. Schneiderman was our Vice President of Research and Development. From November 1991 to November 1998, Mr. Schneiderman was employed at Accent Software International Ltd., where he served as Vice President of Engineering from October 1996 to March 1998 and as Vice President of Product Development from March 1998 to November 1998. Mr. Schneiderman also has held development positions at AT&T Bell Labs and the Whitewater Group. Mr. Schneiderman graduated with a B.S. in Computer Science from the University of Illinois at Urbana/Champaign and a M.S. in Computer Science from Illinois Institute of Technology.

     Mark A. Tebbe has served as a director since December 1998. He currently serves as a member of our Audit Committee, Compensation Committee and Nominations and Governance Committee. Since February 2002, Mr. Tebbe has been Chairman of Techra Networks LLC, a technology-oriented consulting firm. From August 1984 to January 2002, Mr. Tebbe founded and served as Chairman of Lante Corporation, a technology consulting firm. Besides several nonprofit and civic organizations, Mr. Tebbe is a board member of SBI Group, Elexos Corp. and Selective Search. Mr. Tebbe is a former director of Octus Inc. and Accent Software International Ltd. Mr. Tebbe graduated with a B.S. in Computer Science from the University of Illinois at Urbana/Champaign.

     Edward G. Sim has served as a director since August 1999. He currently serves as a member of our Audit Committee, Compensation Committee and Nominations and Governance Committee. Mr. Sim is a member and Managing Director of the Dawntreader Group and Dawntreader Funds, which he co-founded in 1998. From April 1996 to April 1998, Mr. Sim worked with Prospect Street Ventures, a New York-based venture capital firm, where he worked on software and technology investments like 24/7 Media (Nasdaq: TFSM). From June 1994 to April 1996, Mr. Sim worked with J.P. Morgan’s Structured Derivatives Group on the development of a real-time trading application for global asset allocation. Mr. Sim currently serves as a director of Deepnines Technologies, netForensics, Metapa, and Moreover Technologies. Mr. Sim served as a director of LivePerson (NasdaqSC: LPSN) from October 2000 to July 2001, Flashbase (acquired by DoubleClick, Nasdaq: DCLK) from June 1999 to June 2000, and Expertcity/GoToMyPC (acquired by Citrix, Nasdaq: CTXS) from August 1999 to March 2004. Mr. Sim graduated with an A.B. in Economics from Harvard College.

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     Yehuda Sternlicht has served as a director since June 2004. He currently serves as the Chairman of our Audit Committee. Since November 2003, Mr. Sternlicht has been self-employed as an independent financial consultant. From July 1992 until November 2003 he was employed by Savient Pharmaceuticals Inc. (Nasdaq: SVNT) as financial manager and in January 1993 was appointed Chief Financial Officer of SVNT. In June 1995 he was appointed Vice President-Finance and Chief Financial Officer of SVNT, and in December 2002 he was appointed Vice President-Chief Accounting Officer of SVNT. Mr. Sternlicht is qualified as a Certified Public Accountant in the State of Israel and has a BA degree in Accounting and Economy from The Hebrew University.

     Jerry Colonna has served as a director since June 2004. From January 2002 until December 2002, Mr. Colonna was a partner with JP Morgan Partners, LLC, the private equity arm of JP Morgan Chase & Co. Since August 1996, Mr. Colonna has been a partner with Flatiron Partners, an investment company which he co-founded. Mr. Colonna is a member of the board of directors of a number of private companies including PlanetOut Inc., as well as a number of non-profit organizations including PENCIL—Public Education Needs Civic Involvement in Learning, NYPower NY and NYC2012. Mr. Colonna holds a B.A. in English Literature from Queens College at the City University of New York.

     Michael Eisenberg has served as a director since June 2004. Mr. Eisenberg has been a partner in Israel Seed Partners since July 1997. From 1995 to 1997, he worked for Jerusalem Global, a leading Israeli technology investment bank, as Vice President of investment banking. From 1993 to 1995, he was Director of Israel Operations at Marttila & Kiley Inc., a U.S. consulting firm. Mr. Eisenberg currently serves as a director of Shopping.com Ltd., Finjan Software Inc. and Digital Fuel, Inc. Mr. Eisenberg holds a B.A. in Political Science from Yeshiva University.

     Our Amended and Restated Certificate of Incorporation provides that the number of directors shall be not less than five or more than nine directors. Our board of directors is divided into three classes with only one class of directors being elected in each year and each class serving a three-year term. The following chart sets forth the term of office of each class of directors and which director are assigned to each class:

     Non-employee directors receive an annual fee of $15,000, plus $500 for attendance at each full board meeting of our board of directors and reimbursement for reasonable travel expenses. In January 2004, our board authorized the grant of options to purchase 28,671 shares of common stock under our existing stock option plan to each of Mr. Tebbe and Mr. Sim. In June 2004, our board authorized the grant of options to purchase 28,700 shares of common stock under our existing stock option plan to each of Mr. Sternlicht, Mr. Colonna and Mr. Eisenberg. Additionally, the members of the board’s audit committee will be paid an additional annual fee of $5,000 plus reimbursement for reasonable travel expenses, and the Chairman of the audit committee will be paid an additional annual fee of $10,000 plus reimbursement for reasonable travel expenses.

Director Independence

     The American Stock Exchange requires that a majority of our board must be composed of “independent directors,” which is defined generally as a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship, which, in the opinion of the company’s board of directors would interfere with the director’s exercise of independent judgment in carrying out the responsibilities of a director. However, a company listing in connection with an initial public offering is not required to have a majority of independent directors until one year after listing and may phase in the members of its audit, compensation, and nominations committees with one independent member upon listing, a majority of independent members within 90 days of listing, and all independent members within one year of listing.

Currently, we have a majority of independent directors on our board. Our independent directors will have regularly scheduled meetings at which only independent directors are present.

     Any affiliated transactions will be on terms no less favorable to us than could be obtained from independent parties. Any affiliated transactions must be approved by a majority of our independent and disinterested directors.

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Committees of the Board

     Audit Committee. In May 2004, we established an audit committee of the board of directors, which consists of Mr. Sternlicht, as Chairman, Mr. Tebbe and Mr. Sim, each of whom is an independent director under the American Stock Exchange’s listing standards. The audit committee’s duties, which are specified in our Audit Committee Charter, include, but are not limited to:

• reviewing and discussing with management and the independent accountants our annual and quarterly financial statements;
  
• directly appointing, compensating, retaining, and overseeing the work of the independent auditor;
  
• approving, in advance, the provision by the independent auditor of all audit and permissible non-audit services;
  
• establishing procedures for the receipt, retention, and treatment of complaints received by us regarding accounting, internal accounting controls, or auditing matters and the confidential, anonymous submissions by our employees of concerns regarding questionable accounting or auditing matters;
  
• the right to engage and obtain assistance from outside legal and other advisors as the audit committee deems necessary to carry out its duties;
  
• the right to receive appropriate funding from us to compensate the independent auditor and any outside advisors engaged by the committee and to pay the ordinary administrative expenses of the audit committee that are necessary or appropriate to carrying out its duties; and
  
• unless assigned to a comparable committee or group of independent directors, they must review and approve all related party transactions.
  

Financial Experts on Audit Committee

     The audit committee will at all times be composed exclusively of “independent directors” who are “financially literate” as defined under the American Stock Exchange listing standards. The current American Stock Exchange listing standards define an “independent director” generally as a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship, which, in the opinion of the company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The American Stock Exchange listing standards define “financially literate” as being able to read and understand fundamental financial statements, including a company’s balance sheet, income statement and cash flow statement.

     In addition, we must certify to the American Stock Exchange that the committee has, and will continue to have, at least one member who has past employment experience in finance or accounting, requisite professional certification in accounting, or other comparable experience or background that results in the individual’s financial sophistication. The board of directors believes that Mr. Sternlicht satisfies the American Stock Exchange’s definition of financial sophistication and also qualifies as an “audit committee financial expert,” as defined under rules and regulations of the Securities Exchange Commission, or SEC.

     Compensation Committee. In May 2004, we established a compensation committee of the board of directors, which consists of Mr. Sim, Mr. Colonna and Mr. Eisenberg, each of whom is an independent director. The compensation committee reviews and approves our salary and benefits policies, including compensation of executive officers. The compensation committee also administers our stock option plan, and recommends and approves grants of stock options under that plan.

     Nominations and Governance Committee. In May 2004, we established a nominations and governance committee of the board of directors, which consists of Mr. Tebbe, Mr. Sim and Mr. Colonna, each of whom is an independent director. The purpose of the nominations and governance committee is to select, or recommend for our entire board’s selection, the individuals to stand for election as directors at the annual meeting of stockholders and to oversee the selection and composition of committees of our board. The nominations and governance committee’s duties, which are specified in our Nominating/Corporate Governance Committee Charter, include, but are not limited to:

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• establishing criteria for the selection of new directors;
  
• considering stockholder proposals of director nominations;
  
• committee selection and composition;
  
• considering the adequacy of our corporate governance;
  
• overseeing and approving management continuity planning process; and
  
• and reporting regularly to the board with respect to the committee’s duties.
  

Code of Ethics

     In May 2004, we adopted a Code of Ethics and Business Conduct that applies to all of our executive officers, directors and employees. The Code of Ethics and Business Conduct codifies the business and ethical principles that govern all aspects of our business.

Employment Agreements

     Mr. Rosenschein is employed as our President and Chief Executive Officer pursuant to a five-year employment agreement that commenced on January 1, 2002 and was amended and restated as of January 8, 2004. The amended agreement provides for an annual base salary of $180,000 with 10% annual increases and an annual bonus to be determined at the discretion of our board of directors. If we terminate Mr. Rosenschein for any reason other than cause, we are required to pay him a lump sum of $150,000 regardless of how much time remains in the term of his employment agreement less the severance pay portion of his Manager’s Insurance Policy (the “Policy”). If the Policy is greater than $150,000, then Mr. Rosenschein will be entitled to the entire amount payable under the Policy. At the time Mr. Rosenschein’s employment agreement was amended and restated, 241,964 options were granted to Mr. Rosenschein under the 2003 Stock Option Plan. In the event of a change in control, we will accelerate the vesting of 50% of any options granted to Mr. Rosenschein that have not vested as of the effective date of the change of control. If, within 12 months after such change in control, Mr. Rosenschein is terminated without cause, any unvested options that were granted to Mr. Rosenschein will vest immediately upon the effective date of the termination. Mr. Rosenschein has agreed to refrain from competing with us for a period of two years following the termination of his employment.

     Mr. Steinberg is employed as our Chief Financial Officer pursuant to an employment agreement that commenced on April 1, 2004. The agreement provides for a base annual salary of $111,924. We or Mr. Steinberg may terminate the employment agreement by providing three months written notice. If we terminate Mr. Steinberg without cause, we shall extend the period during which Mr. Steinberg may exercise his options granted after the date of his employment agreement by one year from the effective date of Mr. Steinberg’s termination. In the event of a change in control, we will accelerate the vesting of 50% of any options granted to Mr. Steinberg that have not vested as of the effective date of the change of control. If, within 12 months after such change in control, Mr. Steinberg is terminated without cause, Mr. Steinberg is entitled to four months written notice and any unvested options that were granted to Mr. Steinberg will vest immediately upon the effective date of the termination. Mr. Steinberg has agreed to refrain from competing with us for a period of twelve months following the termination of his employment.

     Mr. Schneiderman is employed as our Chief Technical Officer pursuant to an employment agreement that commenced on April 1, 2004. The agreement provides for a base annual salary of $98,724. We or Mr. Schneiderman may terminate the employment agreement by providing three months written notice. If we terminate Mr. Schneiderman without cause, we shall extend the period during which Mr. Schneiderman may exercise his options granted after the date of his employment agreement by one year from the effective date of Mr. Schneiderman’s termination. In the event of a change in control, we will accelerate the vesting of 50% of any options granted to Mr. Schneiderman subsequent to his employment agreement that have not vested as of the effective date of the change of control. If, within 12 months after such change in control, Mr. Schneiderman is terminated without cause, Mr. Schneiderman is entitled to four months written notice and any unvested options that were granted to Mr. Schneiderman subsequent to the date of his employment agreement will vest immediately upon the effective date of the termination. Mr. Schneiderman has agreed to refrain from competing with us for a period of twelve months following the termination of his employment.

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Executive Compensation

     The table below summarizes the compensation earned for services rendered to us in all capacities for the fiscal year ended December 31, 2003 by our Chief Executive Officer and any other officer whose 2003 compensation exceeded $100,000. No other individuals employed by us received a salary and bonus in excess of $100,000 during 2003.

     Our named officers routinely receive other benefits from us that are customary to similarly situated companies. We have concluded, after reasonable inquiry, that the aggregate amount of these benefits in each of the years indicated did not exceed the lesser of $50,000 or 10% of the compensation of any named officer.

Stock Options

     We provide for direct grants or sales of common stock, and common stock options to employees and non-employees through stock option plans. Stock options are granted at an exercise price as determined by the board at the time the option is granted. The exercise price of an employee incentive stock option shall not be less than 100% of the fair market value of a share on the date of grant. The exercise price of a nonstatutory stock option shall not be less than 85% of the fair market value of a share on the date of grant. Our stock options generally vest over four years with 25% vesting after the first year and the remaining 75% vesting in equal monthly amounts over the following thirty-six month period. Each option has a term of ten years.

A summary of the status of our various Stock Option Plans and of other options is as follows:

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OPTIONS GRANTED IN FISCAL YEAR 2003

     The following table sets forth the number of stock options granted to the named executive officers in fiscal year 2003. We granted a total of 244,367 options during the fiscal year ended December 31, 2003.

2003 FISCAL YEAR END OPTION VALUES

     The following table sets forth the value of unexercised “in-the-money” options held that represents the positive difference between the exercise price and the estimated market price of $4.60 at December 31, 2003. No named executive officer exercised any options during 2003.

Equity Compensation Plan Information   

  The following table sets forth certain information at December 31, 2003 with respect to our equity compensation plans that provide for the issuance of options, warrants or rights to purchase our securities.

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PRINCIPAL STOCKHOLDERS

     The table and accompanying footnotes set forth certain information as of September 30, 2004 with respect to the ownership of our common stock by:

• each person or group who beneficially owns more than 5% of our common stock;
  
• each of our directors;
  
• our chief executive officer and other executive officers whose total compensation exceeded $100,000 during the year ended December 31, 2003; and
  
• all of our directors and officers as a group.
  

     A person is deemed to be the beneficial owner of securities that can be acquired within 60 days from the exercise of options and warrants or the conversion of convertible securities. Accordingly, common stock issuable upon exercise of options and warrants that are currently exercisable or exercisable within 60 days of the date of this prospectus, and common stock issuable upon conversion of the bridge notes have been included in the table with respect to the beneficial ownership of the person or entity owning the options, warrants and bridge notes, but not with respect to any other persons or entities.

     Applicable percentage of ownership for each holder is based on 1,727,373 shares of common stock outstanding on September 30, 2004 and 4,568,051 shares of common stock outstanding after the offering, plus any presently exercisable stock options and warrants held by each such holder, and options, warrants and bridge notes held by each such holder that will become exercisable or convertible within 60 days after the date of this prospectus.

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