
Watson has a lot of computer memory. It has a fixed store of data is has "learned". It then needs to use the clues from the Jeopardy game to use this memory to answer the questions.
Watson is composed of a bunch of IBM Power 750 servers. The thing actually understands the nuances of the English language.
There is talk about commercial applications of this technology. But first IBM will need to figure out how to run the Watson program on something less than a massive computer.