**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**Washington,D.C. 20549

**FORM 10-Q**
| **x**                                                  | ** ** | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**        |
|--------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|
|                                                   |       |                                                                                               |
| **For the  quarterly period ended September 30, 2006** |
|                                                   | ** ** | ** **                                                                                         |
| **OR**                                                 |
|                                                   |       |                                                                                               |
| **o**                                                  | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commissionfile number 0-15946**

**Ebix, Inc.**(Exactname of registrant as specified in its charter)

| **DELAWARE**                                      |   | **77-0021975**                        |
|---------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or |   | (I.R.S. Employer  Identification No.) |
| organization)                                     |   |                                  |
|                                              |   |                                  |
| **1900 E.  GOLF ROAD**                            |   | ** **                            |
| **SCHAUMBURG,  IL**                               |   | **60173**                             |
| (Address of  principal executive offices)         |   | (Zip Code)                            |

 

Registrant’s telephone number, including area code: **847-789-3047**

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   Yes  x    No  o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

Large acceleratedfiler  o                   Accelerated filer  o             Non-accelerated filer  x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).   Yes  o    No  x

As of November 10, 2006, the number of shares of Common Stockoutstanding was 2,772,274.

 

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**Ebix, Inc. and Subsidiaries**

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2006

INDEX

 
| PART I — FINANCIAL INFORMATION                                                                                             |   |   |
|---------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                            |   |   |
| Item 1.  Consolidated Financial Statements                                                                                      |   |   |
|                                                                                                                            |   |   |
| Condensed Consolidated Balance Sheets at September 30,  2006 (unaudited) and December 31, 2005                             |   |   |
|                                                                                                                            |   |   |
| Condensed Consolidated Statements of Income for the  Three and Nine Months ended September 30,   2006 and 2005 (unaudited) |   |   |
|                                                                                                                            |   |   |
| Condensed Consolidated Statements of Cash Flows for  the Nine Months ended September 30,   2006 and 2005 (unaudited)            |   |   |
|                                                                                                                            |   |   |
| Notes  to Condensed Consolidated Financial Statements (unaudited)                                                               |   |   |
|                                                                                                                            |   |   |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations                             |   |   |
|                                                                                                                            |   |   |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                                             |   |   |
|                                                                                                                            |   |   |
| Item 4. Controls and Procedures                                                                                                 |   |   |
|                                                                                                                            |   |   |
| PART  II — OTHER INFORMATION                                                                                               |   |   |
|                                                                                                                            |   |   |
| Item  1A. Risk Factors                                                                                                          |   |   |
|                                                                                                                            |   |   |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                                            |   |   |
|                                                                                                                            |   |   |
| Item 4. Submission of Matters to a Vote of Security  Holders                                                                    |   |   |
|                                                                                                                            |   |   |
| Item 6.  Exhibits                                                                                                               |   |   |
|                                                                                                                            |   |   |
| SIGNATURES                                                                                                                      |   |   |

 

2

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**Ebix, Inc. and Subsidiaries**

**Condensed Consolidated Balance Sheets**

(In thousands, except for share and per share amounts)
| ** **                                                                                                                                                                                         | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                         | ** ** | **(Unaudited**)              | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                         | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **Current assets:**                                                                                                                                                                                | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Cash and cash  equivalents                                                                                                                                                                         |       | $                            | 5,334      |                        | $          | 6,733 |   |
| Accounts receivable,  less allowance of $20 and $11, respectively                                                                                                                                  |       | 5,002                        |       | 3,502                       |       |
| Other current assets                                                                                                                                                                               |       | 724                          |       | 444                         |       |
| **Total current assets**                                                                                                                                                                           |       | 11,060                       |       | 10,679                      |       |
| Property and equipment,  net                                                                                                                                                                       |       | 1,598                        |       | 1,488                       |       |
| Goodwill                                                                                                                                                                                           |       | 13,040                       |       | 12,204                      |       |
| Intangible assets, net                                                                                                                                                                             |       | 4,897                        |       | 3,293                       |       |
| Other assets                                                                                                                                                                                       |       | 285                          |       | 317                         |       |
| **Total  assets**                                                                                                                                                                                  |       | $                            | 30,880     |                        | $          | 27,981 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                     | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **Current liabilities:**                                                                                                                                                                           | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Accounts payable and  accrued expenses                                                                                                                                                             |       | $                            | 1,019      |                        | $          | 1,962 |   |
| Accrued payroll and  related benefits                                                                                                                                                              |       | 1,312                        |       | 1,450                       |       |
| Current portion of long  term debt                                                                                                                                                                 |       | 975                          |       | 969                         |       |
| Current portion of  capital lease obligations                                                                                                                                                      |       | 3                            |       | —                      |       |
| Current deferred rent                                                                                                                                                                              |       | 44                           |       | —                      |       |
| Deferred revenue                                                                                                                                                                                   |       | 2,601                        |       | 2,794                       |       |
| **Total current liabilities**                                                                                                                                                                      |       | 5,954                        |       | 7,175                       |       |
| Long term debt, less  current portion                                                                                                                                                              |       | 920                          |       | 1,844                       |       |
| Long term capital lease  obligation, less current portion                                                                                                                                          |       | 10                           |       | —                      |       |
| Long term deferred rent                                                                                                                                                                            |       | 241                          |       | —                      |       |
| Redeemable common stock  (0 shares issued and outstanding at September 30, 2006 and 157,728  outstanding at December 31, 2005, respectively) stated at redemption  price                      |       | —                       |       | 1,461                       |       |
|                                                                                                                                                                                               |       |                         |       |                        |       |
| **Stockholders’ equity:**                                                                                                                                                                     | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Convertible Series D  Preferred stock, $.10 par value, 500,000 shares authorized, no shares issued  and outstanding                                                                                |       | —                       |       | —                      |       |
| Common stock, $.10 par  value,  10,000,000 shares authorized, 2,781,164 issued and 2,772,274 outstanding at  September 30, 2006 and 2,740,516 shares issued and outstanding, at December  31, 2005 |       | 277                          |       | 274                         |       |
| Additional paid-in  capital                                                                                                                                                                        |       | 94,416                       |       | 92,539                      |       |
| Treasury stock (8,890  shares repurchased as of September 30, 2006)                                                                                                                                |       | (148                         | )          | —                      |       |
| Accumulated deficit                                                                                                                                                                                |       | (71,397                      | )          | (75,689                     | )          |
| Accumulated other  comprehensive income                                                                                                                                                            |       | 607                          |       | 377                         |       |
| **Total stockholders’ equity**                                                                                                                                                                |       | 23,755                       |       | 17,501                      |       |
| **Total liabilities and stockholders’ equity**                                                                                                                                                |       | $                            | 30,880     |                        | $          | 27,981 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

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**Ebix, Inc. and Subsidiaries**

**Condensed Consolidated Statements of Income**

(In thousands,except per share data)

(Unaudited)
| ** **                                                                                                                   | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                                                   | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenue:**                                                                                                                 | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Software                                                                                                                     |       | $                                                        | 326        |                                                    | $          | 390 |   | $ | 1,251 |   | $ | 1,000 |   |
| Services and  other (Including revenues from related parties of $1,062, $963, $2,477 and  $2,720, respectively- See Note 6.) |       | 6,970                                                    |       | 5,506                                                   |       | 18,724 |   | 16,934 |   |
| **Total  revenue**                                                                                                           |       | 7,296                                                    |       | 5,896                                                   |       | 19,975 |   | 17,934 |   |
| **Operating  expenses:**                                                                                                     | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Services and  other costs                                                                                                    |       | 1,480                                                    |       | 1,594                                                   |       | 4,170 |   | 4,503 |   |
| Product  development                                                                                                         |       | 1,297                                                    |       | 892                                                     |       | 3,265 |   | 2,459 |   |
| Sales and  marketing                                                                                                         |       | 729                                                      |       | 547                                                     |       | 1,969 |   | 1,547 |   |
| General and  administrative                                                                                                  |       | 1,531                                                    |       | 1,413                                                   |       | 4,892 |   | 4,928 |   |
| Amortization and  depreciation                                                                                               |       | 435                                                      |       | 317                                                     |       | 1,166 |   | 965 |   |
| **Total  operating expenses**                                                                                                |       | 5,472                                                    |       | 4,763                                                   |       | 15,462 |   | 14,402 |   |
| **Operating  income**                                                                                                        |       | 1,824                                                    |       | 1,133                                                   |       | 4,513 |   | 3,532 |   |
| Interest income                                                                                                              |       | 52                                                       |       | 125                                                     |       | 190 |   | 290 |   |
| Interest expense                                                                                                             |       | (22                                                      | )          | (142                                                    | )          | (109 | ) | (357 | ) |
| Foreign exchange  (loss) gain                                                                                                |       | (72                                                      | )          | (17                                                     | )          | 16 |   | 58 |   |
| **Income  before income taxes**                                                                                              |       | 1,782                                                    |       | 1,099                                                   |       | 4,610 |   | 3,523 |   |
| Income tax  (expense) benefit                                                                                                |       | (123                                                     | )          | 127                                                     |       | (318 | ) | (145 | ) |
| **Net  income**                                                                                                              |       | $                                                        | 1,659      |                                                    | $          | 1,226 |   | $ | 4,292 |   | $ | 3,378 |   |
|                                                                                                                         |       |                                                     |       |                                                    |       |   |   |   |   |
| **Basic  earnings per common share**                                                                                         |       | $                                                        | 0.60       |                                                    | $          | 0.45 |   | $ | 1.56 |   | $ | 1.20 |   |
|                                                                                                                         |       |                                                     |       |                                                    |       |   |   |   |   |
| **Diluted  earnings per common share**                                                                                       |       | $                                                        | 0.53       |                                                    | $          | 0.40 |   | $ | 1.37 |   | $ | 1.08 |   |
|                                                                                                                         |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic weighted  average shares outstanding                                                                                   |       | 2,763                                                    |       | 2,734                                                   |       | 2,757 |   | 2,808 |   |
|                                                                                                                         |       |                                                     |       |                                                    |       |   |   |   |   |
| Diluted weighted  average shares outstanding                                                                                 |       | 3,119                                                    |       | 3,089                                                   |       | 3,131 |   | 3,123 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

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**Ebix, Inc. and Subsidiaries**

**Condensed Consolidated Statements of Cash Flows**

(In thousands)

(Unaudited)
| ** **                                                                                             | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
|                                                                                                   |       |                                                    |       |   |   |
| **Cash  flows from operating activities:**                                                             | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Net income                                                                                             |       | $                                                       | 4,292      |   | $ | 3,378 |   |
| **Adjustments  to reconcile net income to net cash provided by (used in) operating  activities:** | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Depreciation and  amortization                                                                         |       | 1,166                                                   |       | 965 |   |
| Stock-based  compensation                                                                              |       | 65                                                      |       | (13 | ) |
| Restricted stock  compensation                                                                         |       | 112                                                     |       | 48 |   |
| Provision for  doubtful accounts                                                                       |       | 10                                                      |       | 6 |   |
| **Changes  in assets and liabilities net of acquisition:**                                             | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Accounts  receivable                                                                                   |       | (1,510                                                  | )          | 9 |   |
| Other assets                                                                                           |       | (248                                                    | )          | (21 | ) |
| Accounts payable  and accrued expenses                                                                 |       | (943                                                    | )          | (84 | ) |
| Accrued payroll  and related benefits                                                                  |       | (138                                                    | )          | (352 | ) |
| Deferred revenue                                                                                       |       | (284                                                    | )          | 170 |   |
| Net cash  provided by operating activities                                                             |       | 2,522                                                   |       | 4,106 |   |
| **Cash  flows from investing activities:**                                                             | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Investment in  Infinity                                                                                |       | (3,040                                                  | )          | — |   |
| Deferred rent                                                                                          |       | 231                                                     |       | — |   |
| Capital  expenditures                                                                                  |       | (370                                                    | )          | (382 | ) |
| Net cash  used in investing activities                                                                 |       | (3,179                                                  | )          | (382 | ) |
| **Cash  flows from financing activities:**                                                             | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Proceeds from  the exercise of the stock options                                                       |       | 322                                                     |       | 65 |   |
| Payments on the  line of credit                                                                        |       | —                                                  |       | (91 | ) |
| Repurchase of  stock guarantee                                                                         |       | —                                                  |       | (2,700 | ) |
| Repurchase of  common stock                                                                            |       | (148                                                    | )          | — |   |
| Capital leases                                                                                         |       | 13                                                      |       | — |   |
| Principal  payments under debt obligations                                                             |       | (966                                                    | )          | (949 | ) |
| Net cash  used in financing activities                                                                 |       | (779                                                    | )          | (3,675 | ) |
| Effect of foreign  exchange rates on cash                                                              |       | 37                                                      |       | (75 | ) |
| Net  change in cash and cash equivalents                                                               |       | (1,399                                                  | )          | (26 | ) |
| Cash and  cash equivalents at the beginning of the period                                              |       | 6,733                                                   |       | 5,843 |   |
| Cash and  cash equivalents at the end of the period                                                    |       | $                                                       | 5,334      |   | $ | 5,817 |   |
|                                                                                                   |       |                                                    |       |   |   |
| **Supplemental  disclosures of cash flow information:**                                                | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Interest paid                                                                                          |       | $                                                       | —     |   | $ | 155 |   |
| Income taxes  paid                                                                                     |       | $                                                       | 384        |   | $ | 260 |   |

 

See accompanying notes tocondensed consolidated financial statements.

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Ebix, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. BASIS OFPRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

**Basis ofpresentation** — These condensed consolidated financialstatements are unaudited, include the accounts of Ebix, Inc. and itswholly-owned subsidiaries (Ebix or “the Company”), and reflect all adjustments(consisting only of normal recurring adjustments) which are, in the opinion ofmanagement, necessary for a fair presentation of the results of the interimperiods.

These condensedconsolidated financial statements should be read in conjunction with theconsolidated financial statements, and accompanying notes thereto, included inthe Company’s Annual Report on Form 10-K for the year ended December 31,2005.

The results ofoperations for the current interim period are not necessarily indicative ofresults to be expected for the entire current year.

Certain priorperiod amounts have been reclassified to conform to the current period presentation.

**Summaryof significant accounting policies—**

**RevenueRecognition**—**We**apply the provisions of Statement of Position (“SOP”) 97-2, “Software RevenueRecognition,” as amended by Statement of Position 98-9, “Modification ofSOP 97-2, Software Revenue Recognition, With Respect to CertainTransactions,” to all transactions involving the sale of software.

InMay 2003, the Financial Accounting Standards Board (“FASB”) finalized theterms of Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangementswith Multiple Deliverables” (EITF 00-21), which provides criteriagoverning how to identify whether goods or services that are to be deliveredseparately in a bundled sales arrangement should be accounted for separately.Deliverables are accounted for separately if they meet all of the following:a) the delivered items have stand-alone value to the customer; b) thefair value of any undelivered items can be reliably determined; and c) ifthe arrangement includes a general right of return, delivery of the undelivereditems is probable and substantially controlled by the seller. The Companyadopted EITF 00-21 on July 1, 2003 for all new revenue arrangementsexecuted subsequent to June 30, 2003 (or significant modification toarrangements existing prior to July 1, 2003). The Company’s current policyis to analyze all new revenue arrangements.

To theextent arrangements contain multiple deliverables, the Company performs ananalysis of the nature of the deliverables to determine to what extent thedeliverables of the arrangement are governed by any higher level literature (asdefined in EITF 00-21). EITF 00-21 recognizes arrangements that qualify fortreatment under SOP 97-2 and certain arrangements that qualify for contractaccounting (i.e. SOP 81-1) as falling under the definition of “higher levelliterature”. The Company applies the provisions of SOP 97-2, as amended byStatement of Position 98-9, “Modifications of SOP 97-2, Software RevenueRecognition, With Respect to Certain Transactions,” to all arrangements whichinclude software deliverables that are considered more than inconsequential tothe other elements in the arrangements. For 2006, all of the Company’scontracts with multiple deliverables have fallen under higher level accountingliterature under the provisions of SOP 97-2 and/or SOP 81-1.

TheCompany recognizes revenue for license fees from its software products upondelivery, provided that the fee is fixed and determinable, acceptance hasoccurred, collectibility is probable and persuasive evidence of an arrangementexists. Revenue from third party software is derived from the licensing ofthird party software products in connection with sales of the Company’ssoftware licenses, and is generally recognized upon delivery together with theCompany’s license revenue. Training, data conversion, installation, andconsulting services are generally recognized as revenue when the services areperformed and collectibility is probable. Revenue for maintenance and supportservice is recognized ratably over the term of the support agreement.

Forarrangements containing multiple elements, revenue is recognized on deliveredelements when vendor-specific 

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objectiveevidence (“VSOE”) of fair value has been established on the undeliveredelements, applying the residual method of SOP 98-9. Fair value is determinedfor each undelivered element based on the price charged for the sale of eachelement separately. In contracts that contain first year maintenance bundledwith software fees, unbundling of maintenance is based on the price charged forrenewal maintenance. Revenue for maintenance and support service is recognizedratably over the term of the support agreement.

Revenuesrelated to hosting arrangements, including monthly fees as well as any initialregistration fees and related custom programming, are recognized ratably overthe term of the agreement in accordance with Staff Accounting Bulletin (“SAB”)No. 104 “Revenue Recognition”. Transaction fees are recognized as revenueas the transactions occur and revenue is earned. Revenue is only recognizedwhen collectiblity is probable.

Deferredrevenue includes maintenance and support payments that have been received orbillings recorded prior to performance and, in certain cases, cash collections,amounts received under multi-element arrangements in which VSOE of undeliveredelements does not exist, and initial registration fees and related service feesunder hosting agreements. Revenue is recognized when VSOE of the undeliveredelements is established, the elements are delivered, or the obligation todeliver the elements is extinguished.

Softwarearrangements involving significant customization, modification or productionare accounted for in accordance with American Institute of Certified PublicAccountants Statement of Position 81-1, “Accounting for Performance onConstruction-Type and Certain Production-Type Contracts,” using thepercentage-of-completion method. The Company recognizes revenue using actualhours worked as a percentage of total expected hours required by thearrangement, provided that the fee is fixed and determinable, there is evidenceof an arrangement and recovery of any related recorded asset is consideredprobable.

Forbusiness process outsourcing agreements, which include call center services,services are primarily performed on a time and materials basis. Revenue isrecognized when the service is performed.

**Newaccounting pronouncements —**In June 2006, the FASB issuedFASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — aninterpretation of FASB Statement No. 109” (“Interpretation”).  This Interpretation prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.  This Interpretation also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition.  TheInterpretation is effective for fiscal years beginning after December 15,2006.  The Company is currently evaluatingthe requirements of this Interpretation, but does not expect that the adoptionwill have a material effect on the Company’s financial statements or taxreturns.

In September 2006, the SEC issued Staff Accounting BulletinNo. 108 (“SAB 108”), “Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements.” SAB 108is effective for fiscal years ending on or after November 15, 2006 andaddresses how financial statement errors should be considered from amateriality perspective and corrected. The literature provides interpretiveguidance on how the effects of the carryover or reversal of prior yearmisstatements should be considered in quantifying a current year misstatement.Historically there have been two common approaches used to quantify sucherrors: (i) the “rollover” approach, which quantifies the error as theamount by which the current year income statement is misstated, and(ii) the “iron curtain” approach, which quantifies the error as thecumulative amount by which the current year balance sheet is misstated. The SECStaff believes that companies should quantify errors using both approaches andevaluate whether either of these approaches results in quantifying amisstatement that, when all relevant quantitative and qualitative factors areconsidered, is material. The Company is currently evaluating the impact, ifany, of adopting the provisions of SAB 108 on our financial statements.

**Employee StockOptions****—At** September 30, 2006, theCompany has two stock-based employee compensation plans. Prior to January 1,2006, the Company accounted for stock options issued to employees in accordancewith APB Opinion No. 25, “Accounting for Stock Issued to Employees.” TheCompany had adopted the disclosure only provisions of SFAS No. 123, “Accountingfor Stock Based Compensation,” and SFAS No. 148, “Accounting for Stock BasedCompensation—Transition and Disclosure—an Amendment to FASB Statement No. 123,”for options and warrants issued to employees. Under APB Opinion No. 25,compensation expense is based on the difference, if any, on the measurementdate, between the estimated fair value of the Company’s stock and the exerciseprice of options to purchase that stock. Any resulting compensation expense isamortized on a straight-line basis over the vesting period of the options.

InDecember 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-BasedPayment” (“FAS 123R”), which revises and replaces SFAS No. 123, “Accounting forStock-Based Payment” and supercedes APB Opinion No. 25, “Accounting for StockIssued to Employees.” FAS 123R requires the measurement of all share-basedpayments to employees, including grants of employee stock options, using afair-value based method and the recording of such expense in the Company’sconsolidated statements of operations. The pro forma disclosures previouslypermitted under SFAS No. 123 are no longer an alternative to financialstatement recognition. The provisions of FAS 123R were to have been effectivefor reporting periods beginning after June 15, 2005. At the end of March 2005,the SEC staff released Staff Accounting Bulletin No. 107 (SAB 107), providingguidance for implementing FAS No. 123R. Subsequently, the Commission delayedthe implementation dates for FAS 123R to the start of the Company’s fiscalyear. The Company accounts for stock options issued to employees in accordancewith (SFAS 123(R)), applying the 

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modifiedprospective method, see Note 3 for additional information.

**Non-employee StockCompensation****—Prior to January 1, 2006 the**Company accounted for stock based compensation issued to non-employees inaccordance with SFAS No. 123 and Emerging Issues Task Force (“EITF”) IssueNo. 96-18, “Accounting for Equity Instruments That Are Issued to OtherThan Employees for Acquiring, or in conjunction with Selling Goods orServices.” SFAS No. 123 establishes a fair value based method ofaccounting for stock-based compensation plans. Under the fair value basedmethod, compensation cost is measured at the grant date based on the value ofthe award, which is calculated using an option pricing model, and is recognizedover the service period, which is usually the vesting period. Beginning onJanuary 1, 2006, the Company accounts for stock based compensation issued tonon-employees in accordance with SFAS 123(R), applying the modified prospectivemethod, see Note 3 for additional information.

Note 2. STOCKOPTIONS

During the thirdquarter of 2006, the Company did not grant any stock options. During the firstquarter of 2006, the Company did not grant any stock options to employees;however, options to purchase a total of 1,500 shares of the Company’s CommonStock were issued to one non-employee director subsequent to his appointment tothe Company’s Board of Directors on January 3, 2006. These options were grantedat an exercise price per share of 100% of the fair market value of a share ofCommon Stock on the date of the grant. These options become exercisable withrespect to (a) 500 shares on the day prior to the first anniversary of thedate of the grant and (b) 125 shares on the last day of each of the eightcalendar quarters commencing on the last day of the calendar quarter ending onor after the first anniversary of the date of the grant. Each option has a termof ten years beginning on the date of the grant.

The Company hasgranted stock options outside the Company’s stock option plans to non-employeeconsultants to purchase up to an aggregate of 57,000 shares of the Company’scommon stock, of which options to purchase 29,500 shares were outstanding atSeptember 30, 2006. These options were granted at prices determined by theBoard of Directors (at no less than 100 percent of the market price on the dateof grant). The options have a four-year vesting period and must be exercisedwithin ten years of the date of the grant. These non-employee options werevalued using the fair value method as prescribed by SFAS No. 123 using thefollowing assumptions: volatility of 51%, risk free interest rate of 4.59% anda 10-year term. Options issued prior to 2001 are performance-based awards, withno service commitment and subject to vesting only if the Company’s stock pricereaches a certain level. Options issued in 2001 vest over four years, but vestingaccelerates if a performance target is achieved. At September 30, 2006,non-employee options to purchase 3,437 shares were vested. The Companyrecognized a credit to compensation expense of approximately $12,000 and$38,000 related to these options during the three and nine-month periods endedSeptember 30, 2005, respectively. There was no compensation expense related tothese options during the three and nine-month periods ended September 30, 2006as the options were vested.

On August 11,2003, the Company granted 25,000 options to purchase the Company’s common stockto an employee who is the brother of the Chief Executive Officer, in connectionwith his joining the Company as an employee. The option grantee was an employeewhen he received the grant. The options vest over four years from the date ofgrant, expire ten years from the date of grant, and were issued with anexercise price below the fair market value of the stock on the date of grant.This grant was not subject to any of the Company’s stock option plans. Thetotal intrinsic value associated with the granting of these options was$96,250, which will be recognized ratably as compensation expense over thefour-year vesting period in accordance with APB Opinion No. 25. The Companyrecognized compensation expense of approximately $6,000 and $18,000 related tothese options during each of the three-month and nine-month periods endedSeptember 30, 2006 and September 30, 2005.

On October 20, 2006, theCompany held the annual meeting of stockholders. Immediately following thatannual meeting of stockholders, each non-employee director receivedoptions to purchase 1,500 shares of Common Stock, including the optionsautomatically awarded under the 1998 Director Option Plan, at an exercise priceper share of 100% of the fair market value of a share of Common Stock onthe date of the grant. These options become exercisable on the last day of eachof the four calendar quarters beginning with the first calendar quarter endingon or after the date of the grant, and have a term of ten years beginning onthe date of grant. In addition, each non-employee director is to receive anannual cash retainer of $14,000. Each member of the Audit Committee andCompensation Committee, other than its Chairman, will receive $2,500 followingthe October 20, 

8

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2006 meeting. Mr. Kellerand Benz will receive $5,000 following the October 20, 2006 meeting for servingon both the Audit and Compensation Committees. The Audit Committee Chairman,Mr. Bhalla will receive $5,000 following the October 20, 2006 meeting.

Note 3. STOCKBASED COMPENSATION

Effective January 1,2006, the Company adopted Statement of Financial Accounting StandardsNo. 123 (revised 2004), “Share Based Payment” , applying the modifiedprospective method. Prior to the adoption of SFAS 123(R), the Company appliedthe provisions of APB Opinion No. 25, “Accounting for Stock Issued toEmployees,” in accounting for its stock-based awards, and accordingly,recognized no compensation cost for its stock plans other than for itsrestricted stock awards.** **Underthe modified prospective method, SFAS 123(R) applies to new awards and toawards that were outstanding as of December 31, 2005 that are subsequentlyvested, modified, repurchased or cancelled. Compensation expense recognizedduring 2006 includes the portion vesting during the period for (1) allshare-based payments granted prior to, but not yet vested as of December 31,2005, based on the grant date fair value estimated in accordance with theoriginal provisions of Statement of Financial Accounting StandardsNo. 123, “Accounting for Stock-Based Compensation” (SFAS 123) and (2) allshare-based payments granted subsequent to December 31, 2005, based on the grant-datefair value estimated using the Black-Scholes option-pricing model. No stockoptions were granted to employees during the first, second or third quarters of2006; however, options were granted to a Director. Stock compensation expenseof $16,000 and $48,000 was recognized during the three and nine-month periodended September 30, 2006 on existing stock options. As a result of theCompany’s decision to adopt the modified prospective method, prior periodresults have not been restated.

The following tableillustrates the effect on net income and earnings per share if the Company hadapplied the fair value recognition provisions of SFAS 123 for the three andnine months ended September 30, 2005:
| ** **                                                                                                                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **September 30, 2005** | ** ** | **September 30, 2005** | ** ** |
|                                                                                                                                          |       |                             |       |                             |       |
| Net income, as  reported                                                                                                                      |       | $                                | 1,226,000  |                             | $          | 3,378,000 |   |
| Add: Stock-based  employee compensation expense included in reported net income, net of related  tax effects                                  |       | 5,000                            |       | 14,000                           |       |
| Deduct: Total  stock-based employee compensation expense determined under fair-value based  method for all awards, net of related tax effects |       | (55,000                          | )          | (594,000                         | )          |
| Pro forma net  income                                                                                                                         |       | $                                | 1,176,000  |                             | $          | 2,798,000 |   |
|                                                                                                                                          |       |                             |       |                             |       |
| Basic earnings  per share, as reported                                                                                                        |       | $                                | 0.45       |                             | $          | 1.20 |   |
| Diluted earnings  per share, as reported                                                                                                      |       | $                                | 0.40       |                             | $          | 1.08 |   |
| Basic earnings  per share, pro forma                                                                                                          |       | $                                | 0.43       |                             | $          | 1.00 |   |
| Diluted earnings per  share, pro forma                                                                                                        |       | $                                | 0.38       |                             | $          | 0.90 |   |

 

Before adoption of SFAS123(R), pro forma disclosures reflected the fair value of each option grantestimated on the date of grant using the Black-Scholes option-pricing modelwith the following weighted-average assumptions for stock options grantedduring the nine months ended September 30, 2005:
| ** **                                | ** ** | **Nine Months  Ended  September 30, 2005** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------------|------------|
| Expected  volatility                      |       | 97                                                        | %          |
| Expected  dividends                       |       | None                                                      |       |
| Weighted average  risk-free interest rate |       | 4.36                                                      | %          |
| Expected life of stock  options           |       | 10 years                                                  |       |

 

9

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A summary of stockbased compensation activity within the Company’s stock-based compensation plansfor the three and nine months ended September 30, 2006 is as follows:
| ** **                         | ** ** | **Number of Shares** | ** ** | **Weighted Average  Exercise Price** | ** **   | **Weighted Average  Remaining  Contractual Term  (Years)** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|------------------------------------|------------|--------------------------------|------------|------------------------------------------------|--------------|----------------------------------------------------------------------|------------|-------------------------------------|------------|
|                               |       |                           |       |                                           |         |                                                                 |       |                                |       |
| Outstanding at  December 31, 2005  |       | 685,912                        |       | $                                              | 11.89        |                                                                 |       |                                |       |   |
| Granted                            |       | 1,500                          |       | $                                              | 19.65        |                                                                 |       |                                |       |   |
| Exercised                          |       | (2,977                         | )          | $                                              | 14.70        |                                                                 |       |                                |       |   |
| Canceled                           |       | —                         |       | $                                              | —       |                                                                 |       |                                |       |   |
| Outstanding at  March 31, 2006     |       | 684,435                        |       | $                                              | 11.91        |                                                                 | 6.08       |                                | $          | 5,706,956 |   |
| Granted                            |       | —                         |       | $                                              | —— |                                                                 |       |                                |       |   |
| Exercised                          |       | (10,475                        | )          | $                                              | 8.81         |                                                                 |       |                                |       |   |
| Canceled                           |       | —                         |       | $                                              | —       |                                                                 |       |                                |       |   |
| Outstanding at  June 30, 2006      |       | 673,960                        |       | $                                              | 11.96        |                                                                 | 5.81       |                                | $          | 3,396,758 |   |
| Granted                            |       | —                         |       | $                                              | —— |                                                                 |       |                                |       |   |
| Exercised                          |       | (16,336                        | )          | $                                              | 12.19        |                                                                 |       |                                |       |   |
| Canceled                           |       | (139                           | )          | $                                              | 29.10        |                                                                 |       |                                |       |   |
| Outstanding at  September 30, 2006 |       | 657,485                        |       | $                                              | 11.95        |                                                                 | 5.53       |                                | $          | 5,621,037 |   |
|                               |       |                           |       |                                           |         |                                                                 |       |                                |       |
| Exercisable at  September 30, 2006 |       | 623,466                        |       | $                                              | 10.48        |                                                                 | 5.58       |                                | $          | 6,248,439 |   |

 

Theaggregate intrinsic value for stock options outstanding and exercisable isdefined as the difference between the market value of the Company’s stock as ofthe end of the period and the exercise price of the stock options. The total intrinsicvalue of stock options exercised during the first, second and third quarters of2006 was $30,000, $86,000 and $136,000, respectively. As a result of thestock options exercised, the Company recorded additional paid-in-capitalof $31,000 in the first quarter, $91,000 in the second quarter and $197,000 inthe third quarter of 2006. During the first quarter of 2006, cash received fromstock options exercised was $32,000. During the second quarter of 2006, cashreceived from stock options exercised was $98,000. During the third quarter of2006, cash received from the stock options exercised were $214,000. Thefollowing is a summary of nonvested stock option activity for the three andnine months ended September 30, 2006:
| ** **                       | ** ** | **Number of Shares** | ** ** | **Weighted Average  Grant-Date Fair  Value** | ** ** |
|----------------------------------|------------|--------------------------------|------------|--------------------------------------------------------|------------|
|                             |       |                           |       |                                                   |       |
| Nonvested at  December 31, 2005  |       | 6,623                          |       | $                                                      | 18.26      |   |
| Granted                          |       | 1,500                          |       | $                                                      | 19.65      |   |
| Vested                           |       | (998                           | )          | $                                                      | 16.09      |   |
| Canceled                         |       | —                         |       | —                                                 |       |
| Nonvested at  March 31, 2006     |       | 7,125                          |       | $                                                      | 16.51      |   |
| Granted                          |       | —                         |       | —                                                 |       |
| Vested                           |       | (1,002                         | )          | $                                                      | 16.09      |   |
| Canceled                         |       | —                         |       | —                                                 |       |
| Nonvested at  June 30, 2006      |       | 6,123                          |       | $                                                      | 16.58      |   |
| Granted                          |       | —                         |       | —                                                 |       |
| Vested                           |       | (998                           | )          | $                                                      | 18.01      |   |
| Canceled                         |       | —                         |       | —                                                 |       |
| Nonvested at September  30, 2006 |       | 5,125                          |       | $                                                      | 18.82      |   |

 

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The Company had 22,644 ofstock options that were unvested at September 30, 2006 that were expensed in1999. In addition the Company has 6,250 of stock options that were unvestedrelated to Rahul Raina; see Note 2 for additional information.

At September 30, 2006,there was $85,000 of total unrecognized compensation cost related to nonvestedstock options. This cost will be recognized over 2.5 years.

TheCompany also grants restricted stock to certain employees. On June 1,2005, the Compensation Committee of the Board of Directors of the Company gavefinal approval to awards of 9,758 shares of restricted stock to Robin Raina,the Company’s Chairman, Chief Executive Officer and President, and 4,382 sharesof restricted stock to Richard J. Baum, the Company’s Executive Vice President,Chief Financial Officer and Secretary, under the Company’s 1996 Incentive Plan.The awards were made pursuant to a 2004 incentive compensation program (the“2004 Program”) approved by the Company’s Board of Directors onDecember 4, 2004 (as described in a Form 8-K filed by the Company onDecember 9, 2004) and were subject to a determination by the CompensationCommittee and the Board, after the Company’s release of its 2004 operatingresults, that such operating results were substantially consistent with theoperating results of the Company for the first nine months of 2004, as theycompared to those for the same period of the prior year (excluding executiveincentive compensation). The Compensation Committee and the Board made suchdetermination in April 2005, at which time the grants of the restrictedstock (along with 2004 cash bonus compensation) were approved, subject to theCompensation Committee’s approval of certain terms of the restricted stockawards and of the forms of restricted stock agreements to represent suchawards.

OnJune 1, 2005, the Compensation Committee approved such terms and forms ofrestricted stock agreements, and the shares of restricted stock were issued toeach of Messrs. Raina and Baum on such date. In accordance with the 2004Program, the number of shares of restricted stock issued to each of Messrs. Rainaand Baum represents 10% of the aggregate of the total salary and cash bonuscompensation earned by him for 2004 (such aggregate compensation being$1,013,000 in the case of Mr. Raina and $455,000 in the case ofMr. Baum), divided by the market price of the Company’s stock onApril 11, 2005, the date the Board approved the restricted stock grants.The Company recognized compensation expense of approximately $8,000 and $25,000related to these shares during the three and nine months ended September 30,2006. There was compensation expense of approximately $8,000 and $57,000related to this restricted stock for the three and nine months ended September30, 2005.

OnFebruary 3, 2006, the Compensation Committee of the Board of Directors of theCompany gave final approval to awards of 8,354 shares of restricted stock toRobin Raina, the Company’s Chairman, Chief Executive Officer and President, and2,506 shares of restricted stock to Richard J. Baum, the Company’s ExecutiveVice President, Chief Financial Officer and Secretary, under the Company’s 1996Incentive Plan. The awards were made pursuant to a 2005 incentive compensationprogram (the “2005 Program”) approved by the Company’s Board of Directors. Inaccordance with the 2005 Program, the number of shares of restricted stockissued to each of Messrs. Raina and Baum represents 15% of the aggregateof the total salary and cash bonus compensation earned by him for 2005 (suchaggregate compensation being $1,100,000 in the case of Mr. Raina and $330,000in the case of Mr. Baum), divided by the market price of the Company’sstock on February 3, 2006, the date the Board approved the restricted stockgrants. The Company recognized compensation expense of approximately $14,000and $86,000 related to these shares for the three and nine months endedSeptember 30, 2006. There was no compensation expense related to thisrestricted stock for the three and nine months ended September 30, 2005.

Pursuantto the restricted stock agreements, the restricted stock vests in three equalannual installments. The restricted stock also vests with respect to anyunvested shares upon the applicable officer’s death, Disability (as defined) orRetirement (as defined), the Company’s termination of the officer other thanfor Cause (as defined) or a Change in Control (as defined) of the Company. Ifthe officer terminates his employment other than due to death, Disability orRetirement or the Company terminates the officer’s employment for Cause, anyunvested shares held by the officer will be forfeited.

11

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Note 4. EARNINGSPER SHARE

Basic earnings pershare (“EPS”) is equal to net income divided by the weighted average number ofshares of common stock outstanding for the period. The weighted average numberof shares outstanding for the three and nine months ended September 30, 2006was 2,762,878 and 2,756,669, respectively. The weighted average number ofshares outstanding for the three and nine months ended September 30, 2005was 2,734,112 and 2,807,518, respectively. Diluted EPS is calculated as if theCompany had additional common stock outstanding from the beginning of the yearor the date of grant for all common stock equivalents, net of assumedrepurchased shares using the treasury stock method. Diluted EPS recognizes thedilutive effect of common stock equivalents and is equal to net income dividedby the sum of the weighted average number of shares outstanding and commonstock equivalents. For the three and nine months ended September 30, 2006 andSeptember 30, 2005, the Company’s common stock equivalents consisted ofrestricted stock and stock options. For the three and nine months endedSeptember 30, 2006, the effect of this calculation resulted in an increase inthe weighted average number of shares outstanding of 356,375 and 374,001. AtSeptember 30, 2006, the fully diluted weighted average number of sharesoutstanding for the three and nine months was 3,119,253 and 3,130,670. For thethree and nine months ended September 30, 2005, the effect of this calculationresulted in an increase in the weighted average number of shares outstanding of355,020 and 315,519. At September 30, 2005, the fully diluted weighted averagenumber of shares outstanding for the three and six months was 3,089,132 and3,132,037. At September 30, 2006, there were 283,484 shares potentiallyissuable with respect to stock options, which could dilute EPS in the futurebut which were excluded from the diluted EPS calculation because their effectwas antidilutive. At September 30, 2005, there were 372,155 shares potentiallyissuable with respect to stock options, which could dilute EPS in the futurebut which were excluded from the diluted EPS calculation because their effectwas antidilutive.

Note 5.COMPREHENSIVE INCOME
| ** **                                                                       | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                             |       |                                                     |       |                                                    |       |   |   |   |   |
| Net income                                                                       |       | $                                                        | 1,659,000  |                                                    | $          | 1,226,000 |   | $ | 4,292,000 |   | $ | 3,378,000 |   |
| Other  comprehensive income (loss)— foreign currency translation adjustment |       | 572,000                                                  |       | (45,000                                                 | )          | 229,000 |   | (272,000 | ) |
| Comprehensive income                                                             |       | $                                                        | 2,231,000  |                                                    | $          | 1,181,000 |   | $ | 4,521,000 |   | $ | 3,106,000 |   |

 

Note 6. RELATEDPARTY TRANSACTIONS AND SIGNIFICANT CUSTOMERS

In 2001, theCompany issued 868,000 shares of its common stock to Brit Insurance HoldingsPLC (“Brit”), for $7,000,000. The total shares held by Brit at September 30,2006 was 930,163, representing an equity ownership of approximately 34%. AtSeptember 30, 2006, Brit owned approximately 78% of CF Epic Insurance andGeneral Fund, which owned approximately 8% of the Company’s common stock.

The Company hasentered into various software and service agreements with Brit. During thethree and nine months ended September 30, 2006 approximately $1,062,000 (15%)and $2,477,000 (12%) was recognized as revenue from Brit and its affiliates.During the three and nine months ended September 30, 2005, approximately$963,000 (16%) and $2,720,000 (15%) was recognized as revenue from Brit and itsaffiliates. Total accounts receivable from Brit and its affiliates at September30, 2006 and December 31, 2005 were $1,255,000 and $988,000, respectively.

During the threeand nine months ended September 30, 2006, approximately $192,000 (3%) and$1,400,000 (7%), respectively, was recognized as revenue from another significantcustomer, AON. During the three and nine months ended September 30, 2005,approximately $ 617,000 (11%) and $1,122,000 (6%), respectively, was recognizedas revenue from AON. Total accounts receivable from AON at September 30, 2006and December 31, 2005 were $350,000 and $181,000, respectively.

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Note 7. ACQUISITION OF LIFELINK

OnFebruary 23, 2004, the Company acquired LifeLink Corporation (“LifeLink”),and the operations of LifeLink have been included in the Company’s financialstatements since that date. Under terms of the agreement, the Company acquiredall of the outstanding capital stock of LifeLink from its shareholders inexchange for an aggregate purchase price of $10,354,000 payable as follows:$5,000,000 paid in cash at closing, $2,500,000 in a non-interest bearing notepayable in cash in annual installments of $500,000 over five years (presentvalue computed as $2,226,000), and $3,000,000 payable in 200,000 shares of thecommon stock of the Company issued at the time of closing to one of theLifeLink shareholders who received the right to sell such shares (the “LifeLinkRedeemable Shares”) back to the Company as described below. The Company alsocapitalized approximately $128,000 of transaction costs in conjunction with theLifeLink acquisition.

At anytime during the one month period commencing on August 23, 2005, the holderof the LifeLink Redeemable Shares had a one-time right to require the Companyto purchase all of the LifeLink Redeemable Shares, originally valued at $15.00per share in the acquisition of LifeLink, for a discounted priced of $13.50 pershare minus the aggregate purchase price received by the holder from any salesof these shares of common stock prior to the exercise of the put option. TheCompany classified $2,700,000 of the value of the common stock issued astemporary equity, “redeemable common stock,” in the consolidated balance sheetdue to the existence of the holder’s embedded put option. The Company andLifeLink’s former shareholder agreed to accelerate the exercisability of theput option and on April 28, 2005, the Company repurchased the LifeLinkRedeemable Shares at a price of $13.50 per share. On May 2, 2005, theLifeLink name was changed to EbixLife Inc. The following table summarizes thefair value of the LifeLink assets acquired and liabilities assumed at the dateof acquisition.

| Current assets             |   | $          | 1,199,000  |   |
|----------------------------|--------|------------|------------|--------|
| Property and  equipment    |   | 119,000    |       |
| Intangible  assets         |   | 3,518,000  |       |
| Goodwill                   |   | 5,989,000  |       |
| Total assets  acquired     |   | 10,825,000 |       |
| Current  liabilities       |   | 471,000    |       |
| Total  liabilities assumed |   | 471,000    |       |
| Net assets acquired        |   | $          | 10,354,000 |   |

 

Of the $3,518,000 ofintangible assets acquired, $977,000 was assigned to developed technology witha remaining estimated useful life of five years, $299,000 was assigned totrademarks with a remaining estimated useful life of five years and $2,242,000was assigned to customer relationships with a remaining estimated useful lifeof seven years. The Company recorded $144,000 and $432,000 of amortization expenserelated to these intangible assets for the three and nine months endedSeptember 30, 2006, respectively and $144,000 and $432,000 of amortizationexpense related to these intangibles for the three and nine months endedSeptember 30, 2005.

***Estimated AmortizationExpenses:***

| For the year ending  December 31, 2006 |   | $ | 575,000 |   |
|---------------------------------------------|--------|---|---------|--------|
| For the year ending December 31, 2007  |   | $ | 575,000 |   |
| For the year ending December 31, 2008  |   | $ | 575,000 |   |
| For the year ending December 31, 2009  |   | $ | 358,000 |   |
| For the year ending December 31, 2010  |   | $ | 320,000 |   |
| Thereafter                                  |   | $ | 47,000  |   |

 

The acquisition of EbixLife was consistent with the Company’s overallfocus on marketing software to insurance agents and brokers. This acquisitionincreased sales and revenue of the consolidated total while providingsignificant sales opportunities for the Company’s other existing services. TheCompany performed an annual impairment assessment, as required by SFASNo. 142, “Goodwill and Other Intangible Assets”, of the EbixLife goodwilland intangible assets as of September 30, 2005 and it was determined thatthe assets were not impaired.  TheCompany will perform its annual impairment assessment as of September 30, 2006during the fourth quarter of 2006.

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# Note8. ACQUISITION OF HEART

OnJuly 1, 2004, Ebix Australia Pty Ltd, which is a wholly-owned subsidiaryof the Company, acquired certain of the operating assets of Heart ConsultingServices Pty Ltd (“Heart”), and the operations of Heart have been included inthe Company’s financial statements since that date. Under terms of theagreement, the Company acquired the operating assets of Heart in exchange foran aggregate purchase price of $7,116,000 payable as follows: $3,619,000 paidin cash at closing (subsequent to closing the former owner of Heart paid theCompany $467,000 for deferred revenue and a vacation accrual settlement),$1,399,000 payable under stand-by letters of credit issued by the Company’slender on the Company’s line of credit in three equal annual installments oneach of the first, second and third anniversaries of the closing (present valuecomputed as $1,293,000), and $2,098,000 payable in 157,728 shares of the commonstock of the Company issued at the time of closing. The Company also capitalizedapproximately $241,000 of transaction costs in conjunction with the Heartacquisition. In connection with the 157,728 shares of common stock issued, theowners of Heart received from Ebix the option to sell their stock back to Ebixsubject to specified time frames and prices.

In2005, the Company had classified $1,461,000 of the value of the common stockissued as temporary equity, “redeemable common stock,” in the condensedconsolidated balance sheet due to the existence of the holder’s embedded putoption. At any time during the one month period commencing January 3, 2006and ending February 3, 2006, the holder of the redeemable common stock hada one-time right to require the Company to purchase all of the holder’s 157,728shares at a price of AU$2,000,000 minus the aggregate purchase price receivedby the holder from any sales of these shares of common stock prior to theexercise of the put option. As of December 31, 2005, the holder had notsold any shares of common stock received from this transaction. The holder didnot exercise the right to require the Company to purchase all of the holder’s157,728 shares as of February 3, 2006; as such, the redeemable commonstock was reclassified in first quarter 2006 as it is no longer redeemable.

Concurrentwith the acquisition, the Company ascribed a preliminary value to each of theassets and liabilities assumed from the acquisition of Heart. Upon final reviewof the acquisition, the purchase price was reallocated. The following tablesummarizes the fair value of the Heart assets acquired and liabilities assumedat the date of acquisition subsequent to the reallocation.

| Current assets             |   | $         | 467,000   |   |
|----------------------------|--------|-----------|-----------|--------|
| Property and equipment     |   | 43,000    |      |
| Intangible assets          |   | 1,229,000 |      |
| Goodwill                   |   | 5,945,000 |      |
| Total assets acquired      |   | 7,684,000 |      |
| Current liabilities        |   | 467,000   |      |
| Total liabilities  assumed |   | 467,000   |      |
| Net assets acquired        |   | $         | 7,217,000 |   |

 

Of the$1,229,000 of intangible assets acquired, $630,000 was assigned to customerrelationships with a remaining useful life of four years, $410,000 was assignedto developed technology and $189,000 was assigned to trademarks with aremaining estimated useful lives of five years. The Company recorded $71,000and $218,000 of amortization expense related to these intangible assets for thethree and nine months ended September 30, 2006, respectively and $61,000 and$199,000 of amortization expense related to these intangibles for the three andnine months ended September 30, 2005.

*EstimatedAmortization Expenses:*

| For the year ended  December 31, 2006 |   | $ | 300,000 |   |
|--------------------------------------------|--------|---|---------|--------|
| For the year ended  December 31, 2007 |   | $ | 300,000 |   |
| For the year ended  December 31, 2008 |   | $ | 215,000 |   |
| For the year ended  December 31, 2009 |   | $ | 65,000  |   |
| For the year ended December 31, 2010  |   | $ | —  |   |

 

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Theacquisition of Heart was consistent with the Company’s overall focus onmarketing software to insurance agents and brokers. This acquisition increasedsales and revenue of the consolidated total while providing significant salesopportunities for the Company’s other existing services. The Company performedan annual impairment assessment, as required by SFAS No. 142, “Goodwilland Other Intangible Assets”, of the Heart goodwill and intangible assets as ofSeptember 30, 2005 and it was determined that the assets were notimpaired. The Company will perform its annual impairment assessment as ofSeptember 30, 2006 during the fourth quarter of 2006.

Note 9**-**LINE OF CREDIT ANDOTHER COMMITMENTS

Bank Line of Credit

InOctober 2002, the Company obtained from LaSalle Bank National Associationa $1,000,000 revolving line of credit, secured by a perfected first securityinterest in substantially all of the Company’s assets. The line of credit wasincreased to $5,000,000 during February 2004. On February 23, 2005,the Company entered into an amendment to the credit agreement amending certainfinancial covenants. Major features of the line, as amended, included aninterest rate equal to the prime rate, security at 60% of the amount of theline in a restricted interest-bearing account and timely financial reportingrequirements.

InOctober 2005, the Company entered into an amendment to the creditagreement, which deleted the security at 60% of the amount of the line in arestricted interest-bearing account and extended the expiration date toOctober 31, 2006. In November 2005, the line of credit was paid.

InAugust 2006, the Company entered into an amendment to the credit agreement,which increased the line to $12,000,000. Total borrowings on this line werezero as of September 30, 2006. On November 10, 2006, there was $11,000,000outstanding on the line of credit. The line of credit agreement expires onAugust 31, 2007.

Letters of Credit

Underterms of the agreement with Heart Consulting Services Pty Ltd. (see note 8),$1,399,000 is payable by the Company under stand-by letters of credit issued bythe Company’s lender on the Company’s line of credit in three equal annualinstallments on each of the first, second and third anniversaries of theclosing of the Heart asset acquisition (present value computed as $1,293,000).The three letters of credit expire on July 31, 2005, July 31, 2006and July 31, 2007, respectively. On July 1, 2005 the Company paid thefirst installment of $508,000. On July 3, 2006 the Company paid the secondinstallment of $496,000.

Self Insurance:

TheCompany is currently self-insured for its health insurance and has a stop losspolicy that limits the individual liability to $75,000 per person and theaggregate liability to 125% of the expected claims based upon the number ofparticipants and historical claims. As of September 30, 2006, the maximumaggregate liability calculated was $805,000 for the annual contract period,which ends in September 2007.

**Note 10—DEBT MATURITIES**
| ** ** | ** ** | **Year Ended December 31,** | ** ** |
|------------|------------|--------------------------------------------|------------|
| ** ** | ** ** | **2006**                                   | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Total** | ** ** |
| EbixLife   |       | $                                          | —     |   | $ | 500,000 |   | $ | 500,000 |   | $ | 500,000 |   | $ | 1,500,000 |   |
| Heart      |       | $                                          | —     |   | $ | 498,000 |   | $ | — |   | $ | — |   | $ | 498,000 |   |
|       |       | $                                          | —     |   | $ | 998,000 |   | $ | 500,000 |   | $ | 500,000 |   | $ | 1,998,000 |   |

 

The EbixLife debt is a result of the EbixLife acquisitionon February 23, 2004 and represents a $2,500,000 non-interest bearing notepayable. The note is payable in annual installments of $500,000 over fiveyears. The Company has imputed interest on this debt of 4%. The debt on thebalance sheet is net of imputed interest. The first installment was paid onFebruary 23, 2005 and the second installment was paid on February 23,2006.

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TheHeart debt is a result of the Heart acquisition on July 1, 2004 andrepresents $1,399,000 payable under stand by letters of credit issued by theCompany’s lender under the Company’s line of credit in three equal annualinstallments on each of the first, second and third anniversaries of theclosing. The Company has imputed interest on this debt at 4%. The firstinstallment was paid on July 1, 2005 and the second installment wasmade on July 3, 2006.

Note 11 — ACQUISITION OF INFINITY ON MAY 9, 2006

On May 9, 2006, Ebix, Inc. (“Ebix”) announced theacquisition of substantially all of the operating assets of Infinity SystemsConsulting, Inc. (“Infinity”). This acquisition was effective as of May 1,2006. Ebix acquired these assets for an upfront payment of $2.9 million in cashand a potential future payment not exceeding $4.5 million in cash if Infinitymeets certain future revenue projections as a division of Ebix. The Companycapitalized approximately $140,000 of transaction costs in conjunction with theInfinity acquisition.

Concurrentwith the acquisition, the Company ascribed a preliminary value to each of theassets and liabilities assumed from the acquisition of Infinity.  The following table summarizes the fair valueof the Infinity assets acquired and liabilities assumed at the date ofacquisition subsequent to the reallocation.

| Property and equipment     |   | $         | 93,000    |   |
|----------------------------|--------|-----------|-----------|--------|
| Intangible assets          |   | 2,399,000 |      |
| Goodwill                   |   | 693,000   |      |
| Total assets acquired      |   | 3,185,000 |      |
| Deferred revenue           |   | 91,000    |      |
| Deferred rent              |   | 54,000    |      |
| Total liabilities  assumed |   | 145,000   |      |
| Net assets acquired        |   | $         | 3,040,000 |   |

 

Of the$2,399,000 of intangible assets acquired, $656,000 was assigned to customerrelationships with a remaining useful life of ten years, $1,525,000 wasassigned to developed technology with a remaining useful life of 5 years and$218,000 was assigned to trade name with a remaining estimated useful life often years. The Company recorded $98,000 and $163,000 of amortization expenserelated to these intangible assets for the three and nine months endedSeptember 30, 2006. There was no amortization expense related to theseintangibles for the three and nine months ended September 30, 2005 as theacquisition was consummated in May 2006.

*EstimatedAmortization Expenses:*

| For the year ended  December 31, 2006               |   | $ | 262,000 |   |
|----------------------------------------------------------|--------|---|---------|--------|
| For the year ended  December 31, 2007               |   | $ | 392,000 |   |
| For the year ended  December 31, 2008               |   | $ | 392,000 |   |
| For the year ended  December 31, 2009               |   | $ | 392,000 |   |
| For the year ended December 31, 2010 and thereafter |   | $ | 961,000 |   |

 

The acquisition ofInfinity was consistent with the Company’s overall focus on providing softwaresolutions to insurance carriers agents and brokers. This acquisition increasedsales and revenue of the consolidated total while providing significant salesopportunities for the Company’s other existing services.

Note 12 — PROFORMA FINANCIALS

The followingunaudited pro forma financial information for the three and nine months endedSeptember 30, 2006 and September 30, 2005, presents the consolidated operationsof the Company as if the Infinity acquisition had been made on January 1, 2005,after giving effect to certain adjustments for the pro forma acquisition as ofthe acquisition.  The Company madeadjustments primarily for the amortization of intangible assets related to theacquisition.  The unaudited pro formafinancial information is provided for informational purposes only and does notproject the Company.

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|                            | ** ** | **Three Months  Ended  September 30, 2006** | ** ** | **Nine Months  Ended  September 30, 2006** | ** ** | **Three Months  Ended  September 30, 2005** | ** ** | **Nine Months  Ended  September 30, 2005** | ** ** |
|----------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                 | ** ** | ** **                                                 | ** ** | ** **                                                | ** ** | ** **                                                 | ** ** | ** **                                                | ** ** |
| Revenue                    |       | $                                                          | 7,296,000  |                                                      | $          | 21,625,000                                                 |       | $                                                         | 7,134,000  |   | $ | 21,647,000 |   |
| Net income                 |       | $                                                          | 1,659,000  |                                                      | $          | 4,490,000                                                  |       | $                                                         | 1,375,000  |   | $ | 3,824,000 |   |
| Basic earnings per  share  |       | $                                                          | 0.60       |                                                      | $          | 1.63                                                       |       | $                                                         | 0.50       |   | $ | 1.36 |   |
| Diluted earnings per share |       | $                                                          | 0.53       |                                                      | $          | 1.43                                                       |       | $                                                         | 0.44       |   | $ | 1.22 |   |

 

Note 13 — STOCKREPURCHASE

On June 2, 2006, the Board of Directors ofEbix, Inc. announced a share repurchase of up to $1 million of Ebix’scurrent outstanding shares of common stock. Under the terms of the Board’s authorization, Ebix retains the right topurchase up to $1 million in shares but does not have to repurchase this entireamount.  All repurchases are expected tobe made with cash on hand.

The repurchaseprogram’s terms have been structured to comply with the SEC’s Rule 10b-18, andis subject to market conditions and applicable legal requirements.  The program does not obligate the Company toacquire any specific number of shares and may be suspended or terminated at anytime.  All purchases will be on the openmarket and are expected to be funded from existing cash.

For the three andnine months ended September 30, 2006, the Company repurchased 7,788 and 8,890shares of common stock at prices ranging from $15.00 to $18.50.  The Company has not repurchased any shares ofcommon stock since September 30, 2006.

Note 14 — FINETREACQUISTION

On October 2, 2006, Ebix, Inc. (“Ebix”) announced themerger with Finetre Corporation (“Finetre”) effective October 1, 2006.  Finetre will become a separate divisionwithin Ebix.  Ebix has paid Finetre shareholders$13,000,000 for substantially all of Finetre stock, and Finetre shareholdersretain the right to earn up to $3,000,000 in additional payments over two yearsif certain revenue and net income targets of the Finetre division of Ebix aremet. Finetre previously operated as  aNorthern Virginia-based ASP software technology firm focusing on transactionprocessing and compliance automation in the financial services industry.

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Item 2.    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The followinginformation should be read in conjunction with the unaudited condensedconsolidated financial statements and the notes thereto included in Part 1.Item 1 of this Quarterly Report, and the audited consolidated financialstatements and notes thereto and Management’s Discussion and Analysis of FinancialCondition and Results of Operations contained in the Company’s Annual Report onForm 10-K for the year ended December 31, 2005.

**Overview**

The Company’sproduct and service strategy focuses on the following five areas:(1) providing software development services to insurance carriers, brokersand agents; (2) worldwide sale, customization, development, implementationand support of its insurance carrier system product, named Business Reinsuranceand Insurance Company System “BRICS”); (3) worldwide sales and support ofagency management systems including EbixASP and eGlobal; (4) expansion ofconnectivity between consumers, agents, carriers and third party providersthrough its exchange family of products worldwide namely, EbixLife andEbixExchange; and (5) business process outsourcing services, which includecall center and back office, either off site or at the Company’s facilities.Software delivered online through application service provider (“ASP”) modelsand connectivity products are recorded as services by the Company. The Companyanticipates that future revenue will be provided principally by developmentservices, system sales, the sale and licensing of BRICS, internationaloperations, EbixLife, EbixExchange, call center services and support.

As discussed innote 11, on May 9, 2006 the Company, for a cash payment of $2.9 million ofinternally generated funds, acquired substantially all of the operating assetsof Infinity Consulting, Inc. effective May 1, 2006. There is a contingentfuture payment of $4.5 million to be made upon attaining performancecriteria.  This acquisition is consistentwith the Company’s overall focus on providing software solutions to insurancecarriers, agents and brokers.  Along withthe Company’s other acquisitions over the last two years, the acquisition ofInfinity provides the Company with a stronger base of insurance customers whoare a target for cross marketing of the Company’s other products.

As discussed on note 14,effective October 1, 2006 the Company purchased Finetre Corp (“Finetre”) for$13 million. Finetre was privately held and sells servicing and processingsolutions to the $225 billion annuity industry. Finetre processes over $12billion of the $225 billion in annuity premiums per year on an ASP basisand is responsible for managing the software, hardware and maintenance upgradeswithout incremental cost to the user. Pricing is based on variable fees basedon the level of volume processed through the platform. The opportunity to crosssell our other insurance products makes this acquisition especially appealingfor synergistic increases in revenue.

**CriticalAccounting Policies**

The Company’s “criticalaccounting policies” are those that require application of management’s mostdifficult, subjective or complex judgements, often as a result of the need tomake estimates about matters that are inherently uncertain and may change infuture periods. The Company has identified the following as its criticalaccounting policies: revenue recognition, estimating the allowance for doubtfulaccounts receivable and accounting for income taxes. For a discussion of thesepolicies, see “Management’s Discussion and Analysis of Financial Condition andResults of Operations — Critical Accounting Policies” in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2005.

**Resultsof Operations**

**Three-MonthPeriod Ended September 30, 2006 Compared to the Three-Month Period EndedSeptember 30, 2005**

**TotalRevenue** - The Company’s revenue has been derived from thelicensing and sale of proprietary software and third party software (“Software”)and from professional services and support services (“Services”). Servicesinclude consulting, implementation, training and project management provided tothe Company’s customers with installed 

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systems and thosein the process of installing systems. Also included in Services are fees forsoftware license maintenance, Infinity services, EbixLife services, Heartservices, initial registration and ongoing monthly subscription fees for the EbixASPproduct and transaction fees generated from the Ebix.mall website, as well assoftware development and call center revenue. Total revenue for the quarterended September 30, 2006 increased $1,400,000, or 23.7%, to $7,296,000 from$5,896,000 for the comparable quarter of the prior year.

**SoftwareRevenue** - Software revenue is comprised of revenue from thesale of Ebix (formerly “cd”) products, legacy products, and other third partysoftware. Total software revenue for the third quarter of 2006 decreased $64,000,or 16.4%, to $326,000 from $390,000 for the comparable quarter of the prioryear. This decrease was primarily due to a decrease in both domestic andinternational software revenue.

**ServicesRevenue** — Total services revenue for the third quarter of2006 increased $1,464,000, or 26.6%, from $5,506,000 for the comparable quarterof the prior year. This increase was primarily due to an increase in consultingrevenue of $951,000 primarily due to the acquisition of Infinity, an increasein international revenue of $442,000 and an increase in EbixLife revenue of$274,000 partially offset by a decrease in support revenue associated withlegacy products of $134,000, a decrease in EbixMall revenue of $20,000, a decreasein hosting revenue of $18,000 and decrease of $31,000 in other various revenue.

During the thirdquarter of 2006 and 2005, approximately $1,062,000 and $963,000, respectivelywas recognized as services revenue from Brit Insurance Holdings PLC (“Brit”)and its affiliates. The amounts represented 15% and 16%, of the Company’s totalrevenues for the third quarters of 2006 and 2005, respectively. Brit ownedapproximately 34% of the Company’s common stock as of September 30, 2006. Inaddition, the Company has been informed that, as of September 30, 2006, Britowned approximately 78% of the equity interests of CF Epic Insurance andGeneral Fund, which at September 30, 2006 owned approximately 8% of the Company’soutstanding common stock.**For thethree-month periods ended September 30, 2006 and September 30, 2005, 3% and 11%of the Company’s total revenues were from AON. Neither Brit and its affiliatesnor AON have long-term agreements with the Company that provide certainty thatsuch revenues will be recurring.

Support revenueassociated with the Company’s legacy products is decreasing due to a trend ofdeclining renewals for these older product offerings.

|                       | ** ** | **Support  Revenue** | ** ** | **Total  Revenue** | ** ** |
|-----------------------|------------|----------------------|------------|--------------------|------------|
|                  |       |                 |       |               |       |
| Third quarter of 2006 |       | $                    | 507,000    |               | $          | 7,296,000 |   |
| Third quarter of 2005 |       | $                    | 641,000    |               | $          | 5,896,000 |   |

 

Support revenuedecreased $134,000, or 21%, and as a percentage of total revenue decreased to7% from 11%, in the third quarter of 2006, compared to the third quarter of2005.

Based on historicaldata, the Company expects that legacy support revenue will continue to decreaseby approximately 20% each year on a declining balance. The Company expects thelegacy support revenue will continue as long as it is economically feasible forthe Company to maintain and support the legacy products. As revenue from thelegacy support decreases, costs will be reduced. When income from legacysupport falls below breakeven, operations will be reviewed to determine ifcosts can be further reduced for the activity to be profitable, and if not, theCompany plans to discontinue supporting the legacy products. The Company cannotpredict when this will occur.

The Company expects that future Services revenue willbe derived from the sale of BRICS as well as EbixASP registration and monthlyfees, EbixLife services, Heart services, Infinity services, softwaredevelopment and legacy support and, to a much lesser extent all transactionrevenues from Ebix.mall, EbixExchange, conversion and training.  The Company expects future service revenuefrom the acquisition of Finetre which occurred on October 1, 2006.  See note 14.

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**Servicesand other costs**- Cost of servicesrevenue includes costs associated with support, call center, consulting,implementation and training services. Total services and other costs for thequarter decreased $114,000, or 7.2%, from $1,594,000 for the comparable quarterof the prior year. This decrease was due to a decrease in international supportcosts of $160,000, a decrease in facility costs of $23,000 and a decrease inother costs of $5,000 partially offset by an increase in expenses for requiredservices to support the Company’s products of $60,000 and an increase inpayroll expenses of $14,000.

**ProductDevelopment Expenses**-Total product development expenses for the third quarter of 2006 increased$405,000, or 45%, from $892,000 for the comparable quarter of the prior year.This increase was due to an increase in domestic payroll expenses of $363,000primarily due to the acquisition of Infinity, and travel expenses of $22,000.In addition, facility costs increased $59,000 as a result of the increases inallocations based on headcount in various locations. These increases werepartially offset by a decrease in international payroll expenses of $39,000.

**Sales andMarketing Expenses**- Total sales andmarketing expenses for the third quarter of 2006 increased $182,000, or 33.3%,from $547,000 for the comparable quarter of the prior year. This increase wasattributable to an increase in payroll expenses of $207,000 primarily due tothe acquisition of Infinity, an increase in advertising expenses of $9,000 andan increase in facility costs of $9,000 partially offset by a decrease ininternational advertising expenses of $39,000 and other expenses of $4,000.

**Generaland Administrative Expenses** - Total general andadministrative expenses for the quarter increased $118,000, or 8.4%, from$1,413,000 for the comparable quarter of the prior year. This increase was dueto an increases in  payroll and benefitsof $192,000, increases in travel and entertainment of $114,000, rent expense of$44,000, office expense of $45,000, charitable contributions of $23,000 and adecrease in the amount of facility costs allocated to other departments of $442,000partially offset by a decrease in international expenses of $622,000, adecrease in legal and audit expense of $65,000 and a decrease in consultingexpenses of $55,000.

**Amortizationand Depreciation Expenses** — Total amortization anddepreciation expenses for the quarter increased $118,000, or 37.2%, from$317,000 for the comparable quarter of the prior year. This increase isprimarily due to the increase in depreciation and amortization of intangiblesrelated to the acquisition of Infinity.

**Incometax expense**— The effectivetax rate for the third quarter of 2006 was higher than the rate for thecomparable quarter of the prior year due to a different income mix among thevarious tax jurisdictions in which the Company does business.

**Nine-MonthPeriod Ended September 30, 2006 Compared to the Nine-Month Period EndedSeptember 30, 2005**

**TotalRevenue** - Total revenue for the nine-month period endedSeptember 30, 2006 increased $2,041,000, or 11.4%, to $19,975,000 from$17,934,000 for the comparable period of the prior year.

**SoftwareRevenue** - Total software revenue for the nine-month periodended September 30, 2006 increased $251,000, or 25.1%, to $1,251,000 from$1,000,000 for the comparable period of the prior year. This increase wasprimarily due to the increase in domestic software revenue.

**ServicesRevenue** — Total services revenue for the nine-month periodended September 30, 2006 increased $1,790,000, or 10.6%, from $16,934,000 forthe comparable period of the prior year. This increase was primarily due to aincrease in consulting revenue of $1,193,000 primarily due to the acquisitionof Infinity, an increase in international service revenue of $966,000 and anincrease in EbixLife revenue of $501,000 partially offset by a decrease insupport revenue associated with legacy products of $467,000, a decrease inEbixMall revenue of $229,000, a decrease in hosting revenue of $79,000, adecrease in call center revenue of $52,000 and a decrease in other revenues of$43,000.

During thenine-month period ended September 30, 2006 and 2005, approximately $2,477,000and $2,720,000, respectively was recognized as services revenue from BritInsurance Holdings PLC (“Brit”) and its affiliates. The amounts represented 12%and 15%, of the Company’s total revenues for the nine-month periods endedSeptember 

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30, 2006 and 2005,respectively. Brit owned approximately 34% of the Company’s common stock as ofSeptember 30, 2006. In addition, the Company has been informed that, as ofSeptember 30, 2006, Brit owned approximately 78% of the equity interests of CFEpic Insurance and General Fund, which at September 30, 2006 ownedapproximately 8% of the Company’s outstanding common stock.**For the nine-month periods endedSeptember 30, 2006 and 2005, 7% and 6% of the Company’s total revenues were fromAON. Neither Brit and its affiliates nor AON have long-term agreements with theCompany that provide certainty that such revenues will be recurring.

Support revenueassociated with the Company’s legacy products is decreasing due to a trend ofdeclining renewals for these older product offerings.

|                                       | ** ** | **Support  Revenue** | ** ** | **Total  Revenue** | ** ** |
|---------------------------------------|------------|----------------------|------------|--------------------|------------|
|                                  |       |                 |       |               |       |
| Nine-months ended  September 30, 2006 |       | $                    | 1,628,000  |               | $          | 19,975,000 |   |
| Nine-months ended September 30, 2005  |       | $                    | 2,095,000  |               | $          | 17,934,000 |   |

 

Support revenuedecreased $467,000, or 22%, and as a percentage of total revenue decreased to8% from 12%, in the nine-month period ended September 30, 2006 compared to thesame period in 2005.

Based onhistorical data, the Company expects that legacy support revenue will continueto decrease by approximately 20% each year on a declining balance. The Companyexpects the legacy support revenue will continue as long as it is economicallyfeasible for the Company to maintain and support the legacy products. Asrevenue from the legacy support decreases, costs will be reduced. When incomefrom legacy support falls below breakeven, operations will be reviewed todetermine if costs can be further reduced for the activity to be profitable,and if not, the Company plans to discontinue supporting the legacy products.The Company cannot predict when this will occur.

The Company expects that future Services revenue willbe derived from the sale of BRICS as well as EbixASP registration and monthlyfees, EbixLife services, Heart services, Infinity services, softwaredevelopment and legacy support and, to a much lesser extent all transactionrevenues from Ebix.mall, EbixExchange, conversion and training. The Companyexpects future service revenue from the acquisition of Finetre which occurredon October 1, 2006.  See note 14.

**Servicesand other costs**- Cost of servicesrevenue includes costs associated with support, call center, consulting,implementation and training services. Total services and other costs for thenine-month period ended September 30, 2006 decreased $333,000, or 7.4%, from$4,503,000 for the comparable period of the prior year. This decrease was dueto a decrease in payroll expenses of $40,000, a decrease in expenses forrequired services to support the Company’s products of $32,000, and a decreasein facility costs of $53,000 a decrease in international support costs of$206,000 and a decrease in other expenses of $2,000.

**ProductDevelopment Expenses**-Total product development expenses for the nine-month period ended September30, 2006 increased $806,000, or 32.8%, from $3,265,000 for the comparableperiod of the prior year. This increase was due to an increase in domesticpayroll expenses of $591,000, primarily due to the acquisition of Infinity, anincrease in international payroll of $26,000 and an increase in travel andentertainment expenses of $22,000. In addition, facility costs increased$167,000 as a result of the increases in headcount in various locations.

**Sales andMarketing Expenses**- Total sales andmarketing expenses for the nine-month period ended September 30, 2006 increased$422,000, or 27.3%, from $1,547,000 for the comparable period of the prioryear. This increase was attributable to an increase in payroll expenses of$460,000 primarily due to the acquisition of Infinity, an increase in traveland entertainment expenses of $9,000, an increase in consulting expenses of$9,000, an increase in facility costs of $22,000 and an increase in officesupplies of $6,000 partially offset by a decrease in advertising expenses of$40,000 and a decrease in international expenses of $44,000.

**Generaland Administrative Expenses** - Total general andadministrative expenses for the nine-month period ended September 30, 2006  decreased $36,000, or 0.7%, from $4,928,000for the comparable period of the prior year. 

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This decrease wasdue to a decrease in international expenses of $545,000 and a decrease in auditand legal fees of $274,000, a decrease in consulting fees of $106,000, a decreasein insurance expense of $11,000 and an increase in the amount of facility costsallocated to other departments of $18,000 partially offset by an increase inpayroll of $435,000, and increase in travel and entertainment expenses of$268,000, an increase in office expense of $124,000, an increase in rentexpense of $58,000, an increase in charitable contributions of $33,000.

**Amortizationand Depreciation Expenses** — Total amortization anddepreciation expenses for the nine-month period ended September 30, 2006increased $201,000, or 20.8%, from $965,000 for the comparable period of theprior year. This increase is primarily due to the increase in depreciation andamortization of intangibles related to the acquisition of Infinity.

# **Incometax expense**— Theeffective tax rate for the nine months ended September 30, 2006 was higher thanthe rate for the comparable period of the prior year due to a different incomemix among the various tax jurisdictions in which the Company does business.

**Liquidityand Capital Resources**

The Company hadcash and cash equivalents of $5,334,000 at September 30, 2006, compared to cashand cash equivalents of $6,733,000 at December 31, 2005.

During the ninemonths ended September 30, 2006, the Company generated operating cash flow of $2,522,000as compared to $4,106,000 of operating cash flow for the nine months endedSeptember 30, 2005. The cash flow from operations in the nine months endedSeptember 30, 2006 is principally due to a growth in net income partiallyoffset by an increase in net accounts receivable of $1,510,000, and a decreasein accounts payable and accrued expenses of $943,000. These balance sheetfluctuations are normal consequences of timing differences between accruals andtheir cash settlement.

Cash used ininvesting activities of $3,179,000 in the nine months ended September 30, 2006represented expenditures made primarily related to the Company’s acquisition ofInfinity. Cash used in financing activities of $779,000 resulted from theCompany’s payment of a long-term debt obligation, partially offset by theproceeds from the exercise of stock options.

In thenine months ended September 30, 2006, 12% and 7% of the Company’s totalrevenues were from two customers—Brit and its affiliates and AON, respectively.Neither Brit nor AON have long-term agreements with the Company that providecertainty that such revenues and related cash flows will be recurring. AONInternational continues to acquire licenses for more locations resulting inmore reliance on the e-Global system.

InOctober 2002, the Company obtained from LaSalle Bank National Associationa $1,000,000 revolving line of credit, secured by a perfected first securityinterest in substantially all of the Company’s assets. The line of credit wasincreased to $5,000,000 during February 2004 and expired onOctober 31, 2006. In November 2005, the line of credit was paid andthe total borrowings on this line were zero. In August 2006, the Companyentered into an amendment to the credit agreement, which increased the line to$12,000,000. Total borrowings on this line were zero as of September 30, 2006.On November 10, 2006, there was $11,000,000 outstanding on the line of credit. Theline of credit agreement expires on August 31, 2007.

On May 9, 2006, Ebix, Inc. (“Ebix”) announced theacquisition of substantially all of the operating assets of Infinity SystemsConsulting, Inc. (“Infinity”). This acquisition was post-dated to be effectiveas of May 1, 2006. Ebix acquired these assets for an upfront payment of $2.9million in cash and a potential future payment not exceeding $4.5 million incash if Infinity meets certain future revenue projections as a division ofEbix.

On October 2, 2006, Ebix,Inc. (“Ebix”) announced the merger with Finetre Corporation (“Finetre”)effective October 1, 2006.  Finetre willbecome a separate division within Ebix. Ebix has paid Finetre shareholders $13,000,000 for substantially all ofFinetre stock, and Finetre shareholders retain the right to earn up to$3,000,000 in additional payments over two years if certain revenue and netincome targets of the Finetre division of Ebix are met.

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Inplanning for its capital needs, the Company takes into account its sources ofcash, which include operating cash flow, cash balances and funds from creditfacilities, and anticipated future cash needs, which include working capitalrequirements for operations, capital expenditures, and expenditures forbusiness acquisitions.  Based on these considerations, the Companybelieves it will have sufficient cash from operations to satisfy itscontractual obligations for at least the next several years.

# The following summarizesthe Company’s contractual obligations at September 30, 2006, and the effectsuch obligations are expected to have on the Company’s liquidity and cash infuture periods (in thousands):

| ** **                      | ** ** | **Payment Due by Period** | ** ** |
|---------------------------------|------------|------------------------------------------|------------|
| ** **                      | ** ** | **Total**                                | ** ** | **Less Than 1  Year** | ** ** | **1 — 3 Years** | ** ** | **3- 5 Years** | ** ** | **More Than 5  Years** | ** ** |
| ** **                      | ** ** | **(in thousands)**                  | ** ** |
|                            |       |                                     |       |   |   |   |   |   |   |   |   |
| Contractual  Obligations:       |       |                                     |       |   |   |   |   |   |   |   |   |
| Long-Term Debt  Obligations (1) |       | $                                        | 1,966      |   | $ | 966 |   | $ | 1,000 |   | $ | — |   | $ | — |   |
| Operating Leases  Obligations   |       | 3,562                                    |       | 897 |   | 1,504 |   | 758 |   | 403 |   |
| Capital Leases Obligations      |       | 13                                       |       | 2 |   | 7 |   | 4 |   | — |   |
| Total                           |       | $                                        | 5,541      |   | $ | 1,865 |   | $ | 2,511 |   | $ | 762 |   | $ | 403 |   |

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(1)                                  Includesinterest of approximately $166,000 at an imputed interest rate of 4% as of thedate of acquisition.

Item3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Themajority of the Company’s operations are based in the U.S. and, accordingly,the majority of our transactions are denominated in U.S. dollars. However, theCompany has foreign-based operations where transactions are denominated inforeign currencies and are subject to market risk with respect to fluctuationsin the relative value of currencies. Currently, the Company and itssubsidiaries have operations in Australia, Canada, India, New Zealand andSingapore and conduct transactions in the local currencies of each location.There can be no assurance that fluctuations in the value of foreign currencieswill not have a material adverse effect on the Company’s business, operatingresults, revenues or financial condition. The impact of fluctuations in thesecurrencies resulted in a net transaction losses of $72,000 and $17,000 for thethree months ended September 30, 2006 and 2005, respectively and nettransaction gains of $16,000 and $58,000 for the nine months ended September30, 2006 and 2005, respectively. The Company considered the historical trendsin currency exchange rate and determined that it was reasonably possible thatadverse changes in exchange rates of 20% for all currencies could beexperienced in the near term. Such adverse changes would have resulted in apositive impact on income before taxes of approximately $26,000 for the threemonths ended September 30, 2006 and an adverse impact on income before taxes ofapproximately $30,000 for the three months ended September 30, 2005, respectively.Such adverse changes would have resulted in an adverse impact on income beforetaxes of approximately $140,000 and $265,000 for the nine months endedSeptember 30, 2006 and 2005, respectively.

Therehave been no material changes in the Company’s interest rate risk during thethree and nine months ended September 30, 2006. For additional information oninterest rate risk, refer to the “Quantitative Disclosures About Market Risk”section of the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2005.

Item4.    CONTROLS AND PROCEDURES —

*Disclosure Controls andProcedures.*The Company maintains controls andprocedures designed to ensure that it is able to collect the information we arerequired to disclose in the reports we file with the SEC, and to process,summarize and disclose this information within the time periods specified inthe rules of the SEC. Management, with the participation of the ChiefExecutive Officer and Chief Financial Officer, has evaluated our disclosurecontrols and procedures (as such term is defined inRules 13a-15(e) and 15d-15(e) under the Securities and ExchangeAct of 1934 as amended (the “Exchange Act”).

Based on such evaluation,the Chief Executive Officer and Chief Financial Officer have concluded that, asof 

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the end of such period, the Company’s controls andprocedures are effective to ensure that we are able to collect, process anddisclose the information it is required to disclose in the report we file withthe SEC within the required time periods.

*Changesin Internal Control Over Financial Reporting.*There has beenno change in our internal control over financial reporting for the three andnine months ended September 30, 2006, that has materially affected, or isreasonably likely to materially affect, internal control over financialreporting.

Part II — OTHERINFORMATION

**SafeHarbor for Forward-Looking Statements under the Securities Litigation ReformAct of 1995** — This Quarterly Report on Form 10-Q containsvarious forward-looking statements and information that are based on management’sbeliefs, as well as assumptions made by, and information currently available tomanagement, including statements regarding future economic performance andfinancial condition, liquidity and capital resources, acceptance of the Company’sproducts by the market and management’s plans and objectives. The Company hastried to identify such forward looking statements by use of words such as “expects,”“intends,” “anticipates,” “plans,”  “believes,“will,” “should,” and similar expressions, but these words are not theexclusive means of identifying such statements. The forward looking statementsincluded in this Quarterly Report are subject to various risks, uncertaintiesand other factors which could cause actual results to vary materially fromthose expressed in, or implied by, the forward looking statements. Such risks,uncertainties and other factors include those discussed in “Risk Factors”below. Except as expressly required by the federal securities laws, the Companyundertakes no obligation to update any such factors or to publicly announce theresults of any of the forward-looking statements contained herein to reflectchanged circumstances or future events or developments or for any other reason.

Item 1A. RISKFACTORS

# **Risk Factors**

You shouldcarefully consider the risks, uncertainties and other factors described below,along with all of the other information included in this quarterly report onForm 10-Q, because they could materially and adversely affect our business,financial condition, operating results, cash flows and prospects and/or themarket price of our common stock. This risk factors section is written inresponse to the Securities and Exchange Commission’s “plain English”guidelines. In this section, the words “we,” “us,” “our” and “ours” refer tothe Company and not any other person.

***RisksRelated To Our Business and Our Industry***

**You may have difficulty evaluating our businessbecause of our limited history of Internet, call center and other businessprocess outsourcing.**

Although our predecessorbegan operations in 1976, we did not begin any Internet operations untilSeptember 1999 and did not begin generating revenues from these operationsuntil the fourth quarter of 2000. We did not begin any call center or otherbusiness process outsourcing operations or begin generating revenues from theseoperations until the first quarter of 2003. Accordingly, there is a limitedhistory of these operations on which you can evaluate our company andprospects. We cannot be certain that our Internet, call center and otherbusiness process outsourcing strategies will be successful, because thesestrategies are new. Our early-stage Internet, call center and other businessprocess outsourcing operations will be particularly susceptible to the risksand uncertainties described in these risk factors and more likely to incur theexpenses associated with addressing them. Our prospects must be considered inlight of the risks, uncertainties, expenses and difficulties frequentlyencountered by companies in a transitional stage of development, particularlycompanies in new and rapidly evolving markets, such as electronic commerce, andusing new and unproven business models.

**Because thesupport revenue that we have traditionally relied upon has been steadilydeclining, it is important that new sources of revenue continue to bedeveloped.**

Our revenue from thesupport services we offer in connection with our legacy software products hasbeen 

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decreasing significantly over the course of the past fewyears. This decline can be attributed to the fact that many of our supportclients are not renewing their support agreements with us, in many casesbecause they are no longer using our legacy software. Even if they arecontinuing to use our legacy software, our support clients may choose not torenew their support agreements if their legacy software products no longerrequire support or they use third party support. In addition, some of theclients who use our support services have reduced the level of support that weprovide them, which in turn reduces our support revenue. This downward trend inour support revenue makes us particularly dependent upon our other sources ofrevenue.

**Two customers currently provide a significantpercentage of our total revenue.**

Revenues from onecustomer, Brit Insurance Holdings PLC and its affiliates, which at September30, 2006 owned approximately 34.0% of our common stock and approximately 78% ofCF Epic Insurance and General Fund, which at that date owned approximately 8%of our common stock, represented approximately 12% ($2,477,000) and 15%($2,720,000) of our total revenue for the nine-month periods ended September30, 2006 and September 30, 2005, respectively. If revenues from this customerwere to discontinue, our operating results could be adversely affected.

Revenues from anothercustomer, AON, represented approximately 7% ($1,400,000) and 6% ($1,122,000) ofour total revenue for the nine-month periods ended September 30, 2006 andSeptember 30, 2005, respectively. If revenues from this customer were todiscontinue, our operating results could be adversely affected.

**Adverse insurance industry economics could adverselyaffect our revenues.**

We are dependent on theinsurance industry, which may be adversely affected by current economic andworld political conditions.

**Our operating results may fluctuate dramatically.**

Our quarterly operatingresults may fluctuate significantly in the future due to a variety of factorsthat could affect our revenues or our expenses in any particular quarter. Youshould not rely on our results of operations during any particular quarter asan indication of our results for a full year or any other quarter. Factors thatmay affect our quarterly results may include the loss of a significant insuranceagent, carrier or broker relationship or the merger of any of our participatinginsurance carriers with one another.

Our operating expensesare based in part on our expectations of our future revenues and are relativelyfixed in the short term. We may be unable to adjust spending quickly enough tooffset any unexpected revenue shortfall.

**We cannot predictour future capital needs and we may not be able to secure additional financingwhen we need it.**

We may need to raiseadditional funds in the future in order to fund more aggressive brand promotionor more rapid expansion, to develop new or enhanced services, to respond tocompetitive pressures or to make acquisitions. Any required additionalfinancing may not be available on terms favorable to us, or at all. If adequatefunds are not available on acceptable terms, we may be unable to meet ourbusiness or strategic objectives or compete effectively. If additional fundsare raised by our issuing equity securities, stockholders may experiencedilution of their ownership interests, and the newly issued securities may haverights superior to those of our common stock. If additional funds are raised byour issuing debt, we may be subject to limitations on our activities.

**Our recentacquisitions of Infinity and Finetre as well as any future acquisitions that weundertake could be difficult to integrate, disrupt our business, dilutestockholder value and harm our operating results.**

The acquisitions of Infinityand Finetre and any other future acquisitions, may cause us to be subject to avariety of risks, including risks associated with an ability to integrateacquired assets or operations into our existing operations, higher costs orunexpected difficulties or problems with acquired assets or entities, outdatedor incompatible technologies, labor difficulties or an inability to realizeanticipated synergies and efficiencies, whether within anticipated timeframesor 

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at all, one or more of which risks, if realized, couldhave an adverse impact on our operations.

**We may not be ableto continue to develop new products to effectively adjust for rapidtechnological changes.**

To be successful, we must adapt to rapidly changingtechnological and market needs, by continually enhancing our website andintroducing new products and services to address our users’ changing demands.

The marketplaces in whichwe operate are characterized by:

•         rapidly changingtechnology;

•         evolving industrystandards;

•         frequent new product andservice introductions;

•         shifting distributionchannels; and

•         changing customerdemands.

Our future success will depend on our ability to adaptto this rapidly evolving marketplace. We could incur substantial costs if weneed to modify our services or infrastructure in order to adapt to changesaffecting our market, and we may be unable to adapt to these changes.

**The markets forour products are highly competitive and are likely to become more competitive,and our competitors may be able to respond more quickly to new or emergingtechnology and changes in customer requirements.**

We operate in highlycompetitive markets. In particular, the online insurance distribution market,like the broader electronic commerce market, is rapidly evolving and highlycompetitive. Our software business also experiences some competition fromcertain large hardware suppliers that sell systems and systems’ components toindependent agencies and from small, independent or freelance developers andsuppliers of software, who sometimes work in concert with hardware vendors tosupply systems to independent agencies. Our Internet business may also faceindirect competition from insurance carriers that have subsidiaries whichperform in-house agency and brokerage functions.

Some of our currentcompetitors have longer operating histories, larger customer bases, greaterbrand recognition and significantly greater financial, marketing and otherresources than we do. In addition, we believe we will face increasingcompetition as the online financial services industry develops and evolves. Ourcurrent and future competitors may be able to:

•         undertake more extensivemarketing campaigns for their brands and services;

•         devote more resources towebsite and systems development;

•         adopt more aggressivepricing policies; and

•         make more attractiveoffers to potential employees, online companies and third-party serviceproviders.

**If we are unableto protect our intellectual property, our reputation and competitiveness in themarketplace may be materially damaged.**

We regard ourintellectual property in general and our software in particular as critical toour success. It may be possible for third parties to copy aspects of ourproducts or, without authorization, to obtain and use information that weregard as trade secrets. Existing copyright law affords only limited practicalprotection, and our software is unpatented.

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**If we infringe onthe proprietary rights of others, we may be at a competitive disadvantage, andany related litigation could be time consuming and costly.**

Third parties may claimthat we have violated their intellectual property rights. Any of these claims,with or without merit, could subject us to costly litigation and divert theattention of key personnel. To the extent that we violate a patent or otherintellectual property right of a third party, we may be prevented fromoperating our business as planned, and we may be required to pay damages, toobtain a license, if available, to use the right or to use a non-infringing method,if possible, to accomplish our objectives.

**We depend on thecontinued services of our senior management and our ability to attract andretain other key personnel.**

Our future success issubstantially dependent on the continued services and continuing contributionsof our senior management and other key personnel, particularly Robin Raina, ourPresident and Chief Executive Officer. The loss of the services of any of ourexecutive officers or other key employees could harm our business. We have nolong-term employment agreements with any of our key personnel, nor do wemaintain key man life insurance policies on any of our key employees.

Our future successdepends on our continuing to attract, retain and motivate highly skilledemployees. If we are not able to attract and retain new personnel, our businesswill be harmed. Competition for personnel in our industry is intense. We may beunable to retain our key employees or attract, assimilate or retain otherhighly qualified employees in the future.

**Our internationaloperations are subject to a number of risks that could affect our income andgrowth.**

We market our softwareinternationally and plan to expand our Internet services to locations outsideof the United States. In 2004, we acquired certain assets from Heart ConsultingServices Pty. Ltd. in Australia. In addition, commencing in 2002, we begandevelopment activities, call center services and other operations in India. Ourinternational operations may not produce enough revenue to justify our investmentsin establishing them and are subject to other inherent risks, including:

•         the impact of recessionsin foreign economies on the level of consumers’ insurance shopping andpurchasing behavior;

•         greater difficulty incollecting accounts receivable;

•         difficulties and costs ofstaffing and managing foreign operations;

•         reduced protection forintellectual property rights in some countries;

•         seasonal reductions inbusiness activity during the summer months in Europe and other parts of theworld;

•         burdensome regulatoryrequirements, other trade barriers and differing business practices;

•         fluctuations in exchangerates;

•         potentially adverse taxconsequences; and

•         political and economicinstability.

Furthermore, our entryinto additional international markets requires significant management attentionand financial resources, which could lessen our ability to manage our existingbusiness effectively.

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**Laws andregulations that govern the insurance industry could expose us or the agents,brokers and carriers who participate in our online marketplace to legalpenalties.**

We perform functions forlicensed insurance agents, brokers and carriers and are, therefore, required tocomply with a complex set of rules and regulations that often vary fromstate to state. These rules and regulations can be difficult to complywith and are ambiguous and open to interpretation. If we fail to properlyinterpret and/or comply with these rules and regulations, we, theinsurance agents, brokers or carriers doing business with us, our officers, oragents with whom we contract could be subject to various sanctions, includingcensure, fines, cease-and-desist orders, loss of license or other penalties.This risk, as well as other laws and regulations affecting our business andchanges in the regulatory climate or the enforcement or interpretation ofexisting law, could expose us to additional costs, including indemnification ofparticipating insurance agents, brokers or carriers for their costs, and couldrequire changes to our business or otherwise harm our business. Furthermore,because the application of online commerce to the consumer insurance market isrelatively new, the impact of current or future regulations on our business isdifficult to anticipate. To the extent that there are changes in therules and regulations regarding the manner in which insurance is sold, ourbusiness could be adversely affected.

**Governmentalregulation of the telemarketing industry may increase our costs and restrictthe operation and growth of our call center business.**

The telemarketingindustry and, therefore, our call center business are subject to an increasingamount of governmental regulation. In particular, telemarketers are now barredfrom contacting persons who have registered their phone numbers on the NationalDo Not Call Registry maintained by the Federal Trade Commission. We could besubject to a variety of enforcement or private actions for our failure or thefailure of our clients to comply with these regulations. Furthermore, our costsmay increase as a result of having to comply with these regulations, and theseregulations may limit our call center activities or reduce the demand for ourcall center services.

***RisksRelated to Our Conduct of Business on The Internet***

**Any disruption of our Internet connections couldaffect the success of our Internet based products.**

Any system failure,including network, software or hardware failure, that causes an interruption inour network or a decrease in responsiveness of our website could result inreduced user traffic and reduced revenue. Continued growth in Internet usagecould cause a decrease in the quality of Internet connection service. Websiteshave experienced service interruptions as a result of outages and other delaysoccurring throughout the Internet network infrastructure. In addition, therehave been several incidents in which individuals have intentionally causedservice disruptions of major e-commerce websites. If these outages, delays orservice disruptions frequently occur in the future, usage of our website couldgrow more slowly than anticipated or decline, and we may lose revenues andcustomers.

If the computer hardwareoperations that host our website were to experience a system failure, theperformance of our website would be harmed. These systems are also vulnerableto damage from fire, floods, earthquakes, acts of terrorism, power loss,telecommunications failures, break-ins and similar events. Our property andbusiness interruption insurance coverage may not be adequate to compensate usfor all losses that may occur. In addition, our users depend on Internetservice providers, online service providers and other website operators foraccess to our website. Each of these providers has experienced significantoutages in the past, and could experience outages, delays and otherdifficulties due to system failures unrelated to our systems. Concernsregarding security of transactions or the transmission of confidentialinformation over the Internet or security problems we experience may prevent usfrom expanding our business or subject us to legal exposure.

If we do not offersufficient security features in our online product and service offerings, ourproducts and services may not gain market acceptance, and we could be exposedto legal liability. Despite the measures that we may take, our infrastructurewill be potentially vulnerable to physical or electronic break-ins, computerviruses or similar problems. If a person circumvents our security measures,that person could misappropriate proprietary information or disrupt or damageour operations. Security breaches that result in access to confidentialinformation could damage our reputation and subject us to a risk of loss orliability. We may be required to make significant expenditures to protectagainst or remedy security breaches. Additionally, if we are unable toadequately address our 

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customers’ concerns aboutsecurity, we may have difficulty selling our goods and services.

**Uncertainty in themarketplace regarding the use of Internet users’ personal information, orproposed legislation limiting such use, could reduce demand for our servicesand result in increased expenses.**

Concern among consumersand legislators regarding the use of personal information gathered fromInternet users could create uncertainty in the marketplace. This could reducedemand for our services, increase the cost of doing business as a result oflitigation costs or increased service delivery costs, or otherwise harm ourbusiness. Legislation has been proposed that would limit the users ofpersonally identifiable information of Internet users gathered online orrequire online services to establish privacy policies. Many state insurancecodes limit the collection and use of personal information by insuranceagencies, brokers and carriers or insurance service organizations. Moreover,the Federal Trade Commission has settled a proceeding against one onlineservice that agreed in the settlement to limit the manner in which personalinformation could be collected from users and provided to third parties.

**Future government regulation of the Internet couldplace financial burdens on our businesses.**

Because of the Internet’spopularity and increasing use, new laws and regulations directed specificallyat e-commerce may be adopted. These laws and regulations may cover issues suchas the collection and use of data from website visitors, including the placingof small information files, or “cookies,” on a user’s hard drive to gatherinformation, and related privacy issues; pricing; taxation; telecommunicationsover the Internet; content; copyrights; distribution; domain name piracy; andquality of products and services. The enactment of any additional laws orregulations, including international laws and regulations, could impede thegrowth of our revenue from our Internet operations and place additionalfinancial burdens on our business.

***RisksRelated To Our Common Stock***

**The price of our common stock may be extremelyvolatile.**

In some future periods,our results of operations may be below the expectations of public marketinvestors, which could negatively affect the market price of our common stock.Furthermore, the stock market in general has experienced extreme price andvolume fluctuations in recent years. We believe that, in the future, the marketprice of our common stock could fluctuate widely due to variations in ourperformance and operating results or because of any of the following factorswhich are, in large part, beyond our control:

•         announcements of newservices, products, technological innovations, acquisitions or strategicrelationships by us or our competitors;

•         trends or conditions inthe insurance, software, business process outsourcing and Internet markets;

•         changes in marketvaluations of our competitors; and

•         general political,economic and market conditions.

In addition, the marketprices of securities of technology companies, including our own, have beenvolatile and have experienced fluctuations that have often been unrelated ordisproportionate to operating performance. As a result, you may not be able tosell shares of our common stock at or above the price at which you purchasethem. In the past, following periods of volatility in the market price of acompany’s securities, securities class action litigation has often beeninstituted against that company. If any securities litigation is initiatedagainst us, we could incur substantial costs and our management’s attention andresources could be diverted from our business.

**The significantconcentration of ownership of our common stock will limit your ability toinfluence corporate actions.**

The concentration ofownership of our common stock may have the effect of delaying, preventing ordeterring 

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a change in control ofour company, could deprive our stockholders of an opportunity to receive apremium for their common stock as part of a sale of our Company, and may affectthe market price of our common stock. At September 30, 2006, Brit InsuranceHoldings PLC beneficially owned approximately 34.0% of our outstanding commonstock and, together with our executive officers and directors, beneficiallyowned approximately 54% of our outstanding common stock. In addition, atSeptember 30, 2006, CF Epic Insurance and General Fund, of which Brit ownsapproximately 78% of the equity interests, beneficially owned 8% of ouroutstanding common stock. As a result, those stockholders, if they acttogether, are able to control all matters requiring stockholder approval,including the election of all directors and approval of significant corporatetransactions and amendments to our certificate of incorporation. Thesestockholders may use their ownership position to approve or take actions thatare adverse to your interests or prevent the taking of actions that areconsistent with your interests.

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**Item** 2.Unregistered Sales ofEquity Securities and Use of Proceeds

The following tableprovides information regarding the Company’s repurchases of shares of itscommon stock during the three months ended September 30, 2006.
| **Period** | ** ** | **Shares  Purchased** | ** ** | **Average  Price  Paid  Per  Share** | ** ** | **Shares  Purchased  as Part  of Publicly  Announced  Programs** | ** ** | **Maximum  Shares that  May  Yet be  Purchased  Under  Publicly  Announced  Program** | ** ** |
|------------|------------|-----------------------|------------|--------------------------------------|------------|----------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| July (1)   |       | 6,079                 |       | $                                    | 16.52      |                                                                       | —     |                                                                                            | —     |   |
| August (1) |       | 1,709                 |       | $                                    | 16.21      |                                                                       | —     |                                                                                            | —     |   |
| September  |       | —                |       | —                               |       | —                                                                     |       | —                                                                                          |       |

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(1)                                  SeeNote 13 to the financial statements included in this Quarterly Report.

Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

At the Company’s Annual Meeting of Stockholders, heldon October 20, 2006, the following members were elected to the Company’s Boardof Directors, each by the respective vote indicated to the right of suchnominee’s name:
| **Nominee**      | ** ** | **For**   | ** ** | **Authority  Withheld** | ** ** |
|------------------|------------|-----------|------------|-------------------------|------------|
| Hans U. Benz     |       | 2,309,921 |       | 37,978                  |       |
| Pavan Bhalla     |       | 2,310,168 |       | 37,731                  |       |
| Neil D. Eckert   |       | 2,308,538 |       | 39,361                  |       |
| Rolf Herter      |       | 2,310,168 |       | 37,731                  |       |
| Hans Ueli Keller |       | 2,309,921 |       | 37,978                  |       |
| Robin Raina      |       | 2,310,168 |       | 37,731                  |       |
|             |       |      |       |                    |       |

 

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Item 6. EXHIBITS
| 2.1    |   | Agreement Plan of Merger by and among Ebix, Finetre  and Steven F. Piaker, as Shareholders’ Representative dated September 22,  2006 (incorporated by reference to Exhibit 2.1 to the Company’s Current  Report on 8-K/A dated October 2, 2006) and incorporated herein by reference. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                            |
| 2.2    |   | Second Amended and Restated Loan and Security  Agreement, dated August 31, 2006 between Ebix, Inc. and LaSalle National  Bank.                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                            |
| 31.1   |   | Certification of Chief Executive Officer Pursuant to  Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002).                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                            |
| 31.2   |   | Certification of Chief Financial Officer Pursuant to  Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002).                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                            |
| 32.1   |   | Certification of Chief Executive Officer Pursuant to  Section 906 of the Sabanes-Oxley Act of 2002 (furnished herewith).                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                            |
| 32.2   |   | Certification of Chief Financial Officer Pursuant to  Section 906 of the Sabanes-Oxley Act of 2002 (furnished herewith).                                                                                                                                                                   |

 

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SIGNATURES

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                          |   | Ebix, Inc. |
|--------------------------|--------|------------|
|                     |   |       |   |   |
|                     |   |       |   |   |
| Date: November 20,  2006 |   | By         |   | /s/ RICHARD J. BAUM |
|                     |   |       |   | Richard J. Baum |
|                     |   |       |   | Executive Vice President — Finance &  Administration, Chief Financial Officer (principal financial and accounting  officer), and Secretary |

 

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EXHIBIT INDEX
| EXHIBIT NO. | ** ** | **DESCRIPTION**                                                                                                                                                                                                                                                                                 |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                                                            |
| 2.1         |       | Agreement Plan of Merger by and among Ebix, Finetre  and Steven F. Piaker, as Shareholders’ Representative dated September 22,  2006 (incorporated by reference to Exhibit 2.1 to the Company’s Current  Report on 8-K/A dated October 2, 2006) and incorporated herein by reference. |
|        |       |                                                                                                                                                                                                                                                                                            |
| 2.2         |       | Second Amended and Restated Loan and Security  Agreement, dated August 31, 2006 between Ebix, Inc. and LaSalle National  Bank. *                                                                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                            |
| 31.1*       |       | Certification of Chief Executive Officer Pursuant to  13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002).                                                                                                                                                                           |
|        |       |                                                                                                                                                                                                                                                                                            |
| 31.2*       |       | Certification of Chief Financial Officer Pursuant to  13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002).                                                                                                                                                                           |
| 32.1*       |       | Certification of Chief Executive Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                        |
| 32.2*       |       | Certification of Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                        |

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*                                         Includedas an exhibit to this quarterly report on Form 10-Q.

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