**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**Form10-K**

 

| **(Mark  One)** | ** ** |
|-----------------|------------|
| **ý**      | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE   SECURITIES EXCHANGE ACT OF 1934** |
|                 |            |  |

 

**For the fiscal year endedDecember 31, 2005**

 

**Commission File Number:  001-31917**

 

**INVESTOOLS INC.**

(Exact name of Registrant as specified in its charter)

 

| **Delaware**                                                    | ** ** | **76-0685039**                             |
|-----------------------------------------------------------------|------------|--------------------------------------------|
| (State or other jurisdiction of incorporation or  organization) |       | (I.R.S. Employer Identification No.)       |
|                                                            |       |                                       |
| **13947 South Minuteman Drive  Draper, Utah**                   |       | **84020**                                  |
| (Address of principal executive offices)                        | ** ** | (Zip Code)                                 |
|                                                            |       |                                       |
| Registrant’s telephone number, including area code:        |
| **(801) 816-6918**                                              |
|                                                            |       |                                       |
| Securities registered pursuant to Section 12(b) of  the Act:    | ** ** | **None**                                   |
| Securities registered pursuant to Section 12(g) of  the Act:    | ** ** | **Common Stock, $.01 par value per share** |
|                                                            |       | (Title of Class)                           |

 

Indicate by check mark whether the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act.

Yes  o    No  ý

 

Indicate by check mark whether the registrant is not required to filereports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes  o    No  ý

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities and Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes  ý    No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of Registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler” and “larger accelerated filer” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o |   | Accelerated filer ý |   | Non-accelerated filer o |
|---------------------------|--------|--------------------------|--------|-------------------------|

 

Indicate by check mark whether the registrant is a shell company (asdefined by Rule 12b-2 of the Act). Yes  o    No  ý

 

The aggregate market value of voting and non-votingcommon equity held by non-affiliates of the Registrant as of June 30, 2005 (thelast business day of the Registrant’s most recently completed second fiscalquarter) based on the closing price of the common stock on the American StockExchange for such date, was $156.7 million. The number of shares of theRegistrant’s common stock converted and outstanding on February 15, 2006 was 44,773,081.

** **

**DocumentsIncorporated by Reference:**

 

The registrant’s definitive proxy statement filed or to be filed withthe Securities and Exchange Commission pursuant to Regulation 14A involving theelection of directors at the annual meeting of the shareholders of theregistrant scheduled to be held on May 30, 2006 is incorporated by reference inPart III of the Form 10-K.

 

 

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**INVESTOOLS INC.**

**FORM 10-K REPORT INDEX**

** **
| **FORWARD LOOKING STATEMENT ** |                                                                                                                  |
|-------------------------------------|-----------------------------------------------------------------------------------------------------------------------|
|                                |                                                                                                                  |   |
| **PART I**                          |                                                                                                                  |   |
|                                |                                                                                                                  |   |
| ITEM 1.                             | BUSINESS                                                                                                              |   |
| ITEM 1A.                            | RISK FACTORS THAT MAY AFFECT FUTURE RESULTS                                                                           |   |
| ITEM 1B.                            | UNRESOLVED STAFF  COMMENTS                                                                                            |   |
| ITEM 2.                             | PROPERTIES                                                                                                            |   |
| ITEM 3.                             | LEGAL PROCEEDINGS                                                                                                     |   |
| ITEM 4.                             | SUBMISSION OF  MATTERS TO A VOTE OF SECURITY HOLDERS                                                                  |   |
|                                |                                                                                                                  |   |
| **PART II**                         |                                                                                                                  |   |
|                                |                                                                                                                  |   |
| ITEM 5.                             | MARKET FOR  REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER  REPURCHASES OF EQUITY SECURITIES |   |
| ITEM 6.                             | SELECTED CONSOLIDATED FINANCIAL DATA                                                                                  |   |
| ITEM 7.                             | MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS                           |   |
| ITEM 7A.                            | QUANTITATIVE AND  QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                           |   |
| ITEM 8.                             | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                                          |   |
| ITEM 9.                             | CHANGES IN AND  DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                                 |   |
| ITEM 9A.                            | CONTROLS AND PROCEDURES                                                                                               |   |
| ITEM 9B.                            | OTHER EVENTS                                                                                                          |   |
|                                |                                                                                                                  |   |
| **PART III**                        |                                                                                                                  |   |
|                                |                                                                                                                  |   |
| **PART IV**                         |                                                                                                                  |   |
|                                |                                                                                                                  |   |
| ITEM 15.                            | EXHIBITS AND FINANCIAL  STATEMENTS                                                                                    |   |

 

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**INVESTOOLSINC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**ForwardLooking Statement**

** **

All statements inthis Annual Report on Form 10-K that are not historical are forward-lookingstatements within the meaning of Section 21E of the Securities Exchange Act of1934.  Such forward-looking statements may be identified by words such as “believe”,“intend”, “expect”, “may”, “could”, “would”, “will”, “should”, “plan”, “project”,“contemplate”, “anticipate”, or similar statements.  In addition, from time to time, we (or ourrepresentatives) may make forward-looking statements of this nature in ourannual report to shareholders, proxy statement, quarterly reports on Form 10-Q,current reports on Form 8-K, press releases or in oral or written presentationsto shareholders, securities analysts, members of the financial press orothers.  All such forward-lookingcautionary statements, whether written or oral, and whether made by us or onour behalf, are expressly qualified by these cautionary statements and anyother cautionary statements which may accompany the forward-lookingstatements.  In addition, theforward-looking statements reflect only our current views concerning futureevents, and we assume no obligation to publicly update or revise anyforward-looking statements made herein or any other forward-looking statementswe make, whether as a result of new information, future events, orotherwise.  Forward-looking statementsare subject to risks and uncertainties which could cause actual results,performance or trends to differ materially from those expressed in theforward-looking statements.  We have madeevery reasonable effort to ensure that the information and assumptions on whichthese statements and projections are based are current, reasonable, andcomplete, but there can be no assurance that management’s expectations, beliefsor projections as expressed in the forward-looking statements will actuallyoccur or prove to be correct.  Factorsthat could cause actual results to differ materially are discussed under “Business— Factors That May Affect Future Results.”

 

**PartI**

# ** **

# **Item 1.**            Business

## ** **

## **Operations Overview**

 

INVESTools Inc.(referred to as “INVESTools”, the “Company”, “we”, “us”, or “our”) is a leaderin investor education.  Our mission is toeducate and empower individual investors to make their own financial decisionsto achieve their financial goals at any time or place by using the INVESToolsMethodTM live, by correspondence or online. We hope to establish the INVESToolsMethod as the most widely recognized, adopted and endorsed approach to investoreducation.  We offer a full range ofinvestor education products and services that provide lifelong learning andsupport to self-directed investors.   Wehave more than 209,000 graduates of our basic courses and 68,000 subscribers toour websites.  Our products and servicesare built around the INVESTools Method, a unique integration of a disciplinedinvesting process, web-based tools, personalized instruction and support.  Our investor education products and servicesare offered in a variety of learning formats with courses ranging frombeginning to advanced, thus addressing the needs of all investor levels.

## ** **

## **Corporate Background**

 

INVESTools wasincorporated in Delaware on May 21, 2001, and began operations on December 6,2001, as a result of a merger between ZiaSun Technologies, Inc., a Nevadacorporation (ZiaSun), and Telescan, Inc., a Delaware corporation(Telescan).  Former ZiaSun and Telescanstockholders acquired an approximate 75% and 25% ownership interest in INVESTools,respectively.  ZiaSun and Telescan eachbecame wholly owned subsidiaries of INVESTools.

 

Our subsidiariesare:

 

•      ZiaSun,which owns 100% of Online Investors Advantage, Inc. (OIA).  OIA owns 100% of the following dormantentities that have no operations: INVESTools Asia Pacific Pte., Limited (INVESTools Asia), InvestorEducation California, LLC, INVESTools Hong Kong Ltd. (INVESTools Hong Kong),Seminar Marketing Group, Inc. (SMG) and Memory Improvement Systems, Inc. (MIS).

 

•      Telescan,which owns 100% of INVESTools Inc., a dormant California corporation with nooperations (INVESTools California).

 

•      SESAcquisition Corp., a California corporation operating under the name 360 Group.We acquired 360 Group in February 2004. 360 Group was a direct marketing agency that offered services such ascustom database development and management, strategic planning, media listplanning and buying, creative and

 

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productionservices, response management and analytic services.  We acquired 360 Group in order to internalizeour marketing department.

 

•      ProphetFinancial Systems, Inc. (Prophet), a California corporation, acquired onJanuary 26, 2005.  Prophet is a Web-basedcontent and services provider that enables active investors to use technicalanalysis to trade more profitably. Prophet’s website, www.Prophet.Net, is a premier Web provider ofadvanced charting technology.

## ** **

## **Business Segments**

 

Managementanalyzes our operations by reviewing financial information regarding productsand services that are aggregated into a single operating segment, investoreducation.

## ** **

## **Business Strategy**

 

Our products andservices are primarily built around a 5-Step Investing Formula that is designedto teach both experienced and beginning investors how to approach the stockselection process and actively manage their investment portfolios.  Course offerings are generally combined with web-basedtools, personalized instruction techniques and ongoing support and are offeredin a variety of learning formats, which solidify the students’ understanding ofthe investing process and help in their effort to take control of theirfinancial future.

 

We seek to offer studentsa full range of investor education products that provide lifelong learning.  Generally, students are introduced to ourproducts and services through a free preview event.  Attendees of the preview event are given aninvitation to attend a more comprehensive instructor-led live or online workshopor purchase an in-depth online or DVD-based home study program, all of whichinclude subscription access to the Investor ToolboxTM website.  Following completion of the initial workshopor home study program, graduates are offered continuing education and advancedcourses to build on what they have learned. These continuing education bundles often contain personalized one-on-onecoaching or starting in 2006 one-to-many online coaching sessions, which arespread out over a period of time and include ongoing support through a live800-number and a live chat hotline for continuing education assistance. Productsare offered under three brands, INVESTools Investor Education, Success MagazineInvestor Education and BusinessWeek Investor Education.

 

### *Learning Formats*

 

Depending on thebrand under which the learning formats are marketed, content and servicesavailable to students (i.e., length of workshop, number or length of coaching programsand access to certain Investor Toolbox features) may vary.

 

•      PreviewEvent—We offer directly or through partners, a free event that introducesattendees to basic investing concepts and provides a broad overview of thefinancial markets.  Depending on thebrand under which the preview event is marketed, participants may receive agift for attending.  Attendees areoffered an invitation to attend a more comprehensive workshop or purchase anin-depth online or DVD-based home study program.

 

•      Workshops—Weoffer one and two-day live, instructor-led investing workshops that covertopics ranging from basic investing principles to advanced strategies.  The workshops provide hands-on experienceusing our proprietary Investor Toolbox website. The basic investing principles workshop includes a six monthsubscription to the Investor Toolbox website as part of the workshop fee.

 

•      HomeStudy Programs—We offer most of our courses in an online or DVD-based homestudy program.  These programs areoffered to preview attendees who are unable to attend the instructor-ledworkshops and workshop graduates seeking to expand their investment knowledgebase through advanced courses.  The homestudy programs provide hands-on training using our proprietary Investor Toolboxwebsite.  The basic investing principleshome study course includes a six month subscription to the Investor Toolbox websiteas part of the home study course fee.

 

•      Coaching—Ourcoaching line of products offer investors one-on-one telephone coaching orone-to-many online coaching and support. The sessions, which are offered for both basic and advanced courses,allow investors to learn at their own pace and successfully apply what they arelearning.  One-on-one coaching is offeredover a set period of time, depending upon the course.

 

•      LiveCoaching Workshops—Our live coaching workshops provide students with an indepth, interactive learning experience and a low student-to-coach ratio.  These courses are taught by our mostexperienced coaches.  They included stockand options training as well as more advanced active investing courses.

 

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•      OngoingSupport (web subscriptions)—As long as alumni maintain an active subscriptionto the Investor Toolbox website, they have unlimited e-mail access to coaches.  Students who participate in the coachingprograms also have access to instructors through a Live Chat online supportoption and coaches through a live 800-number hotline where they can check theirwork.

 

•      eLearning(web subscriptions)—Alumni can access a series of topical online tutorialscalled webinars through our Investor Toolbox website.  The click on demand webinars are designed towalk graduates through the portion of the Investor Toolbox website that relatesto the subject being covered.

 

### *Course Offerings*

 

•      5-StepInvesting Formula—This foundational course is designed to teach bothexperienced and beginning investors how to select stocks according to astep-by-step, disciplined investing process. The 5 steps are:  (1) searchingfor an investment, (2) industry group analysis, (3) fundamental analysis, (4)technical analysis, and (5) portfolio management.  There are no prerequisites to take thiscourse.

 

•      BasicOptions—This course is designed to introduce students to the power of optionsand teach them how to start trading options which will give them opportunitiesto increase their profits and diversify their investing strategies.  The course also provides investors with anumber of options-related strategies such as puts, covered calls and LEAPS thatmay help their investment portfolio. Students must complete the 5-Step Investing Formula prior to taking thiscourse.

 

•      AdvancedTechnical Analysis—This course is designed to teach students technical analysisand advanced charting techniques to identify investment opportunities, reduceambiguity and to give them opportunities to profit in any financial marketcondition.  The course teaches the skillsand discipline to interpret trends and trading opportunities based on thephysical behavior of the market as seen through technical analysis and chartingtechniques.  Students must complete the5-Step Investing Formula prior to taking this course.

 

•      AdvancedOptions—This course is a multi-part course designed to teach students advancedoptions strategies one step at a time. Building on the principles taught in our Basic Options course, theAdvanced Options course introduces new options strategies such as debitspreads, credit spreads, diagonal spreads, straddles and strangles, indexoptions and butterfly spreads.  Studentsmust complete the 5-Step Investing Formula and Basic Options prior to takingthis course.

 

•      INVESToolsCurrency TraderTM—This course prepares students to trade in the foreign exchangemarkets using the same risk management skills and principles that professional,institutional and advanced individual currency traders utilize.  The course focuses on technical analysis andadvanced charting techniques to help investors identify, analyze and leverageglobal currency trading opportunities, reduce risk and increase profitpotential.  The course provides investorswith the proper know-how for taking advantage of the steady stream of uniqueopportunities created by the constant flow of world events.  There are no prerequisites to take thiscourse.

 

### *Continuing Education Programs*

 

Designedfor the serious student, our continuing education programs offer students acomprehensive access to a multitude of products at one price point.  Typically investors receive additional onlineor home study courses, coaching sessions and extended Investor Toolbox websiteaccess.  Depending on the brand underwhich the programs are marketed, content and services available to students(i.e., length of workshop, number of coaching sessions and access to certain onlineInvestor Toolbox features) may vary.

 

•      AssociateInvestor Program—In addition to the foundational 5-Step Investing Formulacourse and initial six month Investor Toolbox website access, the AssociateInvestor Program provides investors with six 5-Step Investing Formulaone-on-one coaching sessions, the Basic Options home study course and six BasicOptions one-on-one coaching sessions.

 

•      MasterInvestor Program—In addition to the foundational 5-Step Investing Formulacourse and initial six month Investor Toolbox website access, the MasterInvestor Program provides investors with six 5-Step Investing Formula coachingsessions, the Basic Options Workshop, Basic Options home study course, sixBasic Options coaching sessions and in 2006, a weekly review of one-to-manycoaching sessions called Masters Talk. The Master Investor Program alsoincludes the Advanced Technical Analysis and Charting home study course, anadditional twelve months of Investor Toolbox website access and a one year VIPpass for basic and alumni workshops.

 

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•      Programof High Distinction—In addition to the foundational 5-Step Investing Formulacourse and initial six month Investor Toolbox website access, the Program ofHigh Distinction provides investors with six 5-Step Investing Formula coachingsessions, the Basic Options Workshop, Basic Options home study course, sixBasic Options coaching sessions, the Advanced Options Workshop, AdvancedOptions home study course, the Advanced Technical Analysis Workshop and theAdvanced Technical Analysis home study course. In 2006, the program is beingupgraded to include the Advanced Options weekly coaching one-to-many coachingsessions called Options Trading Room and Advanced Technical weekly coaching one-to-manysessions called Technical Analysis Trading Room. The Program of HighDistinction also includes a three day live coaching mentor training class, anadditional 24 months of Investor Toolbox website access and a two year VIP passfor basic, alumni and advanced workshops.

 

•      ActiveInvesting Workshops—Three dynamic, intensive workshops, which were added inearly 2005, are offered to students.  Eachworkshop – one for stocks, one for options and one for currency trading – aredesigned to offer attendees more sophisticated strategies and technology.  Attendees are taught how to take advantage ofshorter-term (intraday to one-week) price swings by closely monitoring themarket during open hours and making numerous, quick but well informed decisionsto buy, hold or sell.  This aggressivetrading technique is based primarily on the real-time technical analysis ofvolume, key indicators and technical chart patterns and formations.  Each workshop has a low student to coachratio to give students more personal coaching and deeper comprehension.  With oversight from an experiencedinstructor, investors practice money management, evaluating and calibratingrisk tolerance, monitoring total cash flow and actively managing portfoliogrowth, all in real time.

 

### *Value Added Tools*

 

•      InvestorToolbox—Our Investor Toolbox website gives investors access to the investmenttools needed to execute the strategies taught in our investor educationprograms.  The site has proprietaryfeatures that are not accessible on other financial websites, including morethan 50 pre-built stock searches, comparative reports, market indicators,market commentary and portfolio tracking features.  An initial six month subscription to the siteis included with the purchase of a basic level investing workshop or home studycourse.  At the end of the initialsubscription, graduates are offered renewals for a fee, which depends on thelength of the renewal period and whether additional products or services arepurchased.  Currently, we offer one tosixty month subscription renewals.

 

•      CyberTrader—is a feature that will be added in 2006, the Cyber Trader trading platformwill allow graduates to trade without leaving the Investor Toolbox website.

 

•      OptionsXpress®Trading Platform—is a feature that was added in 2005, the OptionsXpress TradingPlatform allows graduates to trade without leaving the Investor Toolbox website.

 

## **Sales and MarketingStrategy**

 

Revenue is derivedfrom: (i) the initial sale of our products and services as a result ofmarketing efforts across multiple acquisition channels which include, but arenot limited to, television, print, postal mail, radio, online banner, paid andorganic search and email direct marketing campaigns driving customers to eithera free preview of investor education products offered at locations near theprospect or the opportunity to speak with a telesales representative about theproducts offered; and (ii) the additional sale of products and services tograduates as a result of continued interaction with us in workshops, periodicemail and direct mail communications and through access to coaches andinstructors.

 

We experiencedgrowth in initial product sales in 2005 as a result of:  (i) continued refinements to our initiatedand controlled direct marketing efforts for our own brand, INVESTools, and (ii)expanded relationships with co-marketing partners, such as Money In Trainingand Success Magazine Investor Education, where the partners are responsible fordriving leads and acquiring new customers to the organization.  We experienced significant growth inadditional product sales and services to graduates as a result of theintroduction of multiple new products and product bundles.

 

## **Industry Trends**

 

Technology hasgenerated significant growth in the education markets and acceptance offor-profit involvement in the improvement of education is now a mainstreamconcept.  However, only recently has theeducation market begun to emerge as a true industry.  Broadly defined, the education industrycovers a full range of for-profit and non-profit educational products andservices that are delivered through both traditional and technology-basedchannels and includes such disparate elements as early childhood education,corporate training and lifelong learning. We believe that our mission of fulfilling the lifelong education needsof self-directed investors most accurately falls within the confines of 

 

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the educationindustry.

 

(1) We believethat a significant opportunity exists to educate the public about how to makegood investment decisions.  A HarrisInteractive / Securities Industry Association survey (2) confirmed our belief,citing that as more investment related information has become available to thepublic through the Internet, and with increasing cases of corporate accountingfraud and financial mismanagement, as well as the need for reform related tothe United States Social Security program, investors continue to look to thesecurities industry to educate them about how to make better investments tosecure their financial future.

 

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(1) ICI/SIA Study,Equity Ownership in America, 2004

(2) HarrisInteractive Annual SIA Investor Survey, November 2003

## ** **

## **Competition**

 

Generally,competitive factors within the educational market include the range and depthof foundational and continuing education course offerings, the quality of instructorsand coaches, the quality of reference materials provided in connection withcourse studies and the cost of the educational process.  We are aware of several companies thatprovide some level of investor education in similar delivery formats.  However, we believe that:  (i) the depth and quality of our curriculumand training, (ii) the range of our foundational and continuing educationcourse offerings, from beginner to advanced, (iii) our branded and co-marketingproduct distribution partnerships, (iv) the quality of our instructors andcoaches, and (v) our database of prospects and students provide us with aconsiderable competitive advantage compared to other investor educationproviders.

## ** **

## **Intellectual Property**

 

We have registeredand received approval for a number of trademarks in the United States andforeign countries that are important to our future success.  Of critical importance to us is theINVESTools trademark.  The INVESToolstrademark is a widely recognized, adopted and endorsed approach to investoreducation and is associated with quality and reliable service.  Loss of the proprietary use of the INVESToolstrademark or a diminution in the perceived quality associated with that namecould harm our growth in the investor education industry.  In addition, as a result of acquiring ProphetFinancial Systems, Inc. (“Prophet”) we acquired the Prophet trademark andtradename. The Prophet trademark and tradename is a widely recognized chartingwebsite that has won various awards and been recognized as a leader in onlinefinancial charting applications.

 

We have registeredand maintain a multitude of domain names to ensure continuity of delivery forall of our websites.  Domain names aretypically renewed several months prior to their respective expiration dates fora period of two years or longer to prevent loss of ownership.

 

We attempt toprotect our trade secrets and other proprietary information with productdevelopment partners, employees and consultants through nondisclosureagreements, contract provisions and copyright, patent, trademark and tradesecret laws.  With respect totechnologies that we license to third parties for use in specific applicationsor platforms, we rely on licensing agreements to ensure additional protectionrelated to the source code of our products as a trade secret and as anunpublished copyright work.  Managementbelieves that our products, trademarks and other proprietary rights do notinfringe on the proprietary rights of third parties, and management is notaware of any current infringement claims against us.

 

## **Regulatory Compliance**

 

### *General*

 

With the exception of the general requirement that we and oursubsidiaries be registered or qualified to do business in the United States andany foreign countries in which we operate, the products and services providedthrough the use of our technology currently are not subject to the approval ofany government regulatory body.  However,certain foreign countries require that we register with their respectivesecurities and investments commission or similar regulatory body prior toconducting investment-related workshops. We are registered with the Australian Securities and InvestmentsCommission (ASIC) and have a compliance officer residing in Australia.

 

We are not a broker-dealer or otherwise engaged in the business ofeffecting transactions in securities.  Weare not an investment advisor or otherwise engaged in providing investmentadvice or making investment recommendations.

 

### *Sales and Marketing*

 

Our products and services are marketed via a number of channels,including television, print, postal mail, radio, online banners, paid andorganic search and email direct marketing campaigns, which are regulated bynumerous federal and state laws and regulations, including, but not limited to,anti-fraud laws, consumer protection laws, privacy laws, telemarketing laws,telephone solicitation laws and spam laws. While to date we have not been 

 

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adversely impacted by any such regulation, management believes that ourmarketing activities will increasingly be subject to such regulation, whichmay:  (i) limit our ability to solicitnew customers or offer additional products or services to existing customers,and (ii) result in noncompliance, which may subject us to fines or variousforms of civil or criminal prosecution. Such regulation could have an adverse effect on our financial conditionand results of operations.  We havereviewed our marketing and sales practices and have made modifications, whererequired, to ensure compliance.  Wecontinue to monitor the status of existing and proposed regulatory guidelinesto ensure compliance.

 

Althoughour operations on the Internet are not currently regulated by any governmentagency, it is possible that a number of laws and regulations may be adopted inthe future governing the Internet.  Inaddition, existing laws may be interpreted to apply to the Internet in ways notcurrently applied.  Regulatory and legalrequirements are subject to change and may become more restrictive, making ourbusiness units’ compliance more difficult or expensive or otherwise restrictingour ability to conduct their businesses as they are now conducted.

 

### *Securities and Exchange Commission*

 

As apublic company, we are required to file periodic reports, as well as otherinformation, with the Securities and Exchange Commission (SEC) withinestablished deadlines.  Any document wefile with the SEC may be viewed or copied at the SEC’s Public Reference Room at450 Fifth Street, N.W., Washington, D.C. 20549. Additional information regarding the Public Reference Room can beobtained by calling the SEC at (800) SEC-0330. Our SEC filings are also available to the public through the SEC’s website located at http://www.sec.gov.

 

Wemaintain a corporate Web site at http://www.investools.com, on which investorsmay access free of charge our annual report on Form 10-K, quarterly reports onForm 10-Q and amendments to those reports as soon as is reasonably practicableafter furnishing such material with the SEC. In addition, we will voluntarily provide electronic or paper copies ofour filings free of charge upon request to our Investor Relations department at(801) 816-6918.

 

## **HumanResources**

 

At December 31,2005, we had 486 employees.  Of the 486employees, 17 percent were employed in customer acquisition related positions, 60percent were employed in customer fulfillment and retention related positions, 11percent were employed in technology positions, and 12 percent were employed inadministrative and marketing positions. We also had 7 persons under contract primarily in educational services.

 

Our key personnelare covered by employment and confidentiality agreements.  No person employed by us, either full-time,part-time or on a contract basis, is covered by a collective bargainingagreement or represented by a union, and we have never experienced a workstoppage due to a protest or related activities.  Management considers relations with ourpersonnel to be good.

 

## **Item1A. Risk Factors That May Affect Future Results**

### * *

### *Our business may suffer if we are not successful indeveloping, maintaining and defending proprietary aspects of technology used inour products and services.*

 

Oursuccess and ability to compete are dependent on our ability to develop andmaintain the proprietary aspects of our technology.  Litigation may be necessary in the future toenforce our intellectual property rights, to protect trade secrets, todetermine the validity and scope of the proprietary rights of others or todefend against claims of infringement or invalidity.  Any such litigation, even if we prevailed,could be costly, divert resources and could have a material adverse effect onour business, operating results and financial condition.  We can give no assurance that our means ofprotecting our proprietary rights will be adequate, or that our competitorswill not independently develop similar technology.  Any failure by us to protect our intellectualproperty could have a material adverse effect on our business, operatingresults and financial condition.  Weintegrate third-party software into code creating and supporting some of ourproducts and services.  This third-partysoftware may not continue to be available on commercially reasonableterms.  If we are unable to maintainlicenses to the third-party software included in the code supporting ourproduct services, features of our products or services could be unavailable,until equivalent software could be developed or licensed and integrated.  This delay could adversely affect ourbusiness, operating results and financial condition.

 

### *Any negative changes in economic conditions,significant price increases, inflation or adverse events related to variousindustries, or the willingness of investors to trade could harm discretionaryspending and have a material adverse effect.*

 

Webelieve that the level of public interest in investing, particularly in thesecurities and option markets as well as electronic trading has significantlyinfluenced the market for these products and services.  The securities markets have experiencedsubstantial volatility in recent periods. A sharp drop or sustained or gradual decline in securities prices or otherdevelopments in the securities markets typically could cause individualinvestors to be less inclined to invest in the securities markets, which wouldbe likely to result in reduced interest in our investor educational 

 

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productsand services.

 

### *We depend on continued growth in use of the Internetand online commerce.*

 

Ourability to expand our delivery platforms and penetrate new markets could bestagnated without continued growth in the use and efficient operation of theInternet.  Web-based markets forinformation, products and services are new and rapidly evolving.  If Internet usage does not continue to growor grow slower than anticipated, we may be unable to secure new sponsorship andsubscription arrangements for our offerings. To the extent our business relies on web-based delivery platforms, ouroperations will also be dependent on adequate network infrastructure,consistent quality of service and availability to customers of cost-effective,high-speed Internet access.  If oursystems cannot meet customer demand for access and reliability, theserequirements will not be satisfied, and customer satisfaction could degradesubstantially, adversely affecting our prospects for market penetration andprofitability.

 

### *Future regulations or the interpretation of existinglaws pertaining to the Internet could decrease the demand for our products orincrease the cost of doing business.*

 

Anynew law or regulation pertaining to the Internet, or the application orinterpretation of existing laws, could increase our cost of doing business,decrease the demand for our products and services, or otherwise harm ourbusiness.  We must comply with a varietyof federal and state laws affecting the content of materials distributed overthe Internet, as well as regulations and other laws restricting the collection,use and disclosure of personal information that we may obtain in the course ofproviding our online services.  Futurelaws or regulations may relate to information retrieved from or transmittedover the Internet, consumer protection, online content, user privacy, taxationand the quality of products and services. Compliance with future laws and regulations, or existing laws as theymay be interpreted in the future, could be expensive, time consuming,impractical or impossible.

 

### *We may be liable for invasion of privacy ormisappropriation by others of our users’ information, which could adverselyaffect our reputation and financial results.*

 

Someof our services require the disclosure of sensitive information by theuser.  We rely on a number of securitysystems for our services to protect this information from unauthorized use oraccess.  We cannot predict whether newtechnological developments could circumvent these security measures.  If the security measures that we use to protectpersonal information or credit card information are ineffective, we may besubject to liability, including claims for invasion of privacy, impersonation,unauthorized purchases with credit card information or other similar claims.  In addition, the Federal Trade Commission andseveral states have investigated the use of personal information by certainInternet companies.  We could incursignificant expenses if new regulations regarding the use of personal informationare introduced or if our privacy practices are investigated.

 

### *Laws and regulations can affect our operations and maylimit our ability to operate in certain jurisdictions.*

 

Federal,state and international laws and regulations impact our operations and maylimit our ability to obtain authorization to operate in some states orcountries.  Many federal, state andinternational governmental agencies assert authority to regulate providers ofinvestment education programs.  Althoughwe believe that we are currently in compliance with all such regulations, therecan be no assurance that the federal, state or international regulatorystructure will not change.  For example,if we were required to comply with, or found to be in violation of, aregulatory body’s current or future licensing or regulatory requirements, wecould be subject to civil or criminal sanctions, including monetarypenalties.  Additionally, we could berequired to incur significant on-going expenses to comply with regulatoryrequirements or, conceivably, could be barred from providing investmenteducation services in that jurisdiction. If any of these things occur, it could have a material adverse effect onour business and results of operations and may cause our stock price todecline.

 

### *If we are not able to continually enhance ourweb-based products and services and adapt them to changes in technology, ourfuture revenue growth could be adversely affected.*

 

If ourimprovement and adaptation of our web-based products and services is delayed,results in systems interruptions or is not aligned with market expectations orpreferences, our revenue growth could be adversely affected.  The online environment is rapidly evolving,and the technology used in web-based products changes quickly.  We must therefore be able to quickly modifyour solutions to adapt to emerging online standards and practices,technological advances, and changing user and sponsor preferences.  Ongoing enhancement of our web site,web-based products and related technology will entail significant expense andtechnical risk.  We may use newtechnologies ineffectively or fail to adapt our web site, web-based productsand related technology on a timely and cost-effective basis.

 

### *We rely on our strategic partners to provide us withaccess to leads and customers.*

 

Wecurrently access approximately 69% of our revenue through co-branding (BusinessWeek) and co-marketing (Success Magazine and Money in Training)relationships.  Our strategic partnersmay enter into identical or similar relationships with our competitors, which coulddiminish the value of the partners for customer acquisition.  Our strategic partners could terminate theirrelationship with us.  If any of theseorganizations were to terminate their relationship with us our ability todistribute our product and services could be impaired.  We may not be able to maintain our existingrelationships or enter into new strategic relationships.

 

9

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### *Our ability to offer courses may be affected bynatural disaster, strikes and other unpredictable events.*

 

Naturaldisasters, external labor disruptions and other adverse events may affect ourability to conduct our business, resulting in loss of revenue.  Severe blizzards or floods may reduce theability of our course participants to travel to our courses.  These natural disasters may also disrupt theprinting and transportation of the materials used in our direct mailcampaigns.  Furthermore, postal strikescould occur in the countries where we operate which could delay and reducedelivery of our direct mail marketing materials.  Transportation strikes could also occur inthe countries where we operate, adversely affecting course attendance.  The future occurrence of any of these eventscould have a material adverse effect on our business and results of operationsand may cause our stock price to decline.

 

### *If we do not successfully introduce new programs,products and services, our growth rate and revenue will be reduced*.

 

Ourgrowth strategy is dependent on our ability to sell existing training programs,products and services to new students, to open new markets and to develop andintroduce new educational programs, products and services.  If we are unable to expand our markets andproducts, our growth rate and revenue will be reduced.  Market conditions and the level of customerinterest may be different for our current products than for new products, andthere can be no assurance that we will be able to compete favorably with, andobtain market acceptance for, any such new programs, products or services.

 

### *We may desire or need to raise additional capital inthe future and it may not be available on acceptable terms.*

 

If weneed but are unable to obtain additional capital to expand our operations andinvest in new products and services, our business may be adversely affected. In the future we may require substantial additional capital to financeongoing operations or the growth of our business.  To the extent that our existing sources of liquidityand cash flow from operations are insufficient to fund our activities, we mayneed to raise additional funds.  Wecannot be certain that we will be able to obtain additional financing onfavorable terms.  If we fail to raiseadditional funds, we may need to sell debt or additional equity securities orto reduce our growth to a level that can be supported by our cash flow.  Without additional capital, we may not beable to: further develop or enhance our services and products; acquirenecessary technologies, products or businesses; expand operations in the UnitedStates or internationally; hire, train and retain employees; market ourservices and products; or respond to competitive pressures or unanticipatedcapital requirements.

 

### *We need to successfully integrate recently acquiredand potential additional operating companies.*

 

As aresult of recent acquisitions and, as part of our general business strategy, weexpect to experience significant growth and expect such growth to continue intothe future.  This growth is expected toplace a significant strain on our management, financial, operating andtechnical resources.  Failure to managethis growth effectively could have a material adverse effect on our financialcondition or results of operations. There can be no assurance that we will be able to effectively integratethe acquired companies with our own operations. Expansion will place significant demands on our marketing, sales,administrative, operational, financial and management information systems, controlsand procedures.  Accordingly, ourperformance and profitability will depend on the ability of our officers andkey employees to (i) manage our business and our subsidiaries as a cohesiveenterprise, (ii) manage expansion through the timely implementation andmaintenance of appropriate administrative, operational, financial andmanagement information systems, controls and procedures, (iii) add internalcapacity, facilities and third-party sourcing arrangements as and when needed,(iv) maintain service quality controls, and (v) attract, train, retain,motivate and manage effectively our employees. There can be no assurance that we will integrate and manage successfullynew systems, controls and procedures for our business, or that our systems,controls, procedures, facilities and personnel, even if successfullyintegrated, will be adequate to support our projected future operations.  Any failure to implement and maintain suchsystems, controls and procedures, add internal capacity, facilities and third-partysourcing arrangements or attract, train, retain, motivate and manageeffectively our employees could have a material adverse effect on our business,financial condition and results of operations.

 

### *We are dependent on our chief executive officer andchairman of the board for his depth of industry experience and knowledge.*

 

We arehighly dependent on the services of Lee K. Barba, our CEO and Chairman of theBoard.  Mr. Barba has extensiveexperience, knowledge and contacts in the financial and investment industries.  If Mr. Barba were to terminate his employmentwith us, we would lose valuable human capital, adversely affecting ourbusiness.  We currently do not maintainkey man insurance on Mr. Barba or any other member of our senior managementteam.  Neither Mr. Barba nor any othermember of our senior management team intends to retire or is nearing retirementage.

 

### *Legal proceedings could adversely affect our businessand results of operations.*

 

We arefrom time to time involved in various lawsuits and legal proceedings. While weintend to vigorously defend the lawsuit filed against us by Ross Jardine andTrue North Academy LLC as described in Item 3 below, an adverse finding couldsubject us to undetermined penalties. During the fourth quarter of 2005, thelitigation with the Australian Securities and Investment Commission wasresolved with no material adverse effect on our business and results ofoperations. Although we currently are not a defendant in any other materiallegal proceedings, any claim, with or without merit, could result in costlylitigation or require us to modify or cease sales of our products or services,any of which could have a material adverse effect on our business and resultsof operations.

 

10

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# **Items1B. Unresolved Staff Comments**

 

As of December 31,2005, we have no unresolved comments from the Securities Exchange Commission.

 

# **Item 2.**            Properties

 

Our headquartersare currently located in Draper, Utah. In August 2004, we entered into a 63 month lease agreement for the Draperfacility commencing on May 1, 2005.  Themonth-to-month lease for the Provo, Utah facility was terminated atapproximately the same time.

 

In September 2003,we discontinued the use of a leased office space in Provo, Utah.  As such, this lease was sublet to anindependent party for an amount that does not cover in full our leaseobligation under the original lease agreement. Square footage and the monthly rent of this facility are not reflectedin the figures shown in the table below.

 

In addition to theDraper, Utah location, we have leased office space in New York, New York,Houston, Texas, Palo Alto and San Rafael, California.

 

In November 2005,we entered into a 13 month lease agreement to lease additional office space atour Palo Alto location to accommodate operations previously performed at ourSan Rafael location that were moved to Palo Alto and expansion of staff in PaloAlto. In the same month, we entered into an agreement with a real estate brokerto sublease the San Rafael, California location. We expect this to take placesometime during the first half of 2006. As the facility was not subleased atDecember 31, 2005, square footage and monthly rent of the San Rafael facilityare reflected in the figures shown in the table below.

 

The followingtable shows the amount of square footage of our leased facilities and monthlyrent as of December 31, 2005:

 
| **City**   | ** ** | **Square Feet  Rented** | ** ** | **Monthly Rent  as of  December 2005** | ** ** |
|------------|------------|-------------------------|------------|----------------------------------------|------------|
| Draper     |       | 52,000                  |       | $                                      | 53,828     |   |
| Houston    |       | 9,495                   |       | 19,671                                 |       |
| Palo Alto  |       | 6,806                   |       | 18,412                                 |       |
| San Rafael |       | 6,016                   |       | 17,687                                 |       |
| New York   |       | 235                     |       | 4,477                                  |       |
|       |       | 74,552                  |       | $                                      | 114,075    |   |

 

# **Item 3.**            LegalProceedings

# ** **

From time to timewe are involved in certain legal actions arising in the ordinary course ofbusiness.  It is the opinion ofmanagement that such litigation will be resolved without a material adverseeffect on our liquidity, financial position or results of operations.

 

On March 4,2003, a foreign national filed a complaint in the San Diego Superior Courtagainst ZiaSun Technologies, Inc., one of our wholly-ownedsubsidiaries.  The complaint alleges thatcertain individuals, who are not parties in the lawsuit, persuaded theplaintiff to purchase shares of ZiaSun common stock and the complaint alsoalleges a failure to deliver a stock certificate.  ZiaSun does not have any ownership or controlof the third party brokerage house from whom plaintiff claims to have purchasedstock.  The plaintiff was seekingunspecified damages for the alleged fraud in the sale of the stock.  On February 9, 2005, the court awarded asummary judgment in our favor. In March 2005, the plaintiff filed for an appealto continue to pursue this litigation. We believe that this matter will beresolved without material adverse effect on us.

 

In October 2005,the Supreme Court of Queensland, ruled on a lawsuit filed on July 9, 2004, bythe Australian Securities and Investment Commission (ASIC) against OnlineInvestors Advantage, one of our wholly-owned subsidiaries (OIA). The Courtfound that most of the claims pursued by ASIC had not been made out againstOIA, but found for ASIC in respect to certain claims, all of which hinged onthe Court’s finding that the website was a ‘financial product’, as that term isdefined under the Australian Corporations Act. There were no penalties assessedagainst us as a result of this ruling. On October 31, 2005, the Court dismissedASIC’s claim regarding the repayment of money to participants at the workshops.Accordingly, $0.3 million of funds previously held in escrow have been releasedto us. Given OIA’s success on the majority of ASIC’s claims, ASIC was orderedto pay 80% of OIA’s legal costs. Given that ASIC succeeded in respect to asmall number of its claims, OIA was ordered to pay 20% of ASIC’s legal costs.The net of these amounts can not be estimated at this time and therefore noamounts have been recorded in the Consolidated Financial Statements. We expectthese amounts to be settled in the first half of 2006.

 

On November 1,2005, Ross Jardine and True North Academy L.L.C. filed a lawsuit against us inthe Third Judicial District Court, Salt Lake City, Utah.  The lawsuit alleges that we abused  Mr. Jardine’s personal identity under Utahstate 

 

11

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law, his name andlikeness, and appropriated the commercial value of Mr. Jardine’s identity and violatedhis privacy.  In January 2006, we filed ouranswer and counterclaim and in February 2006 we filed a motion for summaryjudgment.  We intend to vigorously defendthis action.

 

In February 2006, wefiled a complaint against Stock Investor.com, LLC, True North Academy, L.L.C.,Wade Hallam, Leroy Hartman and Tony Montoya in the Fourth Judicial Court, UtahCounty, Utah.  The complaint allegesbreach of contract, tortuous interference, violation of the Utah Trade SecretsAct, common law unfair competition, violation of the Utah Unfair CompetitionAct, common law trademark infringement and trade name infringement, and civilconspiracy.  We are seeking damages andinjunctive relief.

 

We establishliabilities when a particular contingency is probable and estimable.  For contingencies noted above, we haveaccrued amounts considered probable and estimable.  We are not aware of pending claims orassessments, other than as described above, which may have a material adverseimpact on our liquidity, financial position or results of operation.

 

# **Item4.**            Submissionof Matters to a Vote of Security Holders

 

During the fourth quarter of 2004, there were nomatters submitted to a vote of the stockholders.

 

**PartII**

** **

# **Item5.**            Market forRegistrant’s Common Equity, Related Stockholder Matters and Issuer Repurchasesof Equity Securities

 

Our common stockis traded on the American Stock Exchange under the symbol IED.  The following table sets forth, for theperiods indicated, the high and low sales prices.

 
| ** **                  | ** ** | **Company Common Stock** | ** ** |
|-----------------------------|------------|--------------------------|------------|
| ** **                  | ** ** | **High**                 | ** ** | **Low** | ** ** |
| 2005                        |       |                     |       |   |   |
| Quarter ended March 31      |       | $                        | 5.36       |   | $ | 3.35 |   |
| Quarter ended June 30       |       | 5.74                     |       | 3.30 |   |
| Quarter ended September  30 |       | 4.65                     |       | 3.25 |   |
| Quarter ended December  31  |       | 5.50                     |       | 4.05 |   |
|                        |       |                     |       |   |   |
| 2004                        |       |                     |       |   |   |
| Quarter ended March 31      |       | $                        | 2.90       |   | $ | 1.51 |   |
| Quarter ended June 30       |       | 2.50                     |       | 1.71 |   |
| Quarter ended September  30 |       | 2.27                     |       | 1.58 |   |
| Quarter ended December  31  |       | 3.50                     |       | 2.10 |   |

 

On March 3, 2006,the closing price of our common stock as reported by the American StockExchange was $7.98.  As of January 26,2006, we had 750 stockholders of record, and as of February 1, 2006 we had6,814 beneficial holders.

 

## **Dividend Policy**

## ** **

We have neverdeclared a cash dividend on our common stock. The Board of Directors currently intends to retain all earnings for usein our business, and therefore, does not anticipate paying any cash dividendson our common stock in the foreseeable future. The declaration of dividends, if any, in the future would be subject tothe discretion of the Board of Directors, which may consider factors such asour results of operations, financial condition, capital needs and acquisitionstrategy, among other things.  See Item 7- Management’s Discussion and Analysis of Financial Condition and Results ofOperations and our consolidated financial statements and the notes thereto.

 

12

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## **Equity Compensation PlanInformation**

 

The following table sets forth information as of December 31, 2005,with respect to our equity compensation plans previously approved bystockholders and equity compensation plans not previously approved bystockholders.

 
| ** **                                              | ** ** | **Equity Compensation Plans**                                                                      | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| **Plan  Category**                                      | ** ** | **Number of securities to  be issued upon exercise  of outstanding options,  warrants and rights** | ** ** | **Weighted average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column (a))** | ** ** |
| ** **                                              | ** ** | **(a)**                                                                                            | ** ** | **(b)** | ** ** | **(c)** | ** ** |
| Equity compensation  plans approved by stockholders (1) |       | 4,052,193 – 4,602,193                                                                         |       | $ | 2.35 |   | 2,247,125 –  2,797,125 |   |
| Equity compensation  plans not approved by stockholders |       | —                                                                                             |       | — |   | — |   |
| Total                                                   |       | 4,052,193 – 4,602,193                                                                         |       | $ | 2.35 |   | 2,247,125 – 2,797,125 |   |

 

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(1) This amount includes an option we granted to ourChief Executive Officer in 2002.  Thevesting of the options is contingent upon an event occurring in the future thatcurrently is not probable.  Based uponthe terms of the option, the number of shares issuable upon exercise of theoption, if any, will be between 50,000 to 550,000 shares at an exercise priceof $0.18 per share.  The option wasgranted under the INVESTools 2001 Stock Option Plan, which was approved bystockholders.

 

## **Issuer Purchases of EquitySecurities**

## ** **

There were no stock repurchases during the fourth quarter of 2005.

 

# **Item 6.**            SelectedConsolidated Financial Data

# ** **

The selected consolidated financial data presented below should be readin conjunction with the consolidated financial statements of INVESTools andrelated footnotes included elsewhere in this document.  The selected consolidated financial data hasbeen derived from the consolidated financial statements of INVESTools.

 

**Statementof Operations**

(in thousands, except for share data)
| ** **                                                                         | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                                                               |       |                         |       |   |   |   |   |   |   |   |   |
| Revenue                                                                            |       | $                            | 138,621    |   | $ | 97,169 |   | $ | 69,802 |   | $ | 53,923 |   | $ | 51,560 |   |
| Cost of revenue                                                                    |       | 92,161                       |       | 65,659 |   | 41,921 |   | 25,411 |   | 22,794 |   |
| Selling expense                                                                    |       | 37,332                       |       | 24,493 |   | 20,669 |   | 19,023 |   | 18,429 |   |
| General and  administrative expense                                                |       | 24,182                       |       | 17,843 |   | 12,388 |   | 14,154 |   | 8,458 |   |
| Special charges                                                                    |       | 1,077                        |       | 1,084 |   | 673 |   | — |   | 6,454 |   |
| Net loss before income  taxes and cumulative effect of accounting change           |       | (15,628                      | )          | (11,719 | ) | (5,771 | ) | (5,401 | ) | (9,151 | ) |
| Net loss from  continuing operations before cumulative effect of accounting change |       | (15,742                      | )          | (11,727 | ) | (7,301 | ) | (5,207 | ) | (9,151 | ) |
| Cumulative effect of  accounting change                                            |       | —                       |       | — |   | — |   | (28,417 | ) | — |   |
| Net loss available to  common stockholders                                         |       | $                            | (15,742    | ) | $ | (11,727 | ) | $ | (7,301 | ) | $ | (33,669 | ) | $ | (9,044 | ) |
| Net loss per common  share—diluted:                                           |       |                         |       |   |   |   |   |   |   |   |   |
| Net loss from  continuing operations before cumulative effect of accounting change |       | $                            | (0.35      | ) | $ | (0.26 | ) | $ | (0.17 | ) | $ | (0.12 | ) | $ | (0.28 | ) |
| Net income from  discontinued operations                                           |       | $                            | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | 0.01 |   |
| Cumulative effect of  accounting change, net of tax                                |       | $                            | —     |   | $ | — |   | $ | — |   | $ | (0.68 | ) | $ | — |   |
| Net loss per share  available to common stockholders                               |       | $                            | (0.35      | ) | $ | (0.26 | ) | $ | (0.17 | ) | $ | (0.80 | ) | $ | (0.27 | ) |
| Basic and diluted  weighted average shares outstanding                             |       | 44,933                       |       | 45,045 |   | 43,692 |   | 41,983 |   | 32,684 |   |

 

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**BalanceSheet Data**

(in thousands)
| ** **                                 | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **2005**               | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                       |       |                   |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                 |       | $                      | 11,466     |   | $ | 10,736 |   | $ | 4,458 |   | $ | 5,160 |   | $ | 5,930 |   |
| Marketable securities                      |       | 16,871                 |       | 13,840 |   | 7,808 |   | — |   | — |   |
| Working capital deficit                    |       | (47,079                | )          | (18,858 | ) | (9,723 | ) | (5,501 | ) | (3,316 | ) |
| Total assets                               |       | 72,699                 |       | 49,778 |   | 26,551 |   | 25,305 |   | 55,174 |   |
| Deferred revenue                           |       | 77,516                 |       | 40,378 |   | 14,520 |   | 8,028 |   | 4,747 |   |
| Total stockholders’  (deficit)/equity |       | (23,739                | )          | (7,232 | ) | 3,184 |   | 10,284 |   | 43,213 |   |
|                                            |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

# ** **

# **Item 7.**            Management’sDiscussion and Analysis of Financial Condition and Results of Operations

# ** **

## **Business Overview**

## ** **

## **Our mission is to educate and empower individual investorsto make their own financial decisions to achieve their financial goals at anytime or place ,by using the INVESTools MethodTM live, by correspondence oronline. We hope to establish the INVESTools Method as the most widelyrecognized, adopted and endorsed approach to investor education.  We offer a full range of investor educationproducts and services that provide lifelong learning and support toself-directed investors   We have morethan 209,000 graduates and 68,000 subscribers to our websites.  Our products and services are built aroundthe INVESTools Method, a unique integration of a disciplined investing process,web-based tools, personalized instruction and support.  Our investor education products and servicesare offered in a variety of learning formats with courses ranging frombeginning to advanced, thus addressing the needs of all investor levels.**

 

## **Concentration Risk**

 

We currently access approximately 69% of our revenue through ourco-branding (BusinessWeek) and co-marketing (Success Magazine and Money inTraining) relationships.  The loss of oneof these partners could have a material adverse effect on our financialperformance in the short-term.  However,we are constantly pursuing new student acquisition channels and we believebusiness from new and existing channels would replace such lost volumes if theywere to occur.  There can be no assurancethat we will be successful in establishing new channels. In May 2005, we terminatedour agreement with CNBC, Inc. (“CNBC”) one of our co-branding partners. As aresult of the termination, all CNBC students were offered the opportunity totransition to the INVESTools brand of investor education products and services.

 

**Acquisitionof Prophet Financial Systems**

 

InJanuary 2005, we acquired Prophet Financial Systems, Inc. (“Prophet”), aCalifornia corporation located in Palo Alto, for $7.9 million in cash.  Prophet creates web-based products thatenable active investors to use technical analysis to trade more knowledgably.  We acquired Prophet to add more functionalityto our Investor Toolbox website as well as to attract and retain new andexisting customers.  At closing, thesellers received a cash payment of $7.9 million. In addition, we incurred$0.6 million of costs related to the acquisition. During the three monthsended June 30, 2005, we recorded a receivable amount of $0.1 million fromthe shareholders of Prophet based on a net working capital adjustment providedfor in the merger agreement for a total adjusted purchase price of$8.4 million. The $0.1 million working capital adjustment was recorded asa reduction in goodwill as this represented an adjustment to the purchaseprice.  The working capital adjustmentreceivable was paid to us during the three months ended September 30, 2005. Inconnection with the transaction, Timothy Knight, Prophet’s Chief ExecutiveOfficer, President and founder entered into a two-year employment agreementwith us as Senior Vice President of Technology.

 

We believe that the strategic acquisition of Prophet has beeninstrumental in improving the suite of products available to our students and integralin the development on the new Investor Toolbox website.  Prophet has been managing the development ofour new Investor Toolbox website that will be released later in 2006.

## ** **

## **Acquisition of 360 Group**

 

In February 2004, we acquired 360 Group a direct marketing company thatprovided services such as custom database development and management, strategicplanning, media and list planning and buying, creative and production services,response management, and analytic services. We acquired 360 Group to internalize our marketing department and we no 

 

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longer provide services to third parties.  At closing the sellers received 830,000shares of our common stock valued at $1,875,000 and $875,000 in cash.  In addition, we incurred $669,000 of costrelated to the acquisition, of which $226,000 was paid with 100,000 shares ofour common stock.  During the threemonths ended June 30, 2004, the sellers received an additional cash payment of$213,000 based on a net working capital provision provided for in the mergeragreement recorded as additional purchase price resulting in an increase ingoodwill.  In October 2004, the sellersreceived an additional cash payment of $438,000 and 415,000 shares of commonstock valued at $842,000 based on 360 Group achieving revenue targets duringthe three months ended September 30, 2004, which was recorded as additionalpurchase price.   In connection with themerger, Scott K. Waltz, the former Vice President, Client Services of 360Group, was named our Senior Vice President, Chief Marketing Officer, and DonKlabunde, the former Chief Technology Officer of 360 Group, was named our VicePresident, Chief Information Officer. In April 2005, we entered into aSeparation Agreement and General Release with Don Klabunde, our former VicePresident and Chief Information Officer.

 

We entered into a separation agreement and general release in October2004, with Scott K. Waltz, our former Senior Vice President and Chief MarketingOfficer.  The separation agreementrequired us to pay Mr. Waltz $0.2 million in severance and relatedbenefits.  Additionally, pursuant to theagreement, we repurchased 304,000 shares of our common stock earned as part ofthe 2004 earnout for $0.7 million as discussed in the previous paragraph.

## ** **

## **Critical AccountingPolicies**

 

Management’s Discussion and Analysis of Financial Condition and Resultsof Operations is based upon the Consolidated Financial Statements, which havebeen prepared in accordance with generally accepted accounting principles inthe United States.  The preparation ofthese financial statements requires us to make estimates and assumptions thataffect the reported amounts of assets, liabilities, revenue and expenses, andrelated disclosure of contingent assets and liabilities.

 

We base our estimates on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from othersources.  Actual results may differ fromthese estimates under different assumptions or conditions.

 

An accounting policy is deemed to be critical if it requires anaccounting estimate to be made based on assumptions about matters that arehighly uncertain at the time the estimate is made, and if different estimatesthat reasonably could have been used, or changes in the accounting estimatesthat are reasonably likely to occur periodically, could materially impact thefinancial statements.  We believe thefollowing critical accounting policies reflect our more significant estimatesand assumptions used in the preparation of the Consolidated FinancialStatements.

 

### *Income Taxes*

 

Theprovision for income taxes is calculated using the asset and liabilitymethod.  Deferred income taxes reflectthe net tax effect of temporary differences between the carrying amounts ofassets and liabilities for financial reporting purposes and the amounts usedfor income tax purposes.  We providevaluation allowances against the deferred tax assets if, based on available evidence,it is more likely than not that some portion or all of the deferred tax assetswill not be realized.  Based on allavailable information, we do not believe it is more likely than not that ourdeferred tax assets will be utilized.  Indetermining the adequacy of the valuation allowance, which totaled $17.7million as of December 31, 2005, we assess our profitability by taking intoaccount the present and anticipated amounts of domestic and internationalearnings, as well as the anticipated taxable income as a result of the reversalof future taxable temporary differences. For financial reporting purposes, we generally provide taxes at the rateapplicable for the appropriate tax jurisdiction.

 

### *Valuation of Long-Lived Assets, Including Goodwill*

 

We reviewannually, or more often if events or circumstances indicate a potentialimpairment exists, goodwill and indefinite lived intangibles for impairment inaccordance with Statement of Financial Accounting Standards (SFAS) No. 142, *Goodwill and Other Intangible Assets*.  We have completed our annual impairmentreview during the fourth quarter of 2005. We did not identify any impairment to our goodwill or indefinite livedintangibles as a result of this review.

 

Wereview long-lived assets, including certain amortizable identifiableintangibles, for impairment whenever events or changes in circumstancesindicate that we will not be able to recover the asset’s carrying amount inaccordance with SFAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets.*

 

Forlong-lived assets held and used, including acquired intangibles, we initiateour review whenever events or changes in circumstances indicate that thecarrying amount of a long-lived asset may not be recoverable.  Recoverability of an asset is measured bycomparing its carrying amount to the expected undiscounted cash flows 

 

15

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expectedto result from the use and eventual disposition of that asset, excluding futureinterest costs that would be recognized as an expense when incurred.  Any impairment to be recognized is measuredby the amount by which the carrying amount of the asset exceeds its fair marketvalue.  Significant management judgmentis required in:

 

•      identifyinga triggering event that arises from a change in circumstances;

•      forecastingfuture operating results; and

•      estimatingthe proceeds from the disposition of long-lived or intangible assets.

 

Materialimpairment charges could be necessary should different conditions prevail ordifferent judgments be made.

 

### *Revenue Recognition*

 

Werecognize revenue in accordance with Staff Accounting Bulletin No. 104, *Revenue Recognition* (SAB 104), andFinancial Accounting Standards Board (FASB) Emerging Issues Task Force No.00-21 *Accounting for Revenue Arrangementswith Multiple Deliverables* (EITF 00-21).  Revenue is not recognized until it isrealized or realizable and earned.  Thecriteria to meet this guideline are: (i) persuasive evidence of an arrangementexists, (ii) delivery has occurred or services have been rendered, (iii) theprice to the buyer is fixed or determinable, and (iv) collectibility isreasonably assured.

 

Wesell our products separately and in various bundles that contain multipledeliverables that include coaching sessions, website subscriptions, educationalworkshops along with other products and services.  In accordance with EITF 00-21, salesarrangements with multiple deliverables are divided into separate units ofaccounting if the deliverables in the arrangement meet the following criteria:(i) the product has value to the customer on a standalone basis; (ii) there is objectiveand reliable evidence of the fair value of undelivered items; and (iii)delivery or performance of any undelivered item is probable and substantiallyin our control.  The fair value of eachseparate element is generally determined by prices charged when each product issold separately.  In certainarrangements, we offer these products bundled together at a discount.  The discount is allocated pro rata to eachelement of revenue based on the relative fair value of each element when fairvalue support exists for each element in the arrangement.  If fair value of all undelivered elements inan arrangement exists but the fair value does not exist for a deliveredelement, then revenue is recognized using the residual method.  Under the residual method, the fair value ofundelivered elements is deferred and the remaining portion of the arrangementfee (after allocation of 100% of any discount to the delivered item) isrecognized as revenue.  We provide somelimited rights of return in connection with our arrangements.  We estimate our returns based on historicalexperience and maintain an allowance for estimated returns, which has beenreflected as an accrued liability.  Eachtransaction is separated into its specific element and revenue from eachelement is recognized according to the following policies:

 
| **Product**                        | ** ** | **Recognition  policy**                                                        |
|------------------------------------|------------|--------------------------------------------------------------------------------|
| Workshop/workshop certificate      |       | Deferred and recognized as the workshop is provided  or certificates expire.   |
| Home study                         |       | Recognized upon delivery of materials to customer                              |
| Online course                      |       | Deferred and recognized as services are delivered                              |
| Coaching                           |       | Deferred and recognized as services are delivered                              |
| Website subscriptions and renewals |       | Deferred and recognized on a straight-line basis  over the subscription period |
| Data licenses                      |       | Recognized monthly based on data usage                                         |

 

Deferredrevenue arises from subscriptions to the websites, workshops, online coursesand coaching services because the payments are received before the delivery ofthe service has been rendered.  Deferredrevenue is recognized into revenue over the period that the services areperformed or the contract period expires. We also sell certificates to attend workshops in the future.  Revenue from these sales is deferred untilthe certificate is used or expires.

 

16

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**SalesTransaction Volume**

** **
| ** **                                     | ** ** | **For the  year ended December 31,** | ** ** | **2005 vs.  2004** | ** ** | **2004 vs.  2003** | ** ** |
|------------------------------------------------|------------|--------------------------------------|------------|--------------------|------------|--------------------|------------|
| **($ in thousands)**                      | ** ** | **2005**                             | ** ** | **2004**           | ** ** | **2003**           | ** ** | **Change** | ** ** | **%** | ** ** | **Change** | ** ** | **%** | ** ** |
| **Initial  Education**                         |       |                                 |       |               |       |               |       |   |   |   |   |   |   |   |   |
| Workshops                                      |       | $                                    | 17,086     |               | $          | 17,907             |       | $ | 34,973 |   | $ | (821 | ) | (5 | )% | $ | (17,066 | ) | (49 | )% |
| Coaching                                       |       | 250                                  |       | 5,891              |       | 4,591              |       | (5,641 | ) | (96 | )% | 1,300 |   | 28 | % |
| Home study                                     |       | 6,403                                |       | 4,659              |       | 8,220              |       | 1,744 |   | 37 | % | (3,561 | ) | (43 | )% |
| Initial web time                               |       | 2,903                                |       | 3,559              |       | 2,899              |       | (656 | ) | (18 | )% | 660 |   | 23 | % |
| Initial education sales  transaction volume    |       | 26,642                               |       | 32,016             |       | 50,683             |       | (5,374 | ) | (17 | )% | (18,667 | ) | (37 | )% |
| **Continuing  Education**                      |       |                                 |       |               |       |               |       |   |   |   |   |   |   |   |   |
| Workshops                                      |       | 30,560                               |       | 14,896             |       | —             |       | 15,664 |   | 105 | % | 14,896 |   | — |   |
| Coaching                                       |       | 68,874                               |       | 31,974             |       | 10,088             |       | 36,900 |   | 115 | % | 21,886 |   | 217 | % |
| Home study                                     |       | 21,329                               |       | 13,284             |       | 4,621              |       | 8,045 |   | 61 | % | 8,663 |   | 187 | % |
| Renewals                                       |       | 23,038                               |       | 23,900             |       | 10,328             |       | (862 | ) | (4 | )% | 13,572 |   | 131 | % |
| Other revenue                                  |       | 5,727                                |       | 6,552              |       | 1,545              |       | (825 | ) | (13 | )% | 5,007 |   | 324 | % |
| Continuing education  sales transaction volume |       | 149,528                              |       | 90,606             |       | 26,582             |       | 58,922 |   | 65 | % | 64,024 |   | 241 | % |
|                                           |       |                                 |       |               |       |               |       |   |   |   |   |   |   |   |   |
| Total sales transaction  volume                |       | 176,170                              |       | 122,622            |       | 77,265             |       | 53,548 |   | 44 | % | 45,357 |   | 59 | % |
| Change in deferred  revenue                    |       | (37,549                              | )          | (25,453            | )          | (7,463             | )          | (12,096 | ) | 48 | % | (17,990 | ) | 241 | % |
| Total Revenue                                  |       | $                                    | 138,621    |               | $          | 97,169             |       | $ | 69,802 |   | $ | 41,452 |   | 43 | % | $ | 27,367 |   | 39 | % |

 
| ** **                                     | ** ** | **%****of  Revenue** | ** ** |
|------------------------------------------------|------------|----------------------|------------|
| ** **                                     | ** ** | **2005**             | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Initial  Education**                         |       |                 |       |   |   |   |   |
| Workshops                                      |       | 12                   | %          | 18 | % | 50 | % |
| Coaching                                       |       | 0                    | %          | 6 | % | 7 | % |
| Home study                                     |       | 5                    | %          | 5 | % | 12 | % |
| Initial web time                               |       | 2                    | %          | 4 | % | 4 | % |
| Initial education sales  transaction volume    |       | 19                   | %          | 33 | % | 73 | % |
| **Continuing  Education**                      |       |                 |       |   |   |   |   |
| Workshops                                      |       | 22                   | %          | 15 | % | 0 | % |
| Coaching                                       |       | 50                   | %          | 33 | % | 14 | % |
| Home study                                     |       | 15                   | %          | 14 | % | 7 | % |
| Renewals                                       |       | 17                   | %          | 25 | % | 15 | % |
| Other revenue                                  |       | 4                    | %          | 7 | % | 2 | % |
| Continuing education  sales transaction volume |       | 108                  | %          | 93 | % | 38 | % |
|                                           |       |                 |       |   |   |   |   |
| Total sales transaction  volume                |       | 127                  | %          | 126 | % | 111 | % |
| Change in deferred  revenue                    |       | (27                  | )%         | (26 | )% | (11 | )% |
| Total Revenue                                  |       | 100                  | %          | 100 | % | 100 | % |

 

In the previous table,sales transaction volume (“STV”), which is a non-GAAP financial measure,represents sales transactions generated in each period before the impact ofrecognition of deferred revenue from prior periods and the deferral of currentperiod sales.  We believe that STV beforechanges in deferred revenue is an important measure of business volume. See “Costof Revenue” below for a further discussion of STV.

 

In the previoustable, we have reclassified certain amounts to different categories to be morereflective of the method in which the education is consumed by the student.Certain amounts related to advanced product workshops were 

 

17

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reclassified fromhome study products to workshops and initial subscriptions were reclassifiedinto their own category from workshops. The amounts in the years ended December31, 2004 and 2003 have been reclassified to conform to the current period’spresentation.

 

In the tableabove, initial education revenues consist of the initial sales to students atthe initial workshops and sales to new students via our telesales groups. Oncethe student completes this initial education, which consists primarily of the5-Step Investing Formula course, they are considered a graduate. Continuingeducation revenues consist of sales of advanced products and web time renewalssold to graduates.

 

**2005 Comparedto 2004**

** **

**Revenue:**

 

Revenue increasedby $41.4 million for the year ended December 31, 2005, when compared to thesame period in 2004, as a result of a proportional increase in the sale of theProgram of High Distinction due to a full year of sales and Active InvestorSeries product sales, increased amounts of fulfillment revenue related tocoaching sessions and advanced workshops that were sold in previous periods.

** **

**Workshops:**

 

Initial workshopssales decreased by $0.8 million for the year ended December 31, 2005, whencompared to the same period in 2004, as a result of the revised agreement withone of our co-marketing partners as of August 2004, whereby the partnersells initial workshops at their preview events for which we record norevenue.  The revised agreement wasentered into in order to incentivize the co-marketing partner to aggregate morestudents that would be candidates for continuing education.  Additionally, in May 2005, we terminated our agreementwith CNBC, Inc (“CNBC”) one of our co-branding partners,  this termination resulted in no initialworkshop sales under the CNBC brand during the year ended December 31,2005. These decreases were partially offset by an increase in workshop revenuesresulting from the expansion of our INVESTools’ branded products marketedthrough Direct Response Television (DRTV), which was launched in January 2005.

 

Sales of ourcontinuing education products sold at workshops and by our telesales groupsincreased $15.7 million for the year ended December 31, 2005, whencompared to the same period in 2004, as a result of an increase in the numberof graduates purchasing continuing education products, especially the Programof High Distinction, which was first offered in the third quarter of 2004.

** **

**Coaching:**

 

Initial sales ofcoaching sessions decreased by $5.6 million for the year ended December 31,2005, when compared to the same period in 2004 resulting from coaching sessionsno longer being bundled as part of our initial workshop offers, rather they arebeing offered by our telesales groups as a continuing education offering.

 

Sales of coachingsessions at continuing education workshops and by our telesales groupsincreased $36.9 million for the year ended December 31, 2005, when compared tothe same period in 2004, primarily due to an increase in the number ofgraduates purchasing continuing education products, especially the Program ofHigh Distinction, which was first offered in the third quarter of 2004,increased sales of the Masters Program and the introduction of Active InvestingSeries during 2005.  The Program of HighDistinction contains five distinctive live and distance coaching products andthe Active Investing Series consists of four days of live coaching related tostocks, options or currency trading.

** **

**HomeStudy:**

 

Initial sales ofhome study products at our initial workshops and by our telesales groupsincreased $1.7 million for the year ended December 31, 2005, whencompared to the same period in 2004, due to the introduction of home studyproducts at preview events and the introduction of the online home studyproduct during the fourth quarter of 2005.

 

Sales of homestudy products sold at our continuing education workshops and by our telesalesgroups increased $8.0 million for the year ended December 31, 2005, whencompared to the same period in 2004, primarily due to an increase in the numberof graduates purchasing continuing education products which contain home studycomponents and the introduction of the online 5-step home study during thefourth quarter of 2005.  Continuingeducation product sales, including a full year of from our Masters Program andProgram of High Distinction products, which contain significant home studycomponents, has added to this increase.

** **

**InitialWeb Time Subscriptions and Renewals:**

 

Initial web timesubscriptions sold at initial workshops and by our telesales group decreased by$0.7 million for the year ended December 31, 2005, when compared to the sameperiod in 2004, as a result of a revised agreement with one of our co-marketingpartners as of August 2004. The revised agreement provides for the partnerto sell initial workshops at its preview events for which INVESTools records norevenue.  The revised agreement wasentered into in order to incentivize the co-marketing partner to aggregate morestudents that would be candidates for continuing education sales.  

 

18

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The revisedagreements with our co-marketing partner have resulted in increased graduates.As a result, our telesales groups have focused more sales efforts on continuingeducation product offerings and away from initial education.

 

Web time renewalssold by our telesales group decreased by $0.9 million for the year endedDecember 31, 2005, when compared to the same period in 2004, primarily asa result of an increase in retake workshop certificates and webinars that arebundled with various renewal sales, which decreases the amount of revenueattributed to the renewal itself.

** **

**Change inDeferred Revenue:**

 

Change in deferredrevenue increased $12.1 million for the year ended December 31, 2005, whencompared to the same period in 2004.  Theincrease was a result of increased sales of continuing education products,which include coaching sessions, advanced workshops and website subscriptionrenewals. Revenue from the coaching sessions, advanced workshops and websitesubscription renewals is deferred and recognized as services to the student aredelivered. We introduced the online 5-Step course in the fourth quarter of2005, revenues from which are deferred and recognized as services to the studentare delivered. The increase in STV was a result of the introduction of theMasters Program and Program of High Distinction in 2004 and the ActiveInvesting Series in 2005, which have course lives of 12-months, 24-months and6-months, respectively.  Sales of theMasters Program and Program of High Distinction products for the full yearduring 2005 have caused us to defer revenue over longer contractual periodswhen compared to the majority of products that were sold during the year endedDecember 31, 2004, in which we only sold the Masters Program and Program ofHigh Distinction for part of the year as well as increases in sales volumes.  As we execute our lifetime value of thestudent strategy, more of the sales will be in advanced products or continuing education,where revenue is deferred over longer contractual periods.

** **

**2004 Comparedto 2003**

 

R**evenue:**

 

Revenue increasedby $27.4 million for the year ended December 31, 2004, when compared to thesame period in 2003, as a result of the introduction of the Program of HighDistinction in the third quarter of 2004 and the introduction of the MastersProgram early in the first quarter of 2004, along with increased amounts offulfillment revenue related to coaching sessions and advanced workshops.

** **

**Workshops:**

 

Initial workshopssales decreased by $17.1 million for the year ended December 31, 2004,when compared to the same period in 2003, as a result of the revised agreementswith one of our co-marketing partners. In December 2003 and August 2004, werevised two separate partner agreements whereby each partner sells initialworkshops at its preview events for which we record no revenue. The revisedagreements were entered into in order to incentivize the co-marketing partnersto aggregate more students that would be candidates for continuingeducation.  This resulted in asignificant decrease in initial workshop sales partially offset by workshopssales generated through our co-branding channels.

 

Sales of ourcontinuing education products sold at workshops and by our telesales groupsincreased $14.9 million for the year ended December 31, 2004, whencompared to the same period in 2003, as a result of an increase in the numberof graduates purchasing continuing education products, the Masters Programoffered in the first quarter of 2004 and especially the Program of HighDistinction, which was first offered in the third quarter of 2004.

** **

**Coaching:**

 

Initial sales ofcoaching sessions increased by $1.3 million for the year ended December 31, 2004,when compared to the same period in 2003 as a result of full year of sales ofour coaching products during 2004 through our co-marketing and one of ourco-branding partnerships.

 

Sales of coachingsessions at continuing education workshops and by our telesales groups increased$21.9 million for the year ended December 31, 2004, when compared to the sameperiod in 2003, primarily due to an increase in the introduction of the MastersProgram in the first quarter of 2004 and the Program of High Distinction, inthe third quarter of 2004.

** **

**HomeStudy:**

 

Initial sales ofhome study products at our initial workshops and by our telesales groups decreasedby $3.6 million for the year ended December 31, 2004, when comparedto the same period in 2003, as a result of the revised agreements with one ofour co-marketing partners. In December 2003 and August 2004, we revised twoseparate partner agreements whereby each partner sells initial workshops at itspreview events for which we record no revenue. The revised agreements wereentered into in order to incent the co-marketing partners to aggregate morestudents that would be candidates for continuing education.  This resulted in a significant decrease ininitial home study sales partially offset by home study sales generated throughour co-branding channels.

 

19

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Sales of homestudy products sold at our continuing education workshops and by our telesalesgroups increased $8.7 million for the year ended December 31, 2004, whencompared to the same period in 2003, as a result of an increase in the numberof graduates purchasing continuing education products, the Masters Programoffered in the first quarter of 2004 and especially the Program of HighDistinction, which was first offered in the third quarter of 2004.

** **

**InitialWeb Time Subscriptions and Renewals:**

 

Initial web timesubscriptions sold at initial workshops and by our telesales group increased by$0.7 million for the year ended December 31, 2004, when compared to the sameperiod in 2003, as a result of no longer bundling coaching sessions in previewsales during the end of the second quarter of 2004, resulting in a largerallocation of revenue to the other elements in the arrangement.

 

Web time renewalssold at workshops and by our telesales group increased by $13.6 million for theyear ended December 31, 2004, when compared to the same period in 2003, primarilyas a result of an increase in the number of graduates purchasing continuingeducation products, the Masters Program offered in the first quarter of 2004and especially the Program of High Distinction, which was first offered in thethird quarter of 2004. These bundles include additional web time subscriptionsof 24-months and 12-months, respectively.

** **

**Change inDeferred Revenue:**

 

Change in deferredrevenue increased $18.0 million for the year ended December 31, 2004, whencompared to the same period in 2003.  Theincrease was a result of increased sales of continuing education products,which include coaching sessions, advanced workshops and website subscriptionrenewals. Revenue from the coaching sessions, advanced workshops and websitesubscription renewals is deferred and recognized as services to the student aredelivered. The increase in STV was a result of the introduction of the MastersProgram and Program of High Distinction in 2004, which have course lives of12-months and 24-months, respectively. These programs have caused us to defer revenue over longer contractualperiods when compared to the majority of products that were sold during theyear ended December 31, 2003, which only had 6 and 12 month contractuallives.  As we execute our lifetime valueof the student strategy, more of the sales will be in advanced products orcontinuing education, where more revenue is deferred over longer contractualperiods.

## ** **

## **Cost of Revenue**

(in thousands)
| ** **           | ** ** | **For the year ended December 31,** | ** ** | **2005 vs. 2004** | ** ** | **2004 vs. 2003** | ** ** |
|----------------------|------------|-------------------------------------|------------|-------------------|------------|-------------------|------------|
| **Cost  of Revenue** | ** ** | **2005**                            | ** ** | **2004**          | ** ** | **2003**          | ** ** | **Change** | ** ** | **%** | ** ** | **Change** | ** ** | **%** | ** ** |
| ** **           | ** ** | ** **                          | ** ** | ** **        | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue              |       | $                                   | 138,621    |              | $          | 97,169            |       | $ | 69,802 |   | $ | 41,452 |   | 43 | % | $ | 27,367 |   | 39 | % |
|                 |       |                                |       |              |       |              |       |   |   |   |   |   |   |   |   |
| Partner Commissions  |       | 30,688                              |       | 27,886            |       | 23,192            |       | 2,802 |   | 10 | % | 4,694 |   | 20 | % |
| Payroll cost         |       | 32,858                              |       | 18,552            |       | 9,038             |       | 14,306 |   | 77 | % | 9,514 |   | 105 | % |
| Other                |       | 28,615                              |       | 19,221            |       | 9,691             |       | 9,394 |   | 49 | % | 9,530 |   | 98 | % |
| Cost of Revenue      |       | $                                   | 92,161     |              | $          | 65,659            |       | $ | 41,921 |   | $ | 26,502 |   | 40 | % | $ | 23,738 |   | 57 | % |

 
| ** **          | ** ** | **% of Revenue** | ** ** |
|---------------------|------------|------------------|------------|
| ** **          | ** ** | **2005**         | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **          | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue             |       | 100              | %          | 100 | % | 100 | % |
|                |       |             |       |   |   |   |   |
| Partner Commissions |       | 22               | %          | 29 | % | 33 | % |
| Payroll cost        |       | 24               | %          | 19 | % | 13 | % |
| Other               |       | 21               | %          | 20 | % | 14 | % |
| Cost of Revenue     |       | 67               | %          | 68 | % | 60 | % |

 

In the tableabove, for the years ended December 31, 2004 and 2003, $1.0 million and $0.4million in payroll costs have been reclassified from general and administrativeexpense to cost of revenue to conform to current year’s presentation.Additionally, for the year ended December 31, 2004, $4.5 million related toemployee commissions were reclassified from partner commissions to payrollcosts to conform to current year’s presentation. The reclassification from partnercommissions to payroll costs had no effect on the year ended December 31, 2003;therefore, no reclassification adjustment was recorded.

 

We defer asignificant portion of our revenues associated with advanced products to futureperiods, we recognize costs as they are incurred. These costs consist ofsolicitation costs, which include employee sales commissions, partnercommissions, credit card fees and materials. Since these costs relate to actualsales as they are incurred and not as the revenue is recognized, the analysisin the table below presents a tool for analyzing these costs because the ratiosare 

 

20

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calculated as apercentage of STV generated in each period. Refer to the Revenue section abovefor a further description of STV. The calculation of cost of revenue and eachof the cost components as a percent of STV in the table below is a non-GAAP financialmeasure, which management believes provides useful information as it comparesthe cost of generating sales with the sales recorded in a period, whether thosesales were recognized as revenue currently or deferred until future periods.Approximately 27 percent of deferred revenue amounts relate to websitesubscriptions, for which the remaining fulfillment cost represents anallocation of website costs, which are substantially fixed in nature at currentsubscriber levels. Another 32 percent of the deferred revenue amounts relate tocoaching sessions, of which the remaining fulfillment cost represents laborcost of less than 16-20% of related coaching revenue. The balance of deferredrevenue corresponds to additional workshops and workshop certificates for ouradvanced product sales, for which the remaining fulfillment cost represents theincremental costs of the workshop certificate. 

 
| ** **                                    | ** ** | **% of STV** | ** ** |
|-----------------------------------------------|------------|--------------|------------|
| ** **                                    | ** ** | **2005**     | ** ** | **2004** | ** ** | **2003** | ** ** |
| Sales transaction  volume                     |       | 100          | %          | 100 | % | 100 | % |
|                                          |       |         |       |   |   |   |   |
| Partner Commissions                           |       | 17           | %          | 23 | % | 30 | % |
| Payroll costs                                 |       | 19           | %          | 15 | % | 12 | % |
| Other                                         |       | 16           | %          | 16 | % | 13 | % |
| Total cost of revenue  as a percentage of STV |       | 52           | %          | 54 | % | 54 | % |

** **

**2005 Comparedto 2004**

 

Total cost ofrevenue increased $26.5 million for the year ended December 31, 2005, whencompared to the same period in 2004 as a result of increased payroll and venuecosts from an increased number of initial workshops delivered under theINVESTools brand introduced in January 2005, the fulfillment of workshops foradvanced courses that were sold in previous periods and not fulfilled during2004 and increased fulfillment of coaching sessions, offset by a decrease ininitial workshops delivered under CNBC relationship and a decrease in partnercommissions resulting from an increase in INVESTools branded revenue.

 

Partnercommissions consist of amounts that are paid to co-branding and co-marketingpartnerships on sales achieved through these channels.  The primary reason for the decrease in theamount of partner commissions as a percentage of STV is due to a change in themix of revenue, resulting from a decrease in revenue sourced from ourco-branding and co-marketing partners, and an increase in INVESTools brandedrevenue, for which partner commissions are not incurred. Furthermore, as aresult of the termination of the relationship with CNBC as a co-brandingpartner in May 2005, we reversed $0.5 million of accrued partner commissionsthat were no longer owed to CNBC.

 

Payroll costsinclude employee commissions based on a percentage of sales achieved at eachevent, wages and the associated employee benefit costs. The primary reason forthe increase in payroll costs as a percentage of STV was due to increasedstaffing at workshops to manage the higher volume of students we instructed atthose workshops and a change in the commission structure for workshop staff,which drove more continuing education sales. Additionally, the payroll costswithin our coaching department increased due to the growth of the department tofulfill the increased demand for our coaching products.

 

Other costsconsist of material costs (including shipping costs), credit card fees, travelexpenditures, venue costs and other costs directly related to revenues. Thesecosts remained consistent as a percentage of  STV during the year ended December 31, 2005,when compared to the same period in 2004.

** **

**2004 Comparedto 2003**

 

Partnercommissions consist of amounts that are paid to co-branding and co-marketingpartnerships based on sales achieved through these channels.  At the end of December 2003 and August 2004,we entered into revised agreements with our two co-marketing partners, whereby thefulfillment of the initial workshop sales were recorded by the partners whichdecreased remaining partner commissions paid on continuing education sales.  The primary reason for the increase in theamount of partner commissions is due to our increased revenue for the yearended December 31, 2004 and as a direct result of increases in advanced bundledproduct sales that are sold at significantly higher prices.  Additionally, partner commissions decreasedas a percentage of revenue as a result of modifications of existingarrangements with co-marketing partners.

 

Payroll costs arecommissions based on a percentage of revenues that are paid to employees basedon the amount of sales achieved at each event. Payroll costs increased $9.5 million for the year ended December 31,2004, when compared to the same periods in 2003.  The primary reason for the increase inpayroll costs is due to our increased STV for the year ended December 31,2004.  The primary reason for theincrease in payroll costs as a percentage of STV is due to our increased STVfor the year ended December 31, 2004, and increases in advanced bundled productsales that are sold at 

 

21

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significantlyhigher price points with different commission plans.

 

Other costsconsist of material costs (including shipping costs), credit card fees, travelexpenditures and other costs directly related to revenues.  Other costs increased $9.5 million for theyear ended December 31, 2004.  Theprimary reason for the increase in other costs is due to increased revenues forthe year ended December 31, 2004. Additionally, $3.1 million of the increase in other costs is a directresult of the 360 Group acquisition completed in February 2004, which increasedother costs as a percentage of revenue. The 360 Group was acquired to internalize our marketing functions.  The 360 Group provided direct marketingservices for third parties at the time the acquisition was completed.

 

## **Selling Expenses**

 
| ** **                                                       | ** ** | **Years Ended December 31,**           | ** ** | **2005 vs. 2004** | ** ** | **2004 vs. 2003** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                       | ** ** | **2005**                               | ** ** | **2004**          | ** ** | **2003**          | ** ** | **Change** | ** ** | **%** | ** ** | **Change** | ** ** | **%** | ** ** |
| ** **                                                       | ** ** | **(in thousands, except percentages)** | ** ** |
| Marketing (a)                                                    |       | $                                      | 26,510     |              | $          | 15,814            |       | $ | 9,993 |   | $ | 10,696 |   | 68 | % | $ | 5,821 |   | 58 | % |
| Other                                                            |       | 10,822                                 |       | 8,679             |       | 10,676            |       | 2,143 |   | 25 | % | (1,997 | ) | (19 | )% |
| Total selling expense                                            |       | $                                      | 37,332     |              | $          | 24,493            |       | $ | 20,669 |   | $ | 12,839 |   | 52 | % | $ | 3,824 |   | 19 | % |
|                                                             |       |                                   |       |              |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Selling  Expenses as a Percentage of Revenue**                 |       |                                   |       |              |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                             |       |                                   |       |              |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Marketing (a)                                                    |       |                                   | 19         | %                 |       | 16                | %          |   | 14 | % |   |   |   |   |   |   |   |   |   |   |
| Other                                                            |       |                                   | 8          | %                 |       | 9                 | %          |   | 15 | % |   |   |   |   |   |   |   |   |   |   |
| Total selling expense                                            |       |                                   | 27         | %                 |       | 25                | %          |   | 29 | % |   |   |   |   |   |   |   |   |   |   |
| (a) Includes the  related party marketing expense itemized below |
|                                                             |       |                                   |       |              |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Related party selling  expense                                   |       |                                   | $—    |              |       | $—           |       |   | $501 |   |   | $— |   | — | % |   | $(501 | ) | (100 | )% |

 

In the tableabove, for the years ended December 31, 2004 and 2003, $0.1 and $0.1 million inother costs have been reclassified from general and administrative expense toselling expense to conform to current year’s presentation.

 

**2005 Comparedto 2004**

 

Marketing expensesincreased $10.7 million in the year ended December 31, 2005, when compared tothe same period in 2004, primarily due to increased spending related to ourINVESTools branded events, which are marketed via our DRTV advertising campaignand increased spending on product development costs. These increases werepartially offset by a reduction in direct mail, radio and print advertisingrelated to a decrease in marketing expenditures for BusinessWeek and a decreaserelated to our former co-branding partner CNBC. Selling expense increased as aresult of increased headcount at our preview events resulting in increasedpayroll costs and travel costs and an increase in sales tax expense, partiallyoff-set by a decrease in marketing supplies.  Selling expense as a percentage of STV willcontinue to increase as we direct source more of our customers under theINVESTools brand as opposed to under partner relationships.

 

**2004 Comparedto 2003**

 

Marketing expensesincreased $5.8 million in the year ended December 31, 2004, when compared tothe same period in 2003, primarily due to an increased spending on direct mail,radio and newspaper advertising associated with our co-branded channels andspending on product development costs. These increases were partially offset by a reduction in emailadvertising and a reduction in printing and shipping costs associated with ourpreview marketing.  Selling expense as apercentage of STV has been decreasing every year as we have been moving towardsselling through the co-marketing partners, for which there is no marketing andlimited travel and facility related elements of selling cost for us.

 

## **General andAdministrative Expense**

 
| ** **            | ** ** | **Years Ended December 31,**           | ** ** | **2005 vs. 2004** | ** ** | **2004 vs. 2003** | ** ** |
|-----------------------|------------|----------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **            | ** ** | **2005**                               | ** ** | **2004**          | ** ** | **2003**          | ** ** | **Change** | ** ** | **%** | ** ** | **Change** | ** ** | **%** | ** ** |
| ** **            | ** ** | **(in thousands, except percentages)** | ** ** |
|                  |       |                                   |       |              |       |              |       |   |   |   |   |   |   |   |   |
| Payroll               |       | $                                      | 12,723     |              | $          | 9,748             |       | $ | 7,232 |   | $ | 2,975 |   | 31 | % | $ | 2,516 |   | 35 | % |
| Other                 |       | 11,459                                 |       | 8,095             |       | 5,156             |       | 3,364 |   | 42 | % | 2,939 |   | 57 | % |
| Total G&A expense |       | $                                      | 24,182     |              | $          | 17,843            |       | $ | 12,388 |   | $ | 6,339 |   | 36 | % | $ | 5,455 |   | 44 | % |

 

22

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**Generaland Administrative Expense as a Percentage of Revenue**

** **
| Payroll               |   | 9  | % | 10 | % | 10 | % |
|-----------------------|--------|----|---|----|---|----|---|
| Other                 |   | 8  | % | 8  | % | 7  | % |
| Total G&A expense |   | 17 | % | 18 | % | 17 | % |

 

In the tableabove, for the years ended December 31, 2004 and 2003, $1.0 million and $0.4million have been reclassified from general and administrative expense to costof revenue to conform to current year’s presentation, respectively.Additionally, for the years ended December 31, 2004 and 2003, $0.1 million and$0.1 million have been reclassified from general and administrative expense toselling expense to conform to current year’s presentation, respectively.

** **

**2005 Comparedto 2004**

 

For the year endedDecember 31, 2005, general and administrative expenses increased by $6.3million compared to the same period of 2004. The increase was primarilyattributable to three distinct items. First, the acquisition of Prophet alongwith a substantial increase in number of associates employed by us led toincreases in payroll related costs. Secondly, audit related costs associatedwith the restatement of our financial statements for fiscal years 2003 and2002, the completion of the 2004 audit of internal controls over financialreporting, our continued use of consultants to maintain compliance with Section404 of the Sarbanes Oxley Act of 2002, and increased legal fees related to continuedlitigation and compliance issues caused our professional fees to significantlyincrease.  Finally, the move of our headquartersto our new Draper, Utah location and the acquisition of Prophet have led toincreases in depreciation, rent, telecommunication costs, and other general andadministrative expenses.

** **

**2004 Comparedto 2003**

 

For the year endedDecember 31, 2004, general and administrative expenses increased by $5.5million compared to the same period of 2003. The increase was primarily attributable to four distinct items.  First, the acquisition of 360 Group increasedgeneral and administrative payroll expense. Secondly, our ongoing litigation in Australia as well as a comprehensivereview of course materials lead to an increase in legal expenses.  Thirdly, increased work relating tocompliance with Section 404 of the Sarbanes Oxley Act of 2002 and tax issuescaused our accounting fees to increase. Finally, the substantial increase in the number of associates employedby us led to increases in health insurance, rent, travel, and other general andadministrative expenses.

## ** **

## **Special Charges**

 
| ** **                           | ** ** | **Years Ended December 31,**           | ** ** | **2005 vs. 2004** | ** ** | **2004 vs. 2003** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                           | ** ** | **2005**                               | ** ** | **2004**          | ** ** | **2003**          | ** ** | **Change** | ** ** | **%** | ** ** | **Change** | ** ** | **%** | ** ** |
| ** **                           | ** ** | **(in thousands, except percentages)** | ** ** |
|                                 |       |                                   |       |              |       |              |       |   |   |   |   |   |   |   |   |
| Severance costs                      |       | $                                      | 77         |              | $          | 597               |       | $ | 673 |   | $ | (520 | ) | (87 | )% | $ | (76 | ) | (11 | )% |
| Impairment of internal  use software |       | 1,000                                  |       | 487               |       | —            |       | 513 |   | 105 | % | 487 |   | — | % |
| Total special charges                |       | $                                      | 1,077      |              | $          | 1,084             |       | $ | 673 |   | $ | (7 | ) | (1 | )% | $ | 411 |   | 61 | % |
|                                      |            |                                        |            |                   |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

## ** **

## **2005 Compared to 2004**

 

For the year endedDecember 31, 2005, severance costs decreased by $0.5 million, compared to yearended December 31, 2004. The reason for the decrease in severance costs was dueto a decrease in number of executive employees whose employment was terminatedin 2005 compared to 2004. For the year ended December 31, 2005, impairment ofinternal use software increased by $0.5 million, when compared to the sameperiod of 2004. The reason for the increase in impairment charges was a resultof an impairment on an internal database development project that was abandonedduring 2005 in favor of third party enterprise risk planning and clientrelationship management software.

## ** **

## **2004 Compared to 2003**

 

For the year endedDecember 31, 2004, severance costs decreased by $0.1 million, when compared tothe same period of 2003. The reason for the decrease in severance costs was dueto a decrease in number of executive employees whose employment was terminatedin 2004 compared to 2003. For the year ended December 31, 2004, impairment ofinternal use software increased by $0.5 million, when compared to the sameperiod of 2003. The reason for the increase in impairment charges was a resultof an impairment on a website development project that was abandoned during2004.

 

## **Liquidity**

### * *

### *Cash Flows*

 

23

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**2005 Comparedto 2004**

 

At December 31,2005, our principal sources of liquidity consisted of $28.3 million of cash andcash equivalents and marketable securities as compared to $24.6 million atDecember 31, 2004, as well as cash generated from operations.

 

Net cash providedby operating activities was $24.9 million at December 31, 2005, compared to$17.5 million net cash provided by operating activities during 2004.  The primary reasons for the increase inoperating cash flows was an increase of $11.7 million in deferred revenueresulting from the growth in sales of continuing education products discussedabove in revenue, increases in accrued payroll of $0.8 million resulting fromincreased headcount, accrued tax liabilities of $1.2 million resulting from increased sales volumes, $1.2 millionincrease in other assets associated with prepaid advertising costs, offset by adecrease in accounts payable of $4.5 million and other current liabilities of $3.2million.

 

At December 31,2005, net working capital increased by $8.0 million, to $21.1 million comparedto $13.1 million at December 31, 2004, excluding current portion of deferredrevenue, which is substantially a non-cash liability. Short-term deferredrevenue increased $36.3 million, to $68.2 million at December 31, 2005,compared to $31.9 million at December 31, 2004. The primary reason for the increase in net working capital beforeconsideration of the current portion of deferred revenue was due to increasesin restricted cash, marketable securities, decreases in accounts payable,increase in accounts receivable and cash and cash equivalents, partially offsetby increases in accrued tax liabilities and accrued payroll. At December 31,2005, long-term portion of deferred revenue increased $0.9 million, to $9.3million compared to $8.4 million at December 31, 2004, as a result of the continuedsuccess of our Program of High Distinction product bundle that contains variousadvanced workshops and coaching sessions resulting in an increase in deferredrevenue that will be recognized over the 24 month contractual period inaddition to sales of web time renewals that extend beyond 12 months.

 

We invest ourexcess cash balances in government agency securities that are earningapproximately a 3.9% average rate of interest and have laddered maturitiesthrough 2007. At December 31, 2005, we have $16.9 million invested inmarketable securities compared to $13.8 million at December 31, 2004. During2005, several investments matured providing proceeds from the maturity ofinvestments of $7.7 million as compared to $10.7 million from the sales and maturityof investments in 2004. During 2005, we purchased $10.8 million in additionalmarketable securities compared to $16.8 million for the same period in 2004. Theproceeds were utilized to fund our growing capital expenditures, acquisition ofProphet, repurchase of our common stock and secure additional cash depositswith our merchant vendors. During 2005, the restricted cash securing one of ourmerchant vendors was increased by $3.0 million as a result of increased salesfrom our continued growth being processed by this merchant vendor. In addition,the funds previously held in escrow of $0.3 million related to the ASIClitigation were released by Australian Courts during the fourth quarter of2005.

 

In June 2004, weauthorized a stock repurchase program under which we can repurchase up to 3.5million shares over a two year period. During 2005, we repurchased 0.3 million shares of our common stock for atotal cost of $1.4 million.  At December31, 2005, the remaining repurchase authorization under this program totaled 2.1million shares.

 

We expect that ourcurrent cash and cash equivalents and marketable securities balances and cashflows from operations will be sufficient to meet our working capital and othercapital requirements for the foreseeable future.

 

### *Contractual Obligations and Commercial Commitments*

 

We have variousfinancial obligations and commitments in the ordinary course of conductingbusiness.  We have contractualobligations requiring future cash payments under existing contractual arrangements,such as management, consulting and non-competition agreements.

 

24

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The followingtable details our known future cash payments (on an undiscounted basis) relatedto various contractual obligations as of December 31, 2005 (in thousands). 

 
| **Payments due by period**                 | ** ** | **Capital  leases(1)** | ** ** | **Operating  leases(2)** | ** ** | **Data &  communication  purchase  agreements(3)** | ** ** | **Management  employment  agreements(4)** | ** ** | **Total  contractual  obligations** | ** ** |
|--------------------------------------------|------------|------------------------|------------|--------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------|------------|
| 2006                                       |       | $                      | 172        |                     | $          | 959                                                         |       | $                                         | 520        |                                | $          | 1,100 |   | $ | 2,751 |   |
|                                       |       |                   |       |                     |       |                                                        |       |                                      |       |                                |       |
| 1 – 3 Years                           |       | 516                    |       | 2,446                    |       | 343                                                         |       | 271                                       |       | 3,576                               |       |
| Thereafter                                 |       | 71                     |       | 393                      |       | —                                                      |       | —                                    |       | 464                                 |       |
| Total Payments                             |       | 759                    |       | $                        | 3,798      |                                                        | $          | 863                                       |       | $                                   | 1,371      |   | $ | 6,791 |   |
|                                       |       |                   |       |                     |       |                                                        |       |                                      |       |                                |       |
| Less: Amount  representing interest (8.0%) |       | 121                    |       |                     |       |                                                        |       |                                      |       |                                |       |
|                                       |       |                   |       |                     |       |                                                        |       |                                      |       |                                |       |
| Present value of lease  payments           |       | 638                    |       |                     |       |                                                        |       |                                      |       |                                |       |
|                                       |       |                   |       |                     |       |                                                        |       |                                      |       |                                |       |
| Less: Current portion                      |       | 125                    |       |                     |       |                                                        |       |                                      |       |                                |       |
|                                       |       |                   |       |                     |       |                                                        |       |                                      |       |                                |       |
| Long-term portion                          |       | $                      | 513        |                     |       |                                                        |       |                                      |       |                                |       |   |

----

(1) Our capitalleases include telecommunications equipment. The terms of the agreements vary from 2006 until 2010.

(2) Our operatingleases include office space and operating facilities.  The terms of the agreements vary from 2006until 2010.

(3) We have supplycontracts with various vendors of financial data and communications servicesproviding for minimum monthly commitments. These contracts have terms from 2006to 2007.

(4) We have enteredinto agreements with certain senior executives that require us to make cashpayments over the contractual periods.

 

InMarch 2004, the employment agreement for the Chief Executive Officer wasextended for three years.  Under theterms of the extended agreement we will be obligated to pay $425,000 in 2006,and $71,000 in 2007.

 

InJanuary 2005, an employment agreement for the Chief Financial Officer wasexecuted for two years.  Under the termsof this agreement we will be obligated to pay $225,000 in 2006.

 

InDecember 2005, an employment agreement for the Senior Vice President and ChiefMarketing /Product Development Officer was executed. Under the terms of thisagreement, we will be obligated to pay $200,000 in 2006.

 

InMarch 2006 we amended an employment agreement for the Vice President ofTechnology to extend the term of the agreement to two years.  Under the terms of this agreement, originallyexecuted in conjunction with the acquisition of Prophet, we will be obligatedto pay $200,000 in 2006 and 2007.

 

We expect toimplement a new enterprise resource planning and client relationship managementsystem during fiscal 2006. The estimated cost for this implementation includingconsulting charges to be incurred in 2006 is estimated to be between $7.0-$8.0 million.

 

We will completethe development of the new Investor Toolbox website during 2006, with anestimated cost of completion to be incurred in 2006 of $4.0-$5.0 million, whichincludes costs to third parties and payroll costs associated with internalresources that are developing the new Investor Toolbox website.

## ** **

## **Issued But Not YetAdopted Accounting Standards**

 

In December 2004,the FASB issued SFAS No. 123R, *Share-BasedPayment*.  SFAS No. 123R is arevision of FASB Statement No. 123, Accounting for Stock-BasedCompensation.  SFAS No. 123R supersedesAPB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementationguidance.  SFAS No. 123R****establishes standards for the accounting for transactionsin which an entity exchanges its equity instruments for goods or services.  It also addresses transactions in which anentity incurs liabilities in exchange for goods or services that are based onthe fair value of the entity’s equity instruments or that may be settled by theissuance of those equity instruments. SFAS No. 123R focuses primarily on accounting for transactions in whichan entity obtains employee services in share-based payment transactions.  SFAS No. 123R requires that the costresulting from all share-based payment transactions be 

 

25

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recognized in thefinancial statements.  It alsoestablishes fair value as the measurement objective in accounting forshare-based payment arrangements and requires all entities to apply afair-value-based measurement method in accounting for share-based paymenttransactions with employees.  Theprovisions of this statement are effective for annual periods beginning after January1, 2006.  We expect to transition to thenew guidance using the modified prospective method. Because we already followSFAS No. 123, the adoption of SFAS No. 123R is not expected to have a materialimpact on our financial statements.

 

In November 2004,the FASB issued SFAS No.****151, *Inventory Costs*, an amendment of ARB No.43, Chapter 4, which would be effective for inventory costs incurred duringfiscal years beginning after June 15, 2005. The amendments made by SFAS No. 151 will improve financial reporting byclarifying that abnormal amounts of idle facility expense, freight, handlingcosts, and wasted materials (spoilage) should be recognized as current-periodcharges and by requiring the allocation of fixed production overheads toinventory based on the normal capacity of the production facilities.  The adoption of SFAS No. 151 is not expectedto have a material impact on our financial statements.

 

In December 2004,the FASB issued SFAS No. 153, *Exchanges ofNonmonetary Assets*, an amendment of APB Opinion No. 29.  The amendments made by SFAS No. 153 are basedon the principle that exchanges of nonmonetary assets should be measured basedon the fair value of the assets exchanged. The amendment also eliminates the narrow exception for nonmonetaryexchanges of similar productive assets and replaces it with a broader exceptionfor exchanges of nonmonetary assets that do not have commercial substance.  The provisions of SFAS No. 153 are effectivefor nonmonetary asset exchanges occurring in fiscal periods beginning afterJune 15, 2005.  The adoption of SFAS No.153 is not expected to have a material impact on our financial statements.

# ** **

# **Item7A.**         Quantitative and Qualitative DisclosuresAbout Market Risk

 

We are exposed tomarket risk, which is the potential loss arising from adverse changes in marketprices and rates.  During 2005, weinvested excess cash in marketable securities that are subject to interest raterisk, which is not considered to be material to us.  Based on our net loss of $15.7 million forthe year ended December 31, 2005, a 1% change in average interest rates on ourmarketable securities would have increased or decreased our net loss by $0.2million. We do not enter, or intend to enter, into derivative financialinstruments for trading or speculative purposes.

# ** **

# **Item8.**            FinancialStatements and Supplementary Data

 

The financialstatements are filed pursuant to Item 15(a)1.

# ** **

# **Item9.**            Changes inand Disagreements with Accountants on Accounting and Financial Disclosure

 

NONE

# ** **

# **Item9A.**         Controls and Procedures

## ** **

## **a) Evaluation ofDisclosure Controls and Procedures**

 

We maintaindisclosure controls and procedures, as such term is defined in Rules 13a-15(e)and 15d-15(e) of the Securities Exchange Act of 1934 as amended (the “ExchangeAct”), that are designed to ensure that information required to be disclosed inthe reports filed or submitted under the Exchange Act, is recorded, processed,summarized, and reported within the time periods specified by the Commission’srules and forms.  Disclosure controls and procedures are designed toensure that information required to be disclosed by us in our Exchange Actreports is accumulated and communicated to our management including ourprincipal executive and financial officers, as appropriate, to allow timelydecisions regarding required disclosures.

 

Under thesupervision and with the participation of our management, including our chiefexecutive officer and chief financial officer, we conducted an evaluation ofour disclosure controls and procedures, as of December 31, 2005.  Based on this evaluation, our chief executiveofficer and our chief financial officer concluded that our disclosure controlsand procedures were not effective as of the end of the period covered by thisAnnual Report on Form 10-K (“Report”) due to the material weakness describedbelow (Item 9A.b.).

 

## **b) Management’s AnnualReport on Internal Control Over Financial Reporting**

 

Management is responsiblefor establishing and maintaining adequate internal control over financialreporting as defined in Exchange Act Rule 13a-15(f).  Management conducted an evaluation of theeffectiveness of the internal control over financial reporting as of December31, 2005, using the criteria established in Internal Control – IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO).  Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

26

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A material weakness is acontrol deficiency, or combination of control deficiencies, that results inmore than a remote likelihood that a material misstatement of the annual orinterim financial statements will not be prevented or detected.  As a result of management's assessment, managementidentified the following material weakness in internal control over financialreporting as of December 31, 2005:

 

*Revenuerecognition systems.* Information systems associated withaccounting for revenue were inadequate to appropriately identify specificcustomer transactions and facilitate the recognition of revenue in accordancewith Generally Accepted Accounting Principles. Accordingly, data from theinformation system related to revenue had to be adjusted using spreadsheet-basedanalyses. The internal controls surrounding these manual processes did notoperate effectively. Specifically, the company did not have effective reviewand monitoring controls in place to identify errors in the manual process. As aresult, material misstatements were identified in the company's revenue thatwere corrected prior to the issuance of the 2005 consolidated financialstatements.

 

Because of the materialweakness described above, management concluded that our internal control overfinancial reporting was not effective as of December 31, 2005.

 

The Company acquiredProphet Financial Systems (the “acquired entity”) during 2005.  Management excluded from its assessment ofthe effectiveness of our internal control over financial reporting as ofDecember 31, 2005, the acquired entity’s internal control over financialreporting associated with total consolidated assets of $10.0 million and total revenuesof $3.5 million included in the consolidated financial statements of INVESToolsand our subsidiaries as of and for the year ended December 31, 2005.

 

The Company's independentregistered public accounting firm, KPMG LLP, has issued an audit report onmanagement’s assessment of our internal control over financial reporting.  Their report is included in Item 9A(d).

# ** **

# **c)Changes in Internal Control Over Financial Reporting**

 

There has been no changein our internal control over financial reporting (as defined in Rules 13a-13(f)and 15d-15(f) of the Exchange Act) that occurred during our last fiscal quarter(our fourth fiscal quarter in the case of an annual report) that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

## *** ***

## ***Management’s Plan for Remediation***

 

While we have not fullyremediated the material weakness relating to revenue recognition systems, wehave implemented systems and controls to appropriately capture salestransactions and appropriately apply our revenue recognition policies and procedures.  During 2005, we accomplished the following:

 

•      Established and hired a full-time position, RevenueManager, within the accounting organization which oversees the manual andsystematic processes involved in the monthly recording of revenue.

•      Developed and implemented a monthly process for thecapture and calculation of each of our revenue streams to ensure revenue isrecorded correctly at the product and order level.

•      Created and implemented revenue recognition templatesfor each product sold and/or combination of products sold which is utilized byeach person in order entry and accounting that is involved in the revenuerecognition process.

•      Entered into an agreement with a software vendor toconfigure and implement revenue recognition software.  The software is expected to be implemented inthe first half of 2006.

•      Engaged a nationally recognized consulting firm toassist with the selection, configuration and deployment of an integratedenterprise resource planning and customer relationship management technologysolution, which will include order entry, revenue recognition and all relatedfinancial modules.  Implementation ofthis technology is expected to occur in the second half of 2006.

 

# **d)Report of Independent Registered Public Accounting Firm**

 

The Board of Directorsand Stockholders

INVESTools Inc.

 

We have auditedmanagement’s assessment, included in the accompanying Management’s AnnualReport on Internal Control Over Financial Reporting (Item 9A.(b)), thatINVESTools Inc. (“the Company”) did not maintain effective internal controlover financial reporting as of December 31, 2005, because of the effect of amaterial weakness identified in management’s assessment, based on criteriaestablished in *Internal Control Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). The Company’s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting. Our responsibilityis to express an opinion on management’s assessment and an opinion on theeffectiveness of the Company’s internal control over financial reporting basedon our audit.

 

27

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Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, evaluating management’s assessment, testingand evaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

 

Acompany’s internal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertain tothe maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management and directors of the company; and (3)provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of the company’s assets thatcould have a material effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

Amaterial weakness is a control deficiency, or combination or controldeficiencies, that results in more than a remote likelihood that a materialmisstatement of the annual or interim financial statements will not beprevented or detected. The following material weakness has been identified andincluded in management’s assessment: As of December 31, 2005, the Company’sinformation systems associated with accounting for revenue were inadequate toappropriately identify specific customer transactions and facilitate therecognition of revenue in accordance with Generally Accepted AccountingPrinciples. Accordingly, data from the Company’s information system related torevenue had to be adjusted using spreadsheet-based analyses. The internalcontrols surrounding these manual processes did not operate effectively.  Specifically, the company did not haveeffective review and monitoring controls in place to identify errors in themanual process. As a result, material misstatements were identified in the company'srevenue that were corrected prior to the issuance of the 2005 consolidatedfinancial statements.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the Consolidated Balance Sheets asof December 31, 2005 and 2004, and the related Consolidated Statements ofOperations, Changes in Stockholders’ (Deficit)/Equity and Comprehensive Loss,and Cash Flows for each of the years in the three-year period ended December31, 2005. The aforementioned material weakness was considered in determiningthe nature, timing, and extent of audit tests applied in our audit of the 2005consolidated financial statements, and this report does not affect our reportdated March 06, 2006, which expressed an unqualified opinion on thoseconsolidated financial statements.

 

In ouropinion, management’s assessment that the Company did not maintain effectiveinternal control over financial reporting as of December 31, 2005, is fairlystated, in all material respects, based on criteria established in *Internal**Control – IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO). Also, in our opinion, because of the effect of thematerial weakness described above on the achievement of the objectives of thecontrol criteria, the Company has not maintained effective internal controlover financial reporting as of December 31, 2005, based on criteria establishedin Internal Control - Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO).

 

TheCompany acquired Prophet Financial Systems (the “acquired entity”) during 2005,and management excluded from its assessment of the effectiveness of theCompany’s internal control over financial reporting as of December 31, 2005,the acquired entity’s internal control over financial reporting associated withtotal assets of $10.0 million and total revenues of $3.5 million included inthe consolidated financial statements of the Company and subsidiaries as of andfor the year ended December 31, 2005. Our audit of internal control overfinancial reporting of the Company also excluded an evaluation of the internalcontrol over financial reporting of the acquired entity.

 

KPMGLLP

SaltLake City, Utah

March6, 2006

 

28

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# **Item9B.**Other Events

 

On March 3, 2006, we entered into an Amended and Restated ExecutiveAgreement with Timothy Knight, our Senior Vice President of Technology. Theamended agreement extends the term of Mr. Knight’s employment one additionalyear to January 29, 2008, and provides for a base salary of $200,000 for 2006and 2007. All other terms of his original Executive Employment Agreement wereamended.

 

**PartIII**

 

In accordance with paragraph (3) of General Instruction G to Form 10-K,Part III of this Report is omitted because we will file a definitive proxy statement involving the election of directorswith the Securities and Exchange Commission not later than 120 days after theclose of the fiscal year pursuant to Regulation 14A.

 

Reference is made to the sections of such proxy statements entitled“Nominees for Director”, “Organization of the Board of Directors”, “ExecutiveOfficers”, “Summary Compensation Table”, “Security Ownership of CertainBeneficial Owners and Management”, “Certain Relationships and RelatedTransactions and Principal Accounting Fees and Services”, which sections ofsuch proxy statement are incorporated herein.

 

29

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**PartIV**

** **

# **Item 15.**   Exhibits and Financial Statements

 

The followingdocuments are filed as part of this Form 10-K:

 

**1.****             ConsolidatedFinancial Statements**

 
| Report of Independent Registered Public Accounting Firm                                                             |   |
|---------------------------------------------------------------------------------------------------------------------|--------|
| Consolidated  Balance Sheets as of December 31, 2005 and 2004                                                       |   |
| Consolidated  Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003                         |   |
| Consolidated  Statements of Stockholders’ (Deficit)Equity for the Years Ended December 31,  2005 2004 and 2003 |   |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003                         |   |
| Notes to Consolidated Financial Statements                                                                          |   |

 

All other schedules have been omitted sincethe required information is not present or is not present in amounts sufficientto require submission of the schedule, or because the information required isincluded in the financial statements or notes thereto.

 

**2.**            **Exhibits**

 
| 2.1      |       | Agreement and Plan of  Merger dated February 26, 2004, by and among INVESTools Inc., SES Acquisition  Corp., Service Enhancement Systems, Inc., Ted B. Shuel and Jamie Lynn Speas  Shuel, as Trustee of The Shuel Family Trust, Scott K. Waltz, individually,  Ted B. Shuel, individually, and Jamie Lynn Speas Shuel, individually.  (Incorporated by reference from INVESTools’ Current Report on Form 8-K filed  on March 10, 2004.) |
|----------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.2      |       | Stock Purchase Agreement dated as  of January 26, 2005, among the Company, Prophet Financial, each of Timothy  Knight and Andreas Bechtolsheim, and each of the individuals or entities  listed on Exhibit A thereto. (Incorporated by reference from INVESTools’  Current Report on Form 8-K filed on February 1, 2005.)                                                                                                               |
| **3.1**  | ** ** | **Amended and Restated Certificate of Incorporation of  INVESTools Inc. (Included as Annex V to the joint proxy statement/prospectus  filed in Registration No. 333-67454.)**                                                                                                                                                                                                                                                                |
| **3.2**  | ** ** | **By-laws of INVESTools Inc. (Included as Annex VI to the  joint proxy statement/prospectus filed in Registration No.   333-67454.)**                                                                                                                                                                                                                                                                                                        |
| **10.1** | ** ** | **Amended Stock Option Plan of Telescan. (Incorporated by  reference from Telescan’s Post-Effective Amendment No. 1 to Form S-8 filed  February 2, 1994.)**                                                                                                                                                                                                                                                                             |
| **10.2** | ** ** | **Amended and Restated 1995 Stock Option Plan of Telescan.  (Incorporated by reference from Telescan’s Registration Statement on Form S-8  filed November 21, 2000.)**                                                                                                                                                                                                                                                                  |
| **10.3** | ** ** | **2000 Stock Option Plan of Telescan. (Incorporated by  reference from Telescan’s Registration Statement on Form S-8 filed November  21, 2000.)**                                                                                                                                                                                                                                                                                       |
| **10.4** | ** ** | **Amended 1999 Stock Option Plan of ZiaSun. (Incorporated  by reference from ZiaSun’s Post-Effective Amendment No. 1 to Form S-8 filed  June 14, 2000.)**                                                                                                                                                                                                                                                                               |
| **10.5** | ** ** | **Non-Qualified Stock Option Agreement between ZiaSun and  Allen D. Hardman. (Incorporated by reference from ZiaSun’s Registration  Statement on Form 10-SB filed September 16, 1999.)**                                                                                                                                                                                                                                                |
| **10.6** | ** ** | **Lease Agreement between EsNET Properties L.C. and OIA,  dated May 25, 1999. (Incorporated by reference from ZiaSun’s Registration  Statement on Form 10-SB filed September 16, 1999.)**                                                                                                                                                                                                                                               |
| **10.7** | ** ** | **Lease Agreement between DC Mason Ltd. and OIA, dated  October 7, 1998. (Incorporated by reference from ZiaSun’s Registration  Statement on Form 10-SB filed September 16, 1999.)**                                                                                                                                                                                                                                                    |
| **10.8** | ** ** | **Lease Agreement between Gordon Jacobson and OIA, dated  June 22, 1999. (Incorporated by reference from the ZiaSun’s Registration  Statement on Form 10-SB filed September 16, 1999.)**                                                                                                                                                                                                                                                |
| **10.9** | ** ** | **Non-Competition Agreement, dated March 8, 2000, between  OIA and MIT, LLC. (Incorporated by reference from ZiaSun’s Current Report on  Form 8-K filed on August 1, 2001.)**                                                                                                                                                                                                                                                           |
| 10.11    |       | Termination  Agreement and General Release by and between INVESTools Inc. and Scott Elder  dated August 26, 2003. (Incorporated by reference from INVESTools’ Quarterly  Report on Form 10-Q filed November 14, 2003.) (1)                                                                                                                                                                                                              |
| 10.12    |       | Termination  Agreement and General Release by and between INVESTools Inc. and Ross Jardine  dated August 26, 2003. (Incorporated by reference from INVESTools’ Quarterly  Report on Form 10-Q filed November 14, 2003.) (1)                                                                                                                                                                                                             |
| 10.14    |       | Employment  Agreement dated February 26, 2004 by and between Scott K. Waltz and  INVESTools Inc. (Incorporated by reference from INVESTools’ Current Report on  Form 8-K filed on March 10, 2004.)(1)                                                                                                                                                                                                                                   |
| 10.15    |       | Employment  Agreement dated February 26, 2004 by and between Don Klabunde and INVESTools  Inc. (Incorporated by reference from INVESTools’ Current Report on Form 8-K  filed on March 10, 2004.)(1)                                                                                                                                                                                                                                     |

 

30

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| 10.16  |       | Executive  Employment Agreement dated January 26, 2005, by and between INVESTools and  Timothy Knight. (Incorporated by reference from INVESTools’ Current Report on  Form 8-K filed on February 1, 2005.)(1)                                           |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.17  |       | Executive  Employment Agreement, dated as of January 17, 2005, between INVESTools and  Ida Kane. (Incorporated by reference from INVESTools’ Current Report on Form  8-K filed on January 19, 2005.)(1)                                                 |
| 10.18  |       | Employment  Agreement, dated December 9, 2003 and effective as of March 4, 2004, between  INVESTools and Lee Barba. (Incorporated by reference from INVESTools’ Current  Report on Form 8-K filed on December 13, 2004.)(1)                             |
| 10.19  |       | Separation  Agreement and General Release, dated October 19, 2004 and effective as of  October 13, 2004, between INVESTools and Scott K. Waltz. (Incorporated by  reference from INVESTools’ Current Report on Form 8-K filed on October 25,  2004.)(1) |
| 10.20  | ** ** | **Executive  Employment Agreement, dated December 8, 2005 between INVESTools and Ainslie  J. Simmonds (Incorporated by reference from INVESTools’ Current Report on  Form 8-K filed on December 14, 2005)(1)**                                          |
| 10.21  | ** ** | **Transition  Agreement dated May 2, 2005, by and between INVESTools and CNBC, Inc.  (Incorporated by reference from INVESTools’ Current Report on Form 8-K filed  May 4, 2005.)**                                                                      |
| 10.22* | ** ** | **Amendment  to Executive Employment Agreement, dated March 3, 2006, between INVESTools  and Timothy Knight.**                                                                                                                                               |
| 21.1*  | ** ** | **Subsidiaries  of INVESTools.**                                                                                                                                                                                                                             |
| 23.1*  |       | Consent of KPMG LLP.                                                                                                                                                                                                                                         |
| 31.1*  |       | Section 302 Certification of Chief Executive Officer                                                                                                                                                                                                         |
| 31.2*  |       | Section 302 Certification of Chief Financial Officer                                                                                                                                                                                                         |
| 32.1*  |       | Section 906 Certification of Chief Executive Officer                                                                                                                                                                                                         |
| 32.2*  |       | Section 906 Certification of Chief Financial Officer                                                                                                                                                                                                         |

 

----

*              Indicatesdocuments filed herewith.

(1)           Managementcontracts or compensation plans or arrangements.

 

31

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## **Signatures**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Act of 1934, the Registrant has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized in the Cityof Draper, State of Utah, on March 6, 2006.

 

 
|   | INVESTools Inc. |
|--------|-----------------|
|   |            |
|   | By:             | /s/ LEE K. BARBA |   |   |
|   |            | Lee K. Barba, Chief Executive Officer and Director |

 

Pursuant to the requirements of the Securities Act of1934, this report has been signed below by the following persons in thecapacities and on the date indicated

 
| **Signature**                        | ** **                                     | **Title**                                         | ** ** | **Date**      |
|--------------------------------------|------------------------------------------------|---------------------------------------------------|------------|---------------|
|                                 |                                           |                                              |       |          |
| ** **                           | **PRINCIPAL EXECUTIVE  OFFICER:**              | ** **                                        | ** ** | ** **    | ** ** |
|                                 |                                           |                                              |       |          |
|   /s/ LEE K. BARBA         |                                           | Chief Executive Officer and Chairman of the Board |       | March 6, 2006 |
|   Lee K. Barba             |                                           |                                              |       |          |
|                                 |                                           |                                              |       |          |
| ** **                           | **PRINCIPAL FINANCIAL /  ACCOUNTING OFFICER:** | ** **                                        | ** ** | ** **    | ** ** |
|                                 |                                           |                                              |       |          |
|   /s/ IDA K. KANE          |                                           | Chief Financial Officer                           |       | March 6, 2006 |
|   Ida K. Kane              |                                           |                                              |       |          |
|                                 |                                           |                                              |       |          |
| ** **                           | **DIRECTORS:**                                 | ** **                                        | ** ** | ** **    | ** ** |
|                                 |                                           |                                              |       |          |
|   /s/ DOUGLAS T. TANSILL   |                                           | Director                                          |       | March 6, 2006 |
|   Douglas T. Tansill       |                                           |                                              |       |          |
|                                 |                                           |                                              |       |          |
|   /s/ MICHAEL H. GOLDSMITH |                                           | Director                                          |       | March 6, 2006 |
|   Michael H. Goldsmith     |                                           |                                              |       |          |
|                                 |                                           |                                              |       |          |
|   /s/ F. WARREN MCFARLAN   |                                           | Director                                          |       | March 6, 2006 |
|   F. Warren McFarlan       |                                           |                                              |       |          |
|                                 |                                           |                                              |       |          |
|   /s/ HANS VON MEISS       |                                           | Director                                          |       | March 6, 2006 |
|   Hans von Meiss           |                                           |                                              |       |          |
|                                 |                                           |                                              |       |          |
|   /s/ STEPHEN C. WOOD      |                                           | Director                                          |       | March 6, 2006 |
|   Stephen C. Wood          |                                           |                                              |       |          |

 

32

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**ReportOf Independent Registered Public Accounting Firm**

 

The Board of Directors and Shareholders

INVESTools Inc.:

 

We have audited the accompanying consolidated balance sheets ofINVESTools Inc. and subsidiaries as of December 31, 2005 and 2004, and therelated consolidated statements of operations, stockholders’ (deficit) equityand comprehensive loss and cash flows for each of the years in the three-yearperiod ended December 31, 2005.  Inconnection with our audits of the consolidated financial statements, we alsohave audited financial statement schedule II. These consolidated financial statements and financial statement scheduleare the responsibility of the Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements and financial statement schedulebased on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of INVESToolsInc. and subsidiaries as of December 31, 2005 and 2004 and the results of theiroperations and their cash flows for each of the years in the three-year periodended December 31, 2005 in conformity with U.S. generally accepted accountingprinciples.  Also in our opinion, therelated financial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly, in allmaterial respects, the information set forth therein.

 

We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the effectiveness ofINVESTools Inc. internal control over financial reporting as of December 31,2005, based on criteria established in Internal Control – Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO), and our report dated March 6, 2006 expressed an unqualified opinion onmanagement’s assessment of  and anadverse opinion on the effective operation of internal control over financialreporting.

 

KPMG LLP

Salt Lake City, Utah

March 6, 2006

 

33

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###### **INVESTOOLSINC. AND SUBSIDIARIES**

###### **CONSOLIDATEDBALANCE SHEETS**

(in thousands)

 
| ** **                                                                                                                                             | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                                                             | ** ** | **2005**         | ** ** | **2004** | ** ** |
| ** **                                                                                                                                             | ** ** | ** **       | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                                                                             | ** ** | ** **       | ** ** | ** ** | ** ** |
| Current  assets:                                                                                                                                       |       |             |       |   |   |
| Cash and cash equivalents                                                                                                                              |       | $                | 11,466     |   | $ | 10,736 |   |
| Marketable securities                                                                                                                                  |       | 16,871           |       | 13,840 |   |
| Accounts receivable, net of allowances of  $55 and $7, respectively                                                                                    |       | 3,353            |       | 2,194 |   |
| Current portion of restricted cash                                                                                                                     |       | 4,722            |       | 384 |   |
| Other current assets                                                                                                                                   |       | 3,133            |       | 2,493 |   |
| **Total current assets**                                                                                                                               |       | 39,545           |       | 29,647 |   |
|                                                                                                                                                   |       |             |       |   |   |
| Long-term  restricted cash                                                                                                                             |       | 366              |       | 1,876 |   |
| Goodwill                                                                                                                                               |       | 18,085           |       | 14,315 |   |
| Intangible  assets, net of accumulated amortization of $1,891 and $508, respectively                                                                   |       | 5,199            |       | 2,152 |   |
| Furniture  and equipment, net of accumulated depreciation of $2,403 and $1,073, respectively                                                           |       | 8,890            |       | 1,574 |   |
| Other  long-term assets                                                                                                                                |       | 614              |       | 214 |   |
|                                                                                                                                                   |       |             |       |   |   |
| **Total assets**                                                                                                                                       |       | $                | 72,699     |   | $ | 49,778 |   |
|                                                                                                                                                   |       |             |       |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ DEFICIT**                                                                                                        |       |             |       |   |   |
| Current  liabilities:                                                                                                                                  |       |             |       |   |   |
| Current portion of deferred revenue                                                                                                                    |       | $                | 68,215     |   | $ | 31,957 |   |
| Accounts payable                                                                                                                                       |       | 3,210            |       | 4,994 |   |
| Accrued payroll                                                                                                                                        |       | 3,522            |       | 2,178 |   |
| Accrued tax liabilities                                                                                                                                |       | 7,359            |       | 5,103 |   |
| Other current liabilities                                                                                                                              |       | 4,193            |       | 4,273 |   |
| Current portion of capital lease                                                                                                                       |       | 125              |       | — |   |
| **Total current liabilities**                                                                                                                          |       | 86,624           |       | 48,505 |   |
|                                                                                                                                                   |       |             |       |   |   |
| Long-term  portion of deferred revenue                                                                                                                 |       | 9,301            |       | 8,421 |   |
| Long-term  portion of capital lease obligations                                                                                                        |       | 513              |       | — |   |
| Other  long-term accrued liabilities                                                                                                                   |       | —           |       | 84 |   |
| **Total liabilities**                                                                                                                                  |       | 96,438           |       | 57,010 |   |
|                                                                                                                                                   |       |             |       |   |   |
| **Stockholders’  deficit:**                                                                                                                       |       |             |       |   |   |
| Preferred stock, $0.01 par value; 1,000  shares authorized; no shares issued and outstanding December 31, 2005 and  2004, respectively                 |       | —           |       | — |   |
| Common stock, $0.01 par value; 60,000  shares authorized; 44,754 and 44,966 shares issued and outstanding at  December 31, 2005 and 2004, respectively |       | 447              |       | 449 |   |
| Additional paid-in capital                                                                                                                             |       | 131,162          |       | 129,097 |   |
| Accumulated other comprehensive loss                                                                                                                   |       | (116             | )          | (32 | ) |
| Deferred stock compensation                                                                                                                            |       | (3,742           | )          | (998 | ) |
| Accumulated deficit                                                                                                                                    |       | (151,490         | )          | (135,748 | ) |
|                                                                                                                                                   |       |             |       |   |   |
| **Total stockholders’ deficit**                                                                                                                   |       | (23,739          | )          | (7,232 | ) |
|                                                                                                                                                   |       |             |       |   |   |
| **Total liabilities and stockholders’ deficit**                                                                                                   |       | $                | 72,699     |   | $ | 49,778 |   |

 

See accompanying notes to these consolidatedfinancial statements.

 

34

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###### **INVESTOOLSINC. AND SUBSIDIARIES**

###### **CONSOLIDATEDSTATEMENTS OF OPERATIONS**

(in thousands, except per share amounts)

 
| ** **                                                      | ** ** | **Years  Ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                      | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                      |       |                          |       |   |   |   |   |
| **Revenue**                                                     |       | $                             | 138,621    |   | $ | 97,169 |   | $ | 69,802 |   |
| **Costs and expenses:**                                         |       |                          |       |   |   |   |   |
| Cost of  revenue                                                |       | 92,161                        |       | 65,659 |   | 41,921 |   |
| Selling  expense                                                |       | 37,332                        |       | 24,493 |   | 20,168 |   |
| Related  party selling expense                                  |       | —                        |       | — |   | 501 |   |
| General and  administrative expense                             |       | 24,182                        |       | 17,843 |   | 12,388 |   |
| Special  charges                                                |       | 1,077                         |       | 1,084 |   | 673 |   |
| Total costs  and expenses                                       |       | 154,752                       |       | 109,079 |   | 75,651 |   |
| Net loss  from operations                                       |       | (16,131                       | )          | (11,910 | ) | (5,849 | ) |
| **Other income (expense):**                                     |       |                          |       |   |   |   |   |
| Gain (loss)  on sale of assets                                  |       | (93                           | )          | (77 | )  | 4 |   |
| Interest  income (expense) and other, net                       |       | 596                           |       | 268 |   | 74 |   |
| Total other  income                                             |       | 503                           |       | 191 |   | 78 |   |
| **Net loss  before income taxes**                               |       | (15,628                       | )          | (11,719 | ) | (5,771 | ) |
| Income tax  expense                                             |       | 114                           |       | 8 |   | 1,530 |   |
| **Net loss**                                                    |       | $                             | (15,742    | ) | $ | (11,727 | ) | $ | (7,301 | ) |
|                                                            |       |                          |       |   |   |   |   |
| **Net loss  per common share—**basic and diluted** ** |       | $                             | (0.35      | ) | $ | (0.26 | ) | $ | (0.17 | ) |
| Basic and  diluted weighted average shares outstanding          |       | 44,933                        |       | 45,045 |   | 43,692 |   |

 

See accompanying notes to these consolidatedfinancial statements.

 

35

----

 

###### **INVESTOOLSINC. AND SUBSIDIARIES**

###### **CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY**

###### **AND COMPREHENSIVELOSS**

(in thousands)

 
|                                            | ** ** | ** **              | ** **  | **Common  Stock**           | ** ** | **Additional** | ** ** | **Accumulated  Other** | ** ** | **Deferred**            | ** **  | ** **              | ** ** | **Total  Stock-**          | ** ** |
|-------------------------------------------------|------------|-------------------------|-------------|-----------------------------|------------|----------------|------------|------------------------|------------|-------------------------|-------------|-------------------------|------------|----------------------------|------------|
| ** **                                      |
| ** **                                      |
| ** **                                      | ** ** | **Comprehensive  Loss** | ** **  | **Outstanding**

**Shares** | ** ** | **Par  Value** | ** ** | **Paid-In  Capital**   | ** ** | **Comprehensive  Loss** | ** **  | **Stock  Compensation** | ** ** | **Accumulated****Deficit** | ** ** | **holder’s  Equity** | ** ** |
| ** **                                      |
| **Balance, December 31, 2002**                  | ** ** | **$**                   | **(33,624** | **)**                       | **43,206** | ** **     | **$**      | **432**                | ** ** | **$**                   | **126,663** | ** **              | **$**      | **—**                 | ** ** | **$** | **(91** | **)** | **$** | **(116,720** | **)** | **$** | **10,284** | ** ** |
| Issuance of common stock for bonuses            |       | —                  |        | 1,154                       |       | 12             |       | 277                    |       | —                  |        | —                  |       | —                     |       | 289 |   |
| Repurchase of common  stock                     |       | —                  |        | (268                        | )          | (3             | )          | (198                   | )          | —                  |        | —                  |       | —                     |       | (201 |  

)  |
| Stock issued due to option exercise             |       | —                  |        | 82                          |       | 1              |       | 54                     |       | —                  |        | —                  |       | —                     |       | 55 |   |
| Issuance of restricted stock                    |       | —                  |        | 15                          |       | —         |       | 12                     |       | —                  |        | (12                     | )          | —                     |       | — |   |
| Deferred stock  compensation                    |       | —                  |        | —                      |       | —         |       | 250                    |       | —                  |        | (250                    | )          | —                     |       | — |   |
| Amortization of deferred stock compensation     |       | —                  |        | —                      |       | —         |       | —                 |       | —                  |        | 60                      |       | —                     |       | 60 |   |
| Net loss                                        |       | (7,301                  | )           | —                      |       | —         |       | —                 |       | —                  |        | —                  |       | (7,301                     | )          | (7,301 | ) |
| Unrealized losses on marketable securities, net |       | (2                      | )           | —                      |       | —         |       | —                 |       | (2                      | )           | —                  |       | —                     |       | (2 | ) |
| **Balance, December 31, 2003**                  | ** ** | **$**                   | **(7,303**  | **)**                       | **44,189** | ** **     | **$**      | **442**                | ** ** | **$**                   | **127,058** | ** **              | **$**      | **(2**                     | **)**      | **$** | **(293** | **)** | **$** | **(124,021** | **)** | **$** | **3,184** | ** ** |
| Repurchase of common  stock                     |       | —                  |        | (1,054                      | )          | (11            | )          | (2,202                 | )          | —                  |        | —                  |       | —                     |       | (2,213 | ) |
| Stock issued due to option exercise             |       | —                  |        | 487                         |       | 5              |       | 316                    |       | —                  |        | —                  |       | —                     |       | 321 |   |
| Issuance of common stock for acquisition        |       | —                  |        | 1,344                       |       | 13             |       | 2,930                  |       | —                  |        | —                  |       | —                     |       | 2,943 |   |
| Deferred stock  compensation                    |       | —                  |        | —                      |       | —         |       | 992                    |       | —                  |        | (992                    | )          | —                     |       | — |   |
| Amortization of deferred stock compensation     |       | —                  |        | —                      |       | —         |       | 3                      |       | —                  |        | 287                     |       | —                     |       | 290 |   |
| Net loss                                        |       | (11,727                 | )           | —                      |       | —         |       | —                 |       | —                  |        | —                  |       | (11,727                    | )          | (11,727 | ) |
| Unrealized losses on marketable securities, net |       | (30                     | )           | —                      |       | —         |       | —                 |       | (30                     | )           | —                  |       | —                     |       | (30 | ) |
| **Balance, December 31, 2004**                  | ** ** | **$**                   | **(11,757** | **)**                       | **44,966** | ** **     | **$**      | **449**                | ** ** | **$**                   | **129,097** | ** **              | **$**      | **(32**                    | **)**      | **$** | **(998** | **)** | **$** | **(135,748** | **)** | **$** | **(7,232** | **)** |
| Repurchase of common  stock                     |       | **—**              |        | (343                        | )          | (3             | )          | (1,391                 | )          | —                  |        | —                  |       | —                     |       | (1,394 | ) |
| Stock issued due to option exercise             |       | **—**              |        | 126                         |       | 1              |       | 136                    |       | —                  |        | —                  |       | —                     |       | 137 |   |
| Issuance of restricted stock                    |       | —                  |        | 5                           |       | —         |       | 16                     |       | —                  |        | (16                     | )          | —                     |       | — |   |
| Deferred stock  compensation                    |       | **—**              |        | —                      |       | —         |       | 3,304                  |       | —                  |        | (3,304                  | )          | —                     |       | — |   |
| Amortization of deferred stock compensation     |       | **—**              |        | —                      |       | —         |       | —                 |       | —                  |        | 576                     |       | —                     |       | 576 |   |
| Net loss                                        |       | (15,742                 | )           | —                      |       | —         |       | —                 |       | —                  |        | —                  |       | (15,742                    | )          | (15,742 | ) |
| Unrealized losses on marketable securities, net |       | (84                     | )           | —                      |       | —         |       | —                 |       | (84                     | )           | —                  |       |                       | —     |   | (84 | ) |
| **Balance, December 31, 2005**                  | ** ** | **$**                   | **(15,826** | **)**                       | **44,754** | ** **     | **$**      | **447**                | ** ** | **$**                   | **131,162** | ** **              | **$**      | **(116**                   | **)**      | **$** | **(3,742** | **)** | **$** | **(151,490** | **)** | **$** | **(23,739** | **)** |
|                                                 |            |                         |             |                             |            |                |            |                        |            |                         |             |                         |            |                            |            |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to these consolidatedfinancial statements.

 

36

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###### **INVESTOOLSINC. AND SUBSIDIARIES**

###### **CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(in thousands)

 
| ** **                                                                          | ** ** | **Years  Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                          | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Cash flows from operating activities:**                                           |       |                          |       |   |   |   |   |
| Net loss                                                                            |       | $                             | (15,742    | ) | $ | (11,727 | ) | $ | (7,301 | ) |
| Reconciling adjustments:                                                            |       |                          |       |   |   |   |   |
| Depreciation  and amortization                                                      |       | 2,714                         |       | 960 |   | 596 |   |
| Deferred  taxes                                                                     |       | 114                           |       | — |   | 2,830 |   |
| Provision  for sales return reserve                                                 |       | 1,882                         |       | 1,652 |   | 1,550 |   |
| Provision  for bad debt expense                                                     |       | 54                            |       | 3 |   | 142 |   |
| Stock  compensation expense                                                         |       | 576                           |       | 290 |   | 349 |   |
| Provision  for inventory reserve                                                    |       | 123                           |       | 171 |   | — |   |
| Loss on sale  of assets                                                             |       | 93                            |       | 77 |   | 4 |   |
| Amortization  of discount on marketable securities                                  |       | —                        |       | — |   | 30 |   |
| Impairment  of internally capitalized software                                      |       | 1,000                         |       | 486 |   | — |   |
| Changes in operating assets and  liabilities, net of effect of acquired businesses: |       |                          |       |   |   |   |   |
| Accounts  receivable                                                                |       | (995                          | )          | (1,525 | ) | 214 |   |
| Restricted  cash                                                                    |       | 369                           |       | (384 | ) | — |   |
| Other  current assets                                                               |       | (1,085                        | )          | (2,273 | ) | (87 | ) |
| Accounts  payable                                                                   |       | (1,894                        | )          | 2,610 |   | (1,679 | ) |
| Deferred  revenue                                                                   |       | 37,001                        |       | 25,290 |   | 6,492 |   |
| Accrued  payroll                                                                    |       | 1,266                         |       | 425 |   | 427 |   |
| Other  current liabilities                                                          |       | (2,824                        | )          | 382 |   | (351 | ) |
| Accrued tax  liabilities                                                            |       | 2,256                         |       | 1,062 |   | 4,222 |   |
| Net cash  provided by operating activities                                          |       | 24,908                        |       | 17,499 |   | 7,438 |   |
| ** **                                                                          |       |                          |       |   |   |   |   |
| **Cash flows from investing activities:**                                           |       |                          |       |   |   |   |   |
| Purchases of  marketable securities                                                 |       | (10,836                       | )          | (16,776 | ) | (8,370 | ) |
| Proceeds  from sales of marketable securities                                       |       | 7,735                         |       | 10,731 |   | 600 |   |
| Proceeds  from sales of equipment                                                   |       | 40                            |       | — |   | — |   |
| Purchases of  fixtures, furniture and equipment                                     |       | (8,823                        | )          | (1,456 | ) | (771 | ) |
| Cash paid in  business acquisitions, net of cash received                           |       | (7,777                        | )          | (62 | ) | — |   |
| Net cash  used in investing activities                                              |       | (19,661                       | )          | (7,563 | ) | (8,541 | ) |
| ** **                                                                          |       |                          |       |   |   |   |   |
| **Cash flows from financing activities:**                                           |       |                          |       |   |   |   |   |
| Payment on  capital lease obligations and notes payable                             |       | (66                           | )          | (253 | ) | (14 | ) |
| Changes in  restricted cash                                                         |       | (3,194                        | )          | (1,513 | ) | 561 |   |
| Repurchase  of stock                                                                |       | (1,394                        | )          | (2,213 | ) | (201 | ) |
| Exercise of  stock options                                                          |       | 137                           |       | 321 |   | 55 |   |
| Net cash  (used in) provided by financing activities                                |       | (4,517                        | )          | (3,658 | ) | 401 |   |
| ** **                                                                          |       |                          |       |   |   |   |   |
| **Increase (decrease) in cash and cash  equivalents:**                              |       | 730                           |       | 6,278 |   | (702 | ) |
| **Cash and cash equivalents:**                                                      |       |                          |       |   |   |   |   |
| Beginning of  year                                                                  |       | 10,736                        |       | 4,458 |   | 5,160 |   |
| End of year                                                                         |       | $                             | 11,466     |   | $ | 10,736 |   | $ | 4,458 |   |

 

See accompanying notes to these consolidated financial statements

 

37

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**1.**             THE COMPANY

 

INVESTools Inc.(the Company) is a leader in investor education.  The Company’s mission is to educate andempower individual investors to make their own financial decisions to achievetheir financial goals at any time or place, by using the INVESTools MethodTMlive, by correspondence or online. The Company hopes to establish theINVESTools MethodTM as the most widely recognized, adopted and endorsed approachto investor education.  The Company offersa full range of investor education products and services that provide lifelonglearning and support to self-directed investors to help them improve theirinvestment performance.  The Company’sproducts and services are built around the INVESTools Method, a uniqueintegration of a disciplined investing process, web-based tools, personalizedinstruction and support.  Its investoreducation products and services are offered in a variety of learning formatswith courses ranging from beginning to advanced for all investor levels.

 

In January 2005,the Company relocated its corporate headquarters from Houston, Texas to SaltLake City, Utah, and then to Draper, Utah in May 2005.  We also maintain offices in New York, NewYork; Houston, Texas; Palo Alto, California and San Rafael, California.

 

## **Concentration Risk**

 

The Companycurrently accesses approximately 69% of its revenue from students through itsco-branding (BusinessWeek) and co-marketing (Success Magazine and Money inTraining) relationships.  The loss of oneof these partners could have a material adverse effect on our financialperformance in the short-term.  In May2005, the Company entered into a termination agreement with CNBC, Inc. (“CNBC”)one of its co-branding partners. Under the terms of the agreement, all CNBCstudents were offered the opportunity to transition to the INVESTools brand ofinvestor education products and services. The CNBC Investor Education co-branded relationship between CNBC andINVESTools was discontinued. Commissions of $0.5 million that had been accruedas a result of the original agreement from September 30, 2004 to May 2, 2005were not required to be paid as part of the termination. Accordingly, duringthe three month period ended June 30, 2005 the Company recorded a $0.5 millionreversal of partner commissions no longer owed as a result of the agreement, aspart of the termination, the Company paid CNBC approximately $0.8 million,which was recorded as other current liabilities, representing the commissionsowed by the Company to CNBC for the quarterly period ended September 30, 2004.

 

The Company payscommissions to its co-marketing and co-branding partners for sales that aregenerated through the various partners’ channels.  The rates at which partners are paidcommissions varies depending on the partner, the products sold to the customer,and the sales channel through which the sale is made.  Commissions are expensed as incurred at thetime of sale.

 

At the end of2003, the Company revised one of its co-marketing partner’s commissionagreements and in August of 2004, the Company revised another one of itsco-marketing partner’s commission agreements. The revised agreements wereentered into in order to incent the co-marketing partners to aggregate morestudents that would be candidates for continuing education.  These revisions resulted in the Companyincreasing the amount of commission rates paid for initial customer acquisitionsales generated at preview events through these co-marketing channels and areduction in the commission rates paid for customer continuing education sales.

 

## **Corporate Background**

 

The Company wasincorporated in Delaware on May 21, 2001, and began operations on December 6,2001, as a result of a merger between ZiaSun Technologies, Inc., a Nevadacorporation (ZiaSun), and Telescan, Inc., a Delaware corporation(Telescan).  Former ZiaSun and Telescanstockholders acquired an approximate 75% and 25% ownership interest in theCompany, respectively.  ZiaSun andTelescan each became wholly owned subsidiaries of the Company.

 

The Company’ssubsidiaries are:

 

•      ZiaSun,which owns 100% of Online Investors Advantage, Inc. (OIA).  OIA owns 100% of the following dormantentities that have no operations: INVESTools Asia Pacific Pte., Limited (INVESTools Asia), InvestorEducation California, LLC, INVESTools Hong Kong Ltd. (INVESTools Hong Kong),Seminar Marketing Group, Inc. (SMG) and Memory Improvement Systems, Inc. (MIS).

 

•      Telescan,which owns 100% of INVESTools Inc., a dormant California corporation with nooperations (INVESTools California).

 

•      SESAcquisition Corp., a California corporation operating under the name 360Group.  The Company acquired 360 Group inFebruary 2004.  360 Group was a directmarketing agency that offered services such as custom 

 

38

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databasedevelopment and management, strategic planning, media list planning and buying,creative and production services, response management and analyticservices.  The Company acquired 360 Groupin order to internalize its marketing department.

 

•      ProphetFinancial Systems, Inc. (Prophet), a California corporation, acquired by theCompany in January 2005.  Prophet is aWeb-based content and services provider that enables active investors to usetechnical analysis to trade more profitably. Prophet’s website, Prophet.Net, is the premier Web provider of advancedcharting technology.

 

**2.**             SIGNIFICANT ACCOUNTING POLICIES AND RELATED INFORMATION

## ** **

## **Principles ofConsolidation**

 

The consolidatedfinancial statements include the accounts of the Company and its majority-ownedsubsidiaries for which the Company exercises control.  All intercompany transactions have beeneliminated.

 

## **Use of Estimates**

 

Preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities, thedisclosed amounts of contingent assets and liabilities and the reported amountsof sales return reserve, revenues and expenses. Management believes the most significant estimates and assumptions areassociated with the valuation of intangibles, goodwill, taxes and the salesreturns reserve.  If the underlyingestimates and assumptions upon which the financial statements are based changein future periods, actual amounts may differ from those included in theaccompanying consolidated financial statements.

 

## **Financial Instruments**

 

The carrying valueof the Company’s financial instruments approximate fair value.  Financial instruments consist primarily ofcash and cash equivalents, marketable securities, accounts receivable, accountspayable and other accrued liabilities.

 

## **Cash Equivalents**

 

The Companyconsiders all investments with an original maturity to the Company of threemonths or less to be cash equivalents. These investments primarily consist of money-market accounts. AtDecember 31, 2005, and 2004, cash equivalents were $9.6 million, and $2.1million, respectively.

 

The amountsincluded in the consolidated financial statements approximate fair value at thebalance sheet date.  The Companymaintains deposits in banks, which may exceed the amount of federal depositinsurance available.  Management believesthe potential risk of loss on these accounts to be minimal.

 

## **Marketable Securities**

 

Managementconsiders all of its investments as available-for-sale.  Accordingly, marketable securities are statedat fair value, with unrealized gains and losses presented net of tax andreported as a separate component of stockholders’ deficit.  Realized gains and losses are recognizedusing the specific identification method. Gains are recognized when realized and are recorded in the accompanyingConsolidated Statement of Operations in other expense.  Losses are recognized as realized or whenmanagement has determined an other-than-temporary decline in fair value hasoccurred.

 

## **Accounts Receivable**

 

Approximately 99%of the revenue received for workshops, products, and web site subscriptions arepaid by credit cards.  Receivables fromcustomers billed for other services are reserved when collection becomesdoubtful.

In 2001, inconnection with the sale of two companies, the Company received notesreceivable from the buyers totaling $150,000 due in two equal installments onJune 15, 2003 and 2004.  No payment wasreceived on June 15, 2003 and 2004.  InDecember 2004, the Company settled for $85,000, which was reported as interestincome and other.

 

## **Allowance for SalesReturns**

 

Provisions forsales return reserves primarily relate to products and service arrangements andare recorded as a reduction to revenue and deferred revenue.  These provisions are made based on historicalexperience and changes in customer preferences. At December 31, 2005, 2004 and 2003, allowance for sales returns of $1.5million, $1.2 million and $1.1 million, respectively, are included as part ofother current liabilities in the accompanying Consolidated Balance sheets.

 

## **Inventories**

 

Inventories arestated at the lower of cost or market value (using the first-in, first-outmethod).  The Company’s inventoriesconsist of manuals and DVDs that comprise the Company’s educationalproducts.  At December 31, 2005 

 

39

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and 2004, $0.9million and $1.3 million in net inventories are included as part of othercurrent assets in the accompanying Consolidated Balance Sheets.

 

## **Restricted Cash**

 

The Company usesmerchant account vendors to process credit card transactions.  Under the terms of these agreements, themerchant account vendor has the right to withhold credit card funds to covercharge backs in the event the Company is unable to honor its commitments.  Such funds can be held for up to a year afterthe Company has terminated its relationship with the merchant accountvendor.  At December 31, 2005 and 2004,the Company has $5.1 million and $1.9 million, respectively, of funds due frommerchant account vendors.  Of the $5.1million in restricted cash $4.5 million is secured by a $4.5 million letter ofcredit in favor of one of the merchant vendors. At December 31, 2005, no fundshave been drawn against this letter of credit.

 

The Company alsoreclassified $0.3 million from restricted cash to cash and cash equivalentsduring the fourth quarter of 2005 due to the release of funds held in escrow inconnection with the ASIC litigation that were released by the Australian Courtsduring the fourth quarter of 2005 (See note 8).

 

## **Furniture and Equipment**

 

Furniture andequipment is stated at cost less accumulated depreciation.  Depreciation is calculated on a straight-linemethod over the estimated useful lives of the assets, which range from two tofive years.

Depreciationexpense was approximately $1.3 million, $0.6 million and $0.5 million for theyears ended December 31, 2005, 2004 and 2003, respectively.

 

The following is adetail of our furniture and equipment (in thousands):

 
| ** **                                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| **Furniture and equipment:**                     |       |     |       |     | ** ** |
| Computer and  office equipment                   |       | $        | 4,508      |     | $          | 2,127 | ** ** |
| Furniture                                        |       | 1,273    |       | 296      |       |
| Software  development in process                 |       | 5,065    |       | —   |       |
| Leasehold  improvements                          |       | 447      |       | 224      |       |
| Total  furniture and equipment                   |       | 11,293   |       | 2,647    |       |
| Less:  accumulated depreciation and amortization |       | (2,403   | )          | (1,073   | )          |
| **Furniture  and equipment, net**                |       | $        | 8,890      |     | $          | 1,574 |   |

 

The Companycapitalizes the costs of software developed for internal use in compliance withStatement of Position, SOP 98-1, *Accountingfor the Costs of Computer Software Developed or Obtained for Internal Use*.  At December 31, 2004, there were no costscapitalized for computer software developed for internal use (see Note 9).  As of December 31, 2005, there were $5.1million in costs capitalized for computer software developed for internal useincluded in software development in process above (see Note 9). The projectsassociated with the costs capitalized for internal use software have not beencompleted at December 31, 2005; therefore, no amortization has been taken onthese amounts.  Amortization of softwaredeveloped for internal use begins when the internal use software is ready forits intended use, and is calculated on a straight-line basis over the estimateduse of the product.

 

## **Goodwill and OtherIndefinite Lived Intangible Assets**

 

Goodwillrepresents the excess of purchase price and related costs over the valueassigned to the net tangible and identifiable intangible assets of businessesacquired. Goodwill and other intangible assets with indefinite lives are notamortized, but instead are tested for impairment annually, or, more frequentlyupon the occurance of a triggering event. The Company evaluates the recoverabilityof goodwill using a two-step impairment test approach at the reporting unitlevel. In the first step the fair value for the reporting unit is compared toits book value including goodwill. In the event that the fair value of thereporting unit is less than the book value, a second step is performed whichcompares the implied fair value of the reporting unit’s goodwill to the bookvalue of the goodwill. The fair value for the goodwill is determined based onthe difference between the fair values of the reporting units and the net fairvalues of the identifiable assets and liabilities of such reporting units(currently we have a single reporting unit). If the fair value of the goodwillis less than the book value, the difference is recognized as an impairment. TheCompany performed its impairment assessment on goodwill, in accordance with themethods prescribed above. The Company concluded that no impairment existedduring or as of December 31, 2005.

 

Indefinite livedintangible assets are tested for impairment annually, or, more frequently uponthe occurance of a triggering event. The Company evaluates the recoverabilityof indefinite lived intangible assets by comparing the indefinite livedintangible assets book value to its fair value. The fair value for indefinitelived intangible assets is determined by performing an undiscounted cash flowanalysis based on cash flows directly attributable to the indefinite livedintangible asset. If the fair value of the indefinite lived intangible assetsis less than book value, the difference is recognized as an impairment.

 

40

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For furtherinformation regarding Goodwill and Other intangible assets, refer to Note 5.

 

## **Long Lived Assets**

 

In accordance withStatement of Financial Accounting Standards (SFAS) No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*, long-lived assets, such as property, equipmentand definite-lived intangibles subject to amortization, are reviewed forimpairment whenever events or changes in circumstances indicate that thecarrying value of an asset may not be recoverable.  Recoverability of assets to be held and usedis measured by a comparison of the carrying amount of an asset or asset groupto estimated future undiscounted net cash flows of the related asset or groupof assets over their remaining lives.  Ifthe carrying amount of an asset exceeds its estimated future cash flows, animpairment charge is recognized for the amount by which the carrying amountexceeds the estimated fair value of the asset. Impairment of long-lived assets is assessed at the lowest levels forwhich there are identifiable cash flows that are independent of other groups ofassets.  Assets to be disposed of arereported at the lower of the carrying amount or fair value, less the estimatedcosts to sell.

 

During 2005 and2004, the Company recognized an impairment loss of $1.0 million and $0.5million, respectively, as a result of the Company’s abandonment of certaincomputer software development projects. The Company did not recognize any impairment of long-lived assets duringthe year ended December 31, 2003.

 

## **Income Taxes**

 

The Company usesthe asset and liability method of accounting for income taxes.  Under the asset and liability method, deferredtax assets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amount ofexisting assets and liabilities and their respective tax bases, and operatingloss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled.  The effect on deferred tax assets and liabilitiesof a change in tax rates is recognized in income in the period that includesthe enactment date.  A valuationallowance is provided when it is more likely than not that some or all of thedeferred tax assets may not be realized.

 

## **Revenue Recognition**

 

The Companyrecognizes revenue in accordance with Staff Accounting Bulletin No. 104, *Revenue Recognition* (SAB 104), and Financial AccountingStandards Board (FASB) Emerging Issues Task Force No. 00-21 *Accounting for Revenue Arrangements with Multiple Deliverables*(EITF 00-21).  Revenue is not recognizeduntil it is realized or realizable and earned. The criteria to meet this guideline are: (i) persuasive evidence of anarrangement exists, (ii) delivery has occurred or services have been rendered,(iii) the price to the buyer is fixed or determinable, and (iv) collectibilityis reasonably assured.

 

The Company sellsits products separately and in various bundles that contain multipledeliverables that include one-on-one coaching sessions, website subscriptions,educational workshops along with other products and services.  In accordance with EITF 00-21, salesarrangements with multiple deliverables are divided into separate units ofaccounting if the deliverables in the arrangement meet the following criteria:(i) the product has value to the customer on a standalone basis; (ii) there isobjective and reliable evidence of the fair value of undelivered items; and(iii) delivery or performances of any undelivered item is probable andsubstantially in the Company’s control. The fair value of each separate element is generally determined byprices charged when sold separately.  Incertain arrangements, the Company offers these products bundled together at adiscount.  The discount is allocated prorata to each element based on the relative fair value of each element when fairvalue support exists for each element in the arrangement.  If fair value of all undelivered elements inan arrangement exists, but fair value does not exist for a delivered element,then revenue is recognized using the residual method.  Under the residual method, the fair value ofundelivered elements is deferred and the remaining portion of the arrangementfee (after allocation of 100 percent of any discount to the delivered item) isrecognized as revenue.  The Companyprovides some limited rights of return in connection with itsarrangements.  The Company estimates itsreturns based on historical experience and maintains an allowance for estimatedreturns, which has been reflected as an accrued liability.  Each transaction is separated into itsspecific elements and revenue from each element is recognized according to thefollowing policies:

 
| **Product**                         | ** ** | **Recognition policy**                                                         |
|-------------------------------------|------------|--------------------------------------------------------------------------------|
| Workshop/workshop certificates      |       | Deferred and recognized as the workshop is  provided or certificate expire     |
| Home study                          |       | Recognized upon delivery to customer                                           |
| Online Course                       |       | Deferred and recognized as services are  delivered                             |
| One-On-One Coaching Sessions        |       | Deferred and recognized as services are  delivered                             |
| Web site subscriptions and renewals |       | Deferred and recognized on a straight-line  basis over the subscription period |
| Data licenses                       |       | Recognized monthly based on data usage                                         |

 

41

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**Deferred Revenue**

 

Deferred revenue arises from subscriptions to thewebsites, workshops, online courses and coaching services because the paymentsare received before the service has been rendered.  Deferred revenue is recognized into revenueover the period that the services are performed or the contract periodexpires.  The Company also sellscertificates to attend workshops in the future. Revenue from these sales is deferred until the certificate is used orexpires.

 

**Stock–Based Compensation**

 

Through December 31, 2002, the Company accountedfor stock-based compensation issued to directors, officers, and employees inaccordance with the provisions of Accounting Principles Board (“APB”) OpinionNo. 25, *Accounting for Stock Issued toEmployees,* and related interpretations.  Under APB No. 25, compensation expense isrecognized if an option’s exercise price on the measurement date is below thefair market value of the Company’s common stock.  The compensation, if any, is amortized toexpense over the vesting period. However, on January 1, 2003, the Company adopted the fair valueexpense recognition method available under SFAS No. 123.  SFAS No. 123 permits recognition on aprospective basis whereby any new options granted after January 1, 2003will be accounted for using the fair value of the option at the date of thegrant.  The Company has chosen to makethis estimate using the Black-Scholes option pricing model.  The value of the option is amortized ratablyinto expense over the appropriate vesting period.

 

For options granted through December 31, 2002,which were accounted for under the provisions of APB No. 25, SFAS No.  123, *Accountingfor Stock-Based Compensation,* requires pro forma informationregarding net loss as if the Company had accounted for its stock optionsgranted under the fair value method prescribed by SFAS No. 123.  For purposes of the pro forma disclosures,the estimated fair value of the stock options granted is amortized over thevesting periods of the respective stock options.  The following is the pro forma disclosure andthe related impact on the net loss attributable to common stockholders and netloss per common share for the years ended December 31, 2005, 2004 and 2003(amounts in thousands except per share amounts).

 
| ** **                                                | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net  loss as reported                                     |       | $                                 | (15,742    | ) | $ | (11,727 | ) | $ | (7,301 | ) |
|                                                      |       |                              |       |   |   |   |   |
| Add:  Stock-based compensation recorded, net of taxes     |       | 576                               |       | 290 |   | 349 |   |
| Deduct:  Pro forma stock-based compensation, net of taxes |       | (732                              | )          | (446 | ) | (586 | ) |
|                                                      |       |                              |       |   |   |   |   |
| Pro  forma net loss                                       |       | $                                 | (15,898    | ) | $ | (11,883 | ) | $ | (7,538 | ) |
|                                                      |       |                              |       |   |   |   |   |
| Basic  and diluted loss per share**—**as reported    |       | $                                 | (0.35      | ) | $ | (0.26 | ) | $ | (0.17 | ) |
| Basic  and diluted loss per share**—**pro forma      |       | (0.35                             | )          | (0.26 | ) | (0.17 | ) |

 

The fair value of options granted were estimated usingthe Black-Scholes option pricing model with the following assumptions:

 
| ** **                                      | ** ** | **2005** | ** ** | **2004**       | ** ** | **2003**           | ** ** |
|-------------------------------------------------|------------|----------|------------|----------------|------------|--------------------|------------|
|                                            |       |     |       |           |       |               |       |
| Risk  free interest rate factors                |       | 4.3%     |       | 4.02% to 4.53% |       | 3.40% to 4.30%     |       |
| Volatility  factors                             |       | 87%      |       | 55% to 118%    |       | 123.02% to 157.60% |       |
| Expected  lives                                 |       | 7 years  |       | 7 years        |       | 7 to 10 years      |       |
| Assumed  dividend yield                         |       | —   |       | —         |       | —             |       |
| Weighted  average fair value of options granted |       | $3.59    |       | $1.95          |       | $0.24              |       |

 

**Advertising Costs**

 

The Company expenses the production costs ofadvertising the first time the advertising takes place.  Advertising costs are included in sellingexpenses.  Advertising costs for theyears ended December 31, 2005, 2004 and 2003 were $26.5 million, $15.8million, and $10.0 million, respectively.

 

**Loss Per Share**

 

Basic net loss per share is computed by dividing thenet loss (numerator) by the weighted average number of shares of common stockoutstanding (denominator) during the periods. Diluted net loss per share gives effect to common share equivalentsconsidered to be potential common shares, if dilutive, computed using thetreasury stock method.  AtDecember 31, 2005, 2004 and 2003, there were approximately 4.1 million,3.3 million, and 3.8 million shares, respectively, of common stock potentiallyissuable with respect to stock options, which were excluded from the net lossper share calculation because the shares were not dilutive.

 

42

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**Recently Issued Accounting Standards**

 

In December 2004, the FASB issued SFAS No. 123R, *Share-Based Payment*.  SFAS No. 123R is a revision of SFAS No. 123,Accounting for Stock-Based Compensation. SFAS No. 123R supersedes APB Opinion No. 25, *Accounting for Stock Issued to Employees*, and its relatedimplementation guidance.  SFAS No. 123Restablishes standards for the accounting for transactions in which an entityexchanges its equity instruments for goods or services.  It also addresses transactions in which anentity incurs liabilities in exchange for goods or services that are based onthe fair value of the entity’s equity instruments or that may be settled by theissuance of those equity instruments. SFAS No. 123R focuses primarily on accounting for transactions in whichan entity obtains employee services in share-based payment transactions.  SFAS No. 123R requires that the costresulting from all share-based payment transactions be recognized in thefinancial statements.  It alsoestablishes fair value as the measurement objective in accounting forshare-based payment arrangements and requires all entities to apply afair-value-based measurement method in accounting for share-based paymenttransactions with employees.  Theprovisions of this statement are effective for interim or annual periodsbeginning after June 15, 2005. The Company will adopt this new accountingstandard effective January 1, 2006. The Company expects to transition to thenew guidance using the modified prospective method.  The adoption of SFAS No. 123R is not expectedto have a material impact on the Company’s consolidated financial statements.

 

In November 2004, the FASB issued SFAS No. 151, *Inventory Costs*, an amendment of ARB No.43, which would be effective for inventory costs incurred during fiscal yearsbeginning after June 15, 2005.  Theamendments made by SFAS No. 151 will improve financial reporting by clarifyingthat abnormal amounts of idle facility expense, freight, handling costs, andwasted materials (spoilage) should be recognized as current-period charges andby requiring the allocation of fixed production overheads to inventory based onthe normal capacity of the production facilities.  The adoption of SFAS No. 151 is not expectedto have a material impact on the Company’s consolidated financial statements.

 

In December 2004, the FASB issued SFAS No. 153, *Exchanges of Nonmonetary Assets*, anamendment of APB Opinion No. 29.  Theamendments made by SFAS No. 153 are based on the principle that exchanges ofnonmonetary assets should be measured based on the fair value of the assetsexchanged.  The amendment also eliminatesthe narrow exception for nonmonetary exchanges of similar productive assets andreplaces it with a broader exception for exchanges of nonmonetary assets thatdo not have commercial substance.  Theprovisions of SFAS No. 153 are effective for nonmonetary asset exchangesoccurring in fiscal periods beginning after June 15, 2005.  The adoption of SFAS No. 153 is not expectedto have a material impact of the Company’s consolidated financial statements.

 

**Reclassifications**

 

Certain prioryears’ balances have been reclassified to conform to the current year’s presentation.For the years ended December 31, 2004 and 2003, $1.0 million and $0.4 million,respectively, related to employee benefit costs associated with employees thatare involved with delivery of product and services have been reclassified fromgeneral and administrative expense to cost of revenue to conform to the currentperiod’s presentation, respectively. Additionally, for the years ended December31, 2004 and 2003, $0.1 and $0.1 million, respectively, related to employeebenefit costs associated with employees generating sales have been reclassifiedfrom general and administrative expense to selling expense to conform to thecurrent period’s presentation.

 

**3.**             MARKETABLE SECURITIES

 

During 2003, the Company started investing excess cashin short-term marketable securities consisting of primarily government backedsecurities with maturities ranging from one month to three years.  The Company determines realized gains andlosses on a specific identification basis. The realized gains and losses are included in interest income and other,net, in the accompanying Consolidated Statements of Operations.

 

The following table summarizes unrealized gains andlosses on the Company’s investments in marketable securities that have been inan unrealized loss position for less than twelve months based on quoted marketprices as of December 31, 2005 and 2004:

 
| ** **                    | ** ** | **As of December 31, 2005** | ** ** | **As of December 31, 2004** | ** ** |
|-------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **Amortized  Cost**              | ** ** | **Gross  Unrealized  Losses**    | ** ** | **Gross  Unrealized  Gains** | ** ** | **Estimated  Fair Value** | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Estimated  Fair Value** | ** ** |
| Government backed  securities |       | $                                | 10,843     |                             | $          | (32 | ) | $ | — |   | $ | 10,811 |   | $ | 13,870 |   | $ | (33 | ) | $ | 3 |   | $ | 13,840 |   |
| Total                         |       | $                                | 10,843     |                             | $          | (32 | ) | $ | — |   | $ | 10,811 |   | $ | 13,870 |   | $ | (33 | ) | $ | 3 |   | $ | 13,840 |   |

 

43

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The following table summarizes unrealized gains andlosses on the Company’s investments in marketable securities that have been inan unrealized loss position for greater than twelve months based on quoted marketprices as of December 31, 2005 and 2004:

 
| ** **                    | ** ** | **As of December 31, 2005** | ** ** | **As of December 31, 2004** | ** ** |
|-------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **Amortized  Cost**              | ** ** | **Gross  Unrealized  Losses**    | ** ** | **Gross  Unrealized  Gains** | ** ** | **Estimated  Fair Value** | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Estimated  Fair Value** | ** ** |
| Government backed  securities |       | $                                | 6,144      |                             | $          | (84 | ) | $ | — |   | $ | 6,060 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Total                         |       | $                                | 6,144      |                             | $          | (84 | ) | $ | — |   | $ | 6,060 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |

 

The following table summarizes contractual maturitiesof the Company’s investments in marketable securities as of December 31,2005:

 
| ** **                           | ** ** | **Amortized  Cost** | ** ** | **Estimated  Fair Value** | ** ** |
|--------------------------------------|------------|---------------------|------------|---------------------------|------------|
| ** **                           | ** ** | **(in thousands)**  | ** ** |
| Due within one year                  |       | $                   | 8,083      |                      | $          | 8,045 |   |
| Due after one year through two years |       | 8,904               |       | 8,826                     |       |
|                                      |            |                     |            |                           |            |  |  |

 

**4.**             ACQUISITIONS

 

**Prophet:**

 

InJanuary 2005, the Company acquired Prophet Financial Systems (“Prophet”),a California corporation located in Palo Alto, for $7.9 million in cash.  Prophet creates Web-based products thatenable active investors to use technical analysis to trade moreprofitably.  The Company acquired Prophetto add more functionality to its Investor ToolboxTM website as wellas to attract and retain new and existing customers.  At closing, the sellers received a cashpayment of $7.9 million. In addition, the Company incurred $0.6 million ofcosts related to the acquisition. During the three months ended June 30,2005, the Company recorded a receivable amount of $0.1 million from theshareholders of Prophet based on a net working capital adjustment provided forin the merger agreement for a total adjusted purchase price of$8.4 million. The $0.1 million working capital adjustment was recorded asa reduction in goodwill as this represented an adjustment to the purchaseprice.  The working capital adjustmentreceivable was paid to the Company during the three months ended September 30,2005. In connection with the transaction, Timothy Knight, Prophet’s ChiefExecutive Officer, President and founder entered into a two-year employmentagreement with the Company as Vice President of Technology.

 

The following table summarizesthe preliminary allocation of the purchase price for Prophet and the estimatedamortization period for the acquired intangibles and includes the receivablefor the working capital adjustment discussed above (the Company has not yetdetermined the final allocation of the purchase price and, accordingly, theamounts shown below may differ from the final allocation) (in thousands):

 
| Current  assets                        |   | $      | 1,092  |   |
|----------------------------------------|--------|--------|--------|--------|
| Furniture and equipment                |   | 201    |   |
| Acquired intangibles:                  |   |   |   |
| Developed  technology (5 years)        |   | 3,220  |   |
| Trademarks  and tradename (indefinite) |   | 820    |   |
| Non-competition  agreements (3 years)  |   | 390    |   |
| Goodwill                               |   | 3,770  |   |
| Assets  acquired                       |   | 9,493  |   |
| Liabilities  assumed                   |   | 1,100  |   |
| Net Assets  Acquired                   |   | $      | 8,393  |   |
|                                        |        |        |        |        |  |

 

The following unaudited pro formaresults of operations for the years ended December 31, 2005 and December 31,2004, assumes the purchase of Prophet occurred on January 1, 2004, aftergiving effect of certain adjustments, including but not limited to,amortization of intangible assets, tax adjustments, and assumes the purchaseprice has been allocated to the assets purchased and the liabilities assumedbased on their values at the date of purchase. The following unaudited pro forma results of operations are presentedfor illustrative purposes only and are not necessarily indicative of theoperating results that would have occurred if the transaction had beenconsummated at the dates indicated. Furthermore, such unaudited pro forma results of operations are notnecessarily indicative of future operating results of 

 

44

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thecombined companies, due to changes in operating activities following thepurchase, and should not be construed as representative of the operatingresults of the combined companies for any future dates or periods.  Pro forma net loss includes amortization ofthe intangible assets.

 
| **(in thousands, except per share data)** | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                   |       | $          | 138,996    |       | $          | 100,303 |   |
| Net loss                                  |       | (15,677    | )          | (12,859    | )          |
| Basic and diluted net loss per share      |       | $          | (0.35      | )          | $          | (0.29 | ) |

 

**The 360 Group**

 

In February 2004, the Company acquired SES AcquisitionCorp., a privately held California corporation operating under the assumed name360 Group (360 Group).  360 Group was adirect marketing company that provided services such as custom databasedevelopment and management, strategic planning, media and list planning andbuying, creative and production services, response management, and analyticservices.  The Company acquired 360 Groupto internalize its marketing department and no longer provides services to third parties.  At closing, the sellers received a cashpayment of $875,000 and 830,000 shares of the Company’s common stock valued at$1,875,000.  In addition, the Companyincurred $669,000 of costs related to the acquisition, of which $226,000 werepaid with 100,000 shares of the Company’s common stock.  During the three months ended June 30,2004, the sellers received an additional cash payment of $213,000 based on anet working capital adjustment provided for in the merger agreement recorded asadditional purchase price resulting in an increase to goodwill.  Pursuant to the merger agreement, inOctober 2004, the sellers received an additional cash payment of $438,000and 415,000 shares of common stock valued at $842,000 based on 360 Groupachieving revenue targets during the three months ended September 30**,**2004.  Theconsideration paid in October of 2004 was recorded as additional purchaseprice.

 

The following table summarizes the purchase price for360 Group and includes the payments for the working capital adjustment and earnout discussed above:

 
| ** **                              | ** ** | **(in thousands)** | ** ** |
|-----------------------------------------|------------|--------------------|------------|
| Value of common stock issued to sellers |       | $                  | 2,717      |   |
| Cash paid to sellers                    |       | 1,525              |       |
| Transaction costs                       |       | 669                |       |
|                                    |       |               |       |
| Total purchase price                    |       | $                  | 4,911      |   |

 

The following table summarizes the allocation of thepurchase price for 360 Group and the estimated amortization period for theacquired intangibles:

 
| ** **                                            | ** ** | **(in thousands)** | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|
| Current assets                                        |       | $                  | 2,003      |   |
| Furniture, fixtures and equipment                     |       | 487                |       |
| Acquired  intangibles:                                |       |               |       |
| Developed technology/database infrastructure (1 year) |       | 1,600              |       |
| Non competition agreement (2 years)                   |       | 500                |       |
| Goodwill                                              |       | 2,357              |       |
| Assets acquired                                       |       | 6,947              |       |
| Liabilities, including notes payable**—**assumed |       | $                  | 2,036      |   |
|                                                  |       |               |       |   |
| Net assets acquired                                   |       | $                  | 4,911      |   |

 

The following unaudited pro forma results ofoperations for the years ended December 31, 2004 and 2003, assumes, thepurchase of 360 Group occurred on January 1, 2003, after giving effect ofcertain adjustments, including, but not limited to, amortization of intangibleassets, tax adjustments and assumes the purchase price has been allocated tothe assets purchased and the liabilities assumed based on their values at thedate of purchase.  The followingunaudited pro forma results of operations are presented for illustrativepurposes only and are not necessarily indicative of the operating results thatwould have occurred if the transaction had been consummated at the datesindicated.  Furthermore, such unauditedpro forma results of operations are not necessarily indicative of futureoperating results of the combined companies due to changes in operatingactivities following the purchase, and should not be construed asrepresentative of the operating results of the combined companies for anyfuture dates or periods.  Pro forma netloss includes amortization of the intangible assets.

 

45

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| **(in thousands, except per share data)** | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                   |       | $          | 97,925     |       | $          | 74,164 |   |
| Net loss                                  |       | (11,401    | )          | (2,698     | )          |
| Basic and diluted net loss per share      |       | $          | (0.25      | )          | $          | (0.06 | ) |

 

In October 2004, the Company entered into a separationagreement and general release with Scott K. Waltz, the former Senior VicePresident and Chief Marketing Officer of the Company.  At the time of acquisition, Mr. Waltz enteredinto a 3-year employment agreement with the Company.  Mr. Waltz’s non-compete agreement did not gointo effect until the expiration of that employment agreement or histermination of employment with the Company. As a result of Mr. Waltz’s termination, the Company reduced theestimated useful life associated with the non-compete agreement from five yearsto two years, the remaining contractual life of the agreement, as of thetermination date.

 

**5.**             GOODWILL AND INTANGIBLE ASSETS

** **

The Company has goodwill related to four acquisitions;the acquisition of OIA in 1999, the acquisition of Telescan in 2001, theacquisition of 360 Group in 2004 and the acquisition of Prophet in 2005.  In accordance with SFAS No. 142, goodwill isnot amortized, but tested for impairment annually.  In connection with the preparation of thefinancial statements as of December 31, 2005, 2004, and 2003, the Companyperformed its annual impairment analyses on goodwill and indefinite livedintangible assets. Based on these analyses the Company concluded that neitherGoodwill or the trademarks and tradenames were impaired as of December 31,2005.

 

The changes in the carrying amount of goodwill for theyears ended December 31, 2005 and 2004 were as follows:

 
| ** **                              | ** ** | **(in thousands)** | ** ** |
|-----------------------------------------|------------|--------------------|------------|
| Balance as of December 31, 2004    |       | $                  | 14,315     |   |
| Additions due to acquisition of Prophet |       | 3,770              |       |
| Balance as of December 31, 2005    |       | $                  | 18,085     |   |

 

**Acquired Intangibles**

 

Acquired intangibles with finite lives as of December 31,2005 and 2004 were as follows:

 
| ** **                    | ** ** | **As of December 31, 2005** | ** ** | **As of December 31, 2004** | ** ** |
|-------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **Gross  Carrying  Amount**      | ** ** | **Accumulated  Amortization**    | ** ** | **Weighted  Average  Remaining  Useful Life** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Weighted  Average  Remaining  Useful Life** | ** ** |
| ** **                    | ** ** | **(in thousands)**               | ** ** | ** **                       | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Existing technology and other |       | $                                | 5,380      |                             | $          | (1,407 | ) | 3.2 years |   | $ | 2,160 |   | $ | (394 | ) | 13.2 years |   |
| Non competition               |       | 890                              |       | (484                             | )          | 1.6 years |   | 500 |   | (114 | ) | 1.75 years |   |
| Total acquired intangibles    |       | $                                | 6,270      |                             | $          | (1,891 | ) | 3.0 years |   | $ | 2,660 |   | $ | (508 | ) | 11.1 years |   |

 

Duringthe fourth quarter of 2005, the estimated useful life of the developedtechnology intangible asset acquired in the 360 acquisition was reduced to 1year from 16 years as plans to implement a new enterprise resource planning andclient relationship management (“ERP/CRM”) system were made for fiscal year2006. The San Rafael existing technology is expected to be used until the newERP/CRM system is successfully implemented. As a result of this change inestimated useful life, amortization expense increased $0.1 million more than itwould have had the estimated useful life remained unchanged.Additionally, prior to the change in the estimated useful life of the developedtechnology, the Company performed an impairment analysis on this asset andconcluded that no impairment existed.

 

Amortization expense was $1.4 million, $0.3 millionand $0.1 million for the years ended December 31, 2005, 2004, and

2003, respectively.

 

46

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Estimated future amortization expense is as follows:

 
| 2006                                 |   | $      | 2,263  |   |
|--------------------------------------|--------|--------|--------|--------|
| 2007                                 |   | 774    |   |
| 2008                                 |   | 653    |   |
| 2009                                 |   | 644    |   |
| 2010                                 |   | 45     |   |
| Thereafter                           |   | — |   |
| Total estimated amortization expense |   | $      | 4,379  |   |

 

**Non-AmortizableAcquired Intangibles**

 

As a result of the Prophet acquisition inJanuary 2005, trademarks and tradenames which are not amortized and haveindefinite lives as of December 31, 2005 were $820,000.

** **

**6.**             INCOME TAXES

 

The provision for income taxes consists of thefollowing (in thousands):

 
| ** **               | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------|------------|-----------------------------------|------------|
| ** **               | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Current:**             |       |                              |       |   |   |   |   |
| Federal                  |       | $                                 | —     |   | $ | — |   | $ | (1,198 | ) |
| State                    |       | —                            |       | 8 |   | (102 | ) |
| **Deferred:**            |       |                              |       |   |   |   |   |
| Federal                  |       | 99                                |       | — |   | 2,467 |   |
| State                    |       | 15                                |       | — |   | 363 |   |
| Total income tax expense |       | $                                 | 114        |   | $ | 8 |   | $ | 1,530 |   |

 

The following table reconciles the differences betweenthe statutory Federal income tax rate at 34% and the effective tax rate forcontinuing operations (in thousands):

 
| ** **                                            | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                            | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Tax at Federal statutory rate                         |       | $                                 | (5,314     | ) | $ | (3,984 | ) | $ | (1,962 | ) |
| State income taxes, net of Federal income tax benefit |       | 10                                |       | 5 |   | (67 | ) |
| Expenses not deductible for tax purposes              |       | 69                                |       | 162 |   | 65 |   |
| Utilization of net operating loss                     |       | —                            |       | — |   | 2,186 |   |
| Change in valuation allowance                         |       | 5,430                             |       | 3,906 |   | 2,541 |   |
| Federal/State tax refund recognition                  |       | —                            |       | — |   | (1,198 | ) |
| Other                                                 |       | (81                               | )          | (81 | ) | (35 | ) |
| Total income tax expense                              |       | $                                 | 114        |   | $ | 8 |   | $ | 1,530 |   |

 

47

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The tax effects of temporary differences that giverise to significant portions of the Federal and State deferred tax assets arecomprised of the following (in thousands):

 
| ** **                       | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------|------------|-----------------------------------|------------|
| ** **                       | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| ** **                       | ** ** | ** **                        | ** ** | ** ** | ** ** |
| **Deferred  tax assets:**        |       |                              |       |   |   |
| Allowance for bad debts          |       | $                                 | 22         |   | $ | 3 |   |
| Accrued liabilities              |       | 575                               |       | 685 |   |
| Deferred revenue                 |       | 3,284                             |       | 3,284 |   |
| Inventory reserve                |       | 62                                |       | 19 |   |
| Book/tax depreciation            |       | 369                               |       | — |   |
| Sales tax reserve                |       | 2,504                             |       | 1,753 |   |
| Net operating loss carry forward |       | 12,139                            |       | 6,501 |   |
| Other                            |       | 81                                |       | — |   |
| Gross deferred tax assets        |       | 19,036                            |       | 12,245 |   |
| Valuation allowance              |       | (17,697                           | )          | (11,390 | ) |
|                             |       |                              |       |   |   |
| Net deferred tax assets          |       | $                                 | 1,339      |   | $ | 855 |   |
|                             |       |                              |       |   |   |
| **Deferred  tax liabilities:**   |       |                              |       |   |   |
| Prepaid assets                   |       | $                                 | 759        |   | $ | 95 |   |
| Book/Tax depreciation            |       | —                            |       | 6 |   |
| Section 197 Intangibles     |       | 694                               |       | 754 |   |
| Gross deferred tax liabilities   |       | $                                 | 1,453      |   | $ | 855 |   |
|                             |       |                              |       |   |   |   |   |
| Net deferred tax liability       |       | $                                 | (114       |  ) | $ | — |   |
|                                  |            |                                   |            |  |  |  |  |  |  |

 

At December 31, 2005, the Company had availableapproximately $31.1 million of net operating loss carry forwards for Federaland state income tax purposes.  These carry forwards, which may providefuture tax benefits, begin to expire in 2006 through 2025.  Additionally,U.S. Federal income tax law limits a corporation’s ability to utilize netoperating losses if it experiences an ownership change of greater than 50% overa three-year period.  As a result of thislimitation the net operating loss currently available for use is $25.0 million.

 

In assessing the realizability of deferred tax assetsat December 31, 2005, the Company considered whether it was more likelythan not that some portion or all of the deferred tax assets would not berealized.  The ultimate realization of deferred tax assets is dependentupon the generation of future taxable income during the periods in which thosetemporary differences become deductible.  The Company considers thescheduled reversal of deferred tax liabilities, projected future taxable incomeand tax planning strategies in making this assessment.  Based on availableinformation, management does not believe it is more likely than not that itsdeferred tax assets will be utilized.  Accordingly, the Company hasestablished a valuation allowance equal to the net deferred tax assets plus anamount for deferred tax liabilities which relate to goodwill and indefinitelived intangibles that cannot be considered future sources of taxable income.

 

The valuation allowance increased by $6.3 million,$3.8 million, and $1.9 million during 2005, 2004 and 2003, respectively.  Subsequently recognized tax benefits relatingto the valuation allowance for deferred tax assets as of December 31,2005, will be allocated as follows:

 
| Income tax  benefit that would be reported in the consolidated statement of operations |   | $     | 14,500 |   |
|----------------------------------------------------------------------------------------|--------|-------|--------|--------|
| Goodwill and other non current intangible assets                                       |   | 3,094 |   |
| Additional paid-in capital                                                             |   | 58    |   |
| Other comprehensive loss                                                               |   | 45    |   |
| Total                                                                                  |   | $     | 17,697 |   |

 

48

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**7.**             STATEMENT OF CASH FLOWS

 

The supplemental cash flow information forDecember 31, 2005, 2004 and 2003, is as follows:

 
| ** **                                               | ** ** | **2005**           | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                                               | ** ** | **(in thousands)** | ** ** |
| ** **                                               | ** ** | ** **         | ** ** |
| Cash paid  during the year for:                          |       |               |       |     |       |     |       |
| Interest                                                 |       | $                  | 32         |     | $          | 8        |       | $ |  3 |   |
| Income taxes                                             |       | $                  | —     |     | $          | 3        |       | $ | 218 |   |
| Non-cash  investing and financing activities:            |       |               |       |     |       |     |       |
| Common stock issued for acquisitions                     |       | $                  | —     |     | $          | 2,943    |       | $ | — |   |
| Deferred stock compensation resulting from option grants |       | $                  | 3,320      |     | $          | 992      |       | $ | 262 |   |
| Unrealized loss on marketable securities                 |       | $                  | (84        | )        | $          | (30      | )          | $ | (2 | ) |
| Capital lease obligations                                |       | $                  | 704        |     | $          | —   |       | $ | — |   |
| Write off of accounts receivable                         |       | $                  | 6          |     | $          | 193      |       | $ | 95 |   |

 

**8.**             COMMITMENTS AND CONTINGENCIES

 

**Commitments**

 

*OperatingLeases*

 

Equipment and facilities are leased under variousnon-cancelable operating leases expiring at various dates through the year2010.  Rent expense was $1.6 million for2005, $1.0 million for 2004, and $.9 million for 2003. In May 2005, the Companycommenced a 5-year lease of its new corporate headquarters in Draper, Utah. Thelease has been classified as an operating lease. In June 2005, the Companyentered into a 5-year capital lease for telecommunications equipment for its newcorporate headquarters. At December 31, 2005, assets under capital lease were$0.7 million. 

 

At December 31, 2005, future minimum leasepayments under non-cancelable operating leases, related subleases, and capitalleases were as follows:

 
| ** **                                 | ** ** | **Capital  leases** | ** ** | **Operating  leases** | ** **  | **Sub-lease  income** | ** ** | **Net operating  leases** | ** ** |
|--------------------------------------------|------------|---------------------|------------|-----------------------|-------------|-----------------------|------------|---------------------------|------------|
| For the fiscal years:                      |       |                |       |                  |        |                  |       |                      |       |
|                                       |       |                |       |                  |        |                  |       |                      |       |
| 2006                                       |       | $                   |  172  |                  | $           | 959                   |       | $                         |  (71  | ) | $ |  888 |   |
| 2007                                       |       | 172                 |       | 915                   |        | —                |       | 915                       |       |
| 2008                                       |       | 172                 |       | 790                   |        | —                |       | 790                       |       |
| 2009                                       |       | 172                 |       | 741                   |        | —                |       | 741                       |       |
| 2010                                       |       | 71                  |       | 393                   |        | —                |       | 393                       |       |
| Thereafter                                 |       | —              |       | —                |        | —                |       | —                    |       |
| Total Lease  Payments                      |       | 759                 |       | $                     |  3,798 |                  | $          |  (71                 | )          | $ |  3,727 |   |
|                                       |       |                |       |                  |        |                  |       |                      |       |
| Less: Amount  representing interest (8.0%) |       | 121                 |       |                  |        |                  |       |                      |       |
|                                       |       |                |       |                  |        |                  |       |                      |       |
| Present  value of lease payments           |       | 638                 |       |                  |        |                  |       |                      |       |
|                                       |       |                |       |                  |        |                  |       |                      |       |
| Less: Current portion                      |       | 125                 |       |                  |        |                  |       |                      |       |
|                                       |       |                |       |                  |        |                  |       |                      |       |
| Long-term  portion                         |       | $                   |  513  |                  |        |                  |       |                      |       |   |
|                                            |            |                     |            |                       |             |                       |            |                           |            |  |  |  |  |  |

 

49

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**Contingencies**

 

*Litigation*

 

From time to time the Company is involved in certain legal actionsarising in the ordinary course of business. It is the opinion of management that such litigation will be resolvedwithout a material adverse effect on the Company’s liquidity, financialposition or results of operations.

 

On March 4, 2003, a foreign national filed a complaint in the SanDiego Superior Court against ZiaSun Technologies, Inc., a wholly-ownedsubsidiary of the Company (ZiaSun).  Thecomplaint alleges that certain individuals, who are not parties in the lawsuit,persuaded the plaintiff to purchase shares of ZiaSun common stock and thecomplaint also alleges a failure to deliver a stock certificate.  ZiaSun does not have any ownership or controlof the third party brokerage house from whom plaintiff claims to have purchasedstock.  The plaintiff was seeking unspecifieddamages for the alleged fraud in the sale of the stock.  On February 9, 2005, the court awarded asummary judgment in favor of the Company. In March 2005, the plaintiff filedfor an appeal to continue to pursue this litigation. The Company believes thatthis matter will be resolved without material adverse effect on the Company.

 

In October 2005, the Supreme Court of Queensland, ruled on a lawsuitfiled on July 9, 2004, by the Australian Securities and Investment Commission(ASIC) against Online Investors Advantage, one of the Company’s wholly-ownedsubsidiaries (OIA). The Court found that most of the claims pursued by ASIC hadnot been made out against OIA, but found for ASIC in respect to certain claims,all of which hinged on the Court’s finding that the website was a ‘financialproduct’, as that term is defined under the Australian Corporations Act. Therewere no penalties assessed against the Company as a result of this ruling. OnOctober 31, 2005, the Court dismissed ASIC’s claim regarding the repayment ofmoney to participants at the workshops. Accordingly, $0.3 million of fundspreviously held in escrow have been released to the Company. Given OIA’ssuccess on the majority of ASIC’s claims, ASIC was ordered to pay 80% of OIA’slegal costs. Given that ASIC succeeded in respect to a small number of itsclaims, OIA was ordered to pay 20% of ASIC’s legal costs. The net of theseamounts cannot be estimated at this time and therefore no amounts have beenrecorded in the Consolidated Financial Statements. The Company expects theseamounts to be settled in the first half of 2006.

 

On November 1, 2005, Ross Jardine and True North Academy,L.L.C. filed alawsuit against the Company in the Third Judicial District Court, Salt LakeCity, Utah. The lawsuit alleges that the Company abused Mr. Jardine’s personalidentity under Utah state law, his name and likeness, and appropriated thecommercial value of Mr. Jardine’s identity and violated his privacy.  In January 2006, the Company filed its answerand counterclaim and in February 2006 the Company filed a motion for summaryjudgment.  The Company intend tovigorously defend this action.

 

In February 2006, the Company filed a complaint against.  Stock Investor.com, LLC, True North Acadamy,L.L.C., Wade Hallam, Leroy Hartman and Tony Montoya in the Forth JudicialDistrict Court, Utah County, Utah. The complaint alleges breach of contract,tortuous interference, violation of the Utah Trade Secrets Act, common lawunfair competition, violation of the Utah Unfair Competition Act, common lawtrademark infringement and trade name infringement, and civil conspiracy. TheCompany is seeking damages and injunctive relief.

 

The Company establishes liabilities when a particular contingency isprobable and estimable.  For contingenciesnoted above, the Company has accrued amounts considered probable and estimable.

 

The Company records liabilities for potential sales taxes related toproduct sales in various states.  Theeffect of recording the potential sales tax liability is to record an accruedliability for the potential sales tax exposure with a corresponding increase toselling expense.  The Company is applyingfor rulings from various states on the taxability of its products to determineif its sales tax policy is supported by the various state taxingjurisdictions.  The Company anticipatesthat the rulings could effectuate a modification to its sales tax collectionpolicy and/or a reversal of a portion of its accrued sales tax liability.

 

The Company is not aware of pending claims or assessments, other thanas described above, which may have a material adverse impact on the Company’sliquidity, financial position or results of operation.

 

50

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**9.**                     SPECIAL CHARGES

 

Special chargesconsisted of the following (in thousands):

 
| ** **                           | ** ** | **Years Ended December 31,** | ** **  |
|--------------------------------------|------------|-----------------------------------|-------------|
| ** **                           | ** ** | **2005**                          | ** **  | **2004** | ** ** | **2003** | ** ** |
| Severance  costs                     |       | $                                 | 77          |   | $ | 597 |   | $ | 673 |   |
| Impairment  of internal use software |       | 1,000                             |        | 487 |   | — |   |
| Total                                |       | $                                 |  1,077 |   | $ |  1,084 |   | $ |  673 |   |

 

The Company hasrecorded severance costs associated with involuntary termination of 12, 19 and16 employees for the years ended December 31, 2005, 2004 and 2003,respectively.

 

The Companycapitalized $1.0 million and $0.5 million related to certain projects toenhance the Company’s internal use software in 2005 and 2004,respectively.  Subsequently, the Companyabandoned these projects to enhance the Company’s internal use software and the$1.0 million and $0.5 million, respectively, was written-off and recorded aspart of special charges in the accompanying Consolidated Statements ofOperations.

 

The followingtable presents the activity associated with severance costs (in thousands):

 
| ** **              | ** ** | **Balance at   December 31,  2004** | ** ** | **Severance   costs** | ** ** | **Severance   benefits paid** | ** ** | **Balance at   December 31,  2005** | ** ** |
|-------------------------|------------|------------------------------------------|------------|-----------------------|------------|-------------------------------|------------|------------------------------------------|------------|
| Remaining  2004 accrual |       | $                                        | 119        |                  | $          | —                        |       | $                                        | (119       | ) | $ | — |   |
| 2005  severance costs   |       | —                                   |       | 77                    |       | (77                           | )          | —                                   |       |
|                    |       | $                                        |  119  |                  | $          |  77                      |       | $                                        |  (196 | ) | $ | — |   |
|                         |            |                                          |            |                       |            |                               |            |                                          |            |  |  |  |  |  |  |  |  |

 

**10.****                  STOCKHOLDERS’ EQUITY**

 

**Classes of Capital Stock**

 

The Company hastwo classes of capital stock: convertible preferred stock and commonstock.  The Company is authorized toissue up to 60 million shares of common stock with a par value of $.01 pershare and 1 million shares of convertible preferred stock with a par value of$.01 per share.

 

**11.****                  STOCKPLANS**

 

**Employee Stock Option Plans**

 

The Company’spurpose of granting stock options is to attract, retain, motivate and rewardofficers, directors and employees of the Company.

 

*Description of Plans*

 

INVESTools 2001 Stock Option Plan

 

This plan isthe only plan out of which the Company can grant options at this time.  The Company has reserved 6 million shares forgrant under this plan, which was approved by stockholders inDecember 2001, for issuance to officers, directors and employees.  Incentive options are granted at fair marketvalue of the Company’s common stock at the date of grant, as determined by theBoard of Directors, and generally expire ten years from the date of grant.  At December 31, 2005, there are 2,247,125shares available for grant under this plan.

 

Telescan Stock Option Plans

 

The Companyreserved 427,456 shares of its common stock for issuance under three stockoption plans for the employees and former directors of Telescan.  No new options are being granted under theseplans.  Options granted under these planswere granted at fair market value at the date of grant and generally expire tenyears from the date of grant.  AtDecember 31, 2005, there are 345,199 shares available for exercise underthis plan.

 

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ZiaSun Stock Option Plan

 

The Companyreserved 1,296,600 shares of its common stock for issuance under one stockoption plan for the officers, employees and former directors of ZiaSun.  No new options are being granted under thisplan.  Options granted under this planwere granted at fair market value at the date of grant and generally expire tenyears from the date of grant.  AtDecember 31, 2005, there are 226,534 shares available for exercise underthis plan.

 

*Employee Stock Option Plan Activity*

 

The following is a summary of option activity underthese plans:

 
| ** **                                                      | ** ** | **2005**   | ** ** | **2004**                               | ** ** | **2003**   | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|----------------------------------------|------------|------------|------------|
| ** **                                                      | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| ** **                                                      | ** ** | ** ** | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Outstanding at beginning of year                                |       | 3,304,468  |       | $                                      | 1.63       |       | 3,779,359  |   | $ | 1.47 |   | 4,387,195 |   | $ | 1.57 |   |
| Granted                                                         |       | 999,500    |       | $                                      | 4.77       |       | 607,000    |   | $ | 2.27 |   | 1,029,500 |   | $ | 0.29 |   |
| Cancelled                                                       |       | (125,871   | )          | $                                      | 3.12       |       | (592,198   | ) | $ | 2.04 |   | (1,555,836 | ) | $ | 0.99 |   |
| Exercised                                                       |       | (125,904   | )          | $                                      | 1.09       |       | (489,693   | ) | $ | 0.67 |   | (81,500 | ) | $ | 0.67 |   |
|                                                            |       |       |       |                                   |       |       |       |   |   |   |   |   |   |
| Outstanding at end of year                                      |       | 4,052,193  |       | $                                      | 2.35       |       | 3,304,468  |   | $ | 1.63 |   | 3,779,359 |   | $ | 1.47 |   |
|                                                            |       |       |       |                                   |       |       |       |   |   |   |   |   |   |
| Options exercisable at year-end                                 |       | 2,428,483  |       |                                   |       | 1,771,718  |       |   |   | 1,629,945 |   |   |   |
| Weighted average fair value of options  granted during the year |       | $          | 3.59       |                                   |       |       | $          | 1.95 |   |   |   | $ | 0.24 |   |   |   |
|                                                                 |            |            |            |                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The following table summarizes information aboutoptions outstanding at December 31, 2005:

 
| ** **                     | ** ** | **Options  Outstanding**               | ** ** | **Options  Exercisable**                             | ** ** |
|--------------------------------|------------|----------------------------------------|------------|------------------------------------------------------|------------|
| **Range of Exercise   Prices** | ** ** | **Number   Outstanding   At 12/31/05** | ** ** | **Weighted  Average   Remaining Contractual   Life** | ** ** | **Weighted    Average   Exercise   Price** | ** ** | **Number   Exercisable   At 12/31/05** | ** ** | **Weighted    Average   Exercise   Price** | ** ** |
| $0.00-$2.50                    |       | 2,644,759                              |       | 6.53                                                 |       | $ | 0.73 |   | 1,965,384 |   | $ | 0.56 |   |
| $2.51-$5.00                    |       | 640,327                                |       | 6.59                                                 |       | 3.66 |   | 370,104 |   | 3.55 |   |
| $5.01-$7.50                    |       | 704,900                                |       | 9.57                                                 |       | 5.23 |   | 30,400 |   | 6.38 |   |
| $7.51-$10.00                   |       | 10,095                                 |       | 4.61                                                 |       | 9.00 |   | 10,095 |   | 9.00 |   |
| $10.01-$50.00                  |       | 52,112                                 |       | 3.48                                                 |       | 28.08 |   | 52,500 |   | 28.11 |   |
|                           |       | 4,052,193                              |       | 7.02                                                 |       | $ | 2.35 |   | 2,428,483 |   | $ | 1.72 |   |

 

**Restricted Stock**

 

InApril 2004, the Board of Directors of the Company approved the INVESToolsInc. 2004 Restricted Stock Plan (the Plan), which was ratified by the Company’sstockholders in June 2004.  Thepurpose of the Plan is to (i) attract and retain employees of the Company andits subsidiaries, qualified individuals to serve as members of the Board, andconsultants to provide services to the Company; (b) motivate participatingemployees, directors and consultants, by means of appropriate incentives, toachieve long-range goals; (c) provide incentive compensation opportunities thatare competitive with those of other similarly situated companies; and (d)further align Plan participants’ interests with those of the Company’s otherstockholders through compensation alternatives based on the Company’s stock;and thereby promote the long-term financial interest of the Company and itssubsidiaries, including the growth in value of the Company’s equity andenhancement of long-term stockholder return. The Plan will be administered by the Compensation Committee (theCommittee) of the Board of Directors, which is comprised of at least two ormore directors of the Company appointed by the Board.

 

There are 500,000shares of Company common stock available for issuance under the Plan.  The shares of Company 

 

52

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common stockawarded under the Plan may be either previously authorized but unissued sharesor issued shares which have been reacquired by the Company after their originalissuance (including but not limited to shares purchased on the open market).

 

Shares of Companycommon stock awarded under the Plan and later reacquired by the Companypursuant to the Plan will again become available for awards under the Plan.

 

Unless otherwiseprovided for in the Plan, Awards granted under the Plan may not be sold,assigned, transferred, pledged or otherwise encumbered for a period of fouryears or such shorter period as the Committee may determine (the RestrictedPeriod).  At its discretion, theCommittee may, at any time after the date of an Award, adjust the length of theRestricted Period to account for individual circumstances of a participant orgroup of participants.

 

In December 2005and 2004, the Company issued 3,000 and 5,000 shares of restricted stockwith a fair value of $5.40 and $3.40 per share, respectively, to members of theCompany’s Advisory Board.  Therestrictions on the restricted stock awards granted lapse over a period of 24months and 12 months, respectively.  Thefair value of the restricted stock awards was recorded as a component ofdeferred stock compensation and is amortized to stock-based compensationexpense as the restrictions lapse.

** **

**StockRepurchase Plan**

 

In June 2004,the Company authorized a stock repurchase program under which the Company canrepurchase up to 3,500,000 shares over a two year period.  The shares will be retired upon acquisition.  As of December 31, 2005 and 2004, theCompany repurchased and retired 343,400 and 1,054,203 shares of its own commonstock for a total cost of $1.4 and $2.2 million, respectively, of the 0.3million shares repurchased during 2005, 0.2 million shares were repurchasedfrom a member of the Company’s Board of Directors.  The remaining repurchase authorization underthis program totaled 2,102,397 shares at December 31, 2005.

** **

**12.****                  EMPLOYEEBENEFITS**

 

In the firstquarter of 2003, the defined contribution 401(k) Profit Sharing Plans for theemployees of OIA and Telescan were consolidated into one plan, the INVESTools401(k) Plan.  The plan providesparticipants with a mechanism for making contributions for retirementsavings.  Each participant may contributespecified amounts of eligible compensation. The Company offers a discretionary employer match whereby the Companymatched participant contributions for 25% up to 4% of salary during 2004 and50% up to 4% of salary during 2005.

** **

**13.****                  RELATEDPARTIES**

 

The related partyexpense component of selling expense is Generation Marketing LLC (Gen M).  At one time, five individuals owned Gen M,four of whom were former officers and directors of the Company.  The officers and directors of the Companyeach owned 16.75% of Gen M for a total of 67%. Gen M handled a significant portion of the Company’s marketing needsfrom direct mail to media buys.  In 2002,the Company hired a second marketing agency to handle some of the marketingneeds for one of the brands to reduce the Company’s reliance on a related party.  In May 2002 and February 2003, theformer officers and directors sold their interests in Gen M to an unrelatedthird party and in February 2003, Scott Elder and Ross Jardine sold theirinterests in Gen M to an unrelated third party. As such Gen M is no longer a related party.

 

The Companyincurred $0.5 million in marketing expenses to Generation Marketing for theperiod January 1, 2003 to February 28, 2003.

** **

**14.****                  SEGMENTREPORTING**

 

The Companyconsists of a single operating segment delivering investor education, whichprovides lifelong learning and support to self-directed investors. All of theCompany’s long-lived assets are located in the United States.

 

The followingtable is a summary breakout of the Company’s domestic and internationalrevenues:

 
| ** **             | ** ** | **Years Ended December 31,** | ** **    |
|------------------------|------------|-----------------------------------|---------------|
| ** **             | ** ** | **2005**                          | ** **    | **2004** | ** ** | **2003** | ** ** |
| Domestic  Revenue      |       | $                                 | 135,377       |   | $ | 93,554 |   | $ | 67,205 |   |
| International  Revenue |       | 3,244                             |          | 3,615 |   | 2,597 |   |
| Total  Revenue         |       | $                                 |  138,621 |   | $ |  97,169 |   | $ |  69,802 |   |
|                        |            |                                   |               |  |  |  |  |  |  |  |  |  |  |

 

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**15.****                  UNAUDITEDQUARTERLY FINANCIAL DATA**

 

 
| ** **                                                      | ** ** | **Fiscal Year 2005  Quarters Ended**           | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                      | ** ** | **March 31,  2005**                            | ** ** | **June 30,   2005** | ** ** | **September  30,   2005** | ** ** | **December 31,    2005** | ** ** |
| ** **                                                      | ** ** | **(in  thousands, except per share data****)** | ** ** |
| **Income  Statement**                                           |       |                                           |       |   |   |   |   |   |   |
| Revenue                                                         |       | $                                              | 30,624     |   | $ | 34,162 |   | $ | 37,018 |   | $ | 36,817 |   |
| Net income (loss)  from operations                              |       | (9,419                                         | )          | (6,333 | ) | 3,925 |   | (4,304 | ) |
| Net income  (loss)                                              |       | $                                              | (9,303     | ) | $ | (6,260 | ) | $ | 4,038 |   | $ | (4,217 | ) |
|                                                            |       |                                           |       |   |   |   |   |   |   |
| Net income  (loss) per common share**—**basic and  diluted |       | $                                              | (0.21      | ) | $ | (0.14 | ) | $ | 0.09 |   | $ | (0.09 | ) |
| Weighted  average shares outstanding**—**basic             |       | 44,971                                         |       | 45,008 |   | 45,009 |   | 44,747 |   |
| Weighted  average shares outstanding**—**diluted           |       | 44,971                                         |       | 45,008 |   | 46,790 |   | 44,747 |   |

 
| ** **

** **                                           | ** ** | **Fiscal Year 2004  Quarters Ended**          | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                       | ** ** | **March 31, 2004**                       | ** ** | **June 30,   2004** | ** ** | **September 30,    2004** | ** ** | **December 31,    2004** | ** ** |
| ** **                                                       | ** ** | **(in thousands, except per share data****)** | ** ** |
| **Income  Statement**                                            |       |                                          |       |   |   |   |   |   |   |
| Revenue                                                          |       | $                                             | 23,219     |   | $ | 25,140 |   | $ | 23,890 |   | $ | 24,920 |   |
| Net loss  from operations                                        |       | (196                                          | )          | (1,623 | ) | (3,261 | ) | (6,830 | ) |
| Net loss                                                         |       | $                                             | (174       | ) | $ | (1,619 | ) | $ | (3,217 | ) | $ | (6,717 | ) |
|                                                             |       |                                          |       |   |   |   |   |   |   |
| Net loss per  common share**—**basic and diluted            |       | $                                             | (0.00      | ) | $ | (0.04 | ) | $ | (0.07 | ) | $ | (0.15 | ) |
| Weighted  average shares outstanding**—**basic and  diluted |       | 44,578                                        |       | 45,329 |   | 45,311 |   | 44,958 |   |

 

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**INVESTOOLS INC. AND SUBSIDIARIES**

 

###### **INVESTOOLSINC.VALUATION AND QUALIFYING ACCOUNTS AND RESERVES**

(in thousands)

 

**Schedule II**

 
| ** **                                                             | ** ** | ** **                            | ** ** | **Addition**                         | ** ** | ** **                          | ** ** | ** **     | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|----------------|------------|
| **Description**                                                        | ** ** | **Balance at   Beginning  Of Period** | ** ** | **Charged  to Revenue  and Expense** | ** ** | **Charged  to Other  Accounts (1)** | ** ** | **Deductions** | ** ** | **Balance  at End of  Period** | ** ** |
|                                                                   |       |                                  |       |                                 |       |                                |       |           |       |   |   |
| Deducted from asset accounts:                                          |       |                                  |       |                                 |       |                                |       |           |       |   |   |
| Provisions for losses on trade accounts  receivable and sales returns: |       |                                  |       |                                 |       |                                |       |           |       |   |   |
| Year Ended December 31, 2005:                                     |       |                                  |       |                                 |       |                                |       |           |       |   |   |
| Bad debt allowance                                                     |       | 7                                     |       | 54                                   |       | —                              |       | (6             | )(2)       | 55 |   |
| Sales return allowance                                                 |       | 1,160                                 |       | 1,882                                |       | 4,921                               |       | (6,415         | )(3)       | 1,548 |   |
| Total                                                                  |       | $                                     | 1,167      |                                 | $          | 1,936                               |       | $              | 4,921      |   | $ | (6,421 | ) | $ | 1,603 |   |
|                                                                   |       |                                  |       |                                 |       |                                |       |           |       |   |   |
| Year Ended December 31, 2004:                                     |       |                                  |       |                                 |       |                                |       |           |       |   |   |
| Bad debt allowance                                                     |       | $                                     | 197        |                                 | 3          |                                | —     |           | (193       | )(2) | 7 |   |
| Sales return allowance                                                 |       | 1,070                                 |       | 1,652                                |       | 2,311                               |       | (3,873         | )(3)       | 1,160 |   |
| Total                                                                  |       | $                                     | 1,267      |                                 | $          | 1,655                               |       | $              | 2,311      |   | $ | (4,066 | ) | $ | 1,167 |   |
|                                                                   |       |                                  |       |                                 |       |                                |       |           |       |   |   |
| Year Ended December 31, 2003:                                     |       |                                  |       |                                 |       |                                |       |           |       |   |   |
| Bad debt allowance                                                     |       | $                                     | 150        |                                 | $          | 142                                 |       | $              | —     |   | $ | (95 | )(2) | $ | 197 |   |
| Sales return allowance                                                 |       | 142                                   |       | 1,550                                |       | 895                                 |       | (1,517         | )(3)       | 1,070 |   |
| Total                                                                  |       | $                                     | 292        |                                 | $          | 1,692                               |       | $              | 895        |   | $ | (1,612 | ) | $ | 1,267 |   |

 

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(1)   Reclass fromdeferred revenue to other accrued liabilities for cash refunds related to salesreturns.

(2)   Uncollectibleaccounts written-off, net of recoveries.

(3)   Representscash paid out for refunds.

 

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