**UNITEDSTATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**Form 10-K**
| **(Mark One)** | ** **                                                |
|----------------|-----------------------------------------------------------|
| **x**          | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE** |
| ** **     | **SECURITIES  EXCHANGE ACT OF 1934**                      |

 

**For the fiscal year ended December 31, 2006**

**Commission File Number:  000-52012**

**INVESTOOLS INC.**

(Exact name ofRegistrant as specified in its charter)

| **Delaware**                                                    |   | **76-0685039**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **45  Rockefeller Plaza, Suite 2012, New York, New York**       |   | **10111**                             |
| (Address of  principal executive offices)                       |   | (Zip Code)                            |

 

Registrant’s telephonenumber, 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 markwhether the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.

Yes  o    No  x

Indicate by checkmark whether the registrant is not required to file reports pursuant to Section13 or Section 15(d) of the Exchange Act. Yes  o    No  x

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

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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

| Large accelerated  filer o |   | Accelerated  filer x |   | Non-accelerated  filer o |
|---------------------------------|--------|---------------------------|--------|-------------------------------|

 

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

The aggregatemarket value of voting and non-voting common equity held by non-affiliates ofthe Registrant as of June 30, 2006 (the last business day of the Registrant’smost recently completed second fiscal quarter) based on the closing price ofthe common stock on the NASDAQ Global Market for such date, was $339.7 million.The number of shares of the Registrant’s common stock outstanding on March 13,2007 was 65,468,458.

**Documents Incorporated byReference:**

The registrant’sdefinitive proxy statement filed or to be filed with the Securities andExchange Commission pursuant to Regulation 14A involving the election ofdirectors at the annual meeting of the shareholders of the registrant scheduledto be held on June 13, 2007 is incorporated by reference in Part III ofthe 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                                                                                              |   |
|                           |                                                                                                                  |   |
| **PART  III**                  |                                                                                                                  |   |
|                           |                                                                                                                  |   |
| **PART IV**                    |                                                                                                                  |   |
|                           |                                                                                                                  |   |
| ITEM 15.                       | EXHIBITS AND  FINANCIAL STATEMENTS                                                                                    |   |

 

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**INVESTOOLS INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**Forward Looking Statement**

All statements in this Annual Report on Form 10-K thatare not historical are forward-looking statements within the meaning of Section21E of the Securities Exchange Act of 1934.  Such forward-lookingstatements may be identified by words such as “believe”, “intend”, “expect”, “may”,“could”, “would”, “will”, “should”, “plan”, “project”, “contemplate”, “anticipate”,or similar statements.  In addition, fromtime to time, we (or our representatives) may make forward-looking statementsof this nature in our annual report to shareholders, proxy statement, quarterlyreports on Form 10-Q, current reports on Form 8-K, press releases or in oral orwritten presentations to shareholders, securities analysts, members of thefinancial press or others.  All suchforward-looking cautionary statements, whether written or oral, and whethermade by us or on our behalf, are expressly qualified by these cautionarystatements and any other cautionary statements which may accompany theforward-looking statements.  In addition,the forward-looking statements reflect only our current views concerning futureevents, and we assume no obligation to publicly update or revise any forward-lookingstatements made herein or any other forward-looking statements we make, whetheras a result of new information, future events, or otherwise.  Forward-looking statements are subject torisks and uncertainties which could cause actual results, performance or trendsto differ materially from those expressed in the forward-lookingstatements.  We have made everyreasonable effort to ensure that the information and assumptions on which thesestatements and projections are based are current, reasonable, and complete, butthere can be no assurance that management’s expectations, beliefs orprojections as expressed in the forward-looking statements will actually occuror prove to be correct.  Factors thatcould cause actual results to differ materially are discussed under “Business —Factors That May Affect Future Results.”

**Part I**

# **Item 1.****            Business**

## **Operations Overview**

Investools Inc. (referred to as “Investools”, the “Company”,“we”, “us”, or “our”) is a leader in investor education.  Our mission is to educate and empowerindividual investors to make their own financial decisions to achieve theirfinancial goals at any time or place by using the Investools MethodTM live, bycorrespondence or online. The Investools MethodTM is a unique integration of adisciplined investing process, web-based tools, personalized instruction andsupport.  We hope to establish theInvestools MethodTM as the most widely recognized, adopted and endorsed approachto educated investing.  We offer a fullrange of investor education products and services that provide lifelonglearning and support to self-directed investors.   We have more than 278,000 graduates of ourbasic courses and 85,400 subscribers to our websites.  Our investor education products and servicesare offered in a variety of learning formats with courses ranging frombeginning to advanced, to address the needs of students on all investor levels.

## **Corporate Background**

The Company was incorporated in Delaware on May 21,2001, and began operations on December 6, 2001, as a result of a merger betweenZiaSun Technologies, Inc., a Nevada corporation (“ZiaSun”), and Telescan, Inc.,a Delaware corporation (“Telescan”). Former ZiaSun and Telescan stockholders acquired approximately 75percent and 25 percent ownership interests in the Company, respectively.  ZiaSun and Telescan each became wholly ownedsubsidiaries of the Company.

As of December 31, 2006, the Company’s subsidiarieswere:

·                  ZiaSun, which owns 100 percent ofOnline Investors Advantage, Inc. (“OIA”). OIA owns 100 perent of Investools Asia Pacific Pte., Limited (“InvestoolsAsia”) and Investools Hong Kong Ltd. (“Investools Hong Kong”).

·                  Telescan, which owns 100 percent ofEntrepreneurs Online, a Texas corporation.

·                  SES Acquisition Corp., a Californiacorporation operating under the name 360 Group. The Company acquired 360 Group in February 2004.  360 Group was a direct marketing agency thatoffered services such as custom database development and management, strategicplanning, media list planning and buying, creative and production services,response management and analytic services. The Company acquired 360 Group in order to internalize its marketingdepartment.

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·                  Prophet Financial Systems, Inc. (“Prophet”),a California corporation, acquired by the Company in January 2005.  Prophet is a Web-based content and servicesprovider that enables active investors to use technical analysis to trade moreprofitably.  Prophet’s website,Prophet.Net, is the premier Web provider of advanced charting technology.

**Acquisitionof thinkorswim Group, Inc.**

On February 15, 2007, Atomic Acquisition Corp., awholly-owned subsidiary of the Company merged with and into thinkorswim Group, Inc.,a Delaware corporation (“thinkorswim”), and a leading online brokerage companyspecializing in options.  thinkorswimshareholders received approximately 50 percent of the merger consideration incash and approximately 50 percent of the merger consideration in shares of ourcommon stock, representing approximately $170 million in cash and 19.1 millionshares of stock valued at $8.75 per share. Also on February 15, 2007, JPMorgan Chase Bank, N.A. and J.P. MorganSecurities Inc. provided us with a senior secured term loan of $125 million tofund a portion of the cash consideration and, separately, also provided us witha committed senior secured revolving credit facility of $25 million.  Immediately following the transaction,thinkorswim shareholders held 30 percent of the ownership of Investools, andthinkorswim received two seats on our expanded, eight-member board ofdirectors.  Certain thinkorswim employeeswill now be eligible for a $20 million retention bonus pool which will be paidannually over a three-year period.  Inaddition, certain thinkorswim employees and contractors received options topurchase 2.3 million shares of our common stock which vest over four years,beginning the year after the grant date.

## **Business Segments**

Management analyzes our operations by reviewingfinancial information regarding products and services that, up through 2006,were aggregated into a single operating segment, investor education.  Following the acquisition of thinkorswim inFebruary 2007, we will also report a securities broker-dealer segment.

## **Business Strategy**

Our products and services are primarily built aroundan investing method that is designed to teach both experienced and beginninginvestors how to approach the stock selection process and actively manage theirinvestment portfolios.  Course offeringsare generally combined with web-based tools, personalized instructiontechniques and ongoing support and are offered in a variety of learning formats,which solidify the students’ understanding of the investing process and help intheir effort to take control of their financial future.

We seek to offer students a full range of investoreducation 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 onlineworkshop or purchase an in-depth online home study program, all of whichinclude subscription access to the Investools Online 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 and one-to-many online coaching sessions, which are spread out over aperiod of time and include ongoing support through a live 800-number and alive-chat hotline for continuing education assistance. Products are offered undertwo brands, Investools Investor Education and Success Magazine InvestorEducation.

***Learning Formats***

**Depending on the brandunder which the different learning formats are marketed, the content andservices available to students, i.e., length of workshop, types of coachingservices, length of time over which services are performed, and access tocertain Investools Online features may vary.  The different learning formats and courseofferings are as follows:**

**·**                  Preview Event—We offer directly or throughpartners, a free event that introduces students to fundamental investingconcepts and provides a broad overview of the financial markets. Depending onthe brand under which the preview event is marketed, participantsmay receive a gift for attending. Students are offered an opportunity topurchase a more comprehensive, live workshop, and are offered access to acomprehensive online course featuring hours of multimedia content, quizzes,forums, and live, online-presentations.

**·**                  Workshops—We offer one and two-day live,instructor-led investing workshops that cover topics ranging from fundamentalinvesting principles to advanced strategies. The workshops provide hands-onexperience using our proprietary Investools Online website. The fundamentalstock investing workshop includes a six month subscription to the InvestorOnline website as part of the workshop fee.

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**·**                  Home Study/Online Courses—We also offerall of our courses in an online format. The home study programs providehands-on training using our proprietary Investools Online website. The stocksonline course includes a six month subscription to the Investools Onlinewebsite as part of the course fee.  Additional online courses onadvanced topics are also available.

**·**                  Coaching Services—Our coaching serviceoptions offer students individual, on-demand access to coaches via thetelephone, or one-to-many online coaching and support. Offered in connectionwith both foundational and advanced courses, the sessions allow students tolearn at their own pace and apply what they are learning. On-demand andone-to-many coaching alternatives are subscription products offered in one tosixty-month time periods, depending on the related course.  One-to-manycoaching services include weekly, topic-driven live webinar sessions (TradingRooms), advanced strategy-based group discussions (Active Investor Talk), andmarket-based group instruction (Masters Talk).

**·**                  Interactive Workshops—Our interactiveworkshops provide students with an in-depth, personal learning experience and alow student-to-coach ratio. These courses are taught by our most experiencedcoaches and are delivered online or live at our Utah facility. They includestocks, options, and currency training, as well as more advanced activeinvesting courses.

**·**                  Ongoing Support and Tutorials (websubscriptions)—As long as alumni maintain an active subscription to theInvestools Online website, they have access to student and technical supportthrough a live-chat online support option and through an 800-numberhotline.  Alumni can access a series of inexpensive or free topical,recorded online tutorials through our Investools Online website. Theclick-on-demand tutorials are designed to walk graduates through the portion ofthe Investools Online website that relates to the subject being covered.

*Course Offerings*

·                  StocksCourse—This foundational course is designed to teach both experienced andbeginning students how to select stocks according to a step-by-step,disciplined investing process.  The 5 steps are:  (1) searching for aninvestment, (2) industry group analysis, (3) fundamental analysis, (4)technical analysis, and (5) portfolio management.  There are noprerequisites to take this course.

·                  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.  Thecourse also provides students with a number of options-related strategies suchas puts, covered calls and LEAPS that may help their investmentportfolio.  Students must complete the Stocks Course 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 skills and discipline to interprettrends and trading opportunities based on the physical behavior of the marketas seen through technical analysis and charting techniques.  Students mustcomplete the Stocks Course 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 taughtin our Basic Options course, the Advanced Options course introduces new optionsstrategies such as vertical spreads, diagonal spreads, straddles and strangles,index options and butterfly spreads.  Students must complete the StocksCourse and Basic Options prior to taking this 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.  Thecourse focuses on technical analysis and advanced charting techniques to helpstudents identify, analyze and leverage global currency trading opportunities,reduce risk and increase profit potential.  The course provides studentswith the proper know-how for taking advantage of the steady stream of uniqueopportunities created by the constant flow of world events.  There are noprerequisites to take this course.

·                  AdvancedCurrency Trader—This course expands on the concepts and strategies taught inthe Investools Currency TraderTM course. Students will learn more about fundamental analysis in the globalcurrency market and will begin learning how to apply advanced technicalanalysis to their currency trading. The course also covers advanced subjectssuch as hedging and the carry trade. Students must complete the InvestoolsCurrency TraderTM course prior to taking this course.

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*ContinuingEducation Programs*

Designed for the serious student, our continuingeducation programs offer students comprehensive access to a multitude of productsat one price point.  Typically students receive additional online or homestudy courses, coaching access and extended access to the Investools Onlinewebsite.  Content and services available to students (i.e., length ofworkshop, number of coaching sessions and access to certain Investools Onlinefeatures) may vary, depending on the brand under which the programs aremarketed.

**·**                  Associate Investor Program—In addition tothe Stocks Course and initial six months access to the Investools Onlinewebsite, the Associate Investor Program provides students with nine monthsaccess to unlimited, on-demand phone coaching for the Stocks Course and BasicOptions courses, six months access to the weekly stocks trading rooms, theBasic Options online course, and an additional three months of InvestoolsOnline website access.

**·**                  Master Investor Program—In addition to theStocks Course and initial six months access to the Investools Online website,the Master Investor Program provides students with 18 months unlimited accessto on-demand phone coaching, 12 months access to the weekly stocks and optionstrading rooms, the Basic Options Workshop, Basic Options online course, and aweekly one-to-many online investing strategy presentation called Masters Talk.The Master Investor Program also includes the Advanced Technical Analysisonline course, an additional 12 months of Investools Online website access anda one year VIP pass for basic and alumni workshops.

**·**                  Program of High Distinction—In addition tothe Stocks Course and initial six months access to the Investools Onlinewebsite, the Program of High Distinction provides students with 24 monthsunlimited access to on-demand phone coaching, the Basic Options Workshop, BasicOptions online course, the Advanced Options Workshop, Advanced Options onlinecourse, the Advanced Technical Analysis Workshop and the Advanced TechnicalAnalysis online course. It also includes access to the weekly stocks, basicoptions, advanced options and advanced technicals trading rooms for 12 months.The Program of High Distinction also includes a three-day, live interactiveclass hosted in our Salt Lake City student center, an additional 24 months ofaccess to the Investools Online website, and a two-year VIP pass for basic,alumni, and advanced workshops.

**·**                  Active Investing Workshops—Three dynamic,intensive workshops, which were added in early 2005, are offered tostudents.  Each workshop covering stocks, options, and currency trading,respectively, is designed to offer students more sophisticated strategies andtechnology.  Students are taught advanced strategies, hedging techniquesand short term trading principles.  Eachworkshop has a low student-to-coach ratio to provide students with morepersonal coaching and deeper comprehension.  With oversight from anexperienced instructor, students practice money management, evaluating andcalibrating risk tolerance, monitoring total cash flow, and actively managingportfolio growth, all in real time.

*Value Added Tools*

**·**                  Investools Online—Our Investools Onlinewebsite gives students access to the investment tools needed to execute thestrategies taught in our investor education programs.  The website hasproprietary features that are not accessible on other financial websites, includingmore than 50 pre-built stock searches, comparative reports, market indicators,market commentary and portfolio tracking features, advanced charting tools,audio and video commentary broadcasts and account management features.  Aninitial six month subscription to the website is included with the purchase ofa basic level investing workshop or online course.  At the end of theinitial subscription, graduates are offered renewals for a fee, which dependson the length of the renewal period and whether additional products or servicesare purchased.  Currently, we offer one to sixty-month subscriptionrenewals.

**·**                  thinkorswim PaperMoney—Thisapplication became available to Investools’ students after our mergerannouncement with thinkorswim in September 2006.  It replicates the live online tradingplatform available to thinkorswim account holders. PaperMoney provides thestudent with a “paper” $100,000 portfolio they can use to learn how to executetrades online and test strategies. PaperMoney includes additional charting and options analytical tools.All students have access to weekly online tutorials on the PaperMoney platform.

**Sales and Marketing Strategy**

Revenue is derived from: (i) the initial sale of ourproducts and services as a result of marketing efforts across multiplemarketing channels which include, but are not limited to, television, print,direct mail, radio, online banner, paid and organic search and email directmarketing campaigns driving customers to either a free preview of investoreducation

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products offered at locations near the prospect or theopportunity to speak with a telesales representative about the productsoffered; and (ii) the additional sale of products and services to graduates asa result of continued interaction with us in workshops, periodic email anddirect mail communications and through access to coaches and instructors.

We experienced growth in initial product sales in 2006as a result of continued refinements to our initiated and controlled directmarketing efforts for our own “Investools” brand.  We experienced significant growth inadditional product sales and services to graduates as a result of theintroduction of multiple new products and product bundles.

**Competition**

We are aware of several companies that provide somelevel of investor education in similar delivery formats.  While these companies may have greaterresources, we believe that:  (i) thedepth and quality of our curriculum and training, (ii) the range of ourfoundational and continuing education course offerings, from beginner toadvanced, (iii) our branded and co-marketing product distribution partnerships,(iv) the quality of our instructors and coaches, (v) our database of prospectsand students, and (vi) our focus on improved learning formats such as online andon-demand access to expert instructors provide us with a considerablecompetitive advantage compared to other investor education providers.

**Intellectual Property**

We have registered and received approval for a numberof trademarks in the United States and foreign countries that are important toour future success.  Of criticalimportance to us is the Investools trademark. The Investools trademark is a widely recognized, adopted and endorsedapproach to investor education and is associated with quality and reliableservice.  In addition, as a result ofacquiring Prophet Financial Systems, Inc. (“Prophet”) we acquired the Prophettrademark and tradename. Prophet’s website is a widely recognized charting toolthat has won various awards and been recognized as a leader in online financialcharting applications.

We have registered and maintain a multitude of domainnames to ensure continuity of delivery for all of our websites.  Domain names are typically renewed severalmonths prior to their respective expiration dates for a period of two years orlonger to prevent loss of ownership.

We attempt to protect our trade secrets and otherproprietary information with product development partners, employees andconsultants through nondisclosure agreements, contract provisions andcopyright, patent, trademark and trade secret laws.  With respect to technologies that we licenseto third parties for use in specific applications or platforms, we rely onlicensing agreements to ensure additional protection related to the source codeof our products as a trade secret and as an unpublished copyright work.  Management believes that our products,trademarks and other proprietary rights do not infringe on the proprietaryrights of third parties, and management is not aware of any currentinfringement claims against us.

**Regulatory Compliance**

### *General*

Ourproducts and services are not currently subject to the prior approval of anygovernment regulatory body.  However,certain foreign countries require that we register with their respectivesecurities commissions before conducting investment-related workshops; forexample, we are registered with the Australian Securities and InvestmentCommission (“ASIC”).

Asof December 31, 2006, we were not a broker-dealer or otherwise engaged in thebusiness of effecting transactions in securities, nor were we an investmentadvisor or otherwise engaged in providing investment advice or makinginvestment recommendations.  However, ourrecently acquired wholly-owned subsidiary, thinkorswim and its businesses, isextensively regulated by various federal and state agencies.

### *Sales and Marketing*

Ourproducts and services are marketed via a number of media channels, includingtelevision, print, direct mail, radio, online banners, paid and organic searchand email direct marketing campaigns, which are regulated by numerous federaland state laws and regulations, including, but not limited to, anti-fraud laws,consumer protection laws, privacy laws, telemarketing laws, telephonesolicitation laws and spam laws.  Whilewe have not been adversely impacted by any such regulation to-date, managementbelieves that our marketing activities will increasingly be subject to suchregulation, which may:  (i) limit ourability to solicit new customers or offer additional products or services toexisting customers, and (ii) result in noncompliance, which may subject us tofines

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orvarious forms of civil or criminal prosecution. Such regulation could have an adverse effect on our financial conditionand results of operations.  We regularlyreview our marketing and sales materials and practices, make modifications fromtime to time as appropriate, and monitor the status of existing and proposedregulatory guidelines.

Although our operationson the Internet are not currently regulated by any government agency, it ispossible that a number of laws and regulations may be adopted in the futuregoverning the Internet.  In addition,existing laws may be interpreted to apply to the Internet in ways not currentlyapplied.  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.

## *Periodic Reporting*

As a public company, weare required to file periodic reports, as well as other information, with theSEC within established deadlines.  Anydocument we file with the SEC may be viewed or copied at the SEC’s PublicReference Room at 100 F Street, N.E., Washington, D.C. 20549.  Additional information regarding the PublicReference Room can be obtained by calling the SEC at (800) SEC-0330.  Our SEC filings are also available to thepublic through the SEC’s web site located at http://www.sec.gov.

We maintain a corporatewebsite at http://www.investools.com, on which investors may access free ofcharge our annual report on Form 10-K, quarterly reports on Form 10-Q andamendments to those reports as soon as is reasonably practicable afterfurnishing such material to the SEC.  Inaddition, we will voluntarily provide electronic or paper copies of our filingsfree of charge upon request to our Investor Relations department at (801)816-6918.

## **Human Resources**

At December 31, 2006, we had 545 employees.  Of those, 18 percent were employed incustomer acquisition related positions, 59 percent were employed in customerfulfillment and retention related positions, 11 percent were employed intechnology positions, and 12 percent were employed in administrative andmarketing positions.  We also had 11persons under contract, primarily in technology positions.

Our key personnel are covered by employment andconfidentiality agreements.  No personemployed by us, either full-time, part-time or on a contract basis, is coveredby a collective bargaining agreement or represented by a union, and we havenever experienced a work stoppage due to a protest or related activities.  Management considers relations with ourpersonnel to be good.

**Item 1A. Risk Factors That MayAffect Future Results**

### *Our business may suffer if we are not successful in developing,maintaining and defending proprietary aspects of technology used in ourproducts and services.*

Our success and abilityto compete are dependent on our ability to develop and maintain the proprietaryaspects of our technology.  Litigationmay be necessary in the future to enforce our intellectual property rights, toprotect trade secrets, to determine the validity and scope of the proprietaryrights of others or to defend against claims of infringement orinvalidity.  Any such litigation, even ifwe prevailed, could be costly, divert resources and could have a materialadverse effect on our 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 priceincreases, inflation or adverse events related to various industries, or thewillingness of investors to trade could harm discretionary spending and have amaterial adverse effect.*

We believe that the levelof public interest in investing, particularly in the securities and optionmarkets as well as electronic trading has significantly influenced the marketfor these products and services.  Thesecurities markets have experienced substantial volatility in recent periods.  A sharp drop or sustained or gradual declinein securities prices or other developments in the securities markets typicallycould cause individual investors to be less inclined

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to invest in thesecurities markets, which would be likely to result in reduced interest in ourinvestor educational products and services.

### *We depend on continued growth in use of the Internet and onlinecommerce.*

Our ability to expand ourdelivery platforms and penetrate new markets could be stagnated withoutcontinued growth in the use and efficient operation of the Internet.  Web-based markets for information, productsand services are new and rapidly evolving. If Internet usage does not continue to grow or grows slower thananticipated, we may be unable to secure new sponsorship and subscriptionarrangements for our offerings.  To theextent our business relies on web-based delivery platforms, our operations willalso be dependent on adequate network infrastructure, consistent quality of serviceand availability to customers of cost-effective, high-speed Internetaccess.  If our systems cannot meetcustomer demand for access and reliability, these requirements will not besatisfied, and customer satisfaction could degrade substantially, adverselyaffecting our prospects for market penetration and profitability.

### *Future regulations or the interpretation of existing laws pertaining tothe Internet could decrease the demand for our products or increase the cost ofdoing business**.*

Any new law or regulationpertaining to the Internet, or the application or interpretation of existinglaws, could increase our cost of doing business, decrease the demand for ourproducts and services, or otherwise harm our business.  We must comply with a variety of federal andstate laws affecting the content of materials distributed over the Internet, aswell as regulations and other laws restricting the collection, use anddisclosure 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 or misappropriation by othersof our users’ information, which could adversely affect our reputation andfinancial results.*

Some of our servicesrequire the disclosure of sensitive information by the user.  We rely on a number of security systems forour services to protect this information from unauthorized use or access.  We cannot predict whether new technologicaldevelopments could circumvent these security measures.  If the security measures that we use toprotect personal information or credit card information are ineffective, we maybe subject to liability, including claims for invasion of privacy,impersonation, unauthorized purchases with credit card information or othersimilar claims.  In addition, the FederalTrade Commission and several states have investigated the use of personalinformation by certain Internet companies. We could incur significant expenses if new regulations regarding the useof personal information are introduced or if our privacy practices areinvestigated.

### *Laws and regulations can affect our operations and may limit ourability to operate in certain jurisdictions.*

Federal, state andinternational laws and regulations impact our operations and may limit ourability to obtain authorization to operate in some states or countries.  Many federal, state and internationalgovernmental agencies assert authority to regulate providers of investmenteducation programs.  Although we believethat we are currently in compliance with all such regulations, there can be noassurance that the federal, state or international regulatory structure willnot change.  For example, if we wererequired to comply with, or found to be in violation of, a regulatory body’scurrent or future licensing or regulatory requirements, we could be subject tocivil or criminal sanctions, including monetary penalties.  Additionally, we could be required to incursignificant on-going expenses to comply with regulatory requirements or,conceivably, could be barred from providing investment education services inthat jurisdiction.  If any of thesethings occur, it could have a material adverse effect on our business andresults of operations and may cause our stock price to decline.

### *If we are not able to continually enhance our web-based products andservices and adapt them to changes in technology, our future revenue growthcould be adversely affected.*

If our improvement andadaptation of our web-based products and services is delayed, results insystems 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-basedproducts and related technology will entail significant expense and technicalrisk.  We may use new technologiesineffectively or fail to adapt our web site, web-based products and relatedtechnology on a timely and

9

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cost-effective basis.

### *We rely on our strategic partners to provide us with access to leadsand customers.*

We currently accessapproximately 56 percent of our sales transaction volume through co-marketing(Success Magazine and NET Marketing Alliance) relationships.  Our strategic partners may enter intoidentical or similar relationships with our competitors, which could diminishthe 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 products and services could be impaired.  We may not be able to maintain our existingrelationships or enter into new strategic relationships.

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

Natural disasters,external labor disruptions and other adverse events may affect our ability toconduct our business, resulting in loss of revenue.  Severe blizzards or floods may reduce the abilityof 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 andservices, our growth rate and revenue will be reduced**.*

Our growth strategy isdependent on our ability to sell existing training programs, products andservices to new students, to open new markets and to develop and introduce neweducational programs, products and services. If we are unable to expand our markets and products, our growth rate andrevenue will be reduced.  Marketconditions and the level of customer interest may be different for our currentproducts than for new products, and there can be no assurance that we will beable to compete favorably with, and obtain market acceptance for, any such newprograms, products or services.

### *We may desire or need to raise additional capital in the future, whichmay not be available on terms acceptable to us.*

If we need but are unableto obtain additional capital to expand our operations and invest in newproducts and services, our business may be adversely affected.  In thefuture we may require substantial additional capital to finance ongoingoperations or the growth of our business. To the extent that our existing sources of liquidity and cash flow fromoperations are insufficient to fund our activities, we may need to raiseadditional funds.  We cannot be certainthat we will be able to obtain additional financing on favorable terms.  If we fail to raise additional funds, we mayneed to sell debt or additional equity securities or to reduce our growth to alevel that can be supported by our cash flow. Without additional capital, we may not be able to: further develop orenhance our services and products; acquire necessary technologies, products orbusinesses; expand operations in the United States or internationally; hire,train and retain employees; market our services and products; or respond tocompetitive pressures or unanticipated capital requirements.

### *We may experience difficulties integrating recent and futureacquisitions.*

As a result of recentacquisitions and, as part of our general business strategy, we expect toexperience significant growth and expect such growth to continue into thefuture.  This growth is expected to placea significant strain on our management, financial, operating and technicalresources.  Failure to manage this growtheffectively could have a material adverse effect on our financial condition orresults of operations.  There can be noassurance that we will be able to effectively integrate the acquired companies,including our newly acquired subsidiary, thinkorswim, with our ownoperations.  Expansion will placesignificant demands on our marketing, sales, administrative, operational,financial and management information systems, controls and procedures.  Accordingly, our performance andprofitability will depend on the ability of our officers and key employees to(i) manage our business and our subsidiaries as a cohesive enterprise, (ii)manage expansion through the timely implementation and maintenance ofappropriate administrative, operational, financial and management informationsystems, controls and procedures, (iii) add internal capacity, facilities andthird-party sourcing arrangements as and when needed, (iv) maintain servicequality controls, and (v) attract, train, retain, motivate and manageeffectively our employees.  There can beno assurance that we will integrate and manage successfully new systems, controlsand procedures for our business, or that our systems, controls, procedures,facilities and personnel, even if successfully integrated, will be adequate tosupport our projected future operations. Any failure to implement and maintain such systems, controls andprocedures, add internal capacity, facilities and third-party sourcingarrangements or attract, train, retain, motivate and manage effectively ouremployees could have a material adverse effect on our business, financialcondition and

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results of operations.

### *We are dependent on our chief executive officer and chairman of theboard of directors for his depth of industry experience and knowledge.*

We are highly dependenton the services of Lee K. Barba, our Chief Executive Officer and Chairman ofthe Board of Directors.  Mr. Barba hasextensive experience, knowledge and contacts in the financial and investmentindustries.  If Mr. Barba were toterminate his employment with us, we would lose valuable human capital,adversely affecting our business.  Wecurrently do not maintain key man insurance on Mr. Barba or any other member ofour senior management team.  Neither Mr.Barba nor any other member of our senior management team intends to retire oris nearing retirement age.

### *Our exposure to litigation could adversely affect our business and resultsof operations.*

We are from time to timeinvolved in various lawsuits and legal proceedings. We recently settledlawsuits filed against us by the Australian Securities and InvestmentCommission, Ross Jardine and True North Academy L.L.C. as described in Item 3below. Although we currently are not a defendant in any other material legalproceedings, any claim, with or without merit, could result in costlylitigation, subject us to undetermined penalties, or require us to modify orcease sales of our products or services, any of which could have a materialadverse effect on our business and results of operations.

### **Items 1B. Unresolved Staff Comments**

None.

### **Item 2.            Properties**

We recently moved our corporate headquarters to NewYork City and intend to add personnel to that office, although our primarysales, service and operation center is located in Draper, Utah.  We also have a technology center in PaloAlto, California, and lease office space in other cities thoughout the UnitedStates.

The following table shows the amount of square footageof our leased facilities and monthly rent as of December 31, 2006:
| Location       | ** ** | **Square Feet  Rented** | ** ** | **Monthly Rent  as of  December 2006** | ** ** |
|----------------|------------|------------------------------|------------|-------------------------------------------------------|------------|
| Draper, UT     |       | 54,650                       |       | $                                                     | 58,760     |   |
| Houston, TX    |       | 9,495                        |       | 11,891                                                |       |
| Palo Alto, CA  |       | 6,893                        |       | 19,990                                                |       |
| San Rafael, CA |       | 3,213                        |       | 8,242                                                 |       |
| New York, NY   |       | 595                          |       | 11,755                                                |       |
|           |       | 74,846                       |       | $                                                     | 110,638    |   |

 

In March 2007, we signed a lease for 11,500 squarefeet of additional space in Draper, Utah, and will begin paying rent under thisnew lease on June 1, 2007.  At the sametime, we will vacate 2,325 square feet currently being leased in Draper at acost of $2,816 per month.  The San Rafaeloffice has been vacated, and is currently under a sublease arrangement.  Most of the operations situated in theHouston office will shutdown by the end of May 2007, and all employees andoperations there will cease in August 2007.

### **Item 3.****            Legal Proceedings**

From time to time we areinvolved in certain legal actions arising in the ordinary course of business,including administrative inquiries and proceedings with government regulators. Webelieve that such litigation and proceedings will be resolved without amaterial adverse effect to our liquidity, financial position or results ofoperations.

We establish liabilitieswhen a particular contingency is probable and estimable. For the followingcontingencies, we accrued amounts considered probable and estimable.

During 2006, we settledoutstanding legal actions with the Australian Securities and InvestmentCommission; Ross Jardine and True North Academy L.L.C.; Ablaise Ltd.; and thesellers of SES Acquisition Corp. Accordingly, the settlement amounts have been included in specialcharges, net of

11

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insurance proceeds. Asconsideration for one of the settlements, we issued 206,156 shares of commonstock in January 2007.  Additionally, ourinsurance carrier reimbursed us for $1 million of a legal settlement which hasbeen recorded in the accompanying consolidated balance sheet as a receivable,and has been netted against the settlement costs included in special charges.

We have applied forrulings from various states on the taxability of our products to determine ifour sales tax policy is supported by the various state taxingjurisdictions.  During 2006, we receivedrulings from a majority of the states to which we applied.  Based on these rulings, we adjusted amountsowing to various states, which aggregated to $0.8 million of additional accruedsales taxes payable.  These amounts areincluded in selling expenses.

We are not aware ofpending claims or assessments, other than as described above, which may have amaterial adverse impact on our liquidity, financial position or results ofoperations.

### **Item 4.****            Submission of Matters to a Vote of SecurityHolders**

During the fourth quarter of 2006, there were nomatters submitted to a vote of the stockholders.

**Part II**

### **Item 5.****            Market for Registrant’s Common Equity, RelatedStockholder Matters and Issuer Repurchases of Equity Securities**

Our common stock is traded on the Nasdaq GlobalMarket. Effective February 21, 2007, our common stock is traded under the symbolSWIM.  The following table sets forth,for the periods indicated, the high and low sales prices for our common stockbased on actual transaction on the Nasdaq Global Market. The prices do notinclude retail markups, markdowns or commissions.
|                            | ** ** | **Company Common Stock  Closing Sales Prices** | ** ** |
|----------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                 | ** ** | **High**                                                           | ** ** | **Low** | ** ** |
| 2006                       |       |                                                               |       |   |   |
| Quarter ended March 31     |       | $                                                                  | 8.80       |   | $ | 5.30 |   |
| Quarter ended June 30      |       | 9.88                                                               |       | 7.47 |   |
| Quarter ended September 30 |       | 10.71                                                              |       | 6.99 |   |
| Quarter ended December 31  |       | 14.21                                                              |       | 10.56 |   |
|                       |       |                                                               |       |   |   |
| 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 |   |

 

On March 13, 2007, the closing price of our commonstock as reported by the Nasdaq Global Market was $14.07.  As of March 13, 2007, we had 688 stockholdersof record and approximately 5,200 beneficial holders, based on informationprovided by our transfer agent.

**Dividend Policy**

We have never declared a cash dividend on our commonstock.  The board of directors currentlyintends to retain any earnings for use in our business, and therefore, does notanticipate paying any cash dividends on our common stock in the foreseeablefuture.  The declaration of dividends, ifany, in the future would be subject to the discretion of the board ofdirectors, which may consider factors such as our results of operations,financial condition, capital needs and acquisition strategy, among otherthings.  See Item 7 – “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andour consolidated financial statements and the notes thereto.

**Securities Authorized for Issuance Under Equity CompensationPlans**

The following table setsforth information as of December 31, 2006, with respect to our equitycompensation plans

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previously approved bystockholders and equity compensation plans not previously approved bystockholders.
|                                                         | ** ** | **Equity Compensation Plan Infomation**                                                                                               | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **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) |       | 3,475,890 – 4,025,890                                                                                                                           |       | $ | 2.25 |   | 3,581,387 – 4,131,387 |   |
| Equity  compensation plans not approved by stockholders |       | —                                                                                                                                               |       | — |   | — |   |
| Total                                                   |       | 3,475,890 – 4,025,890                                                                                                                           |       | $ | 2.25 |   | 3,581,387 – 4,131,387 |   |

 

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(1) This amount includes an option we granted to ourchief executive officer in 2002.  Thevesting of the options was contingent upon an event occurring in the futurethat up through December 31, 2006 was not considered probable.  In February 2007, the board of directorsapproved the vesting of this option.

**Issuer Purchases of EquitySecurities**

There were no stockrepurchases during the fourth quarter of 2006.

**Item 6.****            SelectedConsolidated Financial Data**

The selected consolidatedfinancial data presented below should be read in conjunction with theconsolidated financial statements of Investools and related footnotes includedelsewhere in this annual report and the discussion under Item 7 – “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”  The selected consolidated financial data hasbeen derived from the consolidated financial statements of Investools. Thehistorical financial and operating information may not be indicative of ourfuture performance.

**Results of Operations**

(in thousands, except for per share data)
| ** **                                             | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                   |       |                                        |       |   |   |   |   |   |   |   |   |
| Revenue                                                |       | $                                           | 170,330    |   | $ | 138,621 |   | $ | 97,169 |   | $ | 69,802 |   | $ | 53,923 |   |
| Cost of revenue                                        |       | 121,270                                     |       | 92,161 |   | 65,659 |   | 41,921 |   | 25,411 |   |
| Selling expense                                        |       | 52,947                                      |       | 37,332 |   | 24,493 |   | 20,669 |   | 19,023 |   |
| General and  administrative expense                    |       | 32,657                                      |       | 24,182 |   | 17,843 |   | 12,388 |   | 14,154 |   |
| Special charges                                        |       | 7,608                                       |       | 1,077 |   | 1,084 |   | 673 |   | — |   |
| Net loss  available to common stockholders             |       | $                                           | (40,732    | ) | $ | (15,742 | ) | $ | (11,727 | ) | $ | (7,301 | ) | $ | (33,669 | ) |
| Net loss per  common share—diluted:               |       |                                        |       |   |   |   |   |   |   |   |   |
| Net loss per share available to common stockholders    |       | $                                           | (0.90      | ) | $ | (0.35 | ) | $ | (0.26 | ) | $ | (0.17 | ) | $ | (0.80 | ) |
| Basic and  diluted weighted average shares outstanding |       | 45,042                                      |       | 44,933 |   | 45,045 |   | 43,692 |   | 41,983 |   |

 

**Balance Sheet Data**

(in thousands)
| ** **                                | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------|------------|------------------------|------------|
| ** **                                | ** ** | **2006**               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                      |       |                   |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                 |       | $                      | 52,923     |   | $ | 11,466 |   | $ | 10,736 |   | $ | 4,458 |   | $ | 5,160 |   |
| Marketable securities                     |       | 22,141                 |       | 16,871 |   | 13,840 |   | 7,808 |   | — |   |
| Working capital deficit                   |       | (64,912                | )          | (47,079 | ) | (18,858 | ) | (9,723 | ) | (5,501 | ) |
| Total assets                              |       | 131,637                |       | 72,699 |   | 49,778 |   | 26,551 |   | 25,305 |   |
| Deferred revenue                          |       | 159,575                |       | 77,516 |   | 40,378 |   | 14,520 |   | 8,028 |   |
| Total stockholders’ (deficit)/equity |       | (63,651                | )          | (23,739 | ) | (7,232 | ) | 3,184 |   | 10,284 |   |
|                                           |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

**BusinessOverview**

Our mission is to educate and empower individualinvestors to make their own financial decisions to achieve their financialgoals at any time or place, by using the Investools MethodTM live, bycorrespondence or online. The Investools MethodTM is a unique integration of adisciplined investing process, web-based tools, personalized instruction andongoing support and is offered in a variety of learning formats, which solidifythe students’ understanding of the investing process with courses ranging frombeginning to advanced, thus addressing the needs of all investor levels. Weoffer a full range of investor education products and services that providelifelong learning and support to self-directed investors.  We have more than 278,000 graduates from ourbasic courses and 85,400 active subscribers to our websites.

Investools Inc. offers market-leading investoreducation and execution products and services for self-directedinvestors.  Investools Education Group offers a full range of investoreducation products and services that provide lifelong learning in a variety ofinteractive delivery formats, including instructor-led synchronous andasynchronous online courses, in-person workshops, one-on-one and one-to-manyonline coaching programs and telephone, live-chat and email support.thinkorswim is a leading online brokerage and technology provider focused onproviding services to self-directed options traders and institutional users.thinkorswim offers customers a broad range of products including equities,exchange traded options, futures, mutual funds, and bonds. thinkorswim providesunique front end trading platforms that allow its customers to trade electronicallyand provides sophisticated trading tools and analytics, including tools forimplementing complex, multi-leg options strategies.  The products andservices offered by Investools Inc. have received numerous accolades from thirdparties including Barron’s ranking thinkorswim as one of its top rated onlinebrokers and best for options traders (2006), and Prophet’s top Barron’s rankingas having the best technical analysis tools (2006).

**Acquisitionof thinkorswim Group, Inc.**

On February 15, 2007, Atomic Acquisition Corp., awholly-owned subsidiary of the Company merged with and into thinkorswim Group,Inc. (“thinkorswim”), a Delaware corporation. thinkorswim shareholders received approximately 50 percent of the mergerconsideration in cash and approximately 50 percent of the merger considerationin shares of our common stock, representing approximately $170 million in cashand 19.1 million shares of stock valued at $8.75 per share.  Also on February 15, 2007, JPMorgan ChaseBank, N.A. and J.P. Morgan Securities Inc. provided us with a senior securedterm loan of $125 million to fund a portion of the cash consideration and,separately, also provided us with a committed senior secured revolving creditfacility of $25 million.  Immediatelyfollowing the transaction, thinkorswim shareholders held 30 percent of theownership of Investools, and thinkorswim received two seats on our expanded,eight-member board of directors.  Certainthinkorswim employees will now be eligible for a $20 million retention bonuspool which will be paid annually over a three-year period.  In addition, certain thinkorswim employeesand contractors received options to purchase 2.3 million shares of our commonstock which vest over four years, beginning one year from the date of grant.

**ConcentrationRisk**

During the years endedDecember 31, 2006, 2005, and 2004, we accessed approximately 56 percent, 69percent, and 90 percent, respectively, of our sales transaction volume throughco-marketing (Success Magazine and NET Marketing Alliance) and, prior to June2005, co-branding (CNBC and BusinessWeek) relationships. We are constantlypursuing new student acquisition channels and believe business from new andexisting channels would eventually replace such lost volumes if they were tooccur. There can be no assurance that we would be successful in establishingnew channels.

**Sales Transaction Volume**
|                                                | ** ** | **For the year ended December 31,** | ** ** | **2006 vs. 2005** | ** ** | **2005 vs. 2004** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **($ in thousands)**                 | ** ** | **2006**                                                     | ** ** | **2005**                    | ** ** | **2004**                    | ** ** | **Change** | ** ** | **%** | ** ** | **Change** | ** ** | **%** | ** ** |
| **Initial  Education**                         | ** ** | ** **                                                   | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Workshops                                      |       | $                                                            | 13,712     |                        | $          | 17,086                      |       | $ | 17,907 |   | $ | (3,374 | ) | (20 | )% | $ | (821 | ) | (5 | )% |
| Coaching  services                             |       | 241                                                          |       | 250                         |       | 5,891                       |       | (9 | ) | (4 | )% | (5,641 | ) | (96 | )% |
| Home study/online  courses                     |       | 21,167                                                       |       | 6,403                       |       | 4,659                       |       | 14,764 |   | 231 | % | 1,744 |   | 37 | % |
| Initial web time                               |       | 2,978                                                        |       | 2,903                       |       | 3,559                       |       | 75 |   | 3 | % | (656 | ) | (18 | )% |
| Initial  education sales transaction volume    |       | 38,098                                                       |       | 26,642                      |       | 32,016                      |       | 11,456 |   | 43 | % | (5,374 | ) | (17 | )% |
| **Continuing  Education**                      | ** ** | ** **                                                   | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Workshops                                      |       | 41,191                                                       |       | 30,560                      |       | 14,896                      |       | 10,631 |   | 35 | % | 15,664 |   | 105 | % |
| Coaching  services                             |       | 88,793                                                       |       | 68,874                      |       | 31,974                      |       | 19,919 |   | 29 | % | 36,900 |   | 115 | % |
| Home study/online  courses                     |       | 46,879                                                       |       | 21,329                      |       | 13,284                      |       | 25,550 |   | 120 | % | 8,045 |   | 61 | % |
| Webtime renewals                               |       | 30,265                                                       |       | 23,038                      |       | 23,900                      |       | 7,227 |   | 31 | % | (862 | ) | (4 | )% |
| Other revenue                                  |       | 7,576                                                        |       | 5,727                       |       | 6,552                       |       | 1,849 |   | 32 | % | (825 | ) | (13 | )% |
| Continuing  education sales transaction volume |       | 214,704                                                      |       | 149,528                     |       | 90,606                      |       | 65,176 |   | 44 | % | 58,922 |   | 65 | % |
|                                           |       |                                                         |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Total sales  transaction volume                |       | 252,802                                                      |       | 176,170                     |       | 122,622                     |       | 76,632 |   | 43 | % | 53,548 |   | 44 | % |
| Change in  deferred revenue                    |       | (82,472                                                      | )          | (37,549                     | )          | (25,453                     | )          | (44,923 | ) | 120 | % | (12,096 | ) | 48 | % |
| Total Revenue                                  |       | $                                                            | 170,330    |                        | $          | 138,621                     |       | $ | 97,169 |   | $ | 31,709 |   | 23 | % | $ | 41,452 |   | 43 | % |

 

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In the table above, salestransaction volume (“STV”), which is a non-GAAP financial measure, representssales transactions generated in each period before the impact of deferral ofcurrent period sales.  We believe thatSTV before deferred revenue is an important measure of business volume. See “Costof Revenue” below for a further discussion of STV.
|                                                | ** ** | **% of Revenue** | ** ** |
|------------------------------------------------|------------|----------------------------|------------|
| ** **                                     | ** ** | **2006**                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Initial  Education**                         | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Workshops                                      |       | 8                          | %          | 12 | % | 18 | % |
| Coaching                                       |       | —                     |       | — |   | 6 | % |
| Home study                                     |       | 12                         | %          | 5 | % | 5 | % |
| Initial web time                               |       | 2                          | %          | 2 | % | 4 | % |
| Initial  education sales transaction volume    |       | 22                         | %          | 19 | % | 33 | % |
| **Continuing  Education**                      | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Workshops                                      |       | 24                         | %          | 22 | % | 15 | % |
| Coaching                                       |       | 52                         | %          | 50 | % | 33 | % |
| Home study                                     |       | 28                         | %          | 15 | % | 14 | % |
| Renewals                                       |       | 18                         | %          | 17 | % | 25 | % |
| Other revenue                                  |       | 4                          | %          | 4 | % | 7 | % |
| Continuing  education sales transaction volume |       | 126                        | %          | 108 | % | 93 | % |
|                                           |       |                       |       |   |   |   |   |
| Total sales  transaction volume                |       | 148                        | %          | 127 | % | 126 | % |
| Change in  deferred revenue                    |       | (48                        | )%         | (27 | )% | (26 | )% |
| Total Revenue                                  |       | 100                        | %          | 100 | % | 100 | % |

 

In the table above, initial education revenues consistof the initial sales to students at the initial workshops and sales to newstudents via our telesales groups. Once the student completes this initialeducation, which consists primarily of the Stocks Course, they are considered agraduate. Continuing education revenues consist of sales of advanced productsand web time renewals sold to graduates.

**2006 Compared to 2005**

**Revenue**

Revenue increased by $31.7 million for the year endedDecember 31, 2006, when compared to the prior year. The majority of theincrease resulted from an increased number of graduates acquired due to highermarketing spending and more effective marketing focus. The increase is alsoattributable to improved sales percentages, co-marketing pricing and salesperformance results from workshops and telesales teams. In addition, during2006, the Company recorded sales related to the Investools Investor Conferenceheld in March 2006.

**Initial Education Sales**

Initial education sales sold at our preview events and by our telesalesgroups increased $11.5 million for the year ended December 31, 2006, whencompared to the prior year.  The increase was primarily due to anincreased number of preview events, improved rates of customer response, andimproved sales efforts resulting in an increased number of graduates of ourinitial education courses.  This resulted in 56 percent more Investoolsgraduates of the initial education courses in 2006, as compared to Investoolsmarketed graduates of such courses in 2005. We also increased our internalsales force since last year and received more sales leads, due to the increasedvolume of events. Both of these factors resulted in increased sales of homestudy and online products sold by our telesales groups.

Furthermore, in 2005, STV derived from initial coursessold at our preview events included workshops, which included course materialsdistributed at the workshop and initial website subscription.  Incontrast, during 2006, sales of initial courses sold at preview events includedworkshops, home study/online courses, and initial website subscriptions. Thischange was due to the change in the delivery of course materials for the StocksCourse from hardcopy manuals to online delivery, therefore revenue from theonline courses are recategorized as home study/online course sales since therevenues for the courses are deferred and amortized over the estimated life ofthe subscription.

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**Continuing Education Sales**

Sales at our continuing education workshops and by our telesales groupsincreased $65.2 million for the year ended December 31, 2006 compared to theprior year, primarily due to an increase in successful upsale efforts atworkshops with regard to students who had already graduated from intitaleducation courses.  In addition, during 2006 we developed additionaladvanced education subscription products which contributed to the increase inSTV compared to the year ended December 31, 2005. Continuing education revenueduring the year ended December 31, 2006 also increased due to a difference inthe sales mix of our Program of High Distinction, Masters Programs, sales ofActive Investing Series, along with broker-related royalties not present during2005.

**Deferred Revenue**

Deferred revenue increased $44.9 million for the yearended December 31, 2006, when compared to the same period in 2005.  The increase was a result of increased salesof continuing education products, which include coaching sessions, advancedworkshops and website subscription renewals. Revenue from the coachingsessions, advanced workshops and website subscription renewals is deferred andrecognized as services to the student are delivered. During 2005, the Companyintroduced the online delivery format for all of its education courses. Salesof online courses are deferred for recognition over the estimated life of thecustomer relationship, and results in higher deferred revenue balances. Theonline courses augment live workshops which are recognized upon attendance. Theintroduction of online courses increases the proportion of current period salesdeferred to future periods, given the length of time over which the onlinecourses are available to students.

**2005 Compared to 2004**

**Revenue**

Revenue increased by $41.5 million for the year endedDecember 31, 2005, when compared to the same period in 2004, as a result of aproportional increase in the sale of the Program of High Distinction due to afull year of sales and Active Investor Series product sales, increased amountsof fulfillment revenue related to coaching sessions and advanced workshops thatwere sold in previous periods.

**Initial Education Sales**

Initial education sales decreased by $5.4 million forthe year ended December 31, 2005, when compared to the same period in2004, as a result of the revised agreement with one of our co-marketingpartners as of August 2004, whereby the partner sells initial workshops attheir preview events for which we record no revenue.  The revised agreement was entered into inorder to incent the co-marketing partner to aggregate more students that wouldbe candidates for continuing education. Additionally, in May 2005, we terminated our agreement with CNBC, Inc (“CNBC”)one of our co-branding partners,  thistermination resulted in no initial workshop sales under the CNBC brand duringthe year ended December 31, 2005. These decreases were partially offset byan increase in workshop revenues resulting from the expansion of our Investools’marketed products, which were launched in January 2005.  Additionally, the introduction of home studyand online products in the fourth quarter of 2005 and the elimination ofcoaching services from the initial sale in 2004 impacted the allocation ofinitial education sales.

**Continuing Education Sales**

Sales at our continuing education workshops and by ourtelesales groups increased $58.9 million for the year ended December 31, 2005when compared to the same period in 2004, primarily due to an increase in thenumber of graduates purchasing continuing education products, especially theProgram of High Distinction, which was first offered in the third quarter of2004 and the introduction of Active Investing Series during 2005. The Programof High Distinction contains five distinctive live and distance coachingproducts and the Active Investing Series consists of four days of live coachingrelated to stocks, options or currency trading.

**Deferred Revenue**

Deferred revenue increased $12.1 million for the yearended December 31, 2005, when compared to the same period in 2004.  The increase was a result of increased salesof continuing education products, which include coaching sessions, advancedworkshops and website subscription renewals. Revenue from the coachingsessions, advanced workshops and website subscription renewals is deferred andrecognized as services to the student are delivered. We introduced the onlineStocks Course in the fourth quarter of 2005, revenues from which are deferredand recognized as services to the student are delivered which results in higherdeferred revenue balances. The increase in STV was a result of the introductionof the Masters Program and the Program of High Distinction in 2004, and theActive Investing Series in 2005, which have course lives of 12 months, 24months, and

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six months, respectively.  Sales of the Masters Program and Program ofHigh Distinction products for the full year during 2005 have caused us to deferrevenue over longer contractual periods when compared to the majority ofproducts that were sold during the year ended December 31, 2004.  During 2004, we sold the Masters Program andProgram of High Distinction for only part of the year.  As we execute our lifetime value of thestudent strategy, more of the sales will be in advanced products or continuingeducation, where revenue is deferred over longer contractual periods.

**Cost of Revenue**

(in thousands)
|                               | ** ** | **For the year ended December 31,** | ** ** | **2006 vs. 2005** | ** ** | **2005 vs. 2004** | ** ** |
|-------------------------------|------------|--------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Cost of Revenue** | ** ** | **2006**                                                     | ** ** | **2005**                    | ** ** | **2004**                    | ** ** | **Change** | ** ** | **%** | ** ** | **Change** | ** ** | **%** | ** ** |
| ** **                    | ** ** | ** **                                                   | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                       |       | $                                                            | 170,330    |                        | $          | 138,621                     |       | $ | 97,169 |   | $ | 31,709 |   | 23 | % | $ | 41,452 |   | 43 | % |
|                          |       |                                                         |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Partner  Commissions          |       | 48,477                                                       |       | 30,688                      |       | 27,886                      |       | 17,789 |   | 58 | % | 2,802 |   | 10 | % |
| Payroll cost                  |       | 39,838                                                       |       | 32,858                      |       | 18,552                      |       | 6,980 |   | 21 | % | 14,306 |   | 77 | % |
| Other                         |       | 32,955                                                       |       | 28,615                      |       | 19,221                      |       | 4,340 |   | 15 | % | 9,394 |   | 49 | % |
| Cost of Revenue               |       | $                                                            | 121,270    |                        | $          | 92,161                      |       | $ | 65,659 |   | $ | 29,109 |   | 32 | % | $ | 26,502 |   | 40 | % |

 
|                      | ** ** | **% of Revenue** | ** ** |
|----------------------|------------|----------------------------|------------|
| ** **           | ** ** | **2006**                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **           | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue              |       | 100                        | %          | 100 | % | 100 | % |
|                 |       |                       |       |   |   |   |   |
| Partner  Commissions |       | 29                         | %          | 22 | % | 29 | % |
| Payroll cost         |       | 23                         | %          | 24 | % | 19 | % |
| Other                |       | 19                         | %          | 21 | % | 20 | % |
| Cost of Revenue      |       | 71                         | %          | 67 | % | 68 | % |

 

We defer a significant portion of our revenuesassociated with advanced products to future periods as services are rendered.We recognize costs as they are incurred. These costs consist of solicitationcosts, which include employee sales commissions, partner commissions, creditcard fees, and materials. Since these costs are incurred at the inception ofthe sales transaction, and not as the revenue is recognized, the analysis inthe table below presents a tool for analyzing these costs because the ratiosare calculated as a percentage of STV generated in each period. Refer to theRevenue section above for a further description of STV. The calculation of costof revenue and each of the cost components as a percent of STV in the tablebelow is a non-GAAP financial measure, which management believes providesuseful information as it compares the cost of generating sales with the salesrecorded in a period, whether those sales were recognized as revenue currentlyor deferred until future periods. Approximately 47 percent of deferred revenueamounts relate to website subscriptions and online courses for which theremaining fulfillment cost represents an allocation of website costs, which aresubstantially fixed in nature at current subscriber levels. Another 39 percentof the deferred revenue amounts relate to online and telephonic coachingservices, of which the remaining fulfillment cost represents labor costs ofapproximately 10 to 15 percent of related coaching service revenue. The balanceof deferred revenue corresponds to additional workshops and workshopcertificates for our advanced product sales, for which the remainingfulfillment cost represents the incremental costs of the workshop attendee.
|                                               | ** ** | **% of STV** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **2006**               | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                          |       |                   |       |   |   |   |   |
| Sales  transaction volume                     |       | 100                    | %          | 100 | % | 100 | % |
|                                          |       |                   |       |   |   |   |   |
| Partner Commissions                           |       | 19                     | %          | 17 | % | 23 | % |
| Payroll costs                                 |       | 16                     | %          | 19 | % | 15 | % |
| Other                                         |       | 13                     | %          | 16 | % | 16 | % |
| Total cost of revenue  as a percentage of STV |       | 48                     | %          | 52 | % | 54 | % |

 

**2006 Compared to 2005**

Cost of revenues as a percentage of STV decreased overthe year ended December 31, 2006 when compared to the same period in 2005.While the dollar amounts of each of the components increased along with thegrowth in the number of workshops and events conducted for the year endedDecember 31, 2006, when compared to 2005, the Company experienced a decrease asa percentage of STV in payroll costs and other cost of revenues.

Partner commissions as a percent of STV increased, andconsist of amounts paid to co-branding and co-marketing

17

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partnerships based on sales achieved through thesechannels. The primary reason for the increase in the amount of partnercommissions as a percentage of STV was due to various modifications toagreements with existing partnerships, the establishment of new partnerships,as well as the change in the mix of STV generated through co-marketingchannels.

Payroll costs include employee commissions based on apercentage of sales achieved from our events or telesales groups, certain fixedwages, and the associated employee benefit costs. The primary reason for thedecrease in payroll costs as a percentage of STV was due to a change in thecommission structure for sales staff and other sales employees, which resultedin a reduction of payroll costs proportionate to the increase in the salestransaction volume for the year ended December 31, 2006.  Additionally, payroll costs declined as aresult of the continued transition to online coaching formats that allow fewercoaches to service more students.

Other costs consist of amounts directly related tosales transaction volume including material costs, credit card fees, travelexpenditures, venue costs and other costs. Reasons for the decrease in othercosts as a percentage of STV were due to a decrease in inventory costsresulting from the transition to online courses that do not have significantmaterial costs and significant decrease in travel and venue costs related tofulfillment of workshops, partially offset by the costs associated with theInvestools Investor Conference held in March 2006.

**2005 Compared to 2004**

Total cost of revenue increased $26.5 million for theyear ended December 31, 2005, when compared to the same period in 2004 as aresult of increased payroll and venue costs from an increased number of initialworkshops delivered under the Investools brand introduced in January 2005, thefulfillment of workshops for advanced courses that were sold in previousperiods and not fulfilled during 2004 and increased fulfillment of coachingsessions, offset by a decrease in initial workshops delivered under the CNBCrelationship and a decrease in partner commissions resulting from an increasein Investools branded revenue.

Partner commissions consist of amounts that are paidto co-branding and co-marketing partnerships on sales achieved through thesechannels.  The primary reason for thedecrease in the amount of partner commissions as a percentage of STV is due toa change in the mix of revenue, resulting from a decrease in revenue sourcedfrom our co-branding and co-marketing partners, and an increase in Investoolsbranded revenue, for which partner commissions are not incurred. Furthermore,as a result 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 costs include employee commissions based on apercentage of sales achieved at each event, wages and the associated employeebenefit costs. The primary reason for the increase in payroll costs as apercentage of STV was due to increased staffing at workshops to manage thehigher volume of students we instructed at those workshops and a change in thecommission structure for workshop staff, which drove more continuing educationsales. Additionally, the payroll costs within our coaching department increaseddue to the growth of the department to fulfill the increased demand for ourcoaching products.

Other costs consist of material costs (includingshipping costs), credit card fees, travel expenditures, venue costs and othercosts directly related to revenues. These costs remained consistent as apercentage of STV during the year ended December 31, 2005, when compared to thesame period in 2004.

**SellingExpenses**
|                       | ** ** | **Years Ended December 31,**           | ** ** | **2006 vs. 2005** | ** ** | **2005 vs. 2004** | ** ** |
|-----------------------|------------|-------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **            | ** ** | **2006**                                              | ** ** | **2005**                    | ** ** | **2004**                    | ** ** | **Change** | ** ** | **%** | ** ** | **Change** | ** ** | **%** | ** ** |
| ** **            | ** ** | **(in thousands, except percentages)** | ** ** |
| Marketing             |       | $                                                     | 38,061     |                        | $          | 26,510                      |       | $ | 15,814 |   | $ | 11,551 |   | 44 | % | $ | 10,696 |   | 68 | % |
| Other                 |       | 14,886                                                |       | 10,822                      |       | 8,679                       |       | 4,064 |   | 38 | % | 2,143 |   | 25 | % |
| Total selling expense |       | $                                                     | 52,947     |                        | $          | 37,332                      |       | $ | 24,493 |   | $ | 15,615 |   | 42 | % | $ | 12,839 |   | 52 | % |

 

**SellingExpenses as a Percentage of Revenue**
| Marketing             |   | 22 | % | 19 | % | 16 | % |
|-----------------------|--------|----|---|----|---|----|---|
| Other                 |   | 9  | % | 8  | % | 9  | % |
| Total selling expense |   | 31 | % | 27 | % | 25 | % |

 

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**2006 Compared to 2005**

Total selling expenses for the year ended December 31,2006 increased 42 percent compared to the same period in 2005, mostlyattributable to the increased spending related to the Company’s ongoingemphasis on Investools marketed events advertised online and throughdirect-response television (DRTV) presentations.  The Company increased the Investools marketedgraduates by 56 percent for the year ended December 31, 2006, based on thisincreased marketing spending. These marketing channels proved effective, and asa result we reduced spending on direct mail and traditional radio, newspaper,and TV ads by approximately two-thirds. Other selling expenses also increaseddue to a higher number of preview events held during 2006, which resulted in anincrease in preview registrations. Expenses for 2006 also increased as a result of the Investor Conferenceheld in Las Vegas, an event not held during 2005.  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.

**2005 Compared to 2004**

Total selling expense for the year ended December 31,2005 increased 52 percent compared to the same period in 2004, which isconsistent with the increase in the Investools marketed students, whichincreased 73 percent compared to the same period in 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. Other selling expense increasedas a result 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.

**Generaland Administrative Expense**
|                       | ** ** | **Years Ended December 31,**           | ** ** | **2006 vs. 2005** | ** ** | **2005 vs. 2004** | ** ** |
|-----------------------|------------|-------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **            | ** ** | **2006**                                              | ** ** | **2005**                    | ** ** | **2004**                    | ** ** | **Change** | ** ** | **%** | ** ** | **Change** | ** ** | **%** | ** ** |
| ** **            | ** ** | **(in thousands, except percentages)** | ** ** |
|                  |       |                                                  |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Payroll               |       | $                                                     | 15,318     |                        | $          | 12,723                      |       | $ | 9,748 |   | $ | 2,595 |   | 20 | % | $ | 2,975 |   | 31 | % |
| Other                 |       | 17,339                                                |       | 11,459                      |       | 8,095                       |       | 5,880 |   | 51 | % | 3,364 |   | 42 | % |
| Total G&A expense |       | $                                                     | 32,657     |                        | $          | 24,182                      |       | $ | 17,843 |   | $ | 8,475 |   | 35 | % | $ | 6,339 |   | 36 | % |

 

**Generaland Administrative Expense as a Percentage of Revenue**
| Payroll               |   | 9  | % | 9  | % | 10 | % |
|-----------------------|--------|----|---|----|---|----|---|
| Other                 |   | 10 | % | 8  | % | 8  | % |
| Total G&A expense |   | 19 | % | 17 | % | 18 | % |

 

**2006 Compared to 2005**

General and administrative expenses increased 35percent during the year ended December 31, 2006 as compared to the year endedDecember 31, 2005. Payroll expense included in general and administrativeexpenses remained relatively flat as a percentage of revenue compared to 2005,although increased in dollar amount due mostly to increased staffing in theareas of technology and administration. This increase relates to the systemimplementation and toolbox development efforts that were underway during theyear ended December 31, 2006. In addition, the Company also experienced anincrease in professional fees related to our system implementation and legalfees related to litigation and compliance efforts, and an increase in compensationfor stock options issued.

**2005 Compared to 2004**

For the year ended December 31, 2005, general andadministrative expenses increased by 36 percent compared to the same period in2004. The increase was primarily attributed to three distinct items. First, theacquisition of Prophet along with a substantial increase in number ofassociates employed by us led to increases in payroll related costs. Secondly,audit related costs associated with the restatement of our financial statementsfor fiscal years 2003 and 2002, the completion of the 2004 audit of internalcontrols over financial reporting, our continued use of consultants to maintaincompliance with Section 404 of the Sarbanes Oxley Act of 2002, and increasedlegal fees related to continued litigation and compliance issues caused ourprofessional fees to significantly increase. Finally, the move of our headquarters to our new Draper, Utah locationand the acquisition of Prophet have led to increases in depreciation, rent,telecommunication costs, and other general and administrative expenses.

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**Special Charges**
|                                                                               | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                    | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Severance costs                                                               |       | $                                           | 746        |   | $ | 77 |   | $ | 597 |   |
| Litigation  settlement charges, net of insurance reimbursements of $1 million |       | 5,448                                       |       | — |   | — |   |
| Impairment of  internal use software                                          |       | 1,414                                       |       | 1,000 |   | 487 |   |
| Total                                                                         |       | $                                           | 7,608      |   | $ | 1,077 |   | $ | 1,084 |   |

 

We recorded severance costs associated with theinvoluntary termination of 18, 12, and 19 employees for the years endedDecember 31, 2006, 2005 and 2004, respectively.  The costs were not strictly proportionate tothe number of employees, because there were different severance packagesinvolved in the various termination situations.

During 2006, we concluded several litigation issues,more fully described in Item 3.  Inconnection with these matters, we incurred net costs of $5.4 million during theyear ended December 31, 2006.

We completed a review of the existing user interfacefeatures component of the ongoing Investor Toolbox development project duringthe quarter ended June 30, 2006.  As aresult of feedback from our instructors and coaches, we determined to abandonthe component and redevelop it. Accordingly, we wrote off the capitalized costs related to the existinguser interface component.  These coststotaled $1.4 million.  We had earlieralso capitalized $1.0 million and $0.5 million related to certain projects toenhance our internal use software during the years ended December 31, 2005 and2004, respectively.  Subsequently, weabandoned these projects and the $1.0 million and $0.5 million, respectively,was written-off.

**Interest Income**

Interest income for theyear ended December 31, 2006 increased by 317 percent, due to higherbalances of cash, cash equivalents, and marketable securities maintained during2006 as compared to amounts maintained during 2005.

**Liquidity**

### *Cash Flows*

At December 31, 2006, ourprincipal sources of liquidity consisted of $75.1 million of cash and cashequivalents and marketable securities, as compared to $28.3 million of cash andcash equivalents and marketable securities at December 31, 2005. Subsequent toDecember 31, 2006, we used $45.0 million as part of the purchaseprice of the thinkorswim merger.

Net cash provided byoperating activities was $56.2 million for the year ended December 31, 2006,compared to $24.9 million for the year ended December 31, 2005. Aside from thedifference in net loss for the two periods, the primary reasons for theincrease in operating cash flows was an increase of $45.4 million in the changein deferred revenue. Deferred revenue increased proportionately with the continuedgrowth in sales of our continuing education and online courses discussed above.Also contributing to the increase in operating cash flow was a $10.8 millionincrease in cash flows related to increased levels of accounts payable andother liabilities, offset by a $3.6 million decrease in operating cash flowsrelated to increased prepaid expenses and decreased tax liabilities.

At December 31, 2006, networking capital increased by $34.9 million to $56.0 million, compared to $21.1million at December 31, 2005, after excluding the change in the current portionof deferred revenue which is substantially a non-cash liability. The primaryreason for the increase in net working capital was a $46.7 million increase incash and marketable securities resulting mainly from an increase in STV during2006. Offsetting the cash and securities increases was a $16.5 million increasein accounts payable and accrued expenses, which was also associated with thegrowth in STV, along with the costs of the legal settlements accrued atyear-end.

We regularly invest ourexcess cash balances in government agency securities that earned approximatelya 4 percent average rate of interest during the year.  At December 31, 2006, we had invested insecurities with a fair value of $22.1 million, compared to $16.9 million atDecember 31, 2005. During the year ended December 31, 2006, investments maturedwhich provided $18.2 million in proceeds, as compared to $7.7 million inproceeds provided from the maturity of investments during 2005. During the yearended December 31, 2006, we purchased an additional $23.4 million insecurities, compared to $10.8 million in additional securities purchased during2005. The funds used in 2006 to acquire the additional securities came fromcash provided from operations as a result of increased STV.  Although the Company’s marketable securitiesat December 31, 2006 were due to mature through the second quarter of 2009, weconverted most of them into cash in connection with the February 15, 2007 closeof the merger with thinkorswim.

In June 2004, the boardof directors authorized a stock repurchase program under which we canrepurchase up to 3.5

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million shares of ourcommon stock over a two-year period. In June 2006, the board of directorsextended the program for an additional two years.  In May 2006, we repurchased 160,000 sharesfor $1.4 million under the terms of the program.  There were no stock repurchases during thebalance of 2006, and during the third quarter of 2005, we repurchased 343,400shares for a cost of $1.4 million.  As ofDecember 31, 2006, a total of 1.6 million shares had been repurchased for atotal cumulative cost of $5.0 million.

During 2006, we added$0.2 million in equipment financed with capital leases. We expect to continueto use our liquid assets to invest in our infrastructure and fund ouroperations.

**Credit Agreement with JPMorgan**

In connection with the merger with thinkorswim (seeNote 1), on February 15, 2007 the Company entered into a Credit Agreement withJPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent, and with otherlenders from time to time parties thereto.

The Credit Agreement provides for $125 million insenior secured term loan facilities and a $25 million senior secured revolvingloan facility. The senior secured term loan facilities are comprised of afive-year $50 million senior secured term loan A facility, and afive-and-a-half year $75 million senior secured term loan B facility. Therevolving loan facility has a five-year term. The Credit Agreement includes anexpansion feature with respect to the term loans pursuant to which the Companymay request an increase in the permitted aggregate term loan borrowings of upto $25 million. The borrowings under the new senior credit facilities are guaranteedby substantially all of the material wholly-owned domestic subsidiaries of theCompany (other than thinkorswim, Inc. and certain immaterial subsidiaries).

Loans under the term loan A facility bear interest, atthe borrower’s option, initially, at (1) a rate equal to the London interbankoffered rate (with adjustments for statutory reserve requirements), or LIBOR,plus an applicable margin or (2) a rate equal to the higher of (a) the primerate of JPMorgan and (b) the federal funds effective rate plus 0.50 percent(the “ABR”), plus an applicable margin. After the delivery by the borrower tothe administrative agent of the borrower’s financial statements for the secondfull fiscal quarter completed after the closing date, the applicable marginsfor borrowings under the term loan A facility and the revolving credit facilitymay be reduced subject to a leverage-based pricing grid. Loans under the term Bfacility bear interest at fixed rates of (1) ABR plus 2.25 percent per annum inthe case of ABR loans, or (2) LIBOR plus 3.25 percent per annum in the case ofLIBOR loans.

Interest payments on both the term loan A and Bfacilities are due beginning March 15, 2007, and thereafter at the end ofevery calendar quarter. In addition to interest, principal payments of$2.5 million are due on the term loan A facility at the end of everycalendar quarter, beginning June 30, 2007 through February 2012. Inaddition to quarterly interest payments, principal payments of$7.5 million are due annually on the term loan B facility, beginningat the end of March 2008 through March 2012. In August 2012, a$37.5 million balloon payment on the term loan B facility is due.

The Credit Agreement contains customaryrepresentations and warranties and customary affirmative and negative covenantsapplicable to the Company and its subsidiaries, including, among other things,restrictions on indebtedness, liens, fundamental changes, investments andacquisitions, sales of assets, sale leasebacks, mergers and consolidations,dividends and other distributions, redemptions, hedging agreements,transactions with affiliates, and maximum fixed charge and total leverageratios. The Credit Agreement also includes customary events of default,including the occurrence of a change in control.

If an event of default under the Credit Agreementshall occur and be continuing, the commitments thereunder may be terminated andthe principal amount outstanding thereunder, together with all accrued unpaidinterest and other amounts owed thereunder, may be declared immediately due andpayable.

**Summary**

We expect that ourcurrent cash, cash equivalents and marketable securities balances, creditamounts available through JPMorgan, along with our cash flows from operations,will be sufficient to meet our working capital and other capital requirementsfor the foreseeable future.  Weanticipate allocating our cash resources among three primary areas which includeinternal growth strategies, additional acquisition opportunities, and thecontinuing buyback of our common stock.

*Contractual Obligations andCommercial Commitments*

We have various financialobligations and commitments in the ordinary course of conducting business.  We have contractual obligations requiringfuture cash payments under existing contractual arrangements, such asmanagement and consulting agreements.

21

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The following tabledetails our known future cash payments (on an undiscounted basis) related tovarious contractual obligations as of December 31, 2006 (in thousands).
| Payments due by period      | ** ** | **Capital  leases(1)** | ** ** | **Operating  leases(2)** | ** ** | **Data &  communication  purchase  agreements(3)** | ** ** | **Management  employment  agreements(4)** | ** ** | **Total  contractual  obligations** | ** ** |
|--------------------------------------------|------------|------------------------|------------|--------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------|------------|
| 2007                                       |       | $                      | 228        |                     | $          | 1,230                                                       |       | $                                         | 704        |                                | $          | 271 |   | $ | 2,433 |   |
|                                       |       |                   |       |                     |       |                                                        |       |                                      |       |                                |       |
| 1 – 3 Years                           |       | 457                    |       | 1,530                    |       | 388                                                         |       | 17                                        |       | 2,392                               |       |
| Thereafter                                 |       | 95                     |       | 393                      |       | —                                                      |       | —                                    |       | 488                                 |       |
| Total Payments                             |       | 780                    |       | $                        | 3,153      |                                                        | $          | 1,092                                     |       | $                                   | 288        |   | $ | 5,313 |   |
|                                       |       |                   |       |                     |       |                                                        |       |                                      |       |                                |       |
| Less: Amount  representing interest (8.0%) |       | 100                    |       |                     |       |                                                        |       |                                      |       |                                |       |
|                                       |       |                   |       |                     |       |                                                        |       |                                      |       |                                |       |
| Present value of lease payments            |       | 680                    |       |                     |       |                                                        |       |                                      |       |                                |       |
|                                       |       |                   |       |                     |       |                                                        |       |                                      |       |                                |       |
| Less: Current  portion                     |       | 180                    |       |                     |       |                                                        |       |                                      |       |                                |       |
|                                       |       |                   |       |                     |       |                                                        |       |                                      |       |                                |       |
| Long-term  portion                         |       | $                      | 500        |                     |       |                                                        |       |                                      |       |                                |       |   |

 

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(1) Our capitalleases include telecommunications equipment. The agreements terminate in 2010.

(2) Our operatingleases include office space and operating facilities.  The agreements have termination dates from2007 until 2010. Not included in the table above is a new lease we entered intoin March 2007 for additional space at our Draper office.

(3) We have supplycontracts with various vendors of financial data and communications servicesproviding for minimum monthly commitments. These contracts have terminationdates from 2007 to 2009.

(4) We have enteredinto agreements with certain senior executives that require us to make cashpayments over contractual periods.  Theamounts in the table above relate to obligations owing at December 31, 2006.  During February 2007, we renewed theemployment contracts of three senior executives over two and three-year terms.

(5) The table does not include amounts ofprincipal and interest due under the Credit Agreement with JPMorgan enteredinto on February 15, 2007, described above.

**Critical Accounting Policies**

Management’s Discussion andAnalysis of Financial Condition and Results of Operations is based upon the ConsolidatedFinancial Statements, which have been prepared in accordance with generallyaccepted accounting principles in the United States. The preparation of thesefinancial statements requires us to make estimates and assumptions that affectthe reported amounts of assets, liabilities, revenue and expenses, and relateddisclosures of contingent assets and liabilities.

We base our estimates onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances, the results of which form the basisfor making judgments about the carrying values of assets and liabilities thatare not readily apparent from other sources. Actual results may differfrom these estimates under different assumptions or conditions.

An accounting policy is deemed tobe critical if it requires an accounting estimate to be made based onassumptions about matters that are highly uncertain at the time the estimate ismade, and if different estimates that reasonably could have been used, orchanges in the accounting estimates that are reasonably likely to occurperiodically, could materially impact the financial statements. We believe thefollowing critical accounting policies reflect our more significant estimatesand assumptions used in the preparation of the Consolidated FinancialStatements.

*Income Taxes*

The provision for income taxes is calculatedusing the asset and liability method. Deferred income taxes reflect the net taxeffect of temporary differences between the carrying amounts of assets andliabilities for financial reporting purposes and the amounts used for incometax purposes. We provide valuation allowances against the deferred tax assetsif, based on available evidence, it is more likely than not that some portionor all of the deferred tax assets will not be realized. Based on all availableinformation, we do not believe it is more likely than not that our deferred taxassets will be utilized. In determining the adequacy of the valuation allowancewe assess our profitability by taking into account the present and anticipatedamounts of domestic and international earnings, as well as the anticipatedtaxable income as a result of the reversal of future taxable temporarydifferences. For financial reporting purposes, we generally provide taxes atthe rate applicable for the appropriate tax jurisdiction.

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*Valuation of Long-Lived Assets,Including Goodwill*

We review annually, or more oftenif events or circumstances indicate a potential impairment exists, goodwill andindefinite lived intangibles for impairment in accordance with SFASNo. 142, *Goodwill and Other Intangible Assets.* We completed our annual impairment reviewduring the fourth quarter of 2006. We did not identify any impairment to ourgoodwill or indefinite lived intangibles as a result of this review.

We review long-lived assets,including certain amortizable identifiable intangibles, for impairment wheneverevents or changes in circumstances indicate that we will not be able to recoverthe asset’s carrying amount in accordance with SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets.*

For long-lived assets held andused, including acquired intangibles, we initiate our review whenever events orchanges in circumstances indicate that the carrying amount of a long-livedasset may not be recoverable. Recoverability of an asset is measured bycomparing its carrying amount to the expected undiscounted cash flows expectedto result from the use and eventual disposition of that asset, excluding futureinterest costs that would be recognized as an expense when incurred. Any impairmentto be recognized is measured by the amount by which the carrying amount of theasset exceeds its fair market value. Significant management judgment isrequired in:

·              identifying a triggering event that arisesfrom a change in circumstances;

·              forecasting future operating results; and

·              estimating the proceeds from the dispositionof long-lived or intangible assets.

*Revenue Recognition*

We recognize revenue inaccordance with Staff Accounting Bulletin (“SAB”) No. 104, *Revenue Recognition*, and EITF No. 00-21, *Accounting for Revenue Arrangements with Multiple Deliverables*.Revenue is not recognized until it is realized or realizable and earned. Thecriteria to meet this guideline are: (i) persuasive evidence of anarrangement exists, (ii) delivery has occurred or services have beenrendered, (iii) the price to the buyer is fixed or determinable, and(iv) collectibility is reasonably assured.

We sell our productsseparately and in various bundles that contain multiple deliverables thatinclude on-demand coaching services, website subscriptions, educationalworkshops, online courses, along with other products and services. Inaccordance with EITF 00-21, sales arrangements with multiple deliverables aredivided into separate units of accounting if the deliverables in thearrangement meet the following criteria: (i) the product has value to thecustomer on a standalone basis; (ii) there is objective and reliableevidence of the fair value of undelivered items; and (iii) delivery orperformances of any undelivered item is probable and substantially in ourcontrol. The fair value of each separate element is generally determined byprices charged when sold separately. In certain arrangements, we offer theseproducts bundled together at a discount. The discount is allocated pro rata toeach element based on the relative fair value of each element when fair valuesupport exists for each element in the arrangement. If fair value of allundelivered elements in an arrangement exists, but fair value does not existfor a delivered element, then revenue is recognized using the residual method.Under the residual method, the fair value of undelivered elements is deferredand the remaining portion of the arrangement fee (after allocation of 100percent of any discount to the delivered item) is recognized as revenue. Weprovide some limited rights of return in connection with its arrangements. Weestimate our returns based on historical experience and maintain an allowancefor estimated returns, which has been reflected as an accrued liability. Eachtransaction is separated into its specific elements 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 certificate expires                                   |
| Home study                         |       | Recognized upon  delivery of home study materials to customer                                                 |
| Online course                      |       | Deferred and  recognized over the estimated subscription period                                               |
| Coaching services                  |       | Deferred and  recognized as services are delivered, or on a straight-line basis over the  subscription period |
| Website  subscription and renewals |       | Deferred and  recognized on a straight-line basis over the subscription period                                |
| Data licenses                      |       | Recognized  monthly based on data usage                                                                       |

 

During the fourth quarterof 2005 and throughout 2006, we introduced certain online courses. The termsand conditions of those online courses provide customers with access to and theability to take these courses on an unlimited basis as long as they have an activewebsite subscription. As we currently do not have sufficient historical usagedata related to how these online courses get utilized, revenue is beingrecognized over the estimated expected customer life. However, as historicalusage patterns become evident, we will recognize revenue consistent with theactual usage patterns.

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*DeferredRevenue*

Deferred revenue arisesfrom subscriptions to the websites, workshops, online courses and coachingservices because the payments are received before the service has beenrendered. Deferred revenue is recognized into revenue over the period that theservices are performed or the time that the contract period expires, as shownin the above table.

*Accountingfor Stock-Based Compensation*

Beginning in 2003, weadopted the fair value expense recognition method available under SFASNo. 123, *Accounting for Stock-Based Compensation*(SFAS123), in accounting for options granted after 2002. Effective January 1,2006, the Company adopted SFAS No. 123(R), *Share-BasedPayment* utilizing the modified prospective approach.

Under the modifiedprospective approach, SFAS 123(R) applies to new awards and to unvested awardsthat were outstanding on January 1, 2006 that are subsequently exercised,modified, repurchased, or cancelled. In addition, compensation cost recognizedin the first quarter of 2006 includes compensation cost for all options grantedprior to, but not yet vested as of January 1, 2006, based on thegrant-date fair value estimated in accordance with the original provisions ofSFAS 123, and compensation cost for all options granted subsequent toJanuary 1, 2006, based on the grant-date fair value estimated inaccordance with the provisions of SFAS 123(R). In accordance with the modifiedprospective approach, prior periods were not restated to reflect the impact ofadopting the new standard.

In calculating the fairvalues and compensation cost associated with share-based payments, we take intoaccount multiple factors, which are highly subjective, and wherein changes canhave a significant impact on our operations. These areas include our estimatedstock price volatility, as well as the expected lives of the options.

**Recently Issued AccountingStandards**

InJune 2006, the FASB issued FASB Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109*.  FIN 48 clarifies the accounting foruncertainty in income taxes recognized under SFAS No. 109, *Accountingfor Income Taxes*. FIN 48 prescribes a recognition threshold andmeasurement attribute for financial statement recognition and measurement of atax position taken or expected to be taken in a tax return and also providesguidance on various related matters such as derecognition, interest andpenalties, and disclosure. FIN 48 is effective with the Company’s fiscal yearbeginning January 1, 2007. We expect that the financial impact, if any, ofapplying the provisions of FIN 48 to all tax positions will not be materialupon the initial adoption of FIN 48.

In June 2006, the EITF reached a consensus on EITFIssue No. 06-03, *How Taxes Collected fromCustomers and Remitted to Governmental Authorities Should Be Presented in theIncome Statement (That Is, Gross versus Net Presentation)* (“EITF06-03”). EITF 06-03 provides that the presentation of taxes assessed by agovernmental authority that is directly imposed on a revenue-producingtransaction between a seller and a customer on either a gross basis (includedin revenues and costs) or on a net basis (excluded from revenues) is anaccounting policy decision that should be disclosed. The provisions of EITF06-03 become effective as of January 1, 2007. The adoption of EITF 06-03 willhave no impact on our consolidated financial statements.  We currently account for sales taxes collectedand remitted under the net basis, therefore we do not anticipate that theadoption of EITF 06-03 will have a material impact on our consolidatedfinancial statements.

In September 2006, the SEC released SAB No. 108, *Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements*,(“SAB 108”), which provides the SEC staff’s views regarding the process ofquantifying financial statement misstatements, such as assessing both thecarryover and reversing effects of prior year misstatements on the current yearfinancial statements. SAB 108 is effective as of the end of the 2006 year,allowing a one-time transitional cumulative effect adjustment to retainedearnings as of January 1, 2006 for errors that were not previously deemedmaterial, but are material under the guidance in SAB 108. The adoption of SAB108 had no impact on our consolidated financial statements.

Also in September 2006, the FASB issued SFAS No. 157, *Fair**ValueMeasurements* (“SFAS 157”). SFAS 157 defines fair value, establishesa framework for measuring fair value, and requires enhanced disclosures aboutfair value measurements. SFAS 157 is effective for fiscal years beginning afterNovember 15, 2007.  We are currently evaluating the impact of SFAS 157 onits consolidated financial statements.

InFebruary 2007, FASB Statement No. 159, *TheFair Value Option for Financial Assets and Financial Liabilities* was released. SFAS 159 providescompanies with an option to report selected financial assets and liabilities atfair value and establishes presentation and disclosure requirements designed tofacilitate comparisons between companies that choose different measurementattributes for similar types of assets and liabilities. FAS 159 will be effectivefor us beginning January 1, 2008. We are currently evaluating the potentialeffect of SFAS 159 on our financial statements.

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**Item 7A.****         Quantitativeand Qualitative Disclosures About Market Risk**

We are exposed to market risk, which is the potentialloss arising from adverse changes in market prices and rates.  During 2006, we invested excess cash inmarketable securities that are subject to interest rate risk, which is notconsidered to be material to us.  Basedon our net loss of $40.7 million for the year ended December 31, 2006, a 1precent change in average interest rates on our marketable securities wouldhave increased or decreased our net loss by $0.2 million. In the past, we havenot entered into derivative financial instruments for trading or speculativepurposes.  As required under the terms ofour February 2007 Credit Agreement with JPMorgan, we entered into an interestrate swap which takes effect March 31, 2007. The purpose of the swap is to hedge against cash flows resulting fromvariable interest rates applied to up to 50 percent of the amount owing underthe agreement.

**Item 8.****            FinancialStatements and Supplementary Data**

The financial statements are filed pursuant to Item15(a)1.

**Item 9.****            Changesin and Disagreements with Accountants on Accounting and Financial Disclosure**

None.

**Item 9A.****         Controlsand Procedures**

**(a)   DisclosureControls and Procedures**

We maintain disclosure controls and procedures, assuch term is defined in Rules 13a-15(e) and 15d-15(e) of the SecuritiesExchange Act of 1934 as amended (the “Exchange Act”), that are designed toensure that information required to be disclosed in the reports filed orsubmitted under the Exchange Act, is recorded, processed, summarized, andreported within the time periods specified by the Commission’s rules andforms.  Disclosure controls and procedures are designed to ensure thatinformation required to be disclosed by us in our Exchange Act reports isaccumulated and communicated to our management including our principalexecutive and financial officers, as appropriate, to allow timely decisionsregarding required disclosures.

Under the supervision and with the participation ofour management, including our chief executive officer and chief financialofficer, we conducted an evaluation of our disclosure controls and procedures,as of December 31, 2006.  Based on thisevaluation, our chief executive officer and our chief financial officerconcluded that our disclosure controls and procedures were not effective as ofthe end of the period covered by this Annual Report on Form 10-K due to thematerial weakness described below (Item 9A.(b)).

**(b)   Management’sAnnual Report on Internal Control Over Financial Reporting**

Management is responsible for establishing andmaintaining adequate internal control over financial reporting as defined inExchange Act Rule 13a-15(f).  Managementconducted an evaluation of the effectiveness of the internal control overfinancial reporting as of December 31, 2006, using the criteria established in *Internal Control – Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO).  Because of its inherent limitations, internalcontrol over financial reporting may not prevent 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.

A material weakness is a control deficiency, orcombination of control deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. As a result of management’s assessment, management identified thefollowing material weakness in internal control over financial reporting as ofDecember 31, 2006:

*Revenue recognition systems and processes.* Informationsystems associated with accounting for revenue were inadequate to appropriatelyidentify specific customer transactions and facilitate the recognition ofrevenue in accordance with Generally Accepted Accounting Principles.Accordingly, data from the information systems related to revenue had to beadjusted using spreadsheet-based analyses. The internal controls surroundingthese manual processes did not operate effectively. Specifically, the companydid not have effective review and monitoring controls in place to identifyerrors in the manual processes. As a result, material misstatements wereidentified in the company’s revenue for each quarter during the year endedDecember 31, 2006 and accordingly the Company has restated its unauditedfinancial information for the three months ended March 31, 2006, the threeand six months ended June 30, 2006, and the three and nine months endedSeptember 30, 2006 within this Annual Report on Form 10-K.Additionally, material misstatements were identified in the Company’s revenuefor the quarter and year ended December 31, 2006, which were correctedprior to the issuance of the consolidated financial statements.

Because of the material weakness described above,management concluded that our internal control over financial

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reporting was not effective as of December 31, 2006.

The Company’s independent registered public accountingfirm, KPMG LLP, has issued an audit report on management’s assessment of ourinternal control over financial reporting. Their report is included in Item 9A(d).

**(c)   Changes in Internal Control Over FinancialReporting**

There has been no change in our internal control overfinancial reporting (as defined in Rules 13a-13(f) and 15d-15(f) of theExchange Act) that occurred during our last fiscal quarter (our fourth fiscalquarter in the case of an annual report) that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

*Management’s Plan for Remediation*

While we have not remediated the material weaknessrelating to revenue recognition systems, during the year ended December 31,2006, the Company is in the process of taking corrective action to remediatethe material weaknesses through the implementation of an integrated SAPenterprise resource planning and customer relationship management technologysolution, which includes order entry, revenue recognition and all relatedfinancial modules. In March 2007, the Company went “live” with the ERP moduleswhich included the entire order to cash process, revenue recognition and allfinancial modules.

**(d)   Report of Independent Registered PublicAccounting Firm**

The Board of Directorsand Stockholders

Investools Inc.

We have audited management’s assessment, included inthe accompanying Management’s Annual Report on Internal Control Over FinancialReporting (Item 9A.(b)), that Investools Inc. (“the Company”) did not maintaineffective internal control over financial reporting as of December 31, 2006,because of the effect of a material weakness identified in management’sassessment, based on criteria established in *InternalControl Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluating management’sassessment, testing and evaluating the design and operating effectiveness ofinternal control, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonablebasis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or 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.

A material weakness is a control deficiency, orcombination or control deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. The following material weaknesshas been identified and included in management’s assessment: As of December 31,2006, the Company’s information systems associated with accounting for revenuewere inadequate to appropriately identify specific customer transactions andfacilitate the recognition of revenue in accordance with Generally AcceptedAccounting Principles. Accordingly, data from the Company’s information systemsrelated to revenue had to be adjusted

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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 processes. As a result, material misstatements were identified in thecompany’s revenue for each quarter during the year ended December 31, 2006, andaccordingly the Company has restated its unaudited financial information forthe three months ended March 31, 2006, the three and six months ended June 30,2006, and the three and nine months ended September 30, 2006 within this Form10-K. Additionally, material misstatements were identified in the Company’srevenue for the quarter and year ended December 31, 2006.

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theConsolidated Balance Sheets as of December 31, 2006 and 2005, and the relatedConsolidated Statements of Operations, Changes in Stockholders’(Deficit)/Equity and Comprehensive Loss, and Cash Flows for each of the yearsin the three-year period ended December 31, 2006. The aforementioned materialweakness was considered in determining the nature, timing, and extent of audittests applied in our audit of the 2006 consolidated financial statements, andthis report does not affect our report dated March 16, 2007, which expressed anunqualified opinion on those consolidated financial statements.

In our opinion, management’s assessment that theCompany did not maintain effective internal control over financial reporting asof December 31, 2006, is fairly stated, in all material respects, based oncriteria established in *Internal**Control – Integrated Framework* issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO). Also, in ouropinion, because of the effect of the material weakness described above on theachievement of the objectives of the control criteria, the Company has notmaintained effective internal control over financial reporting as of December31, 2006, based on criteria established in Internal Control - IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO).

KPMG LLPSalt Lake City, UtahMarch 16, 2007

**Part III**

In accordance with paragraph (3) of GeneralInstruction G to Form 10-K, Part III of this Report is omitted because we willfile a definitive proxystatement involving the election of directors with the Securities and ExchangeCommission not later than 120 days after the close of the fiscal year pursuantto Regulation 14A.

Reference is made to the sections of such proxystatements entitled “Nominees for Director”, “Organization of the Board ofDirectors”, “Executive Officers”, “Summary Compensation Table”, “SecurityOwnership of Certain Beneficial Owners and Management”, “Certain Relationshipsand Related Transactions and Principal Accounting Fees and Services”, whichsections of such proxy statement are incorporated herein.

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**Part IV**

**Item 15.****Exhibitsand Financial Statements**

The following documents are filed as part of thisAnnual Report on Form 10-K:

**1.****                                      ConsolidatedFinancial Statements**
| Report of Independent Registered  Public Accounting Firm                                                     |   |
|--------------------------------------------------------------------------------------------------------------|--------|
| Consolidated Balance  Sheets as of December 31, 2006 and 2005                                                |   |
| Consolidated  Statements of Operations for the Years Ended December 31, 2006, 2005, and  2004                |   |
| Consolidated  Statements of Stockholders’ Deficit for the Years Ended December 31, 2006,  2005 and 2004 |   |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2006, 2005, and  2004                |   |
| Notes to  Consolidated Financial Statements                                                                  |   |

 

Except for Schedule II –Valuation and Qualifying Accounts and Reserves, all other schedules have beenomitted since the required information is not present or is not present inamounts sufficient to require submission of the schedule, or because theinformation required is included 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.)                                                                                                              |
| 2.3   |   | Agreement  and Plan of Merger, dated September 18, 2006, among Investools Inc.,  thinkorswim Group, Inc. and Atomic Acquisition Corp. (Incorporated by  reference from Investools’ Current Report on Form 8-K filed on September 20,  2006.)                                                                                                                                                                                  |
| 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.)                                                                                                                                                                                                                                                                                                         |
| 3.3*  |   | Certificate of Amendment of the Certificate of  Incorporation of Investools Inc.                                                                                                                                                                                                                                                                                                                                                             |
| 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  |   | 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)                                                                                                                                                                                                                           |
| 10.6  |   | 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)                                                                                                                                                                                                                                 |
| 10.7  |   | 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)                                                                                                                                                                                                             |
| 10.8  |   | 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)                                                                                                                                                                                                                               |
| 10.9  |   | 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.)                                                                                                                                                                                                                                                           |
| 10.10 |   | Amendment to Executive Employment Agreement, dated  March 3, 2006, between Investools and Timothy Knight. (Incorporated by  reference from Investools’ Annual Report on Form 10-K filed March 7, 2006.)                                                                                                                                                                                                                                 |
| 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                                                                                                                                                                                                                                                                                                                                                                                         |

 

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* Indicates documents filed herewith.

(1) Management contracts or compensationplans or arrangements.

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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 16, 2007.
|        | 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 16, 2007 |
|   Lee K.  Barba             |                                           |                                               |       |           |
|                                  |                                           |                                               |       |           |
| ** **                            | **PRINCIPAL FINANCIAL /  ACCOUNTING OFFICER:** | ** **                                         | ** ** | ** **     | ** ** |
|                                  |                                           |                                               |       |           |
|   /s/ IDA K.  KANE          |                                           | Chief Financial Officer                            |       | March 16, 2007 |
|   Ida K. Kane               |                                           |                                               |       |           |
|                                  |                                           |                                               |       |           |
| ** **                            | **DIRECTORS:**                                 | ** **                                         | ** ** | ** **     | ** ** |
|                                  |                                           |                                               |       |           |
|   /s/ MICHAEL  H. GOLDSMITH |                                           | Director                                           |       | March 16, 2007 |
|   Michael H.  Goldsmith     |                                           |                                               |       |           |
|                                  |                                           |                                               |       |           |
|   /s/ F.  WARREN MCFARLAN   |                                           | Director                                           |       | March 16, 2007 |
|   F. Warren  McFarlan       |                                           |                                               |       |           |
|                                  |                                           |                                               |       |           |
|   /s/ LISA  POLSKY          |                                           | Director                                           |       | March 16, 2007 |
|   Lisa Polsky               |                                           |                                               |       |           |
|                                  |                                           |                                               |       |           |
|   /s/ SCOTT  D. SHERIDAN    |                                           | Director                                           |       | March 16, 2007 |
|   Scott D.  Sheridan        |                                           |                                               |       |           |
|                                  |                                           |                                               |       |           |
|   /s/ TOM  SOSNOFF          |                                           | Director                                           |       | March 16, 2007 |
|   Tom Sosnoff               |                                           |                                               |       |           |
|                                  |                                           |                                               |       |           |
|   /s/ DOUGLAS  T. TANSILL   |                                           | Director                                           |       | March 16, 2007 |
|   Douglas T.  Tansill       |                                           |                                               |       |           |
|                                  |                                           |                                               |       |           |
|   /s/ HANS  VON MEISS       |                                           | Director                                           |       | March 16, 2007 |
|   Hans von  Meiss           |                                           |                                               |       |           |

 

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**Report Of Independent Registered Public AccountingFirm**

The Board ofDirectors and Shareholders

Investools Inc.:

We have auditedthe accompanying consolidated balance sheets of Investools Inc. andsubsidiaries as of December 31, 2006 and 2005, and the related consolidatedstatements of operations, stockholders’ (deficit) equity and comprehensive lossand cash flows for each of the years in the three-year period ended December31, 2006.  In connection with our auditsof the consolidated financial statements, we also have audited financialstatement schedule II.  Theseconsolidated financial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements and financial statement schedule based on our audits.

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Investools Inc. and subsidiariesas of December 31, 2006 and 2005 and the results of their operations and theircash flows for each of the years in the three-year period ended December 31,2006 in conformity with U.S. generally accepted accounting principles.  Also in our opinion, the related financial statementschedule, when considered in relation to the basic consolidated financialstatements taken as a whole, presents fairly, in all material respects, theinformation set forth therein.

We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the effectiveness of Investools Inc. internalcontrol over financial reporting as of December 31, 2006, based on criteriaestablished in Internal Control – Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO), and our reportdated March 16, 2007 expressed an unqualified opinion on management’sassessment of and an adverse opinion on the effective operation of internalcontrol over financial reporting.

KPMG LLPSalt Lake City, UtahMarch 16, 2007

30

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###### **INVESTOOLS INC. ANDSUBSIDIARIES**

###### **CONSOLIDATED BALANCESHEETS**

(in thousands)
| ** **                                                                                                                                             | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                             | ** ** | **2006**              | ** ** | **2005** | ** ** |
| ** **                                                                                                                                             | ** ** | ** **            | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                                                                             | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                        |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                             |       | $                     | 52,923     |   | $ | 11,466 |   |
| Marketable  securities                                                                                                                                 |       | 22,141                |       | 16,871 |   |
| Accounts  receivable, net of allowances of $74 and $55, respectively                                                                                   |       | 5,885                 |       | 3,353 |   |
| Current portion  of restricted cash                                                                                                                    |       | —                |       | 4,722 |   |
| Other current  assets                                                                                                                                  |       | 10,056                |       | 3,133 |   |
| **Total  current assets**                                                                                                                              |       | 91,005                |       | 39,545 |   |
|                                                                                                                                                   |       |                  |       |   |   |
| Long-term restricted  cash                                                                                                                             |       | 377                   |       | 366 |   |
| Goodwill                                                                                                                                               |       | 18,085                |       | 18,085 |   |
| Intangible assets, net  of accumulated amortization of $4,154 and $1,891, respectively                                                                 |       | 2,936                 |       | 5,199 |   |
| Software development  cost, net of accumulated depreciation of $274 and $0, respectively                                                               |       | 12,584                |       | 5,065 |   |
| Furniture and  equipment, net of accumulated depreciation of $4,790 and $2,403, respectively                                                           |       | 5,253                 |       | 3,825 |   |
| Other long-term assets                                                                                                                                 |       | 1,397                 |       | 614 |   |
|                                                                                                                                                   |       |                  |       |   |   |
| **Total  assets**                                                                                                                                      |       | $                     | 131,637    |   | $ | 72,699 |   |
|                                                                                                                                                   |       |                  |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’  DEFICIT**                                                                                                        | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current liabilities:                                                                                                                                   |       |                  |       |   |   |
| Current portion  of deferred revenue                                                                                                                   |       | $                     | 120,919    |   | $ | 68,215 |   |
| Accounts payable                                                                                                                                       |       | 4,388                 |       | 3,210 |   |
| Accrued payroll                                                                                                                                        |       | 4,870                 |       | 3,522 |   |
| Accrued tax  liabilities                                                                                                                               |       | 9,602                 |       | 7,359 |   |
| Other current  liabilities                                                                                                                             |       | 15,958                |       | 4,193 |   |
| Current portion  of capital lease                                                                                                                      |       | 180                   |       | 125 |   |
| **Total  current liabilities**                                                                                                                         |       | 155,917               |       | 86,624 |   |
|                                                                                                                                                   |       |                  |       |   |   |
| Long-term portion of  deferred revenue                                                                                                                 |       | 38,656                |       | 9,301 |   |
| Long-term portion of  capital lease obligations                                                                                                        |       | 500                   |       | 513 |   |
| Other long-term accrued  liabilities                                                                                                                   |       | 215                   |       | — |   |
| **Total  liabilities**                                                                                                                                 |       | 195,288               |       | 96,438 |   |
|                                                                                                                                                   |       |                  |       |   |   |
| **Stockholders’ deficit:**                                                                                                                        | ** ** | ** **            | ** ** | ** ** | ** ** |
| Preferred stock,  $0.01 par value; 1,000 shares authorized; no shares issued and outstanding  December 31, 2006 and 2005, respectively                 |       | —                |       | — |   |
| Common stock,  $0.01 par value; 60,000 shares authorized; 45,264 and 44,754 shares issued  and outstanding at December 31, 2006 and 2005, respectively |       | 453                   |       | 447 |   |
| Additional  paid-in capital                                                                                                                            |       | 128,115               |       | 131,162 |   |
| Accumulated  other comprehensive income (loss)                                                                                                         |       | 3                     |       | (116 | ) |
| Deferred stock  compensation                                                                                                                           |       | —                |       | (3,742 | ) |
| Accumulated  deficit                                                                                                                                   |       | (192,222              | )          | (151,490 | ) |
|                                                                                                                                                   |       |                  |       |   |   |
| **Total  stockholders’ deficit**                                                                                                                  |       | (63,651               | )          | (23,739 | ) |
|                                                                                                                                                   |       |                  |       |   |   |
| **Total liabilities and  stockholders’ deficit**                                                                                                  |       | $                     | 131,637    |   | $ | 72,699 |   |

 

See accompanying notes to these consolidated financialstatements.

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###### **INVESTOOLS INC. ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS**

###### (in thousands, except per share amounts)

 
| ** **                                                                      | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                      | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                      |       |                                        |       |   |   |   |   |
| **Revenue**                                                                     |       | $                                           | 170,330    |   | $ | 138,621 |   | $ | 97,169 |   |
| ** **                                                                      |       |                                        |       |   |   |   |   |
| **Costs  and expenses:**                                                        |       |                                        |       |   |   |   |   |
| Cost of revenue                                                                 |       | 121,270                                     |       | 92,161 |   | 65,659 |   |
| Selling expense                                                                 |       | 52,947                                      |       | 37,332 |   | 24,493 |   |
| General and administrative expense                                              |       | 32,657                                      |       | 24,182 |   | 17,843 |   |
| Special charges                                                                 |       | 7,608                                       |       | 1,077 |   | 1,084 |   |
| Total costs and expenses                                                        |       | 214,482                                     |       | 154,752 |   | 109,079 |   |
|                                                                            |       |                                        |       |   |   |   |   |
| Net loss from operations                                                        |       | (44,152                                     | )          | (16,131 | ) | (11,910 | ) |
| ** **                                                                      |       |                                        |       |   |   |   |   |
| **Other  income (expense):**                                                    |       |                                        |       |   |   |   |   |
| Gain (loss) on sale of assets                                                   |       | 11                                          |       | (93 | ) | (77 | ) |
| Interest income (expense) and other, net                                        |       | 2,486                                       |       | 596 |   | 268 |   |
| Total other income                                                              |       | 2,497                                       |       | 503 |   | 191 |   |
| ** **                                                                      |       |                                        |       |   |   |   |   |
| **Net  loss before income taxes and cumulative change in accounting principle** |       | (41,655                                     | )          | (15,628 | ) | (11,719 | ) |
|                                                                            |       |                                        |       |   |   |   |   |
| Income tax (benefit) expense                                                    |       | (875                                        | )          | 114 |   | 8 |   |
| ** **                                                                      |       |                                        |       |   |   |   |   |
| **Net  loss before cumulative change in accounting principle**                  |       | (40,780                                     | )          | (15,742 | ) | (11,727 | ) |
| ** **                                                                      |       |                                        |       |   |   |   |   |
| Cumulative change in accounting principle                                       |       | 48                                          |       | — |   | — |   |
| ** **                                                                      |       |                                        |       |   |   |   |   |
| **Net  loss**                                                                   |       | $                                           | (40,732    | ) | $ | (15,742 | ) | $ | (11,727 | ) |
| ** **                                                                      |       |                                        |       |   |   |   |   |
| **Net  loss per common share—**basic and diluted                           |       | $                                           | (0.90      | ) | $ | (0.35 | ) | $ | (0.26 | ) |
| Basic and diluted  weighted average shares outstanding                          |       | 45,042                                      |       | 44,933 |   | 45,045 |   |

 

See accompanying notes to these consolidated financialstatements.

32

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###### **INVESTOOLS INC. ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITYAND COMPREHENSIVE LOSS**

###### (in thousands)

| ** **                                                                    | ** ** | ** **              | ** **  | **Common Stock**   | ** ** | **Additional** | ** ** | **Accumulated  Other** | ** ** | **Deferred**                          | ** **  | ** **              | ** ** | **Total Stock-**    | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------|-------------|-------------------------|------------|----------------|------------|------------------------|------------|---------------------------------------|-------------|-------------------------|------------|--------------------------|------------|
| ** **                                                                    | ** ** | **Comprehensive  Loss** | ** **  | **Outstanding  Shares** | ** ** | **Par  Value** | ** ** | **Paid-In  Capital**   | ** ** | **Comprehensive  Income (Loss)** | ** **  | **Stock  Compensation** | ** ** | **Accumulated  Deficit** | ** ** | **holder’s  Equity** | ** ** |
| **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 aquisition                                      |       | —                  |        | 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** | **)** |
| Reclassification  of deferred stock compensation upon adoption of SFAS 123(R) |       | —                  |        | —                  |       | —         |       | (3,742                 | )          | —                                |        | 3,742                   |       | —                   |       | — |   |
| Repurchase of  common stock                                                   |       | —                  |        | (160                    | )          | (2             | )          | (1,358                 | )          | —                                |        | —                  |       | —                   |       | (1,360 | ) |
| Stock issued due  to option exercise                                          |       | —                  |        | 670                     |       | 8              |       | 874                    |       | —                                |        | —                  |       | —                   |       | 882 |   |
| Stock  compensation                                                           |       | —                  |        | —                  |       | —         |       | 1,179                  |       | —                                |        | —                  |       | —                   |       | 1,179 |   |
| Net loss                                                                      |       | (40,732                 | )           | —                  |       | —         |       | —                 |       | —                                |        | —                  |       | (40,732                  | )          | (40,732 | ) |
| Reclassification  adjustment for recognized losses included in net loss       |       | 85                      |        | —                  |       | —         |       | —                 |       | 85                                    |        | —                  |       | —                   |       | 85 |   |
| Unrealized gain  on marketable securities, net                                |       | 34                      |        | —                  |       | —         |       | —                 |       | 34                                    |        | —                  |       | —                   |       | 34 |   |
| **Balance, December 31, 2006**                                                | ** ** | **$**                   | **(40,613** | **)**                   | **45,264** | ** **     | **$**      | **453**                | ** ** | **$**                                 | **128,115** | ** **              | **$**      | **3**                    | ** ** | **$** | **—** | ** ** | **$** | **(192,222** | **)** | **$** | **(63,651** | **)** |

 

See accompanying notes to these consolidated financialstatements.

33

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###### **INVESTOOLS INC. ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS**

###### (in thousands)

| ** **                                                                          | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                          | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Cash  flows from operating activities:**                                          | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                                                            |       | $                                           | (40,732    | ) | $ | (15,742 | ) | $ | (11,727 | ) |
| Reconciling adjustments:                                                            |       |                                        |       |   |   |   |   |
| Depreciation and amortization                                                       |       | 4,924                                       |       | 2,714 |   | 960 |   |
| Deferred taxes                                                                      |       | 114                                         |       | 114 |   | — |   |
| Provision for sales return reserve                                                  |       | 1,419                                       |       | 1,882 |   | 1,652 |   |
| Provision for lease termination                                                     |       | 210                                         |       | — |   | — |   |
| Provision for (recovery of) bad debt expense                                        |       | 19                                          |       | 54 |   | 3 |   |
| Stock compensation expense                                                          |       | 1,179                                       |       | 576 |   | 290 |   |
| Provision for inventory reserve                                                     |       | —                                      |       | 123 |   | 171 |   |
| (Gain) loss on sale of assets                                                       |       | (11                                         | )          | 93 |   | 77 |   |
| Loss on marketable securities                                                       |       | 85                                          |       | — |   | — |   |
| Impairment of internally capitalized software                                       |       | 1,414                                       |       | 1,000 |   | 486 |   |
| Unremitted issuance of stock for legal settlement                                   |       | 2,763                                       |       | — |   | — |   |
| Changes in operating assets and liabilities, net of  effect of acquired businesses: |       |                                        |       |   |   |   |   |
| Accounts receivable                                                                 |       | (2,551                                      | )          | (995 | ) | (1,525 | ) |
| Restricted cash                                                                     |       | —                                      |       | 369 |   | (384 | ) |
| Other assets                                                                        |       | (3,808                                      | )          | (1,085 | ) | (2,273 | ) |
| Accounts payable                                                                    |       | 525                                         |       | (1,894 | ) | 2,610 |   |
| Deferred revenue                                                                    |       | 82,374                                      |       | 37,001 |   | 25,290 |   |
| Accrued payroll                                                                     |       | 1,348                                       |       | 1,266 |   | 425 |   |
| Other liabilities                                                                   |       | 5,604                                       |       | (2,824 | ) | 382 |   |
| Accrued tax liabilities                                                             |       | 1,346                                       |       | 2,256 |   | 1,062 |   |
| Net cash provided by operating activities                                           |       | 56,222                                      |       | 24,908 |   | 17,499 |   |
| ** **                                                                          | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash  flows from investing activities:**                                          | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Purchases of marketable securities                                                  |       | (23,403                                     | )          | (10,836 | ) | (16,776 | ) |
| Proceeds from sales of marketable securities                                        |       | 18,214                                      |       | 7,735 |   | 10,731 |   |
| Proceeds from sales of equipment                                                    |       | 11                                          |       | 40 |   | — |   |
| Payments for capitalized software development costs                                 |       | (8,115                                      | )          | (4,498 | ) | (111 | ) |
| Purchases of furniture and equipment                                                |       | (3,154                                      | )          | (4,325 | ) | (1,345 | ) |
| Deferred acquisition costs                                                          |       | (2,398                                      | )          | — |   | — |   |
| Cash paid in business acquisitions, net of cash  received                           |       | —                                      |       | (7,777 | ) | (62 | ) |
| Net cash used in investing activities                                               |       | (18,845                                     | )          | (19,661 | ) | (7,563 | ) |
| ** **                                                                          | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash  flows from financing activities:**                                          | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Payment on capital lease obligations and notes  payable                             |       | (153                                        | )          | (66 | ) | (253 | ) |
| Changes in restricted cash                                                          |       | 4,711                                       |       | (3,194 | ) | (1,513 | ) |
| Repurchase of stock                                                                 |       | (1,360                                      | )          | (1,394 | ) | (2,213 | ) |
| Exercise of stock options                                                           |       | 882                                         |       | 137 |   | 321 |   |
| Net cash provided by (used in) financing activities                                 |       | 4,080                                       |       | (4,517 | ) | (3,658 | ) |
| ** **                                                                          | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Increase  in cash and cash equivalents:**                                         |       | 41,457                                      |       | 730 |   | 6,278 |   |
| **Cash  and cash equivalents:**                                                     | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Beginning of year                                                                   |       | 11,466                                      |       | 10,736 |   | 4,458 |   |
| End of year                                                                         |       | $                                           | 52,923     |   | $ | 11,466 |   | $ | 10,736 |   |

 

See accompanyingnotes to these consolidated financial statements.

34

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**1.****                                     ****THE COMPANY**

Investools Inc. (the “Company”) is a leader ininvestor education.  The Company’smission is to educate and empower individual investors to make their ownfinancial decisions to achieve their financial goals at any time or place, byusing the Investools MethodTM, by correspondence or online. The Company hopes toestablish the Investools MethodTM as the most widely recognized, adopted andendorsed approach to educated investing. The Company offers a full range of investor education products andservices that provide lifelong learning and support to self-directed investorsto help them improve their investment performance.  The Company’s products and services are builtaround the Investools MethodTM, a unique integration of a disciplined investingprocess, web-based tools, personalized instruction and support.  Its investor education products and servicesare offered in a variety of learning formats with courses ranging frombeginning to advanced for all investor levels.

We maintain offices in New York, New York, Draper,Utah, Houston, Texas and Palo Alto, California.

**Corporate Background**

The Company was incorporated in Delaware on May 21,2001, and began operations on December 6, 2001, as a result of a merger betweenZiaSun Technologies, Inc., a Nevada corporation (“ZiaSun”), and Telescan, Inc.,a Delaware corporation (“Telescan”). Former ZiaSun and Telescan stockholders acquired an approximate 75percent and 25 percent ownership interest in the Company, respectively.  ZiaSun and Telescan each became wholly-ownedsubsidiaries of the Company.  In February2007, the Company also acquired thinkorswim Group, Inc., a Delaware corporation(“thinkorswim”).

As of December 31, 2006, the Company’s subsidiarieswere:

·                  ZiaSun, which owns 100 percent ofOnline Investors Advantage, Inc. (“OIA”). OIA owns 100 percent of Investools Asia Pacific Pte., Limited (“InvestoolsAsia”) and Investools Hong Kong Ltd. (“Investools Hong Kong”).

·                  Telescan, which owns 100 percent ofEntrepreneurs Online, a Texas corporation.

·                  SES Acquisition Corp., a Californiacorporation, operates under the name 360 Group. The Company acquired 360 Group in February 2004.  360 Group was a direct marketing agency thatoffered services such as custom database development and management, strategicplanning, media list planning and buying, creative and production services,response management and analytic services. The Company acquired 360 Group in order to internalize its marketingdepartment.

·                  Prophet Financial Systems, Inc. (“Prophet”),a California corporation, was acquired by the Company in January 2005.  Prophet is a web-based content and servicesprovider that enables active investors to use technical analysis to trade moreprofitably.  Prophet’s website,http://www.prophet.net, is the premier web provider of advanced chartingtechnology.

**Merger Agreement with thinkorswim Group, Inc.**

On September 18, 2006, the Company and thinkorswimGroup, Inc. (“thinkorswim”) entered into an Agreement and Plan of Merger withthinkorswim Group, Inc. (“thinkorswim”), a Delaware corporation, pursuant towhich Investools would acquire thinkorswim. On February 15, 2007, the Company’s wholly-owned subsidiary, AtomicAcquisition Corp., merged with and into thinkorswim.  thinkorswim shareholders receivedapproximately 50 percent of the merger consideration in cash and approximately50 percent of the merger consideration in shares of the Company’s common stock,representing approximately $170 million in cash and 19.1 million shares ofstock valued at $8.75 per share.  In connectionwith the acquisition of thinkorswim, JPMorgan Chase Bank, N.A. and J.P. MorganSecurities Inc. provided the Company a senior secured term loan of $125 millionto fund a portion of the cash consideration and, separately, also provided theCompany with a committed senior secured revolving credit facility of $25million (see also Note 16).  Immediatelyfollowing the transaction, thinkorswim shareholders held approximately 30percent of the ownership of the Company, and thinkorswim received two seats onthe Company’s expanded, eight-member board of directors.  Certain thinkorswim employees will beeligible for a $20 million retention bonus pool which will be paid annuallyover a three-year period.  In addition,certain thinkorswim employees and third-party contractors received options topurchase 2.3 million shares of the Company’s common stock.  The options will vest over four years, withhalf of the options having an exercise price of $15.69 per share, equal to theclosing market price on February 15, 2007, and the other other half of theoptions will have an exercise price of $23.535 per share, or 150 percent of themarket price at closing.

35

----

On December 13, 2006, the Company filed a proxystatement with the SEC in anticipation of holding a Special Meeting ofshareholders on January 17, 2007.  Duringthe meeting, the Company obtained the necessary shareholder approval to issuethe 19.1 million shares to thinkorswim shareholders.  The Company and thinkorswim also entered intoa marketing agreement relating to the placement of thinkorswim’s logo in theCompany’s Investor ToolboxTMwebsite, preferred thinkorswim brokerage rates for the Company’s students, andinterface development for Company students to access thinkorswim’s onlinebrokerage platform.  Under the terms ofthe agreement, thinkorswim will pay the Company a monthly fee of $0.2 millionthrough the end of 2007.  During 2006,the Company recognized $0.6 million in revenue associated with the marketingagreement with thinkorswim.

**Concentration Risk**

During the years ended December 31, 2006, 2005, and2004, we accessed approximately 56 percent, 69 percent, and 90 percent,respectively, of our sales transaction volume through co-marketing (SuccessMagazine and NET Marketing Alliance) and, prior to June 2005, co-branding (CNBCand BusinessWeek) relationships. We are constantly pursuing new studentacquisition channels.

The Company pays commissions to its co-marketing andco-branding partners for sales that are generated through the various partners’channels.  The rates at which partnersare paid commissions vary depending on the partner, the products sold to thecustomer, and the sales channel through which the sale is made.  Commissions are expensed as incurred at thetime of sale.

**2.****                                     ****SIGNIFICANT ACCOUNTING POLICIES AND RELATEDINFORMATION**

**Principles of Consolidation**

The consolidated financial statements include theaccounts of the Company and its wholly-owned subsidiaries. All intercompanytransactions have been eliminated.

**Use of Estimates**

Preparation of financial statements in conformity withU.S. generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, the disclosed amounts of contingent assets and liabilities and thereported amounts of sales return reserve, revenues and expenses.  Management believes the most significantestimates and assumptions are associated with the valuation of intangibles,goodwill, taxes, deferred revenue, and the reserve for sales returns.  If the underlying estimates and assumptionsupon which the financial statements are based change in future periods, actualamounts may differ from those included in the accompanying consolidatedfinancial statements.

**Financial Instruments**

The carrying value of the Company’s financialinstruments approximate fair value. Financial instruments consist primarily of cash and cash equivalents,marketable securities, accounts receivable, accounts payable and other accruedliabilities.

**Cash Equivalents**

The Company considers all investments with an originalmaturity to the Company of three months or less to be cash equivalents.  These investments primarily consist ofmoney-market accounts. At December 31, 2006 and 2005, cash equivalents were $46.8million and $9.6 million, respectively.

The amounts included in the consolidated financialstatements approximate fair value at the balance sheet date.  The Company maintains deposits in banks,which may exceed the amount of federal deposit insurance available.  Management believes the potential risk ofloss on these accounts to be minimal.

**Marketable Securities**

The Company invests excess cash in marketablesecurities, primarily government backed securities with maturities ranging fromone to 36 months. At December 31, 2006, the fair market value of thesesecurities was $22.1 million. The Company has classified these marketablesecurities as available for sale under SFAS No. 115, *Accountingfor Certain Investments in Debt and Equity Securities*. Accordingly,the securities are recorded at fair value and any unrealized gains or lossesare included in accumulated other comprehensive income (loss) withinstockholders’ deficit. Gains are recognized when realized and are recorded inthe Consolidated Statements of Operations in other income. Losses are

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recognized as realized or when management hasdetermined an other-than-temporary decline in fair value has occurred.

**Accounts Receivable**

Receivables from customers for other services arereserved when collection becomes doubtful.

**Allowance for Sales Returns**

Provisions for sales return reserves primarily relateto products and service arrangements and are recorded as a reduction to revenueand deferred revenue.  These provisionsare made based on historical experience and changes in customerpreferences.  At December 31, 2006 and2005, allowance for sales returns of $2.0 million and $1.5 million,respectively, are included as part of other current liabilities in theaccompanying Consolidated Balance Sheets.

**Inventories**

Inventories are stated at the lower of cost or marketvalue (using the first-in, first-out method). The Company’s inventories consist of manuals and DVDs that comprise theCompany’s educational products.  AtDecember 31, 2006 and 2005, $0.1 million and $0.9 million, respectively, in netinventories were included as part of other current assets in the accompanyingConsolidated Balance Sheets.

**Restricted Cash**

The Company uses merchant account vendors to processcredit card transactions.  Under theterms of these agreements, the merchant account vendor has the right towithhold credit card funds to cover charge backs in the event the Company isunable to honor its commitments.  Suchfunds can be held for up to a year after the Company has terminated its relationshipwith the merchant account vendor.  AtDecember 31, 2006 and 2005 the Company had $0.4 million and $5.1 million,respectively, of funds due from merchant account vendors.

**Capitalized Software Development Costs**

For internal use software the Company complies withThe American Institute of Certified Public Accountants (“AICPA”) Statement ofPosition (“SOP”) No. 98-1, *Accounting For Cost ofComputer Software Developed or Obtained for Internal Use*, and EITFNo. 00-2, *Accounting for Website Development Costs*.In accordance with SOP 98-1, software development costs incurred as part of anapproved project plan that result in additional functionality to internal usesoftware are capitalized and amortized on a straight-line basis over theestimated useful life of the software. During the years ended December 31, 2006and 2005, the Company capitalized $9.2 million and $5.7 million, respectively,of software development costs related to internal use software for both thedevelopment of the Investor Toolbox website, and the implementation of theCompany’s integrated enterprise resource planning and customer relationshipmanagement software solution.

Amortization of software developed for internal usebegins when the internal use software is ready for its intended use, and iscalculated on a straight-line basis over the estimated use of the product.  The new Investor Toolbox application wasplaced in service during 2006, and amortization expense was approximately $0.3million.

**Furniture and Equipment**

Furniture and equipment is stated at cost lessaccumulated depreciation.  Depreciationis calculated on a straight-line method over the estimated useful lives of theassets, which range from two to five years. Depreciation expense was approximately $2.4 million, $1.3 million, and$0.6 million for the years ended December 31, 2006, 2005 and 2004,respectively.

The following is a detail of our furniture andequipment (in thousands):
|                                                  | ** ** | **2006** | ** ** | **2005**   | ** ** |
|--------------------------------------------------|------------|----------|------------|------------|------------|
| **Furniture  and equipment:**                    |       |     | ** ** | ** ** | ** ** |
| Computer and  office equipment                   |       | $        | 8,179      |       | $          | 4,508 |   |
| Furniture                                        |       | 1,325    |       | 1,273      |       |
| Leasehold  improvements                          |       | 539      |       | 447        |       |
| Total furniture and equipment                    |       | 10,043   |       | 6,228      |       |
| Less:  accumulated depreciation and amortization |       | (4,790   | )          | (2,403     | )          |
| **Furniture  and equipment, net**                |       | $        | 5,253      |       | $          | 3,825 |   |

 

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**Goodwill and Other Indefinite Lived IntangibleAssets**

Goodwill represents the excess of purchase price andrelated costs over the value assigned to the net tangible and identifiableintangible assets of businesses acquired. Goodwill and other intangible assetswith indefinite lives are not amortized, but instead are tested for impairmentannually, or, more frequently upon the occurance of a triggering event. TheCompany evaluates the recoverability of goodwill using a two-step impairmenttest approach at the reporting unit level. In the first step the fair value forthe reporting unit is compared to its book value including goodwill. In theevent that the fair value of the reporting unit is less than the book value, asecond step is performed which compares the implied fair value of the reportingunit’s goodwill to the book value of the goodwill. The fair value for thegoodwill is determined based on the difference between the fair values of thereporting units and the net fair values of the identifiable assets andliabilities of such reporting units (currently we have a single reportingunit). If the fair value of the goodwill is less than the book value, thedifference is recognized as an impairment. The Company performed its impairmentassessment on goodwill, in accordance with the methods prescribed above. TheCompany concluded that no impairment existed as of December 31, 2006.

Indefinite lived intangible assets are tested forimpairment annually, or, more frequently upon the occurance of a triggeringevent. The Company evaluates the recoverability of indefinite lived intangibleassets by comparing the indefinite lived intangible assets book value to itsestimated fair value. The fair value for indefinite lived intangible assets isdetermined by performing a cash flow analysis. If the fair value of theindefinite lived intangible assets is less than book value, the difference isrecognized as an impairment.

For further information regarding goodwill and otherintangible assets, refer to Note 5.

**Long Lived Assets**

In accordance with Statement of Financial AccountingStandards (SFAS) No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*, long-lived assets, suchas property, equipment and definite-lived intangibles subject to amortization,are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying 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.

**Income Taxes**

The Company uses the asset and liability method ofaccounting for income taxes.  Under theasset and liability method, deferred tax assets and liabilities are recognizedfor the future tax consequences attributable to differences between thefinancial statement carrying amount of existing assets and liabilities andtheir respective tax bases, and operating loss and tax creditcarry-forwards.  Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled.  The effect ondeferred tax assets and liabilities of a change in tax rates is recognized inincome in the period that includes the enactment date.  A valuation allowance is provided when it ismore likely than not that some or all of the deferred tax assets may not berealized.

**Revenue****Recognition**

The Company recognizes revenue in accordance withStaff Accounting Bulletin (“SAB”) No. 104, *RevenueRecognition*, and EITF No. 00-21, *Accountingfor Revenue Arrangements with Multiple Deliverables*. Revenue is notrecognized until it is realized or realizable and earned. The criteria to meetthis guideline are: (i) persuasive evidence of an arrangement exists;(ii) delivery has occurred or services have been rendered; (iii) theprice to the buyer is fixed or determinable; and (iv) collectibility isreasonably assured.

The Company sells its products separately and in variousbundles that contain multiple deliverables that include on-demand coachingservices, website subscriptions, educational workshops, online courses, alongwith 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 objective and reliable evidence of the fair value ofundelivered items; and (iii) delivery or performance of any undelivereditem is probable and substantially in our control. The fair value of eachseparate

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element is generally determined by prices charged whensold separately. In certain arrangements, we offer these products bundledtogether at a discount. The discount is allocated pro rata to each elementbased on the relative fair value of each element when fair value support existsfor each element in the arrangement. If fair value of all undelivered elementsin an arrangement exists, but fair value does not exist for a deliveredelement, then revenue is recognized using the residual method. Under theresidual method, the fair value of undelivered elements is deferred and theremaining portion of the arrangement fee (after allocation of 100 percent ofany discount to the delivered item) is recognized as revenue. The Companyprovides some limited rights of return in connection with its arrangements. TheCompany estimates its returns based on historical experience and maintains anallowance for estimated returns, which has been reflected as an accruedliability. Each transaction is separated into its specific elements and revenuefrom each element is recognized according to the following policies:
| Product                                 | ** ** | **Recognition policy**                                                                                       |
|-----------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|
| Workshop/workshop certificate           |       | Deferred and recognized as the workshop is provided  or certificate expires                                  |
| Home study                              |       | Recognized upon delivery of home study materials to  customer                                                |
| Online courses                          |       | Deferred and recognized over the estimated  subscription period                                              |
| Coaching  services                      |       | Deferred and recognized as services are delivered,  or on a straight-line basis over the subscription period |
| Website subscription and  renewals |       | Deferred and recognized on a straight-line basis  over the subscription period                               |
| Data licenses                           |       | Recognized monthly based on data usage                                                                       |

 

During the fourth quarter of 2005 and throughout 2006,the Company introduced certain online courses. The terms and conditions ofthose online courses provide customers with access to and the ability to takethese courses on an unlimited basis as long as they have an active websitesubscription. As the Company currently does not have sufficient historicalusage data related to how these online courses are utilized, revenue is beingrecognized over the estimated expected customer life. However, as historicalusage patterns become evident, the Company will recognize revenue consistentwith the actual usage patterns.

**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 isrecognized into revenue over the period that the services are performed or thetime that the contract period expires, as shown in the above table.

**Stock–Based Compensation**

Beginning in 2003, the Company adopted the fair valueexpense recognition method available under SFAS No. 123, *Accounting for Stock-Based Compensation* (“SFAS 123”) inaccounting for options granted after 2002. Effective January 1, 2006, theCompany adopted SFAS No. 123 (revised), *Share-BasedPayment* (“SFAS 123(R)”) utilizing the modified prospective approach.

Under the modified prospective approach, SFAS 123(R)applies to new awards and to unvested awards that were outstanding onJanuary 1, 2006 that are subsequently exercised, modified, repurchased, orcancelled. In addition, compensation cost recognized during 2006 includescompensation cost, net of estimated forfeitures, for all options granted priorto, but not yet vested as of January 1, 2006, based on the grant-date fairvalue estimated in accordance with the original provisions of SFAS 123, andcompensation cost for all options granted subsequent to January 1, 2006,based on the grant-date fair value estimated in accordance with the provisionsof SFAS 123(R). The total cost related to the Company’s share-basedcompensation plans, recorded pursuant to the methods then in effect, was $1.2million, $0.6 million, and $0.3 million for the years ended December 31, 2006,2005, and 2004, respectively. In accordance with the modified prospectiveapproach, prior years were not restated to reflect the impact of adopting thenew standard.

The Company receives a tax deduction for certain stockoption exercises during the period the options are exercised, generally for theexcess of the fair market value of the underlying stock on the exercise date,over the exercise price of the options. Prior to the adoption of SFAS 123(R),the Company reported all tax benefits resulting from the exercise of stockoptions as cash flows from operating activities in its Consolidated Statementsof Cash Flows. In accordance with SFAS 123(R), beginning January 1,2006, the Company records in its Consolidated Statements of Cash Flows the taxbenefits from the exercise of stock options as cash flows from financingactivities. Net cash proceeds from the exercise of stock options were $0.9million, $0.1 million, and $0.3 million for the years ended December 31, 2006,2005, and 2004, respectively. The 2006 tax benefit potentially realizable fromstock option exercises was $0.8 million and none in 2005 and 2004. However, theCompany was not able to recognize this tax benefit due to its existing, fully-reservednet operating loss carryforward. Therefore, until the tax deduction reducestaxes payable, the realization of this tax benefit is not recognized, and cashflows from financing activities presented in the accompanying statement of cashflows do not include the tax effect of the option exercises.

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Beginning in 2006, SFAS 123(R) requires the Company torecognize compensation expense related to options based on the estimated numberof options that will ultimately vest. Accordingly, the Company is required toestimate what the forfeitures will be. The estimate of such forfeitures servesto reduce the compensation expense that would otherwise be recorded. Prior to2006, the Company did not estimate such expense reductions, and accounted forforfeitures by reducing the recognized expense as they occurred. Changing thisprinciple of accounting is required by the adoption of SFAS 123(R), and as aresult the Company estimated the cumulative amount of potential pre-vestingforfeitures relating to unvested options as of January 1, 2006. Thereduction in compensation expense that would have been recognized during priorperiods resulting from this change in accounting principle was approximately$48,000, and was recognized effective January 1, 2006. The reduction indeferred tax assets associated with decreasing the estimated future taxdeduction, which resulted from decreasing the related estimated optionexercises, was offset by an equal reduction in the valuation allowance.Accordingly, there was no net tax effect recognized.

As a result of adopting SFAS 123(R) on January 1,2006, the Company’s loss before taxes and its net loss for the year endedDecember 31, 2006 were both approximately $8,000 lower than if the Company hadcontinued to account for options under the combination of APB OpinionNo. 25 and SFAS 123 for its stock option plans. There was no change tobasic and diluted loss per share. There were no remaining unrecognized coststhat would, during 2006 and later, be included in compensation expense relatedto pre-2003 grants, and which were previously accounted for under APB OpinionNo. 25. In addition, as mentioned in the preceding paragraph, SFAS 123(R)requires the Company to begin estimating forfeitures of options which have yetto fully vest. The effect on expenses of estimating forfeitures relating to thecost of unvested options results in lower compensation costs recognized than ifSFAS 123(R) had not been adopted.

The Company was also required to calculate theadditional paid-in capital (“APIC”) pool of excess tax benefits available toabsorb tax deficiencies, if any, subsequent to the adoption of SFAS 123(R).Upon adoption of SFAS 123(R) on January 1, 2006, the Company elected to use thepermitted “short-cut” method in determining this APIC pool. Based on applyingthe short-cut method, it was determined that the Company had no APIC pool oftax benefits against which to absorb future tax deficiencies. Because of theCompany’s existing net operating loss carryover as mentioned above, there was noeffect on the accompanying statement of cash flows as a result of changing theaccounting principle by electing to use the short-cut method.

Another result of adopting SFAS 123(R) is that allunrecognized share-based compensation costs previously included as deferredstock compensation separately presented on the balance sheet has now beenreclassified and resulted in a reduction in additional paid-in capital of $3.7million.

Prior to 2003, the Company accounted for stock optiongrants in accordance with Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees* (the intrinsicvalue method), and accordingly recognized no compensation expense for stockoption grants because the options’ exercise price equaled the fair market valueof the Company’s stock price on the measurement date.  As mentioned above, the Company then adoptedSFAS 123 on January 1, 2003.  Thefollowing table illustrates the effect on operating results and per shareinformation had the Company accounted for share-based compensation, includingthat related to pre-2003 option grants, in accordance with SFAS 123 for theyears ended December 31, 2005 and 2004 (in thousands, except per shareamounts):
|                                                                                        | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                             | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Net loss as  reported                                                                  |       | $                                          | (15,742    | ) | $ | (11,727 | ) |
| Add:  Option-based employee compensation reported in net loss, net of taxes            |       | 576                                        |       | 290 |   |
| Deduct: Pro  forma option-based compensation under the fair value method, net of taxes |       | (732                                       | )          | (446 | ) |
|                                                                                   |       |                                       |       |   |   |
| Pro forma net loss                                                                     |       | $                                          | (15,898    | ) | $ | (11,883 | ) |
|                                                                                   |       |                                       |       |   |   |
| Basic and  diluted net loss per share — as reported                               |       | $                                          | (0.35      | ) | $ | (0.26 | ) |
| Basic and diluted net  loss per share — pro forma                                 |       | $                                          | (0.35      | ) | $ | (0.26 | ) |

 

The Company uses the Black-Scholes option pricingmodel to estimate the fair value of option awards with the following weightedaverage assumptions for the periods indicated:
|                                                 | ** ** | **2006**  | ** ** | **2005** | ** ** | **2004**      | ** ** |
|-------------------------------------------------|------------|-----------|------------|----------|------------|---------------|------------|
| Risk free  interest rate factors                |       | 5.1       | %          | 4.3      | %          | 4.02% to 4.53 | %          |
| Volatility  factors                             |       | 56        | %          | 87       | %          | 55% to 118    | %          |
| Expected lives                                  |       | 6.3 years |       | 7 years  |       | 7 years       |       |
| Assumed dividend  yield                         |       | —    |       | —   |       | —        |       |
| Weighted average fair  value of options granted |       | $         | 5.33       |     | $          | 3.59          |       | $ | 1.95 |   |
|                                                 |            |           |            |          |            |               |            |  |  |  |

 

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The assumptions above are based on multiple factors,including historical exercise patterns of employees in relatively homogeneousgroups with respect to exercise and post-vesting employment terminationbehaviors, and the expected future exercising patterns for those samehomogeneous groups.  During 2006, the Companyused the simplified method for determining expected lives.  The expected volatility is based upon a blendof the Company’s historical volatility of its stock price, and the historicalvolatility of the stock price of one of the Company’s industry peers.

**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, 2006, 2005, and 2004 were $34.7 million, $26.5million, and $15.8 million, respectively. As of December 31, 2006 and 2005, the Company had $3.0 million and $0.7million, respectively, in prepaid advertising costs included in other currentassets.

**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, 2006, 2005 and 2004, there were approximately 3.5 million,4.1 million, and 3.3 million shares, respectively, of common stock potentiallyissuable with respect to stock options, which were excluded from the net lossper share calculation because the shares would be anti-dilutive.

**Comprehensive Income**

Comprehensive income includes changes to equityaccounts that were not the result of transactions with stockholders.  Comprehensive income is comprised of netincome and other comprehensive income and loss items.  The Company’s comprehensive income itemconsists of changes in the fair value of the Company’s marketable securities.

**Recently Issued Accounting Standards**

In June 2006, the FASBissued FASB Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes, an interpretation of FASB Statement No. 109*.  FIN 48 clarifies the accounting foruncertainty in income taxes recognized under SFAS No. 109, *Accountingfor Income Taxes*. FIN 48 prescribes a recognition threshold andmeasurement attribute for financial statement recognition and measurement of atax position taken or expected to be taken in a tax return and also providesguidance on various related matters such as derecognition, interest andpenalties, and disclosure. FIN 48 is effective with the Company’s fiscal yearbeginning January 1, 2007. The Company expects that the financial impact, ifany, of applying the provisions of FIN 48 to all tax positions will not bematerial upon the initial adoption of FIN 48.

In June 2006, the EITF reached a consensus on EITFIssue No. 06-03, *How Taxes Collected fromCustomers and Remitted to Governmental Authorities Should Be Presented in theIncome Statement (That Is, Gross versus Net Presentation)* (“EITF06-03”). EITF 06-03 provides that the presentation of taxes assessed by agovernmental authority that is directly imposed on a revenue-producingtransaction between a seller and a customer on either a gross basis (includedin revenues and costs) or on a net basis (excluded from revenues) is anaccounting policy decision that should be disclosed. The provisions of EITF06-03 become effective as of January 1, 2007. The Company currently accountsfor sales taxes collected and remitted under the net basis, therefore theadoption of EITF 06-03 is not anticipated to have a material impact on theCompany’s consolidated financial statements.

In September 2006, the SEC released SAB No. 108, *Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements*,(“SAB 108”), which provides the SEC staff’s views regarding the process ofquantifying financial statement misstatements, such as assessing both thecarryover and reversing effects of prior year misstatements on the current yearfinancial statements. SAB 108 is effective as of the end of the 2006 year, allowinga one-time transitional cumulative effect adjustment to retained earnings as ofJanuary 1, 2006 for errors that were not previously deemed material, but arematerial under the guidance in SAB 108. The adoption of SAB 108 had no impacton the Company’s consolidated financial statements.

Also in September 2006, the FASB issued SFAS No. 157, *Fair**ValueMeasurements* (“SFAS 157”). SFAS 157 defines fair value, establishesa framework for measuring fair value, and requires enhanced disclosures aboutfair value

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measurements. SFAS 157 iseffective for fiscal years beginning after November 15, 2007.  The Companyis currently evaluating the impact of SFAS 157 on its consolidated financialstatements.

In February 2007, FASBStatement No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities* was released. SFAS 159 provides companies with an option toreport selected financial assets and liabilities at fair value and establishespresentation and disclosure requirements designed to facilitate comparisonsbetween companies that choose different measurement attributes for similartypes of assets and liabilities. SFAS 159 will be effective for the Companybeginning January 1, 2008. The Company currently is evaluating the potentialeffect of SFAS 159 on its financial statements.

**Reclassifications**

Certain prior years’balances have been reclassified to conform to the current year’s presentation.In the Consolidated Statements of Cash Flows for the years ended December 31,2005 and 2004, $4.5 million and $0.1 million, respectively, related to paymentsfor capitalized software development costs have been reclassified frompurchases of furniture and equipment to conform to the current period’spresentation.  Likewise, in the 2005Consolidated Balance Sheet, $4.6 million of capitalized software developmentcosts have been reflected separately from furniture and equipment to conform tothe current period’s presentation.

**3.****                                     ****MARKETABLE SECURITIES**

During 2003, the Companystarted investing excess cash in short-term marketable securities consisting ofprimarily government-backed securities with maturities ranging from one monthto three years.  The Company determinesrealized gains and losses on a specific identification basis.  The realized gains and losses are included ininterest income and other, net, in the accompanying Consolidated Statements ofOperations.  During 2006 the Companyrecognized $0.1 million in other-than temporary impairments which wasreclassified out of accumulated other comprehensive income into interest incomeand other, net.

The following tablesummarizes unrealized gains and losses on the Company’s investments inmarketable securities that have been in an unrealized loss position for lessthan twelve months based on quoted market prices as of December 31, 2006and 2005:
|                               | ** ** | **As of December 31, 2006** | ** ** | **As of December 31, 2005** | ** ** |
|-------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                    | ** ** | **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 |       | $                                               | 16,713     |                                            | (7         | ) | 2 |   | $ | 16,708 |   | $ | 10,843 |   | (32 | ) | — |   | $ | 10,811 |   |
| Total                         |       | $                                               | 16,713     |                                            | (7         | ) | 2 |   | $ | 16,708 |   | $ | 10,843 |   | (32 | ) | — |   | $ | 10,811 |   |

 

The following tablesummarizes unrealized gains and losses on the Company’s investments inmarketable securities that have been in an unrealized loss position for greaterthan twelve months based on quoted market prices as of December 31, 2006and 2005:
|                               | ** ** | **As of December 31, 2006** | ** ** | **As of December 31, 2005** | ** ** |
|-------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                    | ** ** | **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 |       | $                                               | 5,425      |                                            | (1         | ) | 9 |   | $ | 5,433 |   | $ | 6,144 |   | (84 | ) | — |   | $ | 6,060 |   |
| Total                         |       | $                                               | 5,425      |                                            | (1         | ) | 9 |   | $ | 5,433 |   | $ | 6,144 |   | (84 | ) | — |   | $ | 6,060 |   |

 

The following tablesummarizes contractual maturities of the Company’s investments in marketablesecurities as of December 31, 2006:
|                                         | ** ** | **Amortized  Cost**     | ** ** | **Estimated  Fair Value** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|--------------------------------|------------|
| ** **                              | ** ** | **(in thousands)** | ** ** |
| Due within one  year                    |       | $                       | 11,842     |                           | $          | 11,851 |   |
| Due after one year  through three years |       | 10,296                  |       | 10,290                         |       |
|                                         |            |                         |            |                                |            |  |  |

 

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**4.****                                      ACQUISITIONS**

**Prophet Financial Systems**

In January 2005, theCompany acquired Prophet Financial Systems (“Prophet”), a Californiacorporation 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 profitably.  The Company acquired Prophet to add morefunctionality to its Investor ToolboxTM website as well as to attract and retain newand existing customers.  At closing, thesellers received a cash payment of $7.9 million. In addition, the Companyincurred $0.6 million of costs related to the acquisition. During the threemonths ended June 30, 2005, the Company recorded a receivable amount of$0.1 million from the shareholders of Prophet based on a net working capitaladjustment provided for in the merger agreement for a total adjusted purchaseprice of $8.4 million. The $0.1 million working capital adjustment wasrecorded as a reduction in goodwill as this represented an adjustment to thepurchase price.  The working capitaladjustment receivable was paid to the Company during the three months endedSeptember 30, 2005. In connection with the transaction, Timothy Knight, Prophet’schief executive officer, president and founder, entered into a two-yearemployment agreement with the Company as Vice President of Technology.

The following tablesummarizes the 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 (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 360 Group**

In February 2004, theCompany acquired SES Acquisition Corp., a privately held California corporationoperating under the assumed name 360 Group (“360 Group”).  360 Group was 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. The Company acquired 360 Group to internalize its marketing department  and no longer provides services to thirdparties.  At closing, the sellersreceived a cash payment of $875,000 and 830,000 shares of the Company’s commonstock valued at $1,875,000.  In addition,the Company incurred $669,000 of costs related to the acquisition, of which$226,000 were paid 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  2004 was recorded as additional purchaseprice.

The following tablesummarizes the purchase price for 360 Group and includes the payments for theworking capital adjustment and earn out 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 tablesummarizes the allocation of the purchase price for 360 Group and the estimatedamortization period for the acquired 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      |   |

 

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In October 2004, theCompany entered into a separation agreement and general release with Scott K.Waltz, the former senior vice president and chief marketing officer of theCompany.  At the time of acquisition, Mr.Waltz entered into 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.****                                      INTANGIBLEASSETS**

Acquired intangibleassets with finite lives as of December 31, 2006 and 2005 were as follows:
|                                | ** ** | **As of December 31, 2006** | ** ** | **As of December 31, 2005** | ** ** |
|--------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                     | ** ** | **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      |                                            | $          | (3,403 | ) | 3.1 years |   | $ | 5,380 |   | (1,407 | ) | 3.2 years |   |
| Non competition                |       | 890                                             |       | (751                                            | )          | 1.1 years |   | 890 |   | (484 | ) | 1.6 years |   |
| Total acquired  intangibles    |       | $                                               | 6,270      |                                            | $          | (4,154 | ) | 3.0 years |   | $ | 6,270 |   | (1,891 | ) | 3.0 years |   |

 

During the fourth quarterof 2005, the estimated useful life of the developed technology intangible assetacquired in the 360 acquisition was reduced from 16 years to one year as plansto implement a new enterprise resource planning and client relationshipmanagement (“ERP/CRM”) system were made for fiscal year 2007. The San Rafaelexisting technology is expected to be used until the new ERP/CRM system issuccessfully implemented. As a result of this change in estimated useful life,amortization expense increased $0.1 million for the year ended December 31,2005 more than it would 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$2.3 million, $1.4 million, and $0.3 million for the years endedDecember 31, 2006, 2005, and 2004, respectively.

Estimated futureamortization expense is as follows:
| 2007                                  |   | $   | 774    |   |
|---------------------------------------|--------|-----|--------|--------|
| 2008                                  |   | 653 |   |
| 2009                                  |   | 644 |   |
| Thereafter                            |   | 45  |   |
| Total estimated  amortization expense |   | $   | 2,116  |   |

 

**Non-AmortizableAcquired Intangibles**

As a result of theProphet acquisition in January 2005, trademarks and tradenames which arenot amortized and have indefinite lives as of December 31, 2006 were $820,000.

**6.****                                      INCOMETAXES**

The provision for incometax expense (benefit) consists of the following (in thousands):
|                                     | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Current:**                        | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal                             |       | $                                           | (936       | ) | $ | — |   | $ | — |   |
| State                               |       | (53                                         | )          | — |   | 8 |   |
| **Deferred:**                       | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal                             |       | 99                                          |       | 99 |   | — |   |
| State                               |       | 15                                          |       | 15 |   | — |   |
| Total income tax  expense (benefit) |       | $                                           | (875       | ) | $ | 114 |   | $ | 8 |   |

 

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The following tablereconciles the differences between the statutory federal income tax rate at 34percent and the effective tax rate for continuing operations (in thousands):
|                                                        | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Tax at federal  statutory rate                         |       | $                                           | (14,145    | ) | $ | (5,314 | ) | $ | (3,984 | ) |
| State income taxes, net of federal income tax  benefit |       | (25                                         | )          | 10 |   | 5 |   |
| Expenses not deductible for tax purposes               |       | 175                                         |       | 69 |   | 162 |   |
| Utilization of net operating loss                      |       | (936                                        | )          | — |   | — |   |
| Change in valuation allowance                          |       | 14,056                                      |       | 5,430 |   | 3,906 |   |
| Other                                                  |       | —                                      |       | (81 | ) | (81 | ) |
| Total income tax  expense (benefit)                    |       | $                                           | (875       | ) | $ | 114 |   | $ | 8 |   |

 

The tax effects oftemporary differences that give rise to significant portions of the federal andstate deferred tax assets are comprised of the following (in thousands):
|                                  | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------|------------|---------------------------------------------|------------|
| ** **                       | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| ** **                       | ** ** | ** **                                  | ** ** | ** ** | ** ** |
| **Deferred  tax assets:**        |       |                                        |       |   |   |
| Accrued liabilities              |       | $                                           | 862        |   | $ | 575 |   |
| Deferred revenue                 |       | 3,649                                       |       | 3,284 |   |
| Reserves and allowances          |       | 3,072                                       |       | 2,588 |   |
| Book/tax depreciation            |       | 777                                         |       | 369 |   |
| Net operating loss carry forward |       | 25,508                                      |       | 12,139 |   |
| Other                            |       | 346                                         |       | 81 |   |
| Gross deferred tax assets        |       | 34,214                                      |       | 19,036 |   |
| Valuation allowance              |       | (32,809                                     | )          | (17,697 | ) |
|                             |       |                                        |       |   |   |
| Net deferred tax assets          |       | $                                           | 1,405      |   | $ | 1,339 |   |
|                             |       |                                        |       |   |   |
| **Deferred  tax liabilities:**   |       |                                        |       |   |   |
| Prepaid assets                   |       | $                                           | 1,405      |   | $ | 759 |   |
| Section 197 Intangibles     |       | 228                                         |       | 694 |   |
| Gross deferred tax liabilities   |       | $                                           | 1,633      |   | $ | 1,453 |   |
|                             |       |                                        |       |   |   |
| Net deferred tax  liability      |       | $                                           | (228       | ) | $ | (114 | ) |

 

At December 31,2006, the Company had approximately $62.3 million of net operating loss carryforwards available. These carry forwards, which may provide future taxbenefits, begin to expire in 2007 through 2026.

In assessing therealizability of deferred tax assets at December 31, 2006, the Companyconsidered whether it was more likely than not that some portion or all of thedeferred tax assets would not be realized.  The ultimate realization ofdeferred tax assets is dependent upon the generation of future taxable incomeduring the periods in which those temporary differences becomedeductible.  The Company considers the scheduled reversal of deferred taxliabilities, projected future taxable income, and tax planning strategies inmaking this assessment.  Based on available information, management doesnot believe it is more likely than not that its deferred tax assets will beutilized.  Accordingly, the Company has established a valuation allowanceequal to the net deferred tax assets plus an amount for deferred taxliabilities which relate to goodwill and indefinite lived intangibles thatcannot be considered future sources of taxable income.

The valuation allowanceincreased by $15.2 million, $6.3 million, and $3.8 million during 2006, 2005and 2004, respectively.  Subsequentlyrecognized tax benefits relating to the valuation allowance for deferred taxassets as of 

45

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December 31, 2006,will be allocated as follows:
| Income tax benefit that  would be reported in the consolidated statement of operations |   | $     | 29,655 |   |
|----------------------------------------------------------------------------------------|--------|-------|--------|--------|
| Goodwill and  other non-current intangible assets                                      |   | 3,094 |   |
| Additional  paid-in capital                                                            |   | 60    |   |
| Total                                                                                  |   | $     | 32,809 |   |

 

**7.****                                      STATEMENTOF CASH FLOWS**

The supplemental cashflow information for December 31, 2006, 2005 and 2004, is as follows:
|                                                                                                    | ** ** | **2006**                | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                         | ** ** | **(in thousands)** | ** ** |
| ** **                                                                                         | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash paid (received)  during the year for:                                                         |       |                    |       |       |       |       |       |
| Interest                                                                                           |       | $                       | 74         |       | $          | 32         |       | $ | 8 |   |
| Income taxes                                                                                       |       | $                       | (989       | )          | $          | —     |       | $ | 3 |   |
| Non-cash  investing and financing activities:                                                      |       |                    |       |       |       |       |       |
| Common stock issued for acquisitions                                                               |       | $                       | —     |       | $          | —     |       | $ | 2,943 |   |
| Deferred stock compensation resulting from option  grants                                          |       | $                       | —     |       | $          | 3,320      |       | $ | 992 |   |
| Software development, deferred acquisition costs, and  equipment financed through accounts payable |       | $                       | 1,972      |       | $          | —     |       | $ | — |   |
| Licensing contracts financed with vendors                                                          |       | $                       | 350        |       | $          | —     |       | $ | — |   |
| Unrealized (gain) loss on marketable securities                                                    |       | $                       | 34         |       | $          | (84        | )          | $ | (30 | ) |
| Capital lease obligations                                                                          |       | $                       | 195        |       | $          | 704        |       | $ | — |   |
| Write off of  accounts receivable                                                                  |       | $                       | —     |       | $          | 6          |       | $ | 193 |   |

 

**8.****                                      COMMITMENTSAND CONTINGENCIES**

**Commitments**

*Leases*

Equipment and facilitiesare leased under various non-cancelable operating leases expiring at variousdates through the year 2010.  Rentexpense was $2.2 million for 2006, $1.7 million for 2005, and $1.1 million for2004.  Sub-lease income was $0.1 millionfor each of 2006, 2005 and 2004. In November 2006, the Company renewed itsoperating lease on its facilities in Palo Alto, California, and decided toextend its operating lease on its Houston office space until August 2007.  The Company has a first right of refusalrenewal option on its Draper facility, and has three-month auto renewal rightson its New York offices.  Included incertain of the Company facility leases are rent escalation and rentholidays.  The Company recognizes leaseexpense based upon the straight line basis of its minimum payments.  Leasehold improvements are depreciated overthe shorter of the life of the improvement or the lease term.

During 2006, the Companyadded additional items to its existing capitalized lease of telecommunicationsequipment.  At December 31, 2006, theacquisition cost and accumulated amortization of assets under capital leasewere $0.9 million and $0.3 million, respectively, and are included in computerand office equipment.  Amortizationcharge applicable to capitalized assets is included in depreciation expense.

At December 31,2006, future minimum lease payments under non-cancelable operating leases,related subleases, and capital leases were as follows:
|                                            | ** ** | **Capital  leases** | ** ** | **Operating  leases** | ** ** | **Sub-lease  income** | ** ** | **Net operating  leases** | ** ** |
|--------------------------------------------|------------|---------------------|------------|-----------------------|------------|-----------------------|------------|--------------------------------|------------|
| For the fiscal  years:                     |       |                |       |                  |       |                  |       |                           |       |
|                                       |       |                |       |                  |       |                  |       |                           |       |
| 2007                                       |       | $                   | 228        |                  | $          | 1,230                 |       | $                              | (119       | ) | $ | 1,111 |   |
| 2008                                       |       | 228                 |       | 789                   |       | (40                   | )          | 749                            |       |
| 2009                                       |       | 229                 |       | 741                   |       | —                |       | 741                            |       |
| 2010                                       |       | 95                  |       | 393                   |       | —                |       | 393                            |       |
| 2011                                       |       | —              |       | —                |       | —                |       | —                         |       |
| Thereafter                                 |       | —              |       | —                |       | —                |       | —                         |       |
| Total Lease Payments                       |       | 780                 |       | $                     | 3,153      |                  | $          | (159                           | )          | $ | 2,994 |   |
|                                       |       |                |       |                  |       |                  |       |                           |       |
| Less: Amount  representing interest (8.0%) |       | 100                 |       |                  |       |                  |       |                           |       |
|                                       |       |                |       |                  |       |                  |       |                           |       |
| Present value of lease payments            |       | 680                 |       |                  |       |                  |       |                           |       |
|                                       |       |                |       |                  |       |                  |       |                           |       |
| Less: Current  portion                     |       | 180                 |       |                  |       |                  |       |                           |       |
|                                       |       |                |       |                  |       |                  |       |                           |       |
| Long-term  portion                         |       | $                   | 500        |                  |       |                  |       |                           |       |   |

 

In March 2007, theCompany signed a lease for 11,500 square feet of additional space at itsDraper, Utah facility, and will begin paying rent under this new lease of$14,854 per month on June 1, 2007. At the same time the Company willvacate 2,325 square feet currently being leased at the same location at a costof $2,816 per month.

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**Contingencies**

*Litigation*

From time to time theCompany is involved in certain legal actions arising in the ordinary course ofbusiness, including administrative inquiries and proceedings with governmentregulators. The Company believes that such litigation and proceedings will beresolved without a material adverse effect to the Company’s liquidity,financial position or results of operations.

The Company establishesliabilities when a particular contingency is probable and estimable. For thefollowing contingencies, the Company accrued amounts considered probable andestimable.

During 2006, the Companysettled outstanding legal actions with the Australian Securities and InvestmentCommission; Ross Jardine and True North Academy L.L.C.; Ablaise Ltd.; and thesellers of SES Acquisition Corp. Accordingly, the settlement amounts have been included in specialcharges, net of insurance proceeds. As consideration for one of thesettlements, the Company issued 206,156 shares of common stock.  Additionally, in January 2007 the Company’sinsurance carrier reimbursed the Company $1.0 million for one of the legalsettlements.  The reimbursement has beenrecorded in the accompanying consolidated balance sheet as a receivable, andhas been netted against the settlement costs included in special charges.

The Company has appliedfor rulings from various states on the taxability of its products to determineif its sales tax policy is supported by the various state taxingjurisdictions.  During 2006, the Companyreceived rulings from a majority of the states to which it applied.  Based on these rulings, the Company reversed$0.8 million of accrued sales tax payable, which is included in sellingexpenses.

The Company is not awareof pending claims or assessments, other than as described above, which may havea material adverse impact on the Company’s liquidity, financial position orresults of operations.

**9.****                                     ****SPECIAL CHARGES**

Special charges consistedof the following (in thousands):
|                                                                                 | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                      | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Severance costs                                                                 |       | $                                           | 746        |   | $ | 77 |   | $ | 597 |   |
| Litigation  settlement charges, net of insurance reimbursements of $1.0 million |       | 5,448                                       |       | — |   | — |   |
| Impairment of  internal use software                                            |       | 1,414                                       |       | 1,000 |   | 487 |   |
| Total                                                                           |       | $                                           | 7,608      |   | $ | 1,077 |   | $ | 1,084 |   |

 

The Company recordedseverance costs associated with the involuntary termination of 18, 12, and 19employees for the years ended December 31, 2006, 2005 and 2004, respectively.  At December 31, 2006, there was a total of$0.4 million in severance costs still owing.

During 2006, the Companyconcluded several litigation issues, more fully described in Note 8.  In connection with these matters, the Companyrecorded charges of $5.4 million. Of these settlement charges $4.4 millionwas recorded in the fourth quarter of 2006. Legal costs incurred in connectionwith these settlements have been included in general and administrative expense.

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During 2006, the Companycompleted a review of the existing user interface features component of theongoing Investor Toolbox development project. As a result of feedback from Company instructors and coaches, theCompany determined to abandon the component and redevelop it.  Accordingly, the Company wrote off thecapitalized costs related to the existing user interface component inaccordance with SOP 98-1 and SFAS 144. These costs totaled $1.4 million. The Company also capitalized $1.0 million and $0.5 million related tocertain projects to enhance the Company’s internal use software in 2005 and2004, respectively.  Subsequently, theCompany abandoned these projects and the $1.0 million and $0.5 million amounts,respectively, were written-off.

**10.****                               STOCKHOLDERS’ DEFICIT**

**Classes of Capital Stock**

The Company has twoclasses of capital stock: convertible preferred stock and common stock.  As of December 31, 2006, the Company wasauthorized to issue up to 60 million shares of common stock with a par value of$.01 per share and 1 million shares of convertible preferred stock with a parvalue of $.01 per share.  On January 17,2007, stockholders voted to increase the number of common stock shares theCompany was authorized to issue to 100 million.

**11.**                               **STOCK PLANS**

The Company currentlyadministers six stock-based compensation plans. These plans are administered bythe compensation committee of the board of directors, which directly or throughdelegated authority selects persons eligible to receive awards and determinesthe number of shares and/or options subject to each award, the terms,conditions, performance measures, and other provisions of the award.

**Employee Stock Option Plans**

The Company’s purpose ofgranting stock options is to attract, retain, motivate and reward officers,directors and employees of the Company.

*Description of Plans*

Investools 2001 StockOption Plan – This plan is the only plan out of which theCompany currently can grant options. The plan was approved by stockholders inDecember 2001. On June 15, 2006 stockholders approved a proposal amendingthe plan to increase the total number of shares available for grant under thisplan for issuance to officers, directors and employees from six million toeight million. In connection with its proposed merger with thinkorswim, the Companyfiled a proxy statement with the SEC on December 13, 2006 that contained aproposal to increase the total number of shares available for grant under thisplan to 12 million, and to also make options available thereafter toconsultants of the Company. The proposal was approved by stockholders inJanuary 2007.  Incentive options havetypically been granted at fair market value of the Company’s common stock atthe date of grant, and generally expire ten years from the date of grant. Theshares are issuable from the Company’s authorized but unissued shares, or theymay be issued out of treasury stock, if any. Based on awards previouslygranted to employees and directors, the number of shares available for futurestock option grants were 4,131,387 at December 31, 2006.

Telescan Stock OptionPlans – The Company reserved 427,456 shares of its commonstock for issuance under three stock option plans for the employees and formerdirectors of Telescan, Inc., a wholly-owned subsidiary of the Company. Nonew options are being granted under these plans. Options granted under theseplans were granted at fair market value at the date of grant and generallyexpire ten years from the date of grant. At December 31, 2006, there were311,002 shares outstanding under this plan.

ZiaSun Stock Option Plan– The Company reserved 1,296,600 shares of its common stock for issuance underone stock option plan for the officers, employees and former directors ofZiaSun Technologies, Inc., a wholly-owned subsidiary of the Company. Nonew options are being granted under this plan. Options granted under this planwere granted at fair market value at the date of grant and generally expire tenyears from the date of grant. At December 31, 2006, there were 74,400 sharesoutstanding under this plan.

*Employee Stock Option PlanActivity*

The following tablerepresents stock option activity for the year ended December 31, 2006:

48

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|                                         | ** ** | **Number of shares** | ** ** | **Weighted-  average  exercise price** | ** ** | **Weighted-average  remaining  contract life** | ** ** |
|-----------------------------------------|------------|--------------------------------|------------|---------------------------------------------|------------|-----------------------------------------------------|------------|
| Outstanding  options at January 1, 2006 |       | 4,052,193                      |       | $                                           | 2.35       |                                                |       |   |
| Granted                                 |       | 286,118                        |       | $                                           | 9.03       |                                                |       |   |
| Exercised                               |       | (669,522                       | )          | $                                           | 1.32       |                                                |       |   |
| Expired                                 |       | —                         |       | —                                      |       |                                                |       |
| Forfeited                               |       | (192,899                       | )          | $                                           | 4.12       |                                                |       |   |
|                                    |       |                           |       |                                        |       |                                                |       |
| Outstanding at  December 31, 2006       |       | 3,475,890                      |       | $                                           | 3.00       |                                                | 6.4 years  |   |
|                                    |       |                           |       |                                        |       |                                                |       |
| Exercisable December  31, 2006          |       | 2,203,134                      |       | $                                           | 1.48       |                                                | 5.4 years  |   |

 

At December 31, 2006, theaggregate intrinsic value of options outstanding was $38.2 million and theaggregate intrinsic value of exercisable options was $27.1 million. The totalintrinsic value of options exercised was $5.5 million, $0.4 million, and $0.9million for the years ended December 31, 2006, 2005, and 2004, respectively.

At December 31, 2006,there was $3.6 million of unrecognized compensation cost related to optionswhich is expected to be recognized over a weighted-average period of 1.5 years.

During 2002, theCompany’s chief executive officer was granted an option for up to 550,000shares of common stock, the vesting of which was contingent upon an eventoccurring in the future that as of December 31, 2006 was not probable oftaking place. In February 2007, the terms were modified by the board ofdirectors so that the option for 550,000 shares is now fully vested.

**Restricted Stock**

In April 2004, theboard of directors approved the Investools Inc. 2004 Restricted Stock Plan (the“Plan”), which was ratified by the Company’s stockholders inJune 2004.  The purpose of the Planis to (a) attract and retain employees of the Company and its subsidiaries,qualified individuals to serve as members of the Board, and consultants toprovide services to the Company; (b) motivate participating employees,directors and consultants, by means of appropriate incentives, to achievelong-range goals; (c) provide incentive compensation opportunities that arecompetitive with those of other similarly situated companies; and (d) furtheralign Plan participants’ interests with those of the Company’s otherstockholders through compensation alternatives based on the Company’s stock andthereby 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 is administered by the Compensation Committee (the “Committee”)of the board of directors, which is comprised of at least two or more directorsof the Company appointed by the board of directors.

There are 500,000 sharesof Company common stock available for issuance under the 2004 Restricted StockPlan. The shares of Company common stock awarded under the plan may beeither previously authorized but unissued shares or issued shares which havebeen reacquired by the Company after their original issuance (including but notlimited to shares purchased on the open market).

Shares of Company commonstock awarded under the Plan and later reacquired by the Company pursuant tothe Plan will again become available for awards under the Plan.

Unless otherwise providedfor in the Plan, awards granted under the Plan may not be sold, assigned,transferred, pledged or otherwise encumbered for a period of four years or suchshorter period as the Committee may determine (the “Restricted Period”).  At its discretion, the Committee may, at anytime after the date of an award, adjust the length of the Restricted Period toaccount for individual circumstances of a participant or group of participants.

In December 2005 and2004, the Company issued 3,000 and 5,000 shares of restricted, forfeitablestock with a fair value of $5.40 and $3.40 per share, respectively, to membersof its Advisory Board. The restrictions on the restricted stock awards grantedlapse over a period of 24 months and 12 months, respectively.  The fair value of the restricted stock awardsis recognized in compensation expense as the restrictions lapse and until themembers’ performance obligation has been completed, in accordance with EITFNo. 96-18, *Accounting for Equity Instruments That AreIssued to Other Than Employees for Acquiring, or in Conjunction with Selling,Goods or Services*. The amount of unrecognized compensation cost asof December 31, 2006, and the amounts amortized as expense during thethree-year period ended December 31, 2006 is not material to these ConsolidatedFinancial Statements.

**Stock Repurchase Program**

In June 2004, theboard of directors authorized a stock repurchase program under which theCompany can repurchase up to 3.5 million shares of its common stock over atwo-year period.  In June 2006, the boardof directors extended the program for an additional two years.

49

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In May 2006, the Companyrepurchased 160,000 shares of common stock from one of its directors for $1.4million or $8.50 per share, under the terms of the program.  The price of the shares was the closingmarket price on the date of repurchase, less a discount of 5 percent.  During 2005 and 2004, the Company repurchasedand retired 343,400 and 1,054,203 shares of common stock for a total cost of$1.4 and $2.2 million, respectively.  Ofthe 0.3 million shares repurchased during 2005, 0.2 million shares wererepurchased from a member of the Company’s board of directors.   As of the end of 2006, a total of 1.6million shares had been repurchased for a total cumulative cost of $5.0million.

**12.****                               EMPLOYEEBENEFITS**

The Company sponsors thedefined contribution Investools 401(k) Plan. The plan provides participants with a mechanism for making contributionsfor retirement savings.  Each participantmay contribute specified amounts of eligible compensation.  The Company offers a discretionary employermatch whereby the Company matched participant contributions for 50 percent ofup to 6 percent of salary during 2006, 50 percent of up to 4 percent of salaryduring 2005, and 25 percent of up to 4 percent of salary during 2004.  During the years ended December 31, 2006,2005 and 2004, the Company made matching contributions in the amount of $0.5million, $0.3 million, and $0.1 million, respectively.

**13.****                               SEGMENTREPORTING**

The Company consists of asingle operating segment delivering investor education, which provides lifelonglearning and support to self-directed investors. Sales of the Company’s variousproducts are recorded on an individual basis prior to recording deferredrevenue.  Therefore it is impractical toreflect net revenue on a per-product basis. All of the Company’s long-livedassets are located in the United States.

The following table is asummary breakout of the Company’s domestic and international revenues:
|                       | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------|------------|---------------------------------------------|------------|
| ** **            | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Domestic revenue      |       | $                                           | 165,886    |   | $ | 135,377 |   | $ | 93,554 |   |
| International revenue |       | 4,444                                       |       | 3,244 |   | 3,615 |   |
| Total revenue         |       | $                                           | 170,330    |   | $ | 138,621 |   | $ | 97,169 |   |

 

**14.****                               2006UNAUDITED QUARTERLY FINANCIAL STATEMENTS RESTATED**

In February 2007, the Company determined thatduring the year ended December 31, 2006 certain deferred revenue related toworkshops and homestudies had not been appropriately recognized as revenueduring the period the workshop was attended, or homestudy delivered.  The Company also discovered an error inaccrued sales taxes that was recorded in the first quarter of 2006.Additionally, certain immaterial errors were identified which related to theyear ended December 31, 2005. These were also recorded in the firstquarter of 2006.

The Company has accordingly restated operatingresults for each of the first three quarters of 2006 to appropriately reflectrecognition of the additional revenue earned and the sales tax accrued in thefirst quarter of 2006.  The aggregateimpact of the restatement is an increase in revenue recognized under generallyaccepted accounting principles (“GAAP”) of $13.4 million, an increase in firstquarter selling expense of $0.5 million, and an improvement to net loss for thefirst three quarters of $13.0 million. These adjustments also resulted in related changes to long-term deferredtax assets, short-term deferred tax liabilities, current and long-term deferredrevenue, accrued sales taxes, the reserve for sales returns, and accumulateddeficit.

There was no impact from the restatement on netcash provided by operating activities, net cash provided by (used in) investingactivities, or net cash provided by (used in) financing activities.  Following are the corrected consolidatedstatements of operations for each of the three and nine months ended September30, the three and six months ended June 30, and the three months ended March31, 2006.

50

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**INVESTOOLS INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS – (Unaudited)**(in thousands, exceptper share amounts)
| ** **                                                                  | ** ** | **Quarter Ended September 30, 2006** | ** ** | **Quarter Ended June 30, 2006** | ** ** | **Quarter Ended March 31, 2006** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **  Restated  **                     | ** ** | **  As filed  **           | ** ** | ** Difference **                           | ** ** | **Restated** | ** ** | **As filed** | ** ** | **Difference** | ** ** | **Restated** | ** ** | ** As filed ** | ** ** | **Difference** | ** ** |
|                                                                        |       |                                                     |       |                                                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                                                                     |       | $                                                        | 40,043     |                                                | $          | 35,552                                               |       | $ | 4,491 |   | $ | 43,447 |   | $ | 38,396 |   | $ | 5,051 |   | $ | 42,674 |   | $ | 38,781 |   | $ | 3,893 |   |
|                                                                        |       |                                                     |       |                                                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Costs  and expenses:                                                        |       |                                                     |       |                                                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost  of revenue                                                            |       | 26,291                                                   |       | 26,291                                              |       | —                                               |       | 35,851 |   | 35,851 |   | — |   | 28,699 |   | 28,699 |   | — |   |
| Selling  expense                                                            |       | 12,154                                                   |       | 12,154                                              |       | —                                               |       | 12,166 |   | 12,166 |   | — |   | 12,340 |   | 11,888 |   | 452 |   |
| General  and administrative expense                                         |       | 8,353                                                    |       | 8,353                                               |       | —                                               |       | 8,611 |   | 8,611 |   | — |   | 8,075 |   | 8,075 |   | — |   |
| Special  charges                                                            |       | 195                                                      |       | 195                                                 |       | —                                               |       | 2,624 |   | 2,624 |   | — |   | 366 |   | 366 |   | — |   |
| Total  costs and expenses                                                   |       | 46,993                                                   |       | 46,993                                              |       | —                                               |       | 59,252 |   | 59,252 |   | — |   | 49,480 |   | 49,028 |   | 452 |   |
|                                                                        |       |                                                     |       |                                                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  loss from operations                                                   |       | (6,950                                                   | )          | (11,441                                             | )          | 4,491                                                |       | (15,805 | ) | (20,856 | ) | 5,051 |   | (6,806 | ) | (10,247 | ) | 3,441 |   |
|                                                                        |       |                                                     |       |                                                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other  income (expense):                                                    |       |                                                     |       |                                                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gain  (loss on sale of assets                                               |       | —                                                   |       | —                                              |       | —                                               |       | 3 |   | 3 |   | — |   | 7 |   | 7 |   | — |   |
| Interest  income (expense) and other, net                                   |       | 646                                                      |       | 646                                                 |       | —                                               |       | 587 |   | 587 |   | — |   | 348 |   | 348 |   | — |   |
| Total  other income                                                         |       | 646                                                      |       | 646                                                 |       | —                                               |       | 590 |   | 590 |   | — |   | 355 |   | 355 |   | — |   |
|                                                                        |       |                                                     |       |                                                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  loss before income taxes and cumulative change in accounting principle |       | (6,304                                                   | )          | (10,795                                             | )          | 4,491                                                |       | (15,215 | ) | (20,266 | ) | 5,051 |   | (6,451 | ) | (9,892 | ) | 3,441 |   |
|                                                                        |       |                                                     |       |                                                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Income  tax (benefit)                                                       |       | (907                                                     | )          | (907                                                | )          | —                                               |       | 28 |   | 28 |   | — |   | 28 |   | 28 |   | — |   |
|                                                                        |       |                                                     |       |                                                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  loss before cumulative change in accounting principle                  |       | (5,397                                                   | )          | (9,888                                              | )          | 4,491                                                |       | (15,243 | ) | (20,294 | ) | 5,051 |   | (6,479 | ) | (9,920 | ) | 3,441 |   |
|                                                                        |       |                                                     |       |                                                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cumulative  change in accounting principle                                  |       | —                                                   |       | —                                              |       | —                                               |       | — |   | — |   | — |   | 48 |   | 48 |   | — |   |
|                                                                        |       |                                                     |       |                                                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  loss                                                                   |       | $                                                        | (5,397     | )                                                   | $          | (9,888                                               | )          | $ | 4,491 |   | $ | (15,243 | ) | $ | (20,294 | ) | $ | 5,051 |   | $ | (6,431 | ) | $ | (9,872 | ) | $ | 3,441 |   |
|                                                                        |       |                                                     |       |                                                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                        |       |                                                     |       |                                                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  loss per common share – basic and diluted                         |       | $                                                        | (0.12      | )                                                   | $          | (0.22                                                | )          | $ | 0.10 |   | $ | (0.34 | ) | $ | (0.45 | ) | $ | 0.11 |   | $ | (0.14 | ) | $ | (0.22 | ) | $ | 0.08 |   |
|                                                                        |       |                                                     |       |                                                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted  weighted average shares outstanding                      |       | 45,111                                                   |       | 45,111                                              |       | —                                               |       | 45,067 |   | 45,067 |   | — |   | 44,815 |   | 44,815 |   | — |   |

 

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**INVESTOOLSINC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS – (Unaudited)**(in thousands, exceptper share amounts)
| ** **                                                                  | ** ** | **Nine Months Ended September 30, 2006** | ** ** | **Six Months Ended June 30, 2006** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Restated**                                                      | ** ** | **As filed**                                           | ** ** | **Difference** | ** ** | **Restated** | ** ** | **As filed** | ** ** | **Difference** | ** ** |
|                                                                        |       |                                                              |       |                                                        |       |   |   |   |   |   |   |   |   |
| Revenue                                                                     |       | $                                                                 | 126,164    |                                                        | $          | 112,729 |   | $ | 13,435 |   | $ | 86,121 |   | $ | 77,177 |   | $ | 8,944 |   |
|                                                                        |       |                                                              |       |                                                        |       |   |   |   |   |   |   |   |   |
| Costs and  expenses:                                                        |       |                                                              |       |                                                        |       |   |   |   |   |   |   |   |   |
| Cost of revenue                                                             |       | 90,841                                                            |       | 90,841                                                      |       | — |   | 64,550 |   | 64,550 |   | — |   |
| Selling expense                                                             |       | 36,660                                                            |       | 36,208                                                      |       | 452 |   | 24,506 |   | 24,054 |   | 452 |   |
| General and administrative expense                                          |       | 25,039                                                            |       | 25,039                                                      |       | — |   | 16,686 |   | 16,686 |   | — |   |
| Special charges                                                             |       | 3,185                                                             |       | 3,185                                                       |       | — |   | 2,990 |   | 2,990 |   | — |   |
| Total costs and expenses                                                    |       | 155,725                                                           |       | 155,273                                                     |       | 452 |   | 108,732 |   | 108,280 |   | 452 |   |
|                                                                        |       |                                                              |       |                                                        |       |   |   |   |   |   |   |   |   |
| Net loss from operations                                                    |       | (29,561                                                           | )          | (42,544                                                     | )          | 12,983 |   | (22,611 | ) | (31,103 | ) | 8,492 |   |
|                                                                        |       |                                                              |       |                                                        |       |   |   |   |   |   |   |   |   |
| Other income  (expense):                                                    |       |                                                              |       |                                                        |       |   |   |   |   |   |   |   |   |
| Gain (loss on sale of assets                                                |       | 10                                                                |       | 10                                                          |       | — |   | 10 |   | 10 |   | — |   |
| Interest income (expense) and other, net                                    |       | 1,581                                                             |       | 1,581                                                       |       | — |   | 935 |   | 935 |   | — |   |
| Total other income                                                          |       | 1,591                                                             |       | 1,591                                                       |       | — |   | 945 |   | 945 |   | — |   |
|                                                                        |       |                                                              |       |                                                        |       |   |   |   |   |   |   |   |   |
| Net loss before  income taxes and cumulative change in accounting principle |       | (27,970                                                           | )          | (40,953                                                     | )          | 12,983 |   | (21,666 | ) | (30,158 | ) | 8,492 |   |
|                                                                        |       |                                                              |       |                                                        |       |   |   |   |   |   |   |   |   |
| Income tax (benefit)                                                        |       | (851                                                              | )          | (851                                                        | )          | — |   | 56 |   | 56 |   | — |   |
|                                                                        |       |                                                              |       |                                                        |       |   |   |   |   |   |   |   |   |
| Net loss before  cumulative change in accounting principle                  |       | (27,119                                                           | )          | (40,102                                                     | )          | 12,983 |   | (21,722 | ) | (30,214 | ) | 8,492 |   |
|                                                                        |       |                                                              |       |                                                        |       |   |   |   |   |   |   |   |   |
| Cumulative change in accounting principle                                   |       | 48                                                                |       | 48                                                          |       | — |   | 48 |   | 48 |   | — |   |
|                                                                        |       |                                                              |       |                                                        |       |   |   |   |   |   |   |   |   |
| Net loss                                                                    |       | $                                                                 | (27,071    | )                                                           | $          | (40,054 | ) | $ | 12,983 |   | $ | (21,674 | ) | $ | (30,166 | ) | $ | 8,492 |   |
|                                                                        |       |                                                              |       |                                                        |       |   |   |   |   |   |   |   |   |
| Net loss per  common share – basic and diluted                         |       | $                                                                 | (0.60      | )                                                           | $          | (0.89 | ) | $ | 0.29 |   | $ | (0.48 | ) | $ | (0.67 | ) | $ | 0.19 |   |
|                                                                        |       |                                                              |       |                                                        |       |   |   |   |   |   |   |   |   |
| Basic and diluted  weighted average shares outstanding                      |       | 44,999                                                            |       | 44,999                                                      |       | — |   | 44,943 |   | 44,943 |   | — |   |

 

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Following are thecorrected consolidated condensed balance sheets as of September 30, June 30,and March 31, 2006:

 

**INVESTOOLS INC. AND SUBSIDIARIESCONSOLIDATED CONDENSED BALANCE SHEETS – (Unaudited)**(in thousands)

 
| ** **                                        | ** ** | **September 30, 2006** | ** ** | **June 30, 2006** | ** ** | **March 31, 2006** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| ** **                                        | ** ** | **Restated**                     | ** ** | **As filed**           | ** ** | **Difference**               | ** ** | **Restated** | ** ** | **As filed** | ** ** | **Difference** | ** ** | **Restated** | ** ** | **As filed** | ** ** | **Difference** | ** ** |
| **ASSETS**                                        |       |                             |       |                        |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Current assets:                                   |       |                             |       |                        |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                         |       | $                                | 32,660     |                        | $          | 32,660                       |       | $ | — |   | $ | 20,969 |   | $ | 20,969 |   | $ | — |   | $ | 20,722 |   | $ | 20,722 |   | $ | — |   |
| Marketable securities                             |       | 36,473                           |       | 36,473                      |       | —                       |       | 37,662 |   | 37,662 |   | — |   | 22,210 |   | 22,210 |   | — |   |
| Accounts receivable, net                          |       | 5,184                            |       | 5,184                       |       | —                       |       | 2,927 |   | 2,927 |   | — |   | 2,219 |   | 2,219 |   | — |   |
| Current portion restricted cash                   |       | —                           |       | —                      |       | —                       |       | — |   | — |   | — |   | 4,723 |   | 4,723 |   | — |   |
| Other current assets                              |       | 7,562                            |       | 7,562                       |       | —                       |       | 4,800 |   | 4,800 |   | — |   | 2,493 |   | 2,493 |   | — |   |
| Total current assets                              |       | 81,879                           |       | 81,879                      |       | —                       |       | 66,358 |   | 66,358 |   | — |   | 52,367 |   | 52,367 |   | — |   |
|                                              |       |                             |       |                        |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term restricted cash                         |       | 373                              |       | 373                         |       | —                       |       | 371 |   | 371 |   | — |   | 368 |   | 368 |   | — |   |
| Goodwill                                          |       | 18,085                           |       | 18,085                      |       | —                       |       | 18,085 |   | 18,085 |   | — |   | 18,085 |   | 18,085 |   | — |   |
| Intangible assets, net                            |       | 3,375                            |       | 3,375                       |       | —                       |       | 3,949 |   | 3,949 |   | — |   | 4,574 |   | 4,574 |   | — |   |
| Software development cost, net                    |       | 9,428                            |       | 9,428                       |       | —                       |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Furniture and equipment, net                      |       | 5,760                            |       | 5,760                       |       | —                       |       | 12,365 |   | 12,365 |   | — |   | 11,183 |   | 11,183 |   | — |   |
| Other long-term assets                            |       | 1,308                            |       | 1,357                       |       | (49                          | )          | 1,072 |   | 1,229 |   | (157 | ) | 440 |   | 554 |   | (114 | ) |
|                                              |       |                             |       |                        |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total assets                                      |       | $                                | 120,208    |                        | $          | 120,257                      |       | $ | (49 | ) | $ | 102,200 |   | $ | 102,357 |   | $ | (157 | ) | $ | 87,017 |   | $ | 87,131 |   | $ | (114 | ) |
|                                              |       |                             |       |                        |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ DEFICIT**   |       |                             |       |                        |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Current  liabilities:                             |       |                             |       |                        |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Current portion of deferred revenue               |       | $                                | 107,667    |                        | $          | 131,037                      |       | $ | (23,370 | ) | $ | 94,058 |   | $ | 112,268 |   | $ | (18,210 | ) | $ | 73,897 |   | $ | 84,634 |   | $ | (10,737 | ) |
| Accounts payable                                  |       | 6,621                            |       | 6,621                       |       | —                       |       | 4,458 |   | 4,458 |   | — |   | 4,300 |   | 4,300 |   | — |   |
| Accrued payroll                                   |       | 5,141                            |       | 5,141                       |       | —                       |       | 3,850 |   | 3,850 |   | — |   | 3,471 |   | 3,471 |   | — |   |
| Accrued tax liabilities                           |       | 8,103                            |       | 7,700                       |       | 403                          |       | 9,679 |   | 9,384 |   | 295 |   | 8,608 |   | 8,270 |   | 338 |   |
| Other current liabilities                         |       | 10,238                           |       | 10,038                      |       | 200                          |       | 6,121 |   | 5,891 |   | 230 |   | 6,140 |   | 5,949 |   | 191 |   |
| Current portion of capital lease                  |       | 176                              |       | 176                         |       | —                       |       | 171 |   | 171 |   | — |   | 146 |   | 146 |   | — |   |
| Total current liabilities                         |       | 137,946                          |       | 160,713                     |       | (22,767                      | )          | 118,337 |   | 136,022 |   | (17,685 | ) | 96,562 |   | 106,770 |   | (10,208 | ) |
|                                              |       |                             |       |                        |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term portion of deferred revenue             |       | 31,984                           |       | 22,249                      |       | 9,735                        |       | 28,768 |   | 19,732 |   | 9,036 |   | 19,173 |   | 12,520 |   | 6,653 |   |
| Long-term portion of capital lease obligations    |       | 543                              |       | 543                         |       | —                       |       | 580 |   | 580 |   | — |   | 546 |   | 546 |   | — |   |
| Other long-term accrued liabilities               |       | 264                              |       | 264                         |       | —                       |       | 265 |   | 265 |   | — |   | 299 |   | 299 |   | — |   |
| Total liabilities                                 |       | 170,737                          |       | 183,769                     |       | (13,032                      | )          | 147,950 |   | 156,599 |   | (8,649 | ) | 116,580 |   | 120,135 |   | (3,555 | ) |
|                                              |       |                             |       |                        |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Stockholders’  deficit:                      |       |                             |       |                        |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Common stock                                      |       | 451                              |       | 451                         |       | —                       |       | 450 |   | 450 |   | — |   | 450 |   | 450 |   | — |   |
| Additional paid-in capital                        |       | 127,600                          |       | 127,600                     |       | —                       |       | 127,220 |   | 127,220 |   | — |   | 128,069 |   | 128,069 |   | — |   |
| Accumulated other comprehensive loss              |       | (19                              | )          | (19                         | )          | —                       |       | (256 | ) | (256 | ) | — |   | (161 | ) | (161 | ) | — |   |
| Accumulated deficit                               |       | (178,561                         | )          | (191,544                    | )          | 12,983                       |       | (173,164 | ) | (181,656 | ) | 8,492 |   | (157,921 | ) | (161,362 | ) | 3,441 |   |
|                                              |       |                             |       |                        |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total stockholders’ deficit                  |       | (50,529                          | )          | (63,512                     | )          | 12,983                       |       | (45,750 | ) | (54,242 | ) | 8,492 |   | (29,563 | ) | (33,004 | ) | 3,441 |   |
|                                              |       |                             |       |                        |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total liabilities  and stockholders’ deficit |       | $                                | 120,208    |                        | $          | 120,257                      |       | $ | (49 | ) | $ | 102,200 |   | $ | 102,357 |   | $ | (157 | ) | $ | 87,017 |   | $ | 87,131 |   | $ | (114 | ) |

 

53

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

|                                                             | ** ** | **Fiscal Year 2006  Quarters Ended**                | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **December 31,   2006**                                  | ** ** | **September 30,   2006  Restated** | ** ** | **June 30,   2006  Restated** | ** ** | **March 31,  2006  Restated** | ** ** |
| ** **                                                  | ** ** | **(in thousands, except per share data**) | ** ** |
| **Statements  of Operations**                               |       |                                                               |       |   |   |   |   |   |   |
| Revenue                                                     |       | $                                                                  | 44,166     |   | $ | 40,043 |   | $ | 43,447 |   | $ | 42,674 |   |
| Net loss from  operations                                   |       | (14,591                                                            | )          | (6,950 | ) | (15,805 | ) | (6,806 | ) |
| Net loss                                                    |       | $                                                                  | (13,661    | ) | $ | (5,397 | ) | $ | (15,243 | ) | $ | (6,431 | ) |
|                                                        |       |                                                               |       |   |   |   |   |   |   |
| Net loss per  common share—basic and diluted           |       | $                                                                  | (0.30      | ) | $ | (0.12 | ) | $ | (0.34 | ) | $ | (0.14 | ) |
| Weighted average shares  outstanding—basic and diluted |       | 45,168                                                             |       | 45,111 |   | 45,067 |   | 44,815 |   |

 

 

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

 

**16.****                               SUBSEQUENTEVENTS**

**Credit Agreement**

In connection with the merger with thinkorswim (seeNote 1) on February 15, 2007, the Company entered into a Credit Agreement withJPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent, and with otherlenders. 

The Credit Agreement provides for $125 million insenior secured term loan facilities and a $25 million senior secured revolvingloan facility. The senior secured term loan facilities are comprised of afive-year $50 million senior secured term loan A facility, and afive-and-a-half year $75 million senior secured term loan B facility. Therevolving loan facility has a five-year term. The Credit Agreement includes anexpansion feature with respect to the term loans pursuant to which the Companymay request an increase in the permitted aggregate term loan borrowings of upto $25 million. The borrowings under the new senior credit facilities areguaranteed by substantially all of the material wholly-owned domesticsubsidiaries of the Company (other than thinkorswim, Inc. and certainimmaterial subsidiaries). 

Loans under the term loan A facility bear interest, atthe borrower’s option, initially, at (1) a rate equal to the London interbankoffered rate (with adjustments for statutory reserve requirements), or LIBOR,plus an applicable margin or (2) a rate equal to the higher of (a) the primerate of JPMorgan and (b) the federal funds effective rate plus 0.50 percent(the “ABR”), plus an applicable margin. After the delivery by the borrower tothe administrative agent of the borrower’s financial statements for the secondfull fiscal quarter completed after the closing date, the applicable marginsfor borrowings under the term loan A facility and the revolving credit facilitymay be reduced subject to a leverage-based pricing grid. Loans under the term Bfacility bear interest at fixed rates of (1) ABR plus 2.25 percent per annum inthe case of ABR loans, or (2) LIBOR plus 3.25 percent per annum in the case ofLIBOR loans. 

The Credit Agreement contains customaryrepresentations and warranties and customary affirmative and negative 

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covenants applicable to the Company and itssubsidiaries, including, among other things, restrictions on indebtedness,liens, fundamental changes, investments and acquisitions, sales of assets, saleleasebacks, mergers and consolidations, dividends and other distributions,redemptions, hedging agreements, transactions with affiliates, and maximumfixed charge and total leverage ratios. The Credit Agreement also includescustomary events of default, including the occurrence of a change in control.

If an event of default under the Credit Agreementshall occur and be continuing, the commitments thereunder may be terminated andthe principal amount outstanding thereunder, together with all accrued unpaidinterest and other amounts owed thereunder, may be declared immediately due andpayable. 

**Brokerage Service Agreement**

On February 27, 2007, the Company entered into arelationship and acquired certain intangible assets from an active retailoption traders’ group, which is also an existing customer of thinkorswim.  Pursuant to a brokerage service agreement,the Company issued 650,000 unregistered shares of common stock and, subject tomeeting certain broker revenue thresholds over a three-year period, will issuean additional 950,000 shares of unregistered common stock.

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###### **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, 2006:                                     |       |                                                 |       |                                           |       |                                          |       |           |       |   |   |
| Bad debt allowance                                                     |       | $                                                    | 55         |                                           | $          | 19                                            |       | $              | —     |   | $ | — |   | $ | 74 |   |
| Sales return allowance                                                 |       | 1,548                                                |       | 1,419                                          |       | 6,374                                         |       | (7,384         | )(3)       | 1,957 |   |
| Total                                                                  |       | $                                                    | 1,603      |                                           | $          | 1,438                                         |       | $              | 6,374      |   | $ | (7,384 | ) | $ | 2,031 |   |
|                                                                   |       |                                                 |       |                                           |       |                                          |       |           |       |   |   |
| 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 |   |

 

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(1)          Reclass from deferredrevenue to other accrued liabilities for cash refunds related to sales returns.

(2)          Uncollectible accountswritten-off, net of recoveries.

(3)          Represents cash paid outfor refunds.

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