**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

| **x**      | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the  fiscal year ended December 31, 2005.** | ** ** |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **o**      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934 for the transition period from to .**                | ** ** |
| ** ** | **Commission File No. 000-26781**                                                                                                                                | ** ** |

 

**QUOTESMITH.COM, INC.**

**(Exact name of Registrant asspecified in its charter)**

| **Delaware**                      | **36-3299423**          |
|-----------------------------------|-------------------------|
| State or other jurisdiction       | (IRS Employer           |
| of incorporation or organization) | Identification  Number) |

 

**8205 South Cass Avenue, Suite 102Darien, Illinois 60561(630) 515-0170**(Address, including zip code, and telephone number,includingareacode, of Registrant’s principal executive offices)

Securities registeredpursuant to Section 12(b) of the Act: **None**

Securities registeredpursuant to Section 12(g) of the Act:

**Title of Each Class**

Common Stock, $.003 par value

Preferred Stock PurchaseRights

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. o Yes   x No

Indicateby checkmark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act. o Yes   x No

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. x Yes   o No

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained,to the best of the registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.   x

Indicate by a check mark whether the registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer. Seedefinition of “accelerated filer” and “large accelerated filer” in Rule 12b-2of the Exchange Act. (Check One):

| Large Accelerated  Filer o | Accelerated Filer o | Non  Accelerated Filer x |
|---------------------------------|--------------------------|-------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Act). o Yes   x No

Aggregatemarket value of the Registrant’s voting stock held by non-affiliates on March 9,2006, based on the closing price of said stock on the Nasdaq SmallCap Market onsuch date, was $6,270,501.

As of March 9, 2006, 7,317,443****shares of the Registrant’s Common Stock,$.003 par value of the Registrant were outstanding.

**DocumentsIncorporated by Reference**

Portions of the Registrant’sdefinitive proxy statement for the annual meeting of stockholders to be held onMay 18, 2006, to be filed pursuant to Regulation 14(A) areincorporated by reference into Part III of this Form 10-K.

 

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**PART ICAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS**

Becausewe want to provide you with more meaningful and useful information, this AnnualReport on Form 10-K  includesforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, or the Securities Act, and Section 21Eof the Securities Exchange Act of 1934, as amended, or the Exchange Act. Theseforward-looking statements reflect our current expectations and projectionsabout our future results, performance, prospects and opportunities. We haveattempted to identify these forward-looking statements by using words such as “may,”“will,” “expects,” “anticipates,” “believes,” “intends,” “estimates,” “could,”or similar expressions. These forward-looking statements are based oninformation currently available to us and are subject to a number of risks in2006 and beyond. Actual events may differ materially from those expressed in,or implied by, these forward-looking statements. These risks, uncertainties,and other factors include, without limitation, the following:

·       ourability to achieve or sustain profitability;

·       demandfor life insurance;

·       significantfluctuations in our quarterly results;

·       ourability to develop our brand recognition;

·       ournumber of agency contracts;

·       ourability to generate revenue from the sale of Internet leads for lines ofinsurance other than life;

·       ourability to successfully consolidate our call center operations;

·       thelength of time it takes to sell our building in Colorado, and the ultimateprice realized from that sale;

·       ourability to manage our growth;

·       providingaccurate insurance quotes;

·       ourability to manage our expense, quickly respond to changes in our marketplaceand meet consumer expectations;

·       thecomplexity of our technology and our use of new technology;

·       ourability to hire and retain senior management and other qualified personnel;

·       intensecompetition in the insurance industry;

·       ongoinginvestigations by regulatory authorities into the insurance brokerage industry,

·       ourability to keep pace with technological changes and future regulationsaffecting our business;

·       constraintsof the systems we employ; and

·       ourability to raise additional capital if necessary.

See the section of thisAnnual Report on Form 10-K entitled “Risk Factors” for a descriptionof these and other risks, uncertainties, and factors.

You should not place undue reliance on anyforward-looking statements. Except as required by the federal securities laws,we undertake no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events, changedcircumstances, or any other reason after the date of this annual report. Unlessotherwise expressly stated, all references to “we,” “us,” “our,” “Quotesmith,”and the “Company” refer to Quotesmith.com, Inc. and its subsidiaries. Theinformation contained on our Web sites, or Web sites that are linked to our Websites, is specifically not incorporated herein by reference.

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**ITEM 1.**                BUSINESS

**Overview**

We are an insurance agency and brokerage headquarteredin Darien, Illinois. We own and operate a comprehensive online consumerinsurance information service, accessible at www.Insure.com, which caters tothe needs of self-directed insurance shoppers. Since our inception in 1984, wehave been continuously developing a proprietary and comprehensive insuranceprice comparison and order-entry system that provides instant quotes from over60 life insurance companies. We use this database to provide customers with alarge array of comparative life insurance quotes online, over the phone or bymail, and we allow the customer to purchase insurance from the company of theirchoice either online or over the phone with our licensed insurance customerservice staff. Our website also provides insurance information anddecision-making tools, along with access to other forms of personal insurance,such as auto, homeowners, renters, long-term care, health and travel insurancethrough various third parties. We generate revenues from the receipt ofcommissions and fees paid by various sources that are tied directly to thevolume of insurance sales or traffic that we produce. We conduct our insuranceagency and brokerage operations using commissioned and non-commissionedpersonnel and we generate prospective customer interest using traditionaldirect response advertising methods conducted primarily offline.

For the nine-year periodended December 31, 2005, we have spent a total of $70.7 million indirect-to-consumer advertising and have sold approximately 171,000 newpolicies.

**Industry Background**

*The TraditionalInsurance Market in the United States*

The insurance market inthe United States represents over $1 trillion in annual paid premiums. Insuranceproducts are widely held by households and businesses. The United Statesinsurance market is broadly divided into two categories: life and healthinsurance and property and casualty insurance. Over 4,000 insurance companiesdistribute their products through a network of agents and brokers or selldirectly to consumers. There are approximately one million individuals licensedas agents and brokers to sell insurance in the United States. A variety ofdistribution systems have evolved, including “captive” one-company agentsand independent agents and brokers that typically represent only two to fiveinsurance companies.

*Challenges toPurchasing and Delivering Insurance*

There are numerous challenges to the informed purchaseand delivery of insurance products. Some of these challenges are due to thespecialized nature of insurance products and other challenges result from theway in which insurance has been traditionally distributed.

These challengesinclude:

·       *Fragmenteddelivery*.   Insurance products are available from captive agents,independent agents and direct distribution channels as well as new entrants,including banks and other financial institutions. Because of thisfragmentation, there has been no single source of policy coverage and pricinginformation from which a consumer can obtain unbiased and complete information.

·       *Quantity andvariation of products*.   Insurance policies vary by type ofinsurance product, underwriting guidelines, insurance company, jurisdiction andthe particular characteristics and preferences of the consumer. This creates acomplex pricing structure that is not readily understandable or comparablewithout the use of technology.

·       *Information-intensiveunderwriting process*.   The underwriting process requiresconsumers to submit, and insurance companies to collect, large amounts ofindividualized and personal 

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information. This processis difficult, time consuming and, if not accurately completed, will delay theapproval of a policy.

·       *Negativeconsumer perception*.   Consumers often believe that they paidtoo much for their insurance and were not properly informed by insurance agents.Face-to-face contact with an insurance agent may convey the senseof a high-pressure sales environment with a lack of unbiased information.

·       *Misalignmentof interests between insurance agents and consumers*.   Commission-basedinsurance agents represent only a limited number of insurance companies. Accordingly,they are compensated to promote and sell a limited range of products, which isin direct conflict with the consumer’s need to obtain insurance at the lowestprice.

·       *Inconvenientand time-consuming purchase*.   Researching policycoverage, contacting competing insurance companies, collecting information andobtaining insurance quotes require large blocks of time usually during regularworking hours. Consumers are often unable to shop for insurance on their own timeand from the convenience of their own home.

Distribution of insurancethrough traditional agent and broker sales forces is expensive and inefficientfor insurance companies. Traditional agency distribution methods have highfixed costs associated with establishing and maintaining numerous branch andlocal offices, high commission structures, recurring training costs and highagent turnover. In addition, insurance companies often do not target allsegments of the population because of the inability to profitably serve thesesegments through traditional distribution channels.

*Online Insurance*

The growing acceptance of the Internet and electroniccommerce presents a significant opportunity for the insurance industry byallowing consumers to more efficiently and effectively research and transactwith insurance companies. The fragmentation of the insurance industry and thesignificant price and product variation has led consumers to seek alternativemeans of purchase and insurance companies to seek alternative means ofdistribution. We believe that the vast information sharing and communicationspower of the Internet will significantly improve the insurance industry forboth consumers and insurance companies.

Characteristics ofthe insurance product that make it particularly well suited for delivery overthe Internet include:

·       insuranceis an information-based product that needs no physical shipment orwarehousing of merchandise;

·       througha single medium, consumers can access information and compare a wide variety ofinsurance companies’ products;

·       effectivetwo-way communication flow via the Internet allows insurance companies tointeract with consumers and rapidly collect underwriting information;

·       enhancedconvenience, privacy and control over the process of researching and purchasinginsurance without the pressure of a commissioned agent; and

·       abilityof insurance companies to target and serve segments of the market whichpreviously were unprofitable through traditional distribution channels byreducing the need for large sales staff and costly local offices.

Many companies are trying to address the onlineinsurance opportunity. Some companies have created “lead referral” Web sitesfor the purpose of capturing consumer name and address information to 

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be forwarded, as aprospective sales lead, to a specified insurance company or its traditionalsales force. Many of these Web sites are paid up-front referral fees, arealigned with a limited number of insurance companies and often do not quotemany of the lowest priced insurance policies. Consumers are often stillrequired to complete their purchase through a commissioned salesperson. Additionally,these companies typically do not offer any personalized customer service orinsurance fulfillment capabilities and, therefore, do not offer a completequote-to-policy-delivery insurance solution.

Existing insurance companies and their agents andbrokers have created Web sites to sell their insurance products online as analternative to their traditional sales activities. Some companies have createdWeb sites with the primary purpose of creating an insurance sale online for asingle insurance company or group of insurance companies with little or nocomparative overview of prices. These companies perpetuate the fragmentation inthe industry by not offering a comprehensive database of pricing and coverageinformation.

As a result of theshortcomings inherent in the online lead referral and single companyapproaches, we have developed a large-scale, comprehensive and unbiasedInternet-based insurance service. Self-directed consumers willlikely be attracted to the broadest selection of insurance companies and acompelling value proposition based upon price, time and transactionfulfillment.

**The Quotesmith.com Solution**

We believe that Quotesmith.com provides the mostcomprehensive Internet-based insurance service available. Our Insure.comwebsite enables consumers to obtain instant quotes from over 60 life insurancecompanies and provides access to quotes for several different insuranceproducts, including health, auto and home insurance, through third parties. Customerswho prefer an offline experience can receive comparative life insurance quotesfrom our licensed insurance professionals and can complete an insuranceapplication over the phone. Our web site provides consumers withinsurance-related information and decision-making tools. Combining the reachand efficiency of the Internet with our proprietary database and industryexpertise developed over the past 20 years, we provide a complete “quote-to-policy-delivery”insurance solution.

We believe we havecreated a model that addresses the challenges faced by traditional insurancedistribution methods in a manner that offers significant benefits to bothconsumers and insurance companies. Our model allows consumers to:

·       research and become informed about insurance coverageissues;

·       efficientlysearch for, analyze and compare insurance products;

·       quicklyrequest and obtain insurance quotes, either online or by phone; and

·       easilyselect and purchase insurance from the insurance company of their choice.

Our solutionprovides the following principal advantages to both consumers and insurancecompanies:

*ComprehensiveSource of Insurance Information and Products.**  *Using our easy-to-navigate web site, consumers canaccess insurance-related information, and decision-making tools, as well as alibrary of thousands of insurance articles. Our Web site also providesinsurance quotes from over 60 life insurance companies, and access to quotesfrom third parties for several other types of insurance including privatepassenger automobile, dental, individual and family medical, long-term care,disability and small group medical. We believe we offer consumers access to thelargest, most complete repository of comparative information on insuranceproducts, insurance pricing and insurance providers. We empower consumers withrelevant current pricing knowledge, coverage information and independent ratinginformation so consumers can make informed buying decisions.

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*Guaranteed-AccurateInstant Quotes.**  *Over thepast 20 years, we have developed what we believe to be the most complete,regularly updated database used to determine insurance quotes. This databaseserves both the Internet shopper as well as the customer receiving quotes overthe phone from a licensed customer service representative. The ability toobtain instant quotes on the Internet is the first priority for consumerspurchasing insurance online, according to a recent survey by an independentresearch group. We obtain and regularly update all of our pricing, underwritingand policy coverage information contained in our databases with informationobtained directly from the insurance company to ensure accuracy. We offer consumersa unique $500 cash reward guarantee that we will provide an accurate quote. Inaddition, we also offer a $500 cash reward guarantee that we will provide thelowest price quote available with respect to term life insurance policies. Webelieve these Quotesmith.com guarantees are unmatched by any competitor.

*Consumer in Control.**  *We put consumers in control of their insurancepurchase decisions by providing them with the ability to efficiently search,analyze and compare prices of insurance products from multiple insurancecompanies in complete privacy, on their own time and free from the pressure tobuy associated with traditional face-to-face sales. Consumers choose from whatwe believe is the largest selection of insurance companies using their ownpreferences regarding price and insurance company rating. Consumers are able topurchase insurance directly through us without ever speaking to a commissionedsalesperson if they so choose.

*Convenience.**  *Consumers who use our services no longer need tocontact different insurance companies or salespeople, one by one, in order togather information to make educated decisions. Unlike traditional agents whoonly recommend and promote a limited number of insurance companies’ policies,we provide real time access to a large database of over 60 insurance companies’products. Our comparison service presents users with a comprehensive listing ofinsurance quotes, ranked by price. We believe that this large array ofavailable insurance providers in a single destination saves consumers time andeffort in searching for and obtaining the most suitable coverage.

*Quote to Policy DeliverySupport.**  *Consumerscan purchase insurance directly through us. Unlike insurance lead referralservices, at Quotesmith.com we do not abandon the consumer once the insurancecompany has been selected, but continue to provide value-added supportand service throughout the insurance purchase process. We facilitate thisprocess by:

·       providing a licensed agent’sexplanation of various pricing, coverage and independent rating informationwhen asked;

·       providing access to our licensedagents to assist consumers in completing insurance applications;

·       offeringapplications that can be filled out online or over the phone while speakingwith a licensed insurance professional; and

·       arranging and monitoring thecollection of outside underwriting information including paramedicalexaminations, laboratory reports and medical records.

*Focus on Customer Service.**  *Customer service is both our foundation and astrategic priority. We provide a high level of customer service throughout theapplication process and aim to eliminate consumer dissatisfaction andfrustration. Our customer service staff has an average of approximately10 years of experience in the insurance industry.

Weimplement our customer service objectives by:

·       requiring all new employees toattend “Quotesmith University,” a training course that teaches all ofthe service tasks we perform for our customers;

·       monitoringcall center employees to ensure prompt and consistent responses to phone, mailand e-mail inquiries;

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·       providingregular application status reports and Web access to our customers on aconsistent basis through policy delivery; and

·       offeringa 30-day cancellation option on term life policies.

*Licensed NationalInsurance Agency.**  *Unliketraditional insurance agents who are often only licensed in one or a limitednumber of states, our Company and/or certain of its employees are licensed todistribute insurance throughout the United States. This allows us to processand offer insurance policies to consumers nationwide. Over a 20-yearperiod, we have established vital information-contributor relationshipswith over 60 life insurance companies, of which we are currently appointed asan authorized agent by approximately 43 life insurance companies.

*User Friendly System.**  *At our web site, www.Insure.com, consumers can accessour Internet-based services, research policy options and initiatepurchase requests 24 hours a day, 7 days a week. Our easy to use website is designed for fast viewing and general compatibility with all commonlyused web browsers. Callers can receive quotes, discuss policy options with ourlicensed insurance agents and initiate purchase requests over the telephone.

**Our Strategy**

Our strategy is to be theleading service for all insurance needs of individuals. The key elements of ourstrategy include:

*Continue to Build theInsure.com Brand.**  *We willcontinue to pursue a cost-effective marketing strategy designed to promote ourInsure.com brand and consumer awareness of the benefits of researching andbuying insurance through us.

*Continue  to provide the customer with the ability toreceive life insurance quotes and buy either online or through a telephonebased sales staff.*   During the last quarter of 2002 and thefirst quarter of 2003, we launched our proprietary online applicationtechnology for most of our term life insurance offerings. While providing avery efficient and cost effective method of fulfillment, it is our belief thatnot providing a personal, telephone based option for customers restricted thenumber of sales we could make to potential buyers. In May 2004, weacquired selected assets of Life Quotes, and now provide atelephone-based complement to our online sales model for term life insurance.

*Continue to generaterevenue from the sale of non-life insurance Internet leads.**  *Our Website attracts visitors whoare interested in information about lines of insurance other than lifeinsurance. We provide this information through our library of articles and withvarious insurance tools. We also provide these visitors with access to quotesfor insurance other than life by directing them to the Websites of variousthird parties, for which we receive a fee.

*Leverage Customer Base.**  *We have expanded our insurance product offerings andbelieve there is significant opportunity to leverage our existing customer baseand provide new products to them without significant customer acquisition costs.We plan to tailor our marketing efforts based on consumer profiles contained inour database of existing customers. We also believe that the content acquiredin the purchase of the Insure.com Web site will continue to provide us with apermanent new customer gateway, thereby allowing us to reduce our futurecustomer acquisition costs and our reliance on direct-to-consumer advertisingas our primary source of new customers.

*Strengthenand Pursue Strategic Relationships and Agreements.**  *We believe that strategic joint ventures andlicensing arrangements are attractive methods of expansion, as they will enableus to combine our expertise in Internet-based insurance offerings withother brand names, complementary services or technology. We plan to pursueadditional relationships and agreements in the future. In addition, we may seekto acquire additional complementary technologies or businesses.

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*Continue to Focus onCustomer Service.**  *Weprovide insurance products and services for consumers from initial evaluationthrough policy delivery. In order to provide the highest level of servicethroughout the insurance buying process, we will monitor feedback fromconsumers and add new features designed to increase customer usage and loyalty.

**Our Business Model**

We have created amodel that enables consumers to research, shop for and purchase insurance in amanner that we believe is simpler, faster and more convenient than traditionalmethods. Even if the customer prefers to transact this business by phone, ourdatabase provides instant quotes from our database of over 60 life insurancecompanies, and our online application technology provides an efficient orderentry platform. We provide a complete “quote-to-policy-delivery” insurancesolution. Our model:

·       allowsconsumers to *specify the desired coverage* and *indicate their personal**medical conditions* to generate appropriateindividualized quotes;

·       allowsconsumers to *indicate a range**of substitutability* among insurance companies and policyfeatures 

·  for example, consumers may want to purchaseinsurance from a company rated “A” or better by A.M. Best;

·       allowsconsumers to *choose the premium* range they areprepared to pay for the policy they want;

·       allowsconsumers to *purchase insurance* with orwithout the involvement of a commissioned salesperson;

·       allowsus to *monitor and care* for applicants throughthe underwriting process and policy delivery stage; and

·       allowsinsurance companies to *offer additional policies*withintheir existing pricing structures.

We employ a team approach to customer service. If acustomer wishes to initiate an insurance application request or obtaininformation concerning an application already in process, each and everycustomer service representative is able to provide assistance.

Our process is comprised of four primary stages.

*InitialInformation Evaluation.**  *Consumersvisit our user-friendly web site or speak with a licensed insuranceprofessional to access our comprehensive database of insurance policy pricerates, underwriting guidelines, policy coverage and exclusion information, andfinancial stability ratings of over 60 life insurance companies. To helpconsumers understand the underwriting process, our web site providesinformation and helpful tips on how the underwriting process works.

*Search, Retrieval andComparison.**  *Online**consumerscan quickly obtain a customized cost comparison report in a single search bycompleting a brief and anonymous questionnaire at the start of the onlinesession. Customers who call or request a quote by mail will receive the sameinformation. Each anonymous consumer inquiry triggers a proprietary cost searchand comparison algorithm that sorts through a database of thousands ofinsurance options that is updated daily. The search result, delivered inseconds, is a comprehensive comparison of insurance policies ranked by thelowest price that matches the consumer’s criteria. Consumers can then click toview (or callers can discuss with a licensed insurance professional):

·       specificcoverage details about the policy;

·       exclusionsand guarantees (including policy acceptance guidelines); and

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·       latestfinancial stability ratings from five independent rating services.

*ApplicationProcessing.**  *If aconsumer desires to purchase a policy, the consumer selects an insurancecompany and policy, and then fills out an application while online or on thephone with a licensed insurance professional.  We offer online applications to accelerate theunderwriting process for the most popular of the insurance companies within ourterm life offerings. After the consumer completes, receives via download ormail and signs the completed online application, the consumer returns theapplication to us. We then submit the application to the insurance company forunderwriting on behalf of the consumer. We provide toll-free supportduring business hours to assist the consumer in completing the application.

*Underwriting.**  *During the underwriting process, we regularly trackthe progress of the consumer’s outstanding items. We also assist the insurancecompany by arranging for a paramedical examination and facilitating thecollection of any other outside information needed. We obtain status reportsfrom the insurance company at least every ten days regarding the applicationand regularly communicate this information to the consumer. We review allpolicies for accuracy prior to delivery to the consumer.

If an insurance company declines to issue the policyor issues a counter offer at a higher premium, we send a letter to the consumerstating the reasons that the policy is not being issued as applied for. In thisinstance, we also assist the consumer in finding suitable alternative coveragewhenever asked and wherever possible.

Once a policy has beenissued and been paid for by the consumer, we receive a commission from theinsurance company. We do not charge consumers for using our technology and donot currently sell banner advertising at our Insure.com web site.

**Insurance Products**

Quotesmith.comhistorically offered quote and policy-related information regarding termlife insurance. We now also  offerinstant quotes and related information on additional insurance products forboth individuals and small businesses. Our current product offerings include:

·       *Individual term life.  *This is lifeinsurance coverage that has no cash value and continues for a fixed period oftime such as 15, 20 or 25 years. We have been offering instant quotes anddelivering term life policies since 1993.

·       *Private passenger automobile.  *This provides collisionand liability insurance to individuals for private cars and vehicles. Weprovide an auto insurance price comparison service using third-partytechnology.

·       *Homeowner’s.  *This provides insuranceagainst fire and other perils for personal residences. We provide this serviceusing third-party technology.

·       *Dental.  *This currently includesfixed discount plans, although we have, in the past, offered traditionalindemnity plans. We provide this service using third-party technology.

·       *Individual and family medical.  *This is also known ascomprehensive major medical insurance.  We provide this service using third-partytechnology.

·       *International travel medical.  *Thisprovides medical insurance for U.S. citizens traveling abroad and for foreigncitizens traveling in the United States, as well as other risks associated withinternational travel. We provide a multi-company international medical andtravel insurance price comparison service using third-party technology.

·       *Small group medical.  *Small group medical insurance arethose comprehensive medical plans offered to firms that employ from 2 to 100people. We provide this service using third-party technology.

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·       *“No-exam” life.  *This provides insurance forpersons who want life insurance coverage without a paramedical examination. Weoffer instant quotes using our own, as well as third party, technology.

·       *Renters Insurance.  *Thisprovides insurance against the perils of fire, theft and windstorm for renters.We provide instant quotes using third party technology.

We constantly evaluate ourofferings based on a number of factors, including market acceptance andprofitability. We may decide to add or delete lines of coverage at any time.

**Technology**

*ProprietaryInsurance Information Databases.**  *Wemaintain a proprietary database of premium rates and policy coverageinformation from over 60 life insurance companies. We do not rely upon stateinsurance departments or any other regulatory agencies to obtain any insurancepricing information. Instead, we obtain and regularly update all of thepricing, underwriting and policy coverage information contained in ourdatabases directly from each quoted insurance company. We obtain financialstability ratings from A.M. Best, Fitch, Inc., Moody’s, Standard &Poor’s and Weiss Ratings, Inc. and hold licenses to distribute thecopyrighted rating from each of these ratings services. Our dedicated staff offull-time market reporters regularly contacts the insurance companiesquoted on our service and monitors and updates our databases as marketconditions warrant. Each business day we make hundreds of changes to ourinsurance database.

*TechnologySystems.**  *Oursystems for processing quotes and purchase requests, application progresstracking, customer notification and revenue recognition are highly automatedand integrated. Agents and customer service representatives equipped withonline computer terminals can access a customer’s account information from ourdatabase on demand. Our core technology systems use a combination of our ownproprietary technologies and commercially available, licensed technologies. Wehave internally developed and enhanced our proprietary programs over a periodof 20 years using scalable tools and platforms to allow us to rapidlyexpand our network and computing capacity.

An internal programming and system administrationstaff supports our technology. In addition to supporting the systems, our staffcontinually enhances our software and hardware and develops new systems andservices to better service our customers and business objectives.

*Server Hosting and Backup.**  *Our Web sites are hosted by InterNap Network Servicesin Chicago, Illinois. This grade “A” telecommunications data center providesredundant communications lines to the Internet backbone, emergency powerbackup, and security, as well as 24-hour monitoring and engineeringsupport. In addition, we have implemented load balancing systems and our ownredundant servers to provide for fault tolerance. These redundancies permit usto perform scheduled maintenance without taking our web sites offline. Finally,tape backups are performed nightly to prevent a loss of data.

**Marketing**

We attract new consumers and communicate theavailability of new products and services primarily through direct responsemarketing methods. We have established ourselves as a leading Internet-basedinsurance brand through an offline marketing campaign consisting primarily ofmagazine advertisements, radio and direct mail. We employ in-house volumemedia buying and other strategies to minimize the expenses of broad-basedadvertising. Using our proprietary information processing systems and consumerdatabase as well as other resources, we employ statistical analyses to measurethe effectiveness and efficiency of our marketing efforts.

We intend to aggressively pursue a marketing strategydesigned to promote our Insure.com brand and consumer awareness of the benefitsof buying insurance through us.

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Our marketingstrategy is to promote our brand and attract self-directed consumers toour web sites. Our marketing initiatives include:

·       usingdirect response print advertisements placed primarily in financially orientedmagazines and newspapers;

·       advertisingvia radio, television and direct mail; and

·       entering into strategicrelationships with other financial services and general purpose web sites toincrease our access to online consumers.

**MaterialStrategic Relationships and Agreements**

We selectively pursuestrategic relationships and agreements to expand our access to onlineconsumers, to build our brand name recognition and to expand our products andservices with a variety of companies. Revenue associated with our agreementswith strategic partners comprised approximately 12% of total revenue for theyear ended December 31, 2005.

**Competition**

We compete with online and traditional providers ofinsurance products. The market for selling insurance products over the Internetis new, rapidly evolving and intensely competitive. Current and new competitorsmay be able to launch new sites at a relatively low cost. There are a number ofcompanies that either sell insurance online or provide lead referral servicesonline.

We believe that we are the most comprehensive Internet-basedinsurance service because we provide consumers completequote-to-policy-delivery insurance services, instant quotes from over 60 lifeinsurance companies and the ability to buy online or over the phone. OurInternet-based, lead-referral competitors generally captureconsumer name and address information to be forwarded, as a prospective saleslead, to a specified insurance company, without personalized customer serviceor fulfillment capabilities. Other Internet-based competitors have createdWeb sites as alternatives to their traditional sales activities and offerproducts from a single insurance company or a relatively small group ofinsurance companies with little or no comparative overview of prices. While webelieve that our complete quote-to-policy-delivery service offers a morecomprehensive Internet-based insurance service solution than thesecompetitors, we nonetheless expect to face intense competition from these othertypes of insurance services.

We also face competition from the traditionaldistributors of insurance such as captive agents, independent brokers andagents and direct distributors of insurance. Insurance companies anddistributors of insurance products are increasingly competing with banks,securities firms and mutual fund companies that sell insurance or alternativeproducts to similar consumers.

We potentially face competition from unanticipatedalternatives to our insurance service from a number of large Internet companiesand services that have expertise in developing online commerce and infacilitating Internet traffic. These potential competitors could choose tocompete with us directly or indirectly through affiliations with otherelectronic commerce companies, including direct competitors. Other large companieswith strong brand recognition, technical expertise and experience in Internetcommerce could also seek to compete with us. Competition from these and othersources could harm our business, results of operations and financial condition.

We believe that the principal competitive factors inour markets are price, brand recognition, web site useability, ability tofulfill customer purchase requests, customer service, reliability of delivery,ease of use, and technical expertise and capabilities. Many of our current andpotential competitors, including Internet directories and search engines andtraditional insurance agents and brokers, have longer operating histories,larger customer bases, greater brand recognition and significantly greaterfinancial, marketing, 

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technical and otherresources than us. Several of these competitors may be able to secure productsand services on more favorable terms than we can obtain. In addition, many ofthese competitors may be able to devote significantly greater resources than wecan for developing Web sites and systems, marketing and promotional campaigns,attracting traffic to their Web sites and attracting and retaining keyemployees.

Increased competition mayresult in reduced operating margins, loss of market share and damage to ourbrand. We cannot assure you that we will be able to compete successfullyagainst current and future competitors or that competition will not harm ourbusiness, results of operations and financial condition.

**Regulation**

The insurance industry and the marketers of insuranceproducts are subject to extensive regulation by state governments and by theDistrict of Columbia. This regulation extends to the operations of insurancecompanies, insurance agents and to our service.

Our products aresold throughout the United States through licenses held by us and/or one of ouremployees, as is required by each state’s insurance department. In general,state insurance laws establish supervisory agencies with broad administrativeand supervisory powers to:

·       grantand revoke licenses to transact business;

·       imposecontinuing education requirements;

·       regulatetrade practices;

·       requirestatutory financial statements of the insurance companies;

·       approveindividuals and entities to which commissions can be paid;

·       monitorthe activity of our non-licensed customer service representatives;

·       regulatemethods of transacting business and advertising; and

·       approvepolicy forms, and regulate premium rates for some forms of insurance.

Moreover, existing state insurance regulations requirethat a firm, or individual within that firm, must be licensed in order to quotean insurance premium. State insurance regulatory authorities regularly makeinquiries, hold investigations and administer market conduct examinations withrespect to compliance with applicable insurance laws and regulations byinsurance companies and their agents. In recent years, a number of insuranceagents and the life insurance companies they represent have been the subject ofregulatory proceedings and litigation relating to alleged improper lifeinsurance pricing and sales practices. Some of these agents and insurancecompanies have incurred or paid substantial amounts in connection with theresolution of these matters. We do not currently sell the types of lifeinsurance—primarilycash value life insurance policies such as universal life—that are thesubject of these actions.

In addition, licensing laws applicable to insurancemarketing activities and the receipt of commissions vary by jurisdiction andare subject to interpretation as to the application of these requirements tospecific activities or transactions. We and/or many of our employees arecurrently licensed to sell insurance in every state and the District ofColumbia. All interaction with customers is done through our licensed customerservice staff. We do not permit any of our unlicensed personnel whooccasionally have contact with customers to act as insurance agents. We monitorthe regulatory compliance of our sales, marketing and advertising practices andthe related activities of our employees. We also provide continuing educationand training to our staff in an effort to ensure compliance with applicableinsurance laws and regulations. However, we cannot assure you that a stateinsurance department will not make a determination that one or more of theseactivities constitute the solicitation of insurance and that personnel must belicensed. Such a determination could harm our business.

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On November 11, 2004, we announced that we hadreceived a subpoena requesting documents and seeking information from the Stateof Illinois Department of Financial and Professional Regulation, Division ofInsurance. This action is related to investigations by regulatory bodies,including state insurance departments, of certain contingent commissionarrangements between insurance brokers and insurance companies. We havecooperated fully with the Illinois Division of Insurance. Given the apparentwidening of this regulatory probe within the insurance brokerage sector,combined with the fact that we are regulated by the insurance departments ofevery state, we may receive additional subpoenas and information requests ofthis nature going forward. We intend to respond fully and completely to suchinformation requests by any regulator or government entity. We cannot assureyou what the result of this investigation will be or what effect, if any, itwill have on our financial performance or results of operations.

We can give you no assurance that we would be deemedto be in compliance with all applicable insurance licensing requirements andmarketing regulations of each jurisdiction in which we operate. Nor can weassure you that we do not need to obtain any additional licenses.

The federal government does not directly regulate themarketing of most insurance products. However, some products, such as variablelife insurance, must be registered under federal securities laws and thereforethe entities selling these products must be registered with the NationalAssociation of Securities Dealers, Inc. We do not currently sell anyfederally regulated insurance products. If we elect to sell these federallyregulated products in the future, we would be required to qualify for andobtain the required licenses and registrations. We cannot assure you that wewould be able to obtain these licenses.

Further, we are subject to various federal laws andregulations affecting matters such as pensions, age and sex discrimination,financial services, securities and taxation. Congress recently passedlegislation that provides for national licensing of insurance agents andbrokers. The legislation provides an impetus for states to enact uniform lawsand regulations governing licensing of individuals and entities authorized tosell and solicit the purchase of insurance, as well as reciprocity laws andregulations governing the licensing of non-resident individuals. Thislegislation and other future federal or state legislation could result inincreased regulation of our business.

The future regulation ofinsurance sales via the Internet as a part of the new and rapidly growingelectronic commerce business sector is unclear. We believe that we arecurrently in compliance with all current regulations. However, if additionalstate or federal regulations are adopted, they may have an adverse impact onus.

**Employees**

As of December 31,2005, we had 99 employees. We have never had a work stoppage. Ouremployees are not represented by a collective bargaining unit. We consider ourrelations with our employees to be good. Our future success will depend, inpart, on our ability to continue to attract, integrate, retain and motivatehighly qualified technical and managerial personnel, for whom competition isintense.

**Item 1A.     RiskFactors**

**Risks Related to Our Business**

**Our insurance brokerage business has not beenprofitable and may not become profitable in the future**

Our first complete year offocusing on our Internet based insurance service was 1997. We incurredoperating losses each year subsequent to 1997, through the year ended December 31,2005. Because of our overhead structure, including the ongoing costs ofemploying highly-skilled technical personnel, we will need to generate higherrevenues than we did in 2005 in order to achieve profitability. Even if weachieve profitability, we may not be able to maintain profitability in thefuture.

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**If the term life insurance industry declines, ourbusiness will suffer because 85% of our 2005 revenues were derived from thesale of term life insurance**

For the year ended December 31,2005, approximately 85% of our revenue was derived from the sale of individualterm life insurance. Because of this high concentration of revenue from oneline of insurance, our current financial condition is largely dependent on theeconomic health of the term life insurance industry. If sales of term lifeinsurance decline, for any reason, our business would be substantially harmed. Inaddition, in recent years, term life insurance premiums have been declining. Ifterm life insurance premiums continue to decline, it will become even moredifficult for us to become profitable.

**We may generate limited commission revenues becauseconsumers can obtain free quotes and other information without purchasinginsurance through our Web site**

We generate commissionrevenues only if a consumer purchases insurance through our service. Consumerscan access our Web site and obtain quotes and other information free of chargewithout any obligation to purchase insurance through us. Because all of theinsurance policies quoted at our Web site can be purchased through sourcesother than us, consumers may take the quotes and other information that weprovide to them and purchase one of our quoted policies from the agent orbroker of their choice. If consumers only use our Web site for insurance quoteinformation purposes, we will not generate revenues and our business would besignificantly harmed.

**We expect to continue to experience significantfluctuations in our quarterly results, which makes it difficult for investorsto make reliable period-to-period comparisons and may contribute tovolatility in our stock price**

Our quarterlyrevenues and operating results have fluctuated widely in the past and maycontinue to fluctuate widely in the future. Causes of these fluctuations couldor have included, among other factors:

·       changesin selling and marketing expenses, as well as other operating expenses;

·       thelength of time it takes for an insurance company to verify that an applicantmeets the specified underwriting criteria—this process can be lengthy,unpredictable and subject to delays over which we have little or no control,including underwriting backlogs of the insurance company and the accuracy ofinformation provided by the applicant; we tend to place a significant number ofpolicies with the most price-competitive insurance companies, who, due tovolume, have longer and more unpredictable underwriting time frames;

·       volatilityin bonus commissions paid to us by insurance companies which typically arehighest in the fourth quarter;

·       volatilityin renewal commission income;

·       theconversion and fulfillment rates of consumers’ applications;

·       newWeb sites, services and products by our competitors;

·       pricecompetition by insurance companies in the sale of insurance policies; and

·       thelevel of Internet usage for insurance products and services.

In addition, we have a very long revenue cycle forterm life insurance. The time from the date the application is requested by thecustomer until revenue is recorded averages over three months. As a result,substantial portions of our expenses, including selling and marketing expenses,are incurred and recorded in the financial statements well in advance ofpotential matching revenue generation. If revenues do not meet our expectationsas a result of these selling and marketing expenses, our results of operationswill be negatively affected.

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Any one or more of theabove-mentioned factors could harm our business and results ofoperations, which makes quarterly predictions difficult and often unreliable. Asa result, we believe that quarter-to-quarter comparisons of ouroperating results are not necessarily meaningful and not good indicators of ourfuture performance. Due to the above-mentioned and other factors, it ispossible that in one or more future quarters our operating results will fallbelow the expectations of securities analysts and investors. If this happens,the trading price of our common stock would likely decrease.

**We must further develop our brand recognition in orderto remain competitive**

There are a many otherinsurance brokers, insurance carriers and Web sites that offer services thatare competitive with our services. Therefore, we believe that broaderrecognition and a favorable consumer perception of the Insure.com brand is  essential to our future success. Accordingly,we intend to continue to pursue an aggressive brand-enhancement strategyconsisting of advertising, online marketing, and promotional efforts. If theseexpenditures do not result in a sufficient increase in revenues to cover theseadditional selling and marketing expenses, our business, results of operationsand financial condition would be harmed.

**The sale of internet leads for lines of insuranceother than life insurance may not generate a material amount of revenues for us**

As part of our marketingstrategy, we sell internet traffic that comes to our Web site and indicates aninterest in an insurance product other than life insurance to third party Websites and others in order to increase the realized revenue from visitors to ourWeb site. We generated fee revenues totaling $2.0 and $1.6 million fromthese sources in 2005 and 2004, respectively. Most of the agreements with thesethird parties permit either party to terminate the agreement with short notice.As a result, we cannot assure you that any of these relationships or agreementswill be profitable or generate any material amount of revenues in the future. Ifour sales of non-life insurance traffic do not meet our expectations regardingrevenues and earnings, our business could be harmed.

**If weare unable to successfully and cost effectively consolidate our call centeroperation, our business could be harmed**

On February 1, 2006,we announced that we were consolidating our call center operations by closingour Colorado call center and performing all telephone sales and serviceactivities in our Darien, Illinois home office call center. If we are unable tosuccessfully provide these services  orif the projected annual saving are not realized, our business could be harmed.

**If weare unable to sell our building in Colorado for a price at or above book valueand within a reasonable period of time, our business could be harmed**

On February 1, 2006, inconnection with our announced closing of our Colorado call center, we alsoannounced our intention to sell the building that housed the Colorado callcenter. Located in Evergreen, Colorado, that building was acquired as part ofthe 2004 acquisition of certain assets of the former Life Quotes, Inc., andhad a book value of $5.3 million as of December 31, 2005. If we areunable to sell that property at a price at or above the book value within areasonable period of time, our business could be harmed.

**If we lose any of our key executive officers our business may suffer because we rely on their knowledgeof our business**

We believe that oursuccess is significantly dependent upon the continued employment and collectiveskills of our executive officers, including founder and Chief ExecutiveOfficer, Robert S. Bland, and Executive Vice President and Chief OperatingOfficer, William V. Thoms. We maintain key man life 

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insurancepolicies on Messrs. Bland and Thoms and both of these officers haveentered into employment contracts with us. The loss of either of these twoexecutives or any of our other key executive officers could harm us.

**If our insurance quotes are inaccurate and we must payout cash reward guarantees, our business could be harmed**

We offer consumers a $500cash reward guarantee that we provide an accurate insurance quote. For the yearended December 31, 2003, we paid $8,500, for the year ended December 31,2004, we paid $3,500 and for the year ended December 31, 2005, we paid$1,000 in such cash rewards. If our quotes or those of services whose technologywe utilize are inaccurate and we are required to pay a material number of cashreward guarantees, it could have a negative effect on our operation results.

**The former owner of Life Quotes has a limitednon-competition agreement with us.**

Kenneth Manley, the formerowner of Life Quotes, has a non-competition agreement with us that prevents himfrom competing with us for up to six years. However, the agreement allowsManley to form a life insurance agency with members of his family provided thathe acts only as a general agent placing business through Quotesmith.com asmanaging general agent. He is limited to being able to produce a maximum of $2 millionper year in commissionable premium, subject to annual inflationary adjustments.This arrangement could result in Manley obtaining business that we mightotherwise have obtained directly.

**RisksRelated to the Insurance Industry**

**Ourbonus commission revenues are highly unpredictable and may cause fluctuationsin our operating results**

Our bonus commission revenuesrelate to the amount of premiums paid for new insurance policies to a singleinsurance company. In other words, if consumers purchase policies from a fewernumber of insurance companies our bonus commissions may be higher than if thesame policies were purchased from a larger number of insurance companies. Thedecision to purchase a policy from a particular insurance company typicallyrelates to, among other factors, price of the policy and rating of theinsurance company, both of which are factors over which we have no control. Insurancecompanies often change their prices in the middle of the year for competitivereasons. This may reduce the number of policies placed with that insurancecompany which may then reduce our potential bonus commissions. In addition, wehave no control over the bonus commission rates that are set by each individualinsurance company. As a result of these factors, we are unable to control theamount and timing of bonus commission revenues we receive in any particularquarter or year and these amounts may fluctuate significantly. Bonus commissionrevenues were $2.3 million for the year ended December 31, 2005, $2.9 millionfor the year ended December 31, 2004, and $0.8 million for the yearended December 31, 2003.

The insurance industry has come under a significantlevel of scrutiny by various regulatory bodies with respect to contingentcommission arrangements and other matters. The New York Attorney General hasissued subpoenas to numerous insurance brokers related to an inquiry intomarket service agreements and other similar agreements, which compensatebrokers for distribution and other services provided to insurance carriers. Additionally,some state regulators are also investigating these types of agreements, and wehave received a subpoena from the Illinois Department of Financial andProfessional Regulation, Division of Insurance, seeking information regardingthese types of arrangements. It appears that these investigations could havefar-reaching consequences in the insurance industry. For example, Marsh &McLennan Companies, Inc., Willis Group Holdings Ltd., Aon Corporation andArthur J. Gallagher, four of the largest insurance brokerage firms in theindustry, have each announced that they will no longer accept contingentcommissions. Certain of these brokerage firms have entered into agreements with

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variousregulators and attorneys general to resolve issues related to investigations ofthose firms. In addition, the departments of insurance for various states haveproposed new regulations, and other state insurance departments have indicatedthat they will propose new regulations, that address contingent commissionarrangements, including prohibitions involving the payment of money byinsurance carriers in return for steering business and enhanced disclosure ofcontingent commission arrangements to insureds. On December 29, 2004, theNational Association of Insurance Commissioners announced that it has proposedmodel legislation to implement new disclosure requirements related to brokercompensation arrangements.

We cannot predict how theoutcome of this investigation will affect how insurance brokers will becompensated or contingent commissions in the insurance brokerage industry orwhat effect, if any, it will have on our operations. We will continue tomonitor the situation.

**Theinsurance sales industry is intensely competitive, and if we fail tosuccessfully compete in this industry our market share and business will beharmed**

The markets for theproducts and services we offer are intensely competitive and characterized byrapidly changing technology, evolving regulatory requirements and changingconsumer demands. We compete with traditional insurance distribution channels,including insurance agents and brokers, new non-traditional channels suchas commercial banks and savings and loan associations, and a growing number ofdirect distributors including other online services, such as InsWeb Corporationand SelectQuote.

We also potentially facecompetition from a number of large online services that have expertise indeveloping online commerce and in facilitating a high volume of Internettraffic for or on behalf of our competitors. For instance, some of ourcompetitors have relationships with major electronic commerce companies. Otherlarge companies with strong brand recognition, technical expertise andexperience in online commerce and direct marketing could also seek to competein the online insurance market.

There can be no assurancethat we will be able to successfully compete with any of these current orpotential insurance providers.

**Insurancecompanies that have appointed us as agents may cancel those appointments**

Most of our agencycontracts allow the insurance company to cancel our agency appointment at anytime. Should any of the companies with which we place significant amounts ofbusiness decide to cancel our appointments, our business could be harmed.

**Risks Related toRegulation**

**Ourcompliance with the strict regulatory environment applicable to the insurance industryis costly, and if we fail to comply with the numerous laws and regulations thatgovern the industry we could be subject to penalties**

Wemust comply with the complex rules and regulations of each jurisdiction’sinsurance department which impose strict and burdensome guidelines on usregarding our operations. Compliance with these rules and regulationsimposes significant costs on our business. Each jurisdiction’s insurancedepartment typically has the power, among other things, to:

·       authorizehow, by which personnel and under what circumstances an insurance premium canbe quoted and published;

·       approvewhich entities can be paid commissions from insurance companies;

·       licenseinsurance agents and brokers;

·       monitorthe activity of our non-licensed customer service representatives; and

·       approvepolicy forms and regulate some premium rates.

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Due to the complexity,periodic modification and differing statutory interpretations of these laws, wemay not have always been and we may not always be in compliance with all theselaws. In addition, we have at times been subject to regulatory action for failingto comply with these laws. Failure to comply with these numerous laws in thefuture could result in fines, additional licensing requirements or therevocation of our license in the particular jurisdiction. These penalties couldsignificantly increase our general operating expenses and harm our business. Inaddition, even if the allegations in any regulatory action against us turn outto be false, negative publicity relating to any allegations could result in aloss of consumer confidence and significant damage to our brand. We believethat because many consumers and insurance companies are not yet comfortablewith the concept of purchasing insurance online, the publicity relating to anysuch regulatory or legal issues could harm our business.

**Regulation of the sale of insurance over the Internetand other electronic commerce is unsettled, and future regulations could forceus to change the way we do business or make operating our business more costly**

As a company involved inthe sale of insurance over the Internet, we are subject to additionalregulatory risk as insurance regulations have not been fully modified to coverInternet transactions. Currently, many state insurance regulators are exploringthe need for specific regulation of insurance sales over the Internet. Any newregulation could dampen the growth of the Internet as a means of providinginsurance services. Moreover, the laws governing general commerce on theInternet remain largely unsettled, even in areas where there has been somelegislative action. It may take years to determine whether and how existinglaws such as those governing intellectual property, privacy and taxation applyto the Internet. In addition, the growth and development of the market forelectronic commerce may prompt calls for more stringent consumer protectionlaws that may impose additional burdens on companies conducting business overthe Internet. Any new laws or regulations or new interpretations of existinglaws or regulations relating to the Internet could harm our business.

**If we become subject to legal liability for theinformation we distribute on our Web site or communicate to our customers, ourbusiness could be harmed**

Our customers rely upon information we provideregarding insurance quotes, coverage, exclusions, limitations and ratings. Tothe extent that the information we provide is not accurate, we could be liablefor damages from both consumers and insurance companies. These types of claimshave been brought, sometimes successfully, against agents, online services andprint publications in the past. These types of claims could be time-consumingand expensive to defend, divert management’s attention, and could causeconsumers to lose confidence in our service. As a result, these types ofclaims, whether or not successful, could harm our business, financial conditionand results of operations.

In addition, because weare appointed as an agent for only 43 ofthe over 60 life insurance companies quoted on our Web site, we do not havecontractual authorization to publish information regarding the policies frominsurance companies for whom we are not appointed. Several of these insurancecompanies have in the past demanded that we cease publishing their policyinformation and others may do so in the future. In some cases we have publishedinformation despite these demands. If we are required to stop publishinginformation regarding some of the insurance policies that we track in ourdatabase, it could harm us.

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**Risks Related to the Internet and Electronic Commerce**

**Any failures of, or capacity constraints in, oursystems or the systems of third parties on which we rely could reduce or limitvisitors to our Web site and harm our ability to generate revenue**

We use both internally developed and third-partysystems to operate our service. If the number of users of our service increasessubstantially, we will need to significantly expand and upgrade our technology,transaction processing systems and network infrastructure. We do not knowwhether we will be able to accurately project the rate or timing of any ofthese increases, or expand and upgrade our systems and infrastructure toaccommodate these increases in a timely manner. Our ability to facilitatetransactions successfully and provide high quality customer service alsodepends on the efficient and uninterrupted operation of our computer andcommunications hardware systems. Our service has experienced periodic systeminterruptions, and it is likely that these interruptions will continue to occurfrom time to time. Additionally, our systems and operations are vulnerable todamage or interruption from human error, natural disasters, power loss,telecommunication failures, break-ins, sabotage, computer viruses, actsof vandalism and similar events. We may not carry sufficient businessinterruption insurance to compensate for losses that could occur. Any systemfailure that causes an interruption in service or decreases the responsivenessof our service would impair our revenue-generating capabilities, andcould damage our reputation and our brand name.

**Our success depends, in part, on our ability toprotect our proprietary technology**

We believe that our success depends, in part, onprotecting our intellectual property. Other than our trademarks, most of ourintellectual property consists of proprietary or confidential information thatis not subject to patent or similar protection. Competitors may independentlydevelop similar or superior products, software or business models.

We cannot guarantee thatwe will be able to protect our intellectual property. Unauthorized thirdparties may try to copy our products or business model or use our confidentialinformation to develop competing products. Legal standards relating to thevalidity, enforceability and scope of protection of proprietary rights inInternet-related businesses are uncertain and still evolving. As aresult, we cannot predict the future viability or value of our proprietaryrights and those of other companies within the industry.

**We may be subject to claims of infringement that maybe costly to resolve and, if successful, could harm our business**

Our business activitiesand products may infringe upon the proprietary rights of others. Parties mayassert valid or invalid infringement claims against us. Any infringement claimsand resulting litigation, should it occur, could subject us to significantliability for damages and could result in invalidation of our proprietaryrights. Even if we eventually won, any resulting litigation could be time-consumingand expensive to defend and could divert our management’s attention.

**If we are unable to adapt to the rapid technologicalchange in our industry, we will not remain competitive and our business willsuffer**

Our market ischaracterized by rapidly changing technologies, frequent new product andservice introductions, and evolving industry standards. The recent growth ofthe Internet and intense competition in our industry exacerbate these marketcharacteristics. Our future success will depend on our ability to adapt torapidly changing technologies by continually improving the features andreliability of our database and service. We may experience difficulties thatcould delay or prevent the successful introduction or marketing of new productsand services. In addition, new enhancements must meet the requirements of ourcurrent and prospective customers and must achieve significant marketacceptance. We could also 

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incursubstantial costs if we need to modify our service or infrastructures or adaptour technology to respond to these changes.

**Demand for our services may be reduced if we areunable to safeguard the security and privacy of our customer’s information**

A significant barrier toelectronic commerce and online communications has been the need for securetransmission of confidential information over the Internet. Our ability tosecure the transmission of confidential information over the Internet isessential in maintaining consumer and insurance company confidence in ourservice. In addition, because we handle confidential and sensitive informationabout our customers, any security breaches would damage our reputation andcould expose us to litigation and liability. We cannot guarantee that oursystems will prevent security breaches.

**Our business assumes the continued dependability ofthe Internet infrastructure**

Our success will dependupon the development and maintenance of the Internet’s infrastructure to copewith its significant growth and increased traffic. This will require a reliablenetwork backbone with the necessary speed, data capacity and security, and thetimely development of complementary products, such as high-speed modems,for providing reliable Internet access and services. The Internet hasexperienced a variety of outages and other delays as a result of damage toportions of its infrastructure and could face outages and delays in the future.Outages and delays are likely to cause a loss of business by affecting thelevel of Internet usage and the processing of insurance quotes and applicationsrequests made through our Web site. We are unlikely to make up for this loss ofbusiness.

**Risks Related to the Ownership of Our Common Stock**

**Zions Bancorporation, together with two of ourofficers and directors, own a significant portion of our stock and controlQuotemsith.com and their interests may not be the same as our publicstockholders**

As of March 9,2006, Robert Bland, our chairman, President and Chief Executive Officerdirectly or indirectly controlled 31.3% of our outstanding common stock,William Thoms, our Executive Vice President and Chief Operating Officer,directly controlled 7.8% of our outstanding common stock, and ZionsBancorporation controlled 32.3% of our common stock. As a result, if Zions and Messrs. Blandand Thoms act together, or if Zions and Mr. Bland act together, they willbe able to take any of the following actions without the approval of additionalpublic stockholders:

·       elect our directors;

·       amendcertain provisions of our certificate of incorporation,

·       approve a merger, sale ofassets or other major corporate transaction;

·       defeat any takeoverattempt, even if it would be beneficial to our public stockholders; and

·       otherwisecontrol the outcome of all matters submitted for a stockholder vote.

If these persons act together and take any of theactions described above, the interests of our other stockholders may be harmed.For example, these persons could discourage or prevent potential mergers,takeovers or other change of control transactions that could be beneficial toour public stockholders, which could adversely affect the market price of ourcommon stock. They may also be able to prevent or frustrate attempts to replaceor remove incumbent management through their ability to elect directors. Furthermore,they may choose to advance their own interests at the expense of otherstockholders, such as by acting to entrench themselves in a management positionor electing themselves as directors.

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The investor rights agreement we signed with Zionscontains supermajority board voting provisions that could make it moredifficult for stockholders to change the policies of our Board of Directors andelect new members to our Board of Directors

So long as Zionsholds 40% of the shares issued to them, the investor rights agreement we signedwith Zions gives Zions the right to nominate or appoint one member of our Boardof Directors. We must also receive a vote of 75% of our directors for us to:

·       authorize,issue or sell any equity security (including options), other than certainspecified options or pursuant to our employee stock purchase plan (of whichthere are presently 277,260 options available for grant under our stock optionplans and 63,929 shares available for purchase under our employee stockpurchase plan):

·       increasethe authorized number of shares of our stock;

·       enterinto any registration rights agreement;

·       repurchaseor redeem any of our securities other than on a pro rate basis;

·       (i) merge,combine or consolidate with, or agree to merge, combine or consolidate with anyentity, (ii) purchase, or agree to purchase all or substantially all ofthe securities of, any entity, or (iii) purchase, or agree to purchase,all or substantially all of the assets and properties of, or otherwise acquire,or agree to acquire, all or any portion of, any entity, in each case, forconsideration in an amount, which when combined with all other suchtransactions in a fiscal year, exceeds $5,000,000;

·       (i) merge,combine or consolidate with, or agree to merge, combine or consolidate with anyentity in which it is not the surviving entity or (ii) sell, assign,convey, transfer, lease or otherwise dispose of all or substantially all of itsassets;

·       sellor dispose of business or assets in excess of $1,000,000;

·       alteror change materially and adversely the rights of holders of our common stock;

·       incurindebtedness or guarantees in excess of $2,500,000 individually or $5,000,000in the aggregate;

·       amendor proposed to amend our charter or bylaws

·       liquidate,dissolve, recapitalize, or effect a stock split or reverse stock split, orobligate ourselves to do so;

·       engagein any other business other than the business we are currently engaged in; or

·       declareany dividends or distributions.

The supermajorityprovision, combined with Zions’ right to nominate or appoint one member of ourBoard of Directors, could discourage others from initiating a potential merger,takeover or another change of control transaction that could be beneficial toour public stockholders. In addition this supermajority provision could make itmore difficult for stockholders to change the members and policies of the Boardof Directors because any of the actions described above would require theapproval of six of our seven directors. As a result, the market price of ourstock could be harmed.

**If  Zionschooses to exercise its registration rights and sell its stock, the marketprice of our common stock could decrease and our ability to raise capital inthe public markets may be adversely affected**

The 2,363,636 shares weissued to Zions are not registered and are restricted securities. However, theholders of these shares have registration rights under the investor rightsagreement. The investor rights 

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agreementprovides both demand registration rights and piggyback registration rights tothe holders of these shares. Sales of significant amounts of these sharesfollowing registration in accordance with the investor rights agreement or theperception that such sales will occur could adversely affect the market priceof our common stock or our future ability to raise capital through an offeringof equity securities or debt securities convertible into equity securities.

**If our remaining goodwill becomes impaired, we will berequired to write off some or all of it against earnings, which may negativelyimpact the price of our common stock**

We recorded goodwill in the amount of $6.9 millionas a result of our 2004 purchase of assets of Life Quotes, Inc. Whilegoodwill is not amortized, it is subject to periodic reviews for impairment (atleast annually, or more frequently if impairment indicators arise). We reviewgoodwill for impairment periodically and whenever events or changes in businesscircumstances indicate that the carrying value of the assets may not berecoverable. Such impairment reviews are performed at the entity level withrespect to goodwill, as we have one reporting unit. Under those circumstances,if the fair value were less than the carrying amount of the entity, anindicator of impairment would exist and further analysis would be required todetermine whether or not a loss would need to be charged against current periodearnings. We did take note of such indicators during the fourth quarter of 2005.These indicators included declining revenues from life insurance sales and adrop in the market price of our common stock. An impairment review wasconducted as of December 31, 2005, and it was determined that animpairment existed. The determinations of impairment indicators and fair valueare based on estimates and assumptions related to the amount and timing offuture cash flows and future interest rates. The use of different estimates orassumptions could produce different results. As a result of this impairmentdetermination, the Company recorded an impairment charge against earnings inthe fourth quarter of 2005 amounting to $3.75 million.

During 2006, and for aslong as we have goodwill on our balance sheet, we will continue to review forindicators of goodwill impairment. If it were determined that the fair value ofthe entity were less than the carrying amount of the entity, an additionalimpairment charge would be recorded. Recording such a charge would decreaseearnings and could lead to a decline in the price of our common stock.

**Our common stock is currently trading at low prices,which could further reduce the liquidity of the market for, and the price ofour common stock**

We believe that the current per share price level ofthe common stock has reduced the effective marketability of our shares ofcommon stock because of the reluctance of many leading brokerage firms torecommend low-priced stock to their clients. Certain investors view low-pricedstock as speculative and unattractive, although certain other investors may beattracted to low-priced stock because of the greater trading volatilitysometimes associated with such securities. In addition, a variety of brokeragehouse policies and practices tend to discourage individual brokers within thosefirms from dealing in low-priced stock. Such policies and practices pertain tothe payment of brokers’ commissions and to time-consuming procedures thatfunction to make the handling of low-priced stocks unattractive to brokers froman economic standpoint.

In addition, because brokerage commissions onlow-priced stock generally represent a higher percentage of the stock pricethan commissions on higher-priced stock, the current share price of the commonstock can result in individual stockholders paying transaction costs(commissions, markups or markdowns) that represent a higher percentage of theirtotal share value than would be the case if the share price were substantiallyhigher. This factor also may limit the willingness of institutions to purchasethe common stock at its current low share price.

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We believe that thecurrent price of our common stock may have a negative impact on the liquidityand price of our common stock and investors may find it more difficult topurchase or dispose of, or to obtain accurate quotations as to the market valueof, our common stock.

**Our stock price may have wide fluctuations andInternet-related stocks have been particularly volatile**

The market price of our common stock has been highlyvolatile and subject to wide fluctuations. The Nasdaq stock market hasexperienced significant price and volume fluctuations and the market prices ofsecurities of technology companies, particularly Internet-relatedcompanies, have been highly volatile. Market fluctuations, as well as generalpolitical and economic conditions, such as a recession or interest ratefluctuations, could adversely affect the market price of our common stock. Inaddition, the market prices for stocks of Internet-related and technologycompanies, particularly following an initial public offering, frequently reachlevels that bear no relationship to the operating performance of suchcompanies. These market prices generally are not sustainable and are subject towide variations. If our common stock trades to unsustainably high levels, itlikely will thereafter experience a material decline.

In the past, securitiesclass action litigation has often been brought against a company followingperiods of volatility in the market price of their securities. We may in thefuture be the target of similar litigation. Securities litigation could resultin substantial costs, divert management’s attention and resources, and harm ourfinancial condition and results of operations.

**Certain provisions in our charter documents andDelaware law, together with our concentration of stock ownership in a fewpersons, could discourage takeover attempts and lead to management entrenchment**

Our certificate ofincorporation and bylaws and Delaware law contain anti-takeoverprovisions that could have the effect of delaying or preventing changes incontrol that a stockholder may consider favorable. The provisions in ourcharter documents include the following:

·we have a classified Board of Directors with three-yearstaggered terms that will delay the ability of stockholders to change themembership on the Board of Directors;

·our Board of Directors has the ability to issue sharesof preferred stock and to determine the price and other terms, includingpreferences and voting rights, of those shares without stockholder approval;

·stockholder action may be taken only at a special orregular meeting; and

·we have advance notice procedures that must becomplied with by stockholders for them to nominate candidates to our Board ofDirectors.

Our preferred stock purchase rights could causesubstantial dilution to any person or group who attempts to acquire asignificant interest in Quotesmith.com without advance approval of our Board ofDirectors. We have amended our rights plan to exempt acquisitions of shares ofour common stock by Zions from the operation of the rights plan. In addition,our executive officers have employment agreements that may entitle them tosubstantial payments in the event of a change of control. We entered intoamendments to our employment agreements with Messrs. Bland and Thoms thatexempted the issuance of stock to Zions from constituting a change of controlunder these employment agreements.

Furthermore, as of March 9, 2006,Messrs. Bland and Thoms, together with Zions, directly or indirectlycontrolled approximately 71% of our outstanding common stock. This high concentrationof stock ownership, together with the anti-takeover measures described above,could prevent or frustrate attempts to remove or replace incumbent management,including Messrs. Bland and Thoms. These persons may act to further theirinterests as management rather than the interests of the public stockholders.

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The foregoing could havethe effect of delaying, deferring or preventing a change in control ofQuotesmith.com, discourage bids for our common stock at a premium over themarket price, or harm the market price of, and the voting and other rights ofthe holders of, our common stock. We also are subject to Delaware laws thatcould have similar effects. One of these laws prohibits us from engaging in abusiness combination with any significant stockholder for a period of threeyears from the date the person became a significant stockholder unless specificconditions are met.

**Continued terrorist attacks or war could lead tofurther economic instability and adversely affect our stock price, operations,and profitability.**

The terrorist attacks thatoccurred in the United States on September 11, 2001 caused periodic majorinstability in the U.S. and other financial markets. Possible further acts ofterrorism and current and future war risks could have a similar impact. TheUnited States continues to take military action against terrorism and hasrecently taken military action in Iraq. Terrorist attacks and potential war inthe Middle East may lead to additional armed hostilities or to further acts ofterrorism and civil disturbance in the United States or elsewhere, which mayfurther contribute to economic instability. Any such attacks could, among otherthings, cause further instability in financial markets and could directly, orindirectly through reduced demand, negatively affect our facilities andoperations or those of its customers or suppliers.

**Item 1B.     UnresolvedStaff Comments**

Not applicable.

**ITEM 2.     Properties**

Our executive,administrative and operating offices are located in approximately 19,000 squarefeet of leased office space in Darien, Illinois under a lease that expires on December 31,2006. We believe that suitable office space will be available on commerciallyreasonable terms when our lease expires. We also own a 43,000 square footoffice building in Evergreen, Colorado, that was one of the assets acquired inthe May 2004 Life Quotes transaction. This building is currently beingoffered for sale and/or lease.

**ITEM 3.     LegalProceedings**

From time to time we havebeen, and expect to continue to be, subject to legal and regulatory proceedingsand claims in the ordinary course of business. Legal and regulatory proceedingsand claims may include claims of alleged infringement of third partyintellectual property rights, notices from state regulators that we may haveviolated state regulations, and litigation instituted by dissatisfied policyholders. These claims, even if without merit, could result in the significantexpenditure of our financial and managerial resources. We are not aware of anysuch claims that we believe will, individually or in the aggregate, materiallyaffect our business, financial condition or results of operations.

**ITEM 4.     Submissionof Matters to a Vote of Security Holders.**

There were no matterssubmitted to a vote of our stockholders during the quarter ended December 31,2005.

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**PART II**

**ITEM 5.     Marketfor Registrant’s Common Equity and Related Stockholder Matters.**

All common stock and per share information in thisannual report have been retroactively adjusted to reflect a one-for-threereverse stock split that became effective on March 7, 2001.

*Market Information.**  *Our common stock began trading on the Nasdaq NationalMarket under the symbol “QUOT” on August 3, 1999, the date of our initialpublic offering. Prior to this date, no established public trading market forour common equity existed. Effective the opening of business on July 20,2001, our stock listing was transferred from the Nasdaq National Market to theNasdaq SmallCap Market, retaining its existing symbol, QUOT. As of March 15,2006 the approximate number of record holders of our common stock was 1,200. Thelast sale price of our common stock on March 9, 2006 was $3.00. Thefollowing table sets forth, for the period indicated, the high and low lastsale price of our common stock as reported on the Nasdaq SmallCap Market, asapplicable.

| ** **     | ** ** | **High_**  | ** ** | **Low**    | ** ** |
|----------------|------------|------------|------------|------------|------------|
| 2005:          | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter  |       | $          | 5.49       |       | $          | 4.80 |   |
| Second Quarter |       | 4.84       |       | 3.53       |       |
| Third Quarter  |       | 5.42       |       | 3.31       |       |
| Fourth Quarter |       | 3.58       |       | 2.17       |       |
| 2004:          |       |       |       |       |       |
| First Quarter  |       | $          | 6.00       |       | $          | 4.92 |   |
| Second Quarter |       | 6.70       |       | 5.47       |       |
| Third Quarter  |       | 6.00       |       | 5.00       |       |
| Fourth Quarter |       | 6.10       |       | 4.95       |       |

* *

*Dividends.**  *We have never declared or paid any cash dividends onour common stock and do not anticipate paying cash dividends on our commonstock in the foreseeable future. The investor rights agreement we have enteredinto with Zions Bancorporation, or Zions, prohibits us from paying cashdividends on our common stock unless certain conditions are met. We currentlyintend to retain all future earnings to finance the growth and development ofour business. Any future determination as to the payment of dividends will bemade by our board of directors and will depend on our results of operations,financial condition, capital requirements, and any other factors our board ofdirectors considers relevant, including the restrictions contained in theinvestor rights agreement.

*Issuerpurchases of equity securities.*   On October 31,2005, the Company announced that its Board of Directors had authorized therepurchase of up to 650,000 shares of its common stock. Following isinformation concerning the results of that program during 2005:

**ISSUERPURCHASES OF EQUITY SECURITIES**

| ** **                                       | ** ** | ** **         | ** ** | ** **          | ** ** | **Total Number of**               | ** ** | **Maximum Number of**                | ** ** |
|--------------------------------------------------|------------|--------------------|------------|---------------------|------------|---------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                       | ** ** | **Total**          | ** ** | **Average**         | ** ** | **Shares Purchased as Part** | ** ** | **Shares that May Yet Be** | ** ** |
| ** **                                       | ** ** | **Number of** | ** ** | **Price Paid** | ** ** | **of Publicly Announced**         | ** ** | **Purchased Under the**              | ** ** |
| **Period**                                       | ** ** | ** **         | ** ** | **Shares**          | ** ** | **Per Share**                          | ** ** | **Plans or Programs**                | ** ** | **Plans or Programs** | ** ** |
| October 31  through  November 30, 2005 |       |               | 5,075      |                |       |                                        | $     | 2.78                                           |       |   |   | 5,075 |   |   |   | 644,925 |   |   |
| December 1  through  December 31, 2005 |       |               | 2,400      |                |       |                                        | $     | 2.75                                           |       |   |   | 7,475 |   |   |   | 642,525 |   |   |
| Total                                            |       |               | 7,475      |                |       |                                        | $          | 2.77                                           |       |   |   | 7,475 |   |   |   | 642,525 |   |   |
|                                                  |            |                    |            |                     |            |                                             |            |                                                |            |  |  |  |  |  |  |  |  |  |  |  |

 

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**ITEM 6.     SelectedFinancial Data.**

Thehistorical statement of operations data and balance sheet data in the tablebelow is derived from our financial statements. This data should be read inconjunction with “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and with the financial statements, related notes,and other financial information included in this annual report. The historicalresults presented below are not necessarily indicative of the results to beexpected for any future period.

| ** **                                                                     | ** ** | **Year Ended December 31,**                   | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                                                     | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                     | ** ** | **(inthousands, except per share data)** | ** ** |
| **Statement of Operations Data:**                                              |       |                                                         |       |   |   |   |   |   |   |   |   |
| Revenues                                                                       |       | $                                                            | 17,101     |   | $ | 15,910 |   | $ | 9,737 |   | $ | 10,777 |   | $ | 8,851 |   |
| Expenses:                                                                      |       |                                                         |       |   |   |   |   |   |   |   |   |
| Selling and marketing                                                          |       | 6,541                                                        |       | 6,866 |   | 4,735 |   | 2,912 |   | 7,052 |   |
| Operations                                                                     |       | 7,275                                                        |       | 6,531 |   | 3,034 |   | 7,032 |   | 5,366 |   |
| General and administrative                                                     |       | 3,764                                                        |       | 3,148 |   | 2,656 |   | 2,513 |   | 3,343 |   |
| Depreciation and amortization                                                  |       | 973                                                          |       | 1,279 |   | 1,053 |   | 1,405 |   | 798 |   |
| Impairment of goodwill                                                         |       | 3,750                                                        |       | — |   | — |   | — |   | — |   |
| Total expenses                                                                 |       | 22,303                                                       |       | 17,824 |   | 11,478 |   | 13,862 |   | 16,559 |   |
| Operating loss                                                                 |       | (5,202                                                       | )          | (1,914 | ) | (1,741 | ) | (3,085 | ) | (7,708 | ) |
| Interest income,  net                                                          |       | 276                                                          |       | 138 |   | 368 |   | 359 |   | 1,075 |   |
| Realized gain  (loss) on sale of securities                                    |       | —                                                       |       | (45 | ) | 92 |   | — |   | — |   |
| Net loss                                                                       |       | $                                                            | (4,926     | ) | $ | (1,821 | ) | $ | (1,281 | ) | $ | (2,726 | ) | $ | (6,633 | ) |
| Basic and diluted  net loss per share                                     |       | $                                                            | (0.67      | ) | $ | (0.31 | ) | $ | (0.26 | ) | $ | (0.55 | ) | $ | (1.22 | ) |
| Weighted average common  shares and equivalents outstanding, basic and diluted |       | 7,329                                                        |       | 5,851 |   | 4,917 |   | 4,964 |   | 5,441 |   |

 

| ** **                       | ** ** | **December 31,**   | ** ** |
|----------------------------------|------------|-------------------------|------------|
| ** **                       | ** ** | **2005**                | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                       | ** ** | **(in thousands)** | ** ** |
| **Balance Sheet Data:**          |       |                    |       |   |   |   |   |   |   |   |   |
| Cash and  equivalents            |       | $                       | 747        |   | $ | 1,356 |   | $ | 677 |   | $ | 1,640 |   | $ | 4,033 |   |
| Working capital                  |       | 7,190                   |       | 5,140 |   | 5,607 |   | 10,485 |   | 18,514 |   |
| Total assets                     |       | 24,055                  |       | 28,843 |   | 17,526 |   | 19,559 |   | 23,000 |   |
| Long-term  liabilities           |       | —                  |       | — |   | — |   | 35 |   | 84 |   |
| Total liabilities                |       | 1,441                   |       | 1,228 |   | 760 |   | 1,464 |   | 1,085 |   |
| Total stockholders’  equity |       | 22,614                  |       | 27,615 |   | 16,766 |   | 18,095 |   | 21,915 |   |
|                                  |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                          | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| **Selected  Operating Statistics:** |       |                                       |       |   |   |   |   |   |   |   |   |
| Policies sold                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Term life                           |       | 16,845                                     |       | 17,485 |   | 11,011 |   | 16,498 |   | 16,915 |   |
| Health and other                    |       | 315                                        |       | 3,236 |   | 4,845 |   | 4,753 |   | 3,367 |   |
| Total policies  sold                |       | 17,160                                     |       | 20,721 |   | 15,856 |   | 21,251 |   | 20,282 |   |

 

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**SelectedQuarterly Operating Results**

Thefollowing tables set forth unaudited quarterly statements of operations datafor 2005 and 2004. The information for each of these quarters has been preparedon substantially the same basis as the audited financial statements includedelsewhere in this annual report, and, in our opinion, include all adjustments,consisting only of normal recurring adjustments, necessary for a fairpresentation of the results of operations for these periods. Historical resultsare not necessarily indicative of the results to be expected in the future, andresults of interim periods are not necessarily indicative of results for theentire year.

| ** **                                     | ** ** | **Quarter Ended**                                             | ** ** |
|------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **Mar. 31,**                                                  | ** ** | **June 30,** | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** |
| ** **                                     | ** ** | **(in thousands, except per share data)** | ** ** |
| **2005**                                       |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                       |       |                                                               | $          | 4,381 |   |   |   | $ | 4,737 |   |   |   | $ | 4,079 |   |   | $ | 3,905 |   |
| Expenses:                                      |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling and marketing                          |       |                                                               | 1,982      |   |   |   | 1,378 |   |   |   | 1,580 |   |   | 1,602 |   |
| Operations                                     |       |                                                               | 1,786      |   |   |   | 1,848 |   |   |   | 1,901 |   |   | 1,740 |   |
| General and administrative                     |       |                                                               | 945        |   |   |   | 905 |   |   |   | 993 |   |   | 921 |   |
| Depreciation and amortization                  |       |                                                               | 254        |   |   |   | 240 |   |   |   | 237 |   |   | 241 |   |
| Impairment of goodwill                         |       |                                                               | —     |   |   |   | — |   |   |   | — |   |   | 3,750 |   |
| Total expenses                                 |       |                                                               | 4,967      |   |   |   | 4,371 |   |   |   | 4,711 |   |   | 8,254 |   |
| Operating income  (loss)                       |       |                                                               | (586       | ) |   |   | 366 |   |   |   | (632 | ) |   | (4,349 | ) |
| Interest income                                |       |                                                               | 61         |   |   |   | 65 |   |   |   | 71 |   |   | 79 |   |
| Net income (loss)                              |       |                                                               | $          | (525 | ) |   |   | $ | 431 |   |   |   | $ | (561 | ) |   | $ | (4,270 | ) |
| Net income (loss)  per share basic and diluted |       |                                                               | $(0.07     | ) |   |   | $0.06 |   |   |   | $(0.08 | ) |   | $(0.58 | ) |

 

| ** **                                     | ** ** | **Quarter Ended**                                             | ** ** |
|------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **Mar. 31,**                                                  | ** ** | **June 30,** | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** |
| ** **                                     | ** ** | **(in thousands, except per share data)** | ** ** |
| **2004**                                       |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                       |       |                                                               | $          | 2,452 |   |   |   | $ | 4,296 |   |   |   | $ | 4,714 |   |   | $ | 4,449 |   |
| Expenses:                                      |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling and marketing                          |       |                                                               | 1,360      |   |   |   | 2,000 |   |   |   | 1,848 |   |   | 1,658 |   |
| Operations                                     |       |                                                               | 820        |   |   |   | 1,958 |   |   |   | 1,989 |   |   | 1,765 |   |
| General and administrative                     |       |                                                               | 756        |   |   |   | 794 |   |   |   | 737 |   |   | 862 |   |
| Depreciation and amortization                  |       |                                                               | 222        |   |   |   | 344 |   |   |   | 379 |   |   | 333 |   |
| Total expenses                                 |       |                                                               | 3,158      |   |   |   | 5,096 |   |   |   | 4,953 |   |   | 4,618 |   |
| Operating loss                                 |       |                                                               | (706       | ) |   |   | (800 | ) |   |   | (239 | ) |   | (169 | ) |
| Interest income,  net                          |       |                                                               | 86         |   |   |   | 8 |   |   |   | (9 | ) |   | 53 |   |
| Realized gains (losses)  on sale of securities |       |                                                               | —     |   |   |   | (46 | ) |   |   | — |   |   | — |   |
| Net loss                                       |       |                                                               | $          | (620 | ) |   |   | $ | (838 | ) |   |   | $ | (248 | ) |   | $ | (116 | ) |
| Net loss per share basic  and diluted          |       |                                                               | $          | (0.12 | ) |   |   | $ | (0.17 | ) |   |   | $ | (0.04 | ) |   | $ | (0.02 | ) |

 

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**Item 7.**                        MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

**Overviewand Critical Accounting Policies**

We generaterevenues primarily from the receipt of commissions paid to us by insurancecompanies based upon the insurance policies sold to consumers through ourservice. These revenues come in the form of first year, bonus and renewalcommissions that vary by company and product. We recognize the full first yearcommission revenues on term life insurance after the insurance company approvesthe policy and accepts the initial premium payment. At the time revenue isrecognized, an allowance is recorded based on historical information forestimated commissions that will not be received due to the non-payment ofinstallment first year premiums and any premium refunds made by the insurance carriers.We recognize commission revenue on other lines of insurance, primarily healthinsurance, after we receive notice that the insurance company has receivedpayment of the related premium. First year commission revenues per policy canfluctuate due to changing premiums, commission rates, and types or amount ofinsurance sold. We receive bonuses based upon individual criteria set byinsurance companies. We recognize bonus revenues when we receive notificationfrom the insurance company of the bonus due to us. Bonus revenues are typicallyhigher in the fourth quarter of our fiscal year due to the bonus system used bymany life insurance companies, which pay greater amounts based upon theachievement of certain levels of annual production. Revenues for renewalcommissions are recognized after we receive notice that the insurance companyhas received payment for a renewal premium. Renewal commission rates aresignificantly less than first year commission rates and may not be offered byevery insurance company. We also generate revenue from the sale of leads forlines of insurance other than life insurance to third parties. Such revenuesare recognized when we receive notification from those sources of the revenuedue to us. Our revenue recognition accounting policy has been applied to allperiods presented in this report.

The timing between when we submit a consumer’sapplication for insurance to the insurance company and when we generaterevenues has varied over time. The type of insurance product and the insurancecompany’s backlog are the primary factors that impact the length of timebetween submitted applications and revenue recognition. Over the past threeyears, the time between application submission and revenue recognition hasaveraged approximately four months. Any changes in the amount of time betweensubmitted application and revenue recognition, which will be influenced by manyfactors not under our control, will create fluctuations in our operatingresults and could affect our business, operating results and financialcondition.

Operations expenses are comprised of both variable andsemi-variable expenses, including wages, commissions, benefits andexpenses associated with processing insurance applications and maintaining ourdatabase and web sites. The historical lag between the time an application issubmitted to the insurance companies and when we recognize revenuessignificantly impacts our operating results as most of our variable expensesare incurred prior to application submission.

Selling and marketing expenses consist primarily ofdirect advertising costs. The costs of communicating the advertising areexpensed in the period the advertising is communicated.

We have established the 1997 Stock Option Plan and the2004 Non-Qualified Stock Option Plan, or the plans, to provide additionalincentives to our employees, officers, and directors. Under the plans, anaggregate of 800,000 shares of Quotesmith.com common stock may be grantedto participants in the plan. We account for stock option grants in accordancewith Accounting Principles Board Opinion 25, “Accounting for Stock Issuedto Employees” and related interpretations, and, accordingly, recognize nocompensation expense for stock options granted to employees where the exerciseprice is equal to or greater than the market price at the date of the grant. Stockcompensation accounting is discussed more fully in Notes 2 and 7 to theaccompanying financial statements.

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Intangible assets acquired in 2001 in the acquisitionof Insurance News Network, LLC were amortized on a straight-line basisover three years. These assets were fully amortized as of December 31,2004.

Intangibleassets acquired in 2004 in the acquisition of Life Quotes, Inc. consist ofthe following:

| ** **                   | ** ** | **Intangible  Asset  Balance** | ** ** | **Estimated  Useful  Life** | ** **   | **Amortization  Method** | ** ** |
|------------------------------|------------|--------------------------------|------------|-----------------------------|--------------|--------------------------|------------|
| Insurance  contract renewals |       | $                              | 3,538,000  |                        |         | 10 years            |       |   | Accelerated |   |
| Non-compete  agreement       |       | 589,000                        |       |                        | 6 years |                     |       | Straight line |   |
| Total                        |       | $                              | 4,127,000  |                        |         |                     |       |   |   |   |

 

The fair value of insurance contract renewals wasestimated based on the actual policies in force as of the acquisition date, andthe renewal commission rates paid by each insurance carrier. These commissionswere estimated to have a useful life of ten years, based on the terms of thecontracts with the insurance carriers, and an annual lapse rate was applied tothe expected renewals for each carrier based on historical trends. Amortizationis on an accelerated basis, as renewal commissions will decline each year dueto lapses. The ultimate realization of the value of the contract renewals isdependant on a number of factors, including actual lapse ratios, which can beaffected by factors not under our control, such as death rates and the pricinglevel of insurance policies that could be purchased to replace the policies inthe renewal stream. As a result, the actual amount realized from the contractrenewals acquired may differ significantly from the estimated amount, causingimpairment.

Goodwill is not subject to amortization. Allocation ofintangible assets between goodwill and other intangible assets and thedetermination of estimated useful lives are based on valuations that we receivefrom independent appraisers. The calculations of these amounts are based onestimates and assumptions using historical and pro forma data and recognizedvaluation methods. The use of different estimates or assumptions could producedifferent results.

While goodwill is not amortized, it is subject toperiodic reviews for impairment (at least annually, or more frequently ifimpairment indicators arise). We review goodwill for impairment periodicallyand whenever events or changes in business circumstances indicate that thecarrying value of the assets may not be recoverable. Such impairment reviewsare performed at the entity level with respect to goodwill, as we have onereporting unit. Under those circumstances, if the fair value were less than thecarrying amount of the entity, further analysis would be required to determinewhether or not a loss would need to be charged against current period earnings.During the fourth quarter of 2005, the Company experienced declining revenuesfrom life insurance sales and a drop in the market price of its common stock. Ourannual impairment review was conducted as of December 31, 2005, and it wasdetermined that an impairment existed. The determination of fair value and theimpairment are based on a combination of the market price of our common stockand a discounted cash flow analysis based on estimates and assumptionsincluding the amount and timing of future cash flows and future interest rates.The use of different estimates or assumptions could produce different results. Asa result of this impairment determination, the Company recorded an impairmentcharge against earnings in the fourth quarter of 2005 amounting to $3.75 million.

No income tax credits havebeen recognized relating to our tax loss carryforwards due to uncertaintiesrelating to future taxable income.

**Industry Developments**

Our bonus commission revenues relate to the amount ofpremiums paid for new insurance policies to a single insurance company. Bonuscommission revenues were $2.3 million for the year ended December 31,2005, and $2.9 million for the year ended December 31, 2004.

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The insurance industry has come under a significantlevel of scrutiny by various regulatory bodies with respect to contingentcommission arrangements and other matters. The New York Attorney General hasissued subpoenas to numerous insurance brokers related to an inquiry intomarket service agreements and other similar agreements, which compensatebrokers for distribution and other services provided to insurance carriers. Additionally,some state regulators are also investigating these types of agreements, and wehave received a subpoena from the Illinois Department of Financial andProfessional Regulation, Division of Insurance, seeking information regardingthese types of arrangements. It appears that these investigations could havefar-reaching consequences in the insurance industry. For example, Marsh &McLennan Companies, Inc., Willis Group Holdings Ltd., Aon Corporationand Arthur J. Gallagher, four of the largest insurance brokerage firms inthe industry, have each announced that they will no longer accept contingentcommissions. Certain of these brokerage firms have entered into agreements withvarious regulators and attorneys general to resolve issues related toinvestigations of those firms. In addition, the departments of insurance forvarious states have proposed new regulations, and other state insurancedepartments have indicated that they will propose new regulations, that addresscontingent commission arrangements, including prohibitions involving thepayment of money by insurance carriers in return for steering business andenhanced disclosure of contingent commission arrangements to insureds. On December 29,2004, the National Association of Insurance Commissioners announced that it hasproposed model legislation to implement new disclosure requirements related tobroker compensation arrangements.

We cannot predict how theoutcome of this investigation will affect how insurance brokers will becompensated or contingent commissions in the insurance brokerage industry orwhat effect, if any, it will have on our operations. We will continue to monitorthe situation.

**Subsequent Event**

On February 1, 2006,we announced that we were consolidating our call center operations by closingour Colorado call center. Approximately 35 sales and service jobs at theColorado facility were eliminated and all telephone sales and serviceactivities have been consolidated into the Company’s Darien, IL home officecall center effective February 1, 2006. First quarter 2006 expensesrelated to the closing are estimated to be approximately $200,000. The officebuilding owned by the Company in Colorado is currently being offered for saleand for lease.

**Results of Operations**

**Comparisonof Years Ended December 31, 2005 and 2004**

*Revenues*

Revenuesincreased $1.2 million, or 7%, to $17.1 million in 2005 from $15.9 millionin 2004. The components of revenue are as follows:

| ** **                        | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|
| ** **                        | ** ** | **2005**                                   | ** ** | **2004** |   |
| Revenues:                         |       |                                       |       |   |   |
| Commissions -Life                 |       | $                                          | 14,456,897 |   | $ | 13,220,872 |   |
| Commissions-Health                |       | 614,648                                    |       | 1,046,580 |   |
| Sales of non-life insurance leads |       | 2,022,787                                  |       | 1,626,179 |   |
| Other revenue                     |       | 6,976                                      |       | 16,361 |   |
| Total revenue                     |       | 17,101,308                                 |       | 15,909,992 |   |
|                                   |            |                                            |            |  |  |  |  |

 

29

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Life insurance commissionsincreased $1.2 million, or 9%. Sales of life insurance by telephoneincreased $3.2 million, primarily due to the May 2004 acquisition ofLife Quotes, Inc., which provided us with a phone sales capability. Salesof life insurance at our website declined $2.2 million, as we directed asignificant portion of our advertising in 2005 toward supporting the phonesales center. An increase in renewal commission of $200,000 accounted for theremainder of the increase in life insurance commissions. This increase inrevenue was achieved despite a drop in the number of life insurance policiessold to 16,845 in 2005 from 17,485 in 2004, a decrease of 4%, as our averagetotal commission per policy sold increased. Commission from health insurancedecreased 41% in 2005, as we discontinued brokerage sales for health insuranceduring the first quarter of 2005, and are now outsourcing this business tothird parties. As a result, total health insurance policies sold decreased 90%to 315 in 2005 from 3,236 in 2004. Fees from the sale of internet leads forlines of insurance other than life increased 24% to $2 million in 2005,resulting from higher revenue from the sale of auto insurance traffic as wellas new revenue from the sale of health insurance traffic.

*Expenses*

*Sellingand Marketing.*   Sellingand marketing expenses decreased $325,000, or 5%, in 2005 when compared with2004, to a total of $6.5 million. We intentionally decreased ouradvertising spending during the second and third quarters of 2005, as we foundthat we were generating more telephone leads than our agents could efficientlyhandle. Selling and marketing expenses have dropped to 38% of revenue in 2005,compared with 43% of revenue in 2004.

*Operations.*   Operationsexpenses increased 11% to $7.3 million in 2005 from $6.5 million in2004. The 2005 expenses include a full year of operating the Life Quotesdivision, while 2004 expenses only include that operation subsequent to the May 2004acquisition.

*Generaland Administrative.*   General and administrative expenses increased 20%, or$617,000, in 2005 to a total of $3.8 million. Increases in legal andaccounting fees, as well as higher insurance costs and an increase in propertytaxes resulting from owning the Life Quotes building for a full year in 2005accounted for this increase.

*Depreciation andamortization.*   Depreciationand amortization decreased $306,000 in 2005 when compared to 2004. Full yeardepreciation on the Life Quotes building and fixed assets, along withamortization of intangibles acquired in the Life Quotes acquisition, resultedin an increase of $240,000 in this category. However, results for 2004 includedamortization charges of $438,000 related to intangible assets acquired in the2001 acquisition of selected assets of Insurance News Network. Those intangibleassets were fully amortized in 2004, so there were no similar charges in 2005.

*Impairment ofgoodwill*

We recorded goodwill inthe amount of $6.9 million in connection with our May 2004 acquisitionof certain assets of Life Quotes, Inc. While goodwill is not amortized, itis subject to periodic reviews for impairment (at least annually, or morefrequently if impairment indicators arise). As discussed earlier, the Companyrecorded an impairment charge against earnings in the fourth quarter of 2005amounting to $3.75 million.

30

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*Interest Income,Net*

Interestincome, net was $276,000 in 2005 compared to $138,000 in 2004. The componentsof interest income are as follows:

| ** **            | ** ** | **Years ended December 31,** | ** ** |
|-----------------------|------------|---------------------------------------------|------------|
| ** **            | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| Interest income       |       | $                                           | 276,001    |   | $ | 218,968 |   |
| Interest expense      |       | —                                      |       | (80,765 | ) |
| Interest income,  net |       | $                                           | 276,001    |   | $ | 138,203 |   |

 

Interest income increased due to a larger averageportfolio of invested assets and higher interest rates in 2005. There was nodebt in 2005.

During 2005, there were nosales of securities, so there were no realized gains or losses. In 2004, therewere realized losses of $45,000.

*Income Taxes(Credit)*

We had no income taxcredit for 2005 and 2004 due to valuation allowances provided against netdeferred tax assets.

**Comparisonof Years Ended December 31, 2004 and 2003**

*Revenues*

Revenuesincreased $6.2 million, or 63%, to $15.9 million in 2004 from $9.7 millionin 2003. The components of revenue are as follows:

| ** **                        | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|
| ** **                        | ** ** | **2004**                                   | ** ** | **2003** | ** ** |
| Revenues:                         |       |                                       |       |   |   |
| Commissions -Life                 |       | $                                          | 13,220,872 |   | 6,947,736 |   |
| Commissions-Health                |       | 1,046,580                                  |       | 1,033,364 |   |
| Sales of non-life insurance leads |       | 1,626,179                                  |       | 1,736,710 |   |
| Other revenue                     |       | 16,361                                     |       | 19,034 |   |
| Total revenue                     |       | 15,909,992                                 |       | 9,736,844 |   |
|                                   |            |                                            |            |  |  |  |

 

Life insurance commissionsincreased $6.3 million, or 90%, with $5.4 million of the increaseresulting from the operations of our new Life Quotes division. Commissions fromhealth insurance increased 1% in 2004. Total life and health insurance policiessold increased 31% to 20,721 in 2004 from 15,856 in 2003. The Life Quotes operationaccounted for approximately 6,900 paid policies in 2004. Revenue from the saleof internet leads for lines of insurance other than life decreased 6% to $1.6 millionin 2004, resulting from less traffic being directed to partners’ web sites.

*Expenses*

*Sellingand Marketing.**  *Sellingand marketing expenses increased $2.1 million, or 45%, in 2004 whencompared with 2003, to a total of $6.9 million. We have increased ouradvertising spending since the acquisition of Life Quotes in May 2004, inorder to maintain lead flow to our telephone sales staff. However, selling andmarketing expenses have dropped to 43% of revenue in 2004, compared with 49% ofrevenue in 2003.

31

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*Operations.*   Operationsexpenses more than doubled to $6.5 million in 2004 from $3.0 millionin 2003. Operations expenses for our Life Quotes division, which beganoperating after the May 2004 acquisition of Life Quotes, accounted for$3.0 million of that increase.

*Generaland Administrative.**  *Generaland administrative expenses increased 19%, or $492,000, in 2004. Expenses forour Life Quotes division account for $223,000 of this increase, with theremainder resulting from increased costs for employee compensation, corporateinsurance and franchise taxes.

*Depreciation andamortization.**  *Depreciationand amortization increased $226,000 in 2004 when compared to 2003. Depreciationon the Life Quotes building and fixed assets, along with amortization ofintangibles acquired in the Life Quotes acquisition, resulted in charges of $553,000in this category.

*Interest Income,Net*

Interestincome, net was $138,000 in 2004 compared to $368,000 in 2003. The componentsof interest income are as follows:

| ** **            | ** ** | **Years ended December 31,** | ** ** |
|-----------------------|------------|---------------------------------------------|------------|
| ** **            | ** ** | **2004**                                    | ** ** | **2003** | ** ** |
| Interest income       |       | $                                           | 218,968    |   | $ | 376,243 |   |
| Interest expense      |       | (80,765                                     | )          | (8,290 | ) |
| Interest income,  net |       | $                                           | 138,203    |   | $ | 367.953 |   |

 

Interest income declined due to a smaller portfolio ofinvested assets in 2004, resulting from the use of assets to acquire LifeQuotes. Interest expense increased in 2004 due to a short term loan that wasused to assist in the acquisition of Life Quotes.

There were also netrealized losses on the sale of securities of $45,000 in 2004. These securitieswere sold to raise funds for the Life Quotes acquisition. There were netrealized gains on the sale of securities of $92,000 in 2003.

*Income Taxes(Credit)*

We had no income taxcredit for 2004 and 2003 due to valuation allowances provided against netdeferred tax assets.

**Liquidity and Capital Resources**

We currently expect that the cash and fixed maturityinvestments of $9.1 million at December 31, 2005 will be sufficientto meet our anticipated cash requirements for at least the next 12 months.The timing and amounts of our working capital expenditures are difficult topredict, and if they vary materially, we may require additional financing. Ifwe require additional equity financing, it may be dilutive to our stockholdersand the equity securities issued in a subsequent offering may have rights orprivileges senior to our common stock. If debt financing is available, it may requireadditional restrictive covenants with respect to dividends, raising capital andother financial and operational matters, which could impact or restrict ouroperations. If we cannot obtain adequate financing on acceptable terms, we maybe required to reduce the scope of our marketing or operations, which couldharm our business, results of operations and our financial condition.

Our sources of funds will consist primarily ofcommissions generated from the sale of life insurance products, fee revenue fromthe sale of leads for other lines of insurance, investment income, and maturityproceeds from our fixed maturity portfolio. The principal uses of funds areselling and marketing expenses, operations, general and administrativeexpenses, and acquisitions of furniture, equipment and software.

32

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Cash provided by operating activities wasapproximately $171,000 in 2005 and $503,000 in 2004, while cash used inoperating activities was approximately $770,000 in 2003, as shown in ourstatements of cash flows included in this report. The increase in cash flow in2005 and 2004, compared to the amount used in 2003, was primarily a result ofthe collection of higher revenues.

Cash used for investing activities in 2005 totaled$759,000, consisting of the purchase of fixed income investments in excess ofinvestment maturities of $503,000, and the purchase of fixed assets of$256,000. Cash used for investing activities in 2004 totaled $12.5 million,consisting primarily of the acquisition of Life Quotes. Fixed maturitysecurities were sold, generating $11.9 million, to help fund the $18.7 millionacquisition. The purchase of securities in excess of maturities used $5.5 millionof cash. Cash used for investing activities totaling $247,000 in 2003 consistedof the purchase of fixed income investments in excess of investment maturitiesand sales of $182,000, and the purchase of fixed assets of $65,000.

Cash used for financingactivities in 2005 totaled $21,000 and consisted of the repurchase of shares ofour common stock. Cash provided by financing activities in 2004 totaled $12.7 million,consisting primarily of the sale of common stock to fund the Life Quotesacquisition. The Company also borrowed and later repaid $6.5 million inconnection with the acquisition. Cash provided by financing activities in 2003resulted from the exercise of employee stock options totaling $103,000,partially offset by payments of a capital lease obligation of $49,000. We didnot buy back any shares of our common stock in 2004 or 2003.

**Cash Flow Obligations**

In thenormal course of business, we enter into financing transactions, leaseagreements, or other commitments. These commitments may obligate us to certaincash flows during future periods. The following table summarizes suchobligations as of December 31, 2005:

| ** **                       | ** ** | **Payments due by Period** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations** | ** ** | ** **                                | ** ** | **Total** | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** |
| Long-term debt  obligations      |       | $                                         | —     |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Capital lease  obligations       |       | —                                    |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Operating lease  obligations     |       | 290,501                                   |       |   | 290,501 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Purchase obligations             |       | —                                    |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
|                                  |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

The primary objective of our investment activities isto preserve principal while at the same time maximizing yields withoutsignificantly increasing risk. To achieve this objective, we maintain aportfolio of cash and equivalents and investments in a variety of marketable securities, including bothgovernment and corporate obligations.

Substantially all of our investments are subject tointerest rate risk. We consider all of our investments as available-for-sale. Asof December 31, 2005, there were net unrealized losses of $198,098 onthose investments. There were net unrealized losses on those investmentstotaling $143,317 at December 31, 2004.

We did not hold any derivative financial instrumentsas of December 31, 2005, and have never held such instruments in the past.Additionally, all our transactions have been denoted in U.S. currency and donot have any risk associated with foreign currency transactions.

Due to the short termnature of our investments, a 1% increase in interest rates would not decreasethe fair market value of our investments by a material amount.

33

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**Item 8.**                        FinancialStatements and Supplementary Data

The financial statementsare indexed in the Index to Financial Statements, which appear on Pages F-1through F-17 hereof, and are incorporated in this Item by referencethereto.

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

Not applicable

**Item 9A.**                Controlsand Procedures

The Company’s management,with the participation of the Company’s Chief Executive Officer and ChiefFinancial Officer, has evaluated the effectiveness of the Company’s disclosurecontrols and procedures as of December 31, 2005. Based on that evaluation,the Company’s Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures were effective as of December 31,2005 in ensuring that all material information required to be filed in thisannual report have been made known to them in a timely fashion. There were nochanges in the Company’s internal control over financial reporting during thefourth quarter of 2005 that have materially affected or are reasonably likelyto materially affect the Company’s internal controls over financial reporting.

**Item 9B.**               OtherInformation

Not applicable

**PART III**

**Item 10.**                 Directorsand Executive Officers of the Registrant

The sections entitled “Management” and “Section 16(a) BeneficialOwnership Reporting Compliance” are incorporated herein by reference from ourproxy statement to be filed with the Securities and Exchange Commission inconnection with our 2006 annual meeting of stockholders scheduled for May 18,2006. Information about our executive officers is set forth in Item 4(a) inPart I of this Report.

Thefollowing table sets forth information regarding our executive officers andcertain other key employees.

| **Name**            | ** ** | ** ** | ** ** | **Age**                                                       | ** ** | **Position** | ** ** | ** ** |
|---------------------|------------|------------|------------|---------------------------------------------------------------|------------|--------------|------------|------------|
| Robert S. Bland     |       | 52         |       | Chairman of the Board, President and Chief Executive  Officer |
| William V. Thoms    |       | 53         |       | Executive Vice President , Chief Operating Officer            |
| Phillip A. Perillo  |       | 56         |       | Senior Vice President, Chief Financial Officer                |
| Richard C. Claahsen |       | 41         |       | Vice President, Corporate Secretary                           |

* *

*Robert S.Bland***has served asour Chairman of the Board, President and Chief Executive Officer since hefounded Quotesmith.com in 1984. From 1979 to 1984, Mr. Bland was presidentand sole stockholder of Security Funding Corporation, an insurance agency. In March 1984,Mr. Bland sold Security Funding Corporation in order to raise capital tofound Quotesmith.com. Mr. Bland holds a B.S. in marketing from theUniversity of Colorado.

*William V.Thoms* has served as our Executive Vice President since1994. From 1988 to 1993, Mr. Thoms was responsible for our operations andcustomer service departments. Mr. Thoms is a founding stockholder. Priorto joining us, Mr. Thoms was a sales manager for Western Dressing, Inc.,a privately held salad dressing manufacturing company, from 1972 to 1987.

*Phillip A.Perillo* has served as our Senior Vice President andChief Financial Officer since May of 2002. Mr. Perillo has overtwenty years of insurance industry experience, with companies such as the 

34

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Zurich American InsuranceGroup and Marsh & McLennan. Mr. Perillo holds an MBA in Financefrom DePaul University and a B.S. in Accounting from the University of Illinoisat Chicago.

*Richard C. Claahsen***has served as our Vice President of Regulatory Affairssince May 1999. From June 1997 to May 1999, Mr. Claahsenserved as our director of regulatory affairs. From October 1996 to June 1997,he was a special agent with Northwestern Mutual Life Insurance Company. From1993 to 1996, Mr. Claahsen was a litigation paralegal at Templeton &Associates of Chicago, Illinois. In 1999, Mr. Claahsen received hisChartered Life Underwriter designation from The American College of Bryn Mawr,Pennsylvania. Mr. Claahsen holds a B.A. and an M.A. in philosophy from theCatholic University of America and a J.D. from ITT Chicago Kent College of Law.

**Code of Ethics**

We have adopted a Code ofEthics which applies to all financial officers, including our Chief ExecutiveOfficer and our Chief Financial Officer. We believe our Code of Ethics is compliantwith Item 406 of SEC Regulation S-K and the Nasdaq listing standards.Any waivers of the Code of Ethics must be approved by a committee of the Boardof Directors comprised solely of independent directors. There have been nowaivers to the Code of Ethics since its adoption.

**Item 11.**                 ExecutiveCompensation

The sections entitled “ExecutiveCompensation,” excluding the Board Compensation Committee Report and the stockprice performance graph, “Management—Director Compensation” and “Management—CompensationCommittee Interlocks and Insider Participation” is incorporated herein byreference from our proxy statement to be filed with the Securities and ExchangeCommission in connection with our 2006 annual meeting of stockholders scheduledfor May 18, 2006.

**Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management

The section entitled “Principal Shareholders” isincorporated herein by reference from our proxy statement to be filed with theSecurities and Exchange Commission in connection with our 2005 annual meetingof stockholders scheduled for May 19, 2005.

The following table setsforth the following information as of December 31, 2005: (i) thenumber of shares of our common stock to be issued upon the exercise ofoutstanding options, warrants and rights, (ii) the weighted-averageexercise price of such options, warrants and rights and (iii) the numberof shares of our common stock remaining available for future issuance under ourequity compensation plans, other than the outstanding options, warrants andrights described above.

**EquityCompensation Plan Information**

| ** **                                                  | **Plan category** | ** ** | ** ** | **Number of securities to  be issued upon exercise  of outstanding options,  warrants and rights  (a)** | ** ** | **Weighted-average  exercise price   of outstanding  options, warrants  and rights  (b)** | ** ** | **Number of securities  remaining available  for future issuance  under equity compensation plans  (excluding securities   reflected in column (a))  (c)** | ** ** |
|-------------------------------------------------------------|------------------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders     |                   |       | 412,061    |                                                                                                                                                      |       |                                                                                                               | $          | 6.71                                                                                                                                                                                                                        |       |   |   | 357,260 |   |   |
| Equity compensation  plans not approved by security holders |                   |       | —     |                                                                                                                                                      |       |                                                                                                               | —     |                                                                                                                                                                                                                        |       |   | — |   |   |
| **Total**                                                   |                   |       | 412,061    |                                                                                                                                                      |       |                                                                                                               | $          | 6.71                                                                                                                                                                                                                        |       |   |   | 357,260 |   |   |

 

35

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Please see note 7 tothe audited financial statements of Quotesmith.com included elsewhere in thisAnnual Report on Form 10-K for a description of the materialfeatures of the Quotesmith.com, Inc. Stock Option Plans.

**Item 13.**                 CertainRelationships and Related Transactions

The section entitled “CertainRelationships and Related Transactions” is incorporated herein by referencefrom our proxy statement to be filed with the Securities and ExchangeCommission in connection with our 2006 annual meeting of stockholders scheduledfor May 18, 2006.

**Item 14.**                 PrincipalAccounting Fees and Services

Subject to ratification bythe shareholders, the Audit Committee and the Board of Directors have selectedErnst & Young LLP to continue as independent auditors to auditthe financial statements of the Company for the year ended December 31,2006. Representatives of the firm of Ernst & Young LLP will bepresent at the Annual Meeting and will have an opportunity to make a statementif they so desire and will be available to respond to appropriate questions.

**Audit Fees**

The aggregate fees foreach of the last two fiscal years for professional services rendered by Ernst &Young LLP for the audit of our annual financial statements and review offinancial statements included in our Forms 10-Q were $283,000 in2005 and $211,360 in 2004.

**Audit-Related Fees**

The aggregate fees billedin each of the last two fiscal years for assurance and related services byErnst & Young LLP that are reasonably related to the performance ofthe audit or review of our financial statements and are not reported aboveunder the caption “Audit Fees” were $0 in 2005 and $108,967 in 2004. Theaudit-related fees for 2004 involved reviews of intangible assets and goodwillimpairment, and consulting regarding acquisition related issues and apre-acquisition audit of Life Quotes for 2002 and 2003.

**Tax Fees**

For the last two years,there were no fees billed for professional services rendered by Ernst &Young LLP for tax compliance, tax advice and tax planning.

**All Other Fees**

The aggregate fees billedin each of the last two fiscal years for products and services provided byErnst & Young LLP, other than the services reported above, were$1,500 in 2005 and $1,500 in 2004. The fees were for use of the Ernst &Young online service.

**Pre-ApprovalPolicies and Procedures**

The Audit Committee hasadopted a policy that requires advance approval of all audit, audit-related, taxservices, and other services performed by the independent auditor. The policyprovides for pre-approval by the Audit Committee of specifically defined auditand non-audit services. Unless the specific service has been pre-approved withrespect to that year, the Audit Committee must approve the permitted servicebefore the independent auditor is engaged to perform it. The Audit Committeehas delegated to the Chair of the Audit Committee the authority to approvepermitted services provided that the Chair reports any decisions to theCommittee at its next scheduled meeting.

All of the above servicesfor 2005 were approved in advance by our Audit Committee, as required by theAudit Committee Charter.

36

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**PART IV**

**Item 15.**                 Exhibits,Financial Statement Schedules and Reports on Form 8-K:

(a)           1.     Financial Statements:

The financial statements, which appear on Pages F-1through F-17 hereof, are indexed in the Index to Financial Statements andare incorporated herein by reference in this Item by reference thereto.

2.                FinancialStatement Schedules:

No schedules are required due to the absence ofconditions under which they are required or because the required information isprovided in the financial statements or notes thereto.

3.                ExecutiveCompensation Plans and Arrangements.

The followingmanagement contracts or compensatory plans or arrangements are listed asexhibits to this annual report.

Quotesmith.com1997 Stock Option Plan (as amended and restated March 29, 1999).

Quotesmith.com1999 Employee Stock Purchase Plan.

Quotesmith.com2004 Stock Option Plan.

EmploymentAgreement between the Company and Robert S. Bland, as amended.

EmploymentAgreement between the Company and William V. Thoms, as amended.

EmploymentAgreement between the Company and Phillip A. Perillo.

Formof Director Indemnification Agreement

See Exhibit Index (immediately following thesignature pages) for exhibits filed with this annual report.

(b)          Exhibits

See Exhibits Index (immediately following thesignature pages).

(c)           Schedules

All required schedules are included.

37

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**QUOTESMITH.COM,INC.**

**INDEXTO FINANCIAL STATEMENTS**

|                                                                                                     | ** ** | **Page** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------|------------|
| **Audited  Financial Statements**                                                                   |       |     |       |   |   |
| Report of Independent Registered Public Accounting  Firm                                            |       |     | F-2        |   |   |
| Balance Sheets as of December 31, 2005 and 2004                                                |       |     | F-3        |   |   |
| Statements of Operations for the Years Ended  December 31, 2005, 2004, and 2003                |       |     | F-4        |   |   |
| Statements of Stockholders’ Equity for the Years  Ended December 31, 2005, 2004, and 2003 |       |     | F-5        |   |   |
| Statements of Cash Flows for the Years Ended  December 31, 2005, 2004, and 2003                |       |     | F-6        |   |   |
| Notes to  Financial Statements                                                                      |       |     | F-7        |   |   |

 

F-1

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

Board of DirectorsQuotesmith.com, Inc.

We have audited the accompanying balance sheets ofQuotesmith.com, Inc. as of December 31, 2005 and 2004, and therelated statements of operations, stockholders’ equity, and cash flows for eachof the three years in the period ended December 31, 2005. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

We conducted our audits 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 the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Quotesmith.com, Inc. at December 31,2005 and 2004, and the results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2005 in conformity withU.S. generally accepted accounting principles.
|                                        | /s/ ERNST & YOUNG LLP |
|----------------------------------------|--------------------------------|
| Chicago, Illinois  March 15, 2006 |                           |

 

F-2

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**QUOTESMITH.COM, INC.BALANCE SHEETS**

| ** **                                                                                                                       | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                       | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **ASSETS**                                                                                                                       |       |                  |       |   |   |
| Cash and  equivalents                                                                                                            |       | $                     | 746,708    |   | $ | 1,355,970 |   |
| Fixed maturity  investments—  available for sale at fair value*(Note 3)*                                               |       | 4,937,040             |       | 1,975,330 |   |
| Commissions  receivable, less allowances (2005—$435,000; 2004—$482,000)                                      |       | 2,599,937             |       | 2,735,984 |   |
| Other assets                                                                                                                     |       | 348,205               |       | 300,277 |   |
| Total current  assets                                                                                                            |       | 8,631,890             |       | 6,367,561 |   |
| Fixed maturity investments—  available for sale at fair value*(Note 3)*                                                |       | 3,425,145             |       | 5,998,345 |   |
| Land                                                                                                                             |       | 830,000               |       | 830,000 |   |
| Building, less  accumulated depreciation (2005—$195,000; 2004—$78,000)                                                 |       | 4,475,417             |       | 4,592,167 |   |
| Furniture,  equipment, and computer software at cost, lessaccumulated depreciation  (2005—$3,445,000; 2004—$3,194,000) |       | 481,424               |       | 476,113 |   |
| Intangible assets  at cost, less accumulated amortization (2005—$1,033,000; 2004—$428,000)* (Note 2)*        |       | 3,093,959             |       | 3,699,050 |   |
| Goodwill*(Notes 2 and 5)*                                                                                                   |       | 3,117,470             |       | 6,879,986 |   |
| Total assets                                                                                                                     |       | $                     | 24,055,305 |   | $ | 28,843,222 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                    |       |                  |       |   |   |
| Accounts payable and accrued liabilities—current                                                                            |       | $                     | 1,441,474  |   | $ | 1,227,683 |   |
| Total liabilities                                                                                                                |       | 1,441,474             |       | 1,227,683 |   |
| Stockholders’  equity*(Notes 6 and 7):*                                                                                |       |                  |       |   |   |
| Common stock, $.003 par value; shares authorized: 60,000,000;  shares issued: 9,688,709                                     |       | 29,066                |       | 29,066 |   |
| Additional paid-in capital                                                                                                       |       | 76,814,067            |       | 76,814,067 |   |
| Retained-earnings deficit                                                                                                        |       | (50,216,482           | )          | (45,290,292 | ) |
| Treasury stock at cost: 2005—2,366,816 shares;  2004—2,359,341 shares                                        |       | (3,814,722            | )          | (3,793,985 | ) |
| Accumulated other comprehensive income (loss)                                                                                    |       | (198,098              | )          | (143,317 | ) |
| Total  stockholders’ equity                                                                                                 |       | 22,613,831            |       | 27,615,539 |   |
| Total liabilities and  stockholders’ equity                                                                                 |       | $                     | 24,055,305 |   | $ | 28,843,222 |   |

 

See accompanying notes.

F-3

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**QUOTESMITH.COM, INC.STATEMENTS OF OPERATIONS**

| ** **                                                                     | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                                                                      |       |                                        |       |   |   |   |   |
| Commissions and fees *(Note 1)*                                           |       | $                                           | 17,094,332 |   | $ | 15,893,631 |   | $ | 9,717,810 |   |
| Other                                                                          |       | 6,976                                       |       | 16,361 |   | 19,034 |   |
| Total revenues                                                                 |       | 17,101,308                                  |       | 15,909,992 |   | 9,736,844 |   |
| Expenses:                                                                      |       |                                        |       |   |   |   |   |
| Selling and marketing *(Note 2)*                                          |       | 6,540,954                                   |       | 6,866,341 |   | 4,735,438 |   |
| Operations*(Note 7)*                                                      |       | 7,274,606                                   |       | 6,531,308 |   | 3,033,994 |   |
| General and administrative*(Note 7)*                                      |       | 3,764,996                                   |       | 3,147,865 |   | 2,656,183 |   |
| Depreciation                                                                   |       | 367,853                                     |       | 413,394 |   | 575,170 |   |
| Amortization                                                                   |       | 605,090                                     |       | 865,296 |   | 477,557 |   |
| Impairment of goodwill *(Notes 2 and 5)*                                  |       | 3,750,000                                   |       | — |   | — |   |
| Total expenses                                                                 |       | 22,303,499                                  |       | 17,824,204 |   | 11,478,342 |   |
| Operating loss                                                                 |       | (5,202,191                                  | )          | (1,914,212 | ) | (1,741,498 | ) |
| Interest income,  net*(Note 2)*                                           |       | 276,001                                     |       | 138,203 |   | 367,953 |   |
| Net realized gain  (loss) on sale of securities                                |       | —                                      |       | (45,428 | ) | 92,551 |   |
| Loss before income taxes                                                  |       | (4,926,190                                  | )          | (1,821,437 | ) | (1,280,994 | ) |
| Income tax credit*(Note 4)*                                               |       | —                                      |       | — |   | — |   |
| Net loss                                                                       |       | $                                           | (4,926,190 | ) | $ | (1,821,437 | ) | $ | (1,280,994 | ) |
| Net loss per  common share, basic and diluted                                  |       | $                                           | (0.67      | ) | $ | (0.31 | ) | $ | (0.26 | ) |
| Weighted average common shares  and equivalents outstanding, basic and diluted |       | 7,328,595                                   |       | 5,851,237 |   | 4,917,314 |   |

 

See accompanying notes.

F-4

----

**QUOTESMITH.COM, INC.STATEMENTS OF STOCKHOLDERS’EQUITY**

| ** **                                                         | ** ** | **Common Stock**              | ** ** | ** **     | ** ** | ** **                       | ** ** | ** **                       | ** ** | **Accumulated**     | ** **  | ** **                                   | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------|------------|----------------|------------|----------------------------------|------------|----------------------------------|------------|---------------------|-------------|----------------------------------------------|------------|
| ** **                                                         | ** ** | **Number of  Shares  Issued** | ** ** | **Par  Value** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained-  Earnings  Deficit** | ** ** | **Treasury  Stock** | ** **  | **Other  Comprehensive  Income (Loss)** | ** ** | **Total  Stockholders’  Equity** | ** ** |
| 2003:                                                              |       |                               |       |           |       |                             |       |                             |       |                |        |                                         |       |   |   |   |   |   |   |
| Balance at January 1                                          |       | 7,268,072                          |       | 21,804         |       | 63,972,732                       |       | (42,187,861                      | )          | (3,793,985          | )           |                                         | 82,494     |   |   |   | 18,095,184 |   |   |
| Net loss                                                           |       | —                             |       | —         |       | —                           |       | (1,280,994                       | )          | —              |        |                                         | —     |   |   |   | (1,280,994 | ) |   |
| Other comprehensive loss—  net unrealized loss on investments |       | —                             |       | —         |       | —                           |       | —                           |       | —              |        |                                         | (151,678   | ) |   |   | (151,678 | ) |   |
| Total comprehensive loss                                           |       |                               |       |           |       |                             |       |                             |       |                |        |                                         |       |   |   |   | (1,432,672 | ) |   |
| Proceeds  from sale of common stock:                               |       |                               |       |           |       |                             |       |                             |       |                |        |                                         |       |   |   |   |   |   |   |
| *—**exercise**of stock options*                               |       | 49,501                             |       | 149            |       | 102,954                          |       | —                           |       | —              |        |                                         | —     |   |   |   | 103,103 |   |   |
| Balance at December 31                                        |       | 7,317,573                          |       | 21,953         |       | 64,075,686                       |       | (43,468,855                      | )          | (3,793,985          | )           |                                         | (69,184    | ) |   |   | 16,765,615 |   |   |
| 2004:                                                              |       |                               |       |           |       |                             |       |                             |       |                |        |                                         |       |   |   |   |   |   |   |
| Net loss                                                           |       | —                             |       | —         |       | —                           |       | (1,821,437                       | )          | —              |        |                                         | —     |   |   |   | (1,821,437 | ) |   |
| Other comprehensive loss—  net unrealized loss on investments |       | —                             |       | —         |       | —                           |       | —                           |       | —              |        |                                         | (74,133    | ) |   |   | (74,133 | ) |   |
| Total comprehensive loss                                           |       |                               |       |           |       |                             |       |                             |       |                |        |                                         |       |   |   |   | (1,895,570 | ) |   |
| Proceeds  from sale of common stock:                               |       |                               |       |           |       |                             |       |                             |       |                |        |                                         |       |   |   |   |   |   |   |
| —Zions Purchase                                               |       | 2,363,636                          |       | 7,091          |       | 12,727,759                       |       |                             |       |                |        |                                         |       |   |   |   | 12,734,850 |   |   |
| —exercise of  stock options                                   |       | 7,500                              |       | 22             |       | 10,622                           |       | —                           |       | —              |        |                                         | —     |   |   |   | 10,644 |   |   |
| Balance at December 31                                        |       | 9,688,709                          |       | $              | 29,066     |                             | $          | 76,814,067                       |       | $                   | (45,290,292 | )                                            | $          | (3,793,985 | ) |   | $ | (143,317 | ) |   |   | $ | 27,615,539 |   |   |
| 2005:                                                              |       |                               |       |           |       |                             |       |                             |       |                |        |                                         |       |   |   |   |   |   |   |
| Net loss                                                           |       | —                             |       | —         |       | —                           |       | (4,926,190                       | )          | —              |        |                                         | —     |   |   |   | (4,926,190 | ) |   |
| Other comprehensive loss—  net unrealized loss on investments |       | —                             |       | —         |       | —                           |       | —                           |       | —              |        |                                         | (54,781    | ) |   |   | (54,781 | ) |   |
| Total comprehensive loss                                           |       |                               |       |           |       |                             |       |                             |       |                |        |                                         |       |   |   |   | (4,980,971 | ) |   |
| Purchase of 7,475 shares of treasury stock               |       | —                             |       | —         |       | —                           |       | —                           |       | (20,737             | )           |                                         | —     |   |   |   | (20,737 | ) |   |
| Balance at  December 31                                       |       | 9,688,709                          |       | $              | 29,066     |                             | $          | 76,814,067                       |       | $                   | (50,216,482 | )                                            | $          | (3,814,722 | ) |   | $ | (198,098 | ) |   |   | $ | 22,613,831 |   |   |

 

See accompanying notes.

F-5

----

**QUOTESMITH.COM, INC.STATEMENTS OF CASH FLOWS**

| ** **                                                                     | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Cash flows from operating  activities:**                                     | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                                                       |       | $                                           | (4,926,190 | ) | $ | (1,821,437 | ) | $ | (1,280,994 | ) |
| Adjustments to  reconcile to net cash provided (used) by operating activities: | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Depreciation expense                                                           |       | 367,853                                     |       | 413,394 |   | 575,171 |   |
| Amortization                                                                   |       | 664,431                                     |       | 974,539 |   | 626,468 |   |
| Impairment of goodwill                                                         |       | 3,750,000                                   |       | — |   | — |   |
| Accounts payable and accrued liabilities                                       |       | 213,790                                     |       | 486,984 |   | (654,292 | ) |
| Commissions receivable                                                         |       | 148,563                                     |       | 326,053 |   | 63,010 |   |
| Other assets                                                                   |       | (47,928                                     | )          | 123,438 |   | (99,029 | ) |
| Net cash provided (used) by operating activities                               |       | 170,519                                     |       | 502,971 |   | (769,666 | ) |
| **Cash  flows from investing activities:**                                     | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Purchase of selected assets of Life Quotes                                     |       | —                                      |       | (18,703,066 | ) | — |   |
| Purchase of investments                                                        |       | (2,502,631                                  | )          | (6,543,222 | ) | (14,199,621 | ) |
| Proceeds from investment maturities                                            |       | 2,000,000                                   |       | 1,000,000 |   | 7,800,000 |   |
| Proceeds from sales of investments                                             |       | —                                      |       | 11,935,876 |   | 6,217,204 |   |
| Purchase of furniture, equipment and software                                  |       | (256,413                                    | )          | (223,793 | ) | (64,879 | ) |
| Net cash used by investing activities                                          |       | (759,044                                    | )          | (12,534,205 | ) | (247,296 | ) |
| **Cash  flows from financing activities:**                                     |       |                                        |       |   |   |   |   |
| Proceeds of note payable                                                       |       | —                                      |       | 6,500,000 |   | — |   |
| Repayment of note payable                                                      |       | —                                      |       | (6,500,000 | ) | — |   |
| Proceeds from issuance of common  stock                                        |       | —                                      |       | 12,745,494 |   | 103,103 |   |
| Purchase of treasury stock                                                     |       | (20,737                                     | )          | — |   | — |   |
| Payment of capital lease obligation                                            |       | —                                      |       | (35,018 | ) | (49,322 | ) |
| Net cash provided (used) by financing activities                               |       | (20,737                                     | )          | 12,710,476 |   | 53,781 |   |
| **Net  increase (decrease) in cash and equivalents**                           |       | (609,262                                    | )          | 679,242 |   | (963,181 | ) |
| **Cash  and equivalents at beginning of year**                                 |       | 1,355,970                                   |       | 676,728 |   | 1,639,909 |   |
| **Cash and equivalents at end of  year**                                       |       | $                                           | 746,708    |   | $ | 1,355,970 |   | $ | 676,728 |   |

 

See accompanying notes.

F-6

----

**QUOTESMITH.COM, INC.NOTES TO FINANCIAL STATEMENTS**

**1.**                 Descriptionof Business

Quotesmith.com, Inc. (the Company) is aninsurance agency and brokerage. Since its inception in 1984, the Company hasbeen continuously developing a proprietary and comprehensive insurance pricecomparison and order-entry system that provides instant quotes from over 60life insurance companies for term life insurance products. The Company usesthis database to provide customers with a large array of comparative lifeinsurance quotes online, over the phone or by mail, and allows the customer topurchase insurance from the insurance company of their choice either online orover the phone with the Company’s licensed insurance customer service staff. TheCompany’s website also provides insurance information and decision-makingtools, along with access to other forms of personal insurance, such as auto,health, homeowners, renters, long-term care and travel insurance throughvarious third party web sites and other sources. The Company generates revenuesfrom the receipt of commissions and fees paid by various sources, that are tieddirectly to the volume of insurance sales or traffic that is produced. TheCompany conducts its insurance agency and brokerage operations using salariedpersonnel and generates prospective customer interest using traditional directresponse advertising methods conducted primarily offline.

On May 7, 2004, the Company acquired selectedassets of Life Quotes, Inc. for approximately $18,700,000. Life Quotes wasan Evergreen, Colorado-based life insurance brokerage that marketed term lifeinsurance utilizing direct response marketing methods combined with a callcenter staffed with licensed agents. The Company believes that this acquisition provides animportant capability that had been missing from its business model, that is,the ability to service customers by telephone in addition to its internet-basedservice. As a part of the acquisition, the Company granted 262,000 options toacquire common shares to employees of Life Quotes, Inc. The Companyacquired approximately $2.0 million of receivables, $5.5 million ofbuilding and land, intangible assets and other assets and liabilities.

Theaccompanying financial statements reflect the operations of Life Quotes, fromthe date of acquisition. The following table presents unaudited pro formaresults as if the acquisition had occurred at the beginning of 2003.

| ** **                                          | ** ** | **Year Ended  December 31,**                         | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                          | ** ** | **2004**                                                       | ** ** | **2003** | ** ** |
| ** **                                          | ** ** | **(in thousands,  except per share data)** | ** ** |
| Total revenues                                      |       | $                                                              | 19,634     |   | $ | 20,321 |   |
| Net loss                                            |       | (1,360                                                         | )          | (310 | ) |
| Net loss per common  share, basic and diluted  |       | $                                                         | (0.23      | ) | $  | (0.06 | ) |

 

The unaudited pro forma results have been prepared forcomparative purposes only and do not purport to be indicative of the results ofoperations which actually would have resulted had the acquisition occurred atthe beginning of the respective years, nor is it necessarily indicative offuture operating results.

In the period covered inthe accompanying financial statements, the Company’s primary revenue source hasbeen commissions derived from the sale of individual term life insurance. Applicationsare underwritten and commissions are received from numerous life insurancecompanies. Revenues from some of these companies have exceeded ten percent of theCompany’s total revenues. In 2005, these include three companies with revenuesof $2.6 million, $2.0 million and $1.7 million. In 2004, theseincluded four companies with revenues of $3.7 million, $3.0 million,$2.0 million and $1.6 million. In 2003, 

F-7

----

**QUOTESMITH.COM, INC. NOTES TO FINANCIAL STATEMENTS (Continued)**

therewere no companies that provided more than ten percent of the Company’s totalrevenues. The Company’s business represents one business segment.

**2.**                 Summaryof Significant Accounting Policies

**Use of Estimates**

The preparation of thefinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe amounts reported in the financial statements and accompanying notes. Suchestimates and assumptions could change, as more information becomes known,which could impact the amounts reported and disclosed herein.

**Revenue Recognition**

The Company recognizes annual first year commissionsfor life insurance business as revenues when the policy has been approved bythe underwriter and an initial premium payment (which may be annual, semi-annual,quarterly, or monthly) has been made by the customer. An allowance is providedfor estimated commissions that will not be received due to the nonpayment ofinstallment first year premiums.

Revenues on all otherlines of business, as well as for renewal and bonus commissions and otherrevenues, are recognized when the Company receives notification that suchrevenues have been earned.

**Advertising Costs**

Selling and marketingexpenses in the accompanying financial statements are comprised of advertisingcosts. The costs of producing advertising are expensed in the first period thatthe advertising takes place. The costs of communicating the advertising areexpensed in the period the advertising is communicated.

**Investments**

The Company classifies itsfixed maturity investments as available-for-sale and, accordingly, suchinvestments are carried at fair value. The cost of fixed maturity investmentsis adjusted for amortization of premiums and discounts and for declines invalue that are other than temporary. Temporary changes in the fair values ofinvestments are reflected directly in stockholders’ equity as accumulated othercomprehensive income or loss net of income taxes with no effect on net income orloss. Realized gains or losses are calculated using the specific identificationmethod.

**Cash and Equivalents**

Money market investmentsare included as part of cash and equivalents.

**Land and Building**

Building costs aredepreciated over an estimated useful life of 40 years. Land costs are notdepreciated. Repair and maintenance costs are charged to expense as incurred.

F-8

----

**QUOTESMITH.COM, INC. NOTES TO FINANCIAL STATEMENTS (Continued)**

**Furniture,Equipment, and Computer Software**

Furniture, equipment, andcapitalized application development costs of internal-use computer softwareare depreciated over useful lives of three to five years using principally thestraight-line method of depreciation. Repair and maintenance costs are chargedto expense as incurred.

**Intangible Assets**

As a result of the acquisition of selected assets ofLife Quotes, Inc. described above, the Company prepared an allocation ofthe cost of the acquisition to the assets acquired.

Intangibleassets acquired in 2004 in the acquisition of certain assets of Life Quotes, Inc.,consist of the following:

| ** **                   | ** ** | **Intangible Asset** | ** ** | **Estimated**        | ** ** | **Amortization** | ** **   |
|------------------------------|------------|---------------------------|------------|----------------------|------------|------------------|--------------|
| ** **                   | ** ** | **Balance**               | ** ** | **Useful Life** | ** ** | **Method**       | ** **   |
| Insurance  contract renewals |       |                      | $          | 3,538,000            |       |             |         | 10 years |   |   | Accelerated |   |
| Non-compete  agreement       |       |                      | 589,000    |                 |       |             | 6 years |   |   | Straight line |   |
| Total                        |       |                      | $          | 4,127,000            |       |             |         |   |   |   |   |   |

 

The fair value of insurance contract renewals wasestimated based on the actual policies in force as of the acquisition date, andthe renewal commission rates paid by each insurance carrier. These commissionswere estimated to have a useful life of ten years, based on the terms of thecontracts with the insurance carriers, and an annual lapse rate was applied tothe expected renewals for each carrier based on historical trends. Amortizationis on an accelerated basis, as renewal commissions will decline each year dueto lapses. The ultimate realization of the value of the contract renewals isdependant on a number of factors, including actual lapse ratios, which can beaffected by factors not under our control, such as death rates and the pricinglevel of insurance policies that could be purchased to replace the policies inthe renewal stream. As a result, the actual amount realized from the contractrenewals acquired may differ significantly from the amount recorded in thefinancial statements, causing impairment. Amortization expense from theseintangible assets totaled $605,000 in 2005 and $428,000 in 2004, and isexpected to total $554,000 in 2006, $509,000 in 2007, $468,000 in 2008,$431,000 in 2009 and $332,000 in 2010.

Intangible assets as of December 31,2003 represent the value assigned to the insure.com Web site which was acquiredin the 2001 purchase of selected assets of Insurance News Network, LLC. Thisasset was amortized on a straight-line basis over three years. Amortizationexpense was $478,000 in 2003 and $438,000 in 2004.

**Goodwill**

The Company recordedgoodwill in the amount of $6.9 million in connection with its May 2004acquisition of certain assets of Life Quotes, Inc. While goodwill is notamortized, FAS 142 requires that it be subject to periodic reviews for impairment(at least annually, or more frequently if impairment indicators arise) using atwo step process. Such impairment reviews are performed at the entity level, asthe Company has one reporting unit. The first step of the goodwill impairmenttest is used to identify potential impairment by comparing the fair value ofthe Company with its carrying amount, including goodwill. The fair value of theCompany is determined using a combination of a market valuation based on themarket price of the Company’s common stock and a discounted cash flow analysis,which includes making various judgmental assumptions, including assumptionsabout future cash flows, growth rates and discount rates. 

F-9

----

**QUOTESMITH.COM, INC. NOTES TO FINANCIAL STATEMENTS (Continued)**

Theassumptions about future cash flows and growth rates are based on the Company’sbudget and long range plans. Discount rate assumptions are based on anassessment of risk inherent in the Company. If the calculated fair value of theCompany exceeds its carrying amount, goodwill is considered not impaired andthe second step of the impairment test is unnecessary. If the carrying amountof the entity exceeds the calculated fair value, the second step of thegoodwill impairment test is performed to measure the amount of impairment loss,if any. The second step of the goodwill impairment test compares the impliedfair value of the Company’s goodwill with the carrying amount of that goodwill.If the carrying amount exceeds the implied fair value of the goodwill, animpairment loss is recognized in an amount equal to that excess. The impliedfair value of goodwill is determined in the same manner as the amount ofgoodwill recognized in a business combination. That is, the fair value of theCompany is allocated to all of the assets and liabilities of the Company(including any unrecognized intangible assets) as if the Company had beenacquired in a business combination and the fair value of the Company was thepurchase price paid to acquire the Company.

**Treasury Stock**

The cost of reacquiringthe Company’s common stock is reported as a separate component of stockholders’equity.

**Income Taxes**

Deferred income taxes aredetermined based on the temporary differences between financial reporting andtax bases of assets and liabilities and the effect of net operating losscarryforwards, and are measured using enacted tax rates.

**Non-operating Income and Expense**

Interestincome, net in the accompanying statements of operations includes thefollowing:

| ** **           | ** ** | **Years ended December 31,** | ** ** |
|----------------------|------------|---------------------------------------------|------------|
| ** **           | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Interest income      |       | $                                           | 276,001    |   | $ | 218,968 |   | $ | 376,243 |   |
| Interest expense     |       | —                                      |       | (80,765 | ) | (8,290 | ) |
| Interest income, net |       | $                                           | 276,001    |   | $ | 138,203 |   | $ | 367,953 |   |

 

In 2004, the Companyrealized losses of $45,000 on the sale of fixed maturity investments. In 2003,the Company realized gains of $93,000 on the sale of fixed maturityinvestments.

**Net Loss Per Share**

Basic and diluted net lossper share reflects net loss divided by the weighted average number of commonshares outstanding. Diluted net loss per share does not include the effect ofcommon share equivalents because the effect would be antidilutive.

F-10

----

**QUOTESMITH.COM, INC. NOTES TO FINANCIAL STATEMENTS (Continued)**

**Comprehensive Income or Loss**

Comprehensiveloss includes net loss and unrealized gain or loss on investments, as follows:

| ** **                                                                        | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                        | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Unrealized gain  (loss) on investments                                            |       | $                                           | (54,781    | ) | $ | (119,561 | ) | $ | (59,127 | ) |
| Less:  Reclassification adjustment for realized (gains) losses included in income |       | —                                      |       | 45,428 |   | (92,551 | ) |
| Other  comprehensive income (loss)                                                |       | $                                           | (54,781    | ) | $ | (74,133 | ) | $ | (151,678 | ) |

 

**Stock Options**

TheCompany accounts for stock option grants in accordance with AccountingPrinciples Board Opinion 25, “Accounting for Stock Issued to Employees”and related interpretations, and, accordingly, recognizes no compensationexpense for stock options granted to employees where the exercise price isequal to or greater than the market price at the date of the grant. SFAS 123,“Accounting for Stock Based Compensation”, requires disclosure of pro formainformation regarding net income (loss) per share, using pricing models toestimate the fair value of stock option grants. Had compensation expense forthe Company’s stock option plans been determined based on the estimated fairvalue at the date of grant consistent with the methodology prescribed underSFAS 123, approximate net loss and net loss per share would have been asfollows:

| ** **                                                        | ** ** | **Years Ended December 31,**                    | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2005**                                                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                        | ** ** | **(in thousands,  except per share data)** | ** ** |
| Net loss as  reported                                             |       | $                                                              | (4,926     | ) | $ | (1,821 | ) | $ | (1,281 | ) |
| Less pro forma  stock compensation using fair value method        |       | (136                                                           | )          | (211 | ) | (147 | ) |
| Pro forma net  loss                                               |       | $                                                              | (5,062     | ) | $ | (2,032 | ) | $ | (1,428 | ) |
| Pro forma net loss per  common share, basic and diluted |       | $                                                         | (0.69      | ) | $  | (0.35 | ) | $  | (.29 | ) |

 

In 2004, the Financial Accounting Standards Board(FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment,which is a revision of FASB Statement No. 123, *Accounting for Stock-Based Compensation.*Statement 123(R)supersedes APB Opinion 25 and amends FASB Statement No. 95, *Statement of Cash Flows.*Generally, theapproach in Statement 123(R) is similar to the approach described inStatement 123. However, Statement 123(R) requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the income statement based on their fair values. Pro formadisclosure is no longer an alternative.

Statement 123(R) must be adopted no later than January 1,2006. Early adoption will be permitted in periods in which financial statementshave not yet been issued. The Company will adopt Statement 123(R) on January 1,2006. The Company plans to adopt Statement 123(R) using the modifiedprospective method in which compensation cost is recognized beginning with theeffective date (a) based on the requirements of Statement 123(R) forall share-based payments granted after the effective date and (b) based onthe requirements of Statement 123 for all awards granted to employeesprior to the effective date of Statement 123(R) that remain unvested on January 1,2006.

F-11

----

**QUOTESMITH.COM, INC. NOTES TO FINANCIAL STATEMENTS (Continued)**

As permitted by Statement 123,the Company currently accounts for share-based payments to employees usingOpinion 25’s intrinsic value method and, as such, generally recognizes nocompensation cost for employee stock options. Accordingly, the adoption ofStatement 123(R)’s fair value method will have a significant impact on ourresults of operations, although it will have no impact on our overall financialposition. The effect of adopting Statement 123(R) in 2006 for stockoptions issued prior to January 1, 2006, is currently estimated to be$0.02 per diluted share. In addition, Statement 123(R) requires anadjustment to record the cumulative effect of a change in accounting principle,net of any tax effect, to reflect the compensation cost that would not havebeen recognized in prior periods had forfeitures been estimated during thoseperiods. This adjustment applies only to compensation cost previouslyrecognized in the financial statements for awards that are unvested as of January 1,2006. We have not yet determined the impact of forfeitures.

**3.**                 Investments

Investmentsare classified as available-for-sale securities and are reported at fair value,as follows:

| ** **                            | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|------------|------------|
| ** **                            | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**   | ** ** |
| ** **                            | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**  | ** ** |
| **December 31,  2005:**          |       |          |       |           |       |           |       |       |       |   |   |   |   |
| U.S. Government  agency bonds         |       | $             | 3,999,044  |           |       | $              | —     |       |       |   | $ | 35,889 |   |   | $ | 3,963,155 |   |
| Corporate bonds  and commercial paper |       | 4,561,239     |       |           | —     |           |       |       | 162,209    |   |   | 4,399,030 |   |
| Total                                 |       | $             | 8,560,283  |           |       | $              | —     |       |       |   | $ | 198,098 |   |   | $ | 8,362,185 |   |
| **December 31, 2004:**           |       |          |       |           |       |           |       |       |       |   |   |   |   |
| U.S. Government  agency bonds         |       | $             | 987,986    |           |       | $              | —     |       |       |   | $ | 4,086 |   |   | $ | 983,900 |   |
| Corporate  commercial paper           |       | 7,129,006     |       |           | —     |           |       |       | 139,231    |   |   | 6,989,775 |   |
| Total                                 |       | $             | 8,116,992  |           |       | $              | —     |       |       |   | $ | 143,317 |   |   | $ | 7,973,675 |   |

 

As ofDecember 31, 2005, investments maturities are as follows:

| ** **               | ** ** | **Amortized** | ** ** | **Fair**  | ** ** |
|--------------------------|------------|---------------|------------|-----------|------------|
| ** **               | ** ** | **Cost**      | ** ** | **Value** | ** ** |
| Due in one year  or less |       | $             | 5,005,434  |      | $          | 4,937,040 |   |
| Due in 1-2  years        |       | 1,520,662     |       | 1,491,765 |       |
| Due in 2-4  years        |       | 2,034,187     |       | 1,933,380 |       |
| Total                    |       | $             | 8,560,283  |      | $          | 8,362,185 |   |

 

The Company’s fixed maturity investment portfolio issensitive to interest rate fluctuations, which impact the fair value ofindividual securities. Unrealized losses reported above were generally causedby the effect of a rising interest rate environment on certain securities withstated interest rates currently below market rates. The Company has the abilityand the intent to hold these securities until their full cost can be recovered.Therefore, the Company does not believe the unrealized losses represent another-than-temporary impairment as of December 31, 2005.

F-12

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**QUOTESMITH.COM, INC. NOTES TO FINANCIAL STATEMENTS (Continued)**

**4.**                 IncomeTaxes

Areconciliation of income taxes (credit) based on the federal tax rate toamounts reported in the statements of operations is as follows:

| ** **                       | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------|------------|---------------------------------------------|------------|
| ** **                       | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Pre-tax  loss times federal rate |       | $                                           | (1,675,000 | ) | $ | (619,000 | ) | $ | (436,000 | ) |
| State income tax credit          |       | (236,000                                    | )          | (87,000 | ) | (61,000 | ) |
| Increase in valuation allowance  |       | 1,916,000                                   |       | 711,000 |   | 554,000 |   |
| Other                            |       | (5,000                                      | )          | (5,000 | ) | (57,000 | ) |
| Income tax credit                |       | $                                           | —     |   | $ | — |   | $ | — |   |

 

Deferred income taxes reflect the net tax effect oftemporary differences between the amounts of assets and liabilities forfinancial reporting purposes and the amounts used for income tax purposes andthe effect of net operating loss carryforwards.

Significantcomponents of the Company’s deferred tax assets and liabilities are as follows

| ** **                       | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Deferred tax  liabilities        |       | $                     | —     |   | $ | — |   |
| Deferred tax assets:             |       |                  |       |   |   |
| Net operating loss carryforwards |       | 17,193,000            |       | 16,582,000 |   |
| Capital loss carryforward        |       | 18,000                |       | — |   |
| Depreciation and amortization    |       | 1,958,000             |       | 670,000 |   |
| Other                            |       | 293,000               |       | 294,000 |   |
| Total gross  deferred tax assets |       | 19,462,000            |       | 17,546,000 |   |
| Valuation  allowance             |       | (19,462,000           | )          | (17,546,000 | ) |
| Net deferred tax  assets         |       | —                |       | — |   |
| Net deferred tax amounts         |       | $                     | —     |   | $ | — |   |

 

As of December 31,2005, the Company had net operating loss carryforwards of approximately$44,300,000 available to offset future taxable income, which expire in 2006 to2025. There were no income taxes paid or recovered in 2003, 2004 or 2005. TheCompany had a capital loss carryforward of approximately $45,000 to offsetfuture capital gain income, which expire in 2009.

**5.**                 Goodwill

As discussed in Note 2,the Company reviews goodwill for impairment periodically and whenever events orchanges in business circumstances indicate that the carrying value of theassets may not be recoverable. Under those circumstances, if the fair valuewere less than the carrying amount of the entity, further analysis would berequired to determine whether or not a loss would need to be charged againstcurrent period earnings. During the fourth quarter of 2005, the Companyexperienced declining revenues from life insurance sales and a decline in themarket price of its common stock. The annual impairment review was conducted asof December 31, 2005, and it was determined that an impairment existed. Thedeterminations of fair value are based on a combination of the market price ofour common stock and a discounted cash flow analysis based on estimates andassumptions including the amount and timing of 

F-13

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**QUOTESMITH.COM, INC. NOTES TO FINANCIAL STATEMENTS (Continued)**

futurecash flows and future interest rates. The use of different estimates orassumptions could produce different results. As a result of this impairmentdetermination, the Company recorded a non-cash impairment charge againstearnings in 2005 amounting to $3.75 million.

**6.**                 Stockholders’Equity

**Treasury Stock**

As of December 31,2005, the Company is authorized to repurchase 643,000 additional shares of itscommon stock.

**Employee Stock Purchase Plan**

The Company has a planunder which employees could purchase shares of the Company’s common stockthrough payroll deductions of up to 10% of each employee’s compensation. Sharesmay be purchased at 85% of the lower of the fair value of the common stock onthe first or the last day of each six-month offering period. The Companyreserved 83,333 shares for purchase under the plan, of which 63,929****were available at December 31, 2005.

**Preferred Stoc**k

The Company has 5,000,000authorized shares of $0.001 par value preferred stock. No shares have been issued.

**Stockholder Rights Plan**

One preferred stock purchase right is outstanding foreach outstanding share of the Company’s common stock, and the Company intendsto issue those rights along with future issuances of common shares. The rightsbecome exercisable only if a person or group acquires or announces the intentto acquire 15% or more of the Company’s common stock. Prior to the rightsbecoming exercisable, the Company may redeem the rights for $0.03 per right. Ifthe rights become exercisable, the Company may exchange each right for oneshare of common stock providing that 50% of the Company has not been acquired.The rights expire in 2009.

If the rights become exercisable and they have notbeen exchanged, holders of each right, other than the acquiring person orgroup, would be entitled to acquire three hundredths of a share of theCompany’s preferred stock at an exercise price equal to five times the initialoffering price of the Company’s common stock. If issued, each preferred sharewould entitle the holder to cumulative quarterly dividends of the greater of$1.00 per share or 33.3 times the common share dividends. Thepreferred shareholders would receive 33 votes per share and have aliquidation preference of $0.333 per share over the common shares.

In lieu of purchasingpreferred shares, holders of each right, other than the acquiring person orgroup, on payment of the exercise price, would be entitled to acquire thenumber of shares of the Company’s common stock or other assets with a value oftwo times the exercise price. In addition, if 50% of the Company is acquired,the holders of each right would be entitled to acquire the number of shares ofthe acquiring company’s common stock having a value of two times the exerciseprice.

F-14

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**QUOTESMITH.COM, INC. NOTES TO FINANCIAL STATEMENTS (Continued)**

**Investor Rights Agreement**

Zions Bancorporation(Zions) acquired 2.4 million shares of the Company’s common stock during2004. In connection with that transaction, the Company and Zions signed anInvestor Rights Agreement which provides that, as long as Zions continues tohold 40% of the shares issued to them, Zions has the right to nominate orappoint one member of the Company’s Board of Directors. Additionally, certaintransactions would require the approval of 75% of our directors, including themerger with, or acquisition of another company, the sale of business or assetsin excess of $1 million, incurring debt in excess of $2.5 million,declaring dividends or issuing additional capital stock.

**7.**                 StockOptions

The Company has established the 1997 Stock Option Planand the 2004 Non-Qualified Stock Option Plan, (the Plans), to provideadditional incentives to our employees, officers, and directors. Under thePlans, an aggregate of 800,000 shares of Quotesmith.com common stock may begranted to participants in the plan. We account for stock option grants inaccordance with Accounting Principles Board Opinion 25, *Accounting for Stock Issued to Employees*and related interpretations, and, accordingly, recognize no compensationexpense for stock options granted to employees where the exercise price isequal to or greater than the market price at the date of the grant.

Forpurposes of the pro forma disclosures presented in Note 2, the estimatedfair values of the option grants are amortized to expense over the options’vesting period. The fair value of options at the date of grant was estimatedusing the Black-Scholes option pricing model for grants made subsequent to theCompany’s initial public offering in August 1999, and the minimum valuemethod in all prior periods, with the following weighted-average assumptions:

| ** **               | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------|------------|---------------------------------------------|------------|
| ** **               | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Dividend yield           |       | 0.0                                         | %          | 0.0 | % | None Issued |   |
| Risk-free  interest rate |       | 3.8                                         | %          | 2.1 | % | — |   |
| Volatility               |       | 75.2                                        | %          | 79.4 | % | — |   |
| Expected life (years)    |       | 5.0                                         |       | 5.0 |   | — |   |

 

Therewere no stock options granted below the estimated fair value of the Company’scommon stock in 2005, 2004 or 2003. Transactions related to all stock optionsare as follows:

| ** **                                        | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                        | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                        | ** ** | **Weighted**                                | ** ** | **Weighted** | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Shares**                                  | ** ** | **Average** | ** ** | **Shares** | ** ** | **Average** | ** ** | **Shares** | ** ** | **Average** | ** ** |
| ** **                                        | ** ** | **Under**                                   | ** ** | **Exercise** | ** ** | **Under** | ** ** | **Exercise** | ** ** | **Under** | ** ** | **Exercise** | ** ** |
| ** **                                        | ** ** | **Option**                                  | ** ** | **Price** | ** ** | **Option** | ** ** | **Price** | ** ** | **Option** | ** ** | **Price** | ** ** |
| Beginning Balance                                 |       | 601,728                                     |       |   | $ | 6.22 |   |   | 268,332 |   |   | $ | 7.34 |   |   | 360,047 |   |   | $ | 6.28 |   |   |
| Granted with  exercise price equal to stock value |       | 10,500                                      |       |   | 5.09 |   |   | 349,500 |   |   | 5.28 |   |   | — |   |   | — |   |   |
| Exercised                                         |       | —                                      |       |   | — |   |   | (7,500 | ) |   | 1.42 |   |   | (49,501 | ) |   | 2.08 |   |   |
| Forfeited                                         |       | (200,167                                    | )          |   | 5.16 |   |   | (8,604 | ) |   | 6.71 |   |   | (42,214 | ) |   | 4.51 |   |   |
| Outstanding                                       |       | 412,061                                     |       |   | $ | 6.71 |   |   | 601,728 |   |   | $ | 6.22 |   |   | 268,332 |   |   | $ | 7.34 |   |   |
| Exercisable at  end of year                       |       | 279,064                                     |       |   |   |   |   | 202,728 |   |   |   |   |   | 165,999 |   |   |   |   |   |

 

F-15

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**QUOTESMITH.COM, INC. NOTES TO FINANCIAL STATEMENTS (Continued)**

Informationregarding options outstanding and exercisable at December 31, 2005 issummarized as follows:

| ** **                    | ** ** | ** ** | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-------------------------------|------------|------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                    | ** ** | ** ** | ** ** | **Weighted Average**    | ** ** | **Weighted**                 | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                    | ** ** | ** ** | ** ** | **Remaining**                | ** ** | **Average**                  | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                    | ** ** | **Number** | ** ** | **Contractual Life**    | ** ** | **Exercise**                 | ** ** | **Number** | ** ** | **Exercisable** | ** ** |
| **Exercise Price**       | ** ** | ** ** | ** ** | **Outstanding**              | ** ** | **(in years)**          | ** ** | **Price** | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
| $2.00 - $ 2.78 |       |       | 57,500     |                         |       |                         | 5.85       |   |   |   | 2.10 |   |   |   | 32,500 |   |   |   | 2.18 |   |   |
| $2.99 - $ 5.05 |       |       | 159,166    |                         |       |                         | 6.59       |   |   |   | 3.63 |   |   |   | 134,166 |   |   |   | 3.36 |   |   |
| $5.17 - $ 5.42 |       |       | 72,000     |                         |       |                         | 8.75       |   |   |   | 5.19 |   |   |   | 22,337 |   |   |   | 5.17 |   |   |
| $6.00 - $ 6.38 |       |       | 80,416     |                         |       |                         | 6.83       |   |   |   | 6.14 |   |   |   | 47,082 |   |   |   | 6.24 |   |   |
| $9.00 - $10.32      |       |       | 9,146      |                         |       |                         | 3.34       |   |   |   | 9.12 |   |   |   | 9,146 |   |   |   | 9.12 |   |   |
| $33.00                        |       |       | 33,833     |                         |       |                         | 3.58       |   |   |   | 33.00 |   |   |   | 33,833 |   |   |   | 33.00 |   |   |
|                          |       |       | 412,061    |                         |       |                         | 6.59       |   |   |   | $ | 6.71 |   |   |   | 279,064 |   |   |   | $ | 7.64 |   |   |
|                               |            |            |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The options have terms of ten years. Under theCompany’s Plans, 357,260 shares were available for grant as awards or optionsat December 31, 2005.

Theweighted average fair value per share of options granted were as follows:

| **2005** | ** ** | **2004** | ** ** | **2003**    |
|----------|------------|----------|------------|-------------|
| $3.24    |       | $3.40    |       | None Issued |

 

**8.**                 Legaland Regulatory Proceedings

On November 11, 2004,the Company received a subpoena from the Illinois Department of Financial andProfessional Regulation, Division of Insurance, seeking information anddocuments related to compensation arrangements with insurance companies. Thisaction is related to investigations by regulatory bodies, including stateinsurance departments, of certain contingent commission arrangements betweeninsurance brokers and insurance companies. We cannot predict how the outcome ofthese investigations will affect how insurance brokers will be compensated orwhat effect, if any, it will have on our operations. We continue to monitor thesituation.

**9.**                 Commitmentsand Contingencies

As of December 31, 2005, the Company leasesoffice space in Darien, IL under an operating lease agreement in which theCompany is committed to rent expense of approximately $290,000 in 2006. Inaddition, the Company must pay its proportionate share of taxes and operatingcosts for the Darien lease site.

Rent expense was $286,000 in 2003, $267,000 in 2004and $272,000 in 2005.

The Company has employment agreements with two of itsexecutives under which the Company would be required to pay severance of one totwo years of annual salary to terminate those agreements. The Company has anemployment agreement with one additional executive under which the Companywould be required to pay severance of one year of annual salary in the event ofa change in control.

F-16

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**QUOTESMITH.COM, INC. NOTES TO FINANCIAL STATEMENTS (Continued)**

The Company is subject tolegal proceedings and claims in the ordinary course of business. The Company isnot aware of any legal proceedings or claims that are believed to have amaterial effect on the Company’s financial position.

**10.**          SubsequentEvent

On February 1, 2006, we announced that we wereconsolidating our call center operations by closing our Colorado call center.Approximately 35 sales and service jobs at the Colorado facility wereeliminated and all telephone sales and service activities have beenconsolidated into the Company’s Darien, IL home office call center effectiveFebruary 1, 2006. First quarter 2006 expenses related to the closing areestimated to be approximately $200,000. The office building owned by theCompany in Colorado is currently being offered for sale and for lease.

F-17

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Actof 1934, as amended, the Registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized on March 15,2006.
| QUOTESMITH.COM INC. |   |
|---------------------|--------|
| By:                 |   | /s/ ROBERT S. BLAND |   |
|                |   | Robert S. Bland, |   |
|                |   | Chairman, President and Chief Executive Officer |   |
|                |   | /s/ WILLIAM V. THOMS |   |
|                |   | William V. Thoms, Executive Vice President, |   |
|                |   | Chief Operating Officer, and Director |   |
|                |   | /s/ PHILLIP A. PERILLO |   |
|                |   | Phillip A. Perillo, |   |
|                |   | Senior Vice President and Chief Financial Officer |   |
|                |   | (Principal Financial and Accounting Officer) |   |
|                |   | /s/ BRUCE J. RUEBEN |   |
|                |   | Bruce J. Rueben, Director |   |
|                |   | /s/ TIMOTHY F. SHANNON |   |
|                |   | Timothy F. Shannon, Director |   |
|                |   | /s/ JEREMIAH A. DENTON, JR. |   |
|                |   | Jeremiah A. Denton, Jr., Director |   |
|                |   | /s/ RICHARD F. GRETSCH |   |
|                |   | Richard F. Gretsch, Director |   |
|                |   | /s/ JOHN B. HOPKINS |   |
|                |   | John B. Hopkins, Director |   |

 

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**EXHIBITS**

**FORM 10-KINDEX TO EXHIBITS**
| Exhibit Number           | ** ** | Description of Document                                                                                                                                                                                 | ** ** | ** ** |
|-------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| 3.1††               |       | Restated  Certificate of Incorporation of Company.                                                                                                                                                      |
| 3.2††               |       | Amended and  Restated By-Laws of the Company.                                                                                                                                                           |
| 4.3††               |       | Form of  Rights Agreement.                                                                                                                                                                         |
| 4.3(a)††            |       | Certificate of  Designation, Preferences and Rights.                                                                                                                                                    |
| 10.1††              |       | Quotesmith.com  1997 Stock Option Plan (as amended and restated March 29, 1999) of  Registrant                                                                                                     |
| 10.2††              |       | Quotesmith.com  1999 Employee Stock Purchase Plan.                                                                                                                                                      |
| 10.3††              |       | Employment  Agreement between the Company and Robert S. Bland.                                                                                                                                     |
| 10.4††              |       | Employment  Agreement between the Company and William V. Thoms.                                                                                                                                    |
| 10.5†††        |       | Employment  Agreement between the Company and Phillip A. Perillo.                                                                                                                                  |
| 10.6††              |       | Form of  Director Indemnification Agreement.                                                                                                                                                       |
| 10.7††              |       | Lease dated as of  August 1994, between the Company and LaSalle National Trust N.A.                                                                                                           |
| 10.8††              |       | Lease Amendment  Agreement dated as of November 1995, between the Company and LaSalle  National Trust N.A.                                                                                    |
| 10.9††              |       | Lease Amendment Agreement  as of September 1997, between the Company and LaSalle National Trust N.A.                                                                                          |
| 10.10††             |       | Lease Amendment  Agreement dated as of July 1998, between the Company and LaSalle  National Trust N.A                                                                                         |
| 10.11††             |       | Services  Agreement, dated as of September 9, 1998, by and between the Company and  Intuit Insurance Services, Inc.                                                                           |
| 10.12††             |       | Investor Rights  Agreement, dated February 10, 1999, between the Company and Intuit Inc.                                                                                                      |
| 10.13†                   |       | Stock Purchase  Agreement, dated as of March 1, 2004, between the Company and Zions Bancorporation                                                                                                 |
| 10.14†                   |       | Investor Rights  Agreement, dated as of March 1, 2004, between the Company, Zions  Bancorporation, Robert S. Bland and William V. Thom                                                   |
| 10.15†                   |       | Amendment and  Waiver to July 7, 1999 Employment Agreement between the Company and with  Robert S. Bland (12/15/03), dated March 1, 2004                                                 |
| 10.16†                   |       | Amendment and  Waiver to July 7, 1999 Employment Agreement between the Company and  William V. Thoms (2/10/03), dated March 1, 2004                                                      |
| 10.17†                   |       | Asset Purchase  Agreement, dated as of January 31, 2004, by and among the Company, Life  Quotes Acquisition, Inc., Life Quotes, Inc. and Kenneth L.  Manley                         |
| 10.18†                   |       | Real Estate  Purchase and Sale Agreement, dated as of January 31, 2004, between Life  Quotes Acquisition, Inc. and The Kenneth L. Manley Revocable Trust  dated as of June 10, 1987 |
| 10.19†††† |       | Quotesmith.com, Inc.  2004 Non-Qualified Stock Option Plan                                                                                                                                         |
| 21.0                          |       | Subsidiaries of  the Company                                                                                                                                                                            |
| 23.1                          |       | Consent of  Ernst & Young LLP (filed herewith)                                                                                                                                            |
| 31.1                          |       | Certification of  Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley  Act                                                                                                      |
| 31.2                          |       | Certification of  Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley  Act                                                                                                      |

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| 32.1                         |   | Certification of  Chief Executive Officer, Pursuant to Section 1350 of Title 18 of  the United States Code |
|------------------------------|--------|----------------------------------------------------------------------------------------------------------------------|
| 32.2                         |   | Certification of  Chief Financial Officer, Pursuant to Section 1350 of Title 18 of  the United States Code |
| 99.1†††† |   | Code of Ethics                                                                                                       |

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                     † Incorporated by reference to the Company’sCurrent Report on Form 8-K, filed March 4, 2004.

              †† Incorporated by reference to the Company’s Registrationstatement on Form S-1 (Registration no. 333-79355),initially filed with the Securities and Exchange Commission on May 26,1999, as amended.

       ††† Incorporated by reference to the Company’s 2002 Annual Report on Form 10-K,filed with the Securities and Exchange Commission on March 26, 2003.

†††† Incorporated by reference to the Company’s 2003 Annual Report on Form 10-K,filed with the Securities and Exchange Commission on March 22, 2004.

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