**UNITED STATES**

**SECURITIES 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,  2004.** |
| **o**                                                  | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**forthe transition period from          to          .**

**CommissionFile No. 000-26781**

**QUOTESMITH.COM, INC.**

(Exact name of Registrantas specified 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 zipcode, and telephone number, includingarea code, 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 parvaluePreferred Stock Purchase Rights

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes xNo o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of the registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. x

Indicate by a check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule 121-2)Yes x No o

Aggregate market value ofthe Registrant’s voting stock held by non-affiliates on March 21, 2005,based on the closing price of said stock on the Nasdaq SmallCap Market on suchdate, was $11,417,618.

As of March 21, 2005,7,329,368****shares of the Registrant’sCommon Stock, $.003 par value of the Registrant were outstanding.

**DocumentsIncorporated by Reference**

Portionsof the Registrant’s definitive proxy statement for the annual meeting ofstockholders to be held on May 19, 2005, to be filed pursuant toRegulation 14(A) are incorporated by reference into Part III of this Form 10-K.

 

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**PART I**

**CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS**

Because we want toprovide you with more meaningful and useful information, this Annual Report on Form 10-K  includes forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933, as amended, orthe Securities Act, and Section 21E of the Securities Exchange Act of1934, as amended, or the Exchange Act. These forward-looking statements reflectour current expectations and projections about our future results, performance,prospects and opportunities. We have attempted to identify theseforward-looking statements by using words such as “may,” “will,” “expects,” “anticipates,”“believes,” “intends,” “estimates,” “could,” or similar expressions. Theseforward-looking statements are based on information currently available to usand are subject to a number of risks in 2005 and beyond. Actual events maydiffer materially from those expressed in, or implied by, these forward-lookingstatements. These risks, uncertainties, and other factors include, withoutlimitation, 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 our strategic relationships;

·       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 this Annual Report on Form 10-Kentitled “Management’s Discussion and Analysis of Financial Condition andResults of Operations—Factors that May Affect Our Future OperatingResults,” for a description of these and other risks, uncertainties, andfactors.

You should not place unduereliance on any forward-looking statements. Except as required by the federalsecurities laws, we undertake no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents, changed circumstances, or any other reason after the date of thisannual report. Unless otherwise expressly stated, all references to “we,” “us,”“our,” “Quotesmith,” and the “Company” refer to Quotesmith.com, Inc. andits subsidiaries. The information contained on our Web sites, or Web sites thatare linked to our Web sites, is 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 over200 insurance companies for numerous life and health insurance products. We usethis database to provide customers with a large array of comparative life andhealth insurance quotes online, over the phone or by mail, and we allow thecustomer to purchase insurance from the company of their choice either onlineor over the phone with our licensed insurance customer service staff. Ourwebsite also provides insurance information and decision-making tools, alongwith access to other forms of personal insurance, such as auto, homeowners,renters, long-term care and travel insurance through various partners. Wegenerate revenues from the receipt of commissions and fees paid by varioussources, that are tied directly to the volume of insurance sales or trafficthat we produce. We conduct our insurance agency and brokerage operations usingcommissioned and non-commissioned personnel and we generate prospectivecustomer interest using traditional direct response advertising methodsconducted primarily offline.

For the eight-year period ended December 31,2004, we have spent a total of $64.2 million in direct-to-consumer advertisingand have sold approximately 154,000 new policies.

In May 2004, weacquired certain assets of Life Quotes, Inc., a Colorado-based lifeinsurance brokerage that marketed term life insurance using direct responsemarketing methods combined with a call center staffed with licensed agents. Webelieve that this acquisition has provided an important capability that hadbeen missing from our business model, that is, the ability to service customersby telephone in addition to our internet-based service.

**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.

Thesechallenges include:

·       *Fragmented delivery.  *Insurance products are availablefrom captive agents, independent agents and direct distribution channels aswell as new entrants, including banks and other financial institutions. Becauseof this fragmentation, there has been no single source of policy coverage andpricing information from which a consumer can obtain unbiased and completeinformation.

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·       *Quantity and variation of products.*   Insurance policiesvary by type of insurance product, underwriting guidelines, insurance company,jurisdiction and the particular characteristics and preferences of the consumer.This creates a complex pricing structure that is not readily understandable orcomparable without the use of technology.

·       *Information-intensive underwriting process.*   Theunderwriting process requires consumers to submit, and insurance companies tocollect, large amounts of individualized and personal information. This processis difficult, time consuming and, if not accurately completed, will delay theapproval of a policy.

·       *Negative consumer perception.*   Consumers often believethat they paid too much for their insurance and were not properly informed byinsurance agents. Face-to-face contact with an insurance agent mayconvey the sense of a high-pressure sales environment with a lack ofunbiased information.

·       *Misalignment of 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.

·       *Inconvenient and time-consuming purchase.*   Researchingpolicy coverage, contacting competing insurance companies, collecting informationand obtaining insurance quotes require large blocks of time usually duringregular working hours. Consumers are often unable to shop for insurance ontheir own time and 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 ofthe Internet and electronic commerce presents a significant opportunity for theinsurance industry by allowing consumers to more efficiently and effectivelyresearch and transact with insurance companies. The fragmentation of the insuranceindustry and the significant price and product variation has led consumers toseek alternative means of purchase and insurance companies to seek alternativemeans of distribution. We believe that the vast information sharing andcommunications power of the Internet will significantly improve the insuranceindustry for both consumers and insurance companies.

Characteristicsof the insurance product that make it particularly well suited for deliveryover the 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

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·       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 beforwarded, as a prospective sales lead, to a specified insurance company or itstraditional sales force. Many of these Web sites are paid up-front referralfees, are aligned with a limited number of insurance companies and often do notquote many 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 will beattracted to the broadest selection of insurance companies and a compellingvalue proposition based upon price, time and transaction fulfillment.

**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 200 insurancecompanies for several different life, health, auto and home insurance products,and we guarantee the accuracy of every quote. Customers who prefer an offlineexperience can receive comparative life insurance quotes from our licensedinsurance professionals and can complete an insurance application over thephone. Our web site provides consumers with insurance-related information anddecision-making tools. Combining the reach and efficiency of the Internet withour proprietary database and industry expertise developed over the past20 years, we provide a complete “quote-to-policy-delivery” insurancesolution.

We have created amodel that addresses the challenges faced by traditional insurance distributionmethods in a manner that offers significant benefits to both consumers andinsurance companies. The Insure.com model allows consumers to:

·       researchand become informed about insurance coverage issues;

·       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.

The Insure.com solution provides the followingprincipal advantages to both consumers and insurance companies:

*Comprehensive Source of Insurance Information andProducts.  *Using our easy-to-navigate web site,consumers can access insurance-related information, and decision-making tools,as well as a library of thousands of insurance articles. Our Web site alsoprovides insurance quotes from over 200 insurance 

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companies across severaltypes of insurance including individual term life, private passengerautomobile, dental, individual and family medical, long-term care, disability,small group medical, and “no exam” whole life. We believe we offer consumersaccess to the largest, most complete repository of comparative information oninsurance products, insurance pricing and insurance providers. We empowerconsumers with relevant current pricing knowledge, coverage information andindependent rating information so consumers can make informed buying decisions.

*Guaranteed-Accurate Instant Quotes.  *Overthe past 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 offerconsumers a unique $500 cash reward guarantee that we provide an accurate quote.In addition, we also offer a $500 cash reward guarantee that we provide thelowest price quote available with respect to term life and automobile insurancepolicies. These Quotesmith.com guarantees are unmatched by any competitor.

*Consumer in Control.  *We putconsumers in control of their insurance purchase decisions by providing themwith the ability to efficiently search, analyze and compare prices of insuranceproducts from multiple insurance companies in complete privacy, on their owntime and free from the pressure to buy associated with traditional face-to-facesales. Consumers choose from what we believe is the largest selection ofinsurance companies using their own preferences regarding price and insurancecompany rating. Consumers are able to purchase insurance directly through uswithout ever speaking to a commissioned salesperson if they so choose.

*Convenience.  *Consumers whouse our services no longer need to contact different insurance companies orsalespeople, one by one, in order to gather information to make educateddecisions. Unlike traditional agents who only recommend and promote a limitednumber of insurance companies’ policies, we provide real time access to a largedatabase of over 200 insurance companies’ products. Our comparison servicepresents users with a comprehensive listing of insurance quotes, ranked byprice. We believe that this large array of available insurance providers in asingle destination saves consumers time and effort in searching for andobtaining the most suitable coverage.

*Quote to Policy Delivery Support.  *Consumerspurchase 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:

·       providinga licensed agent’s explanation of various pricing, coverage and independentrating information when asked;

·       providingaccess to our licensed agents to assist consumers in completing insuranceapplications;

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

·       arrangingand monitoring the collection of outside underwriting information includingparamedical examinations, laboratory reports and medical records.

*Focus on Customer Service.  *Customerservice is both our foundation and a strategic priority. We provide a highlevel of customer service throughout the application process and aim toeliminate consumer 

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dissatisfaction andfrustration. Our customer service staff has an average of approximately10 years of experience in the insurance industry.

We implement ourcustomer service objectives by:

·       requiringall new employees to attend “Quotesmith University,” a training course thatteaches all of the service tasks we perform for our customers;

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

·       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 National Insurance Agency.  *Unliketraditional insurance agents who are often only licensed in one or a limited numberof 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 200 insurance companies, of which we are currently appointed as anauthorized agent by approximately 180 insurance companies.

*User Friendly System.  *Atour web site, www.Insure.com, consumers can access our Internet-basedservices, research policy options and initiate purchase requests 24 hoursa day, 7 days a week. Our easy to use web site is designed for fastviewing and general compatibility with all commonly used web browsers. Callerscan receive quotes, discuss policy options with our licensed insurance agentsand initiate purchase requests over the telephone.

**Our Strategy**

Our strategy is to be the leading service for allinsurance needs of individuals. The key elements of our strategy include:

*Continue to Build the Insure.com and Life QuotesBrands.  *We will continue to pursue a cost-effectivemarketing strategy designed to promote our Insure.com and Life Quotes brandsand consumer awareness of the benefits of researching and buying insurancethrough us.

*Continue to provide the customer with the abilityto receive quotes and buy either online or through a telephone based salesstaff.*   Duringthe last quarter of 2002 and the first quarter of 2003, we launched ourproprietary online application technology for most of our term life offerings. Whileproviding a very efficient and cost effective method of fulfillment, it is ourbelief that not providing a personal, telephone based option for customersrestricted the number of sales we could make to potential buyers. In May 2004,we acquired selected assets of Life Quotes, which now provide atelephone based complement to our online sales model for term life insurance.

*Expand Number of Participating Insurance Companies.  *Weintend to increase the number of participating insurance companies in ourservice. A significant factor in our strategy has been our ability todemonstrate to an increasing number of leading insurance companies that we cangenerate incremental revenues for them within their existing pricing structures.We plan to extend this ability to broaden our relationships with majorinsurance companies based on reputation, quality and national presence in orderto expand our insurance product offerings.

*Leverage Customer Base.  *Wehave expanded our insurance product offerings and believe there is significantopportunity to leverage our existing customer base and provide new products tothem without significant customer acquisition costs. We plan to tailor ourmarketing efforts based on consumer profiles 

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contained in our databaseof existing customers. We also believe that the content acquired in thepurchase 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.

*Strengthen and Pursue Strategic Relationships andAgreements.  *We believe that strategic joint venturesand licensing arrangements are attractive methods of expansion, as they willenable us to combine our expertise in Internet-based insurance offeringswith other 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.

*Continue to Focus on CustomerService.  *We provide insurance products and services forconsumers from initial evaluation through policy delivery. In order to providethe highest level of service throughout the insurance buying process, we willmonitor feedback from consumers and add new features designed to increasecustomer 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 200 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—forexample, consumers may want to purchase insurance from a company rated “A” orbetter 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.

*Initial Information 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 200 insurance companies. To help consumersunderstand the underwriting process, our web site provides information andhelpful tips on how the underwriting process works.

*Search, Retrieval and Comparison.  *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 

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anonymous consumerinquiry triggers a proprietary cost search and comparison algorithm that sortsthrough a database of thousands of insurance options that is updated daily. Thesearch result, delivered in seconds, is a comprehensive comparison of insurancepolicies ranked by the lowest price that matches the consumer’s criteria. Consumerscan then click to view (or callers can discuss with a licensed insuranceprofessional):

·       specificcoverage details about the policy;

·       exclusionsand guarantees (including policy acceptance guidelines); and

·       latestfinancial stability ratings from five independent rating services.

*Application Processing.  *Ifa consumer 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 theunderwriting process, we regularly track the progress of the consumer’soutstanding items. We also assist the insurance company by arranging for aparamedical examination and facilitating the collection of any other outsideinformation needed. We obtain status reports from the insurance company atleast every ten days regarding the application and regularly communicate thisinformation to the consumer. We review all policies for accuracy prior todelivery 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 Quotesmith.comtechnology and do not currently sell banner advertising at our Insure.com website.

**Insurance Products**

Quotesmith.comhistorically offered quote and policy-related information regarding termlife insurance. We now also offer instant quotes and related information onadditional insurance products for both individuals and small businesses. Ourcurrent 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 collision and liability insurance toindividuals for private cars and vehicles. We provide a multi-company autoinsurance price comparison service using third-party technology.

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

·       *Dental.  *This includes traditionalindemnity insurance along with fixed discount plans. We provide this serviceusing third-party technology.

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·       *Individual and family medical.  *This is also known as comprehensive major medicalinsurance.  We provide this service usingthird-party technology.

·       *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.  *Smallgroup medical insurance are those comprehensive medical plans offered to firmsthat employ from 2 to 100 people. We provide this service using third-partytechnology.

·       *“No-exam” life.  *Thisprovides insurance for persons who want life insurance coverage without aparamedical examination. We offer instant quotes using 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**

*Proprietary Insurance Information Databases.  *Wemaintain a proprietary database of premium rates and policy coverageinformation from over 200 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.

*Technology Systems.  *Oursystems for processing quotes, 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.  *OurWeb sites are hosted by InterNap Network Services in Chicago, Illinois.  This grade “A” telecommunications data centerprovides redundant communications lines to the Internet backbone, emergencypower backup, 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.

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**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 and Life Quotes brands and consumer awarenessof the benefits of buying insurance through us.

Our marketingstrategy is to promote our brands 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 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 10% of total revenue for theyear ended December 31, 2004.

**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 200insurance companies for several different insurance products and the ability tobuy online or over the phone. Our Internet-based, lead-referralcompetitors generally capture consumer name and address information to beforwarded, as a prospective sales lead, to a specified insurance company,without personalized customer service or fulfillment capabilities. OtherInternet-based competitors have created Web sites as alternatives totheir traditional sales activities and offer products from a single insurancecompany or a relatively small group of insurance companies with little or nocomparative overview of prices. While we believe that our completequote-to-policy-delivery service offers a more comprehensive Internet-basedinsurance service solution than these competitors, we nonetheless expect toface intense competition from these other types 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.

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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 other electroniccommerce companies, including direct competitors. Other large companies withstrong 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 consumer bases, greater brand recognition and significantly greaterfinancial, marketing, technical and other resources than us. Several of thesecompetitors may be able to secure products and services on more favorable termsthan we can obtain. In addition, many of these competitors may be able todevote significantly greater resources than we can for developing Web sites andsystems, marketing and promotional campaigns, attracting traffic to their Websites and attracting and retaining key employees.

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 

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with the resolution ofthese matters. We do not currently sell the types of life insurance—primarily cash value lifeinsurance policies such as universal life—that are the subject of theseactions.

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.

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. We intend to cooperate fully with the Illinois Division of Insurance.Given the apparent widening of this regulatory probe within the insurancebrokerage sector, combined with the fact that we are regulated by the insurancedepartments of every state, we expect to receive additional subpoenas andinformation requests of this nature going forward. We intend to respond fullyand completely to such information requests by any regulator or governmententity. We cannot assure you what the result of this investigation will be orwhat effect, if any, it will have on our financial performance or results ofoperations.

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 either uniformlaws and regulations governing licensing of individuals and entities authorizedto sell 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 31,2004, we had 110 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 

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good. Ourfuture success will depend, in part, on our ability to continue to attract,integrate, retain and motivate highly qualified technical and managerialpersonnel, for whom competition is intense.

**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. Our Life Quotes operation is housed ina 43,000 square foot office building in Evergreen, Colorado, which we own. Thereare no other tenants in the building, which has sufficient space to cover anyanticipated expansion plans for the foreseeable future.

**ITEM 3. Legal Proceedings**

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.

**ITEM4. Submission of Matters to a Vote of Security Holders.**

There were no matterssubmitted to a vote of our stockholders during the quarter ended December 31,2004.

**ITEM4(a). Executive Officers of the Registrant**

The following table sets forth information regardingour executive officers and certain other key employees.
| **Name**            | ** ** | ** ** | ** ** | **Age**                                                       | ** ** | ** ** | **Position** | ** ** |
|---------------------|------------|------------|------------|---------------------------------------------------------------|------------|------------|--------------|------------|
| Robert S. Bland     |       | 51         |       | Chairman of the Board,  President and Chief Executive Officer |
| William V. Thoms    |       | 52         |       | Executive Vice President,  Chief Operating Officer            |
| Phillip A. Perillo  |       | 55         |       | Senior Vice President,  Chief Financial Officer               |
| Richard C. Claahsen |       | 40         |       | Vice President, Corporate Secretary                           |

 

*Robert S. Bland*has served as ourChairman of the Board, President and Chief Executive Officer since he foundedQuotesmith.com in 1984. From 1979 to 1984, Mr. Bland was president andsole 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 asour Executive Vice President since 1994. From 1988 to 1993, Mr. Thoms wasresponsible for our operations and customer service departments. Mr. Thomsis a founding stockholder. Prior to joining us, Mr. Thoms was a salesmanager for Western Dressing, Inc., a privately held salad dressingmanufacturing company, from 1972 to 1987.

*Phillip A. Perillo*has served as our Senior Vice President and Chief Financial Officer since May of2002. Mr. Perillo has over twenty years of insurance industry experience,with companies such as the Zurich American Insurance Group and Marsh &McLennan. Mr. Perillo holds an MBA in Finance from DePaul University and aB.S. in Accounting from the University of Illinois at Chicago.

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*RichardC. Claahsen*has served as our Vice President of RegulatoryAffairs since 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.

**PART II**

**ITEM5. Market for 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.

*MarketInformation.  *Our common stock began trading on theNasdaq National Market under the symbol “QUOT” on August 3, 1999, the dateof our initial public offering. Prior to this date, no established publictrading market for our common equity existed. Effective the opening of businesson July 20, 2001, our stock listing was transferred from the NasdaqNational Market to the Nasdaq SmallCap Market, retaining its existing symbol,QUOT. As of March 21, 2005 the approximate number of record holders of ourcommon stock was 1,800. The last sale price of our common stock on March 21,2005 was $5.45. The following table sets forth, for the period indicated, thehigh and low last sale price of our common stock as reported on the NasdaqSmallCap Market, as applicable.
| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| 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    |       |
| 2003:          |       |     |       |    |       |
| First Quarter  |       | $        | 4.60       |    | $          | 3.46 |   |
| Second Quarter |       | 5.12     |       | 3.55    |       |
| Third Quarter  |       | 6.00     |       | 4.01    |       |
| Fourth Quarter |       | 4.92     |       | 3.84    |       |

 

*Dividends.  *Wehave never declared or paid any cash dividends on our common stock and do notanticipate paying cash dividends on our common stock in the foreseeable future.The investor rights agreement we have entered into with Zions Bancorporation,or Zions, prohibits us from paying cash dividends on our common stock unlesscertain conditions are met. We currently intend to retain all future earningsto finance the growth and development of our business. Any future determinationas to the payment of dividends will be made by our board of directors and willdepend on our results of operations, financial condition, capital requirements,and any other factors our board of directors considers relevant, including therestrictions contained in the investor rights agreement.

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**ITEM 6. Selected Financial 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,**                         | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2004**                                                           | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                                     | ** ** | **(in thousands, except per share data)** | ** ** |
| **Statement of Operations Data:**                                              |       |                                                               |       |   |   |   |   |   |   |   |   |
| Revenues                                                                       |       | $                                                                  | 15,910     |   | $ | 9,737 |   | $ | 10,777 |   | $ | 8,851 |   | $ | 15,236 |   |
| Expenses:                                                                      |       |                                                               |       |   |   |   |   |   |   |   |   |
| Selling and marketing                                                          |       | 6,866                                                              |       | 4,735 |   | 2,912 |   | 7,052 |   | 24,201 |   |
| Operations                                                                     |       | 6,531                                                              |       | 3,034 |   | 7,032 |   | 5,366 |   | 6,974 |   |
| General and administrative                                                     |       | 3,148                                                              |       | 2,656 |   | 2,513 |   | 3,343 |   | 4,355 |   |
| Depreciation and amortization                                                  |       | 1,279                                                              |       | 1,053 |   | 1,405 |   | 798 |   | 548 |   |
| Total expenses                                                                 |       | 17,824                                                             |       | 11,478 |   | 13,862 |   | 16,559 |   | 36,078 |   |
| Operating loss                                                                 |       | (1,914                                                             | )          | (1,741 | ) | (3,085 | ) | (7,708 | ) | (20,842 | ) |
| Interest income,  net                                                          |       | 138                                                                |       | 368 |   | 359 |   | 1,075 |   | 2,220 |   |
| Realized gain  (loss) on sale of securities                                    |       | (45                                                                | )          | 92 |   | — |   | — |   | — |   |
| Net loss                                                                       |       | $                                                                  | (1,821     | ) | $ | (1,281 | ) | $ | (2,726 | ) | $ | (6,633 | ) | $ | (18,622 | ) |
| Basic and diluted  net loss per share                                     |       | $                                                                  | (0.31      | ) | $ | (0.26 | ) | $ | (0.55 | ) | $ | (1.22 | ) | $ | (2.93 | ) |
| Weighted average common  shares and equivalents outstanding, basic and diluted |       | 5,851                                                              |       | 4,917 |   | 4,964 |   | 5,441 |   | 6,366 |   |

 
| ** **                       | ** ** | **December 31,**   | ** ** |
|----------------------------------|------------|-------------------------|------------|
| ** **                       | ** ** | **2004**                | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                       | ** ** | **(in thousands)** | ** ** |
| **Balance Sheet Data:**          |       |                    |       |   |   |   |   |   |   |   |   |
| Cash and  equivalents            |       | $                       | 1,356      |   | $ | 677 |   | $ | 1,640 |   | $ | 4,033 |   | $ | 4,269 |   |
| Working capital                  |       | 5,140                   |       | 5,607 |   | 10,485 |   | 18,514 |   | 27,443 |   |
| Total assets                     |       | 28,843                  |       | 17,526 |   | 19,559 |   | 23,000 |   | 32,643 |   |
| Long-term  liabilities           |       | —                  |       | — |   | 35 |   | 84 |   | 128 |   |
| Total liabilities                |       | 1,228                   |       | 760 |   | 1,464 |   | 1,085 |   | 2,976 |   |
| Total stockholders’  equity |       | 27,615                  |       | 16,766 |   | 18,095 |   | 21,915 |   | 29,667 |   |
|                                  |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------|------------|
| ** **                         | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| **Selected Operating Statistics:** |       |                                       |       |   |   |   |   |   |   |   |   |
| Completed quotes                   |       |                                       |       |   |   |   |   |   |   |   |   |
| Term life                          |       | 1,376,000                                  |       | 866,000 |   | 1,266,000 |   | 1,452,000 |   | 2,105,000 |   |
| Health and other                   |       | 546,000                                    |       | 960,000 |   | 1,305,000 |   | 876,000 |   | 1,993,000 |   |
| Total completed quotes             |       | 1,922,000                                  |       | 1,826,000 |   | 2,571,000 |   | 2,328,000 |   | 4,098,000 |   |
| Policies sold                      |       |                                       |       |   |   |   |   |   |   |   |   |
| Term life                          |       | 17,485                                     |       | 11,011 |   | 16,498 |   | 16,915 |   | 33,491 |   |
| Health and other                   |       | 3,236                                      |       | 4,845 |   | 4,753 |   | 3,367 |   | 4,029 |   |
| Total policies  sold               |       | 20,721                                     |       | 15,856 |   | 21,251 |   | 20,282 |   | 37,520 |   |

 

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**SelectedQuarterly Operating Results**

The following tables setforth unaudited quarterly statements of operations data for 2004 and 2003. Theinformation for each of these quarters has been prepared on substantially thesame basis as the audited financial statements included elsewhere in thisannual report, and, in our opinion, include all adjustments, consisting only ofnormal recurring adjustments, necessary for a fair presentation of the resultsof operations for these periods. Historical results are not necessarilyindicative of the results to be expected in the future, and results of interimperiods are not necessarily indicative of results for the entire year.
| ** **                                     | ** ** | **Quarter Ended**                                             | ** ** |
|------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **2004**                                       | ** ** | ** **                                                         | ** ** | **Mar. 31,** | ** ** | **June 30,** | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** |
| ** **                                     | ** ** | **(in thousands, except per share data)** | ** ** |
| 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 | ) |
|                                                |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                     | ** ** | **Quarter Ended**                                             | ** ** |
|------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **2003**                                       | ** ** | ** **                                                         | ** ** | **Mar. 31,** | ** ** | **June 30,** | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** |
| ** **                                     | ** ** | **(in thousands, except per share data)** | ** ** |
| Revenues                                       |       | $                                                                  | 2,572      |   | $ | 2,510 |   | $ | 2,430 |   | $ | 2,225 |   |
| Expenses:                                      |       |                                                               |       |   |   |   |   |   |   |
| Selling and marketing                          |       | 1,303                                                              |       | 1,356 |   | 1,076 |   | 1,001 |   |
| Operations                                     |       | 862                                                                |       | 749 |   | 753 |   | 669 |   |
| General and administrative                     |       | 627                                                                |       | 641 |   | 758 |   | 630 |   |
| Depreciation and amortization                  |       | 284                                                                |       | 263 |   | 253 |   | 253 |   |
| Total expenses                                 |       | 3,076                                                              |       | 3,009 |   | 2,840 |   | 2,553 |   |
| Operating loss                                 |       | (504                                                               | )          | (499 | ) | (410 | ) | (328 | ) |
| Interest income,  net                          |       | 91                                                                 |       | 98 |   | 91 |   | 88 |   |
| Realized gains  (losses) on sale of securities |       | —                                                             |       | 93 |   | — |   | (1 | ) |
| Net loss                                       |       | $                                                                  | (413       | ) | $ | (308 | ) | $ | (319 | ) | $ | (241 | ) |
| Net loss per share basic  and diluted          |       | $                                                                  | (0.08      | ) | $ | (0.06 | ) | $ | (0.06 | ) | $ | (0.05 | ) |
|                                                |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

**Overviewand Critical Accounting Policies**

We generate revenues primarily from the receipt ofcommissions paid to us by insurance companies based upon the policies sold toconsumers through our service. These revenues come in the form of first year,bonus and renewal commissions that vary by company and product. We recognizethe full first year commission revenues on term life insurance after theinsurance company approves the policy and accepts the initial premium payment. Atthe time revenue is recognized, an allowance is recorded based on historicalinformation for estimated commissions that will not be received due to the non-paymentof installment first year premiums and any premium refunds made by theinsurance carriers. We recognize commissions on all other lines of businessafter we receive notice that the insurance company has received payment of therelated premium. First year commission revenues per policy can fluctuate due tochanging premiums, commission rates, and types or amount of insurance sold. Wereceive bonuses based upon individual criteria set by insurance companies. Werecognize bonus revenues when we receive notification from the insurance companyof the bonus due to us. Bonus revenues are typically higher in the fourthquarter of our fiscal year due to the bonus system used by many life insurancecompanies. Revenues for renewal commissions are recognized after we receivenotice that the insurance company has received payment for a renewal premium. Renewalcommission rates are significantly less than first year commission rates andmay not be offered by every insurance company. We also generate revenues fromthe receipt of fees paid by various sources that are tied directly to thevolume of insurance sales or traffic that we produce for such third partyentities.

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 expenses areincurred 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 850,000 shares of Quotesmith.com common stock may be granted toparticipants in the plan. We account for stock option grants in accordance withAccounting Principles Board Opinion 25, “Accounting for Stock Issued toEmployees” 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 have been amortized on a straight-line basisover three years. These assets have been fully amortized as of December 31,2004.

Intangibleassets acquired in 2004 in the acquisition of Life Quotes, Inc. consist ofthe 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 ofinsurance contract renewals was estimated based on the actual policies in forceas of the acquisition date, and the renewal commission rates paid by eachinsurance carrier. These commissions were estimated to have a useful life often years, based on the terms of the contracts with the insurance carriers, andan annual lapse rate was applied to the expected renewals for each carrierbased on historical trends. Amortization is on an accelerated basis, as renewalcommissions will decline each year due to lapses. The ultimate realization ofthe value of the contract renewals is dependant on a number of factors,including actual lapse ratios, which can be affected by factors not under ourcontrol, such as death rates and the pricing level of insurance policies thatcould be purchased to replace the policies in the renewal stream. As a result,the actual amount realized from the contract renewals acquired may differsignificantly from the estimated amount, causing impairment.

Goodwillis not subject to amortization. Allocation of intangible assets betweengoodwill and other intangible assets and the determination of estimated usefullives are based on valuations that we receive from independent appraisers. Thecalculations of these amounts are based on estimates and assumptions usinghistorical and pro forma data and recognized valuation methods. The use ofdifferent estimates or assumptions could produce different results.

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 be recoverable.Such impairment reviews are performed at the entity level with respect togoodwill, as we have one reporting unit. Under those circumstances, if the fairvalue were less than the carrying amount of the entity, an indicator ofimpairment would exist and further analysis would be required to determinewhether or not a loss would need to be charged against current period earnings.No such indicators were noted in 2004. An impairment review was conducted as ofDecember 31, 2004, and it was determined that no impairment existed. Thedeterminations of impairment indicators and fair value are based on estimatesand assumptions related to the amount and timing of future cash flows andfuture interest rates. The use of different estimates or assumptions couldproduce different results.

No income tax credits have beenrecognized relating to our tax loss carryforwards due to uncertainties relatingto 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 $2.9 million for the year ended December 31,2004, and $807,000 for the year ended December 31, 2003.

The New York Attorney General has issued subpoenas tonumerous insurance brokers related to an inquiry into market service agreementsand other similar agreements which compensate brokers for distribution andother services provided to insurance carriers. Additionally, some stateregulators are also 

18

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investigating these typesof agreements, and we have received a subpoena from the Illinois Department ofFinancial and Professional Regulation, Division of Insurance, seekinginformation regarding these types of arrangements. It appears that theseinvestigations could have far-reaching consequences in the insurance industry. Forexample, Marsh & McLennan Companies, Inc. (Marsh), Willis GroupHoldings Ltd. and Aon Corp., three of the largest insurance brokerage firms inthe industry, have each announced that they will no longer accept contingentcommissions. Although the New York Attorney General’s October 14, 2004complaint against Marsh focused primarily upon arrangements with property andcasualty insurance carriers, subpoenas have been served on a number of grouplife and disability and traditional health carriers, as well as the insurancebrokerage companies who assist in the placement of such types of insurance. Atthe press conference announcing its complaint against Marsh, the New YorkAttorney General indicated that its investigation would look across variouslines of insurance. In addition, the departments of insurance for variousstates have proposed new regulations, and other state insurance departmentshave indicated that they will propose new regulations, that address contingentcommission arrangements, including prohibitions involving the payment of moneyby insurance carriers in return for steering business and enhanced disclosureof 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 tomonitor the situation.

**Results of Operations**

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

*Revenues*

Revenuesincreased $6.2 million, or 63%, to $15.9 million in 2004 from $9.7 million in2003. 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 |   |
| Partnership and other fees |       | 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 increase resultingfrom the operations of our new Life Quotes division. Commission from healthinsurance increased 1.3% in 2004. Total life and health insurance policies soldincreased 31% to 20,721 in 2004 from 15,856 in 2003. The Life Quotes operationaccounted for approximately 6,900 paid policies in 2004. Partnership and otherfees decreased 6% to $1.6 million in 2004, resulting from less traffic beingdirected to partners’ web sites.

*Expenses*

*Selling and Marketing.  *Sellingand marketing expenses increased $2.1 million, or 45%, in 2004 when comparedwith 2003, to a total of $6.9 million. We have increased our advertisingspending since the acquisition of Life Quotes in May 2004, in order tomaintain lead flow to our telephone sales staff. 

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However, selling andmarketing expenses have dropped to 43% of revenue in 2004, compared with 49% ofrevenue in 2003.

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

*General and 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.

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

*Interest Income, Net*

Interest income, net was $138,000 in 2004 compared to$368,000 in 2003. The components of 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 $93,000 in 2003.

*Income Taxes(Credit)*

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

**Comparisonof Years Ended December 31, 2003 and 2002**

*Revenues*

Revenues decreased 10% to$9.7 million in 2003 from $10.8 million in 2002. This decrease is attributableto a 25% decrease in the number of policies sold, from 21,251 in 2002 to 15,856in 2003. During the fourth quarter of 2002 and the first quarter of 2003, weimplemented our online application technology for term life insurance business.While this technology streamlined the application process and eliminated theneed to employ third party administrative firms to process applications on ourbehalf, leading to a significant reduction in operations expenses, we believethat many potential customers were unwilling to use this technology, possiblydue in part to a reluctance to enter sensitive personal information online. Wefeel that this accounts for at least a significant portion of the decline in thenumber of policies sold in 2003, and has led us to provide quote andapplication facilities by phone. The decrease in policies sold was partiallyoffset by a 21% increase in revenue per policy sold. In 2002, revenue perpolicy sold was $507. This figure increased to $614 in 2003, as we were able toobtain more favorable commission and bonus arrangements with some of ourcarriers.

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*Expenses*

*Selling and Marketing.  *Sellingand marketing expenses increased $1.8 million, or 63%, to $4.7 million in 2003from $2.9 million in 2002. During 2003, we chose to increase marketingexpenditures in order to support our new Insure.com brand name. As part of thatincrease, we placed advertisements on national radio in 2003, a strategy we hadnot employed in 2002. We were able to increase selling and marketing expensesbecause of the decrease in our operations expenses, described below. We alsoincreased advertising spending during the year in an attempt to generate moreleads and sales.

*Operations.  *Operationsexpense decreased 56% to $3.4 million in 2003 from $7.8 million in 2002, anddecreased as a percentage of revenue from 72% in 2002 to 35% in 2003. Asmentioned above, the development and launch of our online application and orderfulfillment technology in late 2002 and early 2003 allowed us to discontinuethe use of third party administrators to process and complete life insuranceapplications. Also, effective October 31, 2002, the separate Insure.comeditorial office was closed and the positions were transferred to ourheadquarters location, resulting in cost savings. We were also able to staffour operations center in our Darien, Illinois headquarters facility with fewerpeople in 2003 than in 2002. In addition, as discussed in Note 9 to the financialstatements, expense in 2002 included $337,000 for the write off of computersoftware.

*Generaland Administrative.  *General and administrative expensesincreased 5% from $3.2 million in 2002 to $3.3 million in 2003, and increasedfrom 30% of revenues in 2002 to 34% of revenues in 2003.

*Interest Income,Net*

Interestincome, net was $368,000 in 2003 compared to $359,000 in 2002. The componentsof interest income are as follows:
| ** **            | ** ** | **Years ended December 31,** | ** ** |
|-----------------------|------------|---------------------------------------------|------------|
| ** **            | ** ** | **2003**                                    | ** ** | **2002** | ** ** |
| Interest income       |       | $                                           | 376,243    |   | $ | 72,677 |   |
| Interest expense      |       | (8,290                                      | )          | (14,002 | ) |
| Interest income,  net |       | $                                           | 367,953    |   | $ | 358,675 |   |

 

Therewere also net realized gains on the sale of securities of $93,000 in 2003. Therewere no securities sales in 2002.

*Income Taxes(Credit)*

We had no income taxcredit for 2003 and 2002 due to valuation allowances provided against netdeferred tax assets.

**Liquidity and Capital Resources**

We currently expect that the cash and fixed maturityinvestments of $9.3 million at December 31, 2004 will be sufficient to meetour anticipated cash requirements for at least the next 12 months. Thetiming 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 mayrequire additional restrictive covenants with respect to dividends, raisingcapital and other financial and operational matters, which could impact orrestrict our operations. If we cannot obtain adequate financing on acceptableterms, we may be required to reduce the scope of our marketing or operations,which could harm our business, results of operations and our financialcondition.

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Our sources of funds will consist primarily ofcommissions and fee revenue generated from the sale of insurance products,investment income, and sales and maturity proceeds from our fixed maturityportfolio. The principal uses of funds are selling and marketing expenses,operations, general and administrative expenses, and acquisitions of furniture,equipment and software.

Cash provided by operating activities wasapproximately $500,000 in 2004, while cash used in operating activities wasapproximately $770,000 and  $520,000 2003and 2002, respectively, as shown in our statements of cash flows included inthis report. The increase in cash flow in 2004, compared to the amounts used in2003 and 2002, was primarily a result of the collection of higher revenues.

Cash used for investing activities in 2004 totaled$12.5 million, consisting primarily of the acquisition of Life Quotes. Fixedmaturity securities were sold, generating $11.9 million, to help fund the $18.7million acquisition. The purchase of securities in excess of maturities used$5.5 million of cash. Cash used for investing activities totaling $247,000 in2003 consisted of the purchase of fixed income investments in excess ofinvestment maturities and sales of $182,000, and the purchase of fixed assetsof $65,000. Cash used for investing activities totaling $658,000 in 2002consisted of the purchase of fixed income investments in excess of maturitiesof $556,000 and the purchase of fixed assets of $102,000.

Cash provided by financingactivities in 2004 totaled $12.7 million, consisting primarily of the sale ofcommon stock to fund the Life Quotes acquisition. The Company also borrowed andlater repayed $6.5 million in connection with the acquisition. Cash provided byfinancing activities in 2003 resulted from the exercise of employee stockoptions totaling $103,000, partially offset by payments of a capital leaseobligation of $49,000. Cash used in financing activities in 2002 was primarilythe result of our stock buy back. During 2002, we bought back approximately446,000 shares at an average cost of $2.69 per share. We did not buy back anyshares 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, 2004.
| ** **                       | ** ** | **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     |       | 563,507                                   |       | 278,742 |   | 284,765 |   |   | — |   |   |   | — |   |   |
| Purchase obligations             |       | —                                    |       | — |   | — |   |   | — |   |   |   | — |   |   |
|                                  |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Factorsthat may Affect Our Future Operating Results**

**Risks Related to Our Business**

**Ourinsurance brokerage business has not been profitable and may not becomeprofitable in the future, even with the new telephone sales and fulfillmentfacility**

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 31,2004. Because of our overhead structure, including the ongoing costs ofemploying highly-skilled technical personnel, we will need to generate higherrevenues than we did in 2004 in order to achieve profitability. Even if weachieve profitability, we may not be able to maintain profitability in thefuture.

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**Ifthe term life insurance industry declines, our business will suffer because 83%of our 2004 revenues were derived from the sale of term life insurance**

For the year ended December 31,2004, approximately 83% 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.

**Wemay generate limited commission revenues because consumers can obtain freequotes and other information without purchasing insurance 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.

**Weexpect to experience significant fluctuations in our quarterly results, whichmakes it difficult for investors to make reliable period-to-periodcomparisons and may contribute to volatility 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. As aresult, substantial portions of our expenses, including selling and marketingexpenses, are incurred well in advance of potential matching revenue generation.If revenues do not meet our expectations as a result of these selling andmarketing expenses, our results of operations will be negatively affected.

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 

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quarter-to-quartercomparisons of our operating results are not necessarily meaningful and notgood indicators of our future performance. Due to the above-mentioned andother factors, it is possible that in one or more future quarters our operatingresults will fall below the expectations of securities analysts and investors. Ifthis happens, the trading price of our common stock would likely decrease.

**Wemust further develop our brand recognition in order to 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 and LifeQuotes brands are essential to our future success. Accordingly, we intend tocontinue to pursue an aggressive brand-enhancement strategy consisting ofadvertising, online marketing, and promotional efforts. If these expendituresdo not result in a sufficient increase in revenues to cover these additionalselling and marketing expenses, our business, results of operations andfinancial condition would be harmed.

**We donot have agency contracts with all of the insurance companies we quote on ourWeb site and some insurance companies may refuse to participate in our databaseor refuse to do business with us**

While we obtain theinformation contained in our database directly from over 200 insurancecompanies being quoted and listed on our Web site, we currently only hold agencycontracts with about 180 of these insurance companies. In the past, a number ofinsurance companies quoted on our Web site have refused to appoint us as anagent or refused to permit us to publish their quotes for various reasons,including:

·       wedo not meet with our customers on a face-to-face basis;

·       someinsurance companies may have exclusive relationships with other agents;

·       wepublicly market our service on a price-oriented basis which is notcompatible with the insurance company’s branding efforts; and

·       aformal business relationship with us might be perceived negatively by theinsurance company’s existing distribution channels.

We do not intentionallyinclude in our database insurance companies who object to their inclusion. If asignificant number of insurance companies object to the inclusion of theirinformation in our database, the breadth of our database would be limited. Ifconsumers purchase a material number of policies from insurance companies withwhom we are not appointed as an agent, and these insurance companies refuse toenter into agency contracts with us, it could harm our business and results ofoperations. In addition, many of the insurance companies with whom we do haveagency contracts have the ability to terminate their agency relationship uponthirty days notice.

**Ourstrategic relationships and agreements may not generate a material amount ofrevenues for us**

As part of our marketingstrategy, we have entered into certain strategic relationships and agreementswith third-party Web sites and companies in order to increase the realizedrevenue from visitors to our Web sites. During 2004, we generated fee revenuestotaling $1.6 million from these sources. Most of these strategic agreementspermit either party to terminate the agreement with short notice. As a result,we cannot assure you that any of these relationships or agreements will beprofitable or generate any material amount of revenues in the future. If ourstrategic relationships and agreements do not meet our expectations regardingrevenues and earnings, our business could be harmed.

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**If welose any of our key executive officers our business may suffer because we relyon their knowledge of 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 insurance policies on Messrs. Blandand Thoms and both of these officers have entered into employment contractswith us. The loss of either of these two executives or any of our other keyexecutive officers could harm us.

**Ifour insurance quotes are inaccurate and we must pay out 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, 2002, we paid $10,000, for the year ended December 31,2003, we paid $8,500 and for the year ended December 31, 2004, we paid$3,500 in such cash rewards. If our quotes or those of services whosetechnology we utilize are inaccurate and we are required to pay a materialnumber of cash reward guarantees, it could have a negative effect on ouroperation results.

**Theformer owner of Life Quotes has a limited non-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 $2million per year in commissionable premium, subject to annual inflationaryadjustments. This arrangement could result in Manley obtaining business that wemight otherwise have obtained directly.

**Risks Related to the Insurance Industry**

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

Our bonus commission revenues relate to the amount ofpremiums paid for new insurance policies to a single insurance company. Inother words, if consumers purchase policies from a fewer number of insurancecompanies our bonus commissions may be higher than if the same policies werepurchased from a larger number of insurance companies. The decision to purchasea policy from a particular insurance company typically relates to, among otherfactors, price of the policy and rating of the insurance company, both of whichare factors over which we have no control. Insurance companies often changetheir prices in the middle of the year for competitive reasons. This may reducethe number of policies placed with that insurance company which may then reduceour potential bonus commissions. In addition, we have no control over the bonuscommission rates that are set by each individual insurance company. As a resultof these factors, we are unable to control the amount and timing of bonuscommission revenues we receive in any particular quarter or year and theseamounts may fluctuate significantly. Bonus commission revenues were $2.9million for the year ended December 31, 2004, and $0.8 million for theyear ended December 31, 2003.

The New York Attorney General has issued subpoenas tonumerous insurance brokers related to an inquiry into market service agreementsand other similar agreements which compensate brokers for distribution andother services provided to insurance carriers. Additionally, some stateregulators are also investigating these types of agreements, and we havereceived a subpoena from the Illinois Department of Financial and ProfessionalRegulation, Division of Insurance, seeking information regarding these types of

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arrangements. It appearsthat these investigations could have far-reaching consequences in the insuranceindustry. For example, Marsh & McLennan Companies, Inc. (Marsh),Willis Group Holdings Ltd. and Aon Corp., three of the largest insurancebrokerage firms in the industry, have each announced that they will no longeraccept contingent commissions. Although the New York Attorney General’s October 14,2004 complaint against Marsh focused primarily upon arrangements with propertyand casualty insurance carriers, subpoenas have been served on a number ofgroup life and disability and traditional health carriers, as well as theinsurance brokerage companies who assist in the placement of such types of insurance.At the press conference announcing its complaint against Marsh, the New YorkAttorney General indicated that its investigation would look across variouslines of insurance. In addition, the departments of insurance for variousstates have proposed new regulations, and other state insurance departmentshave indicated that they will propose new regulations, that address contingentcommission arrangements, including prohibitions involving the payment of moneyby insurance carriers in return for steering business and enhanced disclosureof 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 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 the products and services we offer areintensely competitive and characterized by rapidly changing technology,evolving regulatory requirements and changing consumer demands. We compete withtraditional insurance distribution channels, including insurance agents andbrokers, new non-traditional channels such as commercial banks andsavings and loan associations, and a growing number of direct distributorsincluding other online services, such as InsWeb Corporation and SelectQuote.

We also potentially face competition from a number oflarge online services that have expertise in developing online commerce and infacilitating a high volume of Internet traffic for or on behalf of ourcompetitors. For instance, some of our competitors have relationships withmajor electronic commerce companies. Other large companies with strong brandrecognition, technical expertise and experience in online commerce and directmarketing could also seek to compete in 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.

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**Risks Related to Regulation**

**Ourcompliance with the strict regulatory environment applicable to the insuranceindustry is costly, and if we fail to comply with the numerous laws andregulations that govern the industry we could be subject to penalties**

We must comply withthe complex rules and regulations of each jurisdiction’s insurancedepartment which impose strict and burdensome guidelines on us regarding ouroperations. Compliance with these rules and regulations imposessignificant costs on our business. Each jurisdiction’s insurance departmenttypically 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.

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, Life Quotes has at times been subject to regulatory actionfor failing to comply with these laws. Failure to comply with these numerouslaws in the future could result in fines, additional licensing requirements orthe revocation of our license in the particular jurisdiction. These penaltiescould significantly increase our general operating expenses and harm ourbusiness. In addition, even if the allegations in any regulatory action againstus turn out to be false, negative publicity relating to any allegations couldresult in a loss of consumer confidence and significant damage to our brand. Webelieve that because many consumers and insurance companies are not yetcomfortable with the concept of purchasing insurance online, the publicityrelating to any such regulatory or legal issues could harm our business.

**Regulationof the sale of insurance over the Internet and other electronic commerce isunsettled, and future regulations could force us to change the way we dobusiness 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 webecome subject to legal liability for the information we distribute on our Website or communicate to our customers, our business 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, 

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sometimes successfully,against agents, online services and print publications in the past. These typesof claims could be time-consuming and expensive to defend, divertmanagement’s attention, and could cause consumers to lose confidence in ourservice. As a result, these types of claims, whether or not successful, couldharm our business, financial condition and results of operations.

In addition, because weare appointed as an agent for only 180of the over 200 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.

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

**Anyfailures of, or capacity constraints in, our systems or the systems of thirdparties on which we rely could reduce or limit visitors to our Web site andharm our ability to generate revenue**

We use both internallydeveloped and third-party systems to operate our service. If the numberof users of our service increases substantially, we will need to significantlyexpand and upgrade our technology, transaction processing systems and networkinfrastructure. We do not know whether we will be able to accurately projectthe rate or timing of any of these increases, or expand and upgrade our systemsand infrastructure to accommodate these increases in a timely manner. Ourability to facilitate transactions successfully and provide high qualitycustomer service also depends on the efficient and uninterrupted operation ofour computer and communications hardware systems. Our service has experiencedperiodic system interruptions, and it is likely that these interruptions willcontinue to occur from time to time. Additionally, our systems and operationsare vulnerable to damage or interruption from human error, natural disasters,power loss, telecommunication failures, break-ins, sabotage, computerviruses, acts of vandalism and similar events. We may not carry sufficientbusiness interruption insurance to compensate for losses that could occur. Anysystem failure that causes an interruption in service or decreases theresponsiveness of our service would impair our revenue-generatingcapabilities, and could damage our reputation and our brand name.

**Oursuccess depends, in part, on our ability to protect our proprietary technology**

We believe that our success depends, in part, on protectingour intellectual property. Other than our trademarks, most of our intellectualproperty consists of proprietary or confidential information that is notsubject to patent or similar protection. Competitors may independently developsimilar 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 proprietary rightsand those of other companies within the industry.

**Wemay be subject to claims of infringement that may be costly to resolve and, ifsuccessful, 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 

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proprietaryrights. Even if we eventually won, any resulting litigation could be time-consumingand expensive to defend and could divert our management’s attention.

**If weare unable to adapt to the rapid technological change in our industry, we willnot remain competitive and our business will suffer**

Our market is characterized by rapidly changingtechnologies, frequent new product and service introductions, and evolvingindustry standards. The recent growth of the Internet and intense competitionin our industry exacerbate these market characteristics. Our future successwill depend on our ability to adapt to rapidly changing technologies bycontinually improving the features and reliability of our database and service.We may experience difficulties that could delay or prevent the successfulintroduction or marketing of new products and services. In addition, newenhancements must meet the requirements of our current and prospectivecustomers and must achieve significant market acceptance. We could also incursubstantial costs if we need to modify our service or infrastructures or adaptour technology to respond to these changes.

**Demandfor our services may be reduced if we are unable to safeguard the security andprivacy of our customer’s information**

A significant barrier to electroniccommerce and online communications has been the need for secure transmission ofconfidential information over the Internet. Our ability to secure thetransmission of confidential information over the Internet is essential inmaintaining consumer and insurance company confidence in our service. Inaddition, because we handle confidential and sensitive information about ourcustomers, any security breaches would damage our reputation and could exposeus to litigation and liability. We cannot guarantee that our systems willprevent security breaches.

**Ourbusiness assumes the continued dependability of the 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 the levelof 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**

**ZionsBancorporation, together with two of our officers and directors, own asignificant portion of our stock and control Quotemsith.com and their interestsmay not be the same as our public stockholders**

As of March 21,2005, Robert Bland, our chairman, President and Chief Executive Officer directlyor indirectly controlled 31.1% of our outstanding common stock, William Thoms,our Executive Vice President and Chief Operating Officer, directly controlled7.9% of our outstanding common stock, and Zions Bancorporation controlled 32.2%of our common stock. As a result, if Zions and Messrs. Bland and Thoms acttogether, or if Zions and Mr. Bland act together, they will be able totake any of the following actions without the approval of additional publicstockholders:

·       elect our directors;

·       amendcertain provisions of our certificate of incorporation,

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

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·       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 acttogether and take any of the actions described above, the interests of ourother stockholders may be harmed. For example, these persons could discourageor prevent potential mergers, takeovers or other change of control transactionsthat could be beneficial to our public stockholders, which could adverselyaffect the market price of our common stock. They may also be able to preventor frustrate attempts to replace or remove incumbent management through theirability to elect directors. Furthermore, they may choose to advance their owninterests at the expense of other stockholders, such as by acting to entrenchthemselves in a management position or electing themselves as directors.

**Theinvestor rights agreement we signed with Zions contains supermajority boardvoting provisions that could make it more difficult for stockholders to changethe policies of our Board of Directors and elect new members to our Board ofDirectors**

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 167,593 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.

30

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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  Zions chooses to exercise its registrationrights and sell its stock, the market price of our common stock could decreaseand our ability to raise capital in the public markets may be adverselyaffected**

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 agreement provides both demand registrationrights and piggyback registration rights to the holders of these shares. Salesof significant amounts of these shares following registration in accordancewith the investor rights agreement or the perception that such sales will occurcould adversely affect the market price of our common stock or our futureability to raise capital through an offering of equity securities or debtsecurities convertible into equity securities.

**Ourcommon stock is currently trading at low prices which could further reduce theliquidity of the market for, and the price of our 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.

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.

**Ourstock price may have wide fluctuations and Internet-related stocks havebeen 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 such companies.

31

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These market pricesgenerally are not sustainable and are subject to wide variations. If our commonstock trades to unsustainably high levels, it likely will thereafter experiencea 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.

**Certainprovisions in our charter documents and Delaware law, together with ourconcentration of stock ownership in a few persons,  could discourage takeover attempts and leadto 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:

·       wehave a classified Board of Directors with three-year staggered terms thatwill delay the ability of stockholders to change the membership on the Board ofDirectors;

·       ourBoard of Directors has the ability to issue shares of preferred stock and todetermine the price and other terms, including preferences and voting rights,of those shares without stockholder approval;

·       stockholderaction may be taken only at a special or regular meeting; and

·       wehave advance notice procedures that must be complied with by stockholders forthem to nominate candidates to our Board of Directors.

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 21, 2005, Messrs. Blandand Thoms, together with Zions, directly or indirectly controlled approximately71% of our outstanding common stock. This high concentration of stockownership, together with the anti-takeover measures described above, couldprevent 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.

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.

**Continuedterrorist attacks or war could lead to further economic instability andadversely 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 

32

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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.

**Item7A. Quantitative and 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, 2004, there were net unrealized losses of $143,317 onthose investments. There were net unrealized losses on those investmentstotaling $69,184 at December 31, 2003.

We did not hold any derivative financial instrumentsas of December 31, 2004, 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.

**Item8. Financial Statements and Supplementary Data**

The financial statementsare indexed in the Index to Financial Statements, which appear on Pages F-1through F-16 hereof, and are incorporated in this Item by referencethereto.

**Item9. Changes in and Disagreements with Accountants on Accounting and FinancialDisclosures**

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, 2004. 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 31,2004 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 2004 that have materially affected or are reasonably likelyto materially affect the Company’s internal controls over financial reporting.

**Item 9B. OtherInformation**

Not applicable

33

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**PART III**

**Item10. Directors and Executive Officers of the Registrant**

The sections entitled “Management”and “Section 16(a) Beneficial Ownership Reporting Compliance” areincorporated 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. Information about ourexecutive officers is set forth in Item 4(a) in Part I of thisReport.

**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 iscompliant with Item 406 of SEC Regulation S-K and the Nasdaq listingstandards. Any waivers of the Code of Ethics must be approved by a committee ofthe Board of Directors comprised solely of independent directors. There havebeen no waivers to the Code of Ethics since its adoption.

**Item 11. Executive Compensation**

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 2005 annual meeting of stockholders scheduledfor May 19, 2005.

**Item12. Security Ownership 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, 2004: (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     |       |       | 601,728    |                                                                                                                                                      |       |                                                                                                             | $          | 6.22                                                                                                                                                                                                                  |       |   |   | 167,593 |   |   |
| Equity  compensation plans not approved by security holders |       |       | —     |                                                                                                                                                      |       |                                                                                                             | —     |                                                                                                                                                                                                                  |       |   | — |   |   |
| **Total**                                                   |       |       | 601,728    |                                                                                                                                                      |       |                                                                                                             | $          | 6.22                                                                                                                                                                                                                  |       |   |   | 167,593 |   |   |

 

Please see note 7 to theaudited 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.

34

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**Item13. Certain Relationships 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 2005 annual meeting of stockholders scheduledfor May 19, 2005.

**Item14. Principal Accounting 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 audit thefinancial statements of the Company for the year ended December 31, 2005. Representativesof the firm of Ernst & Young LLP will be present at the Annual Meetingand will have an opportunity to make a statement if they so desire and will beavailable to respond to appropriate questions.

**AuditFees**

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 $211,360 in 2004 and$188,300 in 2003.

**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 $98,667 in 2004 and $15,431 in 2003. Theaudit-related fees for 2004 involved consulting regarding acquisition relatedissues and a pre-acquisition audit of Life Quotes for 2002 and 2003. Theaudit-related fees for 2003 involved consulting regarding acquisitionaccounting issues.

**TaxFees**

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 $1,500on 2004 and $1,601 in 2003. The fees were for use of the Ernst & Youngonline service.

**Pre-ApprovalPolicies and Procedures**

The Audit Committee has adopted a policy that requiresadvance approval of all audit, audit-related, tax services, and other servicesperformed by the independent auditor. The policy provides for pre-approval bythe Audit Committee of specifically defined audit and non-audit services. Unlessthe specific service has been pre-approved with respect to that year, the AuditCommittee must approve the permitted service before the independent auditor isengaged to perform it. The Audit Committee has delegated to the Chair of theAudit Committee the authority to approve permitted services provided that theChair reports any decisions to the Committee at its next scheduled meeting.

All of the above servicesfor 2004 were approved in advance by our Audit Committee, as required by theAudit Committee Charter.

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**PART IV**

**Item15. Exhibits, Financial Statement Schedules and Reports on Form 8-K:**

(a)           1.     Financial Statements:

The financial statements,which appear on Pages F-1 through F-16 hereof, are indexed inthe Index to Financial Statements and are incorporated herein by reference inthis Item by reference thereto.

2.                FinancialStatement Schedules:

No schedules arerequired due to the absence of conditions under which they are required orbecause the required information is provided in the financial statements ornotes thereto.

3.                ExecutiveCompensation Plans and Arrangements.

The following management contracts or compensatoryplans or arrangements are listed as exhibits to this annual report.

Quotesmith.com 1997Stock Option Plan (as amended and restated March 29, 1999).Quotesmith.com 1999 Employee Stock Purchase Plan.Quotesmith.com 2004 Stock Option Plan.Employment Agreement between the Company and Robert S. Bland, as amended.Employment Agreement between the Company and William V. Thoms, as amended.Employment Agreement between the Company and Phillip A. Perillo.Form of Director IndemnificationAgreementSee Exhibit Index (immediately following the signature pages) forexhibits filed with this annual report.

(b)          Exhibits

See Exhibits Index(immediately following the signature pages).

(c)           Schedules

All required schedules are included.

36

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**QUOTESMITH.COM,INC.INDEX TO FINANCIAL STATEMENTS**
|                                                                                                      | ** ** | **Page**   |
|------------------------------------------------------------------------------------------------------|------------|------------|
| **Audited Financial Statements**                                                                     | ** ** | ** ** |
| Report  of Independent Registered Public Accounting Firm                                             |       | F-2        |
| Balance  Sheets as of December 31, 2004 and 2003                                                |       | F-3        |
| Statements of Operations for  the Years Ended December 31, 2004, 2003, and 2002                 |       | F-4        |
| Statements of  Stockholders’ Equity for the Years Ended December 31, 2004, 2003, and  2002 |       | F-5        |
| Statements of Cash Flows for  the Years Ended December 31, 2004, 2003, and 2002                 |       | 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, 2004 and 2003, and therelated statements of operations, stockholders’ equity, and cash flows for eachof the three years in the period ended December 31, 2004. 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 audit 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 31,2004 and 2003, and the results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2004 in conformity withU.S. generally accepted accounting principles.
|  | /s/  ERNST &  YOUNG LLP |
|--|---------------------------------------|

 

Chicago, IllinoisJanuary 17, 2005

F-2

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**QUOTESMITH.COM, INC.BALANCE SHEETS**
| ** **                                                                                                                        | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                        | ** ** | **2004**              | ** ** | **2003** | ** ** |
| **ASSETS**                                                                                                                        |       |
| Cash and  equivalents                                                                                                             |       | $                     | 1,355,970  |   | $ | 676,728 |   |
| Fixed maturity  investments—available  for sale at fair value*(Note 3)*                                                      |       | 1,975,330             |       | 4,204,150 |   |
| Commissions receivable, less allowances (2004—$482,000; 2003—$176,000)                                             |       | 2,735,984             |       | 1,062,534 |   |
| Other assets                                                                                                                      |       | 300,277               |       | 423,715 |   |
| Total current  assets                                                                                                             |       | 6,367,561             |       | 6,367,127 |   |
| Fixed maturity investments—available for sale at fair  value *(Note  3)*                                                     |       | 5,998,345             |       | 10,345,555 |   |
| Land                                                                                                                              |       | 830,000               |       | — |   |
| Building, less  accumulated depreciation (2004—$77,833)                                                                      |       | 4,592,167             |       | — |   |
| Furniture,  equipment, and computer software at cost, less accumulated depreciation  (2004—$3,194,000; 2003—$2,859,000) |       | 476,113               |       | 375,177 |   |
| Intangible assets  at cost, less accumulated amortization (2004—$428,000; 2003—$995,000) *(Note 2)*                     |       | 3,699,050             |       | 437,761 |   |
| Goodwill                                                                                                                          |       | 6,879,986             |       | — |   |
| Total assets                                                                                                                      |       | $                     | 28,843,222 |   | $ | 17,525,620 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                    |       |
| Accounts payable and accrued liabilities—current                                                                             |       | $                     | 1,227,683  |   | $ | 760,005 |   |
| Total liabilities                                                                                                                 |       | 1,227,683             |       | 760,005 |   |
| Commitments and contingencies *(Note 8)*                                                                                          | * *   | * *              | * *   | * * | * * |
| Stockholders’ equity *(Notes 6  and 7):*                                                                                     |       |                  |       |   |   |
| Common stock, $.003 par value; shares authorized:                                                                                 |       |                  |       |   |   |
| 60,000,000; shares issued:                                                                                                        |       |                  |       |   |   |
| 2004—9,688,709; 2003—7,317,573                                                                                          |       | 29,066                |       | 21,953 |   |
| Additional paid-in capital                                                                                                        |       | 76,814,067            |       | 64,075,686 |   |
| Retained-earnings deficit                                                                                                         |       | (45,290,292           | )          | (43,468,855 | ) |
| Treasury stock at cost: 2,359,341 shares                                                                                          |       | (3,793,985            | )          | (3,793,985 | ) |
| Accumulated other comprehensive income (loss)                                                                                     |       | (143,317              | )          | (69,184 | ) |
| Total  stockholders’ equity                                                                                                  |       | 27,615,539            |       | 16,765,615 |   |
| Total liabilities and  stockholders’ equity                                                                                  |       | $                     | 28,843,222 |   | $ | 17,525,620 |   |

 

See accompanying notes.

F-3

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**QUOTESMITH.COM, INC.**

**STATEMENTS OFOPERATIONS**
| ** **                                                                     | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                     | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| Revenues:                                                                      |       |                                        |       |   |   |   |   |
| Commissions*and*fees*(Note 1)*                                                 |       | $                                           | 15,893,631 |   | $ | 9,717,810 |   | $ | 10,631,467 |   |
| Other                                                                          |       | 16,361                                      |       | 19,034 |   | 145,327 |   |
| Total revenues                                                                 |       | 15,909,992                                  |       | 9,736,844 |   | 10,776,794 |   |
| Expenses:                                                                      |       |                                        |       |   |   |   |   |
| Selling and marketing*(Note 2)*                                           |       | 6,866,341                                   |       | 4,735,438 |   | 2,912,547 |   |
| Operations*(Notes 7 and 9)*                                                    |       | 6,531,308                                   |       | 3,033,994 |   | 7,032,006 |   |
| General and administrative *(Note 7)*                                          |       | 3,147,865                                   |       | 2,656,183 |   | 2,512,942 |   |
| Depreciation                                                                   |       | 413,394                                     |       | 575,170 |   | 926,985 |   |
| Amortization                                                                   |       | 865,296                                     |       | 477,557 |   | 477,557 |   |
| Total expenses                                                                 |       | 17,824,204                                  |       | 11,478,342 |   | 13,862,037 |   |
| Operating loss                                                                 |       | (1,914,212                                  | )          | (1,741,498 | ) | (3,085,243 | ) |
| Interest income,  net *(Note 2)*                                          |       | 138,203                                     |       | 367,953 |   | 358,675 |   |
| Net realized gain  (loss) on sale of securities                                |       | (45,428                                     | )          | 92,551 |   | — |   |
| Loss before  income taxes                                                 |       | (1,821,437                                  | )          | (1,280,994 | ) | (2,726,568 | ) |
| Income tax credit*(Note 4)*                                               |       | —                                      |       | — |   | — |   |
| Net loss                                                                       |       | $                                           | (1,821,437 | ) | $ | (1,280,994 | ) | $ | (2,726,568 | ) |
| Net loss per  common share, basic and diluted                                  |       | $                                           | (0.31      | ) | $ | (0.26 | ) | $ | (0.55 | ) |
| Weighted average  common shares and equivalents outstanding, basic and diluted |       | 5,851,237                                   |       | 4,917,314 |   | 4,964,500 |   |

 

See accompanying notes.

F-4

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**QUOTESMITH.COM, INC.STATEMENTS OF STOCKHOLDERS’EQUITY**
| ** **                                                              | ** ** | **Common Stock** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **    | ** ** | **Accumulated** | ** **  | ** **             | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------|------------|------------|------------|----------------|------------|---------------|------------|-----------------|-------------|------------------------|------------|
| ** **                                                              | ** ** | **Number of**    | ** ** | ** ** | ** ** | **Additional** | ** ** | **Retained-** | ** ** | ** **      | ** **  | **Other**              | ** ** | **Total** | ** ** |
| ** **                                                              | ** ** | **Shares**            | ** ** | **Par**    | ** ** | **Paid-In**    | ** ** | **Earnings**  | ** ** | **Treasury**    | ** **  | **Comprehensive**      | ** ** | **Stockholders’** | ** ** |
| ** **                                                              | ** ** | **Issued**            | ** ** | **Value**  | ** ** | **Capital**    | ** ** | **Deficit**   | ** ** | **Stock**       | ** **  | **Income (Loss)** | ** ** | **Equity** | ** ** |
| 2002:                                                                   |       |                  |       |       |       |           |       |          |       |            |        |                   |       |   |   |   |   |
| Balance at January 1                                               |       | 7,253,570             |       | $          | 21,761     |           | $          | 63,930,061    |       | $               | (39,461,293 | )                      | $          | (2,595,343 | ) |   | $ | 20,096 |   |   | $21,915,282 |   |
| Net loss                                                                |       | —                |       | —     |       | —         |       | (2,726,568    | )          | —          |        |                   | —     |   |   | (2,726,568 | ) |
| Other comprehensive gain—net unrealized gain on  investments  |       | —                |       | —     |       | —         |       | —        |       | —          |        |                   | 62,398     |   |   | 62,398 |   |
| Total comprehensive loss                                                |       |                  |       |       |       |           |       |          |       |            |        |                   |       |   |   | (2,664,170 | ) |
| Purchase of 446,050 treasury shares                                     |       | —                |       | —     |       | —         |       | —        |       | (1,198,642      | )           |                   | —     |   |   | (1,198,642 | ) |
| Proceeds from sale  of common stock:                                    |       |                  |       |       |       |           |       |          |       |            |        |                   |       |   |   |   |   |
| —exercise of stock options                                         |       | 14,502                |       | 43         |       | 26,711         |       | —        |       | —          |        |                   | —     |   |   | 26,754 |   |
| Employee stock compensation                                             |       | —                |       | —     |       | 15,960         |       | —        |       | —          |        |                   | —     |   |   | 15,960 |   |
| Balance at December 31                                             |       | 7,268,072             |       | 21,804     |       | 63,972,732     |       | (42,187,861   | )          | (3,793,985      | )           |                   | 82,494     |   |   | 18,095,184 |   |
| 2003:                                                                   |       |                  |       |       |       |           |       |          |       |            |        |                   |       |   |   |   |   |
| 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 |   |

 

See accompanying notes.

F-5

----

**QUOTESMITH.COM, INC.STATEMENTS OF CASH FLOWS**
| ** **                                                                     | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                     | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Cash flows from operating  activities:**                                     |       |                                        |       |   |   |   |   |
| Net loss                                                                       |       | $                                           | (1,821,437 | ) | $ | (1,280,994 | ) | $ | (2,726,568 | ) |
| Adjustments to  reconcile to net cash provided (used) by operating activities: |       |                                        |       |   |   |   |   |
| Depreciation expense                                                           |       | 413,394                                     |       | 575,171 |   | 924,700 |   |
| Amortization                                                                   |       | 974,539                                     |       | 626,468 |   | 339,253 |   |
| Impairment of computer software                                                |       | —                                      |       | — |   | 336,582 |   |
| Accounts payable and accrued liabilities                                       |       | 486,984                                     |       | (654,292 | ) | 422,654 |   |
| Commissions receivable                                                         |       | 326,053                                     |       | 63,010 |   | 225,958 |   |
| Stock compensation                                                             |       | —                                      |       | — |   | 15,960 |   |
| Other assets                                                                   |       | 123,438                                     |       | (99,029 | ) | (58,267 | ) |
| Net cash provided (used) by operating activities                               |       | 502,971                                     |       | (769,666 | ) | (519,728 | ) |
| **Cash  flows from investing activities:**                                     |       |                                        |       |   |   |   |   |
| Purchase of selected assets of Life Quotes                                     |       | (18,703,066                                 | )          | — |   | — |   |
| Purchase of investments                                                        |       | (6,543,222                                  | )          | (14,199,621 | ) | (23,455,781 | ) |
| Proceeds from investment maturities                                            |       | 1,000,000                                   |       | 7,800,000 |   | 22,900,000 |   |
| Proceeds from sales of investments                                             |       | 11,935,876                                  |       | 6,217,204 |   | — |   |
| Purchase of furniture, equipment and software                                  |       | (223,793                                    | )          | (64,879 | ) | (102,276 | ) |
| Net cash used by investing activities                                          |       | (12,534,205                                 | )          | (247,296 | ) | (658,057 | ) |
| **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 |   | 26,754 |   |
| Purchase of treasury stock                                                     |       | —                                      |       | — |   | (1,198,642 | ) |
| Payment of capital lease obligation                                            |       | (35,018                                     | )          | (49,322 | ) | (43,610 | ) |
| Net cash provided (used) by financing activities                               |       | 12,710,476                                  |       | 53,781 |   | (1,215,498 | ) |
| **Net  increase (decrease) in cash and equivalents**                           |       | 679,242                                     |       | (963,181 | ) | (2,393,283 | ) |
| **Cash  and equivalents at beginning of year**                                 |       | 676,728                                     |       | 1,639,909 |   | 4,033,192 |   |
| **Cash and equivalents at end of  year**                                       |       | $                                           | 1,355,970  |   | $ | 676,728 |   | $ | 1,639,909 |   |

 

See accompanying notes.

F-6

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

**1. Description of 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 200insurance companies for numerous life and health insurance products. TheCompany uses this database to provide customers with a large array ofcomparative life and health insurance quotes online, over the phone or by mail,and allows the customer to purchase insurance from the insurance company oftheir choice either online or over the phone with the Company’s licensedinsurance customer service staff. The Company’s website also provides insuranceinformation and decision-making tools, along with access to other forms ofpersonal insurance, such as auto, homeowners, renters, long-term care andtravel insurance through various partners. The Company generates revenues fromthe receipt of commissions and fees paid by various sources, that are tieddirectly to the volume of insurance sales or traffic that we produce. TheCompany conducts its insurance agency and brokerage operations using bothsalaried and commissioned personnel and generates prospective customer interestusing traditional direct response advertising methods conducted primarilyoffline.

On May 7, 2004, the Company acquired selectedassets of Life Quotes, Inc. for approximately $18,700,000. Life Quotes isan Evergreen, Colorado-based life insurance brokerage that markets term lifeinsurance utilizing direct response marketing methods combined with a callcenter staffed with licensed agents. The Company believes that thisacquisition provides an important capability that had been missing from itsbusiness model, that is, the ability to service customers by telephone inaddition to its internet-based service. As a part of the acquisition, theCompany agreed to grant up to 300,000 options to acquire common shares toemployees of Life Quotes, Inc. The Company acquired approximately $2.0million of receivables, $5.5 million of building and land, intangible assetsand 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 ofthe Company’s total revenues.   In 2004,these included four companies with revenues of $3.7 million, $3.0 million, $2.0million  and $1.6 million. In 2002 

F-7

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

and2003, there were no companies that provided more than ten percent of theCompany’s total revenues. The Company’s business represents one businesssegment.

**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 term-life business as revenues when the policy has been approved by theunderwriter 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 incomeor loss. Realized gains or losses are calculated using the specificidentification method.

**Cash and Equivalents**

Money market and certificateof deposit investments are included as part of cash and equivalents.

**Stock Compensation**

The Company uses theintrinsic value method to measure compensation expense, if any, relating tostock options. Any compensation expense is determined at the date of grant, orthe date of subsequent modification to option terms, based on any excess of thefair value of the related shares over the exercise price, and amortized overthe options’ vesting periods.

F-8

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

**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.

**Furniture,Equipment, and Computer Software**

Furniture, equipment, andcapitalized application development costs of internal-use computersoftware are depreciated over useful lives of three to five years usingprincipally the straight-line method of depreciation. Repair and maintenancecosts are charged to expense as incurred.

**Intangible Assets**

As a result of the acquisition of selected assets ofLife Quotes, Inc. described above, the Company has completed a preliminaryallocation of the cost of the acquisition to the assets acquired, which maystill be adjusted for changes in accounts receivable acquired and deferredtaxes.

Intangibleassets acquired in 2004 in the acquisition of certain assets of Life Quotes, Inc.,consist of the 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 be affectedby factors not under our control, such as death rates and the pricing level ofinsurance policies that could be purchased to replace the policies in therenewal 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 $428,000 in 2004, and is expected to total $605,000in 2005, $554,000 in 2006, $509,000 in 2007, $468,000 in 2008 and $431,000 in2009.

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 2002, $478,000 in 2003 and $438,000 in 2004.

**Assets Held under Capital Lease**

Assets held under capitalleases are recorded at the net present value of the minimum lease payments atthe inception of the lease. Amortization expense is computed using thestraight-line method over the shorter of the estimated useful lives of theassets or the period of the related lease.

F-9

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

**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,** | ** ** |
|-----------------------|------------|---------------------------------------------|------------|
| ** **            | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| Interest income       |       | $                                           | 218,968    |   | $ | 376,243 |   | $ | 372,677 |   |
| Interest expense      |       | (80,765                                     | )          | (8,290 | ) | (14,002 | ) |
| Interest income,  net |       | $                                           | 138,203    |   | $ | 367,953 |   | $ | 358,675 |   |

 

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.

**Comprehensive Income or Loss**

Comprehensive loss includes net loss and unrealizedgain or loss on investments, as follows:
| ** **                                                                        | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                        | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| Unrealized gain  (loss) on investments                                            |       | $                                           | (119,561   | ) | $ | (59,127 | ) | $ | 62,398 |   |
| Less:  Reclassification adjustment for realized (gains) losses included in income |       | 45,428                                      |       | (92,551 | ) | — |   |
| Other  comprehensive income (loss)                                                |       | $                                           | (74,133    | ) | $ | (151,678 | ) | $ | 62,398 |   |

 

**Stock Options**

The Company accounts for stock option grants inaccordance with Accounting Principles Board Opinion 25, “Accounting for StockIssued to Employees” and related interpretations, and, accordingly, recognizesno compensation expense for stock options granted to employees where theexercise price is equal to or greater than the market price at the date of thegrant. SFAS 123, “Accounting for Stock Based Compensation”, requires disclosureof pro forma information regarding net income (loss) per share, using pricingmodels to estimate the fair value of stock option grants. Had compensationexpense for the Company’s stock option plans been determined based on theestimated fair value at the date of grant 

F-10

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

consistent with themethodology prescribed under SFAS 123, approximate net loss and net loss pershare would have been as follows:
| ** **                                                 | ** ** | **Years Ended December 31,**                    | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2004**                                                       | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                 | ** ** | **(in thousands, except  per share data)** | ** ** |
| Net loss as  reported                                      |       | $                                                              | (1,821     | ) | $ | (1,281 | ) | $ | (2,727 | ) |
| Add back stock  compensation, as reported                  |       | —                                                         |       | — |   | 16 |   |
| Less pro forma  stock compensation using fair value method |       | (211                                                           | )          | (147 | ) | (235 | ) |
| Pro forma net  loss                                        |       | $                                                              | (2,032     | ) | $ | (1,428 | ) | $ | (2,946 | ) |
| Pro forma net loss per  common share, basic and diluted    |       | $                                                              | (0.35      | ) | $ | (0.29 | ) | $ | (.59 | ) |

 

On December 16, 2004, the Financial AccountingStandards 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.*Statement123 (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 then July 1,2005. Early adoption will be permitted in periods in which financial statementshave not yet been issued. We expect to adopt Statement 123 (R) on July 1,2005.

Statement 123 (R) permitspublic companies to adopt its requirements using one of two methods:

1.                A “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 employees prior tothe effective date of Statement 123 (R) that remain unvested on theeffective date.

2.                A “modifiedretrospective” method which includes the requirements of the modifiedprospective method described above, but also permits entities to restate basedon the amounts previously recognized under Statement 125 for purposes of proforma disclosure either (a) all prior periods presented or (b) priorinterim periods of the year of adoption.

The Company plans to adopt Statement 123 (R) usingthe modified prospective method.

As permitted by Statement 123, the Company currentlyaccounts for share-based payments to employees using Opinion 25’s intrinsicvalue method and, as such, generally recognizes no compensation cost foremployee stock options. Accordingly, the adoption of Statement123 (R)’s fairvalue method will have a significant impact on our results of operations,although it will have no impact on our overall financial position. The impactof adoption of Statement 123 (R) cannot be predicted at this time becauseit will depend on levels of share-based payments granted in the future. However,had we adopted Statement 123 (R) in prior periods, the impact of thestandard would have approximated the impact of Statement 123 as described inthe disclosure of pro forma net income and earnings per share reported above. Statement

F-11

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

123 (R) also requiresthe benefits of tax deductions in excess of recognized compensation cost to bereported as a financing cash flow, rather than an operating cash flow asrequired under current literature. This requirement will reduce net operatingcash flows and increase net financing cash flows in periods after adoption. Whilethe Company cannot estimate what those amounts will be in the future becausethey depend on, among other things, when employees exercise options, the amountof operating cash flows recognized in prior periods for such excess taxdeductions were $0 in all periods, due to our net operating loss.

**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,  2004:**          | ** ** | ** **    | ** ** |           | ** ** | ** **     |       | ** ** | ** ** | ** ** | ** ** |
| U.S. Government  agency bonds         |       | $             | 987,986    |           |       | $              | —     | ** ** |       | $ | 4,086 |   | $ | 983,900 |   |
| Corporate bonds  and commercial paper |       | 7,129,006     |       |           | —     | ** **     |       | 139,231    |       | 6,989,775 |   |
| Total                                 |       | $             | 8,116,992  |           |       | $              | —     | ** ** |       | $ | 143,317 |   | $ | 7,973,675 |   |
| **December 31, 2003:**           | ** ** | ** **    | ** ** |           | ** ** | ** **     |       | ** ** | ** ** | ** ** | ** ** |
| U.S. Government  agency bonds         |       | $             | 1,689,944  |           |       | $              | 8,095      | ** ** |       | $ | — |   | $ | 1,698,039 |   |
| Corporate  commercial paper           |       | 12,928,945    |       |           | 51,218     | ** **     |       | 128,497    |       | 12,851,666 |   |
| Total                                 |       | $             | 14,618,889 |           |       | $              | 59,313     | ** ** |       | $ | 128,497 |   | $ | 14,549,705 |   |

 

As of December 31,2004, investments maturities are as follows:
| ** **               | ** ** | **Amortized** | ** ** | **Fair**  | ** ** |
|--------------------------|------------|---------------|------------|-----------|------------|
| ** **               | ** ** | **Cost**      | ** ** | **Value** | ** ** |
| Due in one year  or less |       | $             | 1,986,538  |      | $          | 1,975,330 |   |
| Due in 1-2 years         |       | 3,551,914     |       | 3,516,185 |       |
| Due in 2-4 years         |       | 2,578,540     |       | 2,482,160 |       |
| Total                    |       | $             | 8,116,992  |      | $          | 7,973,675 |   |

 

**4. Income Taxes**

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,** | ** ** |
|----------------------------------|------------|---------------------------------------------|------------|
| ** **                       | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| Pre-tax  loss times federal rate |       | $                                           | (619,000   | ) | $ | (436,000 | ) | $ | (927,000 | ) |
| State income tax credit          |       | (87,000                                     | )          | (61,000) |   | (130,900 | ) |
| Increase in valuation allowance  |       | 425,000                                     |       | 554,000 |   | 966,000 |   |
| Stock compensation               |       | —                                      |       | 0 |   | 6,200 |   |
| Other                            |       | 281,000                                     |       | (57,000 | ) | 85,700 |   |
| Income tax credit                |       | $                                           | —     |   | $ | — |   | $ | — |   |

 

 

F-12

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

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,** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Deferred tax  liabilities        |       | $                     | —     |   | $ | — |   |
| Deferred tax assets:             |       |                  |       |   |   |
| Net operating loss carryforwards |       | 16,582,000            |       | 16,097,000 |   |
| Depreciation and amortization    |       | 670,000               |       | 600,000 |   |
| Other                            |       | 294,000               |       | 138,000 |   |
| Total gross  deferred tax assets |       | 17,546,000            |       | 16,835,000 |   |
| Valuation  allowance             |       | (17,546,000           | )          | (16,835,000 | ) |
| Net deferred tax  assets         |       | —                |       | — |   |
| Net deferred tax amounts         |       | $                     | —     |   | $ | — |   |

 

As of December 31,2004, the Company had net operating loss carryforwards of approximately$42,700,000 available to offset future taxable income, which expire in 2006 to2024. There were no income taxes paid or recovered in 2002, 2003 or 2004.

**5. Obligations under Capital Lease**

Furniture, equipment andcomputer software at December 31, 2003 includes gross assets acquiredunder capital lease of $196,000. Related amortization included in accumulateddepreciation was $142,000 at December 31, 2003. These assets were fullyamortized as of December 31, 2004. There were no assets acquired undercapital lease as of December 31, 2004.  Amortization of assets under capital lease isincluded in depreciation expense.

**6. Stockholders’ Equity**

**Treasury Stock**

As of December 31,2004, the Company is authorized to repurchase 652,000 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, 2004.

**Preferred Stoc**k

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

F-13

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

**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. Therights 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 the Company’spreferred stock at an exercise price equal to five times the initial offeringprice of the Company’s common stock. If issued, each preferred share wouldentitle the holder to cumulative quarterly dividends of the greater of$1.00 per share or 33.3 times the common share dividends. The preferredshareholders would receive 33 votes per share and have a liquidation preferenceof $0.333 per share over the common shares.

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

**7. Stock Options**

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 estimated fairvalues of the option grants are amortized to expense over the options’ vestingperiod. The fair value of options at the date of grant was estimated using theBlack-Scholes option pricing model for grants made subsequent to the Company’sinitial public offering in August 1999, and the minimum value method inall prior periods, with the following weighted-average assumptions:
| ** **               | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------|------------|---------------------------------------------|------------|
| ** **               | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| Dividend yield           |       | 0.0                                         | %          | None Issued |   | 0.0 | % |
| Risk-free  interest rate |       | 2.1                                         | %          | — |   | 2.5 | % |
| Volatility               |       | 79.4                                        | %          | — |   | 93.5 | % |
| Expected life (years)    |       | 5.0                                         |       | — |   | 5.0 |   |

 

In 2002, the Company recorded compensation expense of$15,960 relating to stock options granted below the estimated fair value of theCompany’s common stock, with a corresponding credit to additional 

F-14

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

paid-in capital. Therewere no stock options granted below the estimated fair value of the Company’scommon stock in 2004 or 2003.

Transactionsrelated to all stock options are as follows:
| ** **                                        | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                        | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                        | ** ** | ** **                                  | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                        | ** ** | **Shares**                                  | ** ** | **Average** | ** ** | **Shares** | ** ** | **Average** | ** ** | **Shares** | ** ** | **Average** | ** ** |
| ** **                                        | ** ** | **Under**                                   | ** ** | **Exercise** | ** ** | **Under** | ** ** | **Exercise** | ** ** | **Under** | ** ** | **Exercise** | ** ** |
| ** **                                        | ** ** | **Option**                                  | ** ** | **Price** | ** ** | **Option** | ** ** | **Price** | ** ** | **Option** | ** ** | **Price** | ** ** |
| Beginning Balance                                 |       | 268,332                                     |       |   | $ | 7.34 |   |   | 360,047 |   |   | $ | 6.28 |   |   | 712,131 |   |   | $ | 7.03 |   |   |
| Granted with  exercise price equal to stock value |       | 349,500                                     |       |   | 5.28 |   |   | — |   |   | — |   |   | 156,500 |   |   | 3.04 |   |   |
| Exercised                                         |       | (7,500                                      | )          |   | 1.42 |   |   | (49,501 | ) |   | 2.08 |   |   | (14,502 | ) |   | 1.84 |   |   |
| Forfeited                                         |       | (8,604                                      | )          |   | 6.71 |   |   | (42,214 | ) |   | 4.51 |   |   | (494,082 | ) |   | 6.41 |   |   |
| Outstanding                                       |       | 601,728                                     |       |   | $ | 6.22 |   |   | 268,332 |   |   | $ | 7.34 |   |   | 360,047 |   |   | $ | 6.28 |   |   |
| Exercisable at  end of year                       |       | 202,728                                     |       |   |   |   |   | 165,999 |   |   |   |   |   | 129,538 |   |   |   |   |   |

 

Informationregarding options outstanding and exercisable at December 31, 2004 issummarized as follows:
| ** **              | ** ** | ** ** | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-------------------------|------------|------------|------------|------------------------------|------------|------------------------------|------------|
| ** **              | ** ** | ** ** | ** ** | **Weighted Average**         | ** ** | **Weighted**                 | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **              | ** ** | ** ** | ** ** | **Remaining**                | ** ** | **Average**                  | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **              | ** ** | **Number** | ** ** | **Contractual**              | ** ** | **Exercise**                 | ** ** | **Number** | ** ** | **Exercisable** | ** ** |
| **Exercise Price** | ** ** | ** ** | ** ** | **Outstanding**              | ** ** | **Life (in years)**          | ** ** | **Price** | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
| $2.00 - $ 2.78     |       |       | 57,500     |                         |       |                         | 6.85       |   |   |   | 2.10 |   |   |   | 32,500 |   |   |   | 2.18 |   |   |
| $2.99 - $ 5.05     |       |       | 159,166    |                         |       |                         | 7.59       |   |   |   | 3.63 |   |   |   | 96,666 |   |   |   | 2.99 |   |   |
|  $ 5.17       |       |       | 261,500    |                         |       |                         | 9.72       |   |   |   | 5.17 |   |   |   | — |   |   |   | — |   |   |
| $6.00 - $ 6.38     |       |       | 80,583     |                         |       |                         | 7.83       |   |   |   | 6.14 |   |   |   | 30,583 |   |   |   | 6.38 |   |   |
| $9.00 - $10.32          |       |       | 9,146      |                         |       |                         | 4.34       |   |   |   | 9.12 |   |   |   | 9,146 |   |   |   | 9.12 |   |   |
|  $33.00            |       |       | 33,833     |                         |       |                         | 4.58       |   |   |   | 33.00 |   |   |   | 33,833 |   |   |   | 33.00 |   |   |
|                    |       |       | 601,728    |                         |       |                         | 8.26       |   |   |   | $ | 6.22 |   |   |   | 202,728 |   |   |   | $ 8.66 |   |   |
|                         |            |            |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The options have terms of ten years. Under the Company’sPlans, 167,593 shares were available for grant as awards or options at December 31,2004.

Theweighted average fair value per share of options granted were as follows:
| ** ** | ** ** | **2004** | ** ** | **2003** | ** **  | **2002** | ** ** |
|------------|------------|----------|------------|----------|-------------|----------|------------|
|       |       | $        | 3.40       |     | None Issued |     | $          | 2.20 |   |
|            |            |          |            |          |             |          |            |  |  |

 

**8. Commitments and Contingencies**

As of December 31, 2004, the Company leasesoffice space in Darien, IL under an operating lease agreement in which theCompany is committed to rent expense of approximately $278,000 in 2005 and$285,000 in 2006. In addition, the Company must pay its proportionate share oftaxes and operating costs for the Darien lease site.

F-15

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

Rent expense was  $428,000 in 2002 , $286,000 in 2003 and $267,000 in 2004.

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.

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.

**9. Computer Software**

In connection with its auto insurance brokeragebusiness, the Company had developed an auto rating engine and order fulfillmenttechnology that was launched in January 2002. However, the Company wasunable to secure an adequate number of agency appointments and the handlingcosts of this business were higher than anticipated. Therefore, in the thirdquarter of 2002, the Company discontinued the use of this software in favor ofusing an outsourced technology solution. This decision resulted in animpairment of $337,000 representing the entire remaining amount of thesecomputer software costs, included in operations expenses in 2002.

F-16

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, as amended, the Registrant has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized on March 15,2005.
|        | 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                                                                                                 |
| 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, 200

††                         Incorporated by reference to the Company’sRegistration statement 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 AnnualReport on Form 10-K, filed with the Securities and ExchangeCommission on March 26, 2003.

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

 

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