UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549









FORM 10-Q




x  QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF


THE
SECURITIES EXCHANGE ACT OF 1934




For
the quarterly period ended March 31, 2010




OR




o  TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF


THE
SECURITIES EXCHANGE ACT OF 1934




For
the transition period
from            to




Commission
file number 333-123081









HEALTH
BENEFITS DIRECT CORPORATION


(Exact
Name of Registrant as Specified in Its Charter)




Delaware
            
            98-0438502(State
      or Other Jurisdiction of
            
            (I.R.S.
      EmployerIncorporation
      or Organization)
            
            Identification
      No.)




150
North Radnor-Chester Rd.


Radnor
Financial Center, Suite B101


Radnor,
Pennsylvania 19087


(Address
of Principal Executive Offices) (Zip Code)




(484)
654-2200


(Registrant’s
Telephone Number, Including Area Code)




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




Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulations S-T (232.405 of this
chapter) during the preceding 12 months (or for shorter period that the
Registrant was required to submit and post such
files).    Yes   ̈    No   ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “ large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (check
one):




Large
      Accelerated Filer     o
            
            
            Accelerated
      Filer               oNon-Accelerated
      Filer       o
            
            
            Smaller
      Reporting
      Company               x




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




As of May
17, 2010, there were 41,543,544 outstanding shares of common stock, par value
$0.001 per share, of the registrant.












HEALTH
BENEFITS DIRECT CORPORATION


Form 10-Q
Quarterly Report


INDEX




PART I
                FINANCIAL
      INFORMATIONItem
      1
              Financial
      StatementsConsolidated
      Balance Sheets as of March 31, 2010 (UNAUDITED) and
      December 31, 2009
              3Consolidated
      Statements of Operations (UNAUDITED) for the three months ended March 31,
      2010 and 2009
              4Consolidated
      Statements of Changes in Shareholders' Deficit (UNAUDITED)for
      the three months ended March 31, 2010
              5Consolidated
      Statements of Cash Flows (UNAUDITED) for the three months ended March 31,
      2010 and 2009
              6Notes
      to UNAUDITED Consolidated Financial Statements
              7Item
      2
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              32Item 4T
              Controls
      and Procedures
              48PART II
                OTHER
      INFORMATIONItem
      1
              Legal
      Proceedings
              48Item
      6
              Exhibits
              49Signatures
              50


Page 2


PART I.


FINANCIAL
INFORMATION


Item
1. Financial Statements




HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





March 31, 2010
                      
                      
                      December 31, 2009(Unaudited)
                      
                      
                      
                      (1)ASSETSCURRENT
      ASSETS:Cash
                      
                      $
                      1,639,489
                      
                      
                      $
                      1,403,653Accounts
      receivable, net
                      
                      
                      622,506
                      
                      
                      
                      1,015,069Tax
      receivable
                      
                      
                      9,331
                      
                      
                      
                      16,817Prepaid
      expenses
                      
                      
                      154,619
                      
                      
                      
                      83,834Other
      current assets
                      
                      
                      37,559
                      
                      
                      
                      43,227Total
      current assets
                      
                      
                      2,463,504
                      
                      
                      
                      2,562,600Restricted
      cash
                      
                      
                      1,154,631
                      
                      
                      
                      1,154,044Property
      and equipment, net
                      
                      
                      785,543
                      
                      
                      
                      768,184Intangibles,
      net
                      
                      
                      949,258
                      
                      
                      
                      1,088,065Other
      assets
                      
                      
                      153,219
                      
                      
                      
                      110,608Total
      assets
                      
                      $
                      5,506,155
                      
                      
                      $
                      5,683,501LIABILITIES
      AND SHAREHOLDERS' (DEFICIT)CURRENT
      LIABILITIES:Note
      payable
                      
                      $
                      -
                      
                      
                      $
                      7,595Secured
      note from related party
                      
                      
                      1,277,397
                      
                      
                      
                      1,252,740Accounts
      payable
                      
                      
                      1,726,617
                      
                      
                      
                      1,249,883Accrued
      expenses
                      
                      
                      576,824
                      
                      
                      
                      816,733Current
      portion of capital lease obligations
                      
                      
                      161,847
                      
                      
                      
                      135,913Deferred
      revenue
                      
                      
                      491,500
                      
                      
                      
                      232,500Liabilities
      of discontinued operations
                      
                      
                      1,220,596
                      
                      
                      
                      2,144,630Total
      current liabilities
                      
                      
                      5,454,781
                      
                      
                      
                      5,839,994LONG
      TERM LIABILITIES:Warrant
      liability
                      
                      
                      1,274,324
                      
                      
                      
                      2,021,912Capital
      lease obligations
                      
                      
                      276,916
                      
                      
                      
                      201,627Total
      long term liabilities
                      
                      
                      1,551,240
                      
                      
                      
                      2,223,539SHAREHOLDERS'
      (DEFICIT):Preferred
      stock ($.001 par value; 10,000,000 shares authorized; Series A convertible
      preferred stock; 3,437,500 shares authorized, 1,276,750 and 1,000,000
      shares issued and outstanding, respectively (liquidation value $12,767,500
      and $10,000,000, respectively))
                      
                      
                      2,864,104
                      
                      
                      
                      1,983,984Common
      stock ($.001 par value; 200,000,000 shares authorized; 41,543,655 shares
      issued and outstanding)
                      
                      
                      41,543
                      
                      
                      
                      41,543Additional
      paid-in capital
                      
                      
                      36,383,493
                      
                      
                      
                      36,380,493Accumulated
      deficit
                      
                      
                      (40,789,006
                      )
                      
                      
                      (40,786,052
                      )Total
      shareholders' (deficit)
                      
                      
                      (1,499,866
                      )
                      
                      
                      (2,380,032
                      )Total
      liabilities and shareholders' (deficit)
                      
                      $
                      5,506,155
                      
                      
                      $
                      5,683,501





See
accompanying notes to unaudited consolidated financial statements.


(1)
Derived from audited consolidated financial statements.


Page 3


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)





For
      the Three Months EndedMarch 31,2010
                      
                      
                      2009Revenues
                      
                      $
                      1,249,635
                      
                      
                      $
                      1,682,711Cost
      of revenues
                      
                      
                      1,758,408
                      
                      
                      
                      1,517,482Gross
      profit (loss)
                      
                      
                      (508,773
                      )
                      
                      
                      165,229Selling,
      general and administrative expenses:Salaries,
      employee benefits and related taxes
                      
                      
                      596,009
                      
                      
                      
                      1,378,795Advertising
      and other marketing
                      
                      
                      57,343
                      
                      
                      
                      101,899Depreciation
      and amortization
                      
                      
                      231,811
                      
                      
                      
                      211,320Rent,
      utilities, telephone and communications
                      
                      
                      75,243
                      
                      
                      
                      144,192Professional
      fees
                      
                      
                      347,997
                      
                      
                      
                      139,217Other
      general and administrative
                      
                      
                      143,114
                      
                      
                      
                      143,6241,451,517
                      
                      
                      
                      2,119,047Loss
      from operations
                      
                      
                      (1,960,290
                      )
                      
                      
                      (1,953,818
                      )Gain
      from discontinued operations
                      
                      
                      1,031,155
                      
                      
                      
                      708,489Other
      income (expense):Gain
      on change of fair value of warrant liability
                      
                      
                      974,468
                      
                      
                      
                      -Interest
      income
                      
                      
                      2,085
                      
                      
                      
                      12,111Interest
      expense
                      
                      
                      (50,372
                      )
                      
                      
                      (20,051
                      )Total
      other income (expense)
                      
                      
                      926,181
                      
                      
                      
                      (7,940
                      )Net
      loss
                      
                      $
                      (2,954
                      )
                      
                      $
                      (1,253,269
                      )Net
      loss per common share - basic and diluted:Loss
      from operations
                      
                      $
                      (0.03
                      )
                      
                      $
                      (0.05
                      )Gain
      from discontinued operations
                      
                      
                      0.03
                      
                      
                      
                      0.02Net
      loss per common share - basic and diluted
                      
                      $
                      -
                      
                      
                      $
                      (0.03
                      )Weighted
      average common shares outstanding - basic and diluted
                      
                      
                      41,543,655
                      
                      
                      
                      41,279,645





See
accompanying notes to unaudited consolidated financial
statements.


Page 4


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' (DEFICIT)


FOR
THREE MONTHS ENDED MARCH 31, 2010


(Unaudited)





Preferred Stock, $.001
                  
                  
                  Common Stock, $.001Par Value
                  
                  
                  Par ValueTotalNumber of
                  
                  
                  
                  
                  
                  Number of
                  
                  
                  
                  
                  
                  Additional
                  
                  
                  Accumulated
                  
                  
                  Shareholders'Shares
                  
                  
                  Amount
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  Paid-in Capital
                  
                  
                  Deficit
                  
                  
                  (Deficit)Balance
      - December 31, 2009
                  
                  
                  1,000,000
                  
                  
                  $
                  1,983,984
                  
                  
                  
                  41,543,655
                  
                  
                  $
                  41,543
                  
                  
                  $
                  36,380,493
                  
                  
                  $
                  (40,786,052
                  )
                  
                  $
                  (2,380,032
                  )Preferred
      stock and warrants issued in rights offering
                  
                  
                  276,750
                  
                  
                  
                  880,120
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  880,120Amortization
      of deferred compensation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3,000
                  
                  
                  
                  
                  
                  
                  
                  3,000Net
      loss for the period
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (2,954
                  )
                  
                  
                  (2,954
                  )Balance
      - March 31, 2010
                  
                  
                  1,276,750
                  
                  
                  $
                  2,864,104
                  
                  
                  
                  41,543,655
                  
                  
                  $
                  41,543
                  
                  
                  $
                  36,383,493
                  
                  
                  $
                  (40,789,006
                  )
                  
                  $
                  (1,499,866
                  )





See
accompanying notes to unaudited consolidated financial
statements.


Page 5


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)





For the Three Months EndedMarch 31,2010
                        
                        
                        2009Cash
      Flows From Operating Activities:Net
      loss
                        
                        $
                        (2,954
                        )
                        
                        $
                        (1,253,269
                        )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                        
                        
                        231,811
                        
                        
                        
                        211,320Stock-based
      compensation and consulting
                        
                        
                        3,000
                        
                        
                        
                        220,376Gain
      on change of fair value of warrant liability
                        
                        
                        (974,468
                        )
                        
                        
                        -Loss
      on impairment of property and equipment of discontinued
      operations
                        
                        
                        -
                        
                        
                        
                        416,764Loss
      on impairment of intangible assets of discontinued
    operations
                        
                        
                        -
                        
                        
                        
                        1,222,817Gain
      on the disposal of property and equipment of discontinued
      operations
                        
                        
                        6,000
                        
                        
                        
                        (1,562
                        )Changes
      in assets and liabilities:Accounts
      receivable
                        
                        
                        392,563
                        
                        
                        
                        (291,142
                        )Tax
      receivable
                        
                        
                        7,486
                        
                        
                        
                        5,000Prepaid
      expenses
                        
                        
                        (70,785
                        )
                        
                        
                        23,639Other
      current assets
                        
                        
                        (5,002
                        )
                        
                        
                        2,388Other
      assets
                        
                        
                        (42,611
                        )
                        
                        
                        (6,306
                        )Accounts
      payable
                        
                        
                        476,734
                        
                        
                        
                        (234,601
                        )Accrued
      interest on related secured note from related party
                        
                        
                        35,329
                        
                        
                        
                        -Accrued
      expenses
                        
                        
                        (239,909
                        )
                        
                        
                        312,180Due
      to related parties
                        
                        
                        -
                        
                        
                        
                        (4,315
                        )Deferred
      revenue
                        
                        
                        259,000
                        
                        
                        
                        152,501Liabilities
      of discontinued operations
                        
                        
                        (930,035
                        )
                        
                        
                        (2,525,951
                        )Net
      cash used in operating activities
                        
                        
                        (853,841
                        )
                        
                        
                        (1,750,161
                        )Cash
      Flows From Investing Activities:Purchase
      of property and equipment
                        
                        
                        (110,363
                        )
                        
                        
                        (117,344
                        )Proceeds
      from the sale of property and equipment of discontinued
      operations
                        
                        
                        -
                        
                        
                        
                        1,562Net
      cash used in investing activities
                        
                        
                        (110,363
                        )
                        
                        
                        (115,782
                        )Cash
      Flows From Financing Activities:Payments
      on note payable
                        
                        
                        (7,595
                        )
                        
                        
                        -Gross
      proceeds from capital leases
                        
                        
                        134,335
                        
                        
                        
                        85,790Payments
      on capital leases
                        
                        
                        (33,113
                        )
                        
                        
                        (24,397
                        )Restricted
      cash in connection with letters of credit
                        
                        
                        (587
                        )
                        
                        
                        -Gross
      proceeds from sales of preferred stock
                        
                        
                        1,107,000
                        
                        
                        
                        4,000,000Fees
      paid in connection with offering
                        
                        
                        -
                        
                        
                        
                        (15,617
                        )Net
      cash provided by financing activities
                        
                        
                        1,200,040
                        
                        
                        
                        4,045,776Net
      increase in cash
                        
                        
                        235,836
                        
                        
                        
                        2,179,833Cash
      - beginning of the period
                        
                        
                        1,403,653
                        
                        
                        
                        1,842,419Cash
      - end of the period
                        
                        $
                        1,639,489
                        
                        
                        $
                        4,022,251Supplemental
      Disclosures of Cash Flow InformationCash
      payments for interest
                        
                        $
                        15,043
                        
                        
                        $
                        20,051Non
      cash financing activities:Accrued
      Interest on related party note
                        
                        $
                        35,329
                        
                        
                        $
                        -





See
accompanying notes to unaudited consolidated financial
statements.


Page 6


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March 31,
2010





NOTE 1 –
BASIS OF PRESENTATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Basis of
presentation





The
accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of
America (“US GAAP”) for interim financial information and with the instructions
to Form 10-Q and Article 8-03 of Regulation S-X.  Accordingly, the
consolidated financial statements do not include all of the information and
footnotes required by US GAAP for complete financial statements.  In
the opinion of management, all adjustments considered necessary for a fair
presentation have been included and such adjustments are of a normal recurring
nature.  These consolidated financial statements should be read in
conjunction with the consolidated financial statements for the year ended
December 31, 2009 and notes thereto and other pertinent information contained in
Form 10-K of Health Benefits Direct Corporation (the “Company”, “we”, “us” or
“our”) as filed with the Securities and Exchange Commission (the
“Commission”).





The
consolidated financial statements of the Company include the Company and its
subsidiaries.  All material inter-company balances and transactions
have been eliminated.





On March
31, 2010 we sold substantially all of Insurint’s assets and ceased our Insurint
operations on that date.  These financial statements reflect
Insurint’s activity as discontinued operations.  For purposes of
comparability, certain prior period amounts have been reclassified to conform to
the 2010 presentation.  See Note 2 –
Discontinued Operations.





The
results of operations for the three months ended March 31, 2010 are not
necessarily indicative of the results for the full fiscal year ending December
31, 2010.





Organization





Health
Benefits Direct Corporation (the “Company”, “we”, “us” or “our”) was formed in
January 2004 for the purpose of acquiring, owning and operating businesses
engaged in direct marketing and sale of health and life insurance products,
primarily utilizing the Internet and our former call center. Our current
operations consist of our InsPro Technologies LLC subsidiary (“InsPro
Technologies”).





InsPro
Technologies is a provider of comprehensive, web-based insurance administration
software applications.  InsPro Technologies’ flagship software product
is InsPro, which was introduced 2004.  InsPro Technologies offers
InsPro Enterprise (“InsPro”) on a licensed and an ASP (Application Service
Provider) basis.  InsPro is an insurance administration and marketing
system that supports group and individual business lines, and efficiently
processes agent, direct market, worksite and web site generated
business.  InsPro Technologies’ clients include insurance carriers and
third party administrators.  InsPro Technologies realizes revenue from
the sale of software licenses, application service provider fees, software
maintenance fees and professional services.  We acquired InsPro
Technologies on October 1, 2007.


Page 7


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March 31,
2010





NOTE 1 –
BASIS OF PRESENTATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Use of
estimates





The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from those
estimates. Significant estimates in 2010 and 2009 include the allowance for
doubtful accounts, stock-based compensation, the useful lives of property and
equipment and intangible assets, warrant liability and revenue
recognition.





Cash and cash
equivalents





The
Company considers all liquid debt instruments with original maturities of 3
months or less to be cash equivalents.





Restricted
cash





The
Company considers all cash and cash equivalents held in restricted accounts
pertaining to the Company’s letters of credit as restricted cash.





Accounts
receivable





The
Company has a policy of establishing an allowance for uncollectible accounts
based on its best estimate of the amount of probable credit losses in its
existing accounts receivable. The Company periodically reviews its accounts
receivable to determine whether an allowance is necessary based on an analysis
of past due accounts and other factors that may indicate that the realization of
an account may be in doubt. Account balances deemed to be uncollectible are
charged to the allowance after all means of collection have been exhausted and
the potential for recovery is considered remote. At March 31, 2010 and December
31, 2009, the Company has established, based on a review of its outstanding
balances, an allowance for doubtful accounts in the amount of $0.





Accounts
receivable from the two largest InsPro Technologies clients accounted for 46%
and 15%, respectively, of the Company’s total accounts receivable balance at
March 31, 2010.





Fair value of financial
instruments





The
carrying amounts of financial instruments, including cash and cash equivalents,
restricted cash, accounts receivable, accounts payable, accrued expenses and
capital leases approximated fair value as of March 31, 2010 and December 31,
2009, because of the relatively short-term maturity of these instruments and
their market interest rates.


Page 8


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March 31,
2010





NOTE 1 –
BASIS OF PRESENTATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Property and
equipment





Property
and equipment are carried at cost. The cost of repairs and maintenance are
expensed as incurred; major replacements and improvements are
capitalized.  When assets are retired or disposed of, the cost and
accumulated depreciation are removed from the accounts, and any resulting gains
or losses are included in income in the year of disposition.  In
accordance with Statement of Financial Accounting Standards ASC 360, "Accounting
for the Impairment or Disposal of Long-Lived Assets" the Company examines the
possibility of decreases in the value of fixed assets when events or changes in
circumstances reflect the fact that their recorded value may not be
recoverable.





Intangible
assets





Intangible
assets consist of assets acquired in connection with the acquisition of InsPro
Technologies and costs incurred in connection with the development of the
Company’s software.  See Note 4 – Intangible Assets.





The
Company’s InsPro Technologies subsidiary capitalized certain costs valued in
connection with developing or obtaining software for external use.  These costs,
which consist of direct technology labor costs, are capitalized subsequent to
the establishment of technological feasibility and until the product is
available for general release.  Both prior and subsequent costs
relating to the establishment of technological feasibility are expensed as
incurred.  Development costs associated with product enhancements that
extend the original product’s life or significantly improve the original
product’s marketability are also capitalized once technological feasibility has
been established.  Software development costs are amortized on a
straight-line basis over the estimated useful lives of the products not to
exceed two years, beginning with the initial release to
customers.  The Company continually evaluates whether events or
circumstances have occurred that indicate the remaining useful life of the
capitalized software development costs should be revised or the remaining
balance of such assets may not be recoverable.  The Company evaluates
the recoverability of capitalized software based on the net realizable value of
its software products, as defined by the estimated future revenue from the
products less the estimated future costs of completing and disposing of the
products, compared to the unamortized capitalized costs of the
products.  As of March 31, 2010, management believes no revisions to
the remaining useful life or additional write-downs of capitalized software
development costs are required because the net realizable value of its software
products exceeds the unamortized capitalized costs.  Management’s
estimates about future revenue and costs associated with its software products
are subject to risks and uncertainties related to, among other things, market
and industry conditions, technological changes, and regulatory
factors.  A change in estimates could result in an impairment charge
related to capitalized software costs.





Impairment of long-lived
assets





The
Company periodically reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be fully recoverable. The Company recognizes an impairment loss
when the sum of expected undiscounted future cash flows is less than the
carrying amount of the asset. The amount of impairment is measured as the
difference between the asset's estimated fair value and its book
value.


Page 9


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March 31,
2010





NOTE 1 –
BASIS OF PRESENTATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Warrant
Liability





The
Company issued warrants to purchase the Company’s common stock in connection
with the issuance of common and preferred stock, which contain certain
anti-dilution provisions that reduce the exercise price of the
warrants.  See Note 7 – Equity - Common Stock Warrants. Upon the
Company’s adoption of the Derivative and Hedging Topic of the FASB Accounting
Standards Codification (“ASC 815”) on January 1, 2009, the Company
determined that the warrants with provisions that reduce the exercise price of
the warrants did not qualify for a scope exception under ASC 815 as they were
determined not to be indexed to the Company’s stock as prescribed by ASC
815.





The
Company determined the fair value of the warrants issued on March 26, 2010 was
$226,880 and recorded that amount in warrant liability.





For the
three months ended March 31, 2010, the Company recorded a gain on the change in
fair value of derivative liability of $974,468 to mark to market for the
decrease in fair value of the warrants during the three months ended March 31,
2010.





The
Company determined the fair value of the warrant liability at March 31, 2010 was
$1,274,324. The fair value was determined using the Black Scholes Option Pricing
Model based on the following assumptions: dividend yield: 0%; risk
free rate: 0.16% and the following:




Warrant
              
              
              Aggregate
              
              
              Expected TermWarrant Issue
              
              Exercise
              
              
              Number of
              
              
              (Years) ofDate
              
              Price
              
              
              Warrants
              
              
              Warrants
              
              
              Volatility
              
              
              Fair Value1/15/2009
              
              $
              0.20
              
              
              
              20,000,000
              
              
              
              4.0
              
              
              332%
              
              
              $
              997,6343/26/2010
              
              $
              0.20
              
              
              
              5,535,000
              
              
              
              5.0
              
              
              346%
              
              
              
              276,690$
              1,274,324




Income
taxes





The
Company accounts for income taxes under the liability method.  Under
this method, deferred income tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.


Page 10


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March 31,
2010





NOTE 1 –
BASIS OF PRESENTATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Loss per common
share





Basic
earnings per share is computed by dividing net income by the weighted average
number of shares of common stock outstanding during the period. Diluted earnings
per share is computed by dividing net income by the weighted average number of
shares of common stock, common stock equivalents and potentially dilutive
securities outstanding during each period. Diluted loss per common share is not
presented because it is anti-dilutive. The Company's common stock equivalents at
March 31, 2010 include the following:





Convertible
      preferred stock
                    
                    
                    25,535,000Options
                    
                    
                    5,376,648Warrants
                    
                    
                    56,751,88787,663,535





Revenue
recognition





We follow
the guidance of the Commission's Staff Accounting Bulletin 104 for revenue
recognition. In general, the Company records revenue when persuasive evidence of
an arrangement exists, services have been rendered or product delivery has
occurred, the sales price to the customer is fixed or determinable, and
collectibility is reasonably assured.





InsPro
Technologies offers InsPro on a licensed and an application service provider
(“ASP”) basis. An InsPro software license entitles the purchaser a perpetual
license to a copy of the InsPro software installed at a single client location.
Alternatively, ASP hosting service enables a client to lease the InsPro
software, paying only for that capacity required to support their business. ASP
clients access InsPro installed on InsPro Technologies owned servers located at
InsPro Technologies’ offices or at a third party’s site.





InsPro
Technologies’ software maintenance fees apply to both licensed and ASP
clients.  Maintenance fees cover periodic updates to the application
and the InsPro help desk.





InsPro
Technologies’ professional services are generally associated with the
implementation of an InsPro instance for either an ASP or licensed client, and
cover such activities as InsPro installation, configuration, modification of
InsPro functionality, client insurance plan set-up, client insurance document
design and system documentation.


Page 11


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March 31,
2010





NOTE 1 –
BASIS OF PRESENTATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)




InsPro
Technologies revenue is generally recognized under ASC
985-605.   For software arrangements involving multiple elements,
the Company allocates revenue to each element based on the relative fair value
or the residual method, as applicable using vendor specific objective evidence
to determine fair value, which is based on prices charged when the element is
sold separately. Software revenue accounted for under ASC 985-605 is recognized
when persuasive evidence of an arrangement exists, the software is delivered in
accordance with all terms and conditions of the customer contracts, the fee is
fixed or determinable and collectibility is probable.  Revenue related
to post-contract customer support (“PCS”), including technical support and
unspecified when-and-if available software upgrades, is recognized ratably over
the PCS term.   Under ASC 985-605, if fair value does not exist
for any undelivered element, revenue is not recognized until the earlier of
(i) delivery of such element or (ii) when fair value of the
undelivered element is established, unless the undelivered element is a service,
in which case revenue is recognized as the service is performed once the service
is the only undelivered element.





The
Company recognizes revenue from software license agreements when persuasive
evidence of an agreement exists, delivery of the software has occurred, the fee
is fixed or determinable, and collectibility is probable.  The Company
considers fees relating to arrangements with payment terms extending beyond one
year to not be fixed or determinable and revenue for these arrangements is
recognized as payments become due from the customer.  In software
arrangements that include more than one InsPro module, the Company allocates the
total arrangement fee among the modules based on the relative fair value of each
of the modules.





License
revenue allocated to software products generally is recognized upon delivery of
the products or deferred and recognized in future periods to the extent that an
arrangement includes one or more elements to be delivered at a future date and
for which fair values have not been established.  Revenue allocated to
maintenance agreements is recognized ratably over the maintenance term and
revenue allocated to training and other service elements is recognized as the
services are performed.





The
unearned portion of InsPro Technologies’ revenue, which is revenue collected or
billed but not yet recognized as earned, has been included in the consolidated
balance sheet as a liability for deferred revenue.





See Note
2 - Discontinued Operations for revenue recognition for discontinued
operations.





Cost of
Revenues





Cost of
revenues includes direct labor and associated costs for employees and
independent contractors performing InsPro design, development, implementation,
testing together with customer management, training and technical support, as
well as facilities,  equipment and software costs.


Advertising and other
marketing
 
 Advertising
and other marketing costs are expensed as incurred.
  Page 12




HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March 31,
2010


NOTE 1 –
BASIS OF PRESENTATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


Concentrations of credit
risk





The
Company maintains its cash and restricted cash in bank deposit accounts, which
exceed the federally insured limits of $250,000 per account as of March 31,
2010.  At March 31, 2010, the Company had $1,639,489 of cash and
$1,154,631 of restricted cash for a total of $2,794,120 in United States bank
deposits, of which $496,516 was federally insured and $2,297,604 exceeded
federally insured limits.  Effective October 3, 2008 through December
31, 2013, federally insured limits have been increased from $100,000 to $250,000
per account.  The Company has not experienced any losses in such
accounts through March 31, 2010.





The
following table lists the percentage of the Company’s revenue, which was earned
from the Company’s two largest InsPro clients.





For the Three Months ended March 31,2010
                    
                    
                    2009Largest
      InsPro client
                    
                    
                    32
                    %
                    
                    
                    58
                    %Second
      largest InsPro client
                    
                    
                    28
                    %
                    
                    
                    17
                    %





Stock-based
compensation





The
Company accounts for stock based compensation transactions using a
fair-value-based method and recognizes compensation cost for share-based
payments to employees based on their grant-date fair value from the beginning of
the fiscal period in which the recognition provisions are first
applied.





Non-employee stock based
compensation





The cost
of stock based compensation awards issued to non-employees for services are
recorded at either the fair value of the services rendered or the instruments
issued in exchange for such services, whichever is more readily determinable,
based on their grant-date fair value from the beginning of the fiscal period in
which the recognition provisions are first applied.




Registration rights
agreements





The
Company classifies as liability instruments the fair value of registration
rights agreements when such agreements (i) require it to file, and cause to be
declared effective under the Securities Act, a registration statement with the
Commission within contractually fixed time periods, and (ii) provide for the
payment of liquidating damages in the event of its failure to comply with such
agreements. Registration rights with these characteristics are accounted for as
derivative financial instruments at fair value and (ii) contracts that are (a)
indexed to and potentially settled in an issuer's own stock and (b) permit gross
physical or net share settlement with no net cash settlement alternative are
classified as equity instruments.





At March
31, 2010, the Company does not believe that it is probable that the Company will
incur a penalty in connection with registration rights agreements, which we
entered into in connection with the 2008 and 2009 private
placements.  Accordingly no liability was recorded as of March 31,
2010.


Page 13


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March 31,
2010


NOTE 1 –
BASIS OF PRESENTATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)


Recent accounting
pronouncements





In
January 2010, the FASB issued Accounting Standards Update 2010-02, Consolidation
(Topic 810): Accounting and Reporting for Decreases in Ownership of a
Subsidiary. This amendment to Topic 810 clarifies, but does not change, the
scope of current US GAAP. It clarifies the decrease in ownership provisions of
Subtopic 810-10 and removes the potential conflict between guidance in that
Subtopic and asset derecognition and gain or loss recognition guidance that may
exist in other US GAAP. An entity will be required to follow the amended
guidance beginning in the period that it first adopts FAS 160 (now included in
Subtopic 810-10). For those entities that have already adopted FAS 160, the
amendments are effective at the beginning of the first interim or annual
reporting period ending on or after December 15, 2009. The amendments should be
applied retrospectively to the first period that an entity adopted FAS 160. The
Company does not expect the provisions of ASU 2010-02 to have a material effect
on the financial position, results of operations or cash flows of the
Company.





In
January 2010, the FASB issued Accounting Standards Update 2010-01, Equity (Topic
505): Accounting for Distributions to Shareholders with Components of Stock and
Cash (A Consensus of the FASB Emerging Issues Task Force). This amendment to
Topic 505 clarifies the stock portion of a distribution to shareholders that
allows them to elect to receive cash or stock with a limit on the amount of cash
that will be distributed is not a stock dividend for purposes of applying Topics
505 and 260. Effective for interim and annual periods ending on or after
December 15, 2009, and would be applied on a retrospective basis. The Company
does not expect the provisions of ASU 2010-01 to have a material effect on the
financial position, results of operations or cash flows of the
Company.





In
February 2010, the FASB issued ASU 2010-09, which addresses certain
implementation issues related to an entity’s requirement to perform and disclose
subsequent events procedures. The ASU (1) exempts entities that file their
financial statements with, or furnish them to, the SEC from disclosing the date
through which subsequent events procedures have been performed and
(2) clarifies the circumstances in which an entity’s financial statements
would be considered restated and in which the entity would therefore be required
to update its subsequent events evaluation since the originally issued or
available to be issued financial statements. ASU 2010-09 became effective
immediately upon issuance, and the Company has adopted its disclosure
requirements within this Form 10-K for the year ended December 31,
2009.





NOTE 2 –
DISCONTINUED
OPERATIONS





The
Company has classified its former telesales call center and external (ISG) agent
produced agency business (the “Agency Business”), its former Insurint business,
and its leased offices located in New York and Florida as discontinued
operations.





During
the first quarter of 2009, the Company ceased the direct marketing and sale of
health and life insurance and related products to individuals and families in
its Telesales call center.  The Company also determined to discontinue
selling health and life insurance and related products to individuals and
families through its non employee ISG agents.  During the first
quarter of 2009 the Company’s Telesales business segment eliminated 43 positions
including all of its licensed employee sales agents along with other Telesales
service and support personnel and eliminated another 20 positions in Telesales
through attrition.


Page 14


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March 31,
2010





On
February 20, 2009 (the “Closing Date”), the Company entered into and completed
the sale of the Company’s Telesales call center produced agency business (the
“Agency Business”) to eHealth Insurance Services, Inc. (“eHealth”), an
unaffiliated third party, pursuant to the terms of a Client Transition Agreement
(the “Agreement”).





Pursuant
to the Agreement the Company transferred to eHealth the broker of record status
and the right to receive commissions on certain of the in-force individual and
family major medial health insurance policies and ancillary dental, life and
vision insurance policies issued by Aetna, Inc., Golden Rule, Humana,
PacifiCare, Inc., Assurant and United Healthcare Insurance Co. (collectively,
the “Specified Carriers”) on which the Company was designated as broker of
record as of the Closing Date (collectively, the “Transferred Policies” and
each, a “Transferred Policy”).  Certain policies and products were
excluded from the transaction, including the Company’s agency business generated
through its ISG agents, all short term medical products and all business
produced through carriers other than the Specified Carriers.  In
addition, the Agreement also provides for the transfer to eHealth of certain
lead information relating to health insurance prospects (the “Lead
Database”).





The
aggregate initial amount of consideration paid by eHealth to the Company
pursuant to the Agreement during the first quarter of 2009 was approximately
$1,280,000.  In addition, on the Closing Date, eHealth agreed to
assume from the Company certain liabilities relating to historical commission
advances on the Transferred Policies made by the Specified Carriers in an
aggregate amount of approximately $1,385,000.  In addition, eHealth
has agreed to pay to HBDC II, Inc., a Delaware corporation and a wholly-owned
subsidiary of the Company (“HBDC II”) a portion of each commission payment
received by eHealth and reported by the Specified Carrier relating to a
Transferred Policy for the duration of the policy, provided that eHealth remains
broker of record on such Transferred Policy.





Simultaneous
with the execution of the Agreement, the Company and eHealth also entered into a
Marketing and Referral Agreement, dated as of February 20, 2009 (the “Referral
Agreement”).  Pursuant to the terms of the Referral Agreement, eHealth
agreed to construct one or more websites for the purpose of selling health
insurance products (the “Referral Sites”) and to pay to HBDC II a portion of all
first year and renewal commissions received by eHealth from policies sold
through the Referral Sites that result from marketing to prospects using the
Lead Database or other leads delivered by the Company to eHealth.  The
Referral Agreement is scheduled to terminate 18 months following the Closing
Date and is terminable by the Company or eHealth upon material breach by the
other party.


Page 15


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March 31,
2010





NOTE 2 –
DISCONTINUED
OPERATIONS (continued)





On March
31, 2010, the Company entered into and completed an asset purchase agreement of
sale for Insurint (“Insurint Sale Agreement”) with an unaffiliated third
party.  Pursuant to the terms of the Insurint Sale Agreement the
Company sold substantially all of the assets used in the Company’s Insurint’s
business including the Insurint software, www.insurint.com web site, other
intellectual property specific to Insurint including but not limited to the
customer base and all future revenue pertaining to Insurint.  The
buyer agrees to assume future Insurint commitments and expenses subsequent to
March 31, 2010.  Pursuant to the Insurint Sale Agreement the Company
will receive in aggregate $625,000 in cash from the buyer of Insurint, of which
$312,500 was received on April 1, 2010 and the $312,500 balance will be received
over twenty three equal monthly installments in the amount of $13,020.83, with
the first monthly payment being due on May 1, 2010, and the last monthly payment
in the amount of $13,020.91 and due on April 1, 2012.   The
Company recorded a gain on the sale of Insurint of $578,569 on March 31,
2010.





Revenue Recognition for
Discontinued Operations





Our
discontinued operations generates revenue primarily from the receipt of
commissions paid to the Company by insurance companies based upon the insurance
policies sold to consumers by the Company’s Agency Business. We recognize
commission revenue primarily from the sale of health insurance, after we receive
notice that the insurance company has received payment of the related premium.
First year commission revenues per policy can fluctuate due to changing
premiums, commission rates, and types or amount of insurance
sold.  Insurance premium commission revenues are recognized pro-rata
over the terms of the policies.  Revenues for renewal commissions are
recognized after we receive notice that the insurance company has received
payment for a renewal premium. Renewal commission rates are significantly less
than first year commission rates and may not be offered by every insurance
company or with respect to certain types of products.  The unearned
portion of premium commissions has been included in the consolidated balance
sheet in net liabilities of discontinued operations.





During
the first quarter of 2009 the Company recognized a gain upon the execution of
the Agreement of $2,664,794, which is the sum of the aggregate initial amount of
consideration paid by eHealth to the Company and eHealth’s assumption of certain
liabilities relating to historical commission advances on the Transferred
Policies.





The
Company recognizes as revenue commission payments received from eHealth in
connection with the Agreement upon the Company’s notification by eHealth of such
amounts.





The
Company generated revenue from the sale of leads to third parties. Such revenues
are recognized when the Company delivered the leads and bills the purchaser of
the leads.





The
Company also generated revenue from the sub-lease of our leased New York City
office, which is sub-leased on a month to month basis, and also from the
sub-lease of a portion of our leased Deerfield Beach Florida office, which is
leased under operating leases through February 28, 2011. Sub-lease revenue
includes base rent, additional rent representing a portion of occupancy expenses
under the terms of the sub-leases and certain technology and facility services
provided. We recognize sub-lease revenue when lease rent payments are due in
accordance with the sub-lease agreements.  Recognition of sub-lease
revenue commences when control of the facility has been given to the tenant. We
record a provision for losses on accounts receivable equal to the estimated
uncollectible amounts. This estimate is based on our historical experience and a
review of the current status of the Company's receivables.


Page 16


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March 31,
2010





NOTE 2 –
DISCONTINUED
OPERATIONS (continued)





Through
March 31, 2010, the Company offered InsurintTM and typically charged our
Insurint clients a one time account set up fee, which was recognized as earned
when collected and the service had been provided, and recurring access fees,
which were typically monthly in frequency and were recognized as the service was
provided.  As a result the sale of Insurint the Company does not
anticipate recognizing any revenue from Insurint subsequent to March 31,
2010.





Impairment of Long Lived
Assets





During
the first quarter of 2009 we determined certain long term assets were impaired
as a result of the cessation of direct marketing and sales in the Telesales call
center.  The Company recorded expense in 2009 to write-off the value
of these long term assets in the results from discontinued operations, which
included property and equipment net of depreciation of $416,764, intangible
assets net of accumulated amortization acquired from ISG of $1,200,428 and the
value of internet domain name www.healthbenefitsdirect.com net of accumulated
amortization of $22,389.





On July
1, 2009 the Company entered into a sub-lease agreement with a third party,
effective July 15, 2009 which terminated an existing sub-lease agreement for
approximately 8,000 square feet of the Company’s Deerfield Beach office and
replaced it with a sub-lease agreement for approximately 29,952 square
feet.  This new sub-lease terminates on February 28,
2011.  As part of the sub-lease agreement, the Company also agreed to
lease certain personal property to the sub-lessee for the term of the
lease.   The sub-lessee agreed to pay the Company 20 monthly
payments of $10,890 for such personal property and the Company has agreed to
deliver to the sub-lessee a bill of sale for the leased personal property at the
end of the term.  The Company has accounted for this personal property
sub-lease arrangement as a sale and recorded a gain of $217,601.





Page 17


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March 31,
2010





NOTE 2 –
DISCONTINUED
OPERATIONS (continued)





The
financial position of discontinued operations was as follows:


March 31, 2010
                
                
                December 31, 2009Accounts
      receivable, less allowance for doubtful accounts $0 and
    $6,909
                
                $
                (317,696
                )
                
                $
                (322,619
                )Deferred
      compensation advances
                
                
                (362
                )
                
                
                (498
                )Prepaid
      expenses
                
                
                (13,638
                )
                
                
                (16,932
                )Other
      current assets
                
                
                (442,108
                )
                
                
                (5,477
                )Other
      assets
                
                
                (231,661
                )
                
                
                (91,809
                )Accounts
      payable
                
                
                160,312
                
                
                
                183,722Accrued
      expenses
                
                
                1,951,686
                
                
                
                2,273,024Sub-tenant
      security deposit
                
                
                113,706
                
                
                
                121,007Unearned
      commission advances
                
                
                357
                
                
                
                3,461Deferred
      revenue
                
                
                -
                
                
                
                751Net
      current liabilities of discontinued operations
                
                $
                1,220,596
                
                
                $
                2,144,630





The
results of discontinued operations were as follows:


For the Three Months Ended March 31,2010
                  
                  
                  2009Revenues:Commission
      and other revenue from carriers
                  
                  $
                  149,646
                  
                  
                  $
                  1,351,966Gain
      recognized upon the execution of the Agreement
                  
                  
                  -
                  
                  
                  
                  2,664,794Transition
      policy commission pursuant to the Agreement
                  
                  
                  350,332
                  
                  
                  
                  224,338Gain
      on the sale of Insurint
                  
                  
                  578,569
                  
                  
                  
                  -Gain
      on disposal of property and equipment
                  
                  
                  6,000
                  
                  
                  
                  1,562Lead
      sale revenue
                  
                  
                  103
                  
                  
                  
                  2,391Insurint
      revenue
                  
                  
                  53,130
                  
                  
                  
                  39,728Sub-lease
      revenue
                  
                  
                  257,951
                  
                  
                  
                  357,9271,395,731
                  
                  
                  
                  4,642,706Operating
      expenses:Salaries,
      commission and related taxes
                  
                  
                  167,388
                  
                  
                  
                  966,061Lead,
      advertising and other marketing
                  
                  
                  -
                  
                  
                  
                  121,954Depreciation
      and amortization
                  
                  
                  -
                  
                  
                  
                  162,661Rent,
      utilities, telephone and communications
                  
                  
                  (11,387
                  )
                  
                  
                  567,379Professional
      fees
                  
                  
                  86,211
                  
                  
                  
                  359,009Loss
      on impairment of property and equipment
                  
                  
                  -
                  
                  
                  
                  416,764Loss
      on impairment of intangible assets
                  
                  
                  -
                  
                  
                  
                  1,222,817Other
      general and administrative
                  
                  
                  122,364
                  
                  
                  
                  117,572364,576
                  
                  
                  
                  3,934,216Gain
      from discontinued operations
                  
                  $
                  1,031,155
                  
                  
                  $
                  708,489




Page 18


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March 31,
2010





NOTE 3 -
PROPERTY AND
EQUIPMENT





Property
and equipment consisted of the following:


UsefulLife
                  
                  
                  At March 31,
                  
                  
                  At December 31,(Years)
                  
                  
                  2010
                  
                  
                  2009Computer
      equipment and software
                  
                  
                  3
                  
                  
                  $
                  1,010,791
                  
                  
                  $
                  900,428Office
      equipment
                  
                  
                  4.6
                  
                  
                  
                  11,998
                  
                  
                  
                  194,360Office
      furniture and fixtures
                  
                  
                  6.7
                  
                  
                  
                  372,219
                  
                  
                  
                  189,857Leasehold
      improvements
                  
                  
                  9.8
                  
                  
                  
                  34,034
                  
                  
                  
                  34,0341,429,042
                  
                  
                  
                  1,318,679Less
      accumulated depreciation
                  
                  
                  
                  
                  
                  
                  (643,499
                  )
                  
                  
                  (550,495
                  )$
                  785,543
                  
                  
                  $
                  768,184





For the
three months ended March 31, 2010 and 2009, depreciation expense was $93,004 and
$72,513, respectively.




NOTE 4 –
INTANGIBLE
ASSETS





Intangible
assets consisted of the following:


UsefulLife
                  
                  
                  At March 31,
                  
                  
                  At December 31,(Years)
                  
                  
                  2010
                  
                  
                  2009Atiam intangible assets acquired
                  
                  
                  4.7
                  
                  
                  $
                  2,097,672
                  
                  
                  $
                  2,097,672Software
      development costs for external marketing
                  
                  
                  2
                  
                  
                  
                  174,296
                  
                  
                  
                  174,2962,271,968
                  
                  
                  
                  2,271,968Less:
      accumulated amortization
                  
                  
                  
                  
                  
                  
                  (1,322,710
                  )
                  
                  
                  (1,183,903
                  )$
                  949,258
                  
                  
                  $
                  1,088,065





For the
three months ended March 31, 2010 and 2009, amortization expense was $138,807
and $138,807 respectively.





Amortization
expense subsequent to the period ended March 31, 2010 is as
follows:





2010
                  
                  
                  342,4742011
                  
                  
                  346,7342012
                  
                  
                  260,050$
                  949,258


Page 19


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March 31,
2010





NOTE 5 –
SECURED NOTE FROM
RELATED PARTY





On
December 22, 2009, the Company and its subsidiaries entered into a Loan
Agreement (the “Loan Agreement”) and a $1,250,000 Secured Promissory Note (the
“Note”) with The Co-Investment Fund II, L.P.
(“Co-Investment”).  Co-Investment is the controlling stockholder of
the Company and a designee of Cross Atlantic Capital Partners, Inc., of which
Frederick C. Tecce, one of our directors, is a managing partner and of which
Donald Caldwell, also one of our directors and Chairman of our board of
directors, is Chairman and Chief Executive Officer.





Pursuant
to the terms of the Loan Agreement and the Note, Co-Investment extended the
principal sum of $1,250,000 (the “Loan”) to the Company and its subsidiaries
(collectively, the “Borrowers”).  Pursuant to the Note, the Borrowers
agreed to pay to the order of Co-Investment the outstanding principal amount of
the Note plus interest.  Interest will accrue on the unpaid principal
balance of the Note at an annual rate of 8%, except in the case of an event of
default as set forth in the Loan Agreement, in which case the rate of interest
will increase to 11% until such event of default is cured.  All
principal and accrued interest is due and payable on December 22, 2010.
 Co-Investment may accelerate payment of the Loan in the event of default
on the Loan as set forth in Loan Agreement.





Pursuant
to the Loan Agreement, the Borrowers are prohibited from, among other things:
(a) (i) entering into any merger, consolidation or reorganization with or
acquiring all or substantially all of the assets or equity interests of any
other entity, or (ii) selling, leasing, transferring or otherwise disposing of
their properties or assets except in the ordinary course of business; (b)
creating or suffering to exist any lien upon any of their property or assets,
except as permitted; (c) becoming liable upon the obligations or liabilities of
any person or entity; (d) purchasing or acquiring obligations or equity
interests of, or any other interest in any person or entity; (e) making
advances, loans or extensions of credit to any person or entity; (f) creating,
incurring, assuming or suffering to exist any indebtedness or (g) violating any
law, ordinance or regulation of any governmental entity.





The Note
is secured by a perfected first-priority security interest in substantially all
of the assets of the Borrowers, including all of the intellectual property
assets of the Borrowers, and 100% of the stock of the Company’s subsidiaries,
pursuant to the terms of a Security Agreement, Intellectual Property Security
Agreement and Pledge Agreement with Co-Investment, each of which were executed
by the Borrowers and Co-Investment on December 22, 2009, concurrent with the
execution of the Loan Agreement and the Note.





As of
March 31, 2010, the Company has recorded $27,397 of accrued interest on the
Secured Note from Related Party.





See Note
11 – Subsequent Events.





NOTE 6 –
RELATED PARTY
TRANSACTIONS





On
January 14, 2009, Co-Investment purchased 1,000,000 shares (each, a “Preferred
Share”) of the Company’s Preferred Stock, par value $0.001, and warrants to
purchase 1,000,000 shares of Preferred Stock, pursuant to the terms of the
Securities Purchase Agreement (the “2009 Purchase Agreement”) for a purchase
price of  $4,000,000 (the “2009 Private Placement”).


Page 20


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March 31,
2010





NOTE 6 –
RELATED PARTY
TRANSACTIONS (continued)





During
the first quarter of 2010, pursuant to the subscription rights offering
Co-Investment exercised 1,000 basic subscription rights for $1,000,000 and on
March 26, 2010, the Company issued to Co-Investment 250,000 shares of Preferred
Stock and five-year warrants to purchase in aggregate 5,000,000 shares of Common
Stock at an exercise price of $0.20 per share.  See Note 7 -
Shareholders’ Equity.  See Note 1 – Warrant Liability.





NOTE 7 –
SHAREHOLDERS’
EQUITY





Preferred
Stock





On
January 14, 2010 the Company filed a prospectus for a rights offering on form
S-1/A, which the Commission declared effective on January 22, 2010, to
distribute to shareholders at no charge, one non-transferable subscription right
for each 12,256 shares of our common stock and 613 shares of our preferred stock
owned as of January 1, 2010, the record date, either as a holder of record or,
in the case of shares held of record by brokers, dealers, custodian banks, or
other nominees on shareholders’ behalf, as a beneficial owner of such
shares.  This rights offering was designed to give all of the holders
of the Company’s common stock the opportunity to participate in an equity
investment in the Company on the same economic terms as the 2009 Private
Placement.





The basic
subscription right entitled the holder to purchase one unit (a “Subscription
Unit”) at a subscription price of $1,000. A Subscription Unit consisted of 250
shares of Preferred Stock and a five-year warrant to purchase 5,000 shares of
common stock at an exercise price of $0.20 per share.  In the event
that a holder of a Subscription Unit purchased all of the basic Subscription
Units available to the holder then pursuant to their basic subscription right,
the holder had the option to choose to subscribe for a portion of any
Subscription Units that were not purchased by all other holders of Subscription
Units through the exercise of their basic subscription rights.





Effective
with the expiration of the subscription rights, which occurred on March 26,
2010, holders of subscription rights exercised in aggregate 1,061 basic
subscription rights and 46 over-subscription rights for a total 1,107
Subscription Units.  As a result of the exercise of 1,107 Subscription
Units the Company received $1,107,000 in gross proceeds, and on March 26,
2010, issued in aggregate 276,750 shares of Preferred Stock and five-year
warrants to purchase in aggregate 5,535,000 shares of common stock at an
exercise price of $0.20 per share (“2010 Warrants”). Effective with the
expiration of the subscription rights all unexercised subscription rights
expired.  The Preferred Stock issued in 2010 have the same terms as
the Preferred Stock issued in 2009.





The
Company allocated $226,880 of the $1,107,000 proceeds received as a result of
the exercise of Subscription Units to the warrant liability using a
Black-Scholes option pricing model with the following
assumptions:  expected volatility of 345%, a risk-free interest rate
of 0.14%, an expected term of 5 years and 0% dividend
yield.   See Note 1 – Warrant Liability.  The remaining
$880,120 of the proceeds received was allocated to the Preferred Shares issued
in 2010.


Page 21


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March 31,
2010





NOTE 7 –
SHAREHOLDERS’ EQUITY
(continued)





Stock
Options





On March
25, 2010 the Company issued to Mr. James Rourke, who is InsPro Technologies’
Senior Vice President of Sales and Marketing, a stock option grant to purchase a
total of 250,000 shares of the Company’s common stock, which vests as follows:
50,000 shares of common stock on each of July 31, 2010, January 31, 2011, July
31, 2011, January 31, 2012 and July 31, 2012. This option has a five year term
and an exercise price of $0.06, which is equal to closing price of one share of
the Company’s common stock as quoted on the OTCBB on March 25,
2010.





During
2010, 550,000 options previously granted to Mr. Alvin Clemens, who is the
former Co-Chairman of the Company’s Board, were forfeited as a result of Mr.
Clemens resignation from the Board in accordance with the terms of the stock
options.





The
Company recorded compensation expense pertaining to director and employee stock
options and restricted and unrestricted stock grants as follows:


For the three months ended March 31,2010
                      
                      
                      2009Selling,
      marketing and administrative expensesSalaries,
      commission and related taxes
                      
                      $
                      3,000
                      
                      
                      $
                      247,484Loss
      from discontinued operations
                      
                      
                      -
                      
                      
                      
                      37,453$
                      3,000
                      
                      
                      $
                      284,937


Page 22


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March 31,
2010





NOTE 7 –
SHAREHOLDERS’ EQUITY
(continued)





A summary
of the Company's outstanding stock options as of and for the three months ended
March 31, 2010 are as follows:





Number
                        
                        
                        WeightedOf Shares
                        
                        
                        Average
                        
                        
                        WeightedUnderlying
                        
                        
                        Exercise
                        
                        
                        AverageOptions
                        
                        
                        Price
                        
                        
                        Fair ValueOutstanding
      at December 31, 2009
                        
                        
                        5,676,648
                        
                        
                        $
                        1.01
                        
                        
                        $
                        0.57For
      the three months ended March 31, 2010Granted
                        
                        
                        250,000
                        
                        
                        
                        0.06
                        
                        
                        
                        0.06Exercised
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Forfeited
                        
                        
                        (550,000
                        )
                        
                        
                        1.01
                        
                        
                        
                        0.57Outstanding
      at March 31, 2010
                        
                        
                        5,376,648
                        
                        
                        $
                        0.97
                        
                        
                        $
                        0.55Outstanding
      and exercisable at March 31, 2010
                        
                        
                        4,876,648
                        
                        
                        $
                        1.13
                        
                        
                        $
                        0.60




The
weighted average fair value of option grants are estimated as of the date of
grant using the Black-Scholes option-pricing model based on the following
assumptions for options granted during the three months ended March 31, 2010:
Expected volatility 345%, risk-free interest rate 0.14%, expected life in years
5, and assumed dividend yield 0%.





The
following information applies to options outstanding at March 31,
2010:




Options Outstanding
                            
                            
                            Options ExercisableWeightedAverageRemainingExercise
                            
                            
                            Number of Shares
                            
                            
                            Contractual
                            
                            
                            Exercise
                            
                            
                            
                            
                            
                            ExercisePrice
                            
                            
                            Underlying Options
                            
                            
                            Life
                            
                            
                            Price
                            
                            
                            Number Exercisable
                            
                            
                            Price$
                            0.06
                            
                            
                            
                            405,000
                            
                            
                            
                            4.6
                            
                            
                            $
                            0.06
                            
                            
                            
                            155,000
                            
                            
                            $
                            0.060.10
                            
                            
                            
                            2,220,000
                            
                            
                            
                            3.9
                            
                            
                            
                            0.10
                            
                            
                            
                            1,970,000
                            
                            
                            
                            0.100.24
                            
                            
                            
                            15,000
                            
                            
                            
                            3.6
                            
                            
                            
                            0.24
                            
                            
                            
                            15,000
                            
                            
                            
                            0.241.00
                            
                            
                            
                            1,300,000
                            
                            
                            
                            4.5
                            
                            
                            
                            1.00
                            
                            
                            
                            1,300,000
                            
                            
                            
                            1.002.50
                            
                            
                            
                            421,648
                            
                            
                            
                            5.6
                            
                            
                            
                            2.50
                            
                            
                            
                            421,648
                            
                            
                            
                            2.502.62
                            
                            
                            
                            20,000
                            
                            
                            
                            1.7
                            
                            
                            
                            2.62
                            
                            
                            
                            20,000
                            
                            
                            
                            2.622.70
                            
                            
                            
                            475,000
                            
                            
                            
                            1.1
                            
                            
                            
                            2.70
                            
                            
                            
                            475,000
                            
                            
                            
                            2.702.95
                            
                            
                            
                            45,000
                            
                            
                            
                            1.1
                            
                            
                            
                            2.95
                            
                            
                            
                            45,000
                            
                            
                            
                            2.953.50
                            
                            
                            
                            75,000
                            
                            
                            
                            6.0
                            
                            
                            
                            3.50
                            
                            
                            
                            75,000
                            
                            
                            
                            3.503.60
                            
                            
                            
                            400,000
                            
                            
                            
                            1.1
                            
                            
                            
                            3.60
                            
                            
                            
                            400,000
                            
                            
                            
                            3.605,376,648
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            4,876,648


Page 23


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March 31,
2010





NOTE 7 –
SHAREHOLDERS’ EQUITY
(continued)





As of
March 31, 2010, there were 7,000,000 shares of our common stock authorized to be
issued under the Company’s 2008 Equity Compensation Plan, of which 620,332
shares of our common stock remain available for future stock option
grants.





The total
intrinsic value of stock options granted during 2010 and 2009 was $0 and $0,
respectively.  The total intrinsic value of stock options outstanding and
exercisable as of March 31, 2010 was $0.





The value
of equity compensation expense not yet expensed pertaining to unvested equity
compensation was $34,292 as of March 31, 2010, which will be recognized over a
weighted average 4.9 years in the future.





Common Stock
warrants





On March
26, 2010 the Company issued the 2010 Warrants to purchase in aggregate 5,535,000
shares of common stock at an exercise price of $0.20 per share for a period of 5
years.  The 2010 Warrants also include full ratchet anti-dilution
adjustment provisions for issuances of securities below $0.20 per share of
common stock during the first two years following the date of issuance of the
2010 Warrants, subject to customary exceptions.





Upon the
Company’s adoption of EITF No. 07-05, the Company determined the 2010
Warrants did not qualify for a scope exception under SFAS No. 133 as they
were determined not to be indexed to the Company’s stock as prescribed by EITF
No. 07-05. See Note 1 - Warrant Liability.





On March
30, 2010, warrants to purchase 350,000 shares of the Company’s common stock at
an exercise price of $2.80 per share expired in accordance with the terms of the
warrants.





On March
31, 2010, the full ratchet anti-dilution adjustment provisions pertaining to
warrants issued on March 31, 2008, expired.


Page 24




HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March 31,
2010




NOTE 7 –
SHAREHOLDERS’ EQUITY
(continued)





A summary
of the status of the Company's outstanding stock warrants as of and for the
three months ended March 31, 2010 are as follows:





WeightedCommon
                  
                  
                  AverageStock
                  
                  
                  ExerciseWarrants
                  
                  
                  PriceOutstanding
      at December 31, 2009
                  
                  
                  51,566,887
                  
                  
                  $
                  0.38For
      the period ended March 31, 2010Granted
                  
                  
                  5,535,000
                  
                  
                  
                  0.20Exercised
                  
                  
                  -
                  
                  
                  
                  -Expired
                  
                  
                  (350,000
                  )
                  
                  
                  2.80Outstanding
      at March 31, 2010
                  
                  
                  56,751,887
                  
                  
                  
                  0.34Exercisable
      at March 31, 2010
                  
                  
                  56,751,887
                  
                  
                  $
                  0.34





The
following information applies to warrants outstanding at March 31,
2010:





CommonYear
      of
                  
                  Stock
                  
                  
                  ExerciseExpiration
                  
                  Warrants
                  
                  
                  Price2010
                  
                  
                  75,000
                  
                  
                  $
                  1.502011
                  
                  
                  1,175,000
                  
                  
                  
                  1.502012
                  
                  
                  4,966,887
                  
                  
                  
                  1.512013
                  
                  
                  25,000,000
                  
                  
                  
                  0.202014
                  
                  
                  20,000,000
                  
                  
                  
                  0.202015
                  
                  
                  5,535,000
                  
                  
                  $
                  0.2056,751,887





Outstanding
warrants at March 31, 2010 have a weighted average remaining contractual life of
3.3 years.


Page 25


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES
 NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2010




NOTE 8 –
CAPITAL LEASE
OBLIGATIONS





The
Company’s InsPro Technologies subsidiary has entered into several capital lease
obligations to purchase equipment used for operations. The Company has the
option to purchase the equipment at the end of the lease agreement for one
dollar. The underlying assets and related depreciation were included in the
appropriate fixed asset category, and related depreciation account.





Property
and equipment includes the following amounts for leases that have been
capitalized as of March 31, 2010 and December 31, 2009:





December
      31,March
      31, 2010
                      
                      
                      2009Useful
      Life (Years)Computer
      equipment and software
                      
                      3
                      
                      
                      $
                      540,314
                      
                      
                      $
                      483,129Phone
      System
                      
                      3
                      
                      
                      
                      15,011
                      
                      
                      
                      15,011555,325
                      
                      
                      
                      498,141Less
      accumulated depreciation
                      
                      
                      
                      
                      
                      (265,235
                      )
                      
                      
                      (222,134
                      )$
                      290,090
                      
                      
                      $
                      276,006





Future
minimum payments required under capital leases at March 31, 2010 are as
follows:





2010
                  
                  $
                  139,8102011
                  
                  
                  180,5962012
                  
                  
                  100,0212013
                  
                  
                  36,7472014
                  
                  
                  30,0842015
                  
                  
                  12,535Total
      future payments
                  
                  
                  499,793Less
      amount representing interest
                  
                  
                  61,030Present
      value of future minimum payments
                  
                  
                  438,763Less
      current portion
                  
                  
                  161,847Long-term
      portion
                  
                  $
                  276,916





NOTE 9 –
DEFINED CONTRIBUTION
401(k) PLAN





The
Company implemented a 401(k) plan on January 1, 2007.  Eligible
employees contribute to the 401(k) plan. Employees become eligible after
attaining age 19 and after 6 months of employment with the
Company.  The employee may become a participant of the 401(k) plan on
the first day of the month following the completion of the eligibility
requirements.  Effective January 1, 2007 the Company implemented an
elective contribution to the plan of 25% of the employee’s contribution up to 4%
of the employee’s contribution (the “Contribution”).  The
Contributions are subject to a vesting schedule and become fully vested after
one year of service, retirement, death or disability, whichever occurs
first.  The Company made contributions of $10,024 and $11,909 for the
three months ended March 31, 2010 and 2009.


Page 26




HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March 31,
2010




NOTE 10 –
RESTRICTED CASH,
COMMITMENTS AND CONTINGENCIES





Restricted Cash and
Operating Leases





On
February 17, 2006, the Company entered into a lease agreement with FG2200, LLC,
a Florida limited liability company, for approximately 50,000 square feet of
office space at 2200 S.W. 10th Street, Deerfield Beach, Florida (the "Lease").
The initial term of the Lease commences on March 15, 2006 and terminates on
March 31, 2016. The Company has the option to extend the term for two additional
36-month periods. The Company has a one time option to cancel the Lease
effective March 31, 2011 provided the Company; (a) is not in default of the
Lease, (b) no part of the Deerfield Beach office is sub-let beyond March 31,
2011, (c) the Company and its sub-tenants vacate the Deerfield Beach office on
or before March 31, 2011 and (d) the Company gives written notice to FG2200, LLC
on or before June 30, 2010 accompanied with a payment FG2200, LLC the sum of 9
months’ rent pursuant to the lease agreement.  The monthly rent
increases every 12 months, starting at $62,500 plus certain building expenses
incurred by the landlord and ending at approximately $81,550 plus certain
building expenses incurred by the landlord. In connection with the Lease, the
Company provided a $1 million letter of credit to the landlord as a security
deposit for the Company's obligations under the Lease.





On
February 21, 2008 the Company entered into a sub-lease agreement with a third
party whereby the third party sub-leased approximately 5,200 square feet of our
Deerfield Beach office space beginning March 1, 2008 through February 28,
2009.  This sub-lease agreement was amended and restated on October 3,
2008 to increase the sub-leased square footage to 13,900 and extend the lease
term through January 31, 2010 and was then amended whereby effective March 1,
2010 the sub-leased square footage was decreased to 8,700 and the lease term was
extended through February 28, 2011.  See Note 11 – Subsequent
Events.





On
October 1, 2008 the Company entered into a sub-lease agreement with a third
party whereby the third party sub-leased approximately 8,000 square feet of our
Deerfield Beach office space beginning October 15, 2008 through January 31,
2010.  In accordance with this sub-lease agreement the Company
recognizes base rent, additional rent representing a portion of certain actual
occupancy expenses for our Deerfield Beach office and certain telephony,
technology and facility services provided to our
sub-tenant.  Effective July 1, 2009 the Company and the third party
entered into a new sub-lease whereby the third party increased the space
sub-leased to 29,952 square feet of our Deerfield Beach office
space.  Effective March 1, 2010 the Company and the third party
amended the new sub-lease increase the space sub-leased to 35,152 square feet of
our Deerfield Beach office space.





Effective
June 30, 2009, the Company uses 5,094 square feet of the approximate 50,000
square feet of the Deerfield Beach office for operations.  Effective
March 31, 2010, the Company has accrued $1,569,814 related to the non-cancelable
lease for the abandoned portion of the Deerfield Beach office, which is the net
present value of the Company’s future lease payments through March 31, 2011 and
consideration for early termination due under Lease plus management’s estimate
of contractually required expenses pertaining to the Deerfield Beach office,
which are estimated to be $2,536,602, less future sub-lease revenue, which is
estimated to be $965,864.


Page 27




HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March 31,
2010




NOTE 10– RESTRICTED CASH,
COMMITMENTS AND CONTINGENCIES (continued)





On July
7, 2006, the Company entered into a lease agreement with Radnor Properties-SDC,
L.P. (the “Landlord”) for the lease of 7,414 square feet of office space located
in Radnor Financial Center, Building B, 150 Radnor-Chester Road, Radnor,
Pennsylvania.  The term of the lease commenced on November 1, 2006,
which was the date the Company, with the Landlord’s prior consent, assumed
possession of the premises and the date the Landlord tendered possession of the
premises to the Company following the substantial completion of the improvements
required to be made by the Landlord under the lease agreement, and will expire
on the last day of the 125th month
following the commencement of the lease term. The annual rent increases every
12 months, starting at approximately $161,592 plus a proportionate share of
landlord’s building expenses after the second month and ending at approximately
$258,378 plus a proportionate share of landlord’s building expenses. Under the
terms of the lease agreement, rent is waived for the first five months of the
lease term with respect to 5,238 square feet and for the first twelve months for
the remaining 2,176 square feet.  The Company recorded a liability for
deferred rent in the amount of $133,951 as of March 31, 2010.





The
Company paid to the Landlord a security deposit of $110,000 under the lease (the
“Security Deposit”) during the third quarter of 2006 and the Landlord returned
$10,000 of the Security Deposit during the first quarter of 2010 in accordance
with the terms of the lease, which is accounted for as a deposit in other
assets.  The Company will not earn interest on the Security
Deposit.  The Security Deposit will decrease and the Landlord will
return to the Company $10,000 on the third anniversary of the commencement date
of the lease and on each anniversary thereafter until the required Security
Deposit has been reduced to $20,000.  The Security Deposit will be
returned to the Company 30 days after the end of the lease provided the Company
has complied with all provisions of the lease.





Effective
during the first quarter of 2007, the letters of credit pertaining to the lease
for our Florida office and our New York office were collateralized in the form
of a money market account.  Effective February 12, 2009 the money
market account, which collateralized the letter of credit pertaining to our New
York Office, was transferred into a certificate of deposit
(“CD”).  These bank deposits are on deposit with the issuer of the
letters of credit and are classified as restricted cash on the Company’s balance
sheet, which as of March 31, 2010 and December 31, 2009 had balances of
$1,154,631 and $1,154,044, respectively.   The terms of the money
market account allow the Company to receive interest on the principal but
prohibits the Company from withdrawing the principal for the life of the
Deerfield Beach letter of credit. The terms of the CD allow the Company to
receive interest upon the maturity of the CD, which matures on March 12,
2011.  The Company is prohibited from withdrawing the interest on the
CD until the March 12, 2011 maturity of the CD and the CD’s principal for the
life of the New York letter of credit.


Page 28




HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES
 NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 March 31,
2010




NOTE 10– RESTRICTED CASH,
COMMITMENTS AND CONTINGENCIES (continued)





On March
7, 2006, the Company entered into a sublease for approximately 13,773 square
feet of office space located on the 7th floor at 1120 Avenue of the Americas,
New York, New York (the “Sublease Agreement”). The initial term of the Sublease
Agreement commences in March 2006, and terminates on December 31, 2010. The
monthly rent increases every 12 months, starting at approximately $303,000 per
annum plus a proportionate share of landlord’s building expenses and ending at
approximately $341,000 per annum plus a proportionate share of landlord’s
building expenses. In connection with the Sublease Agreement, the Company
provided a $151,503 letter of credit to the landlord as a security deposit for
the Company’s obligations under the sublease. On May 15, 2006 the Company
received the landlord's consent, dated April 18, 2006, to the Sublease
Agreement. In March 2008, the Company closed its sales office located in New
York. Effective March 31, 2010, the Company has accrued $283,212 related to the
non-cancelable lease for the abandoned New York facility, which is net present
value of the Company’s future lease payments due under the remaining Sublease
Agreement term plus management’s estimate of utility payments net of $17,500 of
sub-lease rental revenue.





The
Company leases certain real and personal property under non-cancelable operating
leases.  Rent expense was $311,794 and $475,121 for the
three months ended March 31, 2010 and 2009, respectively.





Litigation





On August
28, 2008, one of our former employees, the plaintiff, filed a national class
action complaint in the Seventeenth Judicial Circuit of Florida, Broward County,
case no. 062008 CA 042798 XXX CE, alleging that we breached a contract with
employees by failing to provide certain commissions and/or bonuses. The
complaint also contained claims for an accounting and for declaratory relief
relating to the alleged compensation agreement.  The plaintiff purported to
bring these claims on behalf of a class of current and former insurance sales
agents.  We filed a motion to dismiss the complaint.  In response, at
the hearing on our Motion to Dismiss, the plaintiff stated that he would amend
the complaint.  The amended complaint was no longer pled as a class action
but, instead, included 64 named plaintiffs. On April 21, 2010, the Company and
the plaintiffs entered into a memorandum of understanding whereby the Company
agreed to pay $23,500 to settle the case, and the Company and the plaintiffs
agreed to: stay all discovery, mutual releases, no admission of wrongdoing, no
further litigation, confidentiality by the plaintiffs, and non disparagement by
the plaintiffs.  The Company and the plaintiffs agreed to enter into
definitive settlement agreement as soon as practical.





On March
24, 2009, certain of our stockholders filed an action in the Supreme Court of
the State of New York, County of New York, Index No. 650174/2009, against us,
our board of directors, two of our investors and the investors’ affiliates
relating to alleged offers we purportedly received in 2008 and a private
placement transaction conducted in January 2009. The plaintiffs alleged that the
members of our board of directors breached their fiduciary duties in responding
to the offers received in 2008 and in connection with the private placement
transaction conducted in January 2009. The complaint also contained claims for
unjust enrichment against certain directors whom plaintiffs claim are
“interested” and claims for aiding and abetting breach of fiduciary duty and
unjust enrichment against our stockholder, Cross Atlantic Capital Partners,
Inc., and its affiliates. The plaintiffs sought to rescind and cancel the
private placement, enjoin the board of directors from undertaking certain
measures and remove certain directors from the board. The plaintiffs also sought
money judgments in an amount not less than $10,000,000, plus interest,
attorneys’ fees, and accounts and experts’ fees. On May 29, 2009, the defendants
moved to dismiss the complaint. The motion was granted on August 13, 2009 on
forum non conveniens grounds. On August 14, 2009, a writ of summons was filed in
the Court of Common Pleas, Philadelphia County No. 090801764 against us, our
board of directors, two of our investors and the investors’ affiliates by the
same stockholders who brought the New York action and seven additional
stockholders.


Page 29




HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March 31,
2010




NOTE 10– RESTRICTED CASH,
COMMITMENTS AND CONTINGENCIES (continued)





On
October 27, 2009 we entered into an agreement with the stockholders who brought
the New York action in which they agreed to withdraw from the Philadelphia
litigation and provided a general release of all claims against us, our board of
directors and the other defendants. These stockholders discontinued their claims
against the defendants in the writ of summons filed in August.  The
terms of this settlement agreement required Co-Investment Fund to purchase all
of the shares of common stock held by the settling plaintiffs (which amounted to
6,108,997 shares).




On
December 21, 2009, five of the remaining shareholders who filed the writ of
summons discontinued their claims against the defendants named in the writ of
summons.  Also on December 21, 2009, Alvin Clemens, a former officer and
director of our company, Robert Kaul and Arthur Nagel (both of whom are
shareholders of our company) filed a complaint in the Philadelphia action. The
complaint brought claims for breach of fiduciary duty against the members of our
board of directors for their alleged actions in responding to the offers
received in 2008 and in connection with the private placement transaction
conducted in January 2009. The complaint also contained claims for aiding and
abetting the alleged breach of fiduciary duty and unjust enrichment against our
stockholder, Cross Atlantic Capital Partners, Inc., and its affiliates. The
plaintiffs sought to rescind and cancel the private placement, enjoin the board
of directors from undertaking certain measures and remove certain directors from
the board. The plaintiffs also sought money judgment against our board members
in an amount in excess of $50,000 and against Cross Atlantic and its affiliates
in an amount in excess of $10,000,000, plus interest, attorneys’ fees, and
accounts and experts’ fees.  Defendants filed preliminary objections
to the complaint on January 11, 2010, arguing that the claims should be
dismissed and/or venue should be in Delaware County and not in Philadelphia
County.  Plaintiffs filed an amended complaint on February 1, 2010 but then
discontinued and ended their complaint on February 22, 2010.





NOTE 11 –
SUBSEQUENT
EVENTS




Management
evaluated the effects of all subsequent events through May 17,
2010.  Management’s evaluation has identified the matters noted below
which require disclosure as significant events subsequent to March 31,
2010.





Modification of Secured Note
from Related Party





On April
13, 2010 the Company and Co-Investment agreed to modify the terms of the Loan
Agreement and the Note such that; i) the $1,250,000 Loan can be increased upon
demand by the Board of Directors of Parent (with 10 days written notice) by an
additional amount of up to $1,000,000 under the same terms and conditions as in
the Loan Agreement and Note, and ii) the date the Loan and accrued interest will
be due and payable was changed from December 22, 2010 to July 1,
2011.





Amendment to Sub-lease
Agreement





On April
30, 2010, the Company and a third party amended an amended and restated
sub-lease agreement, which was effective October 3, 2008, whereby the sub-lease
agreement was extended to February 28, 2011.


Page 30


SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS




Certain
of the statements contained in this Quarterly Report on Form 10-Q, including in
the “Management’s Discussion and Analysis or Plan of Operation (“MD&A”) and
elsewhere in this report are “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). These
statements are based on management’s current expectations and are subject to
uncertainty and changes in circumstances. Actual results may vary materially
from the expectations contained in the forward-looking statements. The
forward-looking statements herein include, among others, statements addressing
management’s views with respect to future financial and operating results and
costs associated with the Company’s operations and other similar statements.
Various factors, including competitive pressures, market interest rates, changes
in insurance carrier mix, regulatory changes, customer and insurance carrier
defaults or insolvencies, acquisition of businesses that do not perform as we
expect or that are difficult for us to integrate or control, adverse resolution
of any contract or other disputes with customers and insurance carriers, or the
loss of one or more key insurance carrier relationships, could cause actual
outcomes and results to differ materially from those described in
forward-looking statements.





The words
“may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,”
“continue” and similar expressions may identify forward-looking statements, but
the absence of these words does not necessarily mean that a statement is not
forward-looking. While we believe that we have a reasonable basis for each
forward-looking statement contained in this Quarterly Report on Form 10-Q, we
caution you that these statements are based on a combination of facts and
factors currently known by us and projections of the future about which we
cannot be certain. Many factors, including general business and economic
conditions and the risks and uncertainties described in the “Risk Factors”
section of our Annual Report on Form 10-K for the fiscal year ended December 31,
2009, affect our ability to achieve our objectives. As a result of these
factors, we cannot assure you that the forward-looking statements in this
Quarterly Report on Form 10-Q will prove to be accurate. In addition, if our
forward-looking statements prove to be inaccurate, the inaccuracy may be
material. In light of the significant uncertainties in these forward-looking
statements, you should not regard these statements as a representation or
warranty by us or any other person that we will achieve our objectives and plans
in any specified time frame, if at all. We may not update these forward-looking
statements, even though our situation may change in the future.





We
qualify all the forward-looking statements contained in this Form 10-Q by
the foregoing cautionary statements.


Page 31


Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations




Overview





The current operations of Health
Benefits Direct Corporation (the “Company”, “we”, “us” or “our”) consist of our
InsPro Technologies, LLC subsidiary (“InsPro Technologies”).





InsPro
is a comprehensive, web-based insurance administration software application.
InsPro was introduced by Atiam Technologies, L.P. (now our InsPro Technologies,
LLC subsidiary) in 2004. InsPro clients include health insurance carriers and
third party administrators. Unlike our Insurint platform, we market InsPro as a
licensed software application, and we realize revenue from the sale of the
software licenses, application service provider fees, software maintenance fees
and Professional services.





Critical
Accounting Policies





Financial Reporting Release No. 60,
which was released by the Securities and Exchange Commission (the “Commission”),
encourages all companies to include a discussion of critical accounting policies
or methods used in the preparation of financial statements. Our consolidated
financial statements include a summary of the significant accounting policies
and methods used in the preparation of the consolidated financial statements.
Management believes the following critical accounting policies affect the
significant judgments and estimates used in the preparation of the consolidated
financial statements.





Use of Estimates - Management's
Discussion and Analysis or Plan of Operation is based upon the Company’s
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these consolidated financial statements requires our management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, management evaluates these estimates,
including those related to allowances for doubtful accounts receivable and
long-lived assets such as intangible assets. Management bases these estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis of
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Significant estimates in 2010 and 2009
include the allowance for doubtful accounts, stock-based compensation, the
useful lives of property and equipment and intangible assets, accrued expenses
pertaining to abandoned facilities, warrant liability and revenue
recognition.  Actual results may differ from these estimates under
different assumptions or conditions.





InsPro Technologies offers InsPro on a
licensed and an application service provider (“ASP”) basis.  An InsPro
software license entitles the purchaser a perpetual license to a copy of the
InsPro software installed at a single client location, which may be used to
drive a production and model office instance of the application.  The
ASP Hosting Service enables a client to lease the InsPro software, paying only
for that capacity required to support their business.  ASP clients
access an instance of InsPro installed on InsPro Technologies’ servers located
at InsPro Technologies’ offices or at a third party’s site.





Software maintenance fees apply to both
licensed and ASP clients.  Maintenance fees cover periodic updates to
the application and the InsPro Help Desk.





Professional services are generally
associated with the implementation of an InsPro instance for either an ASP or
licensed client, and cover such activity as InsPro installation, configuration,
modification of InsPro functionality, client insurance plan set-up, client
insurance document design, and system documentation.


Page 32




InsPro
Technologies revenue is generally recognized under ASC
985-605.   For software arrangements involving multiple elements,
we allocate revenue to each element based on the relative fair value or the
residual method, as applicable using vendor specific objective evidence to
determine fair value, which is based on prices charged when the element is sold
separately. Software revenue accounted for under ASC 985-605 is recognized when
persuasive evidence of an arrangement exists, the software is delivered in
accordance with all terms and conditions of the customer contracts, the fee is
fixed or determinable and collectibility is probable.  Revenue related
to post-contract customer support (“PCS”), including technical support and
unspecified when-and-if available software upgrades, is recognized ratably over
the PCS term.   Under ASC 985-605, if fair value does not exist
for any undelivered element, revenue is not recognized until the earlier of
(i) delivery of such element or (ii) when fair value of the
undelivered element is established, unless the undelivered element is a service,
in which case revenue is recognized as the service is performed once the service
is the only undelivered element.





We recognize revenues from software
license agreements when persuasive evidence of an agreement exists, delivery of
the software has occurred, the fee is fixed or determinable, and collectibility
is probable.  We consider fees relating to arrangements with payment
terms extending beyond one year to not be fixed or determinable and revenue for
these arrangements is recognized as payments become due from the
customer.  In software arrangements that include more than one InsPro
module, we allocate the total arrangement fee among the modules based on the
relative fair value of each of the modules.





License revenue allocated to software
products generally is recognized upon delivery of the products or deferred and
recognized in future periods to the extent that an arrangement includes one or
more elements to be delivered at a future date and for which fair values have
not been established.  Revenue allocated to maintenance agreements is
recognized ratably over the maintenance term and revenue allocated to training
and other service elements is recognized as the services are
performed.





The unearned portion of InsPro
Technologies’ revenue, which is revenue collected or billed but not yet
recognized as earned, has been included in the consolidated balance sheet as a
liability for deferred revenue.





We review the carrying value of
property and equipment and intangible assets for impairment at least annually or
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of long-lived assets is measured
by comparison of its carrying amount to the undiscounted cash flows that the
asset or asset group is expected to generate. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the property, if any, exceeds its fair market
value.


Page 33


RESULTS
OF OPERATIONS FOR THREE MONTHS ENDED MARCH 31, 2010 COMPARED TO THE THREE MONTHS
ENDED MARCH 31, 2009





Revenues





For the
three months ended March 31, 2010 (“First Quarter 2010”), we earned revenues of
$1,249,635 compared to $1,682,711 for the three months ended March 31, 2009
(“First Quarter 2009”), an decrease of $433,076 or 26%.  The decrease
in professional services is attributable to a decrease in work modification
enhancements and data conversion required for existing
clients.  Revenues include the following:




For the Three Months Ended March
      31,2010
                  
                  
                  2009Professional
      services
                  
                  $
                  555,890
                  
                  
                  $
                  1,183,358ASP
      revenue
                  
                  
                  359,745
                  
                  
                  
                  351,853Sales
      of software licenses
                  
                  
                  125,000
                  
                  
                  
                  -Maintenance
      revenue
                  
                  
                  200,000
                  
                  
                  
                  144,500Sub-leasing
      revenue
                  
                  
                  9,000
                  
                  
                  
                  3,000Total
                  
                  $
                  1,249,635
                  
                  
                  $
                  1,682,711





·
            Professional
      services revenue declined $627,468 or 53% as a result of lower post
      implementation services, which were provided by InsPro Technologies in
      First Quarter 2009 to one of our largest clients.  In First
      Quarter 2010 we earned professional services from seven InsPro
      clients.  Implementation services provided to these clients
      included assisting clients in setting up their insurance products in
      InsPro, providing modifications to InsPro’s functionality to support the
      client’s business, interfacing InsPro with the client’s other systems,
      automation of client correspondence to their customers and data conversion
      from the client’s existing systems to
InsPro.




·
            In
      First Quarter 2010 we earned ASP revenue from six InsPro clients. ASP
      hosting service enables a client to lease the InsPro software, paying only
      for that capacity required to support their business.  InsPro’s
      ASP clients access InsPro installed on InsPro Technologies’ owned servers
      located at InsPro Technologies’ offices or at a third party’s
      site.




·
            In
      First Quarter 2010 we earned license fee revenue upon the completion of
      the implementation of InsPro for a
client.




·
            Maintenance
      revenue increased $55,500 or 38% as a result of the addition of two
      maintenance contracts compared to First Quarter 2009.  In First
      Quarter 2010 we earned maintenance revenues from six
    clients.


Page 34


·
            In
      First Quarter 2010 and First Quarter of 2009 we earned sub-leasing revenue
      from the sub leasing of space in our Radnor office.  The
      subleasing commenced in March 2009 and ended in March
  2010.





Cost
of Revenues





Cost of
revenues is incurred by InsPro Technologies to offer InsPro on a licensed and
ASP basis, and to provide professional services together with help desk and
other customer support.  Cost of revenues includes direct labor and
associated costs for employees and independent contractors performing InsPro
design, development, implementation, testing together with customer management,
training and technical support, as well as facilities, equipment and software
costs.





Our cost
of revenues for First Quarter 2010 was $1,758,408 as compared to $1,517,482 for
First Quarter 2009 for an increase of $240,926 or 16% as compared to First
Quarter 2009. Cost of revenues consisted of the following:





For the Three Months Ended March
      31,2010
                      
                      
                      2009Salaries,
      employee benefits and related taxes
                      
                      $
                      987,402
                      
                      
                      $
                      874,260Professional
      fees
                      
                      
                      504,518
                      
                      
                      
                      446,637Rent,
      utilities, telephone and communications
                      
                      
                      75,516
                      
                      
                      
                      55,825Other
      cost of revenues
                      
                      
                      190,972
                      
                      
                      
                      140,760$
                      1,758,408
                      
                      
                      $
                      1,517,482





·
            Our
      salaries, employee benefits and related taxes component of cost of
      revenues in First Quarter 2010 was $987,402 as compared to $874,260 for
      First Quarter 2009 for an increase of $113,142 or 13% as compared to First
      Quarter 2009.  Salaries, employee benefits and related taxes
      increased as a result of increased employee staffing.  InsPro
      Technologies had 32 employees as of March 31, 2010 dedicated to InsPro
      design, development, implementation, and testing together with customer
      management, training and technical support as compared to 27 employees as
      of March 31, 2009.  Subsequent to First Quarter 2009, InsPro
      Technologies strengthened its management by hiring a COO in the fourth
      quarter of 2009 and hiring staff in quality assurance, customer
      implementation and business development
areas.




·
            Our
      professional fees component of cost of revenues in First Quarter 2010 was
      $504,518 as compared to $446,637 for First Quarter 2009 for an increase of
      $57,881 or 13% as compared to First Quarter 2009. Professional fees
      increased as a result of $167,571 of training and set up expense incurred,
      which pertains to a new vendor, who will provide InsPro Technologies
      with offshore outsourcing capabilities, which we believe will provide us
      with cost effective and scalable technology resources in the
      future.  This increase was partially offset by reduced
      utilization of other independent
contractors.




·
            Our
      rent, utilities, telephone and communications component of cost of
      revenues in First Quarter 2010 was $75,516 as compared to $55,825 for
      First Quarter 2009 for an increase of $19,691 or 35% as compared to First
      Quarter 2009.  Rent, utilities, telephone and communications
      increased as a result of InsPro Technologies’ increasing the amount of
      leased space at its Eddystone office during 2009 and to a lesser extent
      increased telephone and communication
costs.


Page 35


·
            Our
      other cost of revenues component of cost of revenues in First Quarter 2010
      was $190,972 as compared to $140,760 in First Quarter 2009, an increase of
      $50,212 or 36%.  Other cost of revenues consisted of the
      following:




For the Three Months Ended March
      31,2010
                        
                        
                        2009Office
      expenses
                        
                        $
                        859
                        
                        
                        $
                        4,695Travel
      and entertainment
                        
                        
                        44,477
                        
                        
                        
                        16,768Computer
      processing, hardware and software
                        
                        
                        144,611
                        
                        
                        
                        118,922Other
                        
                        
                        1,025
                        
                        
                        
                        375Total
                        
                        $
                        190,972
                        
                        
                        $
                        140,760





o
            Our
      travel and entertainment component of cost of revenues in First Quarter
      2010 was $44,477 as compared to $16,768 in First Quarter 2009, an increase
      of $27,709 or 165%.  The increase was the result of increased
      travel pertaining to post implementation support, which was provided to a
      client whose InsPro licensed application was implemented in First Quarter
      2010.  We incur travel and entertainment expense in connection
      with customer relationship management, and implementation of InsPro at
      client locations.




o
            Our
      computer processing, hardware and software component of cost of revenues
      in First Quarter 2010 was $144,611 as compared to $118,922 in First
      Quarter 2009, an increase of $25,689 or 22%.  We incur computer
      processing, hardware and software fees associated with ASP hosting
      services and these services increased due to incremental services and
      expense associated with a new InsPro client.  InsPro has a
      hosting services contract with a third party, which can be terminated with
      notice and payment of a termination fee.  This third party
      provides InsPro Technologies with hosting services for our client’s ASP
      production and test environments.




Gross
Profit





As a
result of the aforementioned factors, we reported a gross loss of $508,773 in
First Quarter 2010 as compared to a gross profit of $165,229 in First Quarter
2009.


Page 36


Selling,
Marketing and Administrative Expenses





Our
selling, marketing and administrative expenses for First Quarter 2010 was
$1,451,517 as compared to $2,119,047 for First Quarter 2009 for a decrease of
$667,530 or 32% as compared to First Quarter 2009.  The primary reason
for the decrease is attributable to reductions in corporate
staffing.  Selling, marketing and administrative expenses consisted of
the following:





For the Three Months Ended March
      31,2010
                  
                  
                  2009Salaries,
      employee benefits and related taxes
                  
                  $
                  596,009
                  
                  
                  $
                  1,378,795Advertising
      and other marketing
                  
                  
                  57,343
                  
                  
                  
                  101,899Depreciation
      and amortization
                  
                  
                  231,811
                  
                  
                  
                  211,320Rent,
      utilities, telephone and communications
                  
                  
                  75,243
                  
                  
                  
                  144,192Professional
      fees
                  
                  
                  347,997
                  
                  
                  
                  139,217Other
      general and administrative
                  
                  
                  143,114
                  
                  
                  
                  143,624$
                  1,451,517
                  
                  
                  $
                  2,119,047




In First
Quarter 2010 we incurred salaries, employee benefits and related taxes of
$596,009 as compared to $1,378,795 for First Quarter 2009, a decrease of
$782,786 or 56.8%. Salaries, commission and related taxes consisted of the
following:




For the Three Months Ended March
      31,2010
                          
                          
                          2009Salaries,
      wages and bonuses
                          
                          $
                          476,049
                          
                          
                          $
                          711,224Share
      based employee and director compensation
                          
                          
                          3,000
                          
                          
                          
                          220,376Commissions
      to employees
                          
                          
                          25,056
                          
                          
                          
                          12,454Employee
      benefits
                          
                          
                          29,812
                          
                          
                          
                          36,661Payroll
      taxes
                          
                          
                          38,205
                          
                          
                          
                          49,711Severance
      and other compensation
                          
                          
                          4,106
                          
                          
                          
                          340,038Directors’
      compensation
                          
                          
                          19,781
                          
                          
                          
                          8,331Total
                          
                          $
                          596,009
                          
                          
                          $
                          1,378,795





·
            Salaries,
      wages and bonuses were $476,049 in First Quarter 2010 as compared to
      $711,224 in First Quarter 2009, a decrease of $235,175 or
      33%.  The decrease is the result the elimination of two senior
      executive positions, the elimination of four human resource positions
      together with $150,000 of executive bonus compensation in First Quarter
      2009.  These reductions in corporate expenses were partially
      offset by increased staffing in InsPro’s sales and IT infrastructure
      areas.


Page 37


·
            Share
      based employee and director compensation expense was $3,000 in First
      Quarter 2010 as compared to $220,376 in First Quarter 2009.  The
      decrease is attributable to vesting and expensing of all outstanding
      options as of the October 29, 2009 change of control on that
      date. Consequently the only expense incurred in 2010 pertains to
      options granted after October 29, 2009.  Share based employee
      and director compensation consist of stock option and restricted stock
      grants, which are valued at fair-value at the date of the grant and
      expensed over the stock option’s vesting period or the duration of
      employment, whichever is shorter.





·
            Commissions
      to employees were $25,056 in First Quarter 2010 as compared to $12,454 in
      First Quarter 2009, an increase of $12,602 or
      101.2%.  Commissions to employees increased as a result of
      increased commissionable revenue activity, which was paid to InsPro
      Technologies’ sales personnel.




·
            Employee
      benefits expense was $29,812 in First Quarter 2010 as compared to $36,661
      in First Quarter 2009, a decrease of $6,849 or 18.7%. The decrease is the
      result of the elimination of corporate staff subsequent to First Quarter
      2009.




·
            Payroll
      taxes expense was $38,205 in First Quarter 2010 as compared to $49,711 in
      First Quarter 2009, a decrease of $11,506 or 23.1%.  The
      decrease is the result of the elimination of corporate staff subsequent to
      First Quarter 2009.




·
            Severance
      and other compensation was $4,106 in First Quarter 2010 as compared to
      $340,038 in First Quarter 2009. The decrease was the result of the accrual
      of severance expense as of March 31, 2009 as a result of the Separation of
      Employment and General Release Agreement with Mr.
  Eissa.




Advertising
and other marketing in First Quarter 2010 was $57,343 as compared to $101,899 in
First Quarter 2009.  The decrease was the result of the completion in
the second quarter of 2009 the development of InsPro Technologies’ marketing
strategy including creating the corporate brand and message and redesign of all
sales and marketing material, company web site, brochures and sales
presentation.  Costs in First Quarter 2009 included the use of outside
agencies for services rendered in connection with the development of InsPro
Technologies’ marketing strategy.





Depreciation
and amortization expense consisted of the following:


For the Three Months Ended March
      31,2010
                  
                  
                  2009Amortization
      of intangibles acquired as a result of the InsPro
    acquisition
                  
                  $
                  117,020
                  
                  
                  $
                  117,020Amortization
      of software and website development for external marketing
                  
                  
                  21,787
                  
                  
                  
                  21,787Depreciation
      expense
                  
                  
                  93,004
                  
                  
                  
                  72,513Total
                  
                  $
                  231,811
                  
                  
                  $
                  211,320





·
            In
      First Quarter 2010 we incurred amortization expense of $117,020 for the
      intangible assets acquired from InsPro Technologies (formerly Atiam
      Technologies, L.P.) on October 1, 2007.  Intangible assets
      acquired from InsPro Technologies were assigned the following
      values:




·
            value
      of client contracts and relationships other than license with an assigned
      value of $1,089,223 amortized straight line over five
  years




·
            value
      of purchased software for sale and licensing value with an assigned value
      of $644,449 amortized straight line over five
  years


Page 38


·
            employment
      and non-compete agreements acquired with an assigned value of $364,000
      amortized straight line over three
years.




·
            In
      First Quarter 2010 we incurred amortization expense of $21,787 for
      software development cost for external marketing pertaining to InsPro
      Technologies’ InsPro system.




·
            In
      First Quarter 2010 we incurred depreciation expense of $93,004 as compared
      to $72,513 in First Quarter 2009. The increase was due to assets acquired
      by InsPro Technologies subsequent to March 31,
  2009.




In First
Quarter 2010 we incurred rent, utilities, telephone and communications expense
of $75,243 as compared to $144,192 in First Quarter 2009, a decrease of $68,949
or 47.8%.  The decrease is primarily due to reductions in telephone
and communications expenses as a result of staffing reductions and cost
containment actions.




In First
Quarter 2010 we incurred professional fees of $347,997 as compared to $139,217
in First Quarter 2009, an increase of $208,780 or
150.0%.  Professional fees consisted of the following:




For the Three Months Ended March
      31,2010
                  
                  
                  2009Accounting
      and auditing
                  
                  $
                  70,442
                  
                  
                  $
                  67,803Legal
                  
                  
                  199,599
                  
                  
                  
                  11,171Technology
                  
                  
                  3,870
                  
                  
                  
                  8,299All
      other
                  
                  
                  74,086
                  
                  
                  
                  51,944$
                  347,997
                  
                  
                  $
                  139,217





·
            In
      First Quarter 2010 we had an increase in legal fees as compared to First
      Quarter 2009, which was primarily due to legal costs incurred in
      connection with litigation with certain shareholders, which commenced on
      March 24, 2009, and legal costs incurred in connection with the Company’s
      filings with the Securities and Exchange
  Commission.




·
            In
      First Quarter 2010 we had an increase in all other professional fees as a
      result of printing, filing and shareholder communication costs incurred in
      connection with the Company’s rights offering in First Quarter
      2010.




In First
Quarter 2010 we incurred other general and administrative expenses of $143,114
as compared to $143,624 in First Quarter 2009, a decrease of $510 or 0.4%. Other
general and administrative expense include office expenses, travel and
entertainment pertaining to sales and marketing activities, corporate insurance
costs and computer hardware and software costs.





Loss
from operations





As a
result of the aforementioned factors, we reported a loss from operations of
$1,960,290 or $0.03 loss from operations per share in First Quarter 2010 as
compared to a loss from operations of $1,953,818 or $0.05 loss per share in
First Quarter 2009.


Page 39


Gain
(loss) on discontinued operations





Results
from discontinued operations were as follows:


For the Three Months Ended March
      31,2010
                
                
                2009Revenues:Commission
      and other revenue from carriers
                
                $
                149,646
                
                
                $
                1,351,966Gain
      recognized upon the execution of the Agreement
                
                
                -
                
                
                
                2,664,794Transition
      policy commission pursuant to the Agreement
                
                
                350,332
                
                
                
                224,338Gain
      on the sale of Insurint
                
                
                578,569
                
                
                
                -Gain
      on disposal of property and equipment
                
                
                6,000
                
                
                
                1,562Lead
      sale revenue
                
                
                103
                
                
                
                2,391Insurint
      revenue
                
                
                53,130
                
                
                
                39,728Sub-lease
      revenue
                
                
                257,951
                
                
                
                357,9271,395,731
                
                
                
                4,642,706Operating
      expenses:Salaries,
      commission and related taxes
                
                
                167,388
                
                
                
                966,061Lead,
      advertising and other marketing
                
                
                -
                
                
                
                121,954Depreciation
      and amortization
                
                
                -
                
                
                
                162,661Rent,
      utilities, telephone and communications
                
                
                (11,387
                )
                
                
                567,379Professional
      fees
                
                
                86,211
                
                
                
                359,009Loss
      on impairment of property and equipment
                
                
                -
                
                
                
                416,764Loss
      on impairment of intangible assets
                
                
                -
                
                
                
                1,222,817Other
      general and administrative
                
                
                122,364
                
                
                
                117,572364,576
                
                
                
                3,934,216Gain
      from discontinued operations
                
                $
                1,031,155
                
                
                $
                708,489





During
the first quarter of 2009, we ceased the direct marketing and sale of health and
life insurance and related products to individuals and families in our Telesales
call center.  we also discontinued the sale of health and life
insurance and related products to individuals and families through our non
employee ISG agents.  During the first quarter of 2009 we eliminated
43 positions including all of its licensed employee sales agents along with
other Telesales service and support personnel and we eliminated another 20
positions in Telesales through attrition.





On
February 20, 2009 we entered into and completed the sale of our Telesales call
center produced agency business (the “Agency Business”) to eHealth, an
unaffiliated third party, pursuant to the terms of a Client Transition Agreement
(the “Agreement”).


Page 40


Pursuant
to the Agreement we transferred to eHealth broker of record status and the right
to receive commissions on certain of the in-force individual and family major
medical health insurance policies and ancillary dental, life and vision
insurance policies issued by Aetna, Inc., Golden Rule, Humana, PacifiCare, Inc.,
Assurant and United Healthcare Insurance Co. (collectively, the “Specified
Carriers”) on which the Company was designated as broker of record as of the
Closing Date (collectively, the “Transferred Policies” and each, a “Transferred
Policy”).  Certain policies and products were excluded from the
transaction, including our agency business generated through our ISG agents, all
short term medical products and all business produced through carriers other
than the Specified Carriers.  In addition, the Agreement also provides
for the transfer to eHealth of certain lead information relating to health
insurance prospects (the “Lead Database”).





The
aggregate initial amount of consideration paid by eHealth during the first
quarter of 2009 was approximately $1,280,000.  In addition, on the
Closing Date, eHealth agreed to assume from us certain liabilities relating to
historical commission advances on the Transferred Policies made by the Specified
Carriers in an aggregate amount of approximately $1,385,000.  eHealth
has agreed to pay to HBDC II, Inc., a Delaware corporation and our wholly-owned
subsidiary a portion of each commission payment received by eHealth and reported
by the Specified Carrier relating to a Transferred Policy for the duration of
the policy, provided that eHealth remains broker of record on such Transferred
Policy.





Revenue Recognition for
Discontinued Operations





Our
Telesales business segment generates revenue primarily from the receipt of
commissions paid to the Company by insurance companies based upon the insurance
policies sold to consumers by the Company.  These revenues are in the
form of first year, bonus and renewal commissions that vary by company and
product.  We recognize commission revenue primarily from the sale of
health insurance, after we receive notice that the insurance company has
received payment of the related premium. First year commission revenues per
policy can fluctuate due to changing premiums, commission rates, and types or
amount of insurance sold.  Insurance premium commission revenues are
recognized pro-rata over the terms of the policies.  Revenues for
renewal commissions are recognized after we receive notice that the insurance
company has received payment for a renewal premium. Renewal commission rates are
significantly less than first year commission rates and may not be offered by
every insurance company or with respect to certain types of
products.  The unearned portion of premium commissions has been
included in the consolidated balance sheet as a liability for unearned
commission advances.





We also
generate revenue from the sub-lease of our leased New York City office and a
portion of our leased Deerfield Beach Florida office, which are both leased
under operating leases. The Company sub-leases portions of our Deerfield Beach
office to two unaffiliated parties through February 28,
2011.  Sub-lease revenue includes base rent, additional rent
representing a portion of occupancy expenses under the terms of the sub-leases
and certain technology and facility services provided. We recognize sub-lease
revenue when lease rent payments are due in accordance with the sub-lease
agreements in accordance with ASC 840 " Leases." Recognition of sub-lease
revenue commences when control of the facility has been given to the tenant. We
record a provision for losses on accounts receivable equal to the estimated
uncollectible amounts. This estimate is based on our historical experience and a
review of the current status of the Company's receivables.


Page 41


For First
Quarter 2010 we earned revenues in discontinued operations of $1,395,731
compared to $4,642,706 in the First Quarter 2009, a decrease of $3,246,975 or
69.9%.  Revenues include the following:




·
            Commission
      and other revenue from carriers of $149,646 in First Quarter 2010 as
      compared to $1,351,966 in First Quarter 2009.  The decrease is
      primarily the result of the execution of the Agreement whereby we no
      longer receive commission revenue on Transferred Policies effective on or
      about February 1, 2009. We continue to receive commissions from carriers
      other than Specified Carriers and commissions on policies other than
      Transferred Policies.




·
            Gain
      recognized upon the execution of the Agreement of $2,664,794 in First
      Quarter 2009, which is the sum of the aggregate initial amount of
      consideration paid by eHealth and eHealth’s assumption of certain
      liabilities relating to historical commission advances on the Transferred
      Policies.




·
            Transition
      policy commission pursuant to the Agreement of $350,332 in First Quarter
      2010 as compared to $224,338 in the First Quarter 2009.  The
      increase is due to First Quarter 2009 only including 1 month of revenue
      whereas Fist Quarter 2010 includes 3 months of
  revenue.




·
            During
      the first quarter of 2010 we recognized a $578,569 gain on the sale
      of Insurint effective open the execution of an asset purchase agreement
      (“Insurint Sale Agreement”) with an unaffiliated third
    party.




o
            Pursuant
      to the terms of the Insurint Sale Agreement we sold substantially all of
      Insurint’s assets used in Insurint’s business including the Insurint
      software, www.insurint.com web site, other intellectual property specific
      to Insurint including but not limited to the customer base and all future
      revenue pertaining to Insurint.  The buyer agreed to assume
      future Insurint commitments and expenses subsequent to March 31,
      2010.




o
            Pursuant
      to the Insurint Sale Agreement we will receive in aggregate $625,000 in
      cash from the buyer of Insurint, of which $312,500 was received on April
      1, 2010 and the $312,500 balance will be received over twenty three equal
      monthly installments in the amount of $13,020.83, with the first monthly
      payment due on May 1, 2010, and the last monthly payment in the amount of
      $13,020.91 due on April 1, 2012.




o
            We
      incurred $21,829 of legal costs pertaining to the Insurint Sale
      Agreement.




·
            Insurint
      revenue of $53,130 in First Quarter 2010 as compared to $39,788 in the
      First Quarter 2009.  Insurint revenue will cease effective with
      and as a result of the Insurint Sale
Agreement.


Page 42


·
            In
      First Quarter 2010 we earned sub-lease revenue of $257,951 as compared to
      $357,927 in First Quarter 2009 relating to the sub-lease of a portion of
      our Florida office and our former New York sales office. The decline in
      Sub-lease revenue is the result of lower sub-lease revenue from both our
      former New York sales office and Deerfield Beach
      office.  Sub-lease revenue includes base rent, additional rent
      pertaining to utilities and occupancy costs and certain telephony,
      technology and facility services provided by us to certain of our
      sub-tenants.




o
            On
      February 21, 2008 we entered into a sub-lease agreement with a third party
      whereby the third party sub-leased approximately 5,200 square feet of our
      Deerfield Beach office space beginning March 1, 2008 through February 28,
      2009.  This sub-lease agreement was amended and restated on
      October 3, 2008 to increase the sub-leased square footage to 13,900 and
      extend the lease term through January 31, 2010, which was subsequently
      amended effective March 1, 2010, to decrease the sub-leased square footage
      to 8,700 and extend the lease term through February 28,
    2011.




o
            On
      October 1, 2008 we entered into a sub-lease agreement with a third party
      whereby the third party sub-leased approximately 8,000 square feet of our
      Deerfield Beach office space beginning October 15, 2008 through January
      31, 2010.  In accordance with this sub-lease agreement the
      Company recognizes base rent, additional rent representing a portion of
      certain actual occupancy expenses for our Deerfield Beach office and
      certain telephony, technology and facility services provided to our
      sub-tenant.  Effective July 1, 2009 the Company and the third
      party entered into a new sub-lease whereby the third party increased the
      space sub-leased to 29,952 square feet of our Deerfield Beach office
      space.  Effective March 1, 2010 the Company and the third party
      amended the new sub-lease increase the space sub-leased to 35,152 square
      feet of our Deerfield Beach office
space.




o
            On
      April 17, 2008 we entered into a sub-lease agreement with a third party
      whereby the third party agreed to sub-lease our New York office space for
      the balance of our Sublease Agreement and pay the Company sub-lease
      payments essentially equal to the Company’s costs under the Sublease
      Agreement.  The third party commenced paying sub-sublease
      payments to us in September 2008; however the third party failed to pay
      their December 2008 and subsequent rent when due.  We were the
      beneficiary to a letter of credit in the amount of $151,503, which we
      utilized as a result of the third party’s failure to pay us their rent
      when due.  On July 23, 2009 we entered into a settlement
      agreement with the third party whereby we cancelled the sub-lease, the
      third party surrendered the sub-leased premises back to us and we and the
      third party each released each other from all
  claims.




o
            On
      December 8, 2009 we entered into a sub-lease agreement with a third party
      whereby the third party agreed to sub-lease our New York office space for
      a three month period with an option to extend the lease on a month to
      month basis through December 30,
2010.




Total
operating expenses of discontinued operations for First Quarter 2010 was
$364,576 as compared to $3,934,216 for First Quarter 2009 for a decrease of
$3,569,640 or 91% as compared to First Quarter 2009.




·
            The
      primary reason for the decrease in operating expenses of discontinued
      operations is attributable to the cessation of direct marketing and
      selling activities in the first quarter of 2009 and to a lesser extent a
      reduction in our accrual for abandoned lease expenses, which were reduced
      to reflect higher anticipated sub-lease revenue from recent amendments to
      our sub-lease agreements with our Deerfield Beach
  tenants.


Page 43


·
            During
      the first quarter of 2009 we determined certain long term assets were
      impaired as a result of the cessation of direct marketing and sales in the
      Telesales call center.  The Company recorded expense in 2009 to
      write-off the value of these long term assets, which included property and
      equipment net of depreciation of $416,764, intangible assets net of
      accumulated amortization acquired from ISG of $1,200,428 and the value of
      internet domain name www.healthbenefitsdirect.com net of accumulated
      amortization of $22,389.





Gain
from discontinued operations





As a
result of the aforementioned factors, we reported a gain from discontinued
operations of $1,031,155 or $0.03 gain from discontinued operations per share in
First Quarter 2010 as compared to a gain from discontinued operations of
$708,489 or $0.02 gain from discontinued operations per share in First Quarter
2009.





Other
income (expenses)





Interest
income is attributable to interest-bearing cash deposits.  The
decrease in interest income is the result of a decline in interest rates and a
decline in cash balances.





Interest expense of $50,372 in first
Quarter 2010 includes $24,657 of accrued interest and $10,670 amortization of
deferred loan costs on the Secured Note, which originated in December of
2009, along with imputed interest on certain employee
obligations.





In First
Quarter 2010 we recognized a gain on change in fair value of warrants
liabilities of $974,468.  The gain in First Quarter 2010 represents
the mark to market adjustments for the change in fair value of warrants, which
contain provisions that adjust the exercise price of these warrants in the event
we issue our common stock or other securities convertible into our common stock
at price lower than the exercise price of these warrants.





Net
loss





As a
result of these factors discussed above, we reported a net loss of $2,954 or
$0.00 loss per share in First Quarter 2010 as compared to a net loss of
$1,253,269 or $0.03 loss per share in First Quarter 2009.





LIQUIDITY
AND CAPITAL RESOURCES





At March
31, 2010, we had a cash balance of $1,639,489 and negative working capital of
$(2,991,277).





At March
31, 2010, we had a restricted cash balance of $1,154,631, which represents money
market account balances with a restricted balance pertaining to two letters of
credit for the benefit of the landlords of our Florida and New York
offices.  The money market accounts are on deposit with the issuer of
the letters of credit.  We receive the interest on the money market
accounts.





Net cash
used by operations was $853,841 in First Quarter 2010 as compared to net cash
used by operations of $1,750,161 in First Quarter 2009.  In 2010 we
used cash to fund our net loss of $2,954 and:





·
            Decreases
      in accounts receivable of $392,563 in 2010, which is primarily the result
      of the collection of 2009 billings from certain of InsPro’s
      clients.


Page 44


·
            Increases
      in accounts payable and accrued expenses of $236,825 in First Quarter
      2010, which is primarily the result the Company’s delayed payment of
      certain payables.




·
            Increases
      in deferred revenue of $259,000, which is attributable to the collection
      of license and annual maintenance fees in First Quarter
    2010.




·
            Decreases
      in net liabilities of discontinued operations of $930,035, which is
      primarily the result of recording a $600,397 receivable from the buyer of
      Insurint, which is included in net liabilities of discontinued operations,
      and to a lesser extent the lease payments pertaining to abandoned
      leases.




In
addition to cash used in operating activities we incurred the following non cash
gain and expenses in 2010, which were included in our net loss,
including:




·
            Recorded
      depreciation and amortization expense of $231,811 and $211,320 in 2010 and
      2009, respectively.




·
            Recorded
      stock-based compensation and consulting expense of $3,000 and $220,376 in
      2010 and 2009, respectively.




·
            Recognized
      a gain on change in fair value of warrants liabilities of $974,468 in
      2010.




·
            In
      First Quarter 2009 we recorded $1,639,581 pertaining to the impairment of
      certain long lived assets of our discontinued
  operations.




·
            We
      recorded a gain of $6,000 and a loss of $1,562 on the disposal of property
      and equipment of discontinued operations in First Quarter 2010 and 2009,
      respectively.




Net cash
used by investing activities in 2010 was $110,363 as compared to $115,782 in
2009.  Investing activities pertain to the purchase of property and
equipment supporting current and future operations.




Net cash
provided by financing activities in 2009 was $1,200,040 as compared to
$4,045,776 in 2009.




·
            During
      the first quarter of 2010 we received $1,107,000 in gross proceeds as a
      result of the exercise of subscription units pertaining to our rights
      offering, which was completed on March 26,
2010.




o
            On
      January 14, 2010 we filed a prospectus for a rights offering on form
      S-1/A, which the Commission declared effective on January 22, 2010, to
      distribute to shareholders at no charge, one non-transferable subscription
      right for each 12,256 shares of our common stock and 613 shares of our
      preferred stock owned as of January 1, 2010, the record date, either as a
      holder of record or, in the case of shares held of record by brokers,
      dealers, custodian banks, or other nominees on shareholders’ behalf, as a
      beneficial owner of such shares.  This rights offering was
      designed to give all of the holders of the Company’s common stock the
      opportunity to participate in an equity investment in the Company on the
      same economic terms as the 2009 Private
  Placement.


Page 45


o
            The
      basic subscription right entitled the holder to purchase one unit
      (“Subscription Unit”) at a subscription price of $1,000. A Subscription
      Unit consisted of 250 shares of Preferred Stock and a five-year warrant to
      purchase 5,000 shares of common stock at an exercise price of $0.20 per
      share.  In the event that a holder of a Subscription Unit
      purchased all of the basic Subscription Units available to the holder then
      pursuant to their basic subscription right, the holder had the option to
      choose to subscribe for a portion of any Subscription Units that were not
      purchased by all other holders of Subscription Units through the exercise
      of their basic subscription rights.





o
            Effective
      with the expiration of the subscription rights, which occurred on March
      26, 2010, holders of subscription rights exercised in aggregate 1,061
      basic subscription rights and 46 over subscription rights for a total
      1,107 Subscription Units.  As a result of the exercise of 1,107
      Subscription Units we issued effective on March 26, 2010 in aggregate
      276,750 shares of Preferred Stock and five-year warrants to purchase in
      aggregate 5,535,000 shares of common stock at an exercise price of $0.20
      per share. The Preferred Stock issued in 2010 have the same terms as the
      Preferred Stock issued in 2009.





o
            Of
      the 1,107 Subscription Units exercised the Co-Investment Fund II, L.P., a
      Delaware limited partnership (“Co-Investment”) exercised 1,000 basic
      subscription rights for $1,000,000 and on March 26, 2010, the Company
      issued to Co-Investment 250,000 shares of Preferred Stock and five-year
      warrants to purchase in aggregate 5,000,000 shares of Common Stock at an
      exercise price of $0.20 per share.





o
            Effective
      with the expiration of the subscription rights all unexercised
      subscription rights expired.





·
            In
      First Quarter 2009 we completed a private placement (the “2009 Private
      Placement”) with Co-Investment and issued 1,000,000 shares of our Series A
      Preferred Stock and warrants to purchase 1,000,000 shares of our Series A
      Preferred Stock (“2009 Warrants”).  Our gross proceeds were
      $4,000,000 and we incurred $15,617 of legal and other expenses in
      connection with the 2009 Private
Placement.




·
            InsPro
      technologies has entered into various capital lease obligations to
      purchase equipment used for
operations.




Off-Balance
Sheet Arrangements





We do not
currently have any relationships with unconsolidated entities or financial
partnerships, such as entities referred to as structured finance or special
purpose entities, which would have been established for the purpose of
facilitating off-balance sheet or other contractually narrow or limited
purposes.





The
letters of credit pertaining to the lease for our Florida office and our New
York office were collateralized in the form of a money market account and
certificate of deposit, which as of March 31, 2010, had a balance of
$1,154,631.  These accounts are on deposit with the issuer of the
letters of credit and are classified as restricted cash on our balance
sheet.  The terms of the money market account allow us to receive
interest on the principal but prohibits us from withdrawing the principal for
the life of the letters of credit.


Page 46


License Agreement With
Realtime Solutions Group





On May
31, 2006, we entered into a Software and Services Agreement (the “License
Agreement”) with Realtime Solutions Group, L.L.C. (“Realtime”), under which
Realtime granted us a worldwide, transferable, non-exclusive, perpetual and
irrevocable license to use, display, copy, modify, enhance, create derivate
works within, and access Realtime Solutions Group’s Straight Through Processing
software (“STP”) and all associated documentation, source code and object code,
for use in the marketing, promotion and sale of health benefits or insurance
products.





As
consideration for the grant of the rights and licenses under the License
Agreement, we paid to Realtime a $10,000 nonrefundable cash deposit and upon
delivery of the STP software and other materials we will pay a license fee in
the form of 216,612 unregistered shares of our common
stock.  Concurrent with entering into the License Agreement, we and
Realtime entered into a Registration Rights Agreement that provides for
piggyback registration rights for the to be issued shares.





We may
unilaterally terminate the License Agreement, with or without cause, at any time
on 30 calendar day prior written notice to Realtime. The license rights in the
software granted under the License Agreement survive any termination of the
License Agreement in perpetuity.





As of
March 31, 2010 we has not taken delivery of the STP software or issued common
stock in connection with the License Agreement.


Page 47


Item
4T. Controls and Procedures





(a) Evaluation of
Disclosure Controls and Procedures.





Our management is responsible for
establishing and maintaining adequate internal control over financial reporting
for the Company.  Under the supervision of our Chief Executive Officer
and Chief Financial Officer, our management conducted an assessment of the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) as of the end of the period covered by this report. Based on the
results of such assessment, management have concluded that the our disclosure
controls and procedures as of the end of the period covered by this report have
been designed and are functioning effectively to provide reasonable assurance
that the information required to be disclosed by us in reports filed under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and is
accumulated and communicated to management, including our principal executive
and principal financial officers, or person performing similar functions, as
appropriate to allow timely decisions regarding required
disclosure.





A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. The design of any system of controls also
is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time, control may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.





(b)
Change in Internal Control over Financial Reporting.





There have not been any changes in our
internal control over financial reporting during our most recent fiscal quarter
that have materially affected, or are reasonably likely to materially affect,
the Company’s internal control over financial reporting.





PART II.


OTHER
INFORMATION




Item 1.  Legal Proceedings




On August
28, 2008, one of our former employees, the plaintiff, filed a national class
action complaint in the Seventeenth Judicial Circuit of Florida, Broward County,
case no. 062008 CA 042798 XXX CE, alleging that we breached a contract with
employees by failing to provide certain commissions and/or bonuses. The
complaint also contained claims for an accounting and for declaratory relief
relating to the alleged compensation agreement.  The plaintiff purported to
bring these claims on behalf of a class of current and former insurance sales
agents.  We filed a motion to dismiss the complaint.  In response, at
the hearing on our Motion to Dismiss, the plaintiff stated that he would amend
the complaint.  The amended complaint was no longer pled as a class action
but, instead, includes 64 named plaintiffs.  On April 21, 2010, the Company
and the plaintiffs entered into a memorandum of understanding whereby the
Company agreed to pay $23,500 to settle the case and the Company and the
plaintiffs agreed to; stay all discovery, mutual releases, no admission of
wrongdoing, no further litigation, confidentiality by the plaintiffs, and non
disparagement by the plaintiffs.  The Company and the plaintiffs
agreed to enter into definitive settlement agreement as soon as
practical.


Page 48


On March
24, 2009, certain of our stockholders filed an action in the Supreme Court of
the State of New York, County of New York, Index No. 650174/2009, against us,
our board of directors, two of our investors and the investors’ affiliates
relating to alleged offers we purportedly received in 2008 and a private
placement transaction conducted in January 2009. The plaintiffs alleged that the
members of our board of directors breached their fiduciary duties in responding
to the offers received in 2008 and in connection with the private placement
transaction conducted in January 2009. The complaint also contained claims for
unjust enrichment against certain directors whom plaintiffs claim are
“interested” and claims for aiding and abetting breach of fiduciary duty and
unjust enrichment against our stockholder, Cross Atlantic Capital Partners,
Inc., and its affiliates. The plaintiffs sought to rescind and cancel the
private placement, enjoin the board of directors from undertaking certain
measures and remove certain directors from the board. The plaintiffs also sought
money judgments in an amount not less than $10,000,000, plus interest,
attorneys’ fees, and accounts and experts’ fees. On May 29, 2009, the defendants
moved to dismiss the complaint. The motion was granted on August 13, 2009 on
forum non conveniens grounds. On August 14, 2009, a writ of summons was filed in
the Court of Common Pleas, Philadelphia County No. 090801764 against us, our
board of directors, two of our investors and the investors’ affiliates by the
same stockholders who brought the New York action and seven additional
stockholders.





On
October 27, 2009 we entered into an agreement with the stockholders who brought
the New York action in which they agreed to withdraw from the Philadelphia
litigation and provided a general release of all claims against us, our board of
directors and the other defendants. These stockholders discontinued their claims
against the defendants in the writ of summons filed in August.  The
terms of this settlement agreement required Co-Investment Fund to purchase all
of the shares of common stock held by the settling plaintiffs (which amounted to
6,108,997 shares).





On December 21, 2009, five of the
remaining shareholders who filed the writ of summons discontinued their claims
against the defendants named in the writ of summons.  Also on December 21,
2009, Alvin Clemens, a former officer and director of our company, Robert Kaul
and Arthur Nagel (both of whom are shareholders of our company) filed a
complaint in the Philadelphia action. The complaint brought claims for breach of
fiduciary duty against the members of our board of directors for their alleged
actions in responding to the offers received in 2008 and in connection with the
private placement transaction conducted in January 2009. The complaint also
contained claims for aiding and abetting the alleged breach of fiduciary duty
and unjust enrichment against our stockholder, Cross Atlantic Capital Partners,
Inc., and its affiliates. The plaintiffs sought to rescind and cancel the
private placement, enjoin the board of directors from undertaking certain
measures and remove certain directors from the board. The plaintiffs also sought
money judgment against our board members in an amount in excess of $50,000 and
against Cross Atlantic and its affiliates in an amount in excess of $10,000,000,
plus interest, attorneys’ fees, and accounts and experts’
fees.  Defendants filed preliminary objections to the complaint on
January 11, 2010, arguing that the claims should be dismissed and/or venue
should be in Delaware County and not in Philadelphia County.  Plaintiffs
filed an amended complaint on February 1, 2010 but then discontinued and ended
their complaint on February 22, 2010.





We are
also involved in various investigations, claims and lawsuits arising in the
normal conduct of our business, none of which, in our opinion, will harm our
business. We cannot assure that we will prevail in any litigation. Regardless of
the outcome, any litigation may require us to incur significant litigation
expense and may result in significant diversion of our attention.




Item 6.   Exhibits




Exhibit
                  No.
                
                Description31.1
                
                Chief
      Executive Officer’s Rule 13a-14(a)/15d-14(a) Certification
      *31.2
                
                Chief
      Financial Officer’s Rule 13a-14(a)/15d-14(a) Certification
      *32.1
                
                Chief
      Executive Officer’s Section 1350 Certification †32.2
                
                Chief
      Financial Officer’s Section 1350 Certification
  †





* Filed
herewith.


†
Furnished herewith.


Page 49


SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




Date:
      May 17, 2010
              HEALTH
      BENEFITS DIRECT CORPORATIONBy:
              /s/ ANTHONY R. VERDIAnthony
      R. VerdiChief
      Financial Officer and Chief Operating Officer(Principal
      Executive and Financial
Officer)


Page 50




EXHIBIT INDEX




Exhibit No.
              
              Description31.1
              
              Principal
      Executive Officer’s Rule 13a-14(a)/15d-14(a) Certification
      *31.2
              
              Chief
      Financial Officer’s Rule 13a-14(a)/15d-14(a) Certification
      *32.1
              
              Principal
      Executive Officer’s Section 1350 Certification †32.2
              
              Chief
      Financial Officer’s Section 1350 Certification
  †


*
Filed herewith.


†
Furnished herewith.




Page 51