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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 Form 10-QSB
  þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 For the transition period from  to
 Commission
File Number: 333-123081
 HEALTH BENEFITS DIRECT CORPORATION
  Delaware
    
    98-0438502(State or Other Jurisdiction of 
Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)
 (Address of Principal Executive Offices)
 (Issuers Telephone Number, Including Area Code)
 (Former name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 þ o
 o þ
  o þ




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##### 



PagePART I  FINANCIAL INFORMATIONItem 1  Consolidated Financial StatementsConsolidated Balance Sheet
As of September 30, 2006 (Unaudited)
    
    
    3Consolidated Statements of Operations (Unaudited)
For the Three and Nine Months Ended September 30, 2006 and 2005
    
    
    4Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2006 and 2005
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2
 Managements Discussion and Analysis or Plan of
Operation
    
    
    27Item 3  Controls and Procedures
    
    
    42PART II  OTHER INFORMATIONItem 6
 Exhibits
    
    
    43Signatures
    
    
    44Certificate of the Chief Executive Officer, required by rule 13a-14(a)Certificate of the Chief Financial Officer, required by rule 13a-14(a)Certificate of the Chief Executive Officer, required by rule 13a-14(b)Certificate of the Chief Financial Officer, required by rule 13a-14(b)
  Page 2




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HEALTH BENEFITS DIRECT CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEET
 September 30, 2006(Unaudited)ASSETSCURRENT ASSETS:Cash
    
    $
    3,073,100Accounts
receivable, less allowance for doubtful accounts of $16,532
    
    
    1,486,914Deferred compensation advances
    
    
    686,193Prepaid expenses
    
    
    403,380Other current assets
    
    
    17,611Total current assets
    
    
    5,667,198Restricted cash
    
    
    1,154,504Property and equipment, net of accumulated depreciation of $384,423
    
    
    2,253,126Intangibles, net of accumulated amortization of $1,145,764
    
    
    4,330,624Other assets
    
    
    169,851Total assets
    
    $
    13,575,303LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    771,896Accrued expenses
    
    
    824,916Due to related parties
    
    
    276,680Unearned commission advances
    
    
    3,790,980Total current liabilities
    
    
    5,664,472SHAREHOLDERS EQUITY:Preferred stock ($.001 par value; 10,000,000 shares authorized;
no shares issued and outstanding)
    
    
    Common stock ($.001 par value; 90,000,000 shares authorized;
28,603,083 shares issued and outstanding
    
    
    28,603Additional paid-in capital
    
    
    24,765,020Accumulated deficit
    
    
    (14,636,754
    )Deferred compensation
    
    
    (2,246,038
    )Total shareholders equity
    
    
    7,910,831Total liabilities and shareholders equity
    
    $
    13,575,303
  Page 3




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HEALTH BENEFITS DIRECT CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)Revenues, net
    
    $
    3,222,434
    
    
    $
    562,497
    
    
    $
    7,082,413
    
    
    $
    1,627,330Operating Expenses:Salaries, commission and related taxes
    
    
    3,880,233
    
    
    
    830,123
    
    
    
    9,376,924
    
    
    
    1,912,233Lead expense
    
    
    1,456,159
    
    
    
    190,637
    
    
    
    2,889,930
    
    
    
    491,876Depreciation and amortization
    
    
    645,802
    
    
    
    21,447
    
    
    
    1,485,115
    
    
    
    59,515Professional fees
    
    
    143,429
    
    
    
    63,388
    
    
    
    855,105
    
    
    
    81,576Management salaries  related parties
    
    
    
    
    
    
    157,500
    
    
    
    
    
    
    
    472,500Other general and administrative
    
    
    1,208,955
    
    
    
    117,690
    
    
    
    3,114,610
    
    
    
    528,8297,334,578
    
    
    
    1,380,785
    
    
    
    17,721,684
    
    
    
    3,546,529Loss from operations
    
    
    (4,112,144
    )
    
    
    (818,288
    )
    
    
    (10,639,271
    )
    
    
    (1,919,199
    )Other income (expense):Loss on disposal of property and equipment
    
    
    (339
    )
    
    
    
    
    
    
    (339
    )
    
    
    Registration rights penalty reversal
    
    
    
    
    
    
    
    
    
    
    60,537
    
    
    
    Interest income
    
    
    54,638
    
    
    
    
    
    
    
    258,220
    
    
    
    Interest expense
    
    
    (3,630
    )
    
    
    (6,332
    )
    
    
    (17,467
    )
    
    
    (18,790
    )Total other income (expense)
    
    
    50,669
    
    
    
    (6,332
    )
    
    
    300,951
    
    
    
    (18,790
    )Net loss
    
    $
    (4,061,475
    )
    
    $
    (824,620
    )
    
    $
    (10,338,320
    )
    
    $
    (1,937,989
    )Net loss per common share:Net loss per common share  basic and diluted
    
    $
    (0.14
    )
    
    $
    (0.11
    )
    
    $
    (0.38
    )
    
    $
    (0.25
    )Weighted average common shares outstanding  basic
and diluted
    
    
    28,254,578
    
    
    
    7,800,000
    
    
    
    27,351,853
    
    
    
    7,800,000
  Page 4




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HEALTH BENEFITS DIRECT CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Nine Months EndedSeptember 30,2006
    
    
    2005(Unaudited)
    
    
    (Unaudited)Cash Flows From Operating Activities:Net loss
    
    $
    (10,338,320
    )
    
    $
    (1,937,989
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    1,485,453
    
    
    
    59,515Stock-based compensation and consulting
    
    
    1,620,357
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    (1,292,653
    )
    
    
    28,587Deferred compensation advances
    
    
    (512,497
    )
    
    
    (18,785
    )Prepaid expenses
    
    
    (374,130
    )
    
    
    Other current assets
    
    
    (17,611
    )
    
    
    Other assets
    
    
    (147,192
    )
    
    
    (62,998
    )Accounts payable
    
    
    390,584
    
    
    
    60,019Accrued expenses
    
    
    414,392
    
    
    
    88,437Due to related parties
    
    
    68,926
    
    
    
    600,900Unearned commission advances
    
    
    2,904,041
    
    
    
    447,406Net cash used in operating activities
    
    
    (5,798,650
    )
    
    
    (734,908
    )Cash Flows From Investing Activities:Purchase of property and equipment
    
    
    (1,481,530
    )
    
    
    (129,008
    )Purchase of intangible assets and capitalization of software development
    
    
    (1,415,186
    )
    
    
    (68,979
    )Net cash used in investing activities
    
    
    (2,896,716
    )
    
    
    (197,987
    )Cash Flows From Financing Activities:Gross proceeds from sales of common stock
    
    
    6,450,000
    
    
    
    Gross proceeds from exercise of warrants
    
    
    525,000
    
    
    
    Gross proceeds from exercise of stock options
    
    
    200,000
    
    
    
    Restricted cash in connection with letters of credit
    
    
    (1,154,504
    )
    
    
    Placement and other fees paid in connection with offering
    
    
    (285,826
    )
    
    
    Proceeds from note payable
    
    
    
    
    
    
    199,000Proceeds from shareholders investments
    
    
    
    
    
    
    186,400Payment of line of credit
    
    
    (399,630
    )
    
    
    Proceeds from related party advances
    
    
    
    
    
    
    550,170Net cash provided by financing activities
    
    
    5,335,040
    
    
    
    935,570Net (decrease)/increase in cash
    
    
    (3,360,326
    )
    
    
    2,675Cash  beginning of year
    
    
    6,433,426
    
    
    
    13,517Cash  end of period
    
    $
    3,073,100
    
    
    $
    16,192Supplemental Disclosures of Cash Flow InformationCash payments for interest
    
    $
    15,044
    
    
    $
    9,453Cash payments for income taxes
    
    $
    
    
    
    $
    
  Page 5




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BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of presentation
    Organization
    Page 6




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BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
   Use of estimates
  Restricted cash
  Accounts receivable
   Page 7




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BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 Property and equipment
  Intangible assets
   Impairment of long-lived assets
   Page 8




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BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 Loss per common share
  Options
    
    
    5,197,000Warrants
    
    
    8,250,00013,447,000
 Revenue recognition
      Page 9




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BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
  Deferred compensation advances
  Lead expense
  Concentrations of credit risk
   Stock-based compensation
 Share Based Payment
 Accounting for Stock-Based Compensation
 Recent accounting pronouncements
  Page 10




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BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
  ISG ACQUISITION
     Cash payment to seller
    
    
    1,135,000Fair value of common stock issued to seller
    
    
    3,310,806Discounted value of future fixed payments of
employment agreement
    
    
    225,212Fair value of stock option issued to seller
    
    
    425,381Estimated direct transaction fees and expenses
    
    
    57,930Estimated purchase price
    
    
    5,154,329
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ISG ACQUISITION (continued)
  Cash
    
    
    111,024Accounts receivable
    
    
    210,889Deferred compensation advances
    
    
    256,775Prepaid expenses and other assets
    
    
    957Property and equipment, net
    
    
    600Intangible assets
    
    
    4,964,330Accrued expenses
    
    
    (164,549
    )Unearned commission advances
    
    
    (225,697
    )5,154,329
   For the Nine MonthsEnded September 30,2006
    
    2005Revenues, net
    
    $
    7,517,126
    
    
    $
    2,580,252Net loss
    
    
    (10,294,962
    )
    
    
    (3,232,583
    )Net loss per
common share  basic and
diluted
    
    
    ($0.38
    )
    
    
    ($0.37
    )
  Page 12




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HEALTHPLAN CHOICE ASSET PURCHASE
    www.1800healthplan.com www.1800healthplan.net www.1-800-healthplan.com www.1-800-healthplan.net
   Page 13




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REALTIME LICENSE AGREEMENT
    NOTE 5
 CONSULTING AGREEMENT WITH REAL IT GROUP LLC
    Page 14




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NOTE 6
 INTERNET DOMAIN NAME PURCHASE AND ASSIGNMENT AGREEMENT
 www.healthbenefitsdirect.com www.healthbenefitsdirect.com www.healthbenefitsdirect.com www.healthbenefitsdirect.com
  PROPERTY AND EQUIPMENT
  Useful Life (Years)Computer equipment and software
    
    3
    
    $
    1,238,368Office equipment
    
    5
    
    
    838,652Office furniture and fixtures
    
    7
    
    
    263,994Leasehold improvements
    
    10
    
    
    296,5352,637,549Less accumulated depreciation
    
    
    
    
    (384,423
    )$
    2,253,126
  Page 15




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INTANGIBLE ASSETS
  Useful Life (Years)ISG intangible assets acquired
    
    Weighted average 4.5
    
    $
    4,964,338HealthPlan Choice intangible assets acquired
    
    0.5
    
    
    240,643Software development costs
    
    1
    
    
    106,262Software development costs
    
    3
    
    
    165,1455,476,388Less: accumulated amortization
    
    
    
    
    (1,145,764
    )$
    4,330,624
   Three months ending December 31, 2006
    
    $
    433,2002007
    
    
    1,429,3712008
    
    
    1,703,0412009
    
    
    621,1162010
    
    
    143,896$
    4,330,624
 RELATED PARTY TRANSACTIONS
  Page 16




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RELATED PARTY TRANSACTIONS (continued)
  
    
    The Company from time to time uses a credit card in the name of Mr. Verdi, an officer of
the Company, for travel expenses, purchases and operating purposes. At September 30, 2006,
the Company owed Mr. Verdi $1,247 for expenses incurred on his credit card.
    
    The Company from time to time uses a credit card in the name of Mr. Spinner, an officer
of the Company, for purchases and operating purposes. At September 30, 2006, the Company
owed Mr. Spinner $113 for expenses incurred on his credit card.
    
    The Company uses a credit card in the name of Mr. Clemens, an officer of the Company,
for purchases and operating purposes. At September 30, 2006, the Company owed Mr. Clemens
$25,386 for expenses incurred on his credit card.
    
    In March 2006, the Company entered into Marketing Services Agreement with SendTec, Inc.
(SendTec). Paul Soltoff, a director of the Company, is the Chief Executive Officer of
SendTec. SendTec provides certain marketing and advertising services and receives a flat
fee of $7,500 per month plus commissions on services rendered. This agreement can be
terminated by either party upon thirty-days notice. For the nine months ended September
30, 2006, the Company paid SendTec $193,059 and has recorded other general and
administrative expense of $160,493, prepaid expenses of $212,500, intangible assets
pertaining to website development of $70,000 and due to related parties of $249,934 in the
accompanying financial statements.
 SHAREHOLDERS EQUITY
 Common Stock
      Page 17




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SHAREHOLDERS EQUITY (continued)
   Stock Options
     Page 18




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##### Table of Contents



SHAREHOLDERS EQUITY (continued)
     Page 19




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SHAREHOLDERS EQUITY (continued)
  Administration
 Eligibility
 Types of Awards.
 Shares Subject to the Plan.
  Change of Control.
 Page 20




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SHAREHOLDERS EQUITY (continued)
  Amendment and Termination of the Plan
  Number
    
    WeightedOf Shares
    
    Average
    
    WeightedUnderlying
    
    Exercise
    
    AverageOptions
    
    Price
    
    Fair ValueOutstanding at December 31, 2005
    
    
    3,935,000
    
    
    $
    1.89
    
    
    $
    0.14Nine months ended September 30, 2006Granted
    
    
    1,652,500
    
    
    
    2.92
    
    
    
    2.35Exercised
    
    
    200,000
    
    
    
    1.00
    
    
    
    0.30Forfeited
    
    
    190,500
    
    
    
    3.00
    
    
    
    1.60Outstanding at September 30, 2006
    
    
    5,197,000
    
    
    $
    2.21
    
    
    $
    0.78Outstanding and exercisable at September 30, 2006
    
    
    1,015,000
    
    
    $
    2.13
    
    
    $
    1.17
  Stock Options Granted During the PeriodNine Months Ended
    
    For the Year EndedSeptember 30, 2006
    
    December 31, 2005Expected volatility
    
    
    110
    %
    
    
    25
    %Risk-free interest rate
    
    
    4.61
    %
    
    
    3.75
    %Expected life in years
    
    
    5.0
    
    
    
    4.5Assumed dividend yield
    
    
    0
    %
    
    
    0
    %
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##### Table of Contents



SHAREHOLDERS EQUITY (continued)
  Options OutstandingNumber of Shares
    
    Weighted
    
    
    
    
    
    Options ExercisableUnderlying
    
    Average
    
    Weighted
    
    Number
    
    WeightedOptions at
    
    Remaining
    
    Average
    
    Exercisable at
    
    AverageExercise
    
    September 30,
    
    Contractual
    
    Exercise
    
    September 30,
    
    ExercisePrice
    
    2006
    
    Life
    
    Price
    
    2006
    
    Price$   1.00
    
    
    1,650,000
    
    
    
    4.1
    
    
    $
    1.00
    
    
    
    425,000
    
    
    $
    1.002.50
    
    
    2,257,500
    
    
    
    2.0
    
    
    
    2.50
    
    
    
    350,000
    
    
    
    2.502.55
    
    
    25,000
    
    
    
    4.8
    
    
    
    2.55
    
    
    
    
    
    
    
    2.70
    
    
    425,000
    
    
    
    2.5
    
    
    
    2.70
    
    
    
    
    
    
    
    2.95
    
    
    45,000
    
    
    
    4.7
    
    
    
    2.95
    
    
    
    
    
    
    
    3.50
    
    
    150,000
    
    
    
    4.6
    
    
    
    3.50
    
    
    
    
    
    
    
    $   3.60
    
    
    644,500
    
    
    
    4.6
    
    
    $
    3.60
    
    
    
    240,000
    
    
    $
    3.605,197,000
    
    
    
    
    
    
    
    
    
    
    
    1,015,000
 Common Stock warrants
   WeightedCommon
    
    
    AverageStock
    
    
    ExerciseWarrants
    
    
    PriceOutstanding at December 31, 2005
    
    
    5,052,500
    
    
    $
    1.50Granted
    
    
    3,547,500
    
    
    
    1.50Exercised
    
    
    350,000
    
    
    
    1.50Outstanding at September 30, 2006
    
    
    8,250,000
    
    
    $
    1.50Warrants exercisable at end of period
    
    
    8,250,000
    
    
    $
    1.50
 Page 22




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SHAREHOLDERS EQUITY (continued)
  Warrants OutstandingWeighted
    
    
    
    Warrants ExercisableNumber
    
    Average
    
    Weighted
    
    Number
    
    WeightedOutstanding at
    
    Remaining
    
    Average
    
    Exercisable at
    
    AverageSeptember 30,
    
    Contractual
    
    Exercise
    
    September 30,
    
    Exercise2006
    
    Life (Years)
    
    Price
    
    2006
    
    Price8,250,000
    
    
    2.2
    
    
    
    1.50
    
    
    
    8,250,000
    
    
    
    1.50
 RESTRICTED CASH, COMMITMENTS AND CONTINGENCIES
 Employment Agreements
    Restricted Cash and Operating Leases
   Page 23




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RESTRICTED CASH, COMMITMENTS AND CONTINGENCIES (continued)
   th
  Page 24




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RESTRICTED CASH, COMMITMENTS AND CONTINGENCIES (continued)
  Three Months ended December 31, 2006
    
    $
    277,7132007
    
    
    1,280,4302008
    
    
    1,333,3912009
    
    
    1,376,4212010
    
    
    1,412,242thereafter
    
    
    6,337,653Total
    
    $
    12,017,850
 BOARD OF DIRECTORS
   SUBSEQUENT EVENTS
 Closure of Sales Offices Located in California and Georgia
    Page 25




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SUBSEQUENT EVENTS (continued)
 Exercise Of Warrants
  Page 26




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FORWARD LOOKING STATEMENTS
  
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
      Page 27




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ITEM
2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(continued)
     Page 28




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ITEM
2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
  Cash payment to seller
    
    $
    1,135,000Fair value of common stock issued to seller
    
    
    3,310,806payments to seller
    
    
    225,212Fair value of stock option issued to seller
    
    
    425,381Estimated direct transaction fees and expenses
    
    
    57,930$
    5,154,329
  Cash
    
    $
    111,024Accounts receivable
    
    
    210,889Deferred compensation advances
    
    
    256,775Prepaid expenses and other assets
    
    
    957Property and equipment, net
    
    
    600Intangible assets
    
    
    4,964,330Accrued expenses
    
    
    (164,549
    )Unearned commission advances
    
    
    (225,697
    )$
    5,154,329
   Page 29




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ITEM
2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
 www.1800healthplan.com www.1800healthplan.net www.1-800-healthplan.com www.1-800-healthplan.net
         
    
    For the three months ended September 30, 2006, we earned revenues of $2,224,224
excluding revenue associated
 Page 30




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ITEM
2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
 with ISG and lead revenue as compared to $550,627 for the 2005
period. The primary reasons for the increase is the increase in number of licensed
insurance agents employed by the Company from approximately 34 at September 30, 2005 to
approximately 90 at September 30, 2006 and the increase of the number of insurance products
being sold.
    
    For the three months ended September 30, 2006, we earned revenues of $668,253 relating
to ISG as compared to $0 for the 2005 period. We acquired ISG during the second quarter of
2006.
    
    For the three months ended September 30, 2006, we earned revenues of $329,957 relating
to the sale of leads to third parties as compared to $11,870 for the 2005 period. We
re-sell certain leads purchased in order to recoup a portion of our lead cost. The primary
reasons for the increase is an increased emphasis on identifying leads suitable for sale
and the increased number of leads purchased.
   
    
    For the three months ended September 30, 2006, we recorded salaries, commission and
related taxes of $3,880,233 as compared to $830,123 for the 2005 period. Salaries,
commission and related taxes consisted of the following:
 For the Three MonthsEnded September 30,2006
    
    
    2005Salaries and wages
    
    $
    2,270,897
    
    
    $
    639,514Share based employee and
director compensation
    
    
    694,555
    
    
    
    Commissions to employees
    
    
    449,826
    
    
    
    140,808Commissions to non-employees
    
    
    85,159
    
    
    
    Employee benefits
    
    
    94,019
    
    
    
    Payroll taxes and other
    
    
    285,777
    
    
    
    49,801Total
    
    $
    3,880,233
    
    
    $
    830,123
 
    
    Salaries and wages were $2,270,897 as compared to $639,514 for the 2005 period, an
increase of $1,631,383 or 255%. These increases were the result of the hiring of
additional personnel employed by the Company. The number of employees increased from
approximately 85 at September 30, 2005 to approximately 232 at September 30, 2006.
    
    Share based employee and director compensation expense was $694,555 as compared to $0
for the 2005 period. Share based employee and director compensation consists of stock
option grants, which are valued at fair-value at the date of the grant and expensed over
the stock options vesting period or expiration date, whichever occurs first. Effective
January 1, 2006, we adopted the provisions of SFAS No. 123(R), Share-Based Payment,
under the modified prospective method. There were no stock options outstanding in the
2005 period. Expense in the third quarter of 2006 included $157,909 associated with
expensing the unamortized fair value of stock options granted to employees whose
employment terminated during the third quarter of 2006.
    
    Commissions to employees were $449,826 as compared to $140,808 for the 2005 period,
which was the result of increased sales that resulted in higher sales commission expense.
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ITEM
2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
 
    
    Commissions to non employees were $85,159 as compared to $0 for the 2005 period.
Effective April 3, 2006 as a result of the ISG acquisition the Company now incurs
commission expense to non employees, who are independent licensed insurance agents. ISGs
revenue is the result of the sale of health insurance products sold through independent
insurance agents. Unlike the Companys employee licensed insurance agents, the Companys
only expense pertaining to independent insurance agents are commissions.
    
    Employee benefits expense was $94,019 as compared to $0 for the 2005 period. The
Company implemented an employee benefits package during 2006, which includes group
medical, dental and life insurance coverage. The employee pays the majority of the cost
of group insurance coverage.
    
    Payroll taxes and other expense was $285,777 as compared to $49,801 for the 2005
period. This is primarily employer payroll taxes and the increase was the result of the
hiring of additional personnel employed by the Company.
    
    Lead expense was $1,456,159 as compared to $190,637 in the 2005 period, an increase of
$1,265,522 or 664%. As we increase the number of licensed agents we employ, we expect our
lead expense to increase in the future in order to facilitate the flow of quality leads to
our sale agents.
    
    For the three months ended September 30, 2006, we recorded depreciation and
amortization expense of $645,802 as compared to $21,447 for the 2005 period. Depreciation
and amortization expense consisted of the following:
 For the Three MonthsEnded September 30,2006
    
    
    2005Amortization of intangibles acquired as a
result of the ISG acquisition
    
    $
    425,685
    
    
    $
    Amortization of intangibles acquired as a
result of the HealthPlan Choice Asset Purchase
    
    
    18,985
    
    
    
    Amortization of software and website development
    
    
    69,853
    
    
    
    7,200Depreciation expense
    
    
    131,279
    
    
    
    14,447Total
    
    $
    645,802
    
    
    $
    21,647
 
    
    For the three months ended September 30, 2006, we recorded amortization expense of
$425,685 for the intangible assets acquired from ISG. The ISG acquisition was effective
April 3, 2006. Accordingly there was no amortization in the 2005 period. The intangible
assets acquired from ISG represent the value of purchased commission override revenue with
an assigned value of $1,411,594 amortized over five years in proportion to expected future
value, value of acquired carrier contracts and agent relationships with an assigned value
of $2,752,143 amortized straight line over the expected useful life of 5 years and value
of employment and non-compete agreement acquired with an assigned value of $800,593
amortized straight line over a weighted average useful life of 3.1 years.
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ITEM
2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
 
    
    For the three months ended September 30, 2006, we recorded amortization expense of
$18,985 for the intangible assets acquired as a result of the HealthPlan Choice asset
purchase. The HealthPlan Choice asset purchase was effective April 10, 2006. Accordingly
there was no amortization in the 2005 period. The intangible assets acquired represent
the value of an employment and non-compete agreement of $157,344, which was fully
amortized in the second quarter of 2006, the value of the bargain sublease amortized
straight line over the balance of the Sublease, which expires on December 31, 2006 and the
value of the 1-800-healthplan telephone number, www.1800healthplan.com,
www.1800healthplan.net, www.1-800-healthplan.com and www.1-800-healthplan.net domain names
amortized straight line over 36 months.
    
    For the three months ended September 30, 2006, we recorded amortization expense of
$69,853 compared to $7,200 in the 2005 period for the software and website development.
As of September 30, 2006, the Company determined that intangible assets pertaining to the
Companys website, which is anticipated to be replaced during the fourth quarter of 2006,
certain carrier integration costs, which are not expected to be recoverable based on the
future revenues, and lead system development, which is no longer expected to be
implemented, was impaired and the Company recorded expense of $54,294 for the three months
ended September 30, 2006.
    
    For the three months ended September 30, 2006, we recorded depreciation expense of
$131,279 as compared to $14,447 for the 2005 period. In the fourth quarter of 2005 and in
the first quarter of 2006, we acquired telephone and switching equipment and computer
equipment, which we began depreciating in the fourth quarter of 2005. In the second
quarter of 2006 we acquired fixed assets in connection with ISG and HealthPlan Choice,
which we began depreciating in the second quarter of 2006.
    
    For the three months ended September 30, 2006, we incurred professional fees of
$143,429 as compared to $63,388 for the 2005 period. During the three months ended
September 30, 2006, we incurred legal fees of $26,247, accounting fees of $19,750 related
to the preparation and audit of our financial statements and the review of our SEC
filings, recruiting fees to attract qualified employees of $13,559, investor relations
fees of $26,596 and computer technology consulting fees of $57,277.
    
    For the three months ended September 30, 2005, we incurred accrued salaries to our
management for services rendered of $157,500 as compared to $0 for the 2006 period. In
October and November of 2005, we entered into employment agreements with these executives
and paid compensation to them in 2006, which is included in salaries, commissions and
related taxes.
    
    For the three months ended September 30, 2006, we incurred other general and
administrative expenses of $1,208,955 as compared to $117,690 for the 2005 period, an
increase of $1,091,265or 927%. Other general and administrative expenses consisted of the
following:
 For the Three MonthsEnded September 30,2006
    
    
    2005Licensing and permit fees
    
    $
    209,789
    
    
    $
    9,461Rent and utilities
    
    
    350,580
    
    
    
    34,375Travel and entertainment
    
    
    70,807
    
    
    
    24,578Telephone
    
    
    185,688
    
    
    
    40,310Office expense
    
    
    144,528
    
    
    
    6,203Advertisement
    
    
    48,456
    
    
    
    2,745Other
    
    
    199,107
    
    
    
    18Total
    
    $
    1,208,955
    
    
    
    117,690
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ITEM
2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
 
    
    During the three months ended September 30, 2006, we had increases in licensing and
permit fees of $200,328 related to the increase in our licensed employee insurance agents.
We incur licensing and appointment costs associated with the licensing of our employee
insurance agents.
    
    During the three months ended September 30, 2006, we had increases in rent of $316,205
attributable to the cost of new and larger facilities. In mid 2005 we began occupying our
New York and California offices. In March 2006, we relocated our Florida office into a
larger facility and entered into a lease for a larger New York sales office. We
anticipate relocating our New York sales office in the third quarter of 2006. In April
2006 we began occupying our Atlanta office as a result of the HealthPlan Choice asset
purchase agreement.
    
    During the three months ended September 30, 2006, we had an increase in travel and
entertainment expense of $46,229 compared to the 2005 period primarily related with
increased marketing activities with insurance carriers and travel between our various
office locations.
    
    During the three months ended September 30, 2006, we had an increase in telephone and
communications expense of $145,378 as compared to the 2005 period due to the increase in
the number of sales agents and other administrative employees.
    
    During the three months ended September 30, 2006, we had an increase in office expense
of $138,325 as compared to the 2005 period due to increase in the number of sales agents
and other administrative employees.
    
    During the three months ended September 30, 2006, we had an increase in advertising of
$45,711 as compared to the 2005 period. During 2006 the Company entered into a Marketing
Services Agreement with SendTec, Inc. (SendTec). Paul Soltoff, a director of the
Company, is the Chief Executive Officer of SendTec. SendTec provides certain marketing
and advertising services to the Company.
    
    Other general and administrative expenses consisted of casual labor, insurance, payroll
fees, maintenance and computer expenses. The increase for the three months ended September
30, 2006 as compared to the 2005 period is attributable to an increase in operational
activities.
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##### Table of Contents



ITEM
2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
    
    
    For the nine months ended September 30, 2006, we earned revenues of $5,301,275 excluding
revenue associated with ISG and lead revenue as compared to $1,522,632 for the 2005 period.
The primary reasons for the increase is the increase in number of licensed insurance
agents employed by the Company from approximately 34 at September 30, 2005 to approximately
90 at September 30, 2006 and the increase of the number of insurance products being sold.
    
    For the nine months ended September 30, 2006, we earned revenues of $1,252,688 relating
to ISG as compared to $0 for the 2005 period. We acquired ISG during the second quarter of
2006.
    
    For the nine months ended September 30, 2006, we earned revenues of $528,450 relating to
the sale of leads to third parties as compared to $104,698 for the 2005 period. We re-sell
certain leads purchased in order to recoup a portion of our lead cost. The primary reasons
for the increase is an increased emphasis on identifying leads suitable for sale and the
increased number of leads purchased.
   
    
    For the nine months ended September 30, 2006, we recorded salaries, commission and
related taxes of $9,376,924 as compared to $1,912,233 for the 2005 period. Salaries,
commission and related taxes consisted of the following:
 For the Nine MonthsEnded September 30,2006
    
    
    2005Salaries and wages
    
    $
    5,561,978
    
    
    $
    1,471,785Share based employee and director
compensation
    
    
    1,539,507
    
    
    
    Commissions to employees
    
    
    1,114,067
    
    
    
    245,258Commissions to non-employees
    
    
    229,410
    
    
    
    Employee benefits
    
    
    204,875
    
    
    
    Payroll taxes and other
    
    
    727,087
    
    
    
    195,190Total
    
    $
    9,376,924
    
    
    $
    1,912,233
 
    
    Salaries and wages were $5,561,978 as compared to $1,471,785 for the 2005 period, an
increase of $4,090,193
or 278%. These increases were the result of the hiring of additional personnel employed by
the Company. The Company had approximately 85 employees at September 30, 2005 and
approximately 232 employees at September 30, 2006.
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##### Table of Contents



ITEM
2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
 
    
    Share based employee and director compensation expense was $1,539,507 as compared to $0
for the 2005 period. Share based employee and director compensation consists of stock
option grants, which are valued at fair-value at the date of the grant and expensed over
the stock options vesting period or expiration date, whichever occurs first. There were
no stock options outstanding in the 2005 period. Expense in the nine months ended
September 30, 2006 period included $49,492 associated with the accelerated vesting of a
stock option to a former director and $286,799 associated with expensing the unamortized
fair value of stock options granted to employees whose employment has terminated.
    
    Commissions to employees were $1,114,067 as compared to $245,258 for the 2005 period.
These increases were the result of an increase in sales that resulted in higher sales
commission expense.
    
    Commissions to non employees were $229,410 as compared to $0 for the 2005 period.
Effective April 3, 2006 as a result of the ISG acquisition the Company now incurs
commission expense to non employees, who are independent licensed insurance agents. ISGs
revenue is the result of the sale of health insurance products sold through independent
insurance agents. Unlike the Companys employee licensed insurance agents, the Companys
only expense pertaining to independent insurance agents are commissions.
    
    Employee benefits expense was $204,875 as compared to $0 for the 2005 period. The
Company implemented an employee benefits package during 2006, which includes group
medical, dental and life insurance coverage. The employee pays the majority of the cost
of group insurance coverage.
    
    Payroll taxes and other expense was $727,087 as compared to $195,190 for the 2005
period. This is primarily employer payroll taxes and the increase was the result of the
hiring of additional personnel employed by the Company.
    
    Lead expense was $2,889,930 as compared to $491,876 in the 2005 period, an increase of
$2,398,054 or 488%. As we increase the number of licensed agents we employ, we expect our
lead expense to increase in the future in order to facilitate the flow of quality leads to
our sale agents.
    
    For the nine months ended September 30, 2006, we recorded depreciation and amortization
expense of $1,485,115 as compared to $59,515 for the 2005 period. Depreciation and
amortization expense consisted of the following:
 For the Nine MonthsEnded September 30,2006
    
    
    2005Amortization of intangibles acquired
as a result of the ISG acquisition
    
    $
    905,821
    
    
    $
    Amortization of intangibles acquired
as a result of the HealthPlan Choice
Asset Purchase
    
    
    186,518
    
    
    
    Amortization of software and website
development
    
    
    103,332
    
    
    
    7,200Depreciation expense
    
    
    289,444
    
    
    
    52,315Total
    
    $
    1,485,115
    
    
    $
    59,515
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##### Table of Contents



ITEM
2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
 
    
    For the nine months ended September 30, 2006, we recorded amortization expense of
$905,821 for the intangible assets acquired from ISG. The ISG acquisition was effective
April 3, 2006. Accordingly there is no amortization in the 2005 period. The intangible
assets acquired from ISG represent the value of purchased commission override revenue with
an assigned value of $1,411,594 amortized over five years in proportion to expected future
value, value of acquired carrier contracts and agent relationships with an assigned value
of $2,752,143 amortized straight line over the expected useful life of 5 years and value
of employment and non-compete agreement acquired with an assigned value of $800,593
amortized straight line over a weighted average useful life of 3.1 years.
    
    For the nine months ended September 30, 2006, we recorded amortization expense of
$186,518 for the intangible assets acquired as a result of the HealthPlan Choice asset
purchase. Accordingly there is no amortization in the 2005 period. The intangible assets
acquired represent the value of an employment and non-compete agreement of $157,344, which
was fully amortized in the second quarter of 2006, the value of the bargain sublease
amortized straight line over the balance of the Sublease, which expires on December 31,
2006 and the value of the 1-800-healthplan telephone number, www.1800healthplan.com,
www.1800healthplan.net, www.1-800-healthplan.com and www.1-800-healthplan.net domain names
amortized straight line over 36 months.
    
    For the nine months ended September 30, 2006, we recorded amortization expense of
$103,332 compared to $7,200 in the 2005 period for the software and website development.
As of September 30, 2006, the Company determined that intangible assets pertaining to the
Companys website, which is anticipated to be replaced during the fourth quarter of 2006,
certain carrier integration costs, which are not expected to be recoverable based on the
future revenues, and lead system development, which is no longer expected to be
implemented, was impaired and the Company recorded expense of $54,294 for the nine months
ended September 30, 2006.
    
    For the nine months ended September 30, 2006, we recorded depreciation expense of
$289,444 as compared to $52,315 for the 2005 period. In the fourth quarter of 2005 and in
the first quarter of 2006, we acquired telephone and switching equipment and computer
equipment, which we began depreciating in the fourth quarter of 2005. In the second
quarter of 2006 we acquired fixed assets in connection with ISG and HealthPlan Choice,
which we began depreciating in the second quarter of 2006.
    
    For the nine months ended September 30, 2006, we incurred professional fees of $855,105
as compared to $81,576 for the 2005 period, an increase of $773,529. During the nine
months ended September 30, 2006, we incurred legal fees of $424,711 associated with our
SEC filings, our compensation plans and restructuring of our board of directors, as well
as other corporate legal matters. Additionally, we incurred accounting fees of $99,171
related to the preparation and audit of our financial statements and the review of our SEC
filings, recruiting fees to attract qualified employees of $122,809, investor relations
fees of $80,726, computer technology consulting fees of 57,277 and other professional fees
of $70,411.
    
    For the nine months ended September 30, 2005, we incurred accrued salaries to our
management for services rendered of $472,500 as compared to $0 for the 2006 period. In
October and November of 2005, we entered into employment agreements with these executives
and paid compensation to them in 2006, which is included in salaries, commissions and
related taxes.
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ITEM
2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
 
    
    For the nine months ended September 30, 2006, we incurred other general and
administrative expenses of $3,114,610 as compared to $528,829 for the 2005 period, an
increase of $2,585,781 or 489%. Other general and administrative expenses consisted of the
following:
 For the Nine MonthsEnded September 30,2006
    
    
    2005Licensing and permit fees
    
    $
    466,573
    
    
    $
    58,702Rent and utilities
    
    
    903,858
    
    
    
    112,199Travel and entertainment
    
    
    276,050
    
    
    
    57,685Telephone
    
    
    419,605
    
    
    
    135,782Cost of integrating HealthPlan Choice
Atlanta office as a sales office
    
    
    103,412
    
    
    
    Office expense
    
    
    383,133
    
    
    
    107,390Advertisement
    
    
    184,092
    
    
    
    10,052Other
    
    
    377,887
    
    
    
    47,019Total
    
    $
    3,114,610
    
    
    $
    528,829
 
    
    During the nine months ended September 30, 2006, we had increases in licensing and
permit fees of $407,871 related to the increase in our sales agents. We incur licensing
and appointment costs associated with the licensing of our employee insurance agents.
    
    During the nine months ended September 30, 2006, we had increases in rent and utilities
of $791,659 attributable to the cost of new and larger facilities. In mid 2005 we began
occupying our New York and California offices. In March 2006, we relocated our Florida
office into a larger facility and entered into a lease for a larger New York sales office.
We anticipate relocating our New York sales office in the third quarter of 2006. In
April 2006 we began occupying our Atlanta office as a result of the HealthPlan Choice
asset purchase agreement.
    
    During the nine months ended September 30, 2006, we had an increase in travel and
entertainment expense of $218,365 compared to the 2005 period primarily related with
increased marketing activities with insurance carriers and travel between our various
office locations.
    
    During the nine months ended September 30, 2006, we had an increase in telephone and
communications expense of $283,823 as compared to the 2005 period due to the increase in
the number of sales agents and other administrative employees.
    
    During the nine months ended September 30, 2006, we incurred $103,412 pertaining to the
cost of integrating HealthPlan Choices office as our Atlanta satellite sales office.
    
    During the nine months ended September 30, 2006, we had an increase in office expense
of $275,743 as compared to the 2005 period due to increase in the number of sales agents
and other administrative employees.
    
    During the nine months ended September 30, 2006, we had an increase in advertising of
$174,040 as compared to the 2005 period. During 2006 the company entered into a Marketing
Services Agreement with SendTec, Inc. (SendTec). Paul Soltoff, a director of the
Company, is the Chief Executive Officer of SendTec. SendTec provides certain marketing
and advertising services.
 
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ITEM
2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
 
    
    Other general and administrative expenses consisted of casual labor, insurance,
utilities, maintenance, computer expenses, and payroll fees. The increase for the nine
months ended September 30, 2006 as compared to the 2005 period is attributable to an
increase in operational activities. Additionally, during the 2006 period, we incurred
approximately $49,700 related to maintenance on our telephone system.
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ITEM
2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
  
    
    Increases in accounts receivable of $1,292,653 related to increased revenues;
    
    Increases in deferred compensation advances of $512,497. We have advanced commissions
relating to the advanced commissions the Company has received from insurance carriers. The
deferred compensation advances are charged to expense in proportion to the Companys
recognition of unearned commissions as revenue;
    
    Increases in prepaid expenses and other current assets of $ 391,741 related
to advances made by us for advertising, the establishment of a health insurance program
for our employees, and other prepaid items;
    
    Increases in accounts payable of $390,584 relating to increased business activity.
    
    Increases in accrued expenses of $414,392 relating to primarily to increased salaries, wages and commissions;
    
    Increases in unearned commission advances of $2,904,041 relating to increased revenues
from certain of the Companys insurance carriers that advance the Company future
commission revenue. The Companys revenue consists primarily of insurance premium
commissions, which are recognized pro-rata over the terms of the insurance policies. The
unearned portion of insurance premium commissions has been included in the consolidated
balance sheet as a liability for unearned commission advances.
    
    
    On April 3, 2006, we issued 1,000,000 shares of our common stock to Ivan M. Spinner, the
sole stockholder of ISG in exchange for all of the outstanding stock of ISG. The fair
value of the shares issued was estimated to be $3,310,806. Also on April 3, 2006 we issued
to Mr. Spinner an employee stock option grant to purchase 150,000 shares of our common
stock at the closing market price on the date of the grant. The fair value of this option
grant was estimated to be $425,381 on the date of grant using the Black-Scholes
option-pricing model. We also paid Mr. Spinner $920,000 and entered into a 2 year
employment agreement in connection with the purchase of ISG.
    
    On April 10, 2006, we issued 80,000 shares of our common stock to Mr. Horace Richard
Priester III in connection with the HealthPlan Choice Asset Purchase Agreement. The fair
value of the shares issued was estimated to be $270,240. We also paid Mr. Priester
$100,000 in connection with the asset purchase agreement.
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##### Table of Contents



ITEM
2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
 
    
    On May 31, 2006, we issued 216,612 shares of our common stock to Realtime Solutions
Group, L.L.C. in connection with a Software and Services Agreement. Realtime granted the
Company 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 and all associated documentation, source code
and object code, for use in the marketing, promotion and sale of health benefits or
insurance products. The fair value of the shares issued was estimated to be $648,536. We
accounted for the issuance of our common stock as the purchase of computer software, which
is included in property and equipment.
    
    On July 17, 2006, we issued 50,000 shares of common stock to Dickerson Employee Benefits
in connection with an Internet Domain Name Purchase and Assignment Agreement to purchase
the Internet domain name www.healthbenefitsdirect.com. We also paid Dickerson Employee
Benefits $50,000. The fair value of the shares issued was estimated to be $121,200.
  
    
    During the first quarter of 2006 we received net proceeds from the sale of common stock
of $6,164,174.
    
    During the second quarter of 2006 we disbursed $1,150,000 from cash and deposited this
amount into a certificate of deposit, which is reported as restricted cash. The
certificate of deposit is on deposit with the same bank that issued 2 letters of credit for
the benefit of the Companys landlords of our new Florida and New York offices.
    
    During the second quarter of 2006 we repaid our $399,630 outstanding balance of a line
of credit with Regions Bank dated August 2004. The interest rate for this line of credit
was prime plus 8.5%. This line of credit was personally guaranteed by the Companys CEO
Scott Frohman, the Companys President and COO Charles Eissa and Michael Brauser. The
Company has no further obligations regarding this line of credit and this line of credit is
not available for future borrowing.
    
    During the third quarter of 2006 certain holders of the Companys warrants exercised
their warrants to purchase in aggregate 350,000 shares of the Companys common stock at an
exercise price of $1.50 per share and the Company received $525,000.
    
    During the third quarter of 2006 Alvin Clemens exercised an option to purchase 200,000
shares of the Companys common stock at an exercise price of $1 per share and the Company
received $200,000.
  Three Months ended December 31, 2006
    
    $
    277,7132007
    
    
    1,280,4302008
    
    
    1,333,3912009
    
    
    1,376,4212010
    
    
    1,412,242thereafter
    
    
    6,337,653Total
    
    $
    12,017,850
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##### Table of Contents



ITEM 3. CONTROLS AND PROCEDURES
     Page 42




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 6. Exhibits
 Exhibit No
    
    Description31.1
    
    Certificate of the Chief Executive Officer of Health Benefits Direct Corporation
required by rule 13a-14(a) under the Exchange Act.31.2
    
    Certificate of the Chief Financial Officer of Health Benefits Direct Corporation
required by rule 13a-14(a) under the Exchange Act.32.1
    
    Certificate of the Chief Executive Officer of Health Benefits Direct Corporation
required by rule 13a-14(b) under the Exchange Act.32.2
    
    Certificate of the Chief Financial Officer of Health Benefits Direct Corporation
required by rule 13a-14(b) under the Exchange Act.
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##### Table of Contents



HEALTH BENEFITS DIRECT CORPORATIONDated: November 14, 2006
    
    
    
    By:
    
    /s/ SCOTT FROHMANScott FrohmanChief Executive Officer(Principal Executive Officer)Dated: November 14, 2006
    
    
    
    By:
    
    /s/ ANTHONY R. VERDIAnthony R. VerdiChief Financial Officer(Principal Financial and Accounting Officer)
 Page 44