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 September 30, 2010




OR




 ̈  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
November 15, 2010, there were 41,543,655 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
INFORMATION





Item
      1
                  Financial
      StatementsConsolidated
      Balance Sheets as of September 30, 2010 (UNAUDITED) and
      December 31, 2009
                  3Consolidated
      Statements of Operations (UNAUDITED) for the three and nine months ended
      September 30, 2010 and 2009
                  4Consolidated
      Statements of Changes in Shareholders' Deficit (UNAUDITED) for the nine
      months ended September 30, 2010
                  5Consolidated
      Statements of Cash Flows (UNAUDITED) for the nine months ended September
      30, 2010 and 2009
                  6Notes
      to UNAUDITED Consolidated Financial Statements
                  7Item
      2
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  37Item
      4T
                  Controls
      and Procedures
                  57PART II
                    OTHER
      INFORMATIONItem
      1
                  Legal
      Proceedings
                  57Item
      6
                  Exhibits
                  58Signatures
                  59


Page
2




PART I.


FINANCIAL
INFORMATION


Item
1. Financial Statements




HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





September 30, 2010
                  
                  
                  December 31, 2009(Unaudited)
                  
                  
                  (1)ASSETSCURRENT
      ASSETS:Cash
                  
                  $
                  5,897,575
                  
                  
                  $
                  1,403,653Accounts
      receivable, net
                  
                  
                  677,103
                  
                  
                  
                  1,015,069Tax
      receivable
                  
                  
                  14,065
                  
                  
                  
                  16,817Prepaid
      expenses
                  
                  
                  196,017
                  
                  
                  
                  83,834Other
      current assets
                  
                  
                  42,802
                  
                  
                  
                  43,227Total
      current assets
                  
                  
                  6,827,562
                  
                  
                  
                  2,562,600Restricted
      cash
                  
                  
                  1,152,372
                  
                  
                  
                  1,154,044Property
      and equipment, net
                  
                  
                  663,098
                  
                  
                  
                  768,184Intangibles,
      net
                  
                  
                  693,463
                  
                  
                  
                  1,088,065Other
      assets
                  
                  
                  102,558
                  
                  
                  
                  110,608Total
      assets
                  
                  $
                  9,439,053
                  
                  
                  $
                  5,683,501LIABILITIES
      AND SHAREHOLDERS' (DEFICIT)CURRENT
      LIABILITIES:Note
      payable
                  
                  $
                  57,705
                  
                  
                  $
                  7,595Secured
      note from related party
                  
                  
                  2,351,205
                  
                  
                  
                  1,252,740Accounts
      payable
                  
                  
                  1,797,987
                  
                  
                  
                  1,249,883Accrued
      expenses
                  
                  
                  437,833
                  
                  
                  
                  816,733Current
      portion of capital lease obligations
                  
                  
                  162,598
                  
                  
                  
                  135,913Due
      to related parties
                  
                  
                  24,827
                  
                  
                  
                  -Deferred
      revenue
                  
                  
                  310,500
                  
                  
                  
                  232,500Liabilities
      of discontinued operations
                  
                  
                  210,635
                  
                  
                  
                  2,144,630Total
      current liabilities
                  
                  
                  5,353,290
                  
                  
                  
                  5,839,994LONG
      TERM LIABILITIES:Warrant
      liability
                  
                  
                  6,242,858
                  
                  
                  
                  2,021,912Capital
      lease obligations
                  
                  
                  205,860
                  
                  
                  
                  201,627Total
      long term liabilities
                  
                  
                  6,448,718
                  
                  
                  
                  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
                  
                  
                  
                  1,983,984Series
      B convertible preferred stock; 2,250,000 shares authorized, 1,800,001 and
      0, shares issued and outstanding, respectively (liquidation value
      $5,400,003 and $0, respectively)
                  
                  
                  3,240,028
                  
                  
                  
                  -Common
      stock ($.001 par value; 200,000,000 shares authorized; 41,543,655 shares
      issued and outstanding)
                  
                  
                  41,543
                  
                  
                  
                  41,543Additional
      paid-in capital
                  
                  
                  36,746,780
                  
                  
                  
                  36,380,493Accumulated
      deficit
                  
                  
                  (45,255,410
                  )
                  
                  
                  (40,786,052
                  )Total
      shareholders' (deficit)
                  
                  
                  (2,362,955
                  )
                  
                  
                  (2,380,032
                  )Total
      liabilities and shareholders' (deficit)
                  
                  $
                  9,439,053
                  
                  
                  $
                  5,683,501








See
accompanying notes to unaudited consolidated financial
statements.


Page
3





HEALTH BENEFITS DIRECT CORPORATION AND
SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)





For the Three Months Ended
                    
                    
                    For the Nine Months EndedSeptember 30,
                    
                    
                    September 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Revenues
                    
                    $
                    1,805,415
                    
                    
                    $
                    1,444,170
                    
                    
                    $
                    4,516,592
                    
                    
                    $
                    4,615,384Cost
      of revenues
                    
                    
                    1,523,188
                    
                    
                    
                    1,690,673
                    
                    
                    
                    4,919,060
                    
                    
                    
                    4,725,938Gross
      profit (loss)
                    
                    
                    282,227
                    
                    
                    
                    (246,503
                    )
                    
                    
                    (402,468
                    )
                    
                    
                    (110,554
                    )Selling,
      general and administrative expenses:Salaries,
      employee benefits and related taxes
                    
                    
                    962,802
                    
                    
                    
                    658,328
                    
                    
                    
                    2,203,567
                    
                    
                    
                    2,775,219Advertising
      and other marketing
                    
                    
                    35,317
                    
                    
                    
                    90,814
                    
                    
                    
                    118,720
                    
                    
                    
                    228,917Depreciation
      and amortization
                    
                    
                    220,868
                    
                    
                    
                    226,654
                    
                    
                    
                    694,352
                    
                    
                    
                    657,977Rent,
      utilities, telephone and communications
                    
                    
                    118,245
                    
                    
                    
                    146,157
                    
                    
                    
                    294,247
                    
                    
                    
                    434,591Professional
      fees
                    
                    
                    63,600
                    
                    
                    
                    448,955
                    
                    
                    
                    515,211
                    
                    
                    
                    906,139Other
      general and administrative
                    
                    
                    134,459
                    
                    
                    
                    75,703
                    
                    
                    
                    390,987
                    
                    
                    
                    397,5161,535,291
                    
                    
                    
                    1,646,611
                    
                    
                    
                    4,217,084
                    
                    
                    
                    5,400,359Loss
      from operations
                    
                    
                    (1,253,064
                    )
                    
                    
                    (1,893,114
                    )
                    
                    
                    (4,619,552
                    )
                    
                    
                    (5,510,913
                    )Gain
      (loss) from discontinued operations
                    
                    
                    403,513
                    
                    
                    
                    470,157
                    
                    
                    
                    2,134,872
                    
                    
                    
                    (725,367
                    )Other
      income (expense):Loss
      on change of fair value of warrant liability
                    
                    
                    (1,790,180
                    )
                    
                    
                    -
                    
                    
                    
                    (1,834,093
                    )
                    
                    
                    -Interest
      income
                    
                    
                    6,554
                    
                    
                    
                    4,771
                    
                    
                    
                    14,019
                    
                    
                    
                    27,082Interest
      expense
                    
                    
                    (68,295
                    )
                    
                    
                    (28,413
                    )
                    
                    
                    (164,604
                    )
                    
                    
                    (72,449
                    )Total
      other (expense)
                    
                    
                    (1,851,921
                    )
                    
                    
                    (23,642
                    )
                    
                    
                    (1,984,678
                    )
                    
                    
                    (45,367
                    )Net
      loss
                    
                    $
                    (2,701,472
                    )
                    
                    $
                    (1,446,599
                    )
                    
                    $
                    (4,469,358
                    )
                    
                    $
                    (6,281,647
                    )Net
      loss per common share - basic and diluted:Loss
      from operations
                    
                    $
                    (0.08
                    )
                    
                    $
                    (0.05
                    )
                    
                    $
                    (0.16
                    )
                    
                    $
                    (0.13
                    )Gain
      (loss) from discontinued operations
                    
                    
                    0.01
                    
                    
                    
                    0.01
                    
                    
                    
                    0.05
                    
                    
                    
                    (0.02
                    )Net
      loss per common share - basic and diluted
                    
                    $
                    (0.07
                    )
                    
                    $
                    (0.03
                    )
                    
                    $
                    (0.11
                    )
                    
                    $
                    (0.15
                    )Weighted
      average common shares outstanding - basic and diluted
                    
                    
                    41,543,655
                    
                    
                    
                    41,279,645
                    
                    
                    
                    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
NINE MONTHS ENDED SEPTEMBER 30, 2010


(Unaudited)





Series A Preferred Stock,
                          
                          
                          Series B Preferred Stock,
                          
                          
                          Common Stock, $.001$.001 Par Value
                          
                          
                          $.001 Par Value
                          
                          
                          Par ValueNumber of
                            Shares
                          
                          
                          Amount
                          
                          
                          Number of
                            Shares
                          
                          
                          Amount
                          
                          
                          Number of
                            Shares
                          
                          
                          Amount
                          
                          
                          Additional
                            Paid-in
                            Capital
                          
                          
                          Accumulated
                            Deficit
                          
                          
                          Total
                            Shareholders'
                            (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
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          880,120Preferred
      stock and warrants issued in private placement
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1,800,001
                          
                          
                          $
                          3,240,028
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          3,240,028Warrant
      issued as compensation
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          332,994
                          
                          
                          
                          
                          
                          
                          
                          332,994Amortization
      of deferred compensation
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          33,293
                          
                          
                          
                          
                          
                          
                          
                          33,293Net
      loss for the period
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (4,469,358
                          )
                          
                          
                          (4,469,358
                          )Balance
      - September 30, 2010
                          
                          
                          1,276,750
                          
                          
                          $
                          2,864,104
                          
                          
                          
                          1,800,001
                          
                          
                          $
                          3,240,028
                          
                          
                          
                          41,543,655
                          
                          
                          $
                          41,543
                          
                          
                          $
                          36,746,780
                          
                          
                          $
                          (45,255,410
                          )
                          
                          $
                          (2,362,955
                          )





See
accompanying notes to unaudited consolidated financial
statements.


Page
5





HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)





For the Nine Months EndedSeptember 30,2010
                  
                  
                  2009Cash
      Flows From Operating Activities:Net
      loss
                  
                  $
                  (4,469,358
                  )
                  
                  $
                  (6,281,647
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                  
                  
                  694,352
                  
                  
                  
                  657,977Stock-based
      compensation and consulting
                  
                  
                  366,287
                  
                  
                  
                  450,227Loss
      on change of fair value of warrant liability
                  
                  
                  1,834,093
                  
                  
                  
                  -Loss
      on impairment of property and equipment of discontinued
      operations
                  
                  
                  -
                  
                  
                  
                  416,764Loss
      on impairment of intangible assets of discontinued
    operations
                  
                  
                  -
                  
                  
                  
                  1,222,817Gain
      (loss) on the disposal of equipment of discontinued
    operations
                  
                  
                  6,530
                  
                  
                  
                  (227,763
                  )Provision
      for bad debt
                  
                  
                  -
                  
                  
                  
                  2,489Changes
      in assets and liabilities:Accounts
      receivable
                  
                  
                  337,966
                  
                  
                  
                  (439,025
                  )Tax
      receivable
                  
                  
                  2,752
                  
                  
                  
                  25,675Prepaid
      expenses
                  
                  
                  (112,183
                  )
                  
                  
                  32,867Other
      current assets
                  
                  
                  (10,915
                  )
                  
                  
                  (3,359
                  )Other
      assets
                  
                  
                  8,050
                  
                  
                  
                  -Accounts
      payable
                  
                  
                  548,104
                  
                  
                  
                  29,560Accrued
      interest on related secured note from related party
                  
                  
                  127,011
                  
                  
                  
                  -Accrued
      expenses
                  
                  
                  (378,900
                  )
                  
                  
                  365,109Due
      to related parties
                  
                  
                  24,827
                  
                  
                  
                  (4,315
                  )Deferred
      revenue
                  
                  
                  78,000
                  
                  
                  
                  (22,500
                  )Liabilities
      of discontinued operations
                  
                  
                  (1,940,525
                  )
                  
                  
                  (1,202,112
                  )Net
      cash used in operating activities
                  
                  
                  (2,883,909
                  )
                  
                  
                  (4,977,236
                  )Cash
      Flows From Investing Activities:Purchase
      of property and equipment
                  
                  
                  (193,473
                  )
                  
                  
                  (304,664
                  )Proceeds
      from the sale of property and equipment of discontinued
      operations
                  
                  
                  -
                  
                  
                  
                  11,495Net
      cash used in investing activities
                  
                  
                  (193,473
                  )
                  
                  
                  (293,169
                  )Cash
      Flows From Financing Activities:Gross
      proceeds from note payable
                  
                  
                  119,875
                  
                  
                  
                  32,831Payments
      on note payable
                  
                  
                  (69,774
                  )
                  
                  
                  (17,816
                  )Gross
      proceeds from secured note from related party
                  
                  
                  1,000,000
                  
                  
                  
                  69,265Payments
      on secured note from related party
                  
                  
                  -
                  
                  
                  
                  (60,404
                  )Fees
      paid in connection with secured note from related party
                  
                  
                  (18,389
                  )
                  
                  
                  -Gross
      proceeds from capital leases
                  
                  
                  137,310
                  
                  
                  
                  85,790Payments
      on capital leases
                  
                  
                  (106,391
                  )
                  
                  
                  (24,397
                  )Restricted
      cash in connection with letters of credit
                  
                  
                  1,672
                  
                  
                  
                  -Gross
      proceeds from sales of preferred stock and warrants
                  
                  
                  6,507,001
                  
                  
                  
                  4,000,000Fees
      paid in connection with offering
                  
                  
                  -
                  
                  
                  
                  (15,617
                  )Net
      cash provided by financing activities
                  
                  
                  7,571,304
                  
                  
                  
                  4,069,652Net
      increase (decrease) in cash
                  
                  
                  4,493,922
                  
                  
                  
                  (1,200,753
                  )Cash
      - beginning of the period
                  
                  
                  1,403,653
                  
                  
                  
                  1,842,419Cash
      - end of the period
                  
                  $
                  5,897,575
                  
                  
                  $
                  641,666Supplemental
      Disclosures of Cash Flow InformationCash
      payments for interest
                  
                  $
                  37,593
                  
                  
                  $
                  72,449Non
      cash financing activities:Accrued
      Interest on related party note
                  
                  $
                  98,466
                  
                  
                  $
                  -





See
accompanying notes to unaudited consolidated financial
statements.


Page
6


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
30, 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
the Annual Report on 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 nine months ended September 30, 2010 are not
necessarily indicative of the results for the full fiscal year ending December
31, 2010.





Organization





The
Company was formed in January 2004 initially for the purpose of acquiring,
owning and operating businesses engaged in the 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
Enterprise (“InsPro”), which was introduced in 2004. InsPro Technologies offers
InsPro on a licensed and an Application Service Provider (“ASP”) 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


September
30, 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 September 30, 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 16%
and 14%, respectively, of the Company’s total accounts receivable balance at
September 30, 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 September 30, 2010 and December 31,
2009, because of the relatively short-term maturity and the market interest
rates of these instruments.


Page
8





HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
30, 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 InsPro
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 September 30, 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, which includes property and
equipment and intangible 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


September
30, 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 in
certain circumstances.  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 and
September 30, 2010 was $226,880 and $2,159,973, respectively, and recorded these
amounts in warrant liability.





For the
nine months ended September 30, 2010, the Company recorded a loss on the change
in fair value of derivative liability of $1,834,093 to mark to market for the
increase in fair value of the warrants during the nine months ended September
30, 2010.





The
Company determined the fair value of the warrant liability at September 30, 2010
was $6,242,858. The fair value was determined using the Black Scholes Option
Pricing Model based on the following assumptions: dividend yield: 0%, risk
free rate: 0.19% and the following:





Warrant Issue
                      Date
                    
                    Warrant
                      Exercise
                      Price
                    
                    
                    Aggregate
                      Number of
                      Warrants
                    
                    
                    Expected Term
                      (Years) of
                      Warrants
                    
                    
                    Volatility
                    
                    
                    Fair Value1/15/2009
                    
                    $
                    0.15
                    
                    
                    
                    26,666,667
                    
                    
                    
                    3.3
                    
                    
                    
                    371
                    %
                    
                    $
                    3,197,3183/26/2010
                    
                    $
                    0.15
                    
                    
                    
                    7,380,000
                    
                    
                    
                    4.5
                    
                    
                    
                    392
                    %
                    
                    
                    885,5689/30/2010
                    
                    $
                    0.15
                    
                    
                    
                    18,000,010
                    
                    
                    
                    5.0
                    
                    
                    
                    392
                    %
                    
                    
                    2,159,972$
                    6,242,858





A summary
of the Company's warrant liability activity and balances as of and for the nine
months ended September 30, 2010 are as follows:





Warrant
      liability balance as of December 31, 2009
                    
                    $
                    2,021,912Fair
      value of warrants issued during the nine months ended September 30,
      2010
                    
                    
                    2,386,853Fair
      value of warrants whose anti-dultion provisions expired during the nine
      months ended September 30, 2010
                    
                    
                    (1,123,710
                    )Increase
      in the fair value of warrants liability during the nine months ended
      September 30, 2010
                    
                    
                    2,957,802Warrant
      liability balance as of September 30, 2010
                    
                    $
                    6,242,858




Page
10


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2010





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





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.





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
September 30, 2010 include the following:





Series
      A convertible preferred stock issued and outstanding
                    
                    
                    25,535,000Series
      B convertible preferred stock issued and outstanding
                    
                    
                    36,000,020Secured
      note convertible into series B convertible preferred stock and
      warrants
                    
                    
                    3,235,770Options,
      issued, outstanding and exercisable
                    
                    
                    4,490,000Warrants
      to purchase common stock, issued, outstanding and
    exercisable
                    
                    
                    83,188,564Warrants
      to purchase series A convertible preferred stock, issued, outstanding and
      exercisable
                    
                    
                    3,000,000155,449,354





Revenue
recognition





We follow
the guidance of the Statement of Financial Accounting Standards ASC 605 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 ASP basis.  An InsPro
software license entitles the purchaser to a perpetual license of InsPro
installed at a single client location.  Alternatively, ASP hosting
service enables a client to lease InsPro, 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.


Page
11


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2010





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





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.




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
and testing together with customer management, training and technical support,
as well as facilities, equipment and software costs.


Page
12


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2010





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





Advertising and other
marketing





Advertising
and other marketing costs are expensed as incurred.





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 September 30,
2010.  At September 30, 2010, the Company had $5,897,575 of cash and
$1,152,372 of restricted cash for a total of $7,049,947 in United States bank
deposits, of which $545,217 was federally insured and $6,504,730 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 September 30, 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 Nine Months ended September 30,2010
                  
                  
                  2009Largest
      InsPro client
                  
                  
                  32
                  %
                  
                  
                  48
                  %Second
      largest InsPro client
                  
                  
                  20
                  %
                  
                  
                  22
                  %





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.


Page
13


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2010





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





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 of 1933, as amended (the “Securities
Act”), a registration statement with the Securities and Exchange Commission (the
“SEC”) 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
(i) 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
September 30, 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, 2009 and 2010 private
placements.  Accordingly no liability was recorded as of September 30,
2010.





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 eventsevaluation 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 beginning with its year
ended December 31, 2009.


Page
14





HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2010





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 eliminated all of its licensed
employee sales agents along with other Telesales service and support
personnel. On February 20, 2009 (the “Closing Date”), the Company entered
into and completed the sale of the Company’s 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 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 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.





Simultaneously
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


September
30, 2010





NOTE 2 –
DISCONTINUED
OPERATIONS (continued)





On March
31, 2010, the Company entered into and completed an asset purchase agreement for
the sale of Insurint (the “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 former
Insurint business, including the Insurint software, the 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.  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 transition policy
commissions pursuant to the Agreement, renewal commissions paid to the Company
by insurance companies based upon the insurance policies sold to consumers by
the Company’s Agency Business prior to the Closing Date, and sub-leasing
revenue.





We
recognize commissions and other revenue from carriers after we receive
notice that the insurance carrier has received payment of the related premium.
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 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


September
30, 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


September
30, 2010





NOTE 2 –
DISCONTINUED
OPERATIONS (continued)





The
financial position of discontinued operations was as follows:





September 30, 2010
                  
                  
                  December 31, 2009Accounts
      receivable, less allowance for doubtful accounts $0 and
    $4,735
                  
                  $
                  (147,777
                  )
                  
                  $
                  (322,619
                  )Other
      current assets
                  
                  
                  (153,884
                  )
                  
                  
                  (22,907
                  )Other
      assets
                  
                  
                  (158,796
                  )
                  
                  
                  (91,809
                  )Accounts
      payable
                  
                  
                  207,581
                  
                  
                  
                  183,722Accrued
      expenses
                  
                  
                  349,805
                  
                  
                  
                  2,273,024Sub-tenant
      security deposit
                  
                  
                  113,706
                  
                  
                  
                  121,007Unearned
      commission advances
                  
                  
                  -
                  
                  
                  
                  3,461Deferred
      revenue
                  
                  
                  -
                  
                  
                  
                  751Net
      current liabilities of discontinued operations
                  
                  $
                  210,635
                  
                  
                  $
                  2,144,630





The
results of discontinued operations were as follows:





FortheThreeMonthsEndedSeptember30,
                
                
                FortheNineMonthsEndedSeptember30,2010
                
                
                2009
                
                
                2010
                
                
                2009Revenues:Commission
      and other revenue from carriers
                
                $
                108,264
                
                
                $
                251,023
                
                
                $
                371,005
                
                
                $
                1,972,178Gain
      recognized upon the execution of the Agreement
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,664,794Transition
      policy commission pursuant to the Agreement
                
                
                244,590
                
                
                
                606,424
                
                
                
                912,646
                
                
                
                1,383,279Gain
      on the sale of Insurint
                
                
                -
                
                
                
                -
                
                
                
                578,569
                
                
                
                -Gain
      on disposal of property and equipment
                
                
                -
                
                
                
                217,501
                
                
                
                6,530
                
                
                
                219,943Lead
      sale revenue
                
                
                53
                
                
                
                -
                
                
                
                156
                
                
                
                10,227Insurint
      revenue
                
                
                -
                
                
                
                31,526
                
                
                
                53,340
                
                
                
                118,022Sub-lease
      revenue
                
                
                304,595
                
                
                
                326,393
                
                
                
                897,486
                
                
                
                1,007,898657,502
                
                
                
                1,432,867
                
                
                
                2,819,732
                
                
                
                7,376,341Operating
      expenses:Salaries,
      employee benefits and related taxes
                
                
                24,211
                
                
                
                321,780
                
                
                
                222,050
                
                
                
                1,633,931Lead,
      advertising and other marketing
                
                
                -
                
                
                
                (27,001
                )
                
                
                -
                
                
                
                101,356Depreciation
      and amortization
                
                
                -
                
                
                
                67,042
                
                
                
                -
                
                
                
                296,745Rent,
      utilities, telephone and communications
                
                
                194,637
                
                
                
                339,382
                
                
                
                89,137
                
                
                
                3,350,070Professional
      fees
                
                
                10,435
                
                
                
                35,222
                
                
                
                180,449
                
                
                
                538,815Loss
      on impairment of property and equipment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                416,764Loss
      on impairment of intangible assets
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,222,817Other
      general and administrative
                
                
                24,705
                
                
                
                226,285
                
                
                
                193,224
                
                
                
                541,210253,988
                
                
                
                962,710
                
                
                
                684,860
                
                
                
                8,101,708Gain
      (loss) from discontinued operations
                
                $
                403,514
                
                
                $
                470,157
                
                
                $
                2,134,872
                
                
                $
                (725,367
                )




Page
18


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2010





NOTE 3 -
PROPERTY AND
EQUIPMENT





Property
and equipment consisted of the following:





Useful
                      Life
                      (Years)
                    
                    
                    At September30,
                      2010
                    
                    
                    At December31,
                      2009Computer
      equipment and software
                    
                    3
                    
                    
                    $
                    1,093,587
                    
                    
                    $
                    900,428Office
      equipment
                    
                    4.6
                    
                    
                    
                    194,360
                    
                    
                    
                    194,360Office
      furniture and fixtures
                    
                    6.7
                    
                    
                    
                    191,363
                    
                    
                    
                    189,857Leasehold
      improvements
                    
                    9.8
                    
                    
                    
                    34,034
                    
                    
                    
                    34,0341,513,344
                    
                    
                    
                    1,318,679Less
      accumulated depreciation
                    
                    
                    
                    
                    
                    (850,246
                    )
                    
                    
                    (550,495
                    )$
                    663,098
                    
                    
                    $
                    768,184





For the
three months ended September 30, 2010 and 2009, depreciation expense was
$103,879 and $87,847, respectively. For the nine months
ended September 30, 2010 and 2009, depreciation expense was $299,750 and
$241,557, respectively.




NOTE 4 –
INTANGIBLE
ASSETS





Intangible
assets consisted of the following:





Useful
                      Life
                      (Years)
                    
                    
                    At September30,
                      2010
                    
                    
                    At December31,
                      2009InsPro
      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
                    
                    
                    
                    
                    
                    (1,578,505
                    )
                    
                    
                    (1,183,903
                    )$
                    693,463
                    
                    
                    $
                    1,088,065





For the
three months ended September 30, 2010 and 2009, amortization expense was
$116,989 and $138,807 respectively.


For the
nine months ended September 30, 2010 and 2009, amortization expense was
$394,602 and $416,420 respectively.





Amortization
expense subsequent to the period ended September 30, 2010 is as
follows:





2010
                        
                        $
                        86,6792011
                        
                        
                        346,7342012
                        
                        
                        260,050$
                        693,463




Page
19


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
30, 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.





On June
15, 2010, the Company and Co-Investment agreed to modify the terms of the Loan
Agreement and the Note to: (i) increase the loan from $1,250,000 to $2,250,000
on June 15, 2010 and (ii) allow Co-Investment to require the Company to repay to
Co-Investment an amount not to exceed the loan balance plus accrued interest in
the form of the Company’s equity securities at the conversion price and terms
identical to the price and terms of the Company’s next issuance of common or
preferred stock issued for cash consideration occurring after June 15, 2010
(“Equity
Issuance”).  An Equity Issuance occurred on September 30,
2010.  The Company and Co-Investment agreed in the event that the
Company does not have a sufficient number of authorized shares of its equity
securities to issue to Co-Investment the Company and Co-Investment will jointly
cooperate with one another in obtaining the necessary shareholder approval to
increase the number of authorized shares of the Parent’s equity securities and
the effective date of the issuance and repayment will be the date of the
Company’s shareholder approval.    See Note 7 Shareholders
Equity.


Page
20


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2010





NOTE 5 –
SECURED NOTE FROM
RELATED PARTY (continued)





As of
September 30, 2010, Co-Investment can convert $323,577 of the Note into 107,859
shares of Series B convertible preferred stock and warrants to purchase
1,078,590 shares of the Company’s common stock at $0.15 per share for a period
of five years at terms identical to the September 2010 Warrants (as defined
below).   As of September 30, 2010, Co-Investment cannot
contractually demand to convert the entire outstanding balance of the Note
because the Company does not have a sufficient number of authorized shares of
its equity securities.  The Company is seeking shareholder approval to
increase the number of authorized shares sufficient to allow Co-Investment to
convert the outstanding balance of the Note at the Company’s upcoming annual
meeting of shareholders, which will be held on November 18, 2010.  As
of September 30, 2010, Co-Investment has not demanded to convert any portion of
the outstanding balance of the Note.





As of
September 30, 2010, the Company recorded $101,205 of accrued interest on the
Note.





NOTE 6 –
RELATED PARTY
TRANSACTIONS





On
January 14, 2009, Co-Investment purchased 1,000,000 shares (each, a “Preferred
Share”) of the Company’s Series A convertible preferred stock (the “Series A
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
for a purchase price of  $4,000,000 (the “2009 Private
Placement”).





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 Series A
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.





During
the second quarter of 2010 the Company incurred $24,827 of legal costs
pertaining to Co-Investment’s out-of-pocket legal costs pertaining to the Loan
Agreement and Note, which is recorded as due to a related party as of September
30, 2010.  Also during the second quarter of 2010 the Company paid
$44,185 to Buchanan Ingersoll & Rooney PC for reimbursement of
Co-Investment’s out-of-pocket legal expenses pertaining to the Company’s
indemnification of Co-Investment in regards to certain
litigation.  Mr. Tecce is of counsel to the law firm of Buchanan
Ingersoll & Rooney PC.





In
connection with the Equity Issuance that occurred on September 30, 2010, the
Company agreed to amend the warrants issued to Co-Investment in connection with
the 2009 Private Placement and the warrants issued to Co-Investment and other
investors in connection with the Company’s March 2010 rights offering (the
“Prior Warrants”) such that the expiration dates of the anti-dilution provisions
of the Prior Warrants were extended to the expiration date of the anti-dilution
provisions of the warrants issued in the Equity Issuance.


Page
21


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2010





NOTE 7 –
SHAREHOLDERS’
EQUITY





Common
Stock





As of
September 30, 2010, the number of the authorized shares of the Company’s common
stock exceeded the aggregate sum of all issued and outstanding shares of the
Company’s common stock, convertible preferred stock,  stock options,
warrants, and the convertible portion of the Note.  See Note 5 –
Secured Note from Related Party.





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 Series A
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 Company’s
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 Series A 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 Series A 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. Effective with the expiration of the
rights offering all unexercised subscription rights expired.  The
Series A Preferred Stock issued in 2010 has the same terms as the Series A
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 Series A Preferred
Stock.


On
September 30, 2010, the Company filed a Certificate of Designation with the
Secretary of State of the State of Delaware. The Certificate of Designation was
approved by the Company’s Board of Directors on September 9, 2010 and became
effective upon filing. The Certificate of Designation provides for the terms of
the Company’s Series B convertible preferred stock, par value $0.001 per share,
(the “Series B Preferred Stock”) issued pursuant to the 2010 Purchase Agreement
(as defined below).


Page
22


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2010





NOTE 7 –
SHAREHOLDERS’ EQUITY
(continued)





On
September 30, 2010, the Company entered into and completed a private placement
(the “2010 Private Placement”) with certain accredited investors (the
“Investors”), including Independence Blue Cross, a Pennsylvania hospital plan
corporation (“Independence Blue Cross”), for an aggregate of 1,800,001 shares of
Series B Preferred Stock, and warrants (“September 2010 Warrants”) to purchase
18,000,010 shares of its Common Stock, pursuant to the terms of a securities
purchase agreement (the “2010 Purchase Agreement”). The gross proceeds from the
closing were $5.4 million and the Company intends to use the net proceeds
of the 2010 Private Placement for working capital purposes.





Pursuant
to the 2010 Purchase Agreement, the Company agreed to sell to the Investors
1,800,001 investment units (each, a “2010 Unit”) in the 2010 Private Placement
at a per 2010 Unit purchase price equal to $3.00.  Each 2010 Unit sold
in the 2010 Private Placement consisted of one share of Series B Preferred Stock
and a Warrant to purchase ten shares of Common Stock at an initial exercise
price of $0.15 per share, subject to adjustment.





The
Series B Preferred Stock is entitled to vote as a single class with the holders
of the Company’s common and preferred stock, with each Share of Series B
Preferred Stock having the right to 20 votes.  Upon the liquidation,
sale or merger of the Company, each Share of Series B Preferred Stock is
entitled to receive an amount equal to the greater of (A) a liquidation
preference equal to the Series B Preferred Stock original issue price, subject
to certain customary adjustments, or (B) the amount such Share of Series B
Preferred Stock would receive if it participated pari passu with the holders of
common and preferred stock on an as-converted basis.  Each Share of
Series B Preferred Stock becomes convertible into 20 shares of common stock (the
“Shares”), subject to adjustment and at the option of the holder of the Series B
Preferred Stock.  For so long as any shares of Series B Preferred
Stocks are outstanding, the vote or consent of the Holders of at least
two-thirds of the Series B Preferred Stock is required to approve (Y) any
amendment to the Company’s certificate of incorporation or bylaws that would
adversely alter the voting powers, preferences or special rights of the Series B
Preferred Stock or (Z) any amendment to the Company’s certificate of
incorporation to create any shares of capital stock that rank senior to the
Series B Preferred Stock.  In addition to the voting rights described
above, for so long as 1,000,000 Shares of Series B Preferred Stocks are
outstanding, the vote or consent of the holders of at least two-thirds of the
Shares of Series B Preferred Stock is required to effect or validate any merger,
sale of substantially all of the assets of the Company or other fundamental
transaction, unless such transaction, when consummated, will provide the holders
of Series B Preferred Stock with an amount per share equal the Series B
Preferred Stock original issue price in aggregate for all issued and outstanding
Series B Preferred Stock.





Under the
terms of the 2010 Purchase Agreement, and subject to the approval of the
Company’s shareholders of an amendment to the Certificate of Incorporation of
the Company to increase the number of shares of authorized Common Stock of the
Company, the Company has agreed to sell an additional 200,000 Units to the
Investors after September 30, 2010, on the same terms and conditions as
described in the 2010 Purchase Agreement (the “Subsequent
Closing”).





The
Company agreed, pursuant to the terms of the 2010 Purchase Agreement, that,
except for the Follow-on Financing (as defined in the 2010 Purchase Agreement),
for a period of 90 days after the effective date (the “Initial Standstill”) of
the 2010 Purchase Agreement, the Company shall not, subject to certain
exceptions, offer, sell, grant any option to purchase, or otherwise dispose of
any equity securities or equity equivalent securities, including without
limitation, any debt, preferred stock, rights, options, warrants or other
instrument that is at any time convertible into or exchangeable for, or
otherwise entitles the holder thereof to receive, capital stock and other
securities of the Company.


Page
23





HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2010





NOTE 7 –
SHAREHOLDERS’ EQUITY
(continued)





The 2010
Purchase Agreement also provides for a customary participation right for the
Investor, subject to certain exceptions and limitations, which grants the
Investor the right to participate in any future capital raising financings of
the Company occurring prior to September 30, 2012.  The Investor may
participate in such financings at a level based on each Investor’s ownership
percentage of the Company on a fully-diluted basis prior to such
financing.





The
Company allocated $2,159,973 of the $5,400,001 proceeds received as a result of
the 2010 Purchase Agreement to the warrant liability using a Black-Scholes
option pricing model with the following assumptions:  expected
volatility of 392%, a risk-free interest rate of 0.19%, an expected term of 5
years and 0% dividend yield.   See Note 1 – Warrant
Liability.  The remaining $3,240,028 of the proceeds received was
allocated to the Series B Preferred Stock.





Stock
Options





On March
25, 2010 the Company issued to an executive of the Company a stock option 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.





On July
9, 2010 the Company issued to five executives of the Company stock options in
aggregate to purchase a total of 500,000 shares of the Company’s common stock,
which vests as follows: 125,000 shares of common stock on each of January 9,
2011, July 9, 2011, January 9, 2012 and July 9, 2012. These options have a five
year term and an exercise price of $0.065, which is equal to closing price of
one share of the Company’s common stock as quoted on the OTCBB on July 9,
2010.





On August
18, 2010, the board of directors of the Company adopted the Company's 2010
Equity Compensation Plan (“the 2010 Plan”), which plan is subject to shareholder
approval.  An aggregate of 1,500,000 shares of the Company’s common
stock have been reserved for issuance under the 2010 Plan in addition to any
authorized and unissued shares of common stock available for issuance under the
Company's 2008 Equity Compensation Plan.  The purpose of the 2010 Plan
is to provide a comprehensive compensation program to attract and retain
qualified individuals to serve as employees, directors or key outside
consultants.  The Company is authorized to award cash fees and issue
non-qualified stock options under the 2010 Plan. The 2010 Plan is administered
by the Company’s board of directors or the compensation committee established by
the board.  On August 18, 2010 the Company issued to Robert Oakes a
stock option grant under the 2010 Plan, subject to shareholder approval, to
purchase a total of 1,500,000 shares of the Company’s common stock, which vests
as follows: 375,000 shares of common stock on each of June 30, 2011, 2012, 2013
and 2014. This option grant has a five year term and an exercise price of
$0.111, which is equal to closing price of one share of the Company’s common
stock as quoted on the OTCBB on August 18, 2010.  As of September 30,
2010 there were 1,500,000 options granted under the 2010 Plan.





During
the nine months ended September 30, 2010, 550,000 options previously
granted to Mr. Alvin Clemens, 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 option.


Page
24





HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2010





NOTE 7 –
SHAREHOLDERS’ EQUITY
(continued)





During
the nine months ended September 30, 2010, 416,648 options previously
granted to Mr. Charles Eissa, the former COO of the Company, were forfeited as a
result of Mr. Eissa’s termination of employment in accordance with the terms of
the stock option.





During
the nine months ended September 30, 2010, 70,000 options previously granted
to various former employees were forfeited 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 Nine months
                      ended September 30,2010
                    
                    
                    2009Selling,
      marketing and administrative expensesSalaries,
      commission and related taxes
                    
                    $
                    20,993
                    
                    
                    $
                    412,775Loss
      from discontinued operations
                    
                    
                    12,300
                    
                    
                    
                    37,453$
                    33,293
                    
                    
                    $
                    450,228





A summary
of the Company's outstanding stock options as of and for the nine months ended
September 30, 2010 are as follows:




Number
                    
                    
                    WeightedOf Shares
                    
                    
                    Average
                    
                    
                    WeightedUnderlying
                    
                    
                    Exercise
                    
                    
                    AverageOptions
                    
                    
                    Price
                    
                    
                    FairValueOutstanding
      at December 31, 2009
                    
                    
                    5,676,648
                    
                    
                    $
                    0.80
                    
                    
                    $
                    0.55For
      the nine months ended September 30, 2010Granted
                    
                    
                    2,250,000
                    
                    
                    
                    0.10
                    
                    
                    
                    0.10Exercised
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Forfeited
                    
                    
                    (1,036,648
                    )
                    
                    
                    1.69
                    
                    
                    
                    0.39Outstanding
      at September 30, 2010
                    
                    
                    6,890,000
                    
                    
                    $
                    0.44
                    
                    
                    $
                    0.43Outstanding
      and exercisable at September 30, 2010
                    
                    
                    4,490,000
                    
                    
                    $
                    0.97
                    
                    
                    $
                    0.63




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 nine months ended September 30, 2010:
Expected volatility 380%, risk-free interest rate 0.19%, expected life in years
5, and assumed dividend yield 0%.


Page
25


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2010





NOTE 7 –
SHAREHOLDERS’ EQUITY
(continued)





The
following information applies to options outstanding at September 30,
2010:




Options Outstanding
                      
                      
                      Options ExercisableExercise
                        Price
                      
                      Number of Shares
                        Underlying Options
                      
                      
                      Weighted
                        Average
                        Remaining
                        Contractual
                        Life
                      
                      
                      Exercise
                        Price
                      
                      
                      NumberExercisable
                      
                      
                      Exercise
                        Price$
                      0.060
                      
                      
                      405,000
                      
                      
                      
                      4.1
                      
                      
                      $
                      0.060
                      
                      
                      
                      205,000
                      
                      
                      $
                      0.0600.065
                      
                      
                      500,000
                      
                      
                      
                      4.8
                      
                      
                      
                      0.065
                      
                      
                      
                      -
                      
                      
                      
                      0.0650.100
                      
                      
                      2,220,000
                      
                      
                      
                      3.4
                      
                      
                      
                      0.100
                      
                      
                      
                      2,020,000
                      
                      
                      
                      0.1000.111
                      
                      
                      1,500,000
                      
                      
                      
                      4.9
                      
                      
                      
                      0.111
                      
                      
                      
                      -
                      
                      
                      
                      0.1111.000
                      
                      
                      1,300,000
                      
                      
                      
                      4.0
                      
                      
                      
                      1.000
                      
                      
                      
                      1,300,000
                      
                      
                      
                      1.0002.620
                      
                      
                      20,000
                      
                      
                      
                      1.2
                      
                      
                      
                      2.620
                      
                      
                      
                      20,000
                      
                      
                      
                      2.6202.700
                      
                      
                      425,000
                      
                      
                      
                      0.4
                      
                      
                      
                      2.700
                      
                      
                      
                      425,000
                      
                      
                      
                      2.7002.950
                      
                      
                      45,000
                      
                      
                      
                      0.7
                      
                      
                      
                      2.950
                      
                      
                      
                      45,000
                      
                      
                      
                      2.9503.500
                      
                      
                      75,000
                      
                      
                      
                      5.5
                      
                      
                      
                      3.500
                      
                      
                      
                      75,000
                      
                      
                      
                      3.500$
                      3.600
                      
                      
                      400,000
                      
                      
                      
                      5.6
                      
                      
                      $
                      3.600
                      
                      
                      
                      400,000
                      
                      
                      $
                      3.6006,890,000
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4,490,000





As of
September 30, 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 606,980
shares of our common stock remain available for future stock option grants under
the 2008 Equity Compensation Plan. As of September 30, 2010, there were
1,500,000 shares of our common stock authorized to be issued under the Company’s
2010 Plan, of which no shares of our common stock remain available for future
stock option grants under the 2010 Plan.





The total
intrinsic value of stock options granted during 2010 and 2009 was $56,000 and
$0, respectively.  The total intrinsic value of stock options outstanding
and exercisable as of September 30, 2010 was $109,050.





The value
of equity compensation expense not yet expensed pertaining to unvested equity
compensation was $215,395 as of September 30, 2010, which will be recognized
over a weighted average 5 years in the future.





Common Stock
warrants





On March
26, 2010 the Company issued warrants (the “March 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 March 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 March 2010 Warrants, subject to customary
exceptions.


Page
26


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2010





NOTE 7 –
SHAREHOLDERS’ EQUITY
(continued)





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





On
September 30, 2010, pursuant to the 2010 Purchase Agreement the Company issued
the September 2010 Warrants to purchase in aggregate 18,000,010 shares of common
stock at an exercise price of $0.15 per share for a period of 5
years.  The September 2010 Warrants also include full ratchet
anti-dilution adjustment provisions for issuances of securities below $0.15 per
share of common stock during the first two years following the date of issuance
of the September 2010 Warrants, subject to customary exceptions.





Also in
connection with the 2010 Private Placement, the Company agreed to amend the
warrants issued to Co-Investment in connection with the Company’s January 2009
private placement (the “2009 Warrants”) and the March 2010 Warrants issued to
Co-Investment and other investors (the “Prior Warrants”) as a condition of
Co-Investment’s consent to modify the terms of the Series A Preferred
Stock.  Pursuant to addendums and certificates of adjustment to the
2009 Warrants  and addendums and certificates of adjustment to the
2010 March Warrants, the expiration dates of the anti-dilution provisions of the
Prior Warrants were extended to the expiration date of the anti-dilution
provisions of the September 2010 Warrants.  In addition, pursuant to
the terms of the Prior Warrants, the exercise price of the Prior Warrants was
reduced from $0.20 to $0.15 and the aggregate number of shares of Common Stock
issuable under the 2009 Warrants was increased by 6,666,667 from 20,000,000 to
26,666,667 and the aggregate number of shares of Common Stock issuable under the
March 2010 Warrants was increased by 1,845,000 from 5,535,000 to
7,380,000.





The
Company determined the March 2010 Warrants and the September 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.





During
the nine months ended September 30, 2010, warrants to purchase 350,000 shares of
the Company’s common stock at an exercise price of $2.80 per share and 75,000
shares of the Company’s common stock at an exercise price of $1.50 per share
expired in accordance with the terms of the warrants.


Page
27


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2010





NOTE 7 –
SHAREHOLDERS’ EQUITY
(continued)





A summary
of the status of the Company's outstanding common stock warrants as of and for
the nine months ended September 30, 2010 are as follows:




WeightedCommon
                      
                      
                      AverageStock
                      
                      
                      ExerciseWarrants
                      
                      
                      PriceOutstanding
      at December 31, 2009
                      
                      
                      51,566,887
                      
                      
                      $
                      0.38For
      the period ended September 30, 2010Granted
                      
                      
                      23,535,010
                      
                      
                      
                      0.16Adjustment
      to warrants issued in 2009 for Preferred Stock and 2010
      Warrants
                      
                      
                      6,666,667
                      
                      
                      
                      0.15Adjustment
      to warrants issued in 2010 for Preferred Stock and 2010
      Warrants
                      
                      
                      1,845,000
                      
                      
                      
                      0.15Expired
                      
                      
                      (425,000
                      )
                      
                      
                      2.57Outstanding
      at September 30, 2010
                      
                      
                      83,188,564
                      
                      
                      
                      0.27Exercisable
      at September 30, 2010
                      
                      
                      83,188,564
                      
                      
                      $
                      0.27





The
following information applies to common stock warrants outstanding at September
30, 2010:


Year of
                      Expiration
                    
                    Common
                      Stock
                      Warrants
                    
                    
                    Exercise Price2011
                    
                    
                    1,175,000
                    
                    
                    $
                    1.502012
                    
                    
                    4,966,887
                    
                    
                    
                    1.512013
                    
                    
                    25,000,000
                    
                    
                    
                    0.202014
                    
                    
                    26,666,667
                    
                    
                    
                    0.152015
                    
                    
                    25,380,010
                    
                    
                    $
                    0.1583,188,564





Outstanding
common stock warrants at September 30, 2010 have a weighted average remaining
contractual life of 3.4 years.





Preferred Stock
warrants





On August
18, 2010, the board of directors of the Company granted a warrant to purchase
150,000 shares of Series A Preferred Stock at an exercise price equal to $4.00
per share to Mr. Oakes.  The warrant is immediately exercisable, non
transferrable and expires on August 18, 2015.  The Company estimated
the fair value of the warrant to be $332,994 as of the date of grant using the
Black-Scholes option-pricing model based on the following assumptions: expected
volatility 384%, risk-free interest rate 0.19%, expected life in years 5, and
assumed dividend yield 0%.  The Company recorded the fair value of the
warrant as salaries, employee benefits and related taxes.


Page
28


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2010





NOTE 7 –
SHAREHOLDERS’ EQUITY
(continued)





A summary
of the status of the Company's outstanding preferred stock warrants as of and
for the nine months ended September 30, 2010 are as follows:





WeightedPreferred
                  
                  
                  AverageStock
                  
                  
                  ExerciseWarrants
                  
                  
                  PriceOutstanding
      at December 31, 2009
                  
                  
                  -
                  
                  
                  $
                  -For
      the period ended September 30, 2010Granted
                  
                  
                  150,000
                  
                  
                  
                  4.00Exercised
                  
                  
                  -
                  
                  
                  
                  -Expired
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      at September 30, 2010
                  
                  
                  150,000
                  
                  
                  
                  4.00Exercisable
      at September 30, 2010
                  
                  
                  150,000
                  
                  
                  $
                  4.00





Outstanding
preferred stock warrants at September 30, 2010 have a weighted average remaining
contractual life of 4.9 years.





Registration
Rights





In
connection with the signing of the 2010 Purchase Agreement, the Company and the
Investor also entered into a Registration Rights Agreement (the “2010
Registration Rights Agreement”). Under the terms of the 2010 Registration Rights
Agreement, the Company agreed to prepare and file with the SEC, within
30 days following the receipt of a demand notice of a holder of Registrable
Securities, a registration statement on Form S-1 (the “Registration Statement”)
covering the resale of the Shares and the Warrant Shares (collectively, the
“Registrable Securities”). Subject to limited exceptions, the Company also
agreed to use its reasonable best efforts to cause the Registration Statement to
be declared effective under the Securities Act of 1933, as amended (the
“Securities Act”), as soon as practical but, in any event, no later than
60 days following the date of the 2010 Registration Rights Agreement (or
120 days following the date of the 2010 Registration Rights Agreement in
the event the Registration Statement is subject to review by the SEC), and
agreed to use its reasonable best efforts to keep the Registration Statement
effective under the Securities Act until the date that all of the Registrable
Securities covered by the Registration Statement have been sold or may be sold
without volume restrictions pursuant to Rule 144(b)(i) promulgated under the
Securities Act.  In addition, if the Company proposes to register any
of its securities under the Securities Act in connection with the offering of
such securities for cash, the Company shall, at such time, promptly give each
holder of Registrable Securities notice of such intent, and such holders shall
have the option to register their Registrable Securities on such additional
registration statement.  The 2010 Registration Rights Agreement also
provides for the cash payment of partial damages to the Investor under certain
circumstances relating to failure to file or obtain or maintain effectiveness of
the Registration Statement, subject to adjustment.  As of September
30, 2010 the Company has not received a demand notice in connection with the
2010 Registration Rights Agreement.


Page
29


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2010





NOTE 8 –
CAPITAL LEASE
OBLIGATIONS





InsPro
Technologies 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 September 30, 2010 and December 31, 2009:




September 30, 2010
                      
                      
                      December 31, 2009Useful Life(Years)Computer
      equipment and software
                      
                      3
                      
                      
                      $
                      595,899
                      
                      
                      $
                      595,898Phone
      System
                      
                      3
                      
                      
                      
                      15,011
                      
                      
                      
                      15,011610,910
                      
                      
                      
                      610,909Less
      accumulated depreciation
                      
                      
                      
                      
                      
                      (367,053
                      )
                      
                      
                      (316,144
                      )$
                      243,857
                      
                      
                      $
                      294,765





Future
minimum payments required under capital leases at September 30, 2010 are as
follows:





2010
                  
                  $
                  43,7692011
                  
                  
                  181,2692012
                  
                  
                  100,6942013
                  
                  
                  37,4202014
                  
                  
                  30,7572015
                  
                  
                  17,941Total
      future payments
                  
                  
                  411,850Less
      amount representing interest
                  
                  
                  43,392Present
      value of future minimum payments
                  
                  
                  368,458Less
      current portion
                  
                  
                  162,598Long-term
      portion
                  
                  $
                  205,860





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 $30,246 and $32,519 for the
nine months ended September 30, 2010 and 2009.


Page
30


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
30, 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 commenced 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 gave written notice to FG2200, LLC
on or before June 15, 2010 accompanied with a payment FG2200, LLC the sum of 9
months’ rent pursuant to the lease agreement.  The Company provided
FG2200, LLC with written notice on June 11, 2010 of the Company’s desire to
terminate the Lease effective March 14, 2011 and paid $783,849 to FG2200, LLC on
June 14, 2010.  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.





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.





From June
30, 2009 through May 15, 2010, the Company used 5,094 square feet of the
approximate 50,000 square feet of the Deerfield Beach office for
operations.  As of September 30, 2010, the Company has accrued
$240,248 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 14, 2011 plus management’s estimate of
contractually required expenses pertaining to the Deerfield Beach office, which
are estimated to be $687,048, less future sub-lease revenue, which is estimated
to be $446,668.


Page
31


HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
30, 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 $129,944 as of September 30, 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 September 30, 2010 and December 31, 2009 had balances of
$1,152,372 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
32




HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
30, 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 September 30, 2010, the
Company has accrued $88,857 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.





The
Company leases certain real and personal property under non-cancelable operating
leases.  Rent expense was $424,919 and $3,249,979 for the nine months
ended September 30, 2010 and 2009, respectively.





Future
minimum payments required under operating leases and service agreements at
September 30, 2010 are as follows:





2010
                  
                  $
                  511,0112011
                  
                  
                  1,152,0032012
                  
                  
                  534,6702013
                  
                  
                  277,1842014
                  
                  
                  255,843thereafter
                  
                  
                  584,128Total
                  
                  $
                  3,314,839





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 have entered into
definitive settlement agreements and the court issued an order dismissing all
claims in this case.




Page
33




HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2010





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





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 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.




Page
34




HEALTH
BENEFITS DIRECT CORPORATION AND SUBSIDIARIES


NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2010





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





Termination of 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.





On August
2, 2010, we provided 30 days notice of our unilateral termination of the License
Agreement without cause.





Board
Representation





In
connection with the 2010 Purchase Agreement, the Company also entered into a
Letter Agreement with Independence Blue Cross, dated September 30, 2010,
pursuant to which Company agreed to create one vacancy on the Company’s Board by
increasing the size of the Board from ten to eleven directors. The Company also
agreed to take all necessary action to appoint a director designated by
Independence Blue Cross upon the earlier to occur of the Subsequent Closing (as
defined in the 2010 Purchase Agreement) or November 30, 2010, who will serve in
such capacity until the expiration of the term at the Company’s 2011 annual
meeting of stockholders. In addition, the Company agreed to include Independence
Blue Cross’ designee on the Board’s slate of nominees for election as directors
of the Company and to use its best efforts to cause the election of such
individual for so long as Independence Blue Cross holds either (i) shares of the
Series B Preferred Stock in an amount equal to fifty percent (50%) or more of
the number of shares of the Series B Preferred Stock purchased under the
Purchase Agreement or (ii) shares of the Common Stock in an amount equal to
fifty percent (50%) or more of the number of shares of the Common Stock that
Independence Blue Cross is entitled to receive upon conversion of the Series B
Preferred Stock acquired under the Purchase Agreement.





NOTE 11 –
SUBSEQUENT
EVENTS





Management
has evaluated the effects of all events subsequent to September 30, 2010 through
the date which the financial statements were available to be issued and has
concluded that all events requiring adjustment to or disclosure in the financial
statements have been made.




Page
35





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 Quarterly Report of
Form 10-Q by the foregoing cautionary statements.




Page
36


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. 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 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
37




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
38




RESULTS
OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 2010 COMPARED TO THE THREE
MONTHS ENDED SEPTEMBER 30, 2009





Revenues





For the
three months ended September 30, 2010 (“Third Quarter 2010”), we earned revenues
of $1,805,415 compared to $1,444,170 for the three months ended September 30,
2009 (“Third Quarter 2009”), an increase of $361,245 or 25%.  Revenues
include the following:




For the Three Months
                          Ended September 30,2010
                        
                        
                        2009Professional
      services
                        
                        $
                        1,260,345
                        
                        
                        $
                        831,701ASP
      revenue
                        
                        
                        374,967
                        
                        
                        
                        371,143Sales
      of software licenses
                        
                        
                        -
                        
                        
                        
                        87,500Maintenance
      revenue
                        
                        
                        170,000
                        
                        
                        
                        144,500Sub-leasing
      revenue
                        
                        
                        103
                        
                        
                        
                        9,326Total
                        
                        $
                        1,805,415
                        
                        
                        $
                        1,444,170





·
            Professional
      services revenue increased $428,644 or 52% as a result of higher post
      implementation services, which were provided by InsPro Technologies to
      several clients.  Implementation services, which were provided
      to 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.




·
            ASP
      revenue increased $3,834 or 1%.   The commencement of
      hosting services to a recently implemented client partially offset by
      lower ASP revenue from three existing clients.  In Third Quarter
      2010 we earned ASP revenue from seven InsPro clients. ASP hosting service
      enables a client to lease the InsPro software, paying only for that
      capacity required to support their business.  In addition InsPro
      Technologies provides hosting service to client’s licensed InsPro
      software.  InsPro’s ASP hosting clients access InsPro installed
      on InsPro Technologies’ owned servers located at InsPro Technologies’
      offices or at a third party’s site.




·
            In
      Third Quarter 2009 we earned $87,500 from sales of software licenses from
      a single InsPro client.




·
            Maintenance
      revenue increased $25,500 or 18% as a result of the addition of two
      maintenance contracts compared to Third Quarter
  2009.




Page
39




Cost
of Revenues





Cost of
revenues are 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 Third Quarter 2010 was $1,523,188 as compared to $1,690,673 for
Third Quarter 2009 for a decrease of $167,485 or 10%. Cost of revenues consisted
of the following:





For the Three Months
                          Ended September 30,2010
                        
                        
                        2009Salaries,
      employee benefits and related taxes
                        
                        $
                        955,156
                        
                        
                        $
                        950,435Professional
      fees
                        
                        
                        355,819
                        
                        
                        
                        493,055Rent,
      utilities, telephone and communications
                        
                        
                        69,558
                        
                        
                        
                        64,162Other
      cost of revenues
                        
                        
                        142,655
                        
                        
                        
                        183,021$
                        1,523,188
                        
                        
                        $
                        1,690,673





·
            Our
      professional fees component of cost of revenues in Third Quarter 2010 was
      $355,819 as compared to $493,055 for Third Quarter 2009 for a decrease of
      $137,236 or 28%.  Professional fees decreased as a result of the
      hiring of two former consultants as employees and reduced utilization of
      certain domestic based independent
contractors.




·
            Our
      rent, utilities, telephone and communications component of cost of
      revenues in Third Quarter 2010 was $69,558 as compared to $64,162 for
      Third Quarter 2009 for an increase of $5,396 or 8%.  Rent,
      utilities, telephone and communications increased as a result of increased
      ASP communications expense and an increase in the amount of leased space
      at InsPro’s Eddystone office during
2009.




·
            Other
      cost of revenues in Third Quarter 2010 was $142,655 as compared to
      $183,021 in Third Quarter 2009, a decrease of $40,366 or
      21%.  The decrease was the result of costs reduction initiatives
      pertaining to computer processing. Other cost of revenues consisted of
      computer processing incurred primarily to provide ASP hosting services,
      hardware and software, travel and entertainment, and office
      expenses.




Gross
Profit





As a
result of the aforementioned factors, we reported a gross profit of $282,227 in
Third Quarter 2010 as compared to a gross loss of $246,503 in Third Quarter
2009.




Page
40




Selling,
Marketing and Administrative Expenses





Our
selling, marketing and administrative expenses for Third Quarter 2010 was
$1,535,291 as compared to $1,646,611 for Third Quarter 2009 for a decrease of
$111,320 or 7%.  Selling, marketing and administrative expenses
consisted of the following:





For the Three Months
                          Ended September 30,2010
                        
                        
                        2009Salaries,
      employee benefits and related taxes
                        
                        $
                        962,802
                        
                        
                        $
                        658,328Advertising
      and other marketing
                        
                        
                        35,317
                        
                        
                        
                        90,814Depreciation
      and amortization
                        
                        
                        220,868
                        
                        
                        
                        226,654Rent,
      utilities, telephone and communications
                        
                        
                        118,245
                        
                        
                        
                        146,157Professional
      fees
                        
                        
                        63,600
                        
                        
                        
                        448,955Other
      general and administrative
                        
                        
                        134,459
                        
                        
                        
                        75,703$
                        1,535,291
                        
                        
                        $
                        1,646,611




In Third
Quarter 2010 we incurred salaries, employee benefits and related taxes of
$962,802 as compared to $658,328 for Third Quarter 2009, an increase of $304,474
or 46%. Salaries, commission and related taxes consisted of the
following:




For the Three Months
                              Ended September 30,2010
                            
                            
                            2009Salaries,
      wages and bonuses
                            
                            $
                            510,010
                            
                            
                            $
                            500,405Share
      based employee and director compensation
                            
                            
                            359,087
                            
                            
                            
                            74,976Commissions
      to employees
                            
                            
                            7,061
                            
                            
                            
                            -Employee
      benefits
                            
                            
                            36,099
                            
                            
                            
                            20,973Payroll
      taxes
                            
                            
                            24,356
                            
                            
                            
                            34,937Severance
      and other compensation
                            
                            
                            3,656
                            
                            
                            
                            2,496Directors’
      compensation
                            
                            
                            22,533
                            
                            
                            
                            24,541Total
                            
                            $
                            962,802
                            
                            
                            $
                            658,328





·
            Share
      based employee and director compensation expense was $359,087 in Third
      Quarter 2010 as compared to $74,976 in Third Quarter 2009.  The
      increase is primarily attributable to the Company’s grant to Mr. Oakes of
      an immediately exercisable warrant to purchase 150,000 shares of Series A
      Preferred Stock at an exercise price equal to $4.00 per
      share.  The Company recorded an expense of $332,994, which is
      the estimated the fair value of warrant.  Share based employee and
      director compensation consist of stock options, restricted stock grants
      and warrants, which are valued at fair-value at the date of the grant and
      expensed over the vesting period or the duration of employment, whichever
      is shorter.





·
            Commissions
      to employees were $7,061 in Third Quarter 2010 as compared to $0 in Third
      Quarter 2009.  Commissions to employees increased as a result of
      increased commissionable revenue activity, which was paid to InsPro
      Technologies’ sales personnel.




Page
41


·
            Employee
      benefits expense was $36,099 in Third Quarter 2010 as compared to $20,973
      in Third Quarter 2009, an increase of $15,126 or 72%.  The
      increase is primarily the result of increased employee group health
      insurance cost, which was caused by a change in the Company’s employee
      benefits program in 2010 to provide all employees with comparable employee
      benefits at comparable cost.  Prior to 2009 non InsPro employees
      paid proportionately more for their  employee group health insurance
      than InsPro employees.




·
            Payroll
      taxes expense was $24,356 in Third Quarter 2010 as compared to $34,937 in
      Third Quarter 2009, a decrease of $10,581 or 30%.  The decrease
      is the result of lower social security payroll taxes paid by the employer
      as a result of employees who have reached the withholding
      limit.




Advertising
and other marketing in Third Quarter 2010 was $35,317 as compared to $90,814 in
Third Quarter 2009.  The decrease was the result of the completion of
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.





Depreciation
and amortization expense consisted of the following:





For the Three Months
                          Ended September 30,2010
                        
                        
                        2009Amortization
      of intangibles acquired as a result of the InsPro
    acquisition
                        
                        $
                        116,989
                        
                        
                        $
                        117,020Amortization
      of software and website development for external marketing
                        
                        
                        -
                        
                        
                        
                        21,787Depreciation
      expense
                        
                        
                        103,879
                        
                        
                        
                        87,847Total
                        
                        $
                        220,868
                        
                        
                        $
                        226,654





·
            In
      Third Quarter 2010 we incurred amortization expense of $116,989 for the
      intangible assets acquired from InsPro Technologies on October 1,
      2007 as compared to $117,020 in Third Quarter 2009.  The
      decrease was the result of the completion of the amortization of
      employment and non-compete agreements acquired as of June 30,
      2010.




·
            In
      Third Quarter 2009 we incurred $0 amortization expense for software
      development cost for external marketing pertaining to InsPro Technologies’
      InsPro system, which was fully amortized as of June 30,
    2010.




·
            In
      Third Quarter 2010 we incurred depreciation expense of $103,879 as
      compared to $87,847 in Third Quarter 2009. The increase was due to assets
      acquired by InsPro Technologies subsequent to September 30,
      2009.




In Third
Quarter 2010 we incurred rent, utilities, telephone and communications expense
of $118,245 as compared to $146,157 in Third Quarter 2009, a decrease of $27,912
or 19%.  The decrease is primarily due to reductions in telephone and
communications expenses as a result of cost containment actions.





In Third
Quarter 2010 we incurred professional fees of $63,600 as compared to $448,955 in
Third Quarter 2009, a decrease of $385,355 or 86%.  The decrease is
primarily attributable to lower legal fees.  In Third Quarter 2010 we
had a decrease in legal fees as compared to Third Quarter 2009, which was
primarily due to lower legal costs incurred in connection with litigation with
certain shareholders, which commenced on March 24, 2009, and lower legal costs
incurred in connection with the Company’s filings with the Securities and
Exchange Commission (the “SEC”).  Professional fees consisted of
legal, accounting, and auditing fees.


Page
42




In Third
Quarter 2010 we incurred other general and administrative expenses of $134,459
as compared to $75,703 in Third Quarter 2009, an increase of $58,756 or 78%. The
increase was the result of increased insurance and late payment fees incurred in
connection with late payments to various vendors.





Loss
from operations





As a
result of the aforementioned factors, we reported a loss from operations of
$1,253,064 in Third Quarter 2010 as compared to a loss from operations of
$1,893,114 in Third Quarter 2009.





Gain
(loss) on discontinued operations





Results
from discontinued operations were as follows:





For the Three Months
                    Ended September 30,2010
                  
                  
                  2009Revenues:Commission
      and other revenue from carriers
                  
                  $
                  108,264
                  
                  
                  $
                  251,023Transition
      policy commission pursuant to the Agreement
                  
                  
                  244,589
                  
                  
                  
                  606,424Gain
      on disposal of property and equipment
                  
                  
                  -
                  
                  
                  
                  217,501Lead
      sale revenue
                  
                  
                  53
                  
                  
                  
                  -Insurint
      revenue
                  
                  
                  -
                  
                  
                  
                  31,526Sub-lease
      revenue
                  
                  
                  304,595
                  
                  
                  
                  326,393657,501
                  
                  
                  
                  1,432,867Operating
      expenses:Salaries,
      employee benefits and related taxes
                  
                  
                  24,211
                  
                  
                  
                  321,780Lead,
      advertising and other marketing
                  
                  
                  -
                  
                  
                  
                  (27,001
                  )Depreciation
      and amortization
                  
                  
                  -
                  
                  
                  
                  67,042Rent,
      utilities, telephone and communications
                  
                  
                  194,637
                  
                  
                  
                  339,382Professional
      fees
                  
                  
                  10,435
                  
                  
                  
                  35,222Other
      general and administrative
                  
                  
                  24,705
                  
                  
                  
                  226,285253,988
                  
                  
                  
                  962,710Gain
      (loss) from discontinued operations
                  
                  $
                  403,513
                  
                  
                  $
                  470,157




Page
43




For Third
Quarter 2010 we earned revenues in discontinued operations of $657,501 compared
to $1,432,867 in the Third Quarter 2009, a decrease of $775,366 or
54%.  Revenues include the following:




·
            Commission
      and other revenue from carriers was $108,264 in Third Quarter 2010 as
      compared to $251,023 in Third 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. Commission and other revenue from carriers is
      anticipated to decline in the future as a result of anticipated lapsation
      of our ISG and Telesales call center produced agency
    business.




·
            Transition
      policy commission pursuant to the Agreement was $244,589 in Third Quarter
      2010 as compared to $606,424 in the Third Quarter 2009.  The
      decrease is due to lower renewal commission rates paid by carriers on
      Transferred Policies and lapsation of our Telesales call center produced
      agency business.  Transition policy commission revenue is
      anticipated to decline in the future as a result of the anticipated
      lapsation of our Telesales call center produced agency
      business.




·
            Insurint
      revenue was $31,526 in the Third Quarter 2009.  Insurint revenue
      effectively ceased effective March 31, 2010 as a result of the Insurint
      Sale Agreement (as defined below).




·
            In
      Third Quarter 2010 we earned sub-lease revenue of $304,595 as compared to
      $326,393 in Third Quarter 2009 relating to the sub-lease of our Florida
      office and our former New York sales 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.





Total
operating expenses of discontinued operations for Third Quarter 2010 was
$253,988 as compared to $962,710.  The decrease in operating expenses
of discontinued operations is due to the elimination of Insurint’s expenses
effective March 31, 2010 as a result of the Insurint Sale Agreement and to
a lesser extent lower expenses associated with our abandoned leased Deerfield
Beach office.




Gain
from discontinued operations





As a
result of the aforementioned factors, we reported a gain from discontinued
operations of $403,513 or a $0.01 gain per share in Third Quarter 2010 as
compared to a gain from discontinued operations of $470,157 or a $0.01 gain per
share in Third 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 $68,293 in Third Quarter 2010 includes $45,371 of accrued interest
and $10,762 amortization of deferred loan costs associated with the secured
note, which we issued to The Co-Investment Fund II, L.P. (the “Note”), which
originated in December of 2009 and was amended on June 15, 2010, together
with imputed interest on certain employee obligations.


Page
44




In Third
Quarter 2010 we recognized a loss on change in fair value of warrants
liabilities of $1,790,180.  The loss in Third 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 $2,701,472 or
$0.07 loss per share in Third Quarter 2010 as compared to a net loss of
$1,446,599 or $0.03 loss per share in Third Quarter 2009.




RESULTS
OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 2010 COMPARED TO THE NINE
MONTHS ENDED SEPTEMBER 30, 2009





Revenues





For the
nine months ended September 30, 2010 (“2010 To Date”), we earned revenues of
$4,516,592 compared to $4,615,384 for the nine months ended September 30, 2009
(“2009 To Date”), a decrease of $98,792 or 2%.  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 Nine Months
                        Ended September 30,2010
                      
                      
                      2009Professional
      services
                      
                      $
                      2,698,822
                      
                      
                      $
                      3,000,593ASP
      revenue
                      
                      
                      1,113,667
                      
                      
                      
                      1,072,465Sales
      of software licenses
                      
                      
                      125,000
                      
                      
                      
                      87,500Maintenance
      revenue
                      
                      
                      570,000
                      
                      
                      
                      433,500Sub-leasing
      revenue
                      
                      
                      9,103
                      
                      
                      
                      21,326Total
                      
                      $
                      4,516,592
                      
                      
                      $
                      4,615,384





·
            Professional
      services revenue declined $301,771 or 10% as a result of lower post
      implementation services, which were provided to several of our largest
      clients.  Implementation services 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.




·
            ASP
      revenue increased $41,202 or 4% as a result of the commencement of hosting
      services to a recently implemented client partially offset by lower ASP
      revenue from three other clients.  In 2010 To Date we earned ASP
      revenue from seven InsPro clients. ASP hosting service enables a client to
      lease the InsPro software, paying only for that capacity required to
      support their business.  In addition InsPro Technologies
      provides hosting service to client’s licensed InsPro
      software.  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
      2010 To Date we earned license fee revenue upon the completion of the
      implementation of InsPro for a
client.




Page
45


·
            Maintenance
      revenue increased $136,500 or 32% as a result of the addition of two
      maintenance contracts compared to 2009 To Date.  In 2010 To Date
      we earned maintenance revenues from six
clients.




·
            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





Our cost
of revenues for 2010 To Date was $4,919,060 as compared to $4,725,938 for 2009
To Date for an increase of $193,122 or 4%. Cost of revenues consisted of the
following:





For the Nine Months
                          Ended September 30,2010
                        
                        
                        2009Salaries,
      employee benefits and related taxes
                        
                        $
                        2,981,293
                        
                        
                        $
                        2,683,754Professional
      fees
                        
                        
                        1,211,358
                        
                        
                        
                        1,397,691Rent,
      utilities, telephone and communications
                        
                        
                        225,308
                        
                        
                        
                        176,898Other
      cost of revenues
                        
                        
                        501,101
                        
                        
                        
                        467,595$
                        4,919,060
                        
                        
                        $
                        4,725,938





·
            Our
      salaries, employee benefits and related taxes component of cost of
      revenues in 2010 To Date was $2,981,293 as compared to $2,683,754 for 2009
      To Date for an increase of $297,539 or 11%.  Salaries, employee
      benefits and related taxes increased as a result of increased employee
      staffing. Subsequent to 2009 To Date, 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 2010 To Date was
      $1,211,358 as compared to $1,397,691 for 2009 To Date for a decrease of
      $186,333 or 13%. Professional fees decreased as a result of the hiring of
      two key former consultants as employees and reduced utilization of certain
      domestic based independent contractors partially offset by $167,571 of
      training and set up expense incurred pertaining 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.




·
            Our
      rent, utilities, telephone and communications component of cost of
      revenues in 2010 To Date was $225,308 as compared to $176,898 for 2009 To
      Date for an increase of $48,410 or 27%.  Rent, utilities,
      telephone and communications increased as a result of increased in ASP and
      corporate telephone and communications expense and an increase in the
      amount of leased space at InsPro’s Eddystone office during
      2009.




Page
46


·
            Our
      other cost of revenues component of cost of revenues in 2010 To Date was
      $501,101 as compared to $467,595 in 2009 To Date, an increase of $33,506
      or 7%.  Other cost of revenues consisted of the
      following:




For the Nine Months
                          Ended September 30,2010
                        
                        
                        2009Office
      expenses
                        
                        $
                        4,940
                        
                        
                        $
                        6,813Travel
      and entertainment
                        
                        
                        84,679
                        
                        
                        
                        70,682Computer
      processing, hardware and software
                        
                        
                        405,826
                        
                        
                        
                        385,326Other
                        
                        
                        5,656
                        
                        
                        
                        4,774Total
                        
                        $
                        501,101
                        
                        
                        $
                        467,595




o
            Our
      travel and entertainment component of cost of revenues in 2010 To Date was
      $84,679 as compared to $70,682 in 2009 To Date, an increase of $13,997 or
      20%.  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 2010 To Date. We incurred
      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 2010 To Date was $405,826 as compared to $385,326 in 2009 To Date, an
      increase of $20,500 or 5%.  The increase was the result of costs
      incurred to reorganize and move certain equipment in order to improve
      performance and ultimately reduce cost in the future and certain vendor
      discounts pertaining to computer processing provided to the Company in
      2009 in connection with a new ASP client, which expired in
      2009.  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
environments.




Gross
Profit (Loss)





As a
result of the aforementioned factors, we reported a gross loss of $402,468 in
2010 To Date as compared to a gross loss of $110,554 in 2009 To
Date.




Page
47




Selling,
Marketing and Administrative Expenses





Our
selling, marketing and administrative expenses for 2010 To Date was $4,217,084
as compared to $5,400,359 for 2009 To Date for a decrease of $1,183,275 or
22%.  The primary reason for the decrease is attributable to
reductions in corporate staffing.  Selling, marketing and
administrative expenses consisted of the following:





For the Nine Months
                        Ended September 30,2010
                      
                      
                      2009Salaries,
      employee benefits and related taxes
                      
                      $
                      2,203,567
                      
                      
                      $
                      2,775,219Advertising
      and other marketing
                      
                      
                      118,720
                      
                      
                      
                      228,917Depreciation
      and amortization
                      
                      
                      694,352
                      
                      
                      
                      657,977Rent,
      utilities, telephone and communications
                      
                      
                      294,247
                      
                      
                      
                      434,591Professional
      fees
                      
                      
                      515,211
                      
                      
                      
                      906,139Other
      general and administrative
                      
                      
                      390,987
                      
                      
                      
                      397,516$
                      4,217,084
                      
                      
                      $
                      5,400,359




In 2010
To Date we incurred salaries, employee benefits and related taxes of $2,203,567
as compared to $2,775,219 for 2009 To Date, a decrease of $571,652 or
21%. Salaries, commission and related taxes consisted of the
following:




For the Nine Months
                              Ended September 30,2010
                            
                            
                            2009Salaries,
      wages and bonuses
                            
                            $
                            1,523,256
                            
                            
                            $
                            1,747,984Share
      based employee and director compensation
                            
                            
                            366,287
                            
                            
                            
                            385,667Commissions
      to employees
                            
                            
                            37,487
                            
                            
                            
                            25,454Employee
      benefits
                            
                            
                            98,587
                            
                            
                            
                            74,552Payroll
      taxes
                            
                            
                            99,664
                            
                            
                            
                            116,490Severance
      and other compensation
                            
                            
                            14,120
                            
                            
                            
                            355,702Directors’
      compensation
                            
                            
                            64,166
                            
                            
                            
                            69,370Total
                            
                            $
                            2,203,567
                            
                            
                            $
                            2,775,219





·
            Salaries,
      wages and bonuses were $1,523,256 in 2010 To Date as compared to
      $1,747,984 in 2009 To Date, a decrease of $224,728 or 13%.  The
      decrease is the result the elimination of two senior executive positions,
      four human resource positions and an accounting position together with
      $150,000 of executive bonus compensation in 2009 To Date.  These
      reductions in corporate expenses were partially offset by increased
      staffing in InsPro’s sales and IT infrastructure
  areas.





·
            Share
      based employee and director compensation expense was $366,287 in 2010 To
      Date as compared to $385,667 in 2009 To
Date.


Page
48




o
            In
      the third quarter of 2010 the Company granted to Mr. Oakes an immediately
      exercisable warrant to purchase 150,000 shares of Series A Preferred Stock
      at an exercise price equal to $4.00 per share.  The Company
      recorded an expense of $332,994, which is the estimated the fair value of
      warrant.




o
            On
      October 29, 2009 all outstanding unvested options became vested and the
      associated unamortized deferred compensation expense was expensed as a
      result of a change of control on that date. Consequently the only
      expense incurred in 2010 pertains to options granted after October 29,
      2009.




o
            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 $37,487 in 2010 To Date as compared to $25,454 in 2009
      To Date, an increase of $12,033 or 47%.  Commissions to
      employees increased as a result of increased commissionable revenue
      activity, which was paid to InsPro Technologies’ sales
      personnel.




·
            Employee
      benefits expense was $98,587 in 2010 To Date as compared to $74,552 in
      2009 To Date, an increase of $24,035 or 32%. The increase is primarily the
      result of increased employee group health insurance cost as a result of a
      change in the Company’s employee benefits program in 2010 to provide all
      employees with comparable employee benefits at comparable
      cost.




·
            Severance
      and other compensation was $14,120 in 2010 To Date as compared to $355,702
      in 2009 To Date. 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 2010 To Date was $118,720 as compared to $228,917 in 2009
To Date.  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 2009 To Date 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 Nine Months
                          Ended September 30,2010
                        
                        
                        2009Amortization
      of intangibles acquired as a result of the InsPro
    acquisition
                        
                        $
                        351,028
                        
                        
                        $
                        351,059Amortization
      of software and website development for external marketing
                        
                        
                        43,574
                        
                        
                        
                        65,361Depreciation
      expense
                        
                        
                        299,750
                        
                        
                        
                        241,557Total
                        
                        $
                        694,352
                        
                        
                        $
                        657,977





·
            In
      2010 To Date we incurred amortization expense of $351,028 for the
      intangible assets acquired from InsPro
  Technologies.




Page
49


·
            In
      2010 To Date we incurred amortization expense of $43,574 for software
      development cost for external marketing pertaining to InsPro Technologies’
      InsPro system as compared to $65,361 in 2009 To Date. The decrease
      was the result of the completion of the amortization in the second quarter
      of 2010.




·
            In
      2010 To Date we incurred depreciation expense of $299,750 as compared to
      $241,557 in 2009 To Date. The increase was due to assets acquired by
      InsPro Technologies subsequent to September 30,
  2009.




In 2010
To Date we incurred rent, utilities, telephone and communications expense of
$294,247 as compared to $434,591 in 2009 To Date, a decrease of $140,344 or
32%.  The decrease is primarily due to reductions in telephone and
communications expenses as a result of corporate staffing reductions and cost
containment actions.




In 2010
To Date we incurred professional fees of $515,211 as compared to $906,139 in
2009 To Date, a decrease of $390,928 or 43%.  The decrease is
primarily the result of lower legal fees as compared to 2009 To Date, which was
primarily due to legal costs incurred 2009 in connection with litigation with
certain shareholders




Loss
from operations





As a
result of the aforementioned factors, we reported a loss from operations of
$4,619,552 in 2010 To Date as compared to a loss from operations of $5,510,913
in 2009 To Date.


Page
50




Gain
(loss) on discontinued operations





Results
from discontinued operations were as follows:





For the Nine Months
                    Ended September 30,2010
                  
                  
                  2009Revenues:Commission
      and other revenue from carriers
                  
                  $
                  371,005
                  
                  
                  $
                  1,972,178Gain
      recognized upon the execution of the Agreement
                  
                  
                  -
                  
                  
                  
                  2,664,794Transition
      policy commission pursuant to the Agreement
                  
                  
                  912,646
                  
                  
                  
                  1,383,279Gain
      on the sale of Insurint
                  
                  
                  578,569
                  
                  
                  
                  -Gain
      on disposal of property and equipment
                  
                  
                  6,530
                  
                  
                  
                  219,943Lead
      sale revenue
                  
                  
                  156
                  
                  
                  
                  10,227Insurint
      revenue
                  
                  
                  53,340
                  
                  
                  
                  118,022Sub-lease
      revenue
                  
                  
                  897,486
                  
                  
                  
                  1,007,8982,819,732
                  
                  
                  
                  7,376,341Operating
      expenses:Salaries,
      employee benefits and related taxes
                  
                  
                  222,050
                  
                  
                  
                  1,633,931Lead,
      advertising and other marketing
                  
                  
                  -
                  
                  
                  
                  101,356Depreciation
      and amortization
                  
                  
                  -
                  
                  
                  
                  296,745Rent,
      utilities, telephone and communications
                  
                  
                  89,137
                  
                  
                  
                  3,350,070Professional
      fees
                  
                  
                  180,449
                  
                  
                  
                  538,815Loss
      on impairment of property and equipment
                  
                  
                  -
                  
                  
                  
                  416,764Loss
      on impairment of intangible assets
                  
                  
                  -
                  
                  
                  
                  1,222,817Other
      general and administrative
                  
                  
                  193,224
                  
                  
                  
                  541,210684,860
                  
                  
                  
                  8,101,708Gain
      (loss) from discontinued operations
                  
                  $
                  2,134,872
                  
                  
                  $
                  (725,367
                  )





For 2010
To Date we earned revenues in discontinued operations of $2,819,732 compared to
$7,376,341 in the 2009 To Date, a decrease of $4,556,609 or
62%.  Revenues include the following:




·
            Commission
      and other revenue from carriers of $371,005 in 2010 To Date as
      compared to $1,972,178 in 2009 To Date.  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 the
      first quarter of 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.




Page
51


·
            Transition
      policy commission pursuant to the Agreement of $912,645 in 2010 To Date as
      compared to $1,383,279 in the 2009 To Date.  The decrease is due
      to the lapsation of our Telesales call center produced agency
      business.




·
            During
      the first quarter of 2010 we recognized a $578,569 gain on the sale
      of Insurint effective upon the March 31, 2010 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 was $53,340 in 2010 To Date and $118,022 in 2009 To
      Date.  Insurint revenue ceased effective March 31, 2010 as a
      result of the Insurint Sale
Agreement.




·
            In
      2010 To Date we earned sub-lease revenue of $897,486 as compared to
      $1,007,898 in 2009 To Date 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.




Total
operating expenses of discontinued operations for 2010 To Date was $684,860 as
compared to $8,101,708 for 2009 To Date for a decrease of $7,416,848 or 92% as
compared to 2009 To Date.  The primary reason for the decrease is
attributable to lower expenses associated with our accrual for abandoned lease
expenses, which is recorded in rent, utilities and communications expenses,
impairment expense in 2009, and to a lesser extent the elimination of Insurint’s
expenses effective March 31, 2010 as a result of the Insurint Sale
Agreement.




Gain
from discontinued operations





As a
result of the aforementioned factors, we reported a gain from discontinued
operations of $2,134,872 or $0.05 per share in 2010 To Date as compared to a
loss from discontinued operations of $725,367 or $0.02 per share in 2009 To
Date.




Page
52




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 $164,604 in 2010 To Date includes $98,466 of accrued interest and
$28,545 amortization of deferred loan costs on the Note, which originated in
December of 2009 and was amended on June 15, 2010, together with imputed
interest on certain employee obligations.





In 2010
To Date we recognized a loss on change in fair value of warrants liabilities of
$1,834,093.  The loss in 2010 To Date 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 $4,469,358 or
$0.11 per share in 2010 To Date as compared to a net loss of $6,281,647 or $0.15
per share in 2009 To Date.





LIQUIDITY
AND CAPITAL RESOURCES





At
September 30, 2010, we had a cash balance of $5,897,575 and working capital of
$1,474,272.





At
September 30, 2010, we had a restricted cash balance of $1,152,372, 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 $2,883,909 in 2010 To Date as compared to net cash used
by operations of $4,977,236 in 2009 To date.  In 2010 we used cash to
fund our net loss of $4,469,358 and:





·
            Decreases
      in accounts receivable of $337,966, which is primarily the result of the
      collection of amounts pertaining to the sale of software licenses in the
      fourth quarter of 2009.




·
            Increases
      in accounts payable of $548,104, which is primarily the result of the
      Company’s delayed payment of certain
payables.




·
            Decreases
      in accrued expenses of $378,900, which is primarily the result of the
      payment of severance to Mr. Eissa in 2010, which was accrued as of
      December 31, 2009, and the recording of legal fees as accounts payable,
      which were accrued as of December 31,
2009.




·
            Decreases
      in net liabilities of discontinued operations of $1,940,525, which is
      primarily the result of:




o
            Our
      $783,849 payment to our landlord of our Deerfield Beach office associated
      with our notification of our desire to terminate our Deerfield Beach lease
      on March 14, 2011, which was $327,513 lower than our previous accrual,
      together with other lease payments pertaining to our abandoned
      leases.




Page
53


o
            Recording
      a $143,037 receivable from the buyer of Insurint as of September 30,
      2010.




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




·
            Recorded
      depreciation and amortization expense of $694,352 and $657,977 in 2010 To
      Date and 2009 To Date,
respectively.




·
            Recorded
      stock-based compensation and consulting expense of $366,287 and $450,277
      in 2010 To Date and 2009 To Date,
respectively.




·
            Recognized
      a loss on change in fair value of warrants liabilities of
      $1,834,093 in 2010 To Date.




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




·
            We
      recorded a loss of $6,530 and a gain of $227,763 on the disposal of
      property and equipment of discontinued operations in 2010 To Date and 2009
      To Date, respectively.




Net cash
used by investing activities in 2010 To Date was $193,473 as compared to
$293,169 in 2009 To Date.  Investing activities pertain to the
purchase of property and equipment supporting current and future
operations.




Net cash
provided by financing activities in 2010 To Date was $7,571,304 as compared to
$4,069,652 in 2009 To Date.




·
            During
      the first quarter of 2010 we received $1,107,000 in gross proceeds as a
      result of the issuance of preferred stock and warrants as a result of the
      exercise of subscription units by certain shareholders 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 SEC 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 Series A
      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.





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 Series A 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.




Page
54


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 Series A 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 Series A Preferred Stock issued in 2010 have
      the same terms as the Series A 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 Series A 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.





·
            During
      the second quarter of 2010 we received $1,000,000 in gross proceeds as a
      result of the modification of the terms of the Loan Agreement and
      Note.




o
            On
      June 15, 2010, the Company and Co-Investment agreed to modify the terms of
      the loan agreement (the “Loan Agreement”) and the Note between the parties
      to; (i) increase the loan from $1,250,000 to $2,250,000 on June 15, 2010
      and (ii) allow Co-Investment to demand the Company to repay to
      Co-Investment an amount not to exceed the loan balance plus accrued
      interest in the form of the Company’s equity securities at the conversion
      price and terms identical to the price and terms of the Company’s next
      issuance of common or preferred stock issued for cash consideration
      occurring after June 15, 2010 (“Equity
      Issuance”).  An Equity Issuance occurred on September 30,
      2010.




o
            The
      Company and Co-Investment agreed in the event that the Company does not
      have a sufficient number of authorized shares of its equity securities to
      issue to Co-Investment the Company and Co-Investment will jointly
      cooperate with one another in obtaining the necessary shareholder approval
      to increase the number of authorized shares of the Company’s equity
      securities and the effective date of the issuance and repayment will be
      the date of the Company’s shareholder
approval.




o
            As
      of September 30, 2010, the Company does not have a sufficient number of
      authorized shares of its equity securities to issue to Co-Investment if
      Co-Investment were to convert the outstanding balance of the
      Note.  As of September 30, 2010, Co-Investment can convert
      $323,577 of the Secured Note from related party into 107,859 shares of
      Series B convertible preferred stock and warrants to purchase 1,078,590
      shares of the Company’s common stock at $0.15 per share for a period of
      five years at terms identical to the September 2010
    Warrants.




o
            The
      Company incurred $18,389 of costs associated with the Loan Agreement and
      Note in the second quarter of 2010.




·
            During
      the third quarter of 2010 we received $5.4 million in gross proceeds as a
      result of the issuance of preferred stock and warrants in a private
      offering.




Page
55


o
            On
      September 30, 2010, the Company entered into and completed a private
      placement (the “2010 Private Placement”) with certain accredited
      investors, including Independence Blue Cross, a Pennsylvania hospital plan
      corporation, for an aggregate of 1,800,001 shares of Series B Preferred
      Stock, and warrants to purchase 18,000,010 shares of its Common Stock,
      pursuant to the terms of a securities purchase
  agreement.




o
            Under
      the terms of the 2010 Purchase Agreement, and subject to the approval of
      the Company’s shareholders of an amendment to the Certificate of
      Incorporation of the Company to increase the number of shares of
      authorized Common Stock of the Company, the Company has agreed to sell an
      additional 200,000 Units to the investors after September 30, 2010, on the
      same terms and conditions as described in the 2010 Purchase
      Agreement.




·
            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.  Our gross proceeds were $4,000,000 and we paid
      $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 September 30, 2010, in aggregate had a
balance of $1,152,372.  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.




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56




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 Securities and Exchange
Commission’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




We are 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.  We have also been involved
in litigation as described in our Quarterly Reports on Form 10-Q for the fiscal
quarters ended March 31, 2010 and June 30, 2010.




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57


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.




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58




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:
      November 15, 2010
                  HEALTH
      BENEFITS DIRECT CORPORATIONBy:
                  /s/
      ANTHONY R. VERDIAnthony
      R. VerdiChief
      Financial Officer and Chief Operating Officer(Principal
      Executive and Financial Officer)




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59




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.




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60