Because we want to provide you with more meaningful and useful information, this Quarterly Report on Form 10-Q includes forward-looking statements that reflect our current expectations and projections about our future results, performance, prospects, and opportunities. We have attempted to identify these forward-looking statements by using words such as "may," "will," "expects," "anticipates," "believes," "intends," "estimates," "could," or similar expressions. These forward-looking statements are based on information currently available to us and are subject to a number of risks in 2009 and beyond. Actual results may differ materially from those expressed in, or implied by, these forward-looking statements. These risks, uncertainties, and other factors include, without limitation: our ability to achieve and sustain profitability; realization of sufficient revenue from contract renewals previously acquired to prevent impairment of the acquired asset; demand for life insurance; significant fluctuations in our quarterly results; our ability to develop our brand recognition; our number of agency contracts; our ability to generate revenue from the sale of non-life insurance leads; our ability to manage our growth; providing accurate insurance quotes; our ability to manage our expenses, quickly respond to changes in our marketplace, and meet consumer expectations; the complexity of our technology and our use of new technology; our ability to hire and retain senior management and other qualified personnel; intense competition in the insurance industry; our ability to keep pace with technological changes and future regulations affecting our business; constraints of the systems we employ; and our ability to raise additional capital if necessary. See the section of this quarterly report entitled "Risk Factors" for a description of these and other risks, uncertainties, and factors that may cause actual results to differ materially from those expressed in, or implied by, these forward-looking statements.

You should not place undue reliance on any forward-looking statements. Except as required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances, or any other reason after the date of this quarterly report. All references to "we," "us," "our," and the "Company" refer to Life Quotes, Inc. and its subsidiaries.

Overview and Critical Accounting Policies

We generate revenues primarily from the receipt of commissions paid to us by insurance companies based upon the policies sold to consumers through our service. These revenues come in the form of first year, bonus and renewal commissions that vary by company and product. We recognize the full first year commission revenues on term life insurance after the insurance company approves the policy and accepts the initial premium payment. At the time revenue is recognized, an allowance is recorded based on historical information for estimated commissions that will not be received due to the non-payment of installment first year premiums and any premium refunds made by the insurance carriers. We recognize commissions on all other lines of business after we receive notice that the insurance company has received payment of the related premium. First year commission revenues per policy can fluctuate due to changing premiums, commission rates, and types or amount of insurance sold. We receive bonuses based upon individual criteria set by insurance companies. We recognize bonus revenue in the period in which it is earned. Bonus revenues are typically higher in the fourth quarter of our fiscal year due to the bonus system used by many life insurance companies, which pay greater amounts upon the achievement of certain levels of annual production. Revenues for renewal commissions are recognized after we receive notice that the insurance company has received payment for a renewal premium. Renewal commission rates are significantly less than first year commission rates and may not be offered by every insurance company. We also generate revenues from the receipt of fees paid by various sources that are tied directly to the volume of insurance sales or traffic that we produce for such third-party entities. Our revenue recognition accounting policy has been applied consistently to all periods presented in this report.

The timing between when we submit a consumer's application for insurance to the insurance company and when we generate revenues has varied over time. The type of insurance product and the insurance company's backlog are the primary factors that impact the length of time between submitted applications and revenue recognition. Over the past three years, the time between application submission and revenue recognition has averaged over three months. Any changes in the amount of time between submitted application and revenue recognition, a significant portion of which is not under our control, will create fluctuations in our operating results and could harm our business, operating results and financial condition.

Operations expenses are comprised of both variable and semi-variable expenses, including wages, benefits, and expenses associated with processing insurance applications and maintaining our database and web site. The historical lag between the time an application is submitted to the insurance companies and when we recognize revenues significantly impacts our operating results as most of our variable expenses are incurred prior to application submission.

Selling and marketing expenses consist primarily of direct advertising costs. These costs are expensed in the period the advertising is communicated.

Intangible assets consist of the following:

                                                               Estimated
                                Intangible     Accumulated      Useful     Amortization
                                Asset Cost     Amortization      Life         Method

  Insurance contract renewals   $ 3,538,000   $    2,358,000    10 years     Accelerated

  Non-compete agreement             589,000          532,000     6 years   Straight line


  Total                         $ 4,127,000   $    2,890,000

The fair value of insurance contract renewals was estimated based on the actual policies in force as of the acquisition date, and the renewal commission rates paid by each insurance carrier. These commissions were estimated to have a maximum useful life of ten years, based on the terms of the contracts with the insurance carriers, and an annual lapse rate was applied to the expected renewals for each carrier based on historical trends. Amortization is on an accelerated basis, as renewal commissions will decline each year due to lapses. The ultimate realization of the value of the contract renewals is dependant on a number of factors, including actual lapse ratios, which can be affected by factors not under our control, such as death rates and the pricing level of insurance policies that could be purchased to replace the policies in the renewal stream. As a result, the actual amount realized from the contract renewals acquired may differ significantly from the amount recorded in the financial statements, causing impairment.

Our assets and liabilities recorded at fair value are categorized based upon a fair value hierarchy in accordance with ASC 820, "Fair Value Measurements and Disclosures" (ASC 820). The fair value hierarchy ranks the quality and reliability of the information used to determine fair value. The fair value of certain of our financial instruments, including Cash and cash equivalents, Certificates of deposit, Accounts receivable, and Accounts payable, approximates the carrying value due to the relatively short maturity of such instruments. We classify our fixed maturity investments as available-for-sale and, accordingly, such investments are carried at fair value. The cost of fixed maturity investments is adjusted for amortization of premiums and discounts and for declines in value that are other than temporary. Temporary changes in the fair values of investments are reflected directly in stockholders' equity as accumulated other comprehensive income or loss net of income taxes with no effect on net income or loss. Realized gains or losses are calculated using the specific identification method

While goodwill is not amortized, it is subject to periodic reviews for impairment (at least annually, or more frequently if impairment indicators arise). We review goodwill for impairment periodically and whenever events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. Such impairment reviews are performed at the entity level with respect to goodwill, as we have one reporting unit. Under those circumstances, if the fair value were less than the carrying amount of the entity, further analysis would be required to determine whether or not a loss would need to be charged against current period earnings. No indicators of impairment were noticed in our December 31, 2008 impairment review. The determination of fair value and the impairment are based on a combination of a market valuation based on a comparison with similar public companies (guideline company method) and a discounted cash flow analysis, which includes making various judgmental assumptions, including assumptions about future cash flows, growth rates and discount rates. The use of different estimates or assumptions could produce different results. As of September 30, 2009, our net book value (i.e., shareholders' equity) was approximately $15 million. The effect of the sale of our Insure.com name and website on October 9, 2009 increased net book value to approximately $31 million. However, as of the market close on October 27, 2009 our market capitalization was approximately $21 million. This fact, along with other factors used in the determination of fair value, such as the year to date net loss and negative cash flow from operations, may lead to potential impairment of goodwill in the fourth quarter, which we are in the process of analyzing.

No income tax credits have been recognized relating to our tax loss carryforwards due to uncertainties relating to future taxable income.

Results of Operations

Comparison of the Quarters and Nine Months Ended September 30, 2009 and
September 30, 2008

Revenues

Revenues decreased $921,000, or 22%, in the quarter ended September 30, 2009
when compared to revenue in the same quarter of 2008, and decreased by $817,000,
or 7% for the nine months ended September 30, 2009 as compared to the first nine
months of 2008. The components of revenue are as follows:



                                       Quarter ended              Nine Months Ended
                                       September 30,                September 30,
                                    2009          2008           2009           2008

    Revenues:
    Life insurance commissions   $ 2,792,789   $ 3,364,037   $  9,809,273   $  9,618,529
    Click revenue                    363,655       689,411      1,312,870      2,259,832
    Other                             59,408        83,840        221,531        282,282

    Total revenue                  3,215,852     4,137,288     11,343,674     12,160,643

Life insurance commission revenue decreased $571,000, or 17%, for the third quarter of 2009, but increased $191,000, or 2% for the first nine months of 2009, when compared with the same periods in 2008. Total policies sold in the third quarter increased 4% from 4,045 to 4,195, but the average revenue per policy decreased by 11%, from $911 to 806, accounting for $303,000 of the decrease in commission revenue. We also experienced an increase in first year lapsed policies, where we earned less than the full annual commission, which caused $113,000 of the decrease. Finally, increased revenue share obligations to affiliates that provided us with life leads caused $214,000 of the decrease. These declines were partially offset by increases in renewal and life settlement commissions. For the first nine months of 2009, policies sold were 13,421, up 17% from policies sold in the first nine months of 2008. The increase in paid policies can be directly attributed to a larger staff of agents in our call center. Fees from the sale of insurance leads, also referred to as "click revenue" decreased $326,000, or 47%, during the third quarter, and decreased $947,000, or 42% for the first nine months of 2009, when compared with the revenue generated in the comparable periods in 2008. We reduced our advertising expenditures in 2009, which may have negatively impacted our revenue from the sale of insurance leads. We have also reduced the sale of excess life insurance leads, in favor of providing these leads to the agents in our call center, further negatively impacting click revenue.

Expenses

Expenses increased $217,000, or 5%, in the quarter ended September 30, 2009 when
compared to expenses in the same quarter of 2008. Expenses for the first nine
months of 2009 decreased by $164,000, or 1%, when compared to the comparable
period in 2008. The components of expenses are as follows:



                                        Quarter ended              Nine Months Ended
                                        September 30,                September 30,
                                     2009          2008           2009           2008

  Expenses:
  Selling and marketing           $   788,152   $   917,680   $  2,362,956   $  3,226,372
  Operations                        2,400,681     2,211,175      7,040,302      6,442,973
  General and administrative          920,043       783,858      2,619,869      2,527,920
  Depreciation and amortization       210,964       190,539        608,726        598,362

  Total expenses                    4,319,840     4,103,252     12,631,853     12,795,627

Selling and Marketing. Selling and marketing expenses decreased $130,000, or 14%, for the third quarter of 2009, and decreased $863,000, or 27%, for the first nine months of 2009, when compared to the same periods in 2008. We intentionally decreased ad spending, as we were generating more leads for life insurance than our growing call center could effectively handle. We also discontinued certain advertising programs that were not providing leads as cost-efficiently as desired.

Operations. Operations expenses increased $190,000, or 9%, in the third quarter of 2009 compared to the same quarter last year and have increased $597,000, or 9%, on a year-to-date basis. Higher wage costs associated primarily with a larger staff of agents was the main reason for the increases in both periods. Also, in the second quarter of 2008, we had a one-time $225,000 refund of prior period telephone service charges, which reduced 2008 year to date expenses.

General and Administrative. General and administrative costs increased $136,000, or 17%, in the third quarter of 2009, and increased $92,000, or 4%, for the nine months ended September 30, 2009. Higher legal fees in connection with the asset sale completed in October 2009 (see Note 6 to the financial statements, "Subsequent Event"), and higher costs for employee insurance caused the increases in both the third quarter and year to date results.

Depreciation and Amortization. Depreciation and amortization charges increased $20,000, or 11%, in the third quarter of 2009 when compared to the results in the comparable period in 2008, and increased $10,000, or 2%, in the year to date period. Depreciation expense increased $29,000 in the third quarter, and increased $31,000 year to date, as our new customer management system went live and we began to depreciate the costs associated with it. This was partially offset by a decrease in amortization expense related to the insurance contract renewals acquired in 2004, which declines each year, as described above.

Investment Income

Investment income decreased $12,000 in the third quarter of 2009, and $88,000 for the first nine months of 2009, due to a smaller bond portfolio caused by the repurchase of our stock, and lower interest rates.

Income Taxes (Credit)

We had no income tax credit in 2009 due to valuation allowances provided against net deferred tax assets.

Liquidity and Capital Resources

We currently expect that the cash and fixed maturity investments we now hold will be sufficient to meet our anticipated cash requirements for at least the next 12 months.

On July 24, 2008, our Board of Directors authorized the repurchase of up to 600,000 shares of common stock, representing up to 8.5% of the total 7.0 million shares outstanding as of that date. The Board approved immediate commencement of the repurchase program as conditions warrant. Future purchases may occur from time to time in open market, block purchases or in negotiated transactions using available cash. No date was established for the completion of the program. As of October 31, 2009, we had repurchased a total of 8,700 shares during 2009, and an additional 478,310 shares can be repurchased under the July 24, 2008 authorization.

The timing and amounts of our working capital expenditures are difficult to predict, and should we decide to purchase more shares of our common stock, engage in acquisitions of companies or their assets, or begin new projects requiring additional resources, we may require additional financing. If we require additional equity financing for operations, it may be dilutive to our stockholders and the equity securities issued in a subsequent offering may have rights or privileges senior to the holders of our common stock. If debt financing is available, it may require restrictive covenants with respect to dividends, raising capital, and other financial and operational matters, which could impact or restrict our operations. If we cannot obtain adequate financing on acceptable terms, we may be required to reduce the scope of our marketing or operations, which could harm our business, results of operations, and our financial condition.

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

Cash used by operating activities was approximately $94,000 for the first nine months of 2009, compared with cash provided by operating activities of $466,000 for the same period in 2008. During the first nine months of 2009, the net loss and an increase in commissions receivable exceeded non-cash expenses for depreciation, amortization and stock option expense, plus the net increase in liabilities. As discussed above, net result for the first nine months of 2009 showed a decline of $741,000 from the loss shown in the first nine months of 2008, as revenue decreased by $817,000 while expenses decreased by $164,000. During the first nine months of 2009, commissions receivable increased $202,000 as a result of an increase in life commission revenue during the year. It also appears that more customers are electing to pay their premiums other than annually, which would also increase our receivables. Accounts payable and accrued liabilities increased $455,000 in the same period primarily due to the timing of payments being made. In 2008, non-cash expenses for depreciation, amortization and stock option compensation, along with a decrease in commissions receivable and an increase in accounts payable and accrued liabilities, were enough to offset the net loss for the period.

Cash was provided by investing activities during the first nine months of 2009 in the amount of $723,000, as investment maturities exceeded the reinvestment of funds and the purchase of fixed assets. Cash provided by investing activities was $3.2 million in the first nine months of 2008, as funds reinvested and used to purchase fixed assets were exceeded by the proceeds from maturities.

Cash of $21,000 was used to repurchase our common stock during the first nine months of 2009, accounting for the cash used by financing activities. Cash of $1.6 million was used by financing activities in the first nine months of 2008 to repurchase our stock.

On October 9, 2009 we received a cash payment of $15,000,000 in connection with the sale of assets described in Note 6 to the financial statements, "Subsequent Event." Our Board of Directors is evaluating various options for the use of these funds.