UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

For the fiscal year ended December 31, 2005

Commission File Number:  001-31917

INVESTOOLS INC.

(Exact name of Registrant as specified in its charter)

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  o    No  ý

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes  o    No  ý

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 and 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  ý    No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “larger accelerated filer” in Rule 12b-2 of the Exchange Act.

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

The aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant as of June 30, 2005 (the last business day of the Registrant’s most recently completed second fiscal quarter) based on the closing price of the common stock on the American Stock Exchange for such date, was $156.7 million. The number of shares of the Registrant’s common stock converted and outstanding on February 15, 2006 was 44,773,081.

Documents Incorporated by Reference:

The registrant’s definitive proxy statement filed or to be filed with the Securities and Exchange Commission pursuant to Regulation 14A involving the election of directors at the annual meeting of the shareholders of the registrant scheduled to be held on May 30, 2006 is incorporated by reference in Part III of the Form 10-K.

INVESTOOLS INC.

FORM 10-K REPORT INDEX

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INVESTOOLS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Forward Looking Statement

All statements in this Annual Report on Form 10-K that are not historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934.  Such forward-looking statements may be identified by words such as “believe”, “intend”, “expect”, “may”, “could”, “would”, “will”, “should”, “plan”, “project”, “contemplate”, “anticipate”, or similar statements.  In addition, from time to time, we (or our representatives) may make forward-looking statements of this nature in our annual report to shareholders, proxy statement, quarterly reports on Form 10-Q, current reports on Form 8-K, press releases or in oral or written presentations to shareholders, securities analysts, members of the financial press or others.  All such forward-looking cautionary statements, whether written or oral, and whether made by us or on our behalf, are expressly qualified by these cautionary statements and any other cautionary statements which may accompany the forward-looking statements.  In addition, the forward-looking statements reflect only our current views concerning future events, and we assume no obligation to publicly update or revise any forward-looking statements made herein or any other forward-looking statements we make, whether as a result of new information, future events, or otherwise.  Forward-looking statements are subject to risks and uncertainties which could cause actual results, performance or trends to differ materially from those expressed in the forward-looking statements.  We have made every reasonable effort to ensure that the information and assumptions on which these statements and projections are based are current, reasonable, and complete, but there can be no assurance that management’s expectations, beliefs or projections as expressed in the forward-looking statements will actually occur or prove to be correct.  Factors that could cause actual results to differ materially are discussed under “Business — Factors That May Affect Future Results.”

Part I

Item 1.            Business

Operations Overview

INVESTools Inc. (referred to as “INVESTools”, the “Company”, “we”, “us”, or “our”) is a leader in investor education.  Our mission is to educate and empower individual investors to make their own financial decisions to achieve their financial goals at any time or place by using the INVESTools Method™ live, by correspondence or online. We hope to establish the INVESTools Method as the most widely recognized, adopted and endorsed approach to investor education.  We offer a full range of investor education products and services that provide lifelong learning and support to self-directed investors.   We have more than 209,000 graduates of our basic courses and 68,000 subscribers to our websites.  Our products and services are built around the INVESTools Method, a unique integration of a disciplined investing process, web-based tools, personalized instruction and support.  Our investor education products and services are offered in a variety of learning formats with courses ranging from beginning to advanced, thus addressing the needs of all investor levels.

Corporate Background

INVESTools was incorporated in Delaware on May 21, 2001, and began operations on December 6, 2001, as a result of a merger between ZiaSun Technologies, Inc., a Nevada corporation (ZiaSun), and Telescan, Inc., a Delaware corporation (Telescan).  Former ZiaSun and Telescan stockholders acquired an approximate 75% and 25% ownership interest in INVESTools, respectively.  ZiaSun and Telescan each became wholly owned subsidiaries of INVESTools.

Our subsidiaries are:

•      ZiaSun, which owns 100% of Online Investors Advantage, Inc. (OIA).  OIA owns 100% of the following dormant entities that have no operations:  INVESTools Asia Pacific Pte., Limited (INVESTools Asia), Investor Education California, LLC, INVESTools Hong Kong Ltd. (INVESTools Hong Kong), Seminar Marketing Group, Inc. (SMG) and Memory Improvement Systems, Inc. (MIS).

•      Telescan, which owns 100% of INVESTools Inc., a dormant California corporation with no operations (INVESTools California).

•      SES Acquisition Corp., a California corporation operating under the name 360 Group. We acquired 360 Group in February 2004.  360 Group was a direct marketing agency that offered services such as custom database development and management, strategic planning, media list planning and buying, creative and

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production services, response management and analytic services.  We acquired 360 Group in order to internalize our marketing department.

•      Prophet Financial Systems, Inc. (Prophet), a California corporation, acquired on January 26, 2005.  Prophet is a Web-based content and services provider that enables active investors to use technical analysis to trade more profitably.  Prophet’s website, www.Prophet.Net, is a premier Web provider of advanced charting technology.

Business Segments

Management analyzes our operations by reviewing financial information regarding products and services that are aggregated into a single operating segment, investor education.

Business Strategy

Our products and services are primarily built around a 5-Step Investing Formula that is designed to teach both experienced and beginning investors how to approach the stock selection process and actively manage their investment portfolios.  Course offerings are generally combined with web-based tools, personalized instruction techniques and ongoing support and are offered in a variety of learning formats, which solidify the students’ understanding of the investing process and help in their effort to take control of their financial future.

We seek to offer students a full range of investor education products that provide lifelong learning.  Generally, students are introduced to our products and services through a free preview event.  Attendees of the preview event are given an invitation to attend a more comprehensive instructor-led live or online workshop or purchase an in-depth online or DVD-based home study program, all of which include subscription access to the Investor Toolbox™ website.  Following completion of the initial workshop or home study program, graduates are offered continuing education and advanced courses to build on what they have learned.  These continuing education bundles often contain personalized one-on-one coaching or starting in 2006 one-to-many online coaching sessions, which are spread out over a period of time and include ongoing support through a live 800-number and a live chat hotline for continuing education assistance. Products are offered under three brands, INVESTools Investor Education, Success Magazine Investor Education and BusinessWeek Investor Education.

Learning Formats

Depending on the brand under which the learning formats are marketed, content and services available to students (i.e., length of workshop, number or length of coaching programs and access to certain Investor Toolbox features) may vary.

•      Preview Event—We offer directly or through partners, a free event that introduces attendees to basic investing concepts and provides a broad overview of the financial markets.  Depending on the brand under which the preview event is marketed, participants may receive a gift for attending.  Attendees are offered an invitation to attend a more comprehensive workshop or purchase an in-depth online or DVD-based home study program.

•      Workshops—We offer one and two-day live, instructor-led investing workshops that cover topics ranging from basic investing principles to advanced strategies.  The workshops provide hands-on experience using our proprietary Investor Toolbox website.  The basic investing principles workshop includes a six month subscription to the Investor Toolbox website as part of the workshop fee.

•      Home Study Programs—We offer most of our courses in an online or DVD-based home study program.  These programs are offered to preview attendees who are unable to attend the instructor-led workshops and workshop graduates seeking to expand their investment knowledge base through advanced courses.  The home study programs provide hands-on training using our proprietary Investor Toolbox website.  The basic investing principles home study course includes a six month subscription to the Investor Toolbox website as part of the home study course fee.

•      Coaching—Our coaching line of products offer investors one-on-one telephone coaching or one-to-many online coaching and support.  The sessions, which are offered for both basic and advanced courses, allow investors to learn at their own pace and successfully apply what they are learning.  One-on-one coaching is offered over a set period of time, depending upon the course.

•      Live Coaching Workshops—Our live coaching workshops provide students with an in depth, interactive learning experience and a low student-to-coach ratio.  These courses are taught by our most experienced coaches.  They included stock and options training as well as more advanced active investing courses.

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•      Ongoing Support (web subscriptions)—As long as alumni maintain an active subscription to the Investor Toolbox website, they have unlimited e-mail access to coaches.  Students who participate in the coaching programs also have access to instructors through a Live Chat online support option and coaches through a live 800-number hotline where they can check their work.

•      eLearning (web subscriptions)—Alumni can access a series of topical online tutorials called webinars through our Investor Toolbox website.  The click on demand webinars are designed to walk graduates through the portion of the Investor Toolbox website that relates to the subject being covered.

Course Offerings

•      5-Step Investing Formula—This foundational course is designed to teach both experienced and beginning investors how to select stocks according to a step-by-step, disciplined investing process.  The 5 steps are:  (1) searching for an investment, (2) industry group analysis, (3) fundamental analysis, (4) technical analysis, and (5) portfolio management.  There are no prerequisites to take this course.

•      Basic Options—This course is designed to introduce students to the power of options and teach them how to start trading options which will give them opportunities to increase their profits and diversify their investing strategies.  The course also provides investors with a number of options-related strategies such as puts, covered calls and LEAPS that may help their investment portfolio.  Students must complete the 5-Step Investing Formula prior to taking this course.

•      Advanced Technical Analysis—This course is designed to teach students technical analysis and advanced charting techniques to identify investment opportunities, reduce ambiguity and to give them opportunities to profit in any financial market condition.  The course teaches the skills and discipline to interpret trends and trading opportunities based on the physical behavior of the market as seen through technical analysis and charting techniques.  Students must complete the 5-Step Investing Formula prior to taking this course.

•      Advanced Options—This course is a multi-part course designed to teach students advanced options strategies one step at a time.  Building on the principles taught in our Basic Options course, the Advanced Options course introduces new options strategies such as debit spreads, credit spreads, diagonal spreads, straddles and strangles, index options and butterfly spreads.  Students must complete the 5-Step Investing Formula and Basic Options prior to taking this course.

•      INVESTools Currency Trader™—This course prepares students to trade in the foreign exchange markets using the same risk management skills and principles that professional, institutional and advanced individual currency traders utilize.  The course focuses on technical analysis and advanced charting techniques to help investors identify, analyze and leverage global currency trading opportunities, reduce risk and increase profit potential.  The course provides investors with the proper know-how for taking advantage of the steady stream of unique opportunities created by the constant flow of world events.  There are no prerequisites to take this course.

Continuing Education Programs

Designed for the serious student, our continuing education programs offer students a comprehensive access to a multitude of products at one price point.  Typically investors receive additional online or home study courses, coaching sessions and extended Investor Toolbox website access.  Depending on the brand under which the programs are marketed, content and services available to students (i.e., length of workshop, number of coaching sessions and access to certain online Investor Toolbox features) may vary.

•      Associate Investor Program—In addition to the foundational 5-Step Investing Formula course and initial six month Investor Toolbox website access, the Associate Investor Program provides investors with six 5-Step Investing Formula one-on-one coaching sessions, the Basic Options home study course and six Basic Options one-on-one coaching sessions.

•      Master Investor Program—In addition to the foundational 5-Step Investing Formula course and initial six month Investor Toolbox website access, the Master Investor Program provides investors with six 5-Step Investing Formula coaching sessions, the Basic Options Workshop, Basic Options home study course, six Basic Options coaching sessions and in 2006, a weekly review of one-to-many coaching sessions called Masters Talk. The Master Investor Program also includes the Advanced Technical Analysis and Charting home study course, an additional twelve months of Investor Toolbox website access and a one year VIP pass for basic and alumni workshops.

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•      Program of High Distinction—In addition to the foundational 5-Step Investing Formula course and initial six month Investor Toolbox website access, the Program of High Distinction provides investors with six 5-Step Investing Formula coaching sessions, the Basic Options Workshop, Basic Options home study course, six Basic Options coaching sessions, the Advanced Options Workshop, Advanced Options home study course, the Advanced Technical Analysis Workshop and the Advanced Technical Analysis home study course. In 2006, the program is being upgraded to include the Advanced Options weekly coaching one-to-many coaching sessions called Options Trading Room and Advanced Technical weekly coaching one-to-many sessions called Technical Analysis Trading Room. The Program of High Distinction also includes a three day live coaching mentor training class, an additional 24 months of Investor Toolbox website access and a two year VIP pass for basic, alumni and advanced workshops.

•      Active Investing Workshops—Three dynamic, intensive workshops, which were added in early 2005, are offered to students.  Each workshop – one for stocks, one for options and one for currency trading – are designed to offer attendees more sophisticated strategies and technology.  Attendees are taught how to take advantage of shorter-term (intraday to one-week) price swings by closely monitoring the market during open hours and making numerous, quick but well informed decisions to buy, hold or sell.  This aggressive trading technique is based primarily on the real-time technical analysis of volume, key indicators and technical chart patterns and formations.  Each workshop has a low student to coach ratio to give students more personal coaching and deeper comprehension.  With oversight from an experienced instructor, investors practice money management, evaluating and calibrating risk tolerance, monitoring total cash flow and actively managing portfolio growth, all in real time.

Value Added Tools

•      Investor Toolbox—Our Investor Toolbox website gives investors access to the investment tools needed to execute the strategies taught in our investor education programs.  The site has proprietary features that are not accessible on other financial websites, including more than 50 pre-built stock searches, comparative reports, market indicators, market commentary and portfolio tracking features.  An initial six month subscription to the site is included with the purchase of a basic level investing workshop or home study course.  At the end of the initial subscription, graduates are offered renewals for a fee, which depends on the length of the renewal period and whether additional products or services are purchased.  Currently, we offer one to sixty month subscription renewals.

•      Cyber Trader—is a feature that will be added in 2006, the Cyber Trader trading platform will allow graduates to trade without leaving the Investor Toolbox website.

•      OptionsXpress® Trading Platform—is a feature that was added in 2005, the OptionsXpress Trading Platform allows graduates to trade without leaving the Investor Toolbox website.

Sales and Marketing Strategy

Revenue is derived from: (i) the initial sale of our products and services as a result of marketing efforts across multiple acquisition channels which include, but are not limited to, television, print, postal mail, radio, online banner, paid and organic search and email direct marketing campaigns driving customers to either a free preview of investor education products offered at locations near the prospect or the opportunity to speak with a telesales representative about the products offered; and (ii) the additional sale of products and services to graduates as a result of continued interaction with us in workshops, periodic email and direct mail communications and through access to coaches and instructors.

We experienced growth in initial product sales in 2005 as a result of:  (i) continued refinements to our initiated and controlled direct marketing efforts for our own brand, INVESTools, and (ii) expanded relationships with co-marketing partners, such as Money In Training and Success Magazine Investor Education, where the partners are responsible for driving leads and acquiring new customers to the organization.  We experienced significant growth in additional product sales and services to graduates as a result of the introduction of multiple new products and product bundles.

Industry Trends

Technology has generated significant growth in the education markets and acceptance of for-profit involvement in the improvement of education is now a mainstream concept.  However, only recently has the education market begun to emerge as a true industry.  Broadly defined, the education industry covers a full range of for-profit and non-profit educational products and services that are delivered through both traditional and technology-based channels and includes such disparate elements as early childhood education, corporate training and lifelong learning.  We believe that our mission of fulfilling the lifelong education needs of self-directed investors most accurately falls within the confines of

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the education industry.

(1) We believe that a significant opportunity exists to educate the public about how to make good investment decisions.  A Harris Interactive / Securities Industry Association survey (2) confirmed our belief, citing that as more investment related information has become available to the public through the Internet, and with increasing cases of corporate accounting fraud and financial mismanagement, as well as the need for reform related to the United States Social Security program, investors continue to look to the securities industry to educate them about how to make better investments to secure their financial future.

(1) ICI/SIA Study, Equity Ownership in America, 2004

(2) Harris Interactive Annual SIA Investor Survey, November 2003

Competition

Generally, competitive factors within the educational market include the range and depth of foundational and continuing education course offerings, the quality of instructors and coaches, the quality of reference materials provided in connection with course studies and the cost of the educational process.  We are aware of several companies that provide some level of investor education in similar delivery formats.  However, we believe that:  (i) the depth and quality of our curriculum and training, (ii) the range of our foundational and continuing education course offerings, from beginner to advanced, (iii) our branded and co-marketing product distribution partnerships, (iv) the quality of our instructors and coaches, and (v) our database of prospects and students provide us with a considerable competitive advantage compared to other investor education providers.

Intellectual Property

We have registered and received approval for a number of trademarks in the United States and foreign countries that are important to our future success.  Of critical importance to us is the INVESTools trademark.  The INVESTools trademark is a widely recognized, adopted and endorsed approach to investor education and is associated with quality and reliable service.  Loss of the proprietary use of the INVESTools trademark or a diminution in the perceived quality associated with that name could harm our growth in the investor education industry.  In addition, as a result of acquiring Prophet Financial Systems, Inc. (“Prophet”) we acquired the Prophet trademark and tradename. The Prophet trademark and tradename is a widely recognized charting website that has won various awards and been recognized as a leader in online financial charting applications.

We have registered and maintain a multitude of domain names to ensure continuity of delivery for all of our websites.  Domain names are typically renewed several months prior to their respective expiration dates for a period of two years or longer to prevent loss of ownership.

We attempt to protect our trade secrets and other proprietary information with product development partners, employees and consultants through nondisclosure agreements, contract provisions and copyright, patent, trademark and trade secret laws.  With respect to technologies that we license to third parties for use in specific applications or platforms, we rely on licensing agreements to ensure additional protection related to the source code of our products as a trade secret and as an unpublished copyright work.  Management believes that our products, trademarks and other proprietary rights do not infringe on the proprietary rights of third parties, and management is not aware of any current infringement claims against us.

Regulatory Compliance

General

With the exception of the general requirement that we and our subsidiaries be registered or qualified to do business in the United States and any foreign countries in which we operate, the products and services provided through the use of our technology currently are not subject to the approval of any government regulatory body.  However, certain foreign countries require that we register with their respective securities and investments commission or similar regulatory body prior to conducting investment-related workshops.  We are registered with the Australian Securities and Investments Commission (ASIC) and have a compliance officer residing in Australia.

We are not a broker-dealer or otherwise engaged in the business of effecting transactions in securities.  We are not an investment advisor or otherwise engaged in providing investment advice or making investment recommendations.

Sales and Marketing

Our products and services are marketed via a number of channels, including television, print, postal mail, radio, online banners, paid and organic search and email direct marketing campaigns, which are regulated by numerous federal and state laws and regulations, including, but not limited to, anti-fraud laws, consumer protection laws, privacy laws, telemarketing laws, telephone solicitation laws and spam laws.  While to date we have not been

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adversely impacted by any such regulation, management believes that our marketing activities will increasingly be subject to such regulation, which may:  (i) limit our ability to solicit new customers or offer additional products or services to existing customers, and (ii) result in noncompliance, which may subject us to fines or various forms of civil or criminal prosecution.  Such regulation could have an adverse effect on our financial condition and results of operations.  We have reviewed our marketing and sales practices and have made modifications, where required, to ensure compliance.  We continue to monitor the status of existing and proposed regulatory guidelines to ensure compliance.

Although our operations on the Internet are not currently regulated by any government agency, it is possible that a number of laws and regulations may be adopted in the future governing the Internet.  In addition, existing laws may be interpreted to apply to the Internet in ways not currently applied.  Regulatory and legal requirements are subject to change and may become more restrictive, making our business units’ compliance more difficult or expensive or otherwise restricting our ability to conduct their businesses as they are now conducted.

Securities and Exchange Commission

As a public company, we are required to file periodic reports, as well as other information, with the Securities and Exchange Commission (SEC) within established deadlines.  Any document we file with the SEC may be viewed or copied at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.  Additional information regarding the Public Reference Room can be obtained by calling the SEC at (800) SEC-0330.  Our SEC filings are also available to the public through the SEC’s web site located at http://www.sec.gov.

We maintain a corporate Web site at http://www.investools.com, on which investors may access free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q and amendments to those reports as soon as is reasonably practicable after furnishing such material with the SEC.  In addition, we will voluntarily provide electronic or paper copies of our filings free of charge upon request to our Investor Relations department at (801) 816-6918.

Human Resources

At December 31, 2005, we had 486 employees.  Of the 486 employees, 17 percent were employed in customer acquisition related positions, 60 percent were employed in customer fulfillment and retention related positions, 11 percent were employed in technology positions, and 12 percent were employed in administrative and marketing positions.  We also had 7 persons under contract primarily in educational services.

Our key personnel are covered by employment and confidentiality agreements.  No person employed by us, either full-time, part-time or on a contract basis, is covered by a collective bargaining agreement or represented by a union, and we have never experienced a work stoppage due to a protest or related activities.  Management considers relations with our personnel to be good.

Item 1A. Risk Factors That May Affect Future Results

Our business may suffer if we are not successful in developing, maintaining and defending proprietary aspects of technology used in our products and services.

Our success and ability to compete are dependent on our ability to develop and maintain the proprietary aspects of our technology.  Litigation may be necessary in the future to enforce our intellectual property rights, to protect trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity.  Any such litigation, even if we prevailed, could be costly, divert resources and could have a material adverse effect on our business, operating results and financial condition.  We can give no assurance that our means of protecting our proprietary rights will be adequate, or that our competitors will not independently develop similar technology.  Any failure by us to protect our intellectual property could have a material adverse effect on our business, operating results and financial condition.  We integrate third-party software into code creating and supporting some of our products and services.  This third-party software may not continue to be available on commercially reasonable terms.  If we are unable to maintain licenses to the third-party software included in the code supporting our product services, features of our products or services could be unavailable, until equivalent software could be developed or licensed and integrated.  This delay could adversely affect our business, operating results and financial condition.

Any negative changes in economic conditions, significant price increases, inflation or adverse events related to various industries, or the willingness of investors to trade could harm discretionary spending and have a material adverse effect.

We believe that the level of public interest in investing, particularly in the securities and option markets as well as electronic trading has significantly influenced the market for these products and services.  The securities markets have experienced substantial volatility in recent periods.  A sharp drop or sustained or gradual decline in securities prices or other developments in the securities markets typically could cause individual investors to be less inclined to invest in the securities markets, which would be likely to result in reduced interest in our investor educational

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products and services.

We depend on continued growth in use of the Internet and online commerce.

Our ability to expand our delivery platforms and penetrate new markets could be stagnated without continued growth in the use and efficient operation of the Internet.  Web-based markets for information, products and services are new and rapidly evolving.  If Internet usage does not continue to grow or grow slower than anticipated, we may be unable to secure new sponsorship and subscription arrangements for our offerings.  To the extent our business relies on web-based delivery platforms, our operations will also be dependent on adequate network infrastructure, consistent quality of service and availability to customers of cost-effective, high-speed Internet access.  If our systems cannot meet customer demand for access and reliability, these requirements will not be satisfied, and customer satisfaction could degrade substantially, adversely affecting our prospects for market penetration and profitability.

Future regulations or the interpretation of existing laws pertaining to the Internet could decrease the demand for our products or increase the cost of doing business.

Any new law or regulation pertaining to the Internet, or the application or interpretation of existing laws, could increase our cost of doing business, decrease the demand for our products and services, or otherwise harm our business.  We must comply with a variety of federal and state laws affecting the content of materials distributed over the Internet, as well as regulations and other laws restricting the collection, use and disclosure of personal information that we may obtain in the course of providing our online services.  Future laws or regulations may relate to information retrieved from or transmitted over the Internet, consumer protection, online content, user privacy, taxation and the quality of products and services.  Compliance with future laws and regulations, or existing laws as they may be interpreted in the future, could be expensive, time consuming, impractical or impossible.

We may be liable for invasion of privacy or misappropriation by others of our users’ information, which could adversely affect our reputation and financial results.

Some of our services require the disclosure of sensitive information by the user.  We rely on a number of security systems for our services to protect this information from unauthorized use or access.  We cannot predict whether new technological developments could circumvent these security measures.  If the security measures that we use to protect personal information or credit card information are ineffective, we may be subject to liability, including claims for invasion of privacy, impersonation, unauthorized purchases with credit card information or other similar claims.  In addition, the Federal Trade Commission and several states have investigated the use of personal information by certain Internet companies.  We could incur significant expenses if new regulations regarding the use of personal information are introduced or if our privacy practices are investigated.

Laws and regulations can affect our operations and may limit our ability to operate in certain jurisdictions.

Federal, state and international laws and regulations impact our operations and may limit our ability to obtain authorization to operate in some states or countries.  Many federal, state and international governmental agencies assert authority to regulate providers of investment education programs.  Although we believe that we are currently in compliance with all such regulations, there can be no assurance that the federal, state or international regulatory structure will not change.  For example, if we were required to comply with, or found to be in violation of, a regulatory body’s current or future licensing or regulatory requirements, we could be subject to civil or criminal sanctions, including monetary penalties.  Additionally, we could be required to incur significant on-going expenses to comply with regulatory requirements or, conceivably, could be barred from providing investment education services in that jurisdiction.  If any of these things occur, it could have a material adverse effect on our business and results of operations and may cause our stock price to decline.

If we are not able to continually enhance our web-based products and services and adapt them to changes in technology, our future revenue growth could be adversely affected.

If our improvement and adaptation of our web-based products and services is delayed, results in systems interruptions or is not aligned with market expectations or preferences, our revenue growth could be adversely affected.  The online environment is rapidly evolving, and the technology used in web-based products changes quickly.  We must therefore be able to quickly modify our solutions to adapt to emerging online standards and practices, technological advances, and changing user and sponsor preferences.  Ongoing enhancement of our web site, web-based products and related technology will entail significant expense and technical risk.  We may use new technologies ineffectively or fail to adapt our web site, web-based products and related technology on a timely and cost-effective basis.

We rely on our strategic partners to provide us with access to leads and customers.

We currently access approximately 69% of our revenue through co-branding (Business Week) and co-marketing (Success Magazine and Money in Training) relationships.  Our strategic partners may enter into identical or similar relationships with our competitors, which could diminish the value of the partners for customer acquisition.  Our strategic partners could terminate their relationship with us.  If any of these organizations were to terminate their relationship with us our ability to distribute our product and services could be impaired.  We may not be able to maintain our existing relationships or enter into new strategic relationships.

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Our ability to offer courses may be affected by natural disaster, strikes and other unpredictable events.

Natural disasters, external labor disruptions and other adverse events may affect our ability to conduct our business, resulting in loss of revenue.  Severe blizzards or floods may reduce the ability of our course participants to travel to our courses.  These natural disasters may also disrupt the printing and transportation of the materials used in our direct mail campaigns.  Furthermore, postal strikes could occur in the countries where we operate which could delay and reduce delivery of our direct mail marketing materials.  Transportation strikes could also occur in the countries where we operate, adversely affecting course attendance.  The future occurrence of any of these events could have a material adverse effect on our business and results of operations and may cause our stock price to decline.

If we do not successfully introduce new programs, products and services, our growth rate and revenue will be reduced.

Our growth strategy is dependent on our ability to sell existing training programs, products and services to new students, to open new markets and to develop and introduce new educational programs, products and services.  If we are unable to expand our markets and products, our growth rate and revenue will be reduced.  Market conditions and the level of customer interest may be different for our current products than for new products, and there can be no assurance that we will be able to compete favorably with, and obtain market acceptance for, any such new programs, products or services.

We may desire or need to raise additional capital in the future and it may not be available on acceptable terms.

If we need but are unable to obtain additional capital to expand our operations and invest in new products and services, our business may be adversely affected.  In the future we may require substantial additional capital to finance ongoing operations or the growth of our business.  To the extent that our existing sources of liquidity and cash flow from operations are insufficient to fund our activities, we may need to raise additional funds.  We cannot be certain that we will be able to obtain additional financing on favorable terms.  If we fail to raise additional funds, we may need to sell debt or additional equity securities or to reduce our growth to a level that can be supported by our cash flow.  Without additional capital, we may not be able to: further develop or enhance our services and products; acquire necessary technologies, products or businesses; expand operations in the United States or internationally; hire, train and retain employees; market our services and products; or respond to competitive pressures or unanticipated capital requirements.

We need to successfully integrate recently acquired and potential additional operating companies.

As a result of recent acquisitions and, as part of our general business strategy, we expect to experience significant growth and expect such growth to continue into the future.  This growth is expected to place a significant strain on our management, financial, operating and technical resources.  Failure to manage this growth effectively could have a material adverse effect on our financial condition or results of operations.  There can be no assurance that we will be able to effectively integrate the acquired companies with our own operations.  Expansion will place significant demands on our marketing, sales, administrative, operational, financial and management information systems, controls and procedures.  Accordingly, our performance and profitability will depend on the ability of our officers and key employees to (i) manage our business and our subsidiaries as a cohesive enterprise, (ii) manage expansion through the timely implementation and maintenance of appropriate administrative, operational, financial and management information systems, controls and procedures, (iii) add internal capacity, facilities and third-party sourcing arrangements as and when needed, (iv) maintain service quality controls, and (v) attract, train, retain, motivate and manage effectively our employees.  There can be no assurance that we will integrate and manage successfully new systems, controls and procedures for our business, or that our systems, controls, procedures, facilities and personnel, even if successfully integrated, will be adequate to support our projected future operations.  Any failure to implement and maintain such systems, controls and procedures, add internal capacity, facilities and third-party sourcing arrangements or attract, train, retain, motivate and manage effectively our employees could have a material adverse effect on our business, financial condition and results of operations.

We are dependent on our chief executive officer and chairman of the board for his depth of industry experience and knowledge.

We are highly dependent on the services of Lee K. Barba, our CEO and Chairman of the Board.  Mr. Barba has extensive experience, knowledge and contacts in the financial and investment industries.  If Mr. Barba were to terminate his employment with us, we would lose valuable human capital, adversely affecting our business.  We currently do not maintain key man insurance on Mr. Barba or any other member of our senior management team.  Neither Mr. Barba nor any other member of our senior management team intends to retire or is nearing retirement age.

Legal proceedings could adversely affect our business and results of operations.

We are from time to time involved in various lawsuits and legal proceedings. While we intend to vigorously defend the lawsuit filed against us by Ross Jardine and True North Academy LLC as described in Item 3 below, an adverse finding could subject us to undetermined penalties. During the fourth quarter of 2005, the litigation with the Australian Securities and Investment Commission was resolved with no material adverse effect on our business and results of operations. Although we currently are not a defendant in any other material legal proceedings, any claim, with or without merit, could result in costly litigation or require us to modify or cease sales of our products or services, any of which could have a material adverse effect on our business and results of operations.

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Items 1B. Unresolved Staff Comments

As of December 31, 2005, we have no unresolved comments from the Securities Exchange Commission.

Item 2.            Properties

Our headquarters are currently located in Draper, Utah.  In August 2004, we entered into a 63 month lease agreement for the Draper facility commencing on May 1, 2005.  The month-to-month lease for the Provo, Utah facility was terminated at approximately the same time.

In September 2003, we discontinued the use of a leased office space in Provo, Utah.  As such, this lease was sublet to an independent party for an amount that does not cover in full our lease obligation under the original lease agreement.  Square footage and the monthly rent of this facility are not reflected in the figures shown in the table below.

In addition to the Draper, Utah location, we have leased office space in New York, New York, Houston, Texas, Palo Alto and San Rafael, California.

In November 2005, we entered into a 13 month lease agreement to lease additional office space at our Palo Alto location to accommodate operations previously performed at our San Rafael location that were moved to Palo Alto and expansion of staff in Palo Alto. In the same month, we entered into an agreement with a real estate broker to sublease the San Rafael, California location. We expect this to take place sometime during the first half of 2006. As the facility was not subleased at December 31, 2005, square footage and monthly rent of the San Rafael facility are reflected in the figures shown in the table below.

The following table shows the amount of square footage of our leased facilities and monthly rent as of December 31, 2005:

Item 3.            Legal Proceedings

From time to time we are involved in certain legal actions arising in the ordinary course of business.  It is the opinion of management that such litigation will be resolved without a material adverse effect on our liquidity, financial position or results of operations.

On March 4, 2003, a foreign national filed a complaint in the San Diego Superior Court against ZiaSun Technologies, Inc., one of our wholly-owned subsidiaries.  The complaint alleges that certain individuals, who are not parties in the lawsuit, persuaded the plaintiff to purchase shares of ZiaSun common stock and the complaint also alleges a failure to deliver a stock certificate.  ZiaSun does not have any ownership or control of the third party brokerage house from whom plaintiff claims to have purchased stock.  The plaintiff was seeking unspecified damages for the alleged fraud in the sale of the stock.  On February 9, 2005, the court awarded a summary judgment in our favor. In March 2005, the plaintiff filed for an appeal to continue to pursue this litigation. We believe that this matter will be resolved without material adverse effect on us.

In October 2005, the Supreme Court of Queensland, ruled on a lawsuit filed on July 9, 2004, by the Australian Securities and Investment Commission (ASIC) against Online Investors Advantage, one of our wholly-owned subsidiaries (OIA). The Court found that most of the claims pursued by ASIC had not been made out against OIA, but found for ASIC in respect to certain claims, all of which hinged on the Court’s finding that the website was a ‘financial product’, as that term is defined under the Australian Corporations Act. There were no penalties assessed against us as a result of this ruling. On October 31, 2005, the Court dismissed ASIC’s claim regarding the repayment of money to participants at the workshops. Accordingly, $0.3 million of funds previously held in escrow have been released to us. Given OIA’s success on the majority of ASIC’s claims, ASIC was ordered to pay 80% of OIA’s legal costs. Given that ASIC succeeded in respect to a small number of its claims, OIA was ordered to pay 20% of ASIC’s legal costs. The net of these amounts can not be estimated at this time and therefore no amounts have been recorded in the Consolidated Financial Statements. We expect these amounts to be settled in the first half of 2006.

On November 1, 2005, Ross Jardine and True North Academy L.L.C. filed a lawsuit against us in the Third Judicial District Court, Salt Lake City, Utah.  The lawsuit alleges that we abused  Mr. Jardine’s personal identity under Utah state

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law, his name and likeness, and appropriated the commercial value of Mr. Jardine’s identity and violated his privacy.  In January 2006, we filed our answer and counterclaim and in February 2006 we filed a motion for summary judgment.  We intend to vigorously defend this action.

In February 2006, we filed a complaint against Stock Investor.com, LLC, True North Academy, L.L.C., Wade Hallam, Leroy Hartman and Tony Montoya in the Fourth Judicial Court, Utah County, Utah.  The complaint alleges breach of contract, tortuous interference, violation of the Utah Trade Secrets Act, common law unfair competition, violation of the Utah Unfair Competition Act, common law trademark infringement and trade name infringement, and civil conspiracy.  We are seeking damages and injunctive relief.

We establish liabilities when a particular contingency is probable and estimable.  For contingencies noted above, we have accrued amounts considered probable and estimable.  We are not aware of pending claims or assessments, other than as described above, which may have a material adverse impact on our liquidity, financial position or results of operation.

Item 4.            Submission of Matters to a Vote of Security Holders

During the fourth quarter of 2004, there were no matters submitted to a vote of the stockholders.

Part II

Item 5.            Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities

Our common stock is traded on the American Stock Exchange under the symbol IED.  The following table sets forth, for the periods indicated, the high and low sales prices.

On March 3, 2006, the closing price of our common stock as reported by the American Stock Exchange was $7.98.  As of January 26, 2006, we had 750 stockholders of record, and as of February 1, 2006 we had 6,814 beneficial holders.

Dividend Policy

We have never declared a cash dividend on our common stock.  The Board of Directors currently intends to retain all earnings for use in our business, and therefore, does not anticipate paying any cash dividends on our common stock in the foreseeable future.  The declaration of dividends, if any, in the future would be subject to the discretion of the Board of Directors, which may consider factors such as our results of operations, financial condition, capital needs and acquisition strategy, among other things.  See Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the notes thereto.

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Equity Compensation Plan Information

The following table sets forth information as of December 31, 2005, with respect to our equity compensation plans previously approved by stockholders and equity compensation plans not previously approved by stockholders.

(1) This amount includes an option we granted to our Chief Executive Officer in 2002.  The vesting of the options is contingent upon an event occurring in the future that currently is not probable.  Based upon the terms of the option, the number of shares issuable upon exercise of the option, if any, will be between 50,000 to 550,000 shares at an exercise price of $0.18 per share.  The option was granted under the INVESTools 2001 Stock Option Plan, which was approved by stockholders.

Issuer Purchases of Equity Securities

There were no stock repurchases during the fourth quarter of 2005.

Item 6.            Selected Consolidated Financial Data

The selected consolidated financial data presented below should be read in conjunction with the consolidated financial statements of INVESTools and related footnotes included elsewhere in this document.  The selected consolidated financial data has been derived from the consolidated financial statements of INVESTools.

Statement of Operations

(in thousands, except for share data)

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Balance Sheet Data

(in thousands)

Item 7.            Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

Our mission is to educate and empower individual investors to make their own financial decisions to achieve their financial goals at any time or place ,by using the INVESTools Method™ live, by correspondence or online. We hope to establish the INVESTools Method as the most widely recognized, adopted and endorsed approach to investor education.  We offer a full range of investor education products and services that provide lifelong learning and support to self-directed investors   We have more than 209,000 graduates and 68,000 subscribers to our websites.  Our products and services are built around the INVESTools Method, a unique integration of a disciplined investing process, web-based tools, personalized instruction and support.  Our investor education products and services are offered in a variety of learning formats with courses ranging from beginning to advanced, thus addressing the needs of all investor levels.

Concentration Risk

We currently access approximately 69% of our revenue through our co-branding (BusinessWeek) and co-marketing (Success Magazine and Money in Training) relationships.  The loss of one of these partners could have a material adverse effect on our financial performance in the short-term.  However, we are constantly pursuing new student acquisition channels and we believe business from new and existing channels would replace such lost volumes if they were to occur.  There can be no assurance that we will be successful in establishing new channels. In May 2005, we terminated our agreement with CNBC, Inc. (“CNBC”) one of our co-branding partners. As a result of the termination, all CNBC students were offered the opportunity to transition to the INVESTools brand of investor education products and services.

Acquisition of Prophet Financial Systems

In January 2005, we acquired Prophet Financial Systems, Inc. (“Prophet”), a California corporation located in Palo Alto, for $7.9 million in cash.  Prophet creates web-based products that enable active investors to use technical analysis to trade more knowledgably.  We acquired Prophet to add more functionality to our Investor Toolbox website as well as to attract and retain new and existing customers.  At closing, the sellers received a cash payment of $7.9 million. In addition, we incurred $0.6 million of costs related to the acquisition. During the three months ended June 30, 2005, we recorded a receivable amount of $0.1 million from the shareholders of Prophet based on a net working capital adjustment provided for in the merger agreement for a total adjusted purchase price of $8.4 million. The $0.1 million working capital adjustment was recorded as a reduction in goodwill as this represented an adjustment to the purchase price.  The working capital adjustment receivable was paid to us during the three months ended September 30, 2005. In connection with the transaction, Timothy Knight, Prophet’s Chief Executive Officer, President and founder entered into a two-year employment agreement with us as Senior Vice President of Technology.

We believe that the strategic acquisition of Prophet has been instrumental in improving the suite of products available to our students and integral in the development on the new Investor Toolbox website.  Prophet has been managing the development of our new Investor Toolbox website that will be released later in 2006.

Acquisition of 360 Group

In February 2004, we acquired 360 Group a direct marketing company that provided services such as custom database development and management, strategic planning, media and list planning and buying, creative and production services, response management, and analytic services.  We acquired 360 Group to internalize our marketing department and we no

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longer provide services to third parties.  At closing the sellers received 830,000 shares of our common stock valued at $1,875,000 and $875,000 in cash.  In addition, we incurred $669,000 of cost related to the acquisition, of which $226,000 was paid with 100,000 shares of our common stock.  During the three months ended June 30, 2004, the sellers received an additional cash payment of $213,000 based on a net working capital provision provided for in the merger agreement recorded as additional purchase price resulting in an increase in goodwill.  In October 2004, the sellers received an additional cash payment of $438,000 and 415,000 shares of common stock valued at $842,000 based on 360 Group achieving revenue targets during the three months ended September 30, 2004, which was recorded as additional purchase price.   In connection with the merger, Scott K. Waltz, the former Vice President, Client Services of 360 Group, was named our Senior Vice President, Chief Marketing Officer, and Don Klabunde, the former Chief Technology Officer of 360 Group, was named our Vice President, Chief Information Officer. In April 2005, we entered into a Separation Agreement and General Release with Don Klabunde, our former Vice President and Chief Information Officer.

We entered into a separation agreement and general release in October 2004, with Scott K. Waltz, our former Senior Vice President and Chief Marketing Officer.  The separation agreement required us to pay Mr. Waltz $0.2 million in severance and related benefits.  Additionally, pursuant to the agreement, we repurchased 304,000 shares of our common stock earned as part of the 2004 earnout for $0.7 million as discussed in the previous paragraph.

Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon the Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting principles in the United States.  The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities.

We base our 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 for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements.  We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of the Consolidated Financial Statements.

Income Taxes

The provision for income taxes is calculated using the asset and liability method.  Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  We provide valuation allowances against the deferred tax assets if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  Based on all available information, we do not believe it is more likely than not that our deferred tax assets will be utilized.  In determining the adequacy of the valuation allowance, which totaled $17.7 million as of December 31, 2005, we assess our profitability by taking into account the present and anticipated amounts of domestic and international earnings, as well as the anticipated taxable income as a result of the reversal of future taxable temporary differences.  For financial reporting purposes, we generally provide taxes at the rate applicable for the appropriate tax jurisdiction.

Valuation of Long-Lived Assets, Including Goodwill

We review annually, or more often if events or circumstances indicate a potential impairment exists, goodwill and indefinite lived intangibles for impairment in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets.  We have completed our annual impairment review during the fourth quarter of 2005.  We did not identify any impairment to our goodwill or indefinite lived intangibles as a result of this review.

We review long-lived assets, including certain amortizable identifiable intangibles, for impairment whenever events or changes in circumstances indicate that we will not be able to recover the asset’s carrying amount in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

For long-lived assets held and used, including acquired intangibles, we initiate our review whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable.  Recoverability of an asset is measured by comparing its carrying amount to the expected undiscounted cash flows

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expected to result from the use and eventual disposition of that asset, excluding future interest costs that would be recognized as an expense when incurred.  Any impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair market value.  Significant management judgment is required in:

•      identifying a triggering event that arises from a change in circumstances;

•      forecasting future operating results; and

•      estimating the proceeds from the disposition of long-lived or intangible assets.

Material impairment charges could be necessary should different conditions prevail or different judgments be made.

Revenue Recognition

We recognize revenue in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104), and Financial Accounting Standards Board (FASB) Emerging Issues Task Force No. 00-21 Accounting for Revenue Arrangements with Multiple Deliverables (EITF 00-21).  Revenue is not recognized until it is realized or realizable and earned.  The criteria to meet this guideline are: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price to the buyer is fixed or determinable, and (iv) collectibility is reasonably assured.

We sell our products separately and in various bundles that contain multiple deliverables that include coaching sessions, website subscriptions, educational workshops along with other products and services.  In accordance with EITF 00-21, sales arrangements with multiple deliverables are divided into separate units of accounting if the deliverables in the arrangement meet the following criteria: (i) the product has value to the customer on a standalone basis; (ii) there is objective and reliable evidence of the fair value of undelivered items; and (iii) delivery or performance of any undelivered item is probable and substantially in our control.  The fair value of each separate element is generally determined by prices charged when each product is sold separately.  In certain arrangements, we offer these products bundled together at a discount.  The discount is allocated pro rata to each element of revenue based on the relative fair value of each element when fair value support exists for each element in the arrangement.  If fair value of all undelivered elements in an arrangement exists but the fair value does not exist for a delivered element, then revenue is recognized using the residual method.  Under the residual method, the fair value of undelivered elements is deferred and the remaining portion of the arrangement fee (after allocation of 100% of any discount to the delivered item) is recognized as revenue.  We provide some limited rights of return in connection with our arrangements.  We estimate our returns based on historical experience and maintain an allowance for estimated returns, which has been reflected as an accrued liability.  Each transaction is separated into its specific element and revenue from each element is recognized according to the following policies:

Deferred revenue arises from subscriptions to the websites, workshops, online courses and coaching services because the payments are received before the delivery of the service has been rendered.  Deferred revenue is recognized into revenue over the period that the services are performed or the contract period expires.  We also sell certificates to attend workshops in the future.  Revenue from these sales is deferred until the certificate is used or expires.

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Sales Transaction Volume

In the previous table, sales transaction volume (“STV”), which is a non-GAAP financial measure, represents sales transactions generated in each period before the impact of recognition of deferred revenue from prior periods and the deferral of current period sales.  We believe that STV before changes in deferred revenue is an important measure of business volume. See “Cost of Revenue” below for a further discussion of STV.

In the previous table, we have reclassified certain amounts to different categories to be more reflective of the method in which the education is consumed by the student. Certain amounts related to advanced product workshops were

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reclassified from home study products to workshops and initial subscriptions were reclassified into their own category from workshops. The amounts in the years ended December 31, 2004 and 2003 have been reclassified to conform to the current period’s presentation.

In the table above, initial education revenues consist of the initial sales to students at the initial workshops and sales to new students via our telesales groups. Once the student completes this initial education, which consists primarily of the 5-Step Investing Formula course, they are considered a graduate. Continuing education revenues consist of sales of advanced products and web time renewals sold to graduates.

2005 Compared to 2004

Revenue:

Revenue increased by $41.4 million for the year ended December 31, 2005, when compared to the same period in 2004, as a result of a proportional increase in the sale of the Program of High Distinction due to a full year of sales and Active Investor Series product sales, increased amounts of fulfillment revenue related to coaching sessions and advanced workshops that were sold in previous periods.

Workshops:

Initial workshops sales decreased by $0.8 million for the year ended December 31, 2005, when compared to the same period in 2004, as a result of the revised agreement with one of our co-marketing partners as of August 2004, whereby the partner sells initial workshops at their preview events for which we record no revenue.  The revised agreement was entered into in order to incentivize the co-marketing partner to aggregate more students that would be candidates for continuing education.  Additionally, in May 2005, we terminated our agreement with CNBC, Inc (“CNBC”) one of our co-branding partners,  this termination resulted in no initial workshop sales under the CNBC brand during the year ended December 31, 2005. These decreases were partially offset by an increase in workshop revenues resulting from the expansion of our INVESTools’ branded products marketed through Direct Response Television (DRTV), which was launched in January 2005.

Sales of our continuing education products sold at workshops and by our telesales groups increased $15.7 million for the year ended December 31, 2005, when compared to the same period in 2004, as a result of an increase in the number of graduates purchasing continuing education products, especially the Program of High Distinction, which was first offered in the third quarter of 2004.

Coaching:

Initial sales of coaching sessions decreased by $5.6 million for the year ended December 31, 2005, when compared to the same period in 2004 resulting from coaching sessions no longer being bundled as part of our initial workshop offers, rather they are being offered by our telesales groups as a continuing education offering.

Sales of coaching sessions at continuing education workshops and by our telesales groups increased $36.9 million for the year ended December 31, 2005, when compared to the same period in 2004, primarily due to an increase in the number of graduates purchasing continuing education products, especially the Program of High Distinction, which was first offered in the third quarter of 2004, increased sales of the Masters Program and the introduction of Active Investing Series during 2005.  The Program of High Distinction contains five distinctive live and distance coaching products and the Active Investing Series consists of four days of live coaching related to stocks, options or currency trading.

Home Study:

Initial sales of home study products at our initial workshops and by our telesales groups increased $1.7 million for the year ended December 31, 2005, when compared to the same period in 2004, due to the introduction of home study products at preview events and the introduction of the online home study product during the fourth quarter of 2005.

Sales of home study products sold at our continuing education workshops and by our telesales groups increased $8.0 million for the year ended December 31, 2005, when compared to the same period in 2004, primarily due to an increase in the number of graduates purchasing continuing education products which contain home study components and the introduction of the online 5-step home study during the fourth quarter of 2005.  Continuing education product sales, including a full year of from our Masters Program and Program of High Distinction products, which contain significant home study components, has added to this increase.

Initial Web Time Subscriptions and Renewals:

Initial web time subscriptions sold at initial workshops and by our telesales group decreased by $0.7 million for the year ended December 31, 2005, when compared to the same period in 2004, as a result of a revised agreement with one of our co-marketing partners as of August 2004. The revised agreement provides for the partner to sell initial workshops at its preview events for which INVESTools records no revenue.  The revised agreement was entered into in order to incentivize the co-marketing partner to aggregate more students that would be candidates for continuing education sales. 

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The revised agreements with our co-marketing partner have resulted in increased graduates. As a result, our telesales groups have focused more sales efforts on continuing education product offerings and away from initial education.

Web time renewals sold by our telesales group decreased by $0.9 million for the year ended December 31, 2005, when compared to the same period in 2004, primarily as a result of an increase in retake workshop certificates and webinars that are bundled with various renewal sales, which decreases the amount of revenue attributed to the renewal itself.

Change in Deferred Revenue:

Change in deferred revenue increased $12.1 million for the year ended December 31, 2005, when compared to the same period in 2004.  The increase was a result of increased sales of continuing education products, which include coaching sessions, advanced workshops and website subscription renewals. Revenue from the coaching sessions, advanced workshops and website subscription renewals is deferred and recognized as services to the student are delivered. We introduced the online 5-Step course in the fourth quarter of 2005, revenues from which are deferred and recognized as services to the student are delivered. The increase in STV was a result of the introduction of the Masters Program and Program of High Distinction in 2004 and the Active Investing Series in 2005, which have course lives of 12-months, 24-months and 6-months, respectively.  Sales of the Masters Program and Program of High Distinction products for the full year during 2005 have caused us to defer revenue over longer contractual periods when compared to the majority of products that were sold during the year ended December 31, 2004, in which we only sold the Masters Program and Program of High Distinction for part of the year as well as increases in sales volumes.  As we execute our lifetime value of the student strategy, more of the sales will be in advanced products or continuing education, where revenue is deferred over longer contractual periods.

2004 Compared to 2003

Revenue:

Revenue increased by $27.4 million for the year ended December 31, 2004, when compared to the same period in 2003, as a result of the introduction of the Program of High Distinction in the third quarter of 2004 and the introduction of the Masters Program early in the first quarter of 2004, along with increased amounts of fulfillment revenue related to coaching sessions and advanced workshops.

Workshops:

Initial workshops sales decreased by $17.1 million for the year ended December 31, 2004, when compared to the same period in 2003, as a result of the revised agreements with one of our co-marketing partners. In December 2003 and August 2004, we revised two separate partner agreements whereby each partner sells initial workshops at its preview events for which we record no revenue. The revised agreements were entered into in order to incentivize the co-marketing partners to aggregate more students that would be candidates for continuing education.  This resulted in a significant decrease in initial workshop sales partially offset by workshops sales generated through our co-branding channels.

Sales of our continuing education products sold at workshops and by our telesales groups increased $14.9 million for the year ended December 31, 2004, when compared to the same period in 2003, as a result of an increase in the number of graduates purchasing continuing education products, the Masters Program offered in the first quarter of 2004 and especially the Program of High Distinction, which was first offered in the third quarter of 2004.

Coaching:

Initial sales of coaching sessions increased by $1.3 million for the year ended December 31, 2004, when compared to the same period in 2003 as a result of full year of sales of our coaching products during 2004 through our co-marketing and one of our co-branding partnerships.

Sales of coaching sessions at continuing education workshops and by our telesales groups increased $21.9 million for the year ended December 31, 2004, when compared to the same period in 2003, primarily due to an increase in the introduction of the Masters Program in the first quarter of 2004 and the Program of High Distinction, in the third quarter of 2004.

Home Study:

Initial sales of home study products at our initial workshops and by our telesales groups decreased by $3.6 million for the year ended December 31, 2004, when compared to the same period in 2003, as a result of the revised agreements with one of our co-marketing partners. In December 2003 and August 2004, we revised two separate partner agreements whereby each partner sells initial workshops at its preview events for which we record no revenue. The revised agreements were entered into in order to incent the co-marketing partners to aggregate more students that would be candidates for continuing education.  This resulted in a significant decrease in initial home study sales partially offset by home study sales generated through our co-branding channels.

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Sales of home study products sold at our continuing education workshops and by our telesales groups increased $8.7 million for the year ended December 31, 2004, when compared to the same period in 2003, as a result of an increase in the number of graduates purchasing continuing education products, the Masters Program offered in the first quarter of 2004 and especially the Program of High Distinction, which was first offered in the third quarter of 2004.

Initial Web Time Subscriptions and Renewals:

Initial web time subscriptions sold at initial workshops and by our telesales group increased by $0.7 million for the year ended December 31, 2004, when compared to the same period in 2003, as a result of no longer bundling coaching sessions in preview sales during the end of the second quarter of 2004, resulting in a larger allocation of revenue to the other elements in the arrangement.

Web time renewals sold at workshops and by our telesales group increased by $13.6 million for the year ended December 31, 2004, when compared to the same period in 2003, primarily as a result of an increase in the number of graduates purchasing continuing education products, the Masters Program offered in the first quarter of 2004 and especially the Program of High Distinction, which was first offered in the third quarter of 2004. These bundles include additional web time subscriptions of 24-months and 12-months, respectively.

Change in Deferred Revenue:

Change in deferred revenue increased $18.0 million for the year ended December 31, 2004, when compared to the same period in 2003.  The increase was a result of increased sales of continuing education products, which include coaching sessions, advanced workshops and website subscription renewals. Revenue from the coaching sessions, advanced workshops and website subscription renewals is deferred and recognized as services to the student are delivered. The increase in STV was a result of the introduction of the Masters Program and Program of High Distinction in 2004, which have course lives of 12-months and 24-months, respectively.  These programs have caused us to defer revenue over longer contractual periods when compared to the majority of products that were sold during the year ended December 31, 2003, which only had 6 and 12 month contractual lives.  As we execute our lifetime value of the student strategy, more of the sales will be in advanced products or continuing education, where more revenue is deferred over longer contractual periods.

Cost of Revenue

(in thousands)

In the table above, for the years ended December 31, 2004 and 2003, $1.0 million and $0.4 million in payroll costs have been reclassified from general and administrative expense to cost of revenue to conform to current year’s presentation. Additionally, for the year ended December 31, 2004, $4.5 million related to employee commissions were reclassified from partner commissions to payroll costs to conform to current year’s presentation. The reclassification from partner commissions to payroll costs had no effect on the year ended December 31, 2003; therefore, no reclassification adjustment was recorded.

We defer a significant portion of our revenues associated with advanced products to future periods, we recognize costs as they are incurred. These costs consist of solicitation costs, which include employee sales commissions, partner commissions, credit card fees and materials. Since these costs relate to actual sales as they are incurred and not as the revenue is recognized, the analysis in the table below presents a tool for analyzing these costs because the ratios are

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calculated as a percentage of STV generated in each period. Refer to the Revenue section above for a further description of STV. The calculation of cost of revenue and each of the cost components as a percent of STV in the table below is a non-GAAP financial measure, which management believes provides useful information as it compares the cost of generating sales with the sales recorded in a period, whether those sales were recognized as revenue currently or deferred until future periods. Approximately 27 percent of deferred revenue amounts relate to website subscriptions, for which the remaining fulfillment cost represents an allocation of website costs, which are substantially fixed in nature at current subscriber levels. Another 32 percent of the deferred revenue amounts relate to coaching sessions, of which the remaining fulfillment cost represents labor cost of less than 16-20% of related coaching revenue. The balance of deferred revenue corresponds to additional workshops and workshop certificates for our advanced product sales, for which the remaining fulfillment cost represents the incremental costs of the workshop certificate.

2005 Compared to 2004

Total cost of revenue increased $26.5 million for the year ended December 31, 2005, when compared to the same period in 2004 as a result of increased payroll and venue costs from an increased number of initial workshops delivered under the INVESTools brand introduced in January 2005, the fulfillment of workshops for advanced courses that were sold in previous periods and not fulfilled during 2004 and increased fulfillment of coaching sessions, offset by a decrease in initial workshops delivered under CNBC relationship and a decrease in partner commissions resulting from an increase in INVESTools branded revenue.

Partner commissions consist of amounts that are paid to co-branding and co-marketing partnerships on sales achieved through these channels.  The primary reason for the decrease in the amount of partner commissions as a percentage of STV is due to a change in the mix of revenue, resulting from a decrease in revenue sourced from our co-branding and co-marketing partners, and an increase in INVESTools branded revenue, for which partner commissions are not incurred. Furthermore, as a result of the termination of the relationship with CNBC as a co-branding partner in May 2005, we reversed $0.5 million of accrued partner commissions that were no longer owed to CNBC.

Payroll costs include employee commissions based on a percentage of sales achieved at each event, wages and the associated employee benefit costs. The primary reason for the increase in payroll costs as a percentage of STV was due to increased staffing at workshops to manage the higher volume of students we instructed at those workshops and a change in the commission structure for workshop staff, which drove more continuing education sales. Additionally, the payroll costs within our coaching department increased due to the growth of the department to fulfill the increased demand for our coaching products.

Other costs consist of material costs (including shipping costs), credit card fees, travel expenditures, venue costs and other costs directly related to revenues. These costs remained consistent as a percentage of  STV during the year ended December 31, 2005, when compared to the same period in 2004.

2004 Compared to 2003

Partner commissions consist of amounts that are paid to co-branding and co-marketing partnerships based on sales achieved through these channels.  At the end of December 2003 and August 2004, we entered into revised agreements with our two co-marketing partners, whereby the fulfillment of the initial workshop sales were recorded by the partners which decreased remaining partner commissions paid on continuing education sales.  The primary reason for the increase in the amount of partner commissions is due to our increased revenue for the year ended December 31, 2004 and as a direct result of increases in advanced bundled product sales that are sold at significantly higher prices.  Additionally, partner commissions decreased as a percentage of revenue as a result of modifications of existing arrangements with co-marketing partners.

Payroll costs are commissions based on a percentage of revenues that are paid to employees based on the amount of sales achieved at each event.  Payroll costs increased $9.5 million for the year ended December 31, 2004, when compared to the same periods in 2003.  The primary reason for the increase in payroll costs is due to our increased STV for the year ended December 31, 2004.  The primary reason for the increase in payroll costs as a percentage of STV is due to our increased STV for the year ended December 31, 2004, and increases in advanced bundled product sales that are sold at

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significantly higher price points with different commission plans.

Other costs consist of material costs (including shipping costs), credit card fees, travel expenditures and other costs directly related to revenues.  Other costs increased $9.5 million for the year ended December 31, 2004.  The primary reason for the increase in other costs is due to increased revenues for the year ended December 31, 2004.  Additionally, $3.1 million of the increase in other costs is a direct result of the 360 Group acquisition completed in February 2004, which increased other costs as a percentage of revenue.  The 360 Group was acquired to internalize our marketing functions.  The 360 Group provided direct marketing services for third parties at the time the acquisition was completed.

Selling Expenses

In the table above, for the years ended December 31, 2004 and 2003, $0.1 and $0.1 million in other costs have been reclassified from general and administrative expense to selling expense to conform to current year’s presentation.

2005 Compared to 2004

Marketing expenses increased $10.7 million in the year ended December 31, 2005, when compared to the same period in 2004, primarily due to increased spending related to our INVESTools branded events, which are marketed via our DRTV advertising campaign and increased spending on product development costs. These increases were partially offset by a reduction in direct mail, radio and print advertising related to a decrease in marketing expenditures for BusinessWeek and a decrease related to our former co-branding partner CNBC. Selling expense increased as a result of increased headcount at our preview events resulting in increased payroll costs and travel costs and an increase in sales tax expense, partially off-set by a decrease in marketing supplies.  Selling expense as a percentage of STV will continue to increase as we direct source more of our customers under the INVESTools brand as opposed to under partner relationships.

2004 Compared to 2003

Marketing expenses increased $5.8 million in the year ended December 31, 2004, when compared to the same period in 2003, primarily due to an increased spending on direct mail, radio and newspaper advertising associated with our co-branded channels and spending on product development costs.  These increases were partially offset by a reduction in email advertising and a reduction in printing and shipping costs associated with our preview marketing.  Selling expense as a percentage of STV has been decreasing every year as we have been moving towards selling through the co-marketing partners, for which there is no marketing and limited travel and facility related elements of selling cost for us.

General and Administrative Expense

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General and Administrative Expense as a Percentage of Revenue

In the table above, for the years ended December 31, 2004 and 2003, $1.0 million and $0.4 million have been reclassified from general and administrative expense to cost of revenue to conform to current year’s presentation, respectively. Additionally, for the years ended December 31, 2004 and 2003, $0.1 million and $0.1 million have been reclassified from general and administrative expense to selling expense to conform to current year’s presentation, respectively.

2005 Compared to 2004

For the year ended December 31, 2005, general and administrative expenses increased by $6.3 million compared to the same period of 2004. The increase was primarily attributable to three distinct items. First, the acquisition of Prophet along with a substantial increase in number of associates employed by us led to increases in payroll related costs. Secondly, audit related costs associated with the restatement of our financial statements for fiscal years 2003 and 2002, the completion of the 2004 audit of internal controls over financial reporting, our continued use of consultants to maintain compliance with Section 404 of the Sarbanes Oxley Act of 2002, and increased legal fees related to continued litigation and compliance issues caused our professional fees to significantly increase.  Finally, the move of our headquarters to our new Draper, Utah location and the acquisition of Prophet have led to increases in depreciation, rent, telecommunication costs, and other general and administrative expenses.

2004 Compared to 2003

For the year ended December 31, 2004, general and administrative expenses increased by $5.5 million compared to the same period of 2003.  The increase was primarily attributable to four distinct items.  First, the acquisition of 360 Group increased general and administrative payroll expense.  Secondly, our ongoing litigation in Australia as well as a comprehensive review of course materials lead to an increase in legal expenses.  Thirdly, increased work relating to compliance with Section 404 of the Sarbanes Oxley Act of 2002 and tax issues caused our accounting fees to increase.  Finally, the substantial increase in the number of associates employed by us led to increases in health insurance, rent, travel, and other general and administrative expenses.

Special Charges

2005 Compared to 2004

For the year ended December 31, 2005, severance costs decreased by $0.5 million, compared to year ended December 31, 2004. The reason for the decrease in severance costs was due to a decrease in number of executive employees whose employment was terminated in 2005 compared to 2004. For the year ended December 31, 2005, impairment of internal use software increased by $0.5 million, when compared to the same period of 2004. The reason for the increase in impairment charges was a result of an impairment on an internal database development project that was abandoned during 2005 in favor of third party enterprise risk planning and client relationship management software.

2004 Compared to 2003

For the year ended December 31, 2004, severance costs decreased by $0.1 million, when compared to the same period of 2003. The reason for the decrease in severance costs was due to a decrease in number of executive employees whose employment was terminated in 2004 compared to 2003. For the year ended December 31, 2004, impairment of internal use software increased by $0.5 million, when compared to the same period of 2003. The reason for the increase in impairment charges was a result of an impairment on a website development project that was abandoned during 2004.

Liquidity

Cash Flows

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2005 Compared to 2004

At December 31, 2005, our principal sources of liquidity consisted of $28.3 million of cash and cash equivalents and marketable securities as compared to $24.6 million at December 31, 2004, as well as cash generated from operations.

Net cash provided by operating activities was $24.9 million at December 31, 2005, compared to $17.5 million net cash provided by operating activities during 2004.  The primary reasons for the increase in operating cash flows was an increase of $11.7 million in deferred revenue resulting from the growth in sales of continuing education products discussed above in revenue, increases in accrued payroll of $0.8 million resulting from increased headcount, accrued tax liabilities of  $1.2 million resulting from increased sales volumes, $1.2 million increase in other assets associated with prepaid advertising costs, offset by a decrease in accounts payable of $4.5 million and other current liabilities of $3.2 million.

At December 31, 2005, net working capital increased by $8.0 million, to $21.1 million compared to $13.1 million at December 31, 2004, excluding current portion of deferred revenue, which is substantially a non-cash liability. Short-term deferred revenue increased $36.3 million, to $68.2 million at December 31, 2005, compared to $31.9 million at December 31, 2004.  The primary reason for the increase in net working capital before consideration of the current portion of deferred revenue was due to increases in restricted cash, marketable securities, decreases in accounts payable, increase in accounts receivable and cash and cash equivalents, partially offset by increases in accrued tax liabilities and accrued payroll. At December 31, 2005, long-term portion of deferred revenue increased $0.9 million, to $9.3 million compared to $8.4 million at December 31, 2004, as a result of the continued success of our Program of High Distinction product bundle that contains various advanced workshops and coaching sessions resulting in an increase in deferred revenue that will be recognized over the 24 month contractual period in addition to sales of web time renewals that extend beyond 12 months.

We invest our excess cash balances in government agency securities that are earning approximately a 3.9% average rate of interest and have laddered maturities through 2007. At December 31, 2005, we have $16.9 million invested in marketable securities compared to $13.8 million at December 31, 2004. During 2005, several investments matured providing proceeds from the maturity of investments of $7.7 million as compared to $10.7 million from the sales and maturity of investments in 2004. During 2005, we purchased $10.8 million in additional marketable securities compared to $16.8 million for the same period in 2004. The proceeds were utilized to fund our growing capital expenditures, acquisition of Prophet, repurchase of our common stock and secure additional cash deposits with our merchant vendors. During 2005, the restricted cash securing one of our merchant vendors was increased by $3.0 million as a result of increased sales from our continued growth being processed by this merchant vendor. In addition, the funds previously held in escrow of $0.3 million related to the ASIC litigation were released by Australian Courts during the fourth quarter of 2005.

In June 2004, we authorized a stock repurchase program under which we can repurchase up to 3.5 million shares over a two year period.  During 2005, we repurchased 0.3 million shares of our common stock for a total cost of $1.4 million.  At December 31, 2005, the remaining repurchase authorization under this program totaled 2.1 million shares.

We expect that our current cash and cash equivalents and marketable securities balances and cash flows from operations will be sufficient to meet our working capital and other capital requirements for the foreseeable future.

Contractual Obligations and Commercial Commitments

We have various financial obligations and commitments in the ordinary course of conducting business.  We have contractual obligations requiring future cash payments under existing contractual arrangements, such as management, consulting and non-competition agreements.

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The following table details our known future cash payments (on an undiscounted basis) related to various contractual obligations as of December 31, 2005 (in thousands).