**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

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**FORM 10-Q**

 
| **ý**                                                                                                                                                                                                               | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                               |
| **For the quarterly period ended September 30,  2004**                                                                                                                                                              |
| ** **                                                                                                                                                                                                               |
| **or**                                                                                                                                                                                                                   |
| ** **                                                                                                                                                                                                               |
| **o**                                                                                                                                                                                                                    | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
| ** **                                                                                                                                                                                                               |
| **For the transition period from               to               ** |
| ** **                                                                                                                                                                                                               |
| **Commission file number 0-26083**                                                                                                                                                                                       |

 

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**INSWEB CORPORATION**

(Exact name of Registrant asspecified in its charter)

 
| **Delaware**                                                   | ** ** | **94-3220749**                      |
|----------------------------------------------------------------|------------|-------------------------------------|
| (State or other jurisdiction ofincorporation or organization)  |       | (IRS EmployerIdentification Number) |
|                                                           |
| **11290 Pyrites Way, Suite 200 Gold River, California  95670** |
| (Address of principal executive offices)                       |
| ** **                                                     |
| **(916) 853-3300**                                             |
| (Registrant’s telephone number, including area code)      |

 

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Indicate by check mark whether the Registrant(1) has filed all reports required to be filed by Sections 13 or15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes **ý** No **o**

 

Indicate by check mark whether the Registrantis an accelerated filer (as defined in Rule12b-2 of the Exchange Act.) Yes **o** No **ý**

 

The number of outstanding shares of theRegistrant’s Common Stock, par value $0.001 per share, on October 29, 2004were 4,751,587 shares.

 

 

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**FORM 10-Q**

**INSWEB CORPORATION**

**INDEX**

 
| **PART I**  | **FINANCIAL INFORMATION**                                                                                              |       |
|-------------|------------------------------------------------------------------------------------------------------------------------|------------|
| ITEM 1:     | Financial Statements  (unaudited)                                                                                      |       |
|        | Condensed Consolidated  Balance Sheets as of September 30, 2004 and December 31, 2003                             |       |
|        | Condensed  Consolidated Statements of Operations for the three and nine months ended September 30,  2004 and 2003 |       |
|        | Condensed  Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003            |       |
|        | Notes  to Condensed Consolidated Financial Statements                                                                  |       |
| ITEM  2:    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                            |       |
| ITEM  3:    | Quantitative  and Qualitative Disclosures About Market Risk                                                            |       |
| ITEM 4:     | Controls and Procedures                                                                                                |       |
|        |                                                                                                                   |       |
| **PART II** | **OTHER INFORMATION**                                                                                                  | ** ** |
| ITEM  4:    | Submission  of Matters to a Vote of Security Holders                                                                   |       |
| ITEM 6:     | Exhibits and  Reports on Form 8-K                                                                                      |       |
|        |                                                                                                                   |       |
| Signature   |                                                                                                                   |

 

2

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**PARTI:****                 FINANCIAL INFORMATION**

 

**ITEM 1.****                  FINANCIALSTATEMENTS**

 

**INSWEB CORPORATION**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 

*(in thousands)*

*(unaudited)*

 
| ** **                                      | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **Assets**                                      |       |                         |       |                        |       |
| Current assets:                                 |       |                         |       |                        |       |
| Cash and cash equivalents                       |       | $                            | 11,447     |                        | $          | 15,223 |   |
| Short-term investments                          |       | 8,294                        |       | 10,868                      |       |
| Accounts receivable, net                        |       | 1,133                        |       | 1,006                       |       |
| Prepaid expenses and other current assets       |       | 704                          |       | 785                         |       |
| Total current assets                            |       | 21,578                       |       | 27,882                      |       |
| Property and equipment, net                     |       | 939                          |       | 1,386                       |       |
| Other assets                                    |       | 523                          |       | 614                         |       |
| Total assets                                    |       | $                            | 23,040     |                        | $          | 29,882 |   |
|                                            |       |                         |       |                        |       |
| **Liabilities and stockholders’ equity**   |       |                         |       |                        |       |
| Current liabilities:                            |       |                         |       |                        |       |
| Accounts payable                                |       | $                            | 1,389      |                        | $          | 524 |   |
| Accrued expenses                                |       | 3,699                        |       | 4,804                       |       |
| Deferred revenue                                |       | 100                          |       | 275                         |       |
| Total current liabilities                       |       | 5,188                        |       | 5,603                       |       |
|                                            |       |                         |       |                        |       |
| Commitments and  contingencies                  |       |                         |       |                        |       |
|                                            |       |                         |       |                        |       |
| Stockholders’ equity:                      |       |                         |       |                        |       |
| Common stock                                    |       | 7                            |       | 7                           |       |
| Paid-in capital, less treasury stock            |       | 198,276                      |       | 197,988                     |       |
| Accumulated deficit                             |       | (180,431                     | )          | (173,716                    | )          |
| Total stockholders’ equity                 |       | 17,852                       |       | 24,279                      |       |
| Total liabilities and stockholders’ equity |       | $                            | 23,040     |                        | $          | 29,882 |   |

 

See accompanying notes.

 

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**INSWEB CORPORATION**

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

 

*(in thousands, except per share amounts)*

*(unaudited)*

 
| ** **                                                                     | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                     | ** ** | **2004**                              | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                                                                      |       |                                  |       |                                      |       |   |   |   |   |
| Transaction fees                                                               |       | $                                     | 3,228      |                                      | $          | 5,931 |   | $ | 10,246 |   | $ | 19,253 |   |
| Development and  maintenance fees                                              |       | 147                                   |       | 255                                       |       | 550 |   | 738 |   |
| Total revenues                                                                 |       | 3,375                                 |       | 6,186                                     |       | 10,796 |   | 19,991 |   |
|                                                                           |       |                                  |       |                                      |       |   |   |   |   |
| Operating  expenses:                                                           |       |                                  |       |                                      |       |   |   |   |   |
| Technology                                                                     |       | 1,268                                 |       | 2,091                                     |       | 4,188 |   | 6,762 |   |
| Sales and  marketing                                                           |       | 3,299                                 |       | 4,327                                     |       | 9,967 |   | 13,116 |   |
| General and  administrative                                                    |       | 1,112                                 |       | 1,249                                     |       | 3,551 |   | 4,481 |   |
| Total operating  expenses                                                      |       | 5,679                                 |       | 7,667                                     |       | 17,706 |   | 24,359 |   |
| Loss from  operations                                                          |       | (2,304                                | )          | (1,481                                    | )          | (6,910 | ) | (4,368 | ) |
| Interest expense                                                               |       | —                                |       | (21                                       | )          | — |   | (84 | ) |
| Interest income                                                                |       | 80                                    |       | 58                                        |       | 225 |   | 224 |   |
| Other (expense)  income                                                        |       | —                                |       | 849                                       |       | (30 | ) | 1,658 |   |
| Net loss                                                                       |       | $                                     | (2,224     | )                                         | $          | (595 | ) | $ | (6,715 | ) | $ | (2,570 | ) |
|                                                                           |       |                                  |       |                                      |       |   |   |   |   |
| Net loss per  share-basic and diluted                                          |       | $                                     | (0.47      | )                                         | $          | (0.13 | ) | $ | (1.43 | ) | $ | (0.49 | ) |
|                                                                           |       |                                  |       |                                      |       |   |   |   |   |
| Weighted-average  shares used in computing per share amounts-basic and diluted |       | 4,716                                 |       | 4,690                                     |       | 4,690 |   | 5,212 |   |

 

See accompanying notes.

 

4

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**INSWEB CORPORATION**

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

*(in thousands)*

*(unaudited)*

 
| ** **                                                                   | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                   | ** ** | **2004**                                  | ** ** | **2003** | ** ** |
| Cash flows from operating activities:                                        |       |                                      |       |   |   |
| Net loss                                                                     |       | $                                         | (6,715     | ) | $ | (2,570 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                                      |       |   |   |
| Amortization of prepaid marketing costs                                      |       | 87                                        |       | 272 |   |
| Depreciation and amortization                                                |       | 585                                       |       | 775 |   |
| Gain on sale of a portion of investment in  Finance All K.K.                 |       | —                                    |       | (822 | ) |
| Other                                                                        |       | —                                    |       | (36 | ) |
| Net changes in operating assets and  liabilities:                            |       |                                      |       |   |   |
| Accounts receivable                                                          |       | (127                                      | )          | 139 |   |
| Prepaid expenses and other current assets                                    |       | 81                                        |       | 277 |   |
| Deposits and other assets                                                    |       | 4                                         |       | 79 |   |
| Accounts payable                                                             |       | 865                                       |       | 245 |   |
| Accrued expenses                                                             |       | (1,041                                    | )          | (361 | ) |
| Deferred revenue                                                             |       | (175                                      | )          | (231 | ) |
|                                                                         |       | (393                                      | )     | 148 |   |
| Net cash used in operating activities                                        |       | (6,436                                    | )          | (2,233 | ) |
|                                                                         |       |                                      |       |   |   |
| Cash flows from investing activities:                                        |       |                                      |       |   |   |
| Redemptions of short-term investments                                        |       | 26,041                                    |       | 14,720 |   |
| Purchases of short-term investments                                          |       | (23,473                                   | )          | (7,946 | ) |
| Purchases of property and equipment                                          |       | (137                                      | )          | (77 | ) |
| Proceeds from sale of a portion of  investment in Finance All K.K.           |       | —                                    |       | 2,097 |   |
| Net cash provided by investing activities                                    |       | 2,431                                     |       | 8,794 |   |
|                                                                         |       |                                      |       |   |   |
| Cash flows from financing activities:                                        |       |                                      |       |   |   |
| Repayments of debt                                                           |       | (65                                       | )          | (3,307 | ) |
| Proceeds from issuance of common stock  through stock plans                  |       | 294                                       |       | 45 |   |
| Repurchase of common stock                                                   |       | —                                    |       | (4,000 | ) |
| Net cash provided by (used in) financing  activities                         |       | 229                                       |       | (7,262 | ) |
| Net decrease in cash and cash equivalents                                    |       | (3,776                                    | )          | (701 | ) |
| Cash and cash equivalents, beginning of  period                              |       | 15,223                                    |       | 12,382 |   |
| Cash and cash equivalents, end of period                                     |       | $                                         | 11,447     |   | $ | 11,681 |   |

 

See accompanying notes.

 

5

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** **

**INSWEB CORPORATION**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

***(unaudited)***

 

**1.  Business of InsWeb**

 

InsWebCorporation operates an online insurance marketplace that enables consumers tocomparison shop online and obtain insurance company-sponsored quotes for avariety of insurance products, including automobile and term life. InsWeb’smarketplace electronically matches consumers and insurance companies. InsWebhas combined extensive knowledge of the insurance industry, technologicalexpertise and close relationships with a significant number of insurancecompanies to develop an integrated online marketplace. InsWeb’s marketplaceenables consumers to research insurance-related topics, search for, analyze andcompare insurance products, apply for and receive insurance company-sponsoredquotes and to purchase automobile and term life insurance coverage throughInsWeb’s insurance agencies.

 

Quotesobtained through the online marketplace are free to consumers, whileparticipating insurance companies pay a transaction fee to InsWeb. These feesare earned either from a fee paid by an insurance company for each closedpolicy, from the delivery of a lead to a participating insurance provider, orfrom a commission or broker fee earned by InsWeb’s insurance agencies, InsWebInsurance Services, Inc. and Goldrush Insurance Services, Inc.

 

Certainconsumers, depending on their responses to several preliminary screeningquestions, are provided the opportunity to link directly to an insurancecompany’s website. In these situations, the consumer will complete theinsurance company’s online application, and InsWeb will be paid a fee for thatconsumer link or click-through.

 

InsWebis subject to all of the risks inherent in an early stage business in theelectronic commerce industry and special risks related to the online insuranceindustry. These risks include, but are not limited to, unpredictable businessmodel, limited management resources, Internet related security risks, thechanging nature of the electronic commerce industry, and variations in consumertraffic (consumers shopping for insurance on the Internet) and insurancecompany participation. Due to the foregoing and other factors, InsWeb’s futureoperating results may be materially affected.

 

Sinceits inception, InsWeb has incurred significant losses, and as of September 30,2004, InsWeb had an accumulated deficit of $180.4 million. These losses, andthis accumulated deficit, have resulted from the significant costs incurred inthe development of InsWeb’s technology platform, the establishment ofrelationships with insurance companies, their integration with the InsWeb site,and InsWeb’s marketing and sales activities. InsWeb intends to continue toinvest in product development and maintenance, sales and marketing. As aresult, InsWeb believes that it will continue to incur operating losses atleast for the next nine to twelve months. InsWeb’s operating results for futureperiods are subject to numerous uncertainties, and there can be no assurancethat InsWeb will be able to achieve and sustain profitability. In view of therapidly evolving nature of InsWeb’s business, InsWeb believes thatperiod-to-period comparisons of its operating results are not necessarilymeaningful and should not be relied upon as an indication of futureperformance.

 

**2.* *Basis of Presentation**

 

Thecondensed consolidated financial statements include the accounts of InsWebCorporation and its wholly-owned subsidiaries, InsWeb InsuranceServices, Inc. and Goldrush Insurance Services, Inc. (“InsWeb” or the “Company”).  All significant inter-company accounts andtransactions have been eliminated in the consolidated financial statements.

 

Theaccompanying unaudited interim financial statements have been prepared inaccordance with U.S. generally accepted accounting principles for interimfinancial information and with the instructions to Form 10-Q and Rule 10-01 ofRegulation S-X.  Accordingly, they do notcontain all of the information and footnotes required by U.S. generallyaccepted accounting principles for complete financial statements.  In the opinion of management, theaccompanying unaudited interim condensed consolidated financial statementsreflect all adjustments, which include only normal recurring adjustments,necessary to present fairly InsWeb’s financial position as of September 30,2004 and the results of operations for the three and nine months endedSeptember 30, 2004 and 2003 and cash flows for the nine months ended September30, 2004 and 2003.  The financial dataand other information disclosed in these notes to the condensed consolidatedfinancial statements related to these periods are unaudited.  The results for the three and nine monthsended September 30, 2004 are not necessarily indicative of the results tobe expected for the year ending December 31, 2004.

 

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Thesecondensed consolidated financial statements should be read in conjunction withthe consolidated financial statements and notes thereto included in InsWeb’sAnnual Report on Form 10-K and other information as filed with the Securitiesand Exchange Commission.

 

**3.  Concentration of Risk — Significant Customers**

 

For the nine months ended September 30, 2004, Progressive and JohnHancock each accounted for 10% of total revenues. John Hancockterminated its participation in the InsWeb term life insurance marketplace onJune 14, 2004. Revenuesfrom Progressive, GE Financial Assurance (“GEFA”), and American Familyaccounted for approximately 16%, 12% and 11%, respectively, of InsWeb’srevenues for the three months ended September 30, 2003. For the ninemonths ended September 30, 2003, revenues from GEFA, Progressive, andAmerican Family accounted for approximately 15%, 15%, and 10%, respectively, ofInsWeb’s revenues.  In September 2003, Progressivediscontinued its participation as a quoting company in the InsWeb market place;however, in October 2003, Progressive signed an agreement to participatein the Sponsored Web Link program. In November 2003, GEFA’s participationas an instant quoting carrier within the InsWeb marketplace was terminated as aresult of its acquisition by AIG, Inc., who has continued as a quoting companyin the InsWeb auto insurance marketplace.

 

**4.  Concentration of Risk — Marketing Partners**

 

InsWeb relies onrelationships with Internet portals and other online companies to attractconsumers to its website. In a typical arrangement, the online company includesa “link” on its website on which a user can click to jump to InsWeb’s websiteor to a site that InsWeb operates under the online company’s name; as part ofthe arrangement, InsWeb typically pays the online company a portion of theresulting transaction fees. For 2003, 2002 and 2001, we received approximately13%, 11% and 32%, respectively of our website traffic from the major Internet portalsYahoo! Inc., MSN and AOL. For the nine months ended September 30, 2004, wereceived approximately 20% of our website traffic from these onlinerelationships.  These relationships maynot continue to generate a substantial amount of new traffic on InsWeb’swebsite, or the revenues generated by these relationships may be insufficientto justify InsWeb’s payment obligations. InsWeb has experienced fluctuations inthe traffic from its online partners as a result of redesigns of their websitesor being outbid for promotions by other online insurance providers.Furthermore, the value of these relationships is based on the continuedpositive market presence, reputation and growth of these online companies’websites and services. Any decline in the market presence, business orreputation of these online companies’ websites and services will reduce thevalue of these relationships to InsWeb and could harm its business.

 

**5.  Per ShareInformation**

 

Basicearnings per share, is computed using the weighted-average number of shares ofcommon stock outstanding. Diluted earnings per share would reflect thepotential dilution that would occur if stock options and warrants had beenexercised.  For the three and nine monthperiods ended September 30, 2004 and 2003, common equivalent shares fromstock options and warrants were excluded from the computation of net loss pershare-diluted as their effect was antidilutive.

 

InsWebaccounts for its stock-based compensation plans under the recognition andmeasurement principles of APB Opinion No. 25, “Accounting for Stock Issued toEmployees,” and related interpretations. The following table illustrates the effect on net loss and net loss pershare if InsWeb had applied the fair value recognition provisions of FinancialAccounting Standards Board Statements No. 123 “Accounting for Stock-BasedCompensation” and No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure*,*”to stock-based employee compensation (in thousands, except per share amounts):

 
| ** **                                                                                                 | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net loss, as reported                                                                                      |       | $                                          | (2,224     | )                                         | $          | (595 | ) | $ | (6,715 | ) | $ | (2,570 | ) |
| Deduct: Stock-based employee compensation  expense determined under fair value based method for all awards |       | (179                                       | )          | (452                                      | )          | (515 | ) | (1,225 | ) |
| Pro forma net loss                                                                                         |       | $                                          | (2,403     | )                                         | $          | (1,047 | ) | $ | (7,230 | ) | $ | (3,795 | ) |
|                                                                                                       |       |                                       |       |                                      |       |   |   |   |   |
| Net loss per share:                                                                                        |       |                                       |       |                                      |       |   |   |   |   |
| Basic and diluted—as reported                                                                         |       | $                                          | (0.47      | )                                         | $          | (0.13 | ) | $ | (1.43 | ) | $ | (0.49 | ) |
| Basic and diluted—pro forma                                                                           |       | $                                          | (0.51      | )                                         | $          | (0.22 | ) | $ | (1.54 | ) | $ | (0.73 | ) |

 

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Optionvaluation models require the input of highly subjective assumptions. BecauseInsWeb’s employee and director stock options have characteristics significantlydifferent from those of traded options, and because changes in the subjectiveinput assumptions can materially affect the fair value estimate, in management’sopinion, the existing models do not necessarily provide a reliable measure ofthe fair value of its employee stock options. For purposes of pro formadisclosures, the estimated fair value of the options is amortized over theoptions’ vesting period. The above pro forma disclosures are not necessarilyrepresentative of the effects on reported income or loss for future periods, asadditional grants are made each year and options vest over several years.

 

**6.Accrued Expenses**

 

Accruedexpenses consist of the following (in thousands):

 
| ** **                             | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                   |       |                         |       |                        |       |
| Accrued lease obligations (see Note 9) |       | $                            | 2,238      |                        | $          | 2,584 |   |
| Accrued employee compensation          |       | 695                          |       | 1,208                       |       |
| Deferred rent                          |       | 518                          |       | 513                         |       |
| Other                                  |       | 248                          |       | 499                         |       |
| Total                                  |       | $                            | 3,699      |                        | $          | 4,804 |   |

 

**7.  Comprehensive Loss**

 

Totalcomprehensive loss for the three and nine months ended September 30, 2004and 2003 was as follows (in thousands):

 
| ** **                                                                                                                                               | ** ** | **Three months  ended September 30,** | ** ** | **Nine months  ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                                               | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net loss                                                                                                                                                 |       | $                                          | (2,224     | )                                         | $          | (595 | ) | $ | (6,715 | ) | $ | (2,570 | ) |
| Other  comprehensive income:                                                                                                                             |       |                                       |       |                                      |       |   |   |   |   |
| Change in  cumulative translation adjustment due to the partial sale of investment in  Finance All K.K.                                                  |       | —                                     |       | 132                                       |       | — |   | 132 |   |
| Change in  unrealized gain on available for sale securities (principally, Finance All  K.K. for the three and nine months ended September 30, 2003) |       | 2                                          |       | 3,254                                     |       | (6 | ) | 3,254 |   |
| Total  comprehensive (loss) income                                                                                                                       |       | $                                          | (2,222     | )                                         | $          | 2,791 |   | $ | (6,721 | ) | $ | 816 |   |

 

**8.  Related PartyTransactions**

 

Duringthe three and nine months ended September 30, 2004, InsWeb recognized$115,000 and $424,000, respectively, in marketing expenses under a marketingagreement with an Internet company, compared to $68,000 and $310,000, for thecomparable periods in 2003, respectively. An affiliate of the Internet company became a stockholder of InsWeb inDecember 1998.

 

**9.  Commitments and Contingencies**

 

**Leases**

 

In July 2002,InsWeb and one of its sublessees agreed to amend the sublease covering portionsof the property InsWeb formerly occupied as its headquarters in Redwood City,California. Under the terms of the amendment, the sublessee agreed to rent theentire facility for the duration of InsWeb’s lease (throughSeptember 2008). All rent and operating expenses otherwise payable byInsWeb to the landlord are required to be paid directly by the sublessee.Therefore, the amended sublease offsets InsWeb’s aggregate operating leasecommitments by approximately $7,679,000 through the remainder of thelease.  However, the sublessee is astart-up company with a limited operating history and, therefore, there areinherent risks and uncertainties associated with its future operations and itsability to discharge its obligations through the term of the sublease.  In the event that the sublessee defaults onits obligations under the amended sublease, InsWeb would be responsible formaking the required lease payments to the landlord throughout the remainingterm of the lease. The Company maintains an accrual of $1,000,000 as ofSeptember 30, 2004 due to the uncertainties associated with this subleasee.

 

8

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In connection withInsWeb’s other lease obligation for its formerly occupied facilities, InsWebmust make assumptions regarding the estimated future sublease income relativeto this facility.  As a result of thedecline in the real estate market in the geographic areas where this propertyis located, the Company maintains an accrual of $1,237,000 as ofSeptember 30, 2004, which is management’s estimate of the differencebetween future sublease income as compared to the remaining lease obligationspayable by InsWeb for this formerly occupied facility. This compares to anaccrual of $1,584,000 as of December 31, 2003. These estimates andassumptions are affected by area-specific conditions such as new commercialdevelopment, market occupancy rates and future market prices.

 

If these estimatesor their related assumptions change in the future, InsWeb may be required torecord additional adjustments to increase or decrease its accrual, asconditions warrant.

 

**SecuritiesClass Action Lawsuit**

 

A securities class action lawsuit was filed on December 5, 2001 inthe United States District Court for the Southern District of New York, (the “Court”)purportedly on behalf of all persons who purchased InsWeb common stock fromJuly 22, 1999 through December 6, 2000.  The complaint named as defendants InsWeb,certain current and former officers and directors, and three investment bankingfirms that served as underwriters for InsWeb’s initial public offering inJuly 1999.  The complaint, assubsequently amended, alleges violations of Sections 11 and 15 of theSecurities Act of 1933 and Sections 10 and 20 of the Securities Exchange Act of1934, on the grounds that the prospectuses incorporated in the registrationstatements for the offering failed to disclose, among other things, that (i)the underwriters had solicited and received excessive and undisclosedcommissions from certain investors in exchange for which the underwritersallocated to those investors material portions of the shares of our stock soldin the offerings and (ii) the underwriters had entered into agreements withcustomers whereby the underwriters agreed to allocated shares of the stock soldin the offering to those customers in exchange for which the customers agreedto purchase additional shares of InsWeb stock in the aftermarket atpre-determined prices.  No specificdamages are claimed.  Similar allegationshave been made in lawsuits relating to more than 300 other initial public offeringsconducted in 1999 and 2000, all of which have been consolidated for pretrialpurposes.  In October 2002, allclaims against the individual defendants were dismissed without prejudice.  In February 2003, the Court dismissedthe claims in the InsWeb action alleging violations of the Securities ExchangeAct of 1934 but allowed the plaintiffs to proceed with the remainingclaims.  In June 2003, theplaintiffs in all of the cases presented a settlement proposal to all of theissuer defendants.  Under the proposedsettlement, the plaintiffs will dismiss and release all claims againstparticipating defendants in exchange for a contingent payment guaranty by theinsurance companies collectively responsible for insuring the issuers in allthe related cases, and the assignment or surrender to the plaintiffs of certainclaims the issuer defendants may have against the underwriters.  InsWeb and most of the other issuerdefendants have accepted the settlement proposal. The settlement is subject toapproval of the Court, which cannot be assured. If the settlement is not approved by the Court, InsWeb would defend thelawsuit vigorously.  However, thelitigation is in the preliminary stage, and the company therefore cannotpredict its outcome.  The litigationprocess is inherently uncertain.  Anunfavorable outcome could have a material adverse effect on InsWeb’s financialcondition, results of operations and cash flows.

 

9

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**ITEM 2.****                 ****MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION****AND RESULTS OF OPERATIONS**

 

*This Quarterly Report on Form 10-Q, and in particularManagement’s Discussion and Analysis of Financial Condition and Results ofOperations, contains “forward-looking statements” with respect to InsWeb’sfuture financial performance. The words or phrases “expects,” “anticipates,” “intends,”“plans,” “believes,” “seeks,” “estimates,” and similar expressions aregenerally intended to identify forward-looking statements. Such forward-lookingstatements are subject to various known and unknown risks and uncertainties,and InsWeb cautions you that any forward-looking information provided by, or onbehalf of, InsWeb is not a guarantee of future performance. Actual resultscould differ materially from those anticipated in such forward-lookingstatements due to a number of factors, some of which are beyond InsWeb’scontrol, including, but not limited to, uncertain economic conditions whichcould result in lower growth rates, decreasing revenue and reducedparticipation in InsWeb’s marketplace, anticipated losses, the unpredictabilityof future revenues, reliance on key customers—property and casualty insurancecarriers- who are themselves subject to volatility in their operating cycles,competition, risks associated with system development and operation risks,management of potential growth and risks of new business areas, businesscombinations, and strategic alliances. These risks and uncertainties, as wellas other risks and uncertainties, which are described in greater detail in thesection entitled “Factors That May Affect Future Performance” and otherdocuments filed with the Securities and Exchange Commission, could cause InsWeb’sactual results to differ materially from historical results or those currentlyanticipated. All forward-looking statements are based on information availableto InsWeb on the date hereof, and InsWeb assumes no obligation to update suchstatements.*

 

**Overview**

 

InsWeboperates an online insurance marketplace that enables consumers to shop onlinefor a variety of insurance products, including automobile and term life, and obtaininsurance company-sponsored quotes. In order to create this marketplace, InsWebhas established close relationships with a significant number of insurancecompanies throughout the United States.

 

InsWeb’sprincipal source of revenues is transaction fees from participating insurancecompanies. While quotes obtained through InsWeb’s online insurance marketplaceare provided to consumers free of charge, InsWeb earns revenues fromparticipating insurance companies based on the delivery of qualified leads.With most insurance companies, InsWeb is paid a fee only when the consumerpurchases an insurance policy, and with others, InsWeb is paid a transactionfee based on the delivery of a lead, regardless of whether or not the consumeractually purchases a policy. Qualified leads are produced when a consumerclicks to view insurance company quotes. These leads are produced both forinsurance companies providing instant online quotes and for insurance companiesproviding e-mail or other offline quotes. Once the leads are generated by theconsumer’s request to view quotes, InsWeb transmits the leads either to InsWebInsurance Services or to the selected insurance company or other entity bye-mail, file transfer or direct connection to the insurance company’s informationsystem. InsWeb provides each participating insurance company withcustom-formatted lead information based on the insurance companies individualrequirements.

 

InsWebalso generates commission revenue and broker fees from the operations of itsinsurance agent subsidiaries. As of September 30, 2004, InsWeb’swholly-owned subsidiaries, InsWeb Insurance Services, Inc. and GoldrushInsurance Services, Inc. (collectively “InsWeb’s Insurance Agency”),function as authorized automobile insurance agents for nine participatinginsurance companies in nine states. Since August 18, 2004, InsWeb’s InsuranceAgency has been selling term life insurance policies in all states on behalf ofsix insurance companies.  Where InsWeb’sInsurance Agency has acted as the selling agent, it receives a commission basedon a percentage of the initial insurance policy premium related to eachinsurance policy sale, and in some cases each renewal of a policy. InsWebrecognizes the revenue from these activities as the insurance policies arepaid, less an estimate for early cancellations. Commission revenue and brokerfees are included in transaction fees.

 

InOctober 2003, InsWeb began providing “**Sponsored Web Links**,”whereby certain consumers, depending on their responses to several preliminaryscreening questions, are provided with the opportunity to link directly to aninsurance company’s website. In these situations, the consumer will completethe insurance company’s online application, and InsWeb will be paid a fee forthat consumer link or click-through. Fees paid to InsWeb for Sponsored WebLinks are included in transaction fees.

 

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Aless significant and declining source of revenues for InsWeb are developmentand maintenance fees that are paid by insurance companies that participate onthe InsWeb insurance marketplace. Development fees are generated from thedesign and development of customized interfaces between an insurance company’sinformation system and the InsWeb site. InsWeb charges maintenance fees formaintaining and servicing the programs of the individual insurance companiesand for maintaining any hardware at InsWeb’s facility that is dedicated tospecific insurance companies.

 

InsWebhas focused its efforts on developing insurance company coverage for automobileinsurance in order to be able to offer true comparative online shopping forthis important segment of the insurance market. Automobile insurance accountedfor approximately 76% and 74% of transaction revenues for the three and ninemonths ended September 30, 2004 and 79% and 81% of transaction revenuesfor the comparable periods in 2003. We anticipate that automobile insurancewill continue to account for a substantial portion of InsWeb’s revenues for theforeseeable future.

 

InsWebhas been dependent on a limited number of insurance companies for a significantportion of its revenues. Revenues from Progressive and John Hancock eachaccounted for approximately 10% of InsWeb’s revenues for the nine months endedSeptember 30, 2004. JohnHancock terminated its participation in the InsWeb term life insurancemarketplace on June 14, 2004. The Company expects that the majority ofleads that would have been directed to John Hancock will be directed to othercarriers, new or existing. Revenuesfrom Progressive, GEFA, and American Family accounted for approximately 16%,12% and 11%, respectively, of InsWeb’s revenues for the three months endedSeptember 30, 2003. For the nine months ended September 30, 2003, revenuesfrom GE Financial Assurance, Progressive, and American Family accounted forapproximately 15%, 15%, and 10%, respectively, of InsWeb’s revenues.  Because of the broad market presence of someof InsWeb’s participating insurance companies, InsWeb expects to continue togenerate a substantial portion of its revenues from a limited number ofinsurance companies for the foreseeable future.

 

InApril 2004, we announced that we intended to seek a strategic partnershipwith one or more firms that have access to a large number of qualifiedconsumers and that such a partnership could result in the sale of all or a partof InsWeb to achieve this goal.  Althoughseveral potential strategic partners were identified during this process, thepreliminary discussions did not produce an acceptable level of interest foreither party. Therefore, management is now devoting its attention to othercurrent initiatives to improve its operating results. We will continue toexplore strategic opportunities if and when they arise, although there can beno assurance that any such partnership arrangement or sale will result.  Uncertainty regarding our future directioncould adversely affect relations with our employees or with our insurancecompany customers or online partners and cause them to alter or delay decisionsregarding their relationship with InsWeb.

 

Sinceits inception, InsWeb has incurred significant losses, and as ofSeptember 30, 2004, InsWeb had an accumulated deficit of$180.4 million. These losses, and this accumulated deficit, have resultedfrom the significant costs incurred in the development of InsWeb’s technologyplatform, the establishment of relationships with insurance companies, theirintegration with the InsWeb site, and InsWeb’s marketing and sales activities.InsWeb intends to continue to invest in product development and maintenance,sales and marketing. As a result, InsWeb believes that it will continue toincur operating losses at least for the next nine to twelve months. InsWeb’soperating results for future periods are subject to numerous uncertainties, andthere can be no assurance that InsWeb will be able to achieve and sustainprofitability. In view of the rapidly evolving nature of InsWeb’s business,InsWeb believes that period-to-period comparisons of its operating results arenot necessarily meaningful and should not be relied upon as an indication offuture performance.

 

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** **

**Results of Operations**

 

Thefollowing table sets forth certain statement of operations items as apercentage of total revenues for the three and nine months endedSeptember 30, 2004 and 2003:

 
| ** **                        | ** ** | **Three months  ended  September 30,** | ** ** | **Nine months  ended  September 30,** | ** ** |
|-----------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| ** **                        | ** ** | **2004**                               | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                         |       |                                   |       |                                  |       |   |   |   |   |
| Transaction fees                  |       | 96                                     | %          | 96                                    | %          | 95 | % | 96 | % |
| Development and  maintenance fees |       | 4                                      | %          | 4                                     | %          | 5 | % | 4 | % |
| Total                             |       | 100                                    | %          | 100                                   | %          | 100 | % | 100 | % |
| Operating  expenses:              |       |                                   |       |                                  |       |   |   |   |   |
| Technology                        |       | 37                                     | %          | 34                                    | %          | 39 | % | 34 | % |
| Sales and  marketing              |       | 98                                     | %          | 70                                    | %          | 92 | % | 66 | % |
| General and  administrative       |       | 33                                     | %          | 20                                    | %          | 33 | % | 22 | % |
| Total                             |       | 168                                    | %          | 124                                   | %          | 164 | % | 122 | % |
| Loss from  operations             |       | (68                                    | )%         | (24                                   | )%         | (64 | )% | (22 | )% |

** **

**Revenues**

 
| ** **              | ** ** | **Three months  ended  September 30,** | ** ** | **Nine months  ended  September 30,** | ** ** |
|-------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| **(In thousands)**      | ** ** | **2004**                               | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
|                    |       | ** **                             |       |                                  |       |   |   |   |   |
| Transaction fees:       |       |                                   |       |                                  |       |   |   |   |   |
| Auto insurance          |       | $                                      | 2,445      |                                  | $          | 4,711 |   | $ | 7,587 |   | $ | 15,624 |   |
| Term life  insurance    |       | 711                                    |       | 1,123                                 |       | 2,452 |   | 3,223 |   |
| Other insurance         |       | 72                                     |       | 97                                    |       | 207 |   | 406 |   |
| Total transaction  fees |       | $                                      | 3,228      |                                  | $          | 5,931 |   | $ | 10,246 |   | $ | 19,253 |   |

** **

**Direct Marketing (Consumer Acquisition)**

 
| ** **                                         | ** ** | **Three months  ended  September 30,** | ** ** | **Nine months  ended  September 30,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| **(In thousands, except per  consumer amounts)**   | ** ** | **2004**                               | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Direct marketing costs                             |       | $                                      | 1,964      |                                  | $          | 2,530 |   | $ | 5,875 |   | $ | 7,655 |   |
| Direct marketing as a percent of  transaction fees |       | 61                                     | %          | 43                                    | %          | 57 | % | 40 | % |
| Number of consumers                                |       | 665                                    |       | 1,865                                 |       | 2,082 |   | 5,784 |   |
| Direct marketing cost per consumer                 |       | $                                      | 2.95       |                                  | $          | 1.36 |   | $ | 2.82 |   | $ | 1.32 |   |
| Transaction fees per consumer                      |       | $                                      | 4.85       |                                  | $          | 3.18 |   | $ | 4.92 |   | $ | 3.33 |   |

** **

**Auto Marketplace**

 
| ** **                                       | ** ** | **Three months  ended  September 30,** | ** ** | **Nine months  ended  September 30,** | ** ** |
|--------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------------|------------|
| **(In thousands, except per  consumer amounts)** | ** ** | **2004**                               | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Auto insurance  transaction fees                 |       | $                                      | 2,445      |                                       | $          | 4,711 |   | $ | 7,587 |   | $ | 15,624 |   |
| Number of  consumers                             |       | 570                                    |       | 1,657                                      |       | 1,735 |   | 5,089 |   |
| Transaction fees per consumer                    |       | $                                      | 4.29       |                                       | $          | 2.84 |   | $ | 4.37 |   | $ | 3.07 |   |

** **

**Term Life Marketplace**

 
| ** **                                       | ** ** | **Three months  ended  September 30,** | ** ** | **Nine months  ended  September 30,** | ** ** |
|--------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| **(In thousands, except per  consumer amounts)** | ** ** | **2004**                               | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Term life  insurance transaction fees            |       | $                                      | 711        |                                  | $          | 1,123 |   | $ | 2,452 |   | $ | 3,223 |   |
| Number of  consumers                             |       | 69                                     |       | 124                                   |       | 242 |   | 402 |   |
| Transaction fees per consumer                    |       | $                                      | 10.30      |                                  | $          | 9.06 |   | $ | 10.13 |   | $ | 8.02 |   |

*** ***

***Definitions:***

 
| “Direct marketing costs”       |   | Represents expenses incurred by the company to  drive consumer traffic to InsWeb’s online insurance marketplace; |
|------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------|
| “Number of consumers”          |   | Represents a consumer who has started an InsWeb  application;                                                         |
| “Transaction Fee per consumer” |   | Represents transaction revenue earned per consumer  who has started an application.                                   |

 

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**Summary**

 

Revenuesfor the three and nine month periods ended September 30, 2004 reflect thechallenging advertising environment for personal lines insurance (auto and termlife insurance) in which InsWeb must compete. While direct marketing costs perconsumer are up, there has yet to be an increase in the number of consumerscoming to the InsWeb site. The Company continues to work toward modifying itsadvertising strategies to improve these results and to find dependable andaffordable sources of consumers. While dealing with the challenges on theconsumer marketing side of the business, the Company continues to improve itsAuto product offering by implementing a shortened quote form, the sharing of consumersamongst its insurance company partners, the expansion of the Sponsored Web Linkbidding platform, and the addition of a new quoting option that providesconsumer leads to local insurance agents. Within the Term Life productoffering, the Company continues to shift its revenue model from a lead paymentto a commission payment because it believes that it will offer greaterlong-term financial benefit and it has also added several new carriers to itsterm life consumer offering.

 

**Revenues**

 

**Transaction Fees.**  Transaction fees (consisting oflead fees, commissions and Sponsored Links fees) relating to automobileinsurance decreased to $2.4 million and $7.6 million, for the three andnine months ended September 30, 2004, respectively from $4.7 millionand $15.6 million for the comparable periods in 2003, a decrease of 49% and51%, respectively. These decreases for the three and nine months endedSeptember 30, 2004 are each attributable to a 66% decrease in consumer traffic(consumers who have started the InsWeb auto application) from the comparableperiods in 2003.  Revenue per autoconsumer increased to $4.29 and $4.37 for the three and nine months endedSeptember 30, 2004, compared to $2.84 and $3.07 for the comparable period in2003 primarily as a result of the Sponsored Web Link program discussed above.Management expects revenue per auto consumer to increase for the remainder of2004 and early 2005 as InsWeb continues to implement initiatives to increasethe sale of automobile insurance policies to consumers that shop the InsWebauto insurance marketplace, in particular the expansion of the new program ofproviding consumer leads to local agents.

 

Transactionfees (consisting of lead fees and commissions) relating to term life insurancedecreased to $0.7 million and $2.5 million for the three and nine monthsended September 30, 2004 from $1.1 million and $3.2 million for thecomparable periods in 2003. The decrease in revenues was a result of asignificant decrease in consumer traffic (consumers who have started the InsWebterm life application).  Revenue per termlife consumer increased to $10.30 and $10.13 for the three and nine monthsended September 30, 2004, compared to $9.06 and $8.02 for the comparableperiods in 2003, on a 45% and 40% decrease, respectively, in consumer traffic.Revenue per term life consumer is expected to be negatively impacted in thenear term, however, as additional insurance companies convert to acommission-based revenue model. The conversion of an insurance company from alead-based revenue model to a commission-based model results in lower revenuesin the short-term, as it takes 90 to 120 days to complete the sale of aterm life policy and revenue is recognized as the policy is paid by theconsumer. OnJune 14, 2004, John Hancock, who accounted for 10% oftotal revenues for the nine months ended September 30, 2004, terminated its participation on the InsWebterm life insurance marketplace.

 

**Operating Expenses**

 

**Technology.**  Technology expenses consistprimarily of payroll and related expenses, including employee benefits,facility and systems costs, for product and site development personnel involvedwith the planning, design and implementation of carrier integration to theInsWeb online insurance marketplace. Technology expenses decreased to$1.3 million and $4.2 million for the three and nine months endedSeptember 30, 2004, from $2.1 million and $6.8 million for the comparableperiods in 2003. The decrease was primarily attributable to a reduction inheadcount. Technology expenses for the remainder of 2004 and early 2005 areexpected to remain at or near current levels.

 

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**Sales and Marketing.**  Sales and marketing expensesinclude direct marketing expenditures that include advertising, promotions andfees paid to online companies with which InsWeb has contractual relationshipsto drive consumer traffic to the InsWeb online marketplace. InsWeb’s currentconsumer marketing program is focused on maintaining key online relationships andselective cost-effective marketing campaigns designed to maintain consumerawareness of InsWeb and its online insurance marketplace. InsWeb hasexperienced occasional fluctuations in the traffic from its online partners asa result of redesigns of their websites or being outbid for promotions by otheronline insurance providers. Also included in sales and marketing expenses arepayroll and related expenses, including employee benefits, facility costs,telecommunications and systems costs, for InsWeb’s sales and marketingpersonnel and the personnel and related costs for InsWeb’s insurance agencyoperations (both auto and term life), which includes selling agents,underwriters, supervisors and customer service and support groups. Overallsales and marketing expenses decreased to $3.3 million and $10.0 million forthe three and nine months ended September 30, 2004, from $4.3 million and $13.1million for the comparable periods in 2003. Direct marketing costs decreased to$2.0 million and $5.9 million for the three and nine months endedSeptember 30, 2004, from $2.5 million and $7.7 million for thecomparable periods in 2003. However direct marketing expense as a percent oftransaction fee revenues was 61% and 57% for the three and nine months endedSeptember 30, 2004, as compared to 43% and 40% for the comparable periodsin 2003. The Company expects that for the remainder of 2004 and into 2005,direct marketing costs per consumer acquired will remain at the current levels.Total direct marketing costs will fluctuate based on the amount of consumertraffic driven to the InsWeb marketplace, while all other sales and marketingexpenditures are expected to increase for the remainder of 2004 and early 2005,as the term life agency operations are expanded.

 

**General and Administrative.** General and administrative expenses consist primarily of payroll andrelated expenses, including employee benefits, facility costs,telecommunications and systems costs, for InsWeb’s general management,administrative and accounting personnel, as well as other general corporateexpenses. General and administrative expenses decreased to $1.1 millionand $3.6 million for the three and nine months ended September 30, 2004 from$1.2 million and $4.5 million for the comparable periods in 2003. Thedecrease was primarily due to a reduction in headcount. General andadministrative expenses are expected to remain at current levels for theremainder of 2004 and early 2005.

 

**Interest Expense**

 

Nointerest expense was incurred during the three and nine months ended September30, 2004.  Interest expense incurred forthe comparable periods in 2003 totaled $21,000 and $84,000 and was primarilyattributable to the fixed portion of InsWeb’s long-term marketing commitment,which was paid in May 2003.

 

**Interest Income**

 

Interestincome was $80,000 and $225,000 for the three and nine months endedSeptember 30, 2004 and $58,000 and $224,000 for the three and nine monthsended September 30, 2003. Interest income is income earned on InsWeb’sshort-term investments.

 

**Other Income(Expense)**

 

Forthe three months ended September 30, 2003, other income included the $0.8million gain from the sale of a portion of InsWeb’s interest in Finance AllK.K.  For the nine months endedSeptember 30, 2003, other income also included $0.8 million relating tothe eHealthinsurance litigation settlement.

 

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**Critical Accounting Policies**

 

InsWeb’sdiscussion and analysis of its financial condition and results of operationsare based on InsWeb’s consolidated financial statements which have beenprepared in accordance with U.S. generally accepted accounting principles. Thepreparation of these financial statements requires InsWeb to make estimates andjudgments that affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. InsWeb bases its estimates and judgments on historicalexperience and on various other factors that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions. InsWeb believes thefollowing critical accounting policies affect its more significant judgmentsand estimates used in the preparation of its consolidated financial statements.

 

**Accrual for Lease Obligations.** InsWeb is contractually obligated to make future lease payments oncertain formerly occupied facilities through September 2008. As ofSeptember 30, 2004, total future obligations for these facilities amounted to$9.6 million; these obligations are offset by total future sublease incomeof approximately $8.2 million. Substantially all future sublease income isdue from a sublessee that is a start-up company with a limited operatinghistory and, therefore, there are inherent risks and uncertainties associatedwith its future operations and its ability to discharge its obligations throughthe term of the sublease. In the event that the sublessee defaults on itsobligations under the amended sublease, InsWeb would be responsible for makingthe required lease payments to the landlord through the remaining term of thelease. In connection with this lease obligation and another lease for formerlyoccupied facilities, InsWeb must make assumptions regarding the estimatedfuture sublease income relative to these facilities. The Company maintains anaccrual of $2.2 million as of September 30, 2004 for lease commitmentsrelated to these formerly occupied facilities, as compared to an accrual of$2.6 million as of December 31, 2003. These estimates and assumptionsare affected by area-specific conditions such as new commercial development,market occupancy rates and future market prices. If these estimates or theirrelated assumptions change in the future, InsWeb may be required to recordadjustments to increase or decrease its accrual, as conditions warrant.

 

**Contingencies.**  As discussed in “Item 1 — Note9 of Notes to Condensed Consolidated Financial Statements” and “Part II – Item 1,” a class action lawsuit has been filed thatalleges InsWeb violated certain federal securities laws at the time of itsinitial public offering. Although some claims against InsWeb in this classaction have been dismissed and a settlement of these proceedings has beenproposed and conditionally accepted, InsWeb cannot accurately predict theultimate outcome of this matter at this time and therefore, cannot estimate therange of probable loss, if any, due to the inherent uncertainties oflitigation. InsWeb believes it has meritorious defenses; however InsWeb cannotassure that it will prevail in this action. An unfavorable outcome could have amaterial adverse effect on InsWeb’s financial condition, results of operationsand cash flows.

 

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**Liquidity and Capital Resources**

 

Summarizedcash flow information is as follows (in thousands):

 
| ** **                                       | ** ** | **Nine months  ended  September 30,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                       | ** ** | **2004**                                   | ** ** | **2003** | ** ** |
|                                             |       |                                       |       |   |   |
| Cash used in operating activities                |       | $                                          | (6,436     | ) | $ | (2,233 | ) |
| Cash (used in) provided by investing  activities |       | 2,431                                      |       | 8,794 |   |
| Cash provided by (used in) financing  activities |       | 229                                        |       | (7,262 | ) |
|                                                  |            |                                            |            |  |  |  |  |

 

AtSeptember 30, 2004, InsWeb’s principal source of liquidity was $19.7 million incash, cash equivalents and short-term investments, which decreased from $26.1million as of December 31, 2003. The decrease resulted from the use of $6.4 million of cash in operatingactivities.

 

Forthe nine months ended September 30, 2004, net cash used in operating activitieswas $6.4 million compared to cash used in operating activities of $2.2 millionfor the comparable period in 2003.  Forthe nine months ended September 30, 2004, non-cash items included depreciationand amortization of assets of $0.6 million. InsWeb’s net loss of $6.7 million for the first nine months of 2004contributed to cash used in operations for the nine months ended September 30,2004.

 

Forthe nine months ended September 30 2004, net cash provided by investingactivities was $2.4 million, which primarily consisted of redemptions ofshort-term investments offset by the purchases of short-term investments.

 

Forthe nine months ended September 30, 2004, net cash provided by financingactivities was $0.2 million.  Cashprovided by financing activities was attributable to the proceeds fromexercises of stock options of $0.3 million offset by debt repayments of $65,000to a marketing partner.

 

InsWebleases its current office facilities under non-cancelable operating leases,which expire at various dates through April 2011, including a 10-yearlease agreement through 2011 for office space in the Sacramento area whichhouses its corporate headquarters and agency operations. InsWeb has options toextend the lease at the end of the lease term, and has the right of firstrefusal on other office space in the complex. In addition, InsWeb has enteredinto various sublease arrangements associated with previously exited facilitiesthat have terms extending through September 2008.

 

Aggregatecontractual cash obligations as of September 30, 2004 are summarized as follows(in thousands):

 
| **Years ending December 31,** | ** ** | **Gross lease  commitments** | ** ** | **Sublease  income** | ** ** | **Net lease  commitment** | ** ** |
|------------------------------------|------------|------------------------------|------------|----------------------|------------|---------------------------|------------|
| 2004                               |       | $                            | 807        |                 | $          | (486                      | )          | $ | 321 |   |
| 2005                               |       | 3,257                        |       | (1,961               | )          | 1,296                     |       |
| 2006                               |       | 3,391                        |       | (2,030               | )          | 1,361                     |       |
| 2007                               |       | 3,483                        |       | (2,100               | )          | 1,383                     |       |
| 2008                               |       | 2,936                        |       | (1,615               | )          | 1,321                     |       |
| Thereafter                         |       | 2,515                        |       | —               |       | 2,515                     |       |
|                               |       | $                            | 16,389     |                 | $          | (8,192                    | )          | $ | 8,197 |   |

 

InsWebcurrently anticipates that its cash, cash equivalents and short-terminvestments will be sufficient to meet its anticipated cash needs for workingcapital and capital expenditures for at least the next 12 months. AlthoughInsWeb does not anticipate the need for additional financing, InsWebnevertheless may require additional funds to meet operating needs, or to expandits business internally or through acquisition. InsWeb cannot be certain thatadditional financing will be available when required, on favorable terms or atall. If InsWeb is not successful in raising additional capital as required, itsbusiness could be materially harmed. If additional funds were raised throughthe issuance of equity securities, the percentage ownership of InsWeb’sthen-current stockholders would be reduced.

 

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**Factors That May Affect Our FuturePerformance**

 

*Our future business, operating results and financialcondition are subject to various risks and uncertainties, including thosedescribed below.*

 

**Our business is difficult to evaluate becauseour market is evolving rapidly and our business model is unpredictable**

 

An investor in our common stock must consider the uncertaintiesfrequently encountered by early stage companies in new and rapidly evolvingmarkets. These uncertainties include:

 

•      anevolving and unpredictable business model, which makes prediction of futureresults uncertain and an investment in our common stock highly speculative;

•      thedevelopment of comparable services by competitors, which may reduce our marketshare;

•      theuncertainty of the extent to which the consumer market will adopt the Internetas the preferred medium for comparison shopping for and purchase of insuranceproducts, which may limit our ability to generate revenue from consumers thatvisit our online marketplace or our insurance agency;

•      ourability to retain key employees; and

•      ourreliance on key customers and ability to retain customers.

 

Our business strategy may not be successful and we may not be able tosuccessfully address these uncertainties. Moreover, our ability to take theforegoing steps may be hampered by our limited financial resources should wefail to rapidly increase revenues or should increased revenues be more thanoffset by increased operating expenses.

 

**We have a history of losses, we expect futurelosses, and we may not achieve or maintain profitability**

 

Given planned investment levels, our ability to achieve profitabilitywill depend upon our ability to generate and sustain substantially increasedrevenues. As a result, we believe that we will incur operating losses at leastfor the next nine to twelve months. We incurred operating losses of $7.0 millionfor 2003, $15.5 million for 2002, and $46.0 million for 2001. As ofSeptember 30, 2004, our accumulated deficit was $180.4 million. Ouroperating results for future periods are subject to numerous uncertainties, andwe may not achieve sufficient revenues to become profitable. Even if we achieveprofitability, we may not sustain or increase profitability on a quarterly orannual basis in the future. If we are unable to achieve profitability or if ourprofitability is delayed we may need to seek additional financing to continueour business operations. Such financing could be on terms that are dilutive toour existing stockholders or could involve the issuance of securities that haverights and preferences that are senior to those associated with our commonstock. Moreover, if such financing were not available or were available onlyupon terms that were unacceptable to us, we could be required to significantlycurtail our operations.

 

**Our current efforts to seek a strategic partnership couldhave an adverse effect on our operations and our relationships with employees,insurance company customers and online partners.**

 

InApril 2004, we announced that we intended to seek a strategic partnershipwith one or more firms that have access to a large number of qualifiedconsumers and that such a partnership could result in the sale of all or a partof InsWeb to achieve this goal.  Althoughseveral potential strategic partners were identified during this process, thepreliminary discussions did not produce an acceptable level of interest foreither party. Therefore, management is now devoting its attention to othercurrent initiatives to improve its operating results. We will continue toexplore strategic opportunities if and when they arise, although there can beno assurance that any such partnership arrangement or sale will result.  Uncertainty regarding our future directioncould adversely affect relations with our employees or with our insurancecompany customers or online partners and cause them to alter or delay decisionsregarding their relationship with InsWeb.

 

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**Our future revenues are unpredictable, ouroperating results are likely to fluctuate from quarter to quarter, and if wefail to meet the expectations of securities analysts or investors, our stockprice could decline significantly**

 

Due to the emerging nature of the market in which we compete and thehigh proportion of our revenues that are derived from consumer traffic on ourwebsite, our future revenues are inherently difficult to forecast. We believethat period-to-period comparisons of our operating results may not bemeaningful, and you should not rely upon them as an indication of our futureperformance. Moreover, our expense levels are based largely on our investmentplans and estimates of future revenues. We may be unable to adjust our spendingto compensate for an unexpected shortfall in revenues. Accordingly, anysignificant shortfall in revenues relative to our planned expenditures would harmour results of operations and could cause our stock price to fall sharply,particularly following quarters in which our operating results fail to meet theexpectations of investors.

 

Factors that may cause fluctuations in our operating results include thefollowing, many of which are outside our control:

 

•              Wemay experience consumer dissatisfaction with our online marketplace as we addor change features, or as the insurance coverage offered by participatinginsurance companies varies;

•              Consumertraffic on our online marketplace may decline as a result of the announcementor introduction of a competing online insurance marketplace or other newwebsites, products or services offered by our competitors;

•              Consumertraffic may also fluctuate as a result of changes in level of advertising byentities with which we have insurance marketing relationships;

•              Ourrevenues may be harmed if we lose one or more significant insurance companyrelationships or if any of our participating insurance companies merge with oneanother;

•              Useof the Internet by consumers may fluctuate due to seasonal factors or otheruncontrollable factors affecting consumer behavior and may be affected by slowInternet performance due to technical problems or traffic bottlenecks on thenetwork;

•              Ourability to convert site visits into transaction fees may fluctuate due tochanges in our user interface or other features on our site;

•              Ourability to generate transaction fees may be adversely affected by changes inthe underwriting criteria used by our participating insurance companies todetermine which consumers will be offered quotes; and

•              Ourability to generate transaction fees may also be harmed due to technicaldifficulties on our website that hamper a consumer’s ability to start or completea shopping session.

 

**Seasonality affecting insurance shopping andInternet usage may cause fluctuations in our operating results**

 

We have experienced seasonality in our business associated with generalslowness in the insurance industry during the year-end holiday period. Weexpect to continue to experience seasonality as our business matures. Becauseof this seasonality, investors may not be able to predict our annual operatingresults based on a quarter-to-quarter comparison of our operating results. Webelieve seasonality will have an ongoing impact on our business.

 

**Because a significant portion of our revenueis attributable to automobile insurance shopping on our online marketplace, weare especially vulnerable to risks related to the online market for automobileinsurance or the automobile insurance industry generally**

 

Automobile insurance accounted for approximately 79% of our transactionrevenues in 2003, approximately 83% in 2002 and approximately 69% in 2001. Forthe nine months ended September 30, 2004, auto insurance accounted forapproximately 74% of our transaction revenues. We anticipate that automobile insurance will continue to account for asubstantial portion of our revenues for the foreseeable future. As a result, ifwe fail to attract a broad base of consumers to shop for automobile insuranceon our site, our ability to generate revenue will be reduced and our businesswill be harmed. In addition, property and casualty insurance, includingautomobile insurance, is subject to operating cycles. During cycles whereautomobile insurance rates are stable, traffic to our website might declinebecause consumers have less incentive to shop for insurance. On the other hand,during a cycle in which loss ratios rise, insurance companies may choose torestrict the amount of business they write while they await approval of rateincreases from the various state insurance departments. Our business could beharmed if our participating insurance companies reduce their participation inour online marketplace.

 

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**If we are unable to promote our brand andexpand our brand recognition, our ability to draw consumers to our website willbe limited**

 

A growing number of websites offer services that are similar to andcompetitive with the services offered on our online insurance marketplace. Therefore, a positiverecognition of our brand is critical to attracting additional consumers to ourwebsite, strengthening our relationships with participating insurance companiesand attracting new insurance companies. In order to attract and retainconsumers and insurance companies and to promote and maintain our brand, we arecontinuing our financial commitment to create and maintain brand awareness. Ourcurrent marketing program consists of the maintenance of certain network onlinerelationships and other selective cost effective marketing campaigns, designedto maintain consumer awareness of InsWeb and our online insurance marketplace.If our marketing efforts do not generate a corresponding increase in revenuesor we otherwise fail to successfully promote our brand, or if these effortsrequire excessive expenditures, our business will be harmed. Moreover, ifvisitors to our website do not perceive our existing services or the productsand services of our participating insurance companies to be of high quality, orif we alter or modify our brand image, introduce new services or enter into newbusiness ventures that are not favorably received, the value of our brand couldbe harmed.

 

Our ability tomaintain a positive recognition of our brand also depends in part on thequality of the products and services consumers receive from our participatinginsurance companies or our insurance agency, including timely response to requestsfor quotes or coverage. If we are unable to provide consumers with high-qualityproducts and services, the value of our brand may be harmed and the number ofconsumers using our services may decline.

 

**Competition in the market for onlinedistribution of insurance is intense, and if we are unable to competeeffectively with current competitors or new competitors that enter the market,the fees paid to us by participating insurance companies may fall, the feescharged by online companies with which we have strategic relationships mayrise, and our market share may suffer**

 

The online insurance distribution market is a new industry and, likethe broader electronic commerce market, is both rapidly evolving and highlycompetitive. Increased competition, particularly by companies offering onlineinsurance distribution, could reduce the fees we are able to charge ourparticipating insurance companies or increase the fees we are required to payto online companies with which we have strategic relationships, resulting inreduced margins or loss of market share, any of which could harm our business.In addition, our current and future competitors may be able to:

 

•      undertakemore extensive marketing campaigns for their brands and services;

•      devotemore resources to website and systems development;

•      adoptmore aggressive pricing policies; and

•      makemore attractive offers to potential employees, online companies and third-partyservice providers.

 

Accordingly, we may not be able to maintain or grow consumer traffic toour website and our base of participating insurance companies, our competitorsmay grow faster than we do, or companies with whom we have strategicrelationships may discontinue their relationships with us, any of which wouldharm our business.

 

**Because a limited number of insurancecompanies account for a majority of our revenues, the loss of a singleinsurance company relationship could result in a substantial drop in ourrevenues**

 

InsWeb has been dependent on a limited number of insurance companies fora majority of its revenues. Revenues from Progressive, GE Financial Assurance (“GEFA”) and AmericanFamily accounted for approximately 14%, 14% and 10%, respectively, of InsWeb’srevenues for the year ended December 31, 2003. Revenues from Amica, GEFA and KemperDirect accounted for approximately 14%, 14% and 10%, respectively, of InsWeb’srevenues for the year ended December 31, 2002. Revenues from Amica, GEFA and AIGaccounted for approximately 11%, 11% and 10%, respectively, of InsWeb’srevenues for the year ended December 31, 2001. Revenues from Progressive and John Hancock each accountedfor approximately 10% of our revenues for the nine months ended September 30,2004. John Hancock terminatedits participation in the InsWeb term life insurance marketplace onJune 14, 2004. The Company expects that the majority of leads thatwould have been directed to John Hancock will be directed to other carriers,new or existing.

 

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InSeptember 2003, Progressive discontinued its participation as a quotingcompany in the InsWeb market place; however, in October 2003, Progressivesigned an agreement to participate in the Sponsored Web Link program. InNovember 2003, GEFA’sparticipation as an instant quoting carrier within the InsWeb marketplace wasterminated as a result of its acquisition by AIG, Inc., who is and willcontinue as a quoting company in the InsWeb marketplace.

 

Should one or moreof our other key insurance company partners cease to participate in our onlinemarketplace, change its underwriting criteria or geographic coverage in a waythat reduces the proportion of consumers that are offered quotes from thatinsurance company, or suffer a significant decline in its ratings, ouroperating results could be materially harmed. Because of the broad marketpresence of some of our participating insurance companies, we expect tocontinue to generate a substantial portion of our revenues from a limitednumber of insurance companies for the foreseeable future. Although InsWebcontinually seeks new insurance companies to participate in the onlinemarketplace, we may be unable to add any new insurance companies.

 

**We may have difficulty integrating newinsurance companies into our online marketplace or agency operations, whichcould harm our ability to offer improved comparison-shopping opportunities andthus limit the attractiveness of our service to consumers**

 

Integration of an insurance company into our online marketplacerequires a significant commitment of time and resources on our part and on thepart of the insurance company, and is a technologically difficult process. Thisintegration process typically takes from three to six months to complete andtypically requires us to expend between 160 and 2,000 man-hours. To developcompany-sponsored quotes for consumers, the integration requires either thedevelopment of a customized interface with the insurance company’s own ratingsystem, accessing a third-party rating engine of the insurance company’schoice, or adding the insurance company’s rating information into InsWeb’sproprietary rating engines. Though integration into our agency operations mayrequire fewer resources to implement than integration of an insurance companyinto our online marketplace, potential participating insurance companies maynot be willing to invest the time and resources necessary to achieve thisintegration, or we may not be able to overcome the technological difficultiesassociated with, or devote the time and resources necessary to, successfullyintegrate the insurance company into our online marketplace or our agencyoperations.

 

**We do not have exclusive relationships orlong-term contracts with insurance companies, which may limit our ability toretain these insurance companies as participants in our marketplace andmaintain the attractiveness of our services to consumers**

 

We do not have an exclusive relationship with any of the insurancecompanies whose insurance products are offered on our online marketplace, andthus, consumers may obtain quotes and coverage from these insurance companieswithout using our website. Our participating insurance companies offer theirproducts directly to consumers through insurance agents, mass marketingcampaigns or through other traditional methods of insurance distribution. Theseinsurance companies can also offer their products and services over theInternet, either directly to consumers or through one or more of our onlinecompetitors, or both. In addition, most of our agreements with ourparticipating insurance companies are cancelable at the option of either partyupon 90 days’ notice or less. We have experienced, and expect to continueto experience, reductions in the level of participation in our marketplace orcomplete termination by participating insurance companies. These reductions inparticipation, terminations, or an inability to attract additional insurancecompanies to our marketplace could materially affect our revenues and harm ourbusiness.

 

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**The outcome and impact of the securitiesclass action lawsuit involving InsWeb is uncertain**

 

A securities classaction lawsuit was filed on December 5, 2001 in the United States DistrictCourt for the Southern District of New York, (the “Court”) purportedly onbehalf of all persons who purchased our common stock from July 22, 1999through December 6, 2000.  Thecomplaint named as defendants InsWeb, certain current and former officers anddirectors, and three investment banking firms that served as underwriters forInsWeb’s initial public offering in July 1999.  The complaint, as subsequently amended,alleges violations of Sections 11 and 15 of the Securities Act of 1933 andSections 10 and 20 of the Securities Exchange Act of 1934, on the grounds thatthe prospectuses incorporated in the registration statements for the offeringfailed to disclose, among other things, that (i) the underwriters had solicitedand received excessive and undisclosed commissions from certain investors inexchange for which the underwriters allocated to those investors materialportions of the shares of our stock sold in the offerings and (ii) theunderwriters had entered into agreements with customers whereby theunderwriters agreed to allocated shares of the stock sold in the offering tothose customers in exchange for which the customers agreed to purchaseadditional shares of InsWeb stock in the aftermarket at pre-determinedprices.  No specific damages are claimed.  Similar allegations have been made inlawsuits relating to more than 300 other initial public offerings conducted in1999 and 2000, all of which have been consolidated for pretrial purposes.  In October 2002, all claims against theindividual defendants were dismissed without prejudice.  In February 2003, the Court dismissedthe claims in the InsWeb action alleging violations of the Securities ExchangeAct of 1934 but allowed the plaintiffs to proceed with the remainingclaims.  In June 2003, theplaintiffs in all of the cases presented a settlement proposal to all of theissuer defendants.  Under the proposedsettlement, the plaintiffs will dismiss and release all claims againstparticipating defendants in exchange for a contingent payment guaranty by theinsurance companies collectively responsible for insuring the issuers in allthe related cases, and the assignment or surrender to the plaintiffs of certainclaims the issuer defendants may have against the underwriters.  InsWeb and most of the other issuerdefendants have accepted the settlement proposal. The settlement is subject toapproval of the Court, which cannot be assured. If the settlement is not approved by the Court, InsWeb would defend thelawsuit vigorously.  However, the litigationis in the preliminary stage, and we therefore cannot predict its outcome.  The litigation process is inherentlyuncertain.  An unfavorable outcome couldhave a material adverse effect on InsWeb’s financial condition, results ofoperations and cash flows.

 

**Traffic on our website is heavily dependenton our online relationships. These relationships may not generate sufficientrevenues to justify the fees we pay to online companies and our consumertraffic may decline in the event an online relationship is unsuccessful**

 

We rely on relationships with a variety of Internet portals, financialinstitutions, and other online companies to attract consumers to our website.In a typical arrangement, the online company includes a “link” on its websiteon which a user can click to jump to our website or to a site that we operateunder the online company’s name; as part of the arrangement, we typically paythe online company a portion of the resulting transaction fees and in somecases a fixed fee. These relationships may not continue to generate asubstantial amount of new traffic on our website, or the revenues generated bythese relationships may be insufficient to justify our payment obligations. Wehave experienced occasional fluctuations in the traffic from our onlinepartners as a result of redesigns of their websites or being outbid forpromotions by other online insurance providers. Furthermore, the value of theserelationships is based on the continued positive market presence, reputationand growth of these online companies’ websites and services. Any decline in themarket presence, business or reputation of these online companies’ websites andservices will reduce the value of these relationships to us and could harm ourbusiness.

 

For 2003, 2002 and2001, we received approximately 13%, 11% and 32%, respectively of our websitetraffic from the major Internet portals Yahoo! Inc., MSN and AOL. For the ninemonths ended September 30, 2004, we received approximately 20% of our websitetraffic from these online relationships. During 2002, InsWeb significantlyexpanded its on-line marketing relationship with LowerMyBills.com, Inc., as aresult of which LowerMyBills.com delivered approximately 34% and 21% of InsWeb’swebsite traffic for 2002 and 2003, respectively.  In early 2004, InsWeb terminated its on-linemarketing relationship with LowerMyBills.com, Inc.

 

Most of our relationships with online companies are terminable byeither party on 30 to 90 days’ notice. We may not be able to negotiate orrenew marketing agreements with online companies on terms that are acceptableto us. The termination, non-renewal or renewal on unfavorable terms of arelationship from which we generate significant traffic to our website wouldharm our business. If the recent trend of failing online companies continues,the traffic currently being received as well as the ability to attract newconsumer traffic to our site could be harmed. Additionally, an online company’sfailure to maintain efficient and uninterrupted operation of its computer andcommunications hardware systems would likely reduce the amount of traffic wereceive at our site, harming our business.

 

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**Laws and regulations that govern theinsurance industry could expose us, or our participating insurance companies,our officers, or agents with whom we contract, to legal penalties if we fail tocomply, and could require changes to our business**

 

We perform functions for licensed insurance companies and are,therefore, required to comply with a complex set of rules and regulations thatoften vary from state to state. If we fail to comply with these rules andregulations, we, an insurance company doing business with us, our officers, oragents with whom we contract, could be subject to various sanctions, includingcensure, fines, a cease-and-desist order or other penalties. This risk, as wellas changes in the regulatory climate or the enforcement or interpretation ofexisting law, could expose us to additional costs, including indemnification ofparticipating insurance companies for their costs, and could require changes toour business or otherwise harm our business. Furthermore, because theapplication of online commerce to the consumer insurance market is relativelynew, the impact of current or future regulations on InsWeb’s business isdifficult to anticipate.

 

**If we are unable to safeguard the securityand privacy of consumers’ and participating insurance companies’ confidentialdata, consumers and insurance companies may not use our services and ourbusiness may be harmed**

 

A significant barrier to electronic commerce and communications is thesecure transmission of personally identifiable information of Internet users aswell as other confidential information over public networks. If any compromiseor breach of security were to occur, it could harm our reputation and expose usto possible liability. A party who is able to circumvent our security measurescould misappropriate proprietary information or cause interruptions in ouroperations. We may be required to make significant expenditures to protect againstsecurity breaches or to alleviate problems caused by any breaches. To date, wehave experienced no breaches in our network security. We rely on encryption andauthentication technology licensed from third parties to provide the securityand authentication necessary to effect secure transmission of confidentialinformation, such as names, addresses, Social Security and credit card numbers,user names and passwords and insurance company rate information. Advances incomputer capabilities, new discoveries in the field of cryptography, or otherevents or developments could result in a compromise or breach of the algorithmswe use to protect consumers’ and insurance companies’ confidential information.

 

**System failures could reduce or limit trafficon our website or interrupt our communications with individual insurancecompanies and harm our ability to generate revenue**

 

Since launching our online marketplace, we have experienced occasionalminor system failures or outages that have resulted in the online marketplacebeing out of service for a period ranging from several minutes to three hourswhile our technicians brought backup systems online. We may experience furthersystem failures or outages in the future that could disrupt the operation ofour website and could harm our business. Our revenues depend in large part onthe volume of traffic on our website and, more particularly, on the number ofinsurance quotes generated by our website in response to consumer inquiries.Accordingly, the performance, reliability and availability of our website,quote-generating systems and network infrastructure are critical to ourreputation and our ability to attract a high volume of traffic to our websiteand to attract and retain participating insurance companies. Moreover, webelieve that consumers who have a negative experience with an electroniccommerce website may be reluctant to return to that site. Thus, a significantfailure or outage affecting our systems could result in severe long-term damageto our business.

 

Additionally, several of our participating insurance companies havechosen a technical solution that requires that our website servers communicatewith these insurance companies’ computer systems in order to perform theunderwriting and risk analysis and rating functions required to generatequotes. Thus, the availability of quotes from a given insurance company maydepend in large part upon the reliability of that insurance company’s owncomputer systems, over which we have no control

 

**Our facilities and systems are vulnerable tonatural disasters and other unexpected losses, and we may not have adequateinsurance to cover such losses**

 

Our computer hardware operations are located in leased facilities inGold River, California. A third-party service provider located in theSacramento, California area maintains a backup of our critical systems. If bothof these locations experienced a system failure, the performance of our websitewould be harmed. These systems are also vulnerable to damage from fire, power loss,telecommunications failures, break-ins, natural disasters and similar events.If we seek to replicate our systems at other locations, we will face a numberof technical challenges, particularly with respect to database replications,which we may not be able to address successfully. Although we carry propertyand business interruption insurance, our coverage may not be adequate tocompensate us for all losses that may occur. Our servers may also be vulnerableto computer viruses, physical or electronic break-ins and similar disruptions.

 

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**We rely on the services of our executiveofficers and other key personnel, whose knowledge of our business and theinsurance industry and technical expertise would be extremely difficult toreplace**

 

Our future success is substantially dependent on the continued servicesand continuing contributions of our senior management and other key personnel,particularly Hussein A. Enan, Chairman of our Board, and Chief Executive Officer,and the loss of the services of any of our executive officers or other keyemployees could harm our business.

 

We have no long-term employment agreements with any of our keypersonnel, although executive officers and key personnel are entitled to certainseverance benefits should their employment be involuntarily terminated. Inaddition, InsWeb has granted stock options as incentives to executive officersand certain other key personnel. As the value of these incentives is highlydependent on an increase in the market price of our common stock, we may beunable to retain such key employees, nor retain or recruit other officers andkey employees in the future.

 

**Regulation of the Internet is unsettled, andfuture regulations could inhibit the growth of the Internet and otherwise harmour business**

 

The laws governing the Internet remain largely unsettled, even in areaswhere there has been some legislative action. Furthermore, the growth anddevelopment of the market for electronic commerce may prompt the enactment ofmore stringent consumer protection laws that may impose additional burdens oncompanies conducting business online. For example, federal legislationrestricting the sending of unsolicited commercial email, or “spam”, may impedethe implementation of national email-based marketing campaigns. New laws alsomay inhibit the growth of the Internet as a medium for commerce and comparisoninsurance shopping, which could, in turn, decrease demand for our services,increase our cost of doing business, or otherwise harm our business. Inaddition, applicability to the Internet of existing laws governing issuesincluding property ownership, copyrights and other intellectual propertyissues, taxation, libel and personal privacy is uncertain. The vast majority ofthese laws was adopted prior to the advent of the Internet and relatedtechnologies and, as a result, do not contemplate or address the unique issuesof the Internet and related technologies.

 

**Any acquisitions or new projects that weundertake could be difficult to integrate, disrupt our business, dilutestockholder value and harm our operating results**

 

We may acquire or make investments in complementary businesses,technologies, services or products if appropriate opportunities arise. Theprocess of integrating any acquired business, technology, service or productinto our business and operations may result in unforeseen operatingdifficulties and expenditures. Integration of an acquired company also mayconsume much of our management’s time and attention that would otherwise beavailable for ongoing development of our business. Moreover, the anticipatedbenefits of any acquisition may not be realized. We may be unable to identify,negotiate or finance future acquisitions successfully, or to integrate successfullyany acquisitions with our current business. Future acquisitions could result inpotentially dilutive issuances of equity securities or the incurrence of debt,contingent liabilities or amortization expenses related to goodwill and otherintangible assets, any of which could harm our business. Likewise, we maychoose to develop new products or services internally. The revenue realizedfrom these potential products or services, however, might not exceed our costs;and the development process might distract management from other meaningfulopportunities.

 

**We may be subject to claims for infringementof intellectual property, with or without merit, which could be costly todefend or settle**

 

We may from time to time be subject to claims of infringement of otherparties’ proprietary rights or claims that our own trademarks, patents or otherintellectual property rights are invalid. We have been subject to infringementclaims in the ordinary course of business, including claims of allegedinfringement of the patent and trademark rights of third parties us or bycompanies with which we have business relationships. Any claims of this type,with or without merit, could be time-consuming to defend, result in costlylitigation, divert management attention and resources or require us to enterinto royalty or license agreements. License agreements may not be available onreasonable terms, if at all, and the assertion or prosecution of anyinfringement claims could significantly harm our business.

 

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**We incorporate third-party technologies andservices into our online marketplace, and if the providers of thesetechnologies and services fail in a timely manner to develop, license orsupport technology necessary to our services, market acceptance of our onlinemarketplace could be harmed**

 

We have incorporated technology developed by third parties into ouronline marketplace, and we will continue to incorporate third-party technologyin our future products and services. We have limited control over whether orwhen these third-party technologies will be developed or enhanced. If athird-party fails to timely develop, license or support technology necessary toour services, market acceptance of our online marketplace could be harmed.

 

**Our stock price has fluctuated widely, andInternet stocks in general have been extremely volatile**

 

The trading price of our common stock has been highly volatile and maybe significantly affected by factors including actual or anticipated fluctuationsin our operating results, new products or new contracts by us or ourcompetitors, loss of key customers, conditions and trends in the electroniccommerce and insurance industries, changes in financial estimates by securitiesanalysts, general market conditions and other factors. The trading prices ofmany Internet stocks have experienced extreme price and volume fluctuations.These fluctuations often have been unrelated or disproportionate to theoperating performance of these companies. These fluctuations may continue andcould harm our stock price. Any negative change in the public’s perception ofthe prospects of Internet or electronic commerce companies could also depressour stock price regardless of our results.

 

**Delaware law and our charter documentscontain provisions that could discourage or prevent a potential takeover, evenif such a transaction would be beneficial to our stockholders**

 

Provisions of Delaware law and our certificate of incorporation andbylaws could make more difficult the acquisition of us by means of a tenderoffer, a proxy contest, or otherwise, and the removal of incumbent officers anddirectors.

 

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**ITEM 3.****                  QUANTITATIVEAND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.**

 

Therehave been no material changes to the Company’s disclosures related to certainmarket risks as reported under Part II, Item 7A, “Quantitative and QualitativeDisclosures About Market Risk,” in the Annual Report of InsWeb to the U.S.Securities and Exchange Commission on Form 10-K for the year endedDecember 31, 2003.

 

**ITEM 4.****                  CONTROLSAND PROCEDURES**

 

(a)               Under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, we evaluated the effectiveness of our disclosurecontrols and procedures, as such term is defined under Rule 13a-15(e)promulgated under the Securities Exchange Act of 1934, as amended. Based uponthat evaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective as of the end of theperiod covered by this quarterly report.

 

(b)               There has been no change in our internalcontrol over financial reporting during the quarter ended September 30,2004 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II:****               ****OTHER INFORMATION**

 

**ITEM 6.  EXHIBITS ANDREPORTS ON FORM 8-K**

 

(a)           Exhibits

 
| **Exhibit  Number** | ** ** | **Description of  Document**                                                                                    |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------|
| 31.1                |       | Certification of Chief Executive  Officer, pursuant to Exchange Act Rule 13a-14(a).                             |
|                |       |                                                                                                            |
| 31.2                |       | Certification of Chief Financial  Officer, pursuant to Exchange Act Rule 13a-14(a).                             |
|                |       |                                                                                                            |
| 32                  |       | Certification of Chief Executive  Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350. |

 

(b)           Reports on Form 8-K:

 

On July 21, 2004, we filed a reporton Form 8-K, under Item 12, announcing InsWeb Corporation’s financial resultsfor the quarter ended June 30, 2004.

 

On August 5, 2004, we filed areport on Form 8-K, under Item 5, announcing the resignation of InsWebCorporation’s Chief Executive Officer.

 

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**SIGNATURE**

 

In accordance with the requirementsof the Securities Exchange Act of 1934, the registrant has caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 

 
| Dated: November 12, 2004 | **INSWEB  CORPORATION**    |
|--------------------------|----------------------------|
| ** **               | **(Registrant)**           |
|                     |                       |
|                     |                       |
| ** **               | **/s/ WILLIAM D. GRIFFIN** | ** ** |
|                     | William D. Griffin         |
|                     | Chief Financial Officer    |

 

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