**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

----

 

**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 June 30, 2005**                                                                                                                                                                          |
| ** **                                                                                                                                                                                                                |
| **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**                                                                                                                                                                                        |

 

----

 

**INSWEB CORPORATION**

(Exact name of Registrant as specified in itscharter)

 
| **Delaware**                                                    | ** ** | **94-3220749**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (IRS Employer  Identification Number) |

 

**11290 Pyrites Way, Suite 200 Gold River, California95670**

(Address of principal executive offices)

 

**(916) 853-3300**

(Registrant’s telephone number, including area code)

 

----

 

Indicateby check mark whether the Registrant (1) has filed all reports required tobe filed by Sections 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes ý No o

 

Indicateby check mark whether the Registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act.) Yes o No ý

 

Thenumber of outstanding shares of the Registrant’s Common Stock, par value $0.001per share, on July 22, 2005 were 4,044,061 shares.

 

 

----

 

**FORM 10-Q**

**INSWEB CORPORATION**

**INDEX**

 
| **PART I**  | **FINANCIAL INFORMATION**                                                                                   | ** ** |
|-------------|-------------------------------------------------------------------------------------------------------------|------------|
| ITEM 1:     | Financial Statements (unaudited)                                                                            |       |
|        | Condensed  Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004                       |       |
|        | Condensed  Consolidated Statements of Operations for the three and six months ended June  30, 2005 and 2004 |       |
|        | Condensed  Consolidated Statements of Cash Flows for the six months ended June 30, 2005  and 2004           |       |
|        | 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 6:     | Exhibits                                                                                                    |       |
|        |                                                                                                        |       |
| Signature   |                                                                                                        |       |

 

2

----

 

**PART I: FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS**

 

**INSWEB CORPORATION**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 

*(in thousands)*

*(unaudited)*

 
| ** **                                      | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|
| **Assets**                                      |       |               |       |                        |       |
| Current assets:                                 |       |               |       |                        |       |
| Cash and cash equivalents                       |       | $                  | 8,685      |                        | $          | 9,334 |   |
| Short-term investments                          |       | 4,726              |       | 8,145                       |       |
| Accounts receivable, net                        |       | 2,651              |       | 1,025                       |       |
| Prepaid expenses and other current assets       |       | 438                |       | 707                         |       |
| Total current assets                            |       | 16,500             |       | 19,211                      |       |
| Property and equipment, net                     |       | 646                |       | 814                         |       |
| Other assets                                    |       | 407                |       | 450                         |       |
| Total assets                                    |       | $                  | 17,553     |                        | $          | 20,475 |   |
|                                            |       |               |       |                        |       |
| **Liabilities and stockholders’ equity**   |       |               |       |                        |       |
| Current liabilities:                            |       |               |       |                        |       |
| Accounts payable                                |       | $                  | 2,480      |                        | $          | 1,248 |   |
| Accrued expenses                                |       | 3,489              |       | 3,456                       |       |
| Deferred revenue                                |       | 73                 |       | 56                          |       |
| Total current liabilities                       |       | 6,042              |       | 4,760                       |       |
|                                            |       |               |       |                        |       |
| Commitments and  contingencies                  |       |               |       |                        |       |
|                                            |       |               |       |                        |       |
| Stockholders’ equity:                      |       |               |       |                        |       |
| Common stock                                    |       | 7                  |       | 7                           |       |
| Paid-in capital                                 |       | 202,985            |       | 202,961                     |       |
| Treasury stock                                  |       | (6,334             | )          | (4,596                      | )          |
| Accumulated other comprehensive loss            |       | (2                 | )          | (8                          | )          |
| Accumulated deficit                             |       | (185,145           | )          | (182,649                    | )          |
| Total stockholders’ equity                 |       | 11,511             |       | 15,715                      |       |
| Total liabilities and stockholders’ equity |       | $                  | 17,553     |                        | $          | 20,475 |   |

 

See accompanying notes.

 

3

----

 

**INSWEB CORPORATION**

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

 

*(in thousands, except per share amounts)*

*(unaudited)*

 
| ** **                                                                     | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                                                      | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Transaction fees                                                               |       | $                                | 6,522      |                           | $          | 3,188 |   | $ | 12,128 |   | $ | 7,018 |   |
| Development and  maintenance fees                                              |       | 82                               |       | 178                            |       | 170 |   | 403 |   |
| Total revenues                                                                 |       | 6,604                            |       | 3,366                          |       | 12,298 |   | 7,421 |   |
|                                                                           |       |                             |       |                           |       |   |   |   |   |
| Operating  expenses:                                                           |       |                             |       |                           |       |   |   |   |   |
| Technology                                                                     |       | 1,417                            |       | 1,450                          |       | 2,789 |   | 2,920 |   |
| Sales and  marketing                                                           |       | 5,288                            |       | 3,334                          |       | 9,990 |   | 6,668 |   |
| General and  administrative                                                    |       | 1,071                            |       | 1,157                          |       | 2,203 |   | 2,439 |   |
| Total operating  expenses                                                      |       | 7,776                            |       | 5,941                          |       | 14,982 |   | 12,027 |   |
| Loss from  operations                                                          |       | (1,172                           | )          | (2,575                         | )          | (2,684 | ) | (4,606 | ) |
| Interest income                                                                |       | 96                               |       | 74                             |       | 188 |   | 145 |   |
| Other expense                                                                  |       | —                           |       | (30                            | )          | — |   | (30 | ) |
|                                                                           |       |                             |       |                           |       |   |   |   |   |
| Net loss                                                                       |       | $                                | (1,076     | )                              | $          | (2,531 | ) | $ | (2,496 | ) | $ | (4,491 | ) |
|                                                                           |       |                             |       |                           |       |   |   |   |   |
| Net loss per  share-basic and diluted                                          |       | $                                | (0.27      | )                              | $          | (0.54 | ) | $ | (0.57 | ) | $ | (0.96 | ) |
|                                                                           |       |                             |       |                           |       |   |   |   |   |
| Weighted-average  shares used in computing per share amounts-basic and diluted |       | 4,044                            |       | 4,690                          |       | 4,412 |   | 4,677 |   |

 

See accompanying notes.

 

4

----

 

**INSWEB CORPORATION**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASHFLOWS**

 

*(in thousands)*

*(unaudited)*

 
| ** **                                                                   | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                       | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                        |       |                           |       |   |   |
| Net loss                                                                     |       | $                              | (2,496     | ) | $ | (4,491 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                           |       |   |   |
| Depreciation and amortization                                                |       | 288                            |       | 463 |   |
| Other                                                                        |       | —                         |       | 30 |   |
| Net changes in operating assets and  liabilities:                            |       |                           |       |   |   |
| Accounts receivable                                                          |       | (1,626                         | )          | 55 |   |
| Prepaid expenses and other current assets                                    |       | 269                            |       | 310 |   |
| Other assets                                                                 |       | (15                            | )          | 2 |   |
| Accounts payable                                                             |       | 1,232                          |       | 735 |   |
| Accrued expenses                                                             |       | 73                             |       | (824 | ) |
| Deferred revenue                                                             |       | 17                             |       | (124 | ) |
| Net cash used in operating activities                                        |       | (2,258                         | )          | (3,844 | ) |
| Cash flows from investing activities:                                        |       |                           |       |   |   |
| Redemptions of short-term investments                                        |       | 8,417                          |       | (15,027 | ) |
| Purchases of short-term investments                                          |       | (4, 992                        | )          | 12,708 |   |
| Purchases of property and equipment                                          |       | (61                            | )          | (125 | ) |
| Net cash provided by (used in) investing  activities                         |       | 3,364                          |       | (2,444 | ) |
| Cash flows from financing activities:                                        |       |                           |       |   |   |
| Repayments of debt                                                           |       | (41                            | )          | (74 | ) |
| Proceeds from issuance of common stock  through stock plans                  |       | 24                             |       | 172 |   |
| Repurchase of common stock                                                   |       | (1,738                         | )          | — |   |
| Net cash (used in) provided by financing  activities                         |       | (1,755                         | )          | 98 |   |
| Net decrease in cash and cash equivalents                                    |       | (649                           | )          | (6,190 | ) |
| Cash and cash equivalents, beginning of  period                              |       | 9,334                          |       | 15,223 |   |
| Cash and cash equivalents, end of period                                     |       | $                              | 8,685      |   | $ | 9,033 |   |

 

See accompanying notes.

 

5

----

 

**INSWEB CORPORATION**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

***(unaudited)***

 

**1.  Business of InsWeb**

 

InsWeboperates an online insurance marketplace that enables consumers to comparisonshop online for a variety of insurance products, including automobile and termlife. InsWeb’s marketplace electronically matches consumers and insuranceproviders. InsWeb has combined extensive knowledge of the insurance industry,technological expertise and close relationships with a significant number ofinsurance companies to develop an integrated online marketplace. InsWeb’smarketplace enables consumers to research insurance-related topics, search for,analyze and compare insurance products, apply for and receive insurancecompany-sponsored quotes and to purchase automobile and term life insurancecoverage through InsWeb’s insurance agencies.

 

InsWeb’sprincipal source of revenues is transaction fees from participating insuranceproviders, either directly from an insurance company or from a local insuranceagent. While quotes obtained through InsWeb’s online insurance marketplace areprovided to consumers free of charge, InsWeb earns revenues from participatinginsurance companies or agents based on the delivery of qualified leads. Thesefees are earned either from an insurance company based on a closed policy, fromthe delivery of a lead to a participating insurance provider or local agent, 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 third partyinsurance provider’s website. In these situations, the consumer will completethe third party company’s online application, and InsWeb will be paid a fee forthat consumer link or click-through.

 

InAugust 2004, InsWeb launched its term life agency business in an effort toincrease revenue per consumer within the term life marketplace. The conversionfrom a lead-based revenue model to a commission-based revenue model resulted inlower revenues in the short-term, as it typically takes 90 to 120 days tocomplete the sales process for a term life policy. At the time the term lifeagency business was launched, the Company was uncertain whether the transactiondata available was sufficient to reliably estimate cancellations for purposesof satisfying the criteria in Statement of Financial Accounting Standards No.48, “Revenue Recognition When Right of Return Exists,” for service transactionssubject to customer cancellation privileges. Accordingly, during the initialdeployment period of the commission-based model, the Company recognizedcommission revenue on a ratable basis over the initial term of the relatedpolicy as the cancellation privileges expired. Based on term life agencyactivity and cancellation data accumulated since the launch, management hasdetermined that it is now appropriate to use the historical cancellation rateto estimate a cancellation allowance for term life agency transactions.Beginning with the quarter ended June 30, 2005, the Company recognizes revenuefrom its term life agency business when commissions have been earned, net of anestimate for future cancellations based on its historical cancellation data. Inconnection with the change in estimate for cancellations, the Companyrecognized commission revenue of $286,000 in the quarter ended June 30, 2005relating to commissions earned on term life policies closed in prior quarters.

 

In2004, InsWeb launched its agent network program which provides online autoinsurance consumers access to local insurance agents. Currently, the agentnetwork program is conducted through an intermediary, NetQuote, Inc., whoprovides auto consumer leads to local insurance agents. During the three andsix months ended June 30, 2005, this agent network program represented 33% and30% of auto transaction fees, respectively. During the three and six monthsended June 30, 2004, this agent network program represented 6% and 3% of autotransaction fees, respectively.

 

Tolessen InsWeb’s reliance on this intermediary, and to maximize its revenuepotential, we are preparing to launch a proprietary agent network program (“AgentInsider”)that will provide leads directly to local insurance agents who have registeredwith InsWeb. We expect that this initiative will be launched during the thirdquarter of 2005, and may initially result in reduced revenues, depending on therate of registration and degree of participation of local personal linesinsurance agents throughout the country. Going forward, we expect that theagent network program, both through the intermediary and through our internallydeveloped network, will continue to represent a significant percentage of autotransaction fees. However, the agent network is subject to a number ofuncertainties, including the cost of developing and marketing the program, andthe continued participation of our third party intermediary. If we are unableto create a positive offering, or if the transition of the agent networkprogram from the intermediary to our internally developed program is delayed orotherwise unsuccessful, the Company’s business may be harmed.

 

6

----

 

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 to specificinsurance 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 77% of transaction revenues in 2004 and 78% in the first sixmonths of 2005. We anticipate that automobile insurance will continue toaccount for a significant portion of InsWeb’s revenues for the foreseeablefuture.

 

InsWebis subject to all of the risks inherent in the electronic commerce industry andspecial risks related to the online insurance industry. These risks include,but are not limited to, uncertain economic conditions which could result inlower growth rates, the changing nature of the electronic commerce industry,variations in consumer traffic (consumers shopping for insurance on theInternet), unpredictability of future revenues, reliance on key customers –property and casualty insurance carriers – who are themselves subject tovolatility in their operating cycles, reliance on a third party intermediarywho provides leads to local insurance agents on InsWeb’s behalf. These risksand uncertainties, among others, could cause InsWeb’s actual results to differmaterially from historical results or those currently anticipated.  In light of the evolving nature of InsWeb’sbusiness to better capitalize on its position as a leading insurance portal,including the current expansion of InsWeb’s agent network program, InsWebbelieves that period-to-period comparisons of its operating results are notnecessarily meaningful and should not be relied upon as an indication of futureperformance. However, there is no assurance that InsWeb will be able to achieveor sustain profitability.

 

Sinceits inception, InsWeb has incurred significant losses, and as of June 30, 2005,InsWeb had an accumulated deficit of $185.1 million. InsWeb’s operations to date have consumedsubstantial amounts of cash, cash equivalents and short-term investments ($8.7million in 2004 and $4.2 million in 2003) and will continue to require capitalin the near future. Theselosses, and this accumulated deficit, have resulted from the significant costsincurred in the development of InsWeb’s technology platform, the establishmentof relationships with insurance companies, their integration with the InsWebsite, and InsWeb’s marketing and sales activities. In order to remain competitive, the Company mustcontinue to make investments essential to its ability to operate, and InsWeb intends to continue to invest inproduct development and maintenance, and sales and marketing. In addition, theCompany will continue to incur the costs associated with continuing to functionas a publicly listed company, including the costs of compliance with theprovisions of the Sarbanes-Oxley Act of 2002, which will require the Company to comply with Section 404 of theSarbanes-Oxley Act in fiscal 2006. As a result, InsWeb believes that itwill continue to incur operating losses through the remainder of fiscal year2005. In the event that InsWeb is unable togenerate revenues sufficient to offset its costs, or if its costs of marketingand operations are greater than it anticipates, the Company may be unable togrow its business at the rate desired or may be required to delay, reduce, orcease certain of its operations, any of which could materially harm itsbusiness and financial results.In addition, if InsWeb is unable to ultimately achieve profitability, theCompany may need to seek additional financing to continue its businessoperations. The Company cannot be certain that additional financing will beavailable when required, on favorable terms or at all. If InsWeb is notsuccessful in raising additional capital as required, it may delay,significantly reduce or cease certain of its operations, which could adverselyaffect its results of operations and financial position.

 

7

----

 

**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, the accompanyingunaudited interim condensed consolidated financial statements reflect alladjustments, which include only normal recurring adjustments, necessary topresent fairly InsWeb’s financial position as of June 30, 2005, its results ofoperations for the three and six months ended June 30, 2005 and 2004 and itscash flow flows for the six months ended June 30, 2005 and 2004.  The financial data and other informationdisclosed in these notes to the condensed consolidated financial statementsrelated to these periods are unaudited. The results for the three and six months ended June 30, 2005 are notnecessarily indicative of the results to be expected for the year endingDecember 31, 2005.

 

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 for the year ended December 31, 2004 and otherinformation as filed with the Securities and Exchange Commission.

 

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

 

Forthe three months and six months ended June 30, 2005, one customer accounted for30% and 29% of total revenues, respectively. This customer also represented 24%of accounts receivable at June 30, 2005. For the three months ended June 30,2004, two other customers each accounted for 11% of total revenues.  For the six months ended June 30, 2004, thesetwo customers accounted for 12% and 11% of total revenues, respectively.

 

**4.  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 had been exercised.  For the three and six month period ended June30, 2005 and 2004, common equivalent shares from stock options were excludedfrom the computation of net loss per share-diluted as their effect wasantidilutive.

 

8

----

 

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,” to stock-based employee compensation (in thousands, except pershare amounts):

 
| ** **                                                                                                                              | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                              | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net loss, as reported                                                                                                                   |       | $                                     | (1,076     | )                                   | $          | (2,531 | ) | $ | (2,496 | ) | $ | (4,491 | ) |
| Deduct: Stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |       | (126                                  | )          | (194                                | )          | (258 | ) | (336 | ) |
| Pro forma net loss                                                                                                                      |       | $                                     | (1,202     | )                                   | $          | (2,725 | ) | $ | (2,754 | ) | $ | (4,827 | ) |
|                                                                                                                                    |       |                                  |       |                                |       |   |   |   |   |
| Net loss per share:                                                                                                                     |       |                                  |       |                                |       |   |   |   |   |
| Basic and diluted—as reported                                                                                                      |       | $                                     | (0.27      | )                                   | $          | (0.54 | ) | $ | (0.57 | ) | $ | (0.96 | ) |
| Basic and diluted—pro forma                                                                                                        |       | $                                     | (0.30      | )                                   | $          | (0.58 | ) | $ | (0.62 | ) | $ | (1.03 | ) |

 

Forpurposes of pro forma disclosures, the estimated fair value of the options isamortized over the options’ vesting period. The above pro forma disclosures arenot necessarily representative of the effects on reported income or loss forfuture periods, as additional grants are made each year and options vest overseveral years.

 

**5.Accrued Expenses**

 

Accruedexpenses consist of the following (in thousands):

 
| ** **                             | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------|------------|--------------------|------------|-----------------------------|------------|
|                                   |       |               |       |                        |       |
| Accrued lease obligations (see Note 7) |       | $                  | 2,022      |                        | $          | 2,172 |   |
| Accrued employee compensation          |       | 764                |       | 559                         |       |
| Deferred rent                          |       | 525                |       | 522                         |       |
| Other                                  |       | 178                |       | 203                         |       |
| Total                                  |       | $                  | 3,489      |                        | $          | 3,456 |   |

 

**6.  Comprehensive Loss**

 

Totalcomprehensive loss for the three months and six months ended June 30, 2005 and2004 was as follows (in thousands):

 
| ** **                                                                           | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                           | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                 |       |                                  |       |                                |       |   |   |   |   |
| Net loss                                                                             |       | $                                     | (1,076     | )                                   | $          | (2,531 | ) | $ | (2,496 | ) | $ | (4,491 | ) |
| Other comprehensive income (loss) - change  in unrealized gain (loss) on investments |       | 4                                     |       | (9                                  | )          | 6 |   | (8 | ) |
| Comprehensive loss                                                                   |       | $                                     | (1,072     | )                                   | $          | (2,540 | ) | $ | (2,490 | ) | $ | (4,499 | ) |

 

9

----

 

**7.  Commitments and Contingencies**

 

**Leases**

 

InsWeb is contractually obligated to make future leasepayments on certain formerly occupied facilities through September 2008.As of June 30, 2005, total future obligations for these facilities amounted to$7,971,000; these obligations are offset by total estimated future subleaseincome of approximately $6,734,000. Substantially all future sublease income isdue from a sublessee who is an early-stage 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 sublease, InsWeb would be responsible for making therequired lease payments to the landlord through the remaining term of the lease.In connection with this lease and other lease obligations for formerly occupiedfacilities, InsWeb must make assumptions regarding the estimated futuresublease income relative to these facilities. Based on these assumptions, theCompany has recorded an accrual of $2,022,000 as of June 30, 2005 for leasecommitments related to these formerly occupied facilities, as compared to anaccrual of $2,172,000 as of December 31, 2004. These estimates andassumptions are affected by area-specific conditions such as new commercialdevelopment, market occupancy rates and future market prices. If theseestimates or their related assumptions change in the future, InsWeb may berequired to record a charge to increase its accrual.

 

**SecuritiesClass Action Lawsuit**

 

Asecurities class action lawsuit was filed on December 5, 2001 in theUnited States District Court for the Southern District of New York, (the “Court”)purportedly on behalf of all persons who purchased our common stock fromJuly 22, 1999 through December 6, 2000. The complaint named asdefendants InsWeb, certain current and former officers and directors, and threeinvestment banking firms that served as underwriters for InsWeb’s initialpublic offering in July 1999. The complaint, as subsequently amended, allegesviolations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10and 20 of the Securities Exchange Act of 1934, on the grounds that theprospectuses incorporated in the registration statement for the offering failedto 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 offering and (ii) theunderwriters had entered into agreements with customers whereby theunderwriters agreed to allocate 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-determined prices.No specific damages are claimed. Similar allegations have been made in lawsuitsrelating to more than 300 other initial public offerings conducted in 1999 and2000, all of which have been consolidated for pretrial purposes. InOctober 2002, all claims against the individual defendants were dismissedwithout prejudice. In February 2003, the Court dismissed the claims in theInsWeb action alleging violations of the Securities Exchange Act of 1934 but allowedthe plaintiffs to proceed with the remaining claims. In June 2003, theplaintiffs in all of the cases presented a settlement proposal to all of theissuer defendants. Under the proposed settlement, the plaintiffs will dismissand release all claims against participating defendants in exchange for acontingent payment guaranty by the insurance companies collectively responsiblefor insuring the issuers in all the related cases, and the assignment orsurrender to the plaintiffs of certain claims the issuer defendants may haveagainst the underwriters. InsWeb and most of the other issuer defendants haveaccepted the settlement proposal. The settlement was given preliminary approvalby the Court in February 2005, pending a modification to the settlement documents.If the Court does not approve the settlement in its final form, InsWeb woulddefend the lawsuit vigorously. However, the litigation is in the preliminarystage, and we cannot predict its outcome. The litigation process is inherentlyuncertain. An unfavorable outcome could have a material adverse effect onInsWeb’s financial condition, results of operations and cash flows.

 

10

----

 

**8.  Stockholders’ Equity**

 

#### **Negotiated common stock repurchases**

 

In March 2005, the Board ofDirectors authorized management to repurchase 755,821 shares of InsWebCorporation common stock, consisting of 531,947 shares held by NationwideMutual Insurance Company and 223,874 shares held by Century Capital Partners,L.P. These shares represented 16% of InsWeb’s total outstanding common stockand were purchased for $1,738,000, or $2.30 per share. Subsequent to theclosing of these transactions on March 31, 2005, Nationwide Mutual and CenturyCapital hold no shares.

 

**9.  Recent Accounting Pronouncements**

 

On December 16, 2004, theFinancial Accounting Standards Board (“FASB”) issued Statement No. 123(R), “Share-BasedPayment,” which is a revision of FASB Statement No. 123, “Accounting forStock-Based Compensation.” Statement 123 ( R ) supersedes APB No. 25, “Accounting for Stock Issued to Employees,”and amends FASB Statement No. 95, “Statement of Cash Flows.” Generally, theapproach in Statement 123 ( R ) is similar to the approach described inStatement 123. However, Statement 123 ( R ) requires all share-based payments to employees, including grants ofemployee stock options, to be recognized in the income statement based on theirfair values. Pro forma disclosure is no longer an alternative.

 

Statement 123(R) originallyrequired adoption no later than July 1, 2005. In April 2005, the Securities andExchange Commission (“SEC”) issued a release that amends the compliance datesfor Statement 123(R). Under the SEC’s new rule, the Company will be required toapply Statement 123(R) as of January 1, 2006. Statement 123(R) permits publiccompanies to adopt its requirements using one of two methods: (i) a “modifiedprospective” method in which compensation cost is recognized beginning with theeffective date based on the requirements of Statement 123(R) for allshare-based payments granted after the effective date and based on therequirements of Statement 123 for all awards granted to employees prior to theeffective date of Statement 123(R) that remain unvested on the effective date;or (ii) a “modified retrospective” method which includes the requirements ofthe modified prospective method described above, but also permits entities torestate, based on the amounts previously recognized under Statement 123, forpurposes of pro forma disclosures. The Company plans to adopt Statement 123(R)using the modified prospective method.

 

As permitted by Statement123, the Company currently accounts for share-based payments to employees usingAPB No. 25’s intrinsic value method and, as such, generally recognizes nocompensation cost for employee and director stock options. Accordingly, theadoption of Statement 123(R)’s fair value method could have a significantimpact on InsWeb’s results of operations, although it will have no impact onits overall financial position. The impact of adoption of Statement 123(R)cannot be predicted at this time because it will depend on levels ofshare-based payments granted in the future.

 

11

----

 

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

 

*This Quarterly Report on Form 10-Q, and inparticular Management’s Discussion and Analysis of Financial Condition andResults of Operations, contains “forward-looking statements” with respect toInsWeb’s future financial performance. The words or phrases “expects,” “anticipates,”“intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressionsare generally intended to identify forward-looking statements. Suchforward-looking statements are subject to various known and unknown risks anduncertainties, and InsWeb cautions you that any forward-looking informationprovided by, or on behalf of, InsWeb is not a guarantee of future performance.Actual results could differ materially from those anticipated in suchforward-looking statements due to a number of factors, some of which are beyondInsWeb’s control, including, but not limited to, uncertain economic conditionswhich could result in lower growth rates, decreasing revenue and reduced participationin InsWeb’s marketplace, anticipated losses, the unpredictability of futurerevenues, reliance on key customers—property and casualty insurance carriers-who are themselves subject to volatility in their operating cycles, reliance ona third party intermediary who provides leads to local insurance agents onInsWeb’s behalf, competition, risks associated with system development andoperation risks, management of potential growth and risks of new businessareas, business combinations, and strategic alliances. These risks anduncertainties, as well as other risks and uncertainties, which are described ingreater detail in the section entitled “Factors That May Affect FuturePerformance” and other documents filed with the Securities and Exchange Commission,could cause InsWeb’s actual results to differ materially from historicalresults or those currently anticipated. All forward-looking statements arebased on information available to InsWeb on the date hereof, and InsWeb assumesno obligation to update such statements.*

 

**Overview**

 

InsWeboperates an online insurance marketplace that enables consumers to comparisonshop online for a variety of insurance products, including automobile and termlife. InsWeb’s marketplace electronically matches consumers and insuranceproviders. InsWeb has combined extensive knowledge of the insurance industry,technological expertise and close relationships with a significant number ofinsurance companies to develop an integrated online marketplace. InsWeb’smarketplace enables consumers to research insurance-related topics, search for,analyze and compare insurance products, apply for and receive insurancecompany-sponsored quotes and to purchase automobile and term life insurancecoverage through InsWeb’s insurance agencies.

 

InsWeb’sprincipal source of revenues is transaction fees from participating insuranceproviders, either directly from an insurance company or from a local insuranceagent. While quotes obtained through InsWeb’s online insurance marketplace areprovided to consumers free of charge, InsWeb earns revenues from participatinginsurance companies or agents based on the delivery of qualified leads. Thesefees are earned either from an insurance company based on a closed policy, fromthe delivery of a lead to a participating insurance provider or local agent, 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 third partyinsurance provider’s website. In these situations, the consumer will completethe third party company’s online application, and InsWeb will be paid a fee forthat consumer link or click-through.

 

InAugust 2004, InsWeb launched its term life agency business in an effort toincrease revenue per consumer within the term life marketplace. The conversionfrom a lead-based revenue model to a commission-based revenue model resulted inlower revenues in the short-term, as it typically takes 90 to 120 days tocomplete the sales process for a term life policy. At the time the term lifeagency business was launched, the Company was uncertain whether the transactiondata available was sufficient to reliably estimate cancellations for purposesof satisfying the criteria in Statement of Financial Accounting Standards No.48, “Revenue Recognition When Right of Return Exists,” for service transactionssubject to customer cancellation privileges. Accordingly, during the initialdeployment period of the commission-based model, the Company recognizedcommission revenue on a ratable basis over the initial term of the relatedpolicy as the cancellation privileges expired. Based on term life agencyactivity and cancellation data accumulated since the launch, management hasdetermined that it is now appropriate to use the historical cancellation rateto estimate a cancellation allowance for term life agency transactions.Beginning with the quarter ended June 30, 2005, the Company recognizes revenuefrom its term life agency business when commissions have been earned, net of anestimate for future cancellations based on its historical cancellation data. Inconnection with the change in estimate for cancellations, the Companyrecognized commission revenue of $286,000 in the quarter ended June 30, 2005relating to commissions earned on term life policies closed in prior quarters.

 

12

----

 

In2004, InsWeb launched its agent network program which provides online autoinsurance consumers access to local insurance agents. Currently, the agentnetwork program is conducted through an intermediary, NetQuote, Inc., whoprovides auto consumer leads to local insurance agents. During the three andsix months ended June 30, 2005, this agent network program represented 33% and30% of auto transaction fees, respectively. During the three and six monthsended June 30, 2004, this agent network program represented 6% and 3% of autotransaction fees, respectively.

 

Tolessen InsWeb’s reliance on this intermediary, and to maximize our revenuepotential, we are preparing to launch a proprietary agent network program (“AgentInsider”)that will provide leads directly to local insurance agents who have registeredwith InsWeb. We expect that this initiative will be launched during the thirdquarter of 2005, and may initially result in reduced revenues, depending on therate of registration and degree of participation of local personal linesinsurance agents throughout the country. Going forward, we expect that theagent network program, both through the intermediary and through our internallydeveloped network, will continue to represent a significant percentage of autotransaction fees. However, the agent network is subject to a number ofuncertainties, including the cost of developing and marketing the program, andthe continued participation of our third party intermediary. If we are unableto create a positive offering, or if the transition of the agent networkprogram from the intermediary to our internally developed program is delayed orotherwise unsuccessful, the Company’s business may be harmed.

 

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 77% of transaction revenues in 2004 and 78% in the first sixmonths of 2005. We anticipate that automobile insurance will continue toaccount for a significant portion of InsWeb’s revenues for the foreseeablefuture.

 

InsWebis subject to all of the risks inherent in the electronic commerce industry andspecial risks related to the online insurance industry. These risks include,but are not limited to, uncertain economic conditions which could result inlower growth rates, the changing nature of the electronic commerce industry,variations in consumer traffic (consumers shopping for insurance on theInternet), unpredictability of future revenues, reliance on key customers –property and casualty insurance carriers – who are themselves subject tovolatility in their operating cycles, reliance on a third party intermediarywho provides leads to local insurance agents on InsWeb’s behalf. These risksand uncertainties, among others, could cause InsWeb’s actual results to differmaterially from historical results or those currently anticipated.  In light of the evolving nature of InsWeb’sbusiness to better capitalize on its position as a leading insurance portal,including the current expansion of InsWeb’s agent network program, InsWebbelieves that period-to-period comparisons of its operating results are notnecessarily meaningful and should not be relied upon as an indication of futureperformance. However, there is no assurance that InsWeb will be able to achieveor sustain profitability.

 

Since its inception, InsWebhas incurred significant losses, and as of June 30, 2005, InsWeb had anaccumulated deficit of $185.1 million. InsWeb’soperations to date have consumed substantial amounts of cash, cash equivalentsand short-term investments ($8.7 million in 2004 and $4.2 million in 2003) andwill continue to require capital in the near future. These losses, and this accumulated deficit,have resulted from the significant costs incurred in the development of InsWeb’stechnology platform, the establishment of relationships with insurancecompanies, their integration with the InsWeb site, and InsWeb’s marketing andsales activities. In order to remain competitive, theCompany must continue to make investments essential to its ability to operate,and InsWeb intends to continueto invest in product development and maintenance, and sales and marketing. Inaddition, the Company will continue to incur the costs associated withcontinuing to function as a publicly listed company, including the costs ofcompliance with the provisions of the Sarbanes-Oxley Act of 2002, which willrequire the Company to comply withSection 404 of the Sarbanes-Oxley Act in fiscal 2006. As a result,InsWeb believes that it will continue to incur operating losses through theremainder of fiscal year 2005. In the eventthat InsWeb is unable to generate revenues sufficient to offset its costs, orif its costs of marketing and operations are greater than it anticipates, theCompany may be unable to grow its business at the rate desired or may berequired to delay, reduce, or cease certain of its operations, any of whichcould materially harm its business and financial results. In addition, if InsWeb is unable toultimately achieve profitability, the Company may need to seek additionalfinancing to continue its business operations. The Company cannot be certainthat additional financing will be available when required, on favorable termsor at all. If InsWeb is not successful in raising additional capital asrequired, it may delay, significantly reduce or cease certain of itsoperations, which could adversely affect its results of operations andfinancial position.

 

13

----

 

**Results ofOperations**

 

Thefollowing tables set forth certain statement of operations highlights for the threeand six months ended June 30, 2005 and 2004:

 

**Revenuesand operating expenses as a percentage of total revenues:**

 
| ** **                        | ** ** | **Three months  ended  June 30,** | ** ** | **Six months  ended  June 30,** | ** ** |
|-----------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **2005**                          | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                         |       |                              |       |                            |       |   |   |   |   |
| Transaction fees                  |       | 99                                | %          | 95                              | %          | 99 | % | 95 | % |
| Development and  maintenance fees |       | 1                                 | %          | 5                               | %          | 1 | % | 5 | % |
| Total                             |       | 100                               | %          | 100                             | %          | 100 | % | 100 | % |
| Operating  expenses:              |       |                              |       |                            |       |   |   |   |   |
| Technology                        |       | 22                                | %          | 43                              | %          | 23 | % | 39 | % |
| Direct marketing                  |       | 53                                | %          | 61                              | %          | 55 | % | 53 | % |
| Sales and  marketing              |       | 27                                | %          | 38                              | %          | 26 | % | 37 | % |
| General and administrative        |       | 16                                | %          | 35                              | %          | 18 | % | 33 | % |
| Total                             |       | 118                               | %          | 177                             | %          | 122 | % | 162 | % |
| Loss from  operations             |       | (18                               | )%         | (77                             | )%         | (22 | )% | (62 | )% |

 

**Revenues:**

 
| ** **                       | ** ** | **Three months  ended  June 30,** | ** ** | **Six months  ended  June 30,** | ** ** |
|----------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| **(In thousands)**               | ** ** | **2005**                          | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
|                             |       |                              |       |                            |       |   |   |   |   |
| Transaction fees:                |       |                              |       |                            |       |   |   |   |   |
| Auto insurance                   |       | $                                 | 4,888      |                            | $          | 2,406 |   | $ | 9,586 |   | $ | 5,142 |   |
| Term life  insurance             |       | 1,569                             |       | 708                             |       | 2,397 |   | 1,741 |   |
| Other insurance                  |       | 65                                |       | 74                              |       | 145 |   | 135 |   |
| Total transaction  fees          |       | 6,522                             |       | 3,188                           |       | 12,128 |   | 7,018 |   |
| Development and maintenance fees |       | 82                                |       | 178                             |       | 170 |   | 403 |   |
| Total revenues                   |       | $                                 | 6,604      |                            | $          | 3,366 |   | $ | 12,298 |   | $ | 7,421 |   |
|                                  |            |                                   |            |                                 |            |  |  |  |  |  |  |  |  |  |

 

**Direct Marketing (Consumer Acquisition) Metrics:**

 
| ** **                                             | ** ** | **Three months  ended  June 30,** | ** ** | **Six months  ended  June 30,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| **(In thousands,****except per consumer amounts****)** | ** ** | **2005**                          | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                   |       |                              |       |                            |       |   |   |   |   |
| Direct marketing costs                                 |       | $                                 | 3,505      |                            | $          | 2,057 |   | $ | 6,661 |   | $ | 3,911 |   |
| Number of consumers                                    |       | 1,320                             |       | 684                             |       | 2,411 |   | 1,417 |   |
| Direct marketing cost per consumer                     |       | $                                 | 2.66       |                            | $          | 3.01 |   | $ | 2.76 |   | $ | 2.76 |   |
| Total transaction fees per consumer                    |       | $                                 | 4.94       |                            | $          | 4.66 |   | $ | 5.03 |   | $ | 4.95 |   |
|                                                        |            |                                   |            |                                 |            |  |  |  |  |  |  |  |  |  |  |

 

**Auto Marketplace Metrics:**

 
| ** **                                             | ** ** | **Three months  ended  June 30,** | ** ** | **Six months  ended  June 30,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| **(In thousands,****except per consumer amounts****)** | ** ** | **2005**                          | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                   |       |                              |       |                            |       |   |   |   |   |
| Auto insurance transaction fees                        |       | $                                 | 4,888      |                            | $          | 2,406 |   | $ | 9,856 |   | $ | 5,142 |   |
| Number of consumers                                    |       | 1,203                             |       | 580                             |       | 2,171 |   | 1,165 |   |
| Transaction fees per consumer                          |       | $                                 | 4.06       |                            | $          | 4.15 |   | $ | 4.42 |   | $ | 4.41 |   |
|                                                        |            |                                   |            |                                 |            |  |  |  |  |  |  |  |  |  |

 

14

----

 

**Term Life Marketplace Metrics:**

 
| ** **                                             | ** ** | **Three months  ended  June 30,** | ** ** | **Six months  ended  June 30,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| **(In thousands,****except per consumer amounts****)** | ** ** | **2005**                          | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                   |       |                              |       |                            |       |   |   |   |   |
| Term life insurance transaction fees                   |       | $                                 | 1,569      |                            | $          | 708 |   | $ | 2,397 |   | $ | 1,741 |   |
| Number of consumers                                    |       | 84                                |       | 74                              |       | 177 |   | 174 |   |
| Transaction fees per consumer                          |       | $                                 | 18.68      |                            | $          | 9.57 |   | $ | 13.54 |   | $ | 10.01 |   |
|                                                        |            |                                   |            |                                 |            |  |  |  |  |  |  |  |  |  |

 

**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 completed an InsWeb  application, provided their contact information and has had an insurance lead  submitted on their behalf; |
| “Transaction fees per consumer” |   | Represents transaction revenues earned per  consumer.                                                                                                        |

 

**Revenues**

 

**Transaction Fees.** Transaction fees (consisting of lead fees, closed policy fees,commissions and sponsored link fees) relating to automobile insurance increasedto $4.9 million and $9.6 million for the three and six months ended June30, 2005, respectively, from $2.4 million and $5.1 million for thecomparable periods in 2004. These increases were primarily attributable to 107%and 86% increases in consumer traffic (consumers who have started the InsWebauto application) from the comparable periods in 2004, respectively. Revenue perauto consumer decreased slightly to $4.06.

 

Transaction fees (primarilycommissions earned on closed policies) relating to term life insuranceincreased to $1.6 million and $2.4 million for the three and six monthsended June 30, 2005 from $0.7 million and $1.7 million for the comparableperiods in 2004. These increases reflect the completed transition of our termlife business to a commission-based revenue model.

 

15

----

 

**OperatingExpenses**

 

**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 the agent network programdiscussed previously, as well as carrier integration and other enhancements tothe InsWeb online insurance marketplace. Technology expenses remained level at$1.4 million for the three months ended June 30, 2005 and 2004.  Technology expenses decreased to$2.8 million for the six months ended June 30, 2005 from $2.9 millionfor the comparable period in 2004. The decrease was primarily attributable to areduction in headcount. Technology expenses for the remainder of 2005 areexpected to remain at or near current levels.

 

**Sales and Marketing.**  Salesand marketing expenses include direct marketing expenditures such asadvertising, promotions and fees paid to online companies with which InsWeb hascontractual relationships to drive consumer traffic to the InsWeb onlinemarketplace. InsWeb’s current consumer marketing program is focused ondeveloping and retaining key online relationships and selective cost-effectivemarketing campaigns designed to maintain consumer awareness of InsWeb and itsonline insurance marketplace. 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, the developing agent network program (“AgentInsider”) and thepersonnel and related costs for InsWeb’s Insurance Agency operations (Auto andTerm Life), which includes selling agents, underwriters, supervisors andcustomer service and support groups. Overall sales and marketing expensesincreased to $5.3 million and $10.0 million for the three and six months endedJune 30, 2005, from $3.3 million and $6.7 million for the comparable periods in2004. These increases were primarily a result of increases in direct marketingcosts to $3.5 million and $6.7 million for the three and six months endedJune 30, 2005, respectively, compared to $2.0 million and $3.9 million forthe comparable periods in 2004. For the three months ended June 30, 2005, thenumber of consumers increased by 93% over the second quarter of 2004, while theaverage cost decreased 12% to $2.66 per consumer. The decrease in cost perconsumer was attributable to a decrease in our cost of online advertising. TheCompany expects that for the remainder of 2005, direct marketing costs perconsumer acquired will remain at or near current levels. However, total directmarketing costs will fluctuate based on the amount of consumer traffic drivento the InsWeb marketplace, while all other sales and marketing expenditures areexpected to increase for the remainder 2005, as the AgentInsider program andthe term life agency are expanded.

 

**General and Administrative.** General and administrative expenses consist primarily of payroll andrelated expenses, including employee benefits, facility costs, telecommunicationsand systems costs, for InsWeb’s general management, administrative andaccounting personnel, as well as other general corporate expenses. General andadministrative expenses decreased to $1.1 million and $2.2 million for thethree and six months ended June 30, 2005, respectively, from $1.2 millionand $2.4 million for the comparable periods in 2004. The decrease was primarilydue to a reduction in headcount. General and administrative expenses areexpected to remain at current levels for the remainder of 2005.

 

**Interest Income.** Interest income increased to $96,000 and $188,000 for the three and sixmonths ended June 30, 2005, respectively, from $74,000 and $145,000 for thecomparable periods in 2004. Interest income is income earned on InsWeb’s short-terminvestments.

 

16

----

 

**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 these estimatesunder different assumptions or conditions. InsWeb believes the followingcritical accounting policies affect its more significant judgments andestimates used in the preparation of its consolidated financial statements.

 

***Accrual for Lease Obligations******.***  InsWeb is contractually obligated to makefuture lease payments on certain formerly occupied facilities throughSeptember 2008. As of June 30, 2005, total future obligations for thesefacilities amounted to $8.0 million; these obligations are offset by totalestimated future sublease income of approximately $6.7 million. Substantiallyall future sublease income is due from a sublessee who is an early-stagecompany with a limited operating history and, therefore, there are inherentrisks and uncertainties associated with its future operations and its abilityto discharge its obligations through the term of the sublease. In the eventthat the sublessee defaults on its obligations under the sublease, InsWeb wouldbe responsible for making the required lease payments to the landlord throughthe remaining term of the lease. In connection with this lease and other leaseobligations for formerly occupied facilities, InsWeb must make assumptionsregarding the estimated future sublease income relative to these facilities. Basedon these assumptions, the Company has recorded an accrual of $2.0 million as ofJune 30, 2005 for lease commitments related to these formerly occupiedfacilities, as compared to an accrual of $2.2 million as of December 31,2004. These estimates and assumptions are affected by area-specific conditionssuch as new commercial development, market occupancy rates and future marketprices. If these estimates or their related assumptions change in the future,InsWeb may be required to record a charge to increase its accrual.

 

***Contingencies*****.**  As discussed in “Item 1 — Note 7 of Notesto Condensed Consolidated Financial Statements,” a class action lawsuit has been filed that alleges InsWeb violatedcertain federal securities laws at the time of its initial public offering.Although some claims against InsWeb in this class action have been dismissedand a settlement of these proceedings has been proposed and conditionallyaccepted, InsWeb cannot accurately predict the ultimate outcome of this matterat this time and therefore, cannot estimate the range of probable loss, if any,due to the inherent uncertainties of litigation. InsWeb believes it hasmeritorious defenses; however InsWeb cannot assure that it will prevail in thisaction. An unfavorable outcome could have a material adverse effect on InsWeb’sfinancial condition, results of operations and cash flows.

 

***Income Taxes.*** InsWeb accounts for income taxes in accordance with Statement ofFinancial Accounting Standards No. 109 (SFAS 109), *Accounting for Income Taxes*. The deferredtax assets and/or liabilities are determined by multiplying the differencesbetween the financial reporting and tax reporting bases for assets andliabilities by the enacted tax rates expected to be in effect when suchdifferences are recovered or settled.

 

Thecarrying value of InsWeb’s deferred tax assets, which were $70.4 million atDecember 31, 2004, are dependent upon our ability to generate sufficient futuretaxable income. The Company has established a full valuation allowance againstits net deferred tax assets for continuing operations to reflect theuncertainty of realizing the deferred tax benefits, given historical losses. Avaluation allowance is required when it is more likely than not that all or aportion of a deferred tax asset will not be realized. A review of all availablepositive and negative evidence needs to be considered, including InsWeb’s pastand future performance, the market environment in which it operates, theutilization of tax attributes in the past, and the length of carryforwardperiods and evaluation of potential tax planning strategies. InsWeb expects tocontinue to maintain a full valuation allowance until an appropriate level ofprofitability is sustained or it is able to develop tax strategies that wouldenable it to conclude that it is more likely than not that a portion of itsdeferred tax assets would be realizable.

 

17

----

 

**Liquidity and Capital Resources**

 

AtJune 30, 2005 InsWeb’s principal source of liquidity and overall cash positionwas $13.4 million, consisting of cash, cash equivalents and short-terminvestments, a decrease from $17.5 million at December 31, 2004.  The decrease resulted from the use of $4.0million of cash in operating and financing activities. The primary driver thatimpacts changes in the Company’s overall cash position is its operating loss.

 

Forthe six months ended June 30, 2005, net cash used in operating activities was$2.3 million. The primary components of the use of cash was the net loss of$2.5 million and an increase in accounts receivable of $1.6 million, partially offsetby an increase in accounts payable of $1.2 million. The increase in accountsreceivable was a result of the revenue growth during the quarter, with dayssales outstanding increasing to 34 days at June 30, 2005, compared to 26 daysoutstanding at December 31, 2004.  Theincrease in accounts payable was a result of the significant increase in directmarketing activities during the quarter, increasing consumer traffic to theInsWeb marketplace and a corresponding increase in direct marketing costs.

 

Forthe six months ended June 30, 2005, net cash provided by investing activitieswas $3.4 million, which primarily consisted of redemptions of short-term investmentsoffset by the purchases of short-term investments. Investing activities willgenerally fluctuate in conjunction with cash required to meet working capitalrequirements.

 

Forthe six months ended June 30, 2005, net cash used in financing activities was$1.8 million.  Cash used by financingactivities was attributable to the repurchase of common stock for $1.7 million(see Note 8 to Notes to Condensed Consolidated Financial Statements).

 

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 June 30, 2005 are summarized as follows (inthousands):

 
| **Years ending December 31,** | ** ** | **Gross lease  commitments** | ** ** | **Sublease  income** | ** ** | **Net lease  commitment** | ** ** |
|------------------------------------|------------|------------------------------|------------|----------------------|------------|---------------------------|------------|
| 2005                               |       | $                            | 1,637      |                 | $          | (989                      | )          | $ | 648 |   |
| 2006                               |       | 3,391                        |       | (2,030               | )          | 1,361                     |       |
| 2007                               |       | 3,483                        |       | (2,100               | )          | 1,383                     |       |
| 2008                               |       | 2,936                        |       | (1,615               | )          | 1,321                     |       |
| 2009                               |       | 1,078                        |       | —               |       | 1,078                     |       |
| Thereafter                         |       | 1,437                        |       | —               |       | 1,437                     |       |
|                               |       | $                            | 13,962     |                 | $          | (6,734                    | )          | $ | 7,228 |   |
|                                    |            |                              |            |                      |            |                           |            |  |  |  |  |

 

Our operationsto date have consumed substantial amounts of cash, cash equivalents andshort-term investments ($8.6 million in 2004 and $9.6 million in 2003) and willcontinue to require capital in the near future. In order to remain competitive,we must continue to make investments which are essential to our ability tooperate, including investments in direct marketing, technology and generaladministration, including the governance and compliance costs required of apublic company. Weanticipate that our cash, cash equivalents and short-term investments will besufficient to meet our anticipated cash needs for working capital and capitalexpenditures for at least the next 12 months. Longer-term, if the enhancements to our automarketplace, including the expansion of our agent network program, and thelaunch of our term life agency are unable to generate revenues sufficient to offsetour costs, or if our costs of marketing and operations are greater than weanticipate, we may be unable to grow our business at the rate desired; or wemay be required to delay, reduce, or cease certain of our operations, any ofwhich could materially harm our business and financial results. Although we do not anticipate the need foradditional financing, we nevertheless may require additional funds to meetoperating needs. We cannot be certain that additional financing will beavailable when required, on favorable terms or at all. If we are not successfulin raising additional capital as required, we may delay, significantly reduceor cease certain of our operations, which could adversely affect our results ofoperations and financial position.

 

18

----

 

**Factors That May Affect Our Future Performance**

 

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

 

**Our business is difficult to evaluate because our market isevolving rapidly and our business model is unpredictable**

 

An evaluation of our futureprospects is very difficult. An investor in our common stock must consider theuncertainties frequently encountered by early stage companies in new andrapidly evolving markets. These uncertainties include:

 

•                                          an evolving and unpredictable business model,which makes prediction of future results uncertain and an investment in our commonstock highly speculative;

 

•                                          the development of comparable services bycompetitors, which may reduce our market share;

 

•                                          the uncertainty of the extent to which theconsumer market will adopt the Internet as the preferred medium for comparisonshopping for and purchase of insurance products, which may limit our ability togenerate revenue from consumers that visit our online marketplace or ourinsurance agency;

 

•                                          our ability to retain key employees; and

 

•                                          our reliance on key customers and ability to retaincustomers.

 

Our business strategy maynot be successful and we may not be able to successfully address theseuncertainties. Moreover, our ability to take the foregoing steps may behampered by our limited financial resources should we fail to rapidly increaserevenues or should increased revenues be more than offset by increasedoperating expenses.

 

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

 

Given planned investmentlevels, our ability to achieve profitability will depend upon our ability togenerate and sustain substantially increased revenues. As a result, we believethat we will incur operating losses through the remainder of 2005. We incurredoperating losses of $9.2 million for 2004, $7.0 million for 2003, and$15.5 million for 2002. As of June 30, 2005, our accumulated deficit was$185.1 million. Our operating results for future periods are subject tonumerous uncertainties, and we may not achieve sufficient revenues to becomeprofitable. Even if we achieve profitability, we may not sustain or increaseprofitability on a quarterly or annual basis in the future. If we are unable toachieve profitability or if our profitability is delayed we may need to seekadditional financing to continue our business operations. Such financing couldbe on terms that are dilutive to our existing stockholders or could involve theissuance of securities that have rights and preferences that are senior tothose associated with our common stock. Moreover, if such financing were notavailable or were available only upon terms that were unacceptable to us, wecould be required to delay,reduce, or cease certain of our operations, any of which could materially harmour business and financial results.

 

**If we are unable to achieve cash flow breakeven or generateworking capital that may be required in the future, our ability to operatecould suffer or cease**

 

Our operations to date have consumed substantialamounts of cash, cash equivalents and short-term investments ($8.6 million in2004 and $9.6 in 2003) and will continue to require capital in the near future.In order to remain competitive, we must continue to make investments essentialto our ability to operate, including investments in direct marketing, technologyand general administration.In addition, we will continue to face the costs ofbeing a public company. In the event that we are unable to generate revenuessufficient to offset our costs, or if our costs of marketing and operations aregreater than we anticipate, we may be unable to grow our business at the ratedesired or may be required to delay, reduce, or cease certain of ouroperations, any of which could materially harm our business and financialresults.

 

19

----

 

**Wemay incur unexpected costs or receive less revenue than we planned from recentinitiatives that are part of our evolving business model and, as a result, ouroperations could be harmed**

 

In2004, InsWeb launched its agent network program which provides online autoinsurance consumers access to local insurance agents. Currently, the agentnetwork program is conducted through an intermediary, NetQuote, Inc., whoprovides auto consumer leads to local insurance agents. During the three andsix months ended June 30, 2005, this agent network program represented 33% and30% of auto transaction fees, respectively. During the three and six monthsended June 30, 2004, this agent network program represented 6% and 3% of autotransaction fees, respectively.

 

Tolessen InsWeb’s reliance on this intermediary, and to maximize our revenuepotential, we are preparing to launch a proprietary agent network program (“AgentInsider”)that will provide leads directly to local insurance agents who have registeredwith InsWeb. We expect that this initiative will be launched during the thirdquarter of 2005, and may initially result in reduced revenues, depending on therate of registration and degree of participation of local personal linesinsurance agents throughout the country. Going forward, we expect that theagent network program, both through the intermediary and through our internallydeveloped network, will continue to represent a significant percentage of autotransaction fees. However, the agent network is subject to a number ofuncertainties, including the cost of developing and marketing the program, andthe continued participation of our third party intermediary. If we are unableto create a positive offering, or if the transition of the agent networkprogram from the intermediary to our internally developed program is delayed orotherwise unsuccessful, the Company’s business may be harmed.

 

InAugust 2004, InsWeb launched its term life agency business in an effort toachieve increased revenue per consumer within its term life marketplace,resulting in a shift from a lead payment to a commission-based revenue model,which the Company believes will offer greater long-term financial benefit. Thisinitiative is subject to a number of uncertainties, including the cost ofdeveloping the agency operations, and the continued participation of insurancecarriers. Moreover, there are many insurance agencies selling term lifeinsurance online. If we are unable to create a positive offering with thisinitiative, we may lose business to competitors and/or our business may beharmed.

 

**Our future revenues are unpredictable, our operating resultsare likely to fluctuate from quarter to quarter, and if we fail to meet theexpectations of investors, our stock price could decline significantly**

 

Due to the evolving natureof our business model and the high proportion of our revenues that are derivedfrom consumer traffic to our website, our future revenues are inherentlydifficult to forecast. Particularly in light of recent changes in our businessmodel, including the evolution of InsWeb’s agent network program, InsWebbelieves that period-to-period comparisons of its operating results are notnecessarily meaningful and should not be relied upon as an indication of 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 wouldharm our 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 causefluctuations in our operating results include the following, many of which areoutside our control:

 

•                                          We may experience consumer dissatisfactionwith our online marketplace as we add or change features, or as the insurancecoverage offered by participating insurance companies varies;

 

•                                          Consumer traffic on our online marketplacemay decline as a result of the announcement or introduction of a competingonline insurance marketplace or other new websites, products or servicesoffered by our competitors;

 

•                                          Consumer traffic may also fluctuate as aresult of changes in level of advertising by entities with which we haveinsurance marketing relationships;

 

•                                          Our revenues may be harmed if we lose one ormore significant insurance company relationships or if any of our participatinginsurance companies merge with one another;

 

20

----

 

•                                          Our revenues may be harmed if our new agentnetwork initiative is not developed and launched in a timely or completemanner, or if the transition to our internally developed agent network programfrom our current third party intermediary is unsuccessful;

 

•                                          Use of the Internet by consumers mayfluctuate due to seasonal factors or other uncontrollable factors affectingconsumer behavior and may be affected by slow Internet performance due totechnical problems or traffic bottlenecks on the network;

 

•                                          Our ability to convert site visits intotransaction fees and/or revenue from insurance agency activities may fluctuatedue to changes in our user interface or other features on our site;

 

•                                          Our ability to generate transaction fees maybe adversely affected by changes in the underwriting criteria used by ourparticipating insurance companies to determine which consumers will be offeredquotes; and

 

•                                          Our ability to generate transaction feesand/or revenue from insurance agency activities may also be harmed due totechnical difficulties on our website that hamper a consumer’s ability to startor complete a shopping session.

 

**We are exposed to increased costs and risks associated withcomplying with the increasing regulation of corporate governance and disclosurestandards**

 

Weare spending an increased amount of management time and external resources tocomply with changing laws, regulations and standards relating to corporategovernance and public disclosure, including the Sarbanes-Oxley Act of 2002, newSEC regulations and Nasdaq Stock Market rules. In particular, Section 404 ofthe Sarbanes-Oxley Act of 2002 requires management’s annual review andevaluation of our internal control systems, and attestations of theeffectiveness of these systems by our independent auditors. We have commenceddocumenting our internal control systems and procedures and will need toconsider improvements that may be necessary in order for us to comply with therequirements of Section 404 by the end of 2006. This process may require us tohire additional personnel and outside advisory services and will result insignificant additional accounting and legal expenses. We may encounter problemsor delays in completing the review and evaluation, the implementation ofimprovements and we may be unsuccessful in obtaining an unqualified report onour assessment of, and/or the effectiveness of, our internal controls overfinancial reporting from our independent auditors. While we believe that wecurrently have adequate internal controls over financial reporting, in theevent that our chief executive officer or chief financial officer determinethat our controls over financial reporting are not effective as defined underSection 404, investor perceptions of our company may be adversely affected andcould cause a decline in the market price of our stock.

 

**Seasonality affecting insurance shopping and Internet usagemay cause fluctuations in our operating results**

 

We have experiencedseasonality in our business associated with general slowness in the insuranceindustry during the year-end holiday period. We expect to continue toexperience seasonality as our business matures. Because of this seasonality,investors may not be able to predict our annual operating results based on aquarter-to-quarter comparison of our operating results. We believe seasonalitywill have an ongoing impact on our business.

 

**Because a significant portion of our revenue is attributableto automobile insurance shopping on our online marketplace, we are especiallyvulnerable to risks related to the online market for automobile insurance orthe automobile insurance industry generally**

 

Automobile insuranceaccounted for approximately 77% of our transaction revenues in 2004,approximately 79% in 2003 and approximately 83% in 2002. For the six monthsended June 30, 2005, auto insurance accounted for approximately 79% of ourtransaction revenues. We anticipate that automobile insurance will continue toaccount for a substantial portion of our revenues for the foreseeable future.As a result, if we fail to attract a broad base of consumers to shop forautomobile insurance on our site, our ability to generate revenue will bereduced and our business will be harmed. In addition, property and casualtyinsurance, including automobile insurance, is subject to operating cycles.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.

 

21

----

 

**If we are unable to promote our brand and expand our brandrecognition, our ability to draw consumers to our website will be limited**

 

A growing number of websitesoffer services that are similar to and competitive with the services offered onour online insurance marketplace. Therefore, a positive recognition of ourbrand is critical to attracting additional consumers to our website,strengthening our relationships with participating insurance companies andattracting new insurance companies. In order to attract and retain consumersand 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 revenues orwe 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 to maintain apositive recognition of our brand also depends in part on the quality of theproducts and services consumers receive from our participating insurancecompanies or our insurance agency, including timely response to requests forquotes 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 online distribution ofinsurance is intense, and if we are unable to compete effectively with currentcompetitors or new competitors that enter the market, the fees paid to us byparticipating insurance companies may fall, the fees charged by onlinecompanies with which we have strategic relationships may rise, and our marketshare may suffer**

 

The online insurancedistribution market is a relatively new industry and, like the broaderelectronic commerce market, is both rapidly evolving and highly competitive.Increased competition, particularly by companies offering online insurancedistribution, could reduce the fees we are able to charge our participatinginsurance companies or increase the fees we are required to pay to onlinecompanies with which we have strategic relationships, resulting in reducedmargins or loss of market share, any of which could harm our business. Inaddition, our current and future competitors may be able to:

 

•              undertake more extensive marketingcampaigns for their brands and services;

•              devote more resources to websiteand systems development;

•              adopt more aggressive pricingpolicies; and

•              make more attractive offers topotential employees, online companies and third-party service providers.

 

Accordingly, we may not beable to maintain or grow consumer traffic to our website and our base of participatinginsurance companies, our competitors may grow faster than we do, or companieswith whom we have strategic relationships may discontinue their relationshipswith us, any of which would harm our business.

 

**We may have difficulty integrating new insurance companiesinto our online marketplace or agency operations, which could harm our abilityto offer improved comparison-shopping opportunities and thus limit theattractiveness of our service to consumers**

 

Integration of an insurancecompany into our online marketplace requires a significant commitment of timeand resources on our part and on the part of the insurance company, and is atechnologically difficult process. This integration process typically takesfrom three to six months to complete and typically requires us to expendbetween 160 and 2,000 man-hours. To develop company-sponsored quotes forconsumers, the integration requires either the development of a customizedinterface with the insurance company’s own rating system, accessing a third-partyrating engine of the insurance company’s choice, or adding the insurancecompany’s rating information into InsWeb’s proprietary rating engines. Thoughintegration into our agency operations may require fewer resources to implementthan integration of an insurance company into our online marketplace, potentialparticipating insurance companies may not be willing to invest the time andresources necessary to achieve this integration, or we may not be able toovercome the technological difficulties associated with, or devote the time andresources necessary to, successfully integrate the insurance company into ouronline marketplace or our agency operations.

 

22

----

 

**We do not have exclusive relationships or long-term contractswith insurance companies, which may limit our ability to retain these insurancecompanies as participants in our marketplace and maintain the attractiveness ofour services to consumers**

 

We do not have an exclusiverelationship with any of the insurance companies whose insurance products areoffered on our online marketplace, and thus, consumers may obtain quotes andcoverage from these insurance companies without using our website. Ourparticipating insurance companies offer their products directly to consumersthrough insurance agents, mass marketing campaigns or through other traditionalmethods of insurance distribution. These insurance companies can also offertheir products and services over the Internet, either directly to consumers orthrough one or more of our online competitors, or both. In addition, most ofour agreements with our participating insurance companies are cancelable at theoption of either party upon 90 days’ notice or less. We have experienced,and expect to continue to experience, reductions in the level of participationin our marketplace or complete termination by participating insurancecompanies. These reductions in participation, terminations, or an inability toattract additional insurance companies to our marketplace could materiallyaffect our revenues and harm our business.

 

**The outcome and impact of the securities class action lawsuitinvolving InsWeb is uncertain**

 

A securities class actionlawsuit was filed on December 5, 2001 in the United States District Courtfor the Southern District of New York, (the “Court”) purportedly on behalf ofall persons who purchased our common stock from July 22, 1999 throughDecember 6, 2000. The complaint named as defendants InsWeb, certaincurrent and former officers and directors, and three investment banking firmsthat served as underwriters for InsWeb’s initial public offering inJuly 1999. The complaint, as subsequently amended, alleges violations ofSections 11 and 15 of the Securities Act of 1933 and Sections 10 and 20 of theSecurities Exchange Act of 1934, on the grounds that the prospectusesincorporated in the registration statements for the offering failed todisclose, among other things, that (i) the underwriters had solicited andreceived 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 the underwritersagreed to allocated shares of the stock sold in the offering to those customersin exchange for which the customers agreed to purchase additional shares ofInsWeb stock in the aftermarket at pre-determined prices. No specific damagesare claimed. Similar allegations have been made in lawsuits relating to morethan 300 other initial public offerings conducted in 1999 and 2000, all ofwhich have been consolidated for pretrial purposes. In October 2002, allclaims against the individual defendants were dismissed without prejudice. InFebruary 2003, the Court dismissed the claims in the InsWeb actionalleging violations of the Securities Exchange Act of 1934 but allowed theplaintiffs to proceed with the remaining claims. In June 2003, the plaintiffsin all of the cases presented a settlement proposal to all of the issuerdefendants. Under the proposed settlement, the plaintiffs will dismiss andrelease all claims against participating defendants in exchange for acontingent payment guaranty by the insurance companies collectively responsiblefor insuring the issuers in all the related cases, and the assignment orsurrender to the plaintiffs of certain claims the issuer defendants may haveagainst the underwriters. InsWeb and most of the other issuer defendants haveaccepted the settlement proposal. The settlement was given preliminary approvalby the Court in February 2005, pending a modification to the settlementdocuments. If the Court does not approve the settlement in its final form,InsWeb would defend the lawsuit vigorously. However, the litigation is in thepreliminary stage, and we cannot predict its outcome. The litigation process isinherently uncertain. An unfavorable outcome could have a material adverseeffect on InsWeb’s financial condition, results of operations and cash flows.

 

**Laws and regulations that govern the insurance industry couldexpose us, or our participating insurance companies, our officers, or agentswith whom we contract, to legal penalties if we fail to comply, and could requirechanges to our business**

 

We perform functions forlicensed insurance companies and are, therefore, required to comply with acomplex set of rules and regulations that often vary from state to state. If wefail to comply with these rules and regulations, we, an insurance company doingbusiness with us, our officers, or agents with whom we contract, could besubject to various sanctions, including censure, fines, a cease-and-desistorder or other penalties. This risk, as well as changes in the regulatory climateor the enforcement or interpretation of existing law, could expose us toadditional costs, including indemnification of participating insurancecompanies for their costs, and could require changes to our business orotherwise harm our business. Furthermore, because the application of onlinecommerce to the consumer insurance market is relatively new, the impact ofcurrent or future regulations on InsWeb’s business is difficult to anticipate.

 

23

----

 

**If we are unable to safeguard the security and privacy ofconsumers’ and participating insurance companies’ confidential data, consumersand insurance companies may not use our services and our business may be harmed**

 

A significant barrier toelectronic commerce and communications is the secure transmission of personallyidentifiable information of Internet users as well as other confidentialinformation over public networks. If any compromise or breach of security wereto occur, it could harm our reputation and expose us to possible liability. Aparty who is able to circumvent our security measures could misappropriateproprietary information or cause interruptions in our operations. We may berequired to make significant expenditures to protect against security breachesor to alleviate problems caused by any breaches. To date, we have experiencedno breaches in our network security. We rely on encryption and authenticationtechnology licensed from third parties to provide the security andauthentication 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 traffic on our websiteor interrupt our communications with individual insurance companies and harmour ability to generate revenue**

 

Since launching our onlinemarketplace, we have experienced occasional minor system failures or outagesthat have resulted in the online marketplace being out of service for a periodranging from several minutes to three hours while our technicians broughtbackup systems online. We may experience further system failures or outages inthe future that could disrupt the operation of our website and could harm ourbusiness. Our revenues depend in large part on the volume of traffic on ourwebsite and, more particularly, on the number of insurance quotes generated byour website in response to consumer inquiries. Accordingly, the performance,reliability and availability of our website, quote-generating systems andnetwork infrastructure are critical to our reputation and our ability toattract a high volume of traffic to our website and to attract and retainparticipating insurance companies. Moreover, we believe that consumers who havea negative experience with an electronic commerce website may be reluctant toreturn to that site. Thus, a significant failure or outage affecting oursystems could result in severe long-term damage to our business.

 

Additionally, several of ourparticipating insurance companies have chosen a technical solution thatrequires that our website servers communicate with these insurance companies’computer systems in order to perform the underwriting and risk analysis andrating functions required to generate quotes. Thus, the availability of quotesfrom a given insurance company may depend in large part upon the reliability ofthat insurance company’s own computer systems, over which we have no control.

 

**Our facilities and systems are vulnerable to naturaldisasters and other unexpected losses, and we may not have adequate insuranceto cover such losses**

 

Our computer hardwareoperations are located in leased facilities in Gold River, California. A third-partyservice provider located in the Sacramento, California area maintains a backupof our critical systems. If both of these locations experienced a systemfailure, the performance of our website would be harmed. These systems are alsovulnerable to damage from fire, power loss, telecommunications failures,break-ins, natural disasters and similar events. If we seek to replicate oursystems at other locations, we will face a number of technical challenges,particularly with respect to database replications, which we may not be able toaddress successfully. Although we carry property and business interruptioninsurance, our coverage may not be adequate to compensate us for all lossesthat may occur. Our servers may also be vulnerable to computer viruses,physical or electronic break-ins and similar disruptions.

 

**We rely on the services of our executive officers and otherkey personnel, whose knowledge of our business and the insurance industry andtechnical expertise would be extremely difficult to replace**

 

Our future success issubstantially dependent on the continued services and continuing contributionsof our senior management and other key personnel, particularly Hussein A. Enan,Chairman of our Board and Chief Executive Officer, and the loss of the servicesof any of our executive officers or other key employees could harm ourbusiness. InsWeb has granted stock options as incentives to executive officers,new employees and certain other key personnel. As the value of these incentivesis highly dependent on an increase in the market price of our common stock, wemay be unable to retain such key employees, nor retain or recruit otherofficers and key employees in the future.

 

24

----

 

**Regulation of the Internet is unsettled, and futureregulations could inhibit the growth of the Internet and otherwise harm ourbusiness**

 

The growth and developmentof the market for electronic commerce may prompt the enactment of morestringent consumer protection laws that may impose additional burdens oncompanies conducting business online. For example, the enactment of federallegislation restricting the sending of unsolicited commercial email, or “spam”,may impede the implementation of national email-based marketing campaigns. Newlaws also may inhibit the growth of the Internet as a medium for commerce andcomparison insurance shopping, which could, in turn, decrease demand for ourservices, increase our cost of doing business, or otherwise harm our business.In addition, 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 related technologiesand, as a result, do not contemplate or address the unique issues of theInternet and related technologies.

 

**Any acquisitions that we undertake could be difficult tointegrate, disrupt our business, dilute stockholder value and harm ouroperating results**

 

We may acquire or makeinvestments in complementary businesses, technologies, services or products ifappropriate opportunities arise. The process of integrating any acquiredbusiness, technology, service or product into our business and operations may resultin unforeseen operating difficulties and expenditures. Integration of anacquired company also may consume much of our management’s time and attentionthat would otherwise be available for ongoing development of our business.Moreover, the anticipated benefits of any acquisition may not be realized. Wemay be unable to identify, negotiate or finance future acquisitionssuccessfully, or to integrate successfully any acquisitions with our currentbusiness. Future acquisitions could result in potentially dilutive issuances ofequity securities or the incurrence of debt, contingent liabilities oramortization expenses related to goodwill and other intangible assets, any ofwhich could harm our business.

 

**We may be subject to claims for infringement of intellectualproperty, with or without merit, which could be costly to defend or settle**

 

We may from time to time besubject to claims of infringement of other parties’ proprietary rights orclaims that our own trademarks, patents or other intellectual property rightsare invalid. We have been subject to infringement claims in the ordinary courseof business, including claims of alleged infringement of the patent andtrademark rights of third parties by companies and us with which we havebusiness relationships. Any claims of this type, with or without merit, couldbe time-consuming to defend, result in costly litigation, divert managementattention and resources or require us to enter into royalty or licenseagreements. License agreements may not be available on reasonable terms, if atall, and the assertion or prosecution of any infringement claims couldsignificantly harm our business.

 

**We incorporate third-party technologies and services into ouronline marketplace, and if the providers of these technologies and servicesfail in a timely manner to develop, license or support technology necessary toour services, market acceptance of our online marketplace could be harmed**

 

We have incorporatedtechnology developed by third parties into our online marketplace, and we willcontinue to incorporate third-party technology in our future products andservices. We have limited control over whether or when these third-party technologieswill be developed or enhanced. If a third-party fails to timely develop,license or support technology necessary to our services, market acceptance ofour online marketplace could be harmed.

 

**Our stock price has fluctuated widely, and Internet stocks ingeneral have been extremely volatile**

 

The trading price of ourcommon stock has been highly volatile and may be significantly affected byfactors including actual or anticipated fluctuations in our operating results,new products or new contracts by us or our competitors, loss of key customers,conditions and trends in the electronic commerce and insurance industries,changes in financial estimates by securities analysts, general marketconditions and other factors. The trading prices of many Internet stocks haveexperienced extreme price and volume fluctuations. These fluctuations often havebeen unrelated or disproportionate to the operating performance of thesecompanies. These fluctuations may continue and could harm our stock price. Anynegative change in the public’s perception of the prospects of Internet orelectronic commerce companies could also depress our stock price regardless ofour results.

 

25

----

 

**ITEM 3.****                 ****QUANTITATIVE AND QUALITATIVEDISCLOSURE ABOUT MARKET RISK.**

 

There have been no material changes to the Company’s disclosures relatedto certain market risks as reported under Part II, Item 7A, “Quantitative andQualitative Disclosures About Market Risk,” in the Annual Report of InsWeb tothe U.S. Securities and Exchange Commission on Form 10-K for the year endedDecember 31, 2004.

 

**ITEM 4.****                 ****CONTROLS AND 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 Officerconcluded that our disclosure controls and procedures were effective as of theend of the period covered by this quarterly report.

 

(b)                                             There has been no change in our internalcontrol over financial reporting during the three months ended June 30, 2005that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

**PART II:                OTHERINFORMATION**

 

**ITEM 6.                  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. |

 

26

----

 

**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: August 11, 2005 | **INSWEB  CORPORATION**    |
|------------------------|----------------------------|
| ** **             | **(Registrant)**           |
|                   |                       |
| ** **             | **/s/ WILLIAM D. GRIFFIN** | ** ** |
|                   | William D. Griffin         |
|                   | Chief Financial Officer    |

 

27

----