**SECURITIES AND EXCHANGECOMMISSION**

**Washington,DC 20549**

 

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**FORM 10-Q**

 

| **ý**                                                                                                                                                                                                                 | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                 | ** ** | ** **                                                                                              |
| **For the  quarterly period ended March 31, 2006**                                                                                                                                                                         |
| ** **                                                                                                                                                                                                                 | ** ** | ** **                                                                                              |
| **Or**                                                                                                                                                                                                                     |
| ** **                                                                                                                                                                                                                 | ** ** | ** **                                                                                              |
| **o**                                                                                                                                                                                                                      | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                 | ** ** | ** **                                                                                              |
| **For the  transition period  from               to               ** |
| ** **                                                                                                                                                                                                                 | ** ** | ** **                                                                                              |
| **Commission  file number 0-26083**                                                                                                                                                                                        |

 

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**INSWEB CORPORATION**

(Exactname of Registrant as specified in its charter)

 

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

 
| **11290  Pyrites Way, Suite 200 Gold River, California 95670** |
|----------------------------------------------------------------|
| (Address of principal  executive offices)                      |
| ** **                                                     |
| **(916)  853-3300**                                            |
| (Registrant’s telephone  number, including area code)     |

 

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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 a large accelerated filer, anaccelerated filer, or a non-accelerated filer (see definition of “largeaccelerated filer and accelerated filer” in Rule 12b-2 of the ExchangeAct).

 

Large Accelerated Filer o Accelerated Filer o  Non-Accelerated Filer ý

 

Indicateby check mark whether the registrant is a shell company (as defined byRule 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 April 28, 2006 were 4,087,094 shares.

 

 

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**FORM 10-Q**

**INSWEBCORPORATION**

**INDEX**

 
| **PART I**  | **FINANCIAL INFORMATION**                                                                           | ** ** |
|-------------|-----------------------------------------------------------------------------------------------------|------------|
| ITEM 1:     | Financial Statements  (unaudited)                                                                   |       |
|        | Condensed Consolidated  Balance Sheets as of March 31, 2006 and December 31, 2005              |       |
|        | Condensed Consolidated  Statements of Operations for the three months ended March 31, 2006 and 2005 |       |
|        | Condensed Consolidated  Statements of Cash Flows for the three months ended March 31, 2006 and 2005 |       |
|        | 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 1:     | Legal Proceedings                                                                                   |       |
| ITEM 1A:    | Risk Factors                                                                                        |       |
| ITEM 6:     | Exhibits                                                                                            |       |
|        |                                                                                                |       |
| Signature   |                                                                                                |       |

 

2

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**PART I:****                                                   FINANCIALINFORMATION**

 

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

 

**INSWEBCORPORATION**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 

*(inthousands)*

*(unaudited)*

 
| ** **                                      | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **Assets**                                      |       |                     |       |                        |       |
| Current assets:                                 |       |                     |       |                        |       |
| Cash and cash equivalents                       |       | $                        | 7,322      |                        | $          | 9,073 |   |
| Short-term investments                          |       | 711                      |       | 1,233                       |       |
| Accounts receivable, net                        |       | 2,974                    |       | 2,297                       |       |
| Prepaid expenses and other current assets       |       | 603                      |       | 545                         |       |
| Total current assets                            |       | 11,610                   |       | 13,148                      |       |
| Property and equipment, net                     |       | 477                      |       | 524                         |       |
| Other assets                                    |       | 335                      |       | 346                         |       |
| Total assets                                    |       | $                        | 12,422     |                        | $          | 14,018 |   |
|                                            |       |                     |       |                        |       |
| **Liabilities and stockholders’ equity**   |       |                     |       |                        |       |
| Current liabilities:                            |       |                     |       |                        |       |
| Accounts payable                                |       | $                        | 2,808      |                        | $          | 2,655 |   |
| Accrued expenses                                |       | 2,952                    |       | 3,094                       |       |
| Deferred revenue                                |       | 140                      |       | 128                         |       |
| Total current liabilities                       |       | 5,900                    |       | 5,877                       |       |
|                                            |       |                     |       |                        |       |
| Commitments and  contingencies                  |       |                     |       |                        |       |
|                                            |       |                     |       |                        |       |
| Stockholders’ equity:                      |       |                     |       |                        |       |
| Common stock                                    |       | 7                        |       | 7                           |       |
| Paid-in capital                                 |       | 203,130                  |       | 203,059                     |       |
| Treasury stock                                  |       | (6,334                   | )          | (6,334                      | )          |
| Accumulated other comprehensive loss            |       | —                   |       | (1                          | )          |
| Accumulated deficit                             |       | (190,281                 | )          | (188,590                    | )          |
| Total stockholders’ equity                 |       | 6,522                    |       | 8,141                       |       |
| Total liabilities and stockholders’ equity |       | $                        | 12,422     |                        | $          | 14,018 |   |

 

See accompanying notes.

 

3

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**INSWEBCORPORATION**

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

 

*(inthousands, except per share amounts)*

*(unaudited)*

 
| ** **                                                                     | ** ** | **Three Months  Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Revenues:                                                                      |       |                                             |       |   |   |
| Transaction fees                                                               |       | $                                                | 7,565      |   | $ | 5,606 |   |
| Development and  maintenance fees                                              |       | 90                                               |       | 88 |   |
| Total revenues                                                                 |       | 7,655                                            |       | 5,694 |   |
|                                                                           |       |                                             |       |   |   |
| Operating  expenses:                                                           |       |                                             |       |   |   |
| Direct marketing                                                               |       | 4,945                                            |       | 3,156 |   |
| Sales and  marketing                                                           |       | 2,064                                            |       | 1,546 |   |
| Technology                                                                     |       | 1,253                                            |       | 1,372 |   |
| General and  administrative                                                    |       | 1,176                                            |       | 1,132 |   |
| Total operating  expenses                                                      |       | 9,438                                            |       | 7,206 |   |
| Loss from  operations                                                          |       | (1,783                                           | )          | (1,512 | ) |
| Interest income                                                                |       | 92                                               |       | 92 |   |
| Net loss                                                                       |       | $                                                | (1,691     | ) | $ | (1, 420 | ) |
|                                                                           |       |                                             |       |   |   |
| Net loss per  share-basic and diluted                                          |       | $                                                | (0.41      | ) | $ | (0. 30 | ) |
|                                                                           |       |                                             |       |   |   |
| Weighted-average  shares used in computing per share amounts-basic and diluted |       | 4,085                                            |       | 4, 785 |   |

 

See accompanying notes.

 

4

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**INSWEB CORPORATION**

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

*(inthousands)*

*(unaudited)*

 
| ** **                                                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| Cash flows from operating activities:                                        |       |                                        |       |   |   |
| Net loss                                                                     |       | $                                           | (1,691     | ) | $ | (1,420 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                                        |       |   |   |
| Stock-based compensation                                                     |       | 44                                          |       | — |   |
| Depreciation and amortization                                                |       | 67                                          |       | 157 |   |
| Net changes in operating assets and  liabilities:                            |       |                                        |       |   |   |
| Accounts receivable                                                          |       | (678                                        | )          | (1,221 | ) |
| Prepaid expenses and other current assets                                    |       | (57                                         | )          | 239 |   |
| Other assets                                                                 |       | 11                                          |       | — |   |
| Accounts payable                                                             |       | 153                                         |       | 665 |   |
| Accrued expenses                                                             |       | (132                                        | )          | 162 |   |
| Deferred revenue                                                             |       | 12                                          |       | 9 |   |
| Net cash used in operating activities                                        |       | (2,271                                      | )          | (1,409 | ) |
|                                                                         |       |                                        |       |   |   |
| Cash flows from investing activities:                                        |       |                                        |       |   |   |
| Redemptions of short-term investments                                        |       | 524                                         |       | 4,246 |   |
| Purchases of short-term investments                                          |       | (21                                         | )          | (2,576 | ) |
| Net cash provided by investing activities                                    |       | 503                                         |       | 1,670 |   |
|                                                                         |       |                                        |       |   |   |
| Cash flows from financing activities:                                        |       |                                        |       |   |   |
| Repayments of debt                                                           |       | (10                                         | )          | (13 | ) |
| Proceeds from issuance of common stock  through stock plans                  |       | 27                                          |       | 21 |   |
| Repurchase of common stock                                                   |       | —                                      |       | (1,738 | ) |
| Net cash provided by (used in) financing  activities                         |       | 17                                          |       | (1,730 | ) |
| Net decrease in cash and cash equivalents                                    |       | (1,751                                      | )          | (1,469 | ) |
| Cash and cash equivalents, beginning of  period                              |       | 9,073                                       |       | 9,334 |   |
| Cash and cash equivalents, end of period                                     |       | $                                           | 7,322      |   | $ | 7,865 |   |

 

See accompanying notes.

 

5

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**INSWEBCORPORATION**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

***(unaudited)***

 

**1. Business of InsWeb**

 

InsWeb Corporation operates an onlineinsurance marketplace that enables consumers to comparison shop online and toobtain insurance company-sponsored quotes for a variety of insurance products,including automobile, homeowners and term life. InsWeb’s marketplaceelectronically matches consumers and insurance providers. InsWeb has combinedextensive knowledge of the insurance industry, technological expertise andclose relationships with a significant number of insurance companies to developan integrated online marketplace.

 

InsWeb’s principal source of revenues is transactionfees from participating insurance providers, either directly from an insurancecompany or from a local insurance agent. While quotes obtained through InsWeb’sonline insurance marketplace are provided to consumers free of charge, InsWebearns revenues from participating insurance companies or agents based on thedelivery of qualified leads. These fees are earned either from an insurancecompany based on a closed policy, from the delivery of a lead to aparticipating insurance provider or local agent, or from a commission earned byInsWeb’s insurance agency, InsWeb Insurance Services, Inc. In certaininstances, consumers are provided the opportunity to link directly to a thirdparty insurance provider’s website. In these situations, the consumer willcomplete the third party company’s online application, and InsWeb will be paida fee for that consumer link or click-through.

 

InsWeb is subject to all of the risks inherent inthe electronic commerce industry and special risks related to the onlineinsurance industry. These risks include, but are not limited to, uncertaineconomic conditions which could result in lower growth rates, the changingnature of the electronic commerce industry, variations in the availability andcost of acquiring consumer traffic, unpredictability of future revenues,reliance on key customers –insurance carriers, agents and other providers – whoare themselves subject to volatility in their operating cycles, and reliance ona third party intermediary who provides leads to local insurance agents onInsWeb’s behalf. These risks and uncertainties, among others, could causeInsWeb’s actual results to differ materially from historical results or thosecurrently anticipated. In light of the evolving nature of InsWeb’s business tobetter capitalize on its position as a leading insurance portal, including thecurrent expansion of InsWeb’s agent network program, InsWeb believes thatperiod-to-period comparisons of its operating results are not necessarilymeaningful and should not be relied upon as an indication of futureperformance. Moreover, there is no assurance that InsWeb will be able toachieve or sustain profitability.

 

InsWeb has incurred operating losses of $6.3 millionin 2005, $9.2 million in 2004, and $7.0 million in 2003, and as of March 31,2006, our accumulated deficit was $190.3 million. In addition, InsWeb’s operating activities to date have consumedsubstantial amounts of cash, cash equivalents and short-term investments ($5.3million in 2005, $8.7 million in 2004, and $4.2 million in 2003) and willcontinue to require capital in the near future. At March 31, 2006, InsWeb had$8.0 million in cash, cash equivalents and short-term investments. The losses and the related accumulateddeficit are a result of the significant costs incurred in the development ofInsWeb’s technology 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, among otherthings, even though the Company will not be required to comply with Section 404 of the Sarbanes-Oxley Act until 2007. Asa result, InsWeb believes that it will continue to incur operating losses forthe next six to nine months. 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.

 

6

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**2. Basis of Presentation**

 

The condensed consolidated financial statementsinclude the accounts of InsWeb Corporation and its wholly-owned subsidiaries,InsWeb Insurance Services, Inc. and Goldrush Insurance Services, Inc. (“InsWeb”or the “Company”). All significant inter-company accounts and transactions havebeen eliminated in the consolidated financial statements.

 

The accompanying unaudited interim financialstatements have been prepared in accordance with U.S. generally acceptedaccounting principles for interim financial information and with theinstructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, theydo not contain all of the information and footnotes required by U.S. generallyaccepted accounting principles for complete financial statements. In theopinion of management, the accompanying unaudited interim condensedconsolidated financial statements reflect all adjustments, which include onlynormal recurring adjustments, necessary to present fairly InsWeb’s financialposition as of March 31, 2006 and the results of operations and cash flows forthe three months ended March 31, 2006 and 2005. The financial data and otherinformation disclosed in these notes to the condensed consolidated financial statementsrelated to these periods are unaudited. The results for the three months endedMarch 31, 2006 are not necessarily indicative of the results to be expected forthe year ending December 31, 2006.

 

These condensed consolidated financial statements shouldbe read in conjunction with the consolidated financial statements and notesthereto included in InsWeb’s Annual Report on Form 10-K and other informationas filed with the Securities and Exchange Commission. Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States have beencondensed or omitted pursuant to such rules and regulations.  The December31, 2005 condensed consolidated balance sheet was derived from auditedfinancial statements, but does not include all disclosures required byaccounting principles generally accepted in the United States.  However,the Company believes the disclosures are adequate to make the information presentednot misleading.

 

Basic earnings per share is computed using theweighted-average number of shares of common stock outstanding. Diluted earningsper share would reflect the potential dilution that would occur if stockoptions and warrants had been exercised. For the three month periods endedMarch 31, 2006 and 2005, common equivalent shares from stock options andwarrants were excluded from the computation of net loss per share-diluted astheir effect was antidilutive.

 

**3. Stock-Based Compensation**

 

**Stock Plans**

 

In July 1997, InsWeb authorized the 1997Stock Option Plan (the “Option Plan”) and the Senior Executive Option Plan (the“Executive Plan”). Under the Option Plan, the Board of Directors may issueincentive stock options to employees of InsWeb and its subsidiaries and mayalso issue nonqualified stock options to employees, officers, directors,independent contractors and consultants of InsWeb and its subsidiaries. Underthe Executive Plan, the Board of Directors may issue nonqualified stock optionsto employees, officers and directors of InsWeb and its subsidiaries. InMay 2003, the Option Plan was amended, with stockholder approval, toprovide that each director would receive a fully-vested option to purchase5,000 shares of common stock on July 1st (or the first businessday thereafter) of each year in which the director remains in office. Thisoption grant is in lieu of previously granted options for each Board orcommittee meeting attended. The Option Plan provides for an automatic annualincrease in the share reserve, to be effective on the first day of each fiscalyear, by a number of shares equal to 5% of the number of common sharesoutstanding as of the last day of the preceding fiscal year. Options grantedunder both plans are priced at the fair market value on the date of grant and priorto January 1, 2006 generally vested in equal monthly installments over a threeyear period; subsequent to January 1, 2006 options granted will generally vest overa one year period. Certain options granted to members of InsWeb’s Board ofDirectors vest immediately. Prior to January 1, 2006, options expired ten yearsfrom the date of grant, subsequent to January 1, 2006 options expire five yearsfrom date of grant.

 

7

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On October 19, 2005, the Compensation Committee ofthe Board of Directors of InsWeb Corporation approved the acceleration ofvesting of all stock options outstanding as of October 19, 2005 held byemployees. Options to purchase approximately 496,000 shares of common stock, or33% of the total outstanding options, with varying remaining vesting schedules,were subject to the acceleration and became immediately exercisable. All otherterms and conditions applicable to such options, including the exercise prices,remained unchanged.

 

InsWeb has an Employee Stock Purchase Plan(the “Purchase Plan”) under which eligible employees may authorize payrolldeductions of up to 15% of their compensation to purchase shares at 85% of thelower of the fair market value of the common stock on the date of commencementof the offering or on the last day of the six-month purchase period. During thethree months ended March 31, 2006, 4,500 shares were distributed to employeesat the price of $2.48 per share. The weighted average fair value of theseawards was $0.86 per share. At March 31, 2006, InsWeb had 369,000 sharesof its common stock reserved for future issuance under the Purchase Plan.

 

**Share-Based Compensation**

 

OnJanuary 1, 2006, the Company adopted the provisions of Statement of FinancialAccounting Standards No. 123(R) (“SFAS 123(R)”), “Share-Based Payments,”requiring it to recognize expense related to the fair value of its share-basedcompensation awards. The Company elected to use the modified prospective transitionmethod as permitted by SFAS 123(R) and therefore has not restated its financialresults for prior periods. Under this transition method, share-basedcompensation expense for the three months ended March 31, 2006 includesall share-based compensation awards granted subsequent to January 1, 2006 basedon the grant-date fair value estimated in accordance with the provisions ofSFAS 123(R). The Company recognizes compensation expense for stock optionawards issued subsequent to January 1, 2006 on a straight-line basis over therequisite service period of the award.  All options issued prior toJanuary 1, 2006 were fully vested at the date of adoption of SFAS 123(R), andtherefore, no compensation expense was recognized for these options for the threemonths ended March 31, 2006.

 

Thefollowing table sets forth the total share-based compensation expense resultingfrom stock options included in the Company’s operating expenses in itsCondensed Consolidated Statements of Operations for the three months ended March31, 2006 (in thousands):

 
| Included in  operating expenses: |   |   |   |
|----------------------------------|--------|--------|--------|
| Sales and  marketing             |   | $      | 44     |   |
| Technology                       |   | — |   |
| General and  administrative      |   | — |   |
| Total stock-based  compensation  |   | $      | 44     |   |

 

Prior to the adoption of SFAS 123(R), InsWeb accounted for its stock-basedcompensation plans under the recognition and measurement principles of APBOpinion No. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations. The following table illustrates the effect on net loss and netloss per share if InsWeb had applied the fair value recognition provisions ofFinancial Accounting Standards Board Statements No. 123 “Accounting forStock-Based Compensation” and No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure*,*”to stock-based employee compensation for the three months ended March 31, 2005(in thousands, except per share amounts):

 
| Net loss, as reported                                                                                      |   | $      | (1,420 | ) |
|------------------------------------------------------------------------------------------------------------|--------|--------|--------|---|
| Deduct: Stock-based employee compensation  expense determined under fair value based method for all awards |   | (129   | )      |
| Proforma net loss                                                                                          |   | $      | (1,549 | ) |
| Net loss per share:                                                                                        |   |   |   |
| Basic and diluted—as reported                                                                         |   | $      | (0.30  | ) |
| Basic and diluted—pro forma                                                                           |   | $      | (0.32  | ) |

 

8

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Thefair value of stock-based awards granted pursuant to the Company’s stock optionplans was estimated using the Black-Scholes model with the followingassumptions for the three months ended March 31, 2006:

 
| Expected term (in years)                  |   | 3.00 |   |
|-------------------------------------------|--------|------|--------|
| Expected volatility                       |   | 0.69 |   |
| Risk-free interest rate                   |   | 4.0  | %      |
| Expected dividend                         |   | 0    | %      |
| Weighted-average fair value at grant date |   | $    | 1.49   |   |
|                                           |        |      |        |  |

 

***Expected Term.*** The expected term represents the period that theCompany’s stock-based awards are expected to be outstanding and was determinedbased on the Company’s historical experience with similar awards, givingconsideration to the contractual terms of the share-based awards, vestingschedules and expectations of future employee behavior as influenced by changesto the terms of its share-based awards.

 

***Expected Volatility.*** The Company uses the trading history of its commonstock in determining an estimated volatility factor when using theBlack-Scholes option-pricing formula to determine the fair value of optionsgranted.

 

***Risk-Free Interest Rate.*** The Company bases the risk-free interest rate used inthe Black-Scholes valuation method on the implied yield currently available onU.S. Treasury zero-coupon issues with the same or substantially equivalentremaining term.

 

***Expected Dividend.***The Company has not declared dividends to date.Therefore, the Company uses a zero value for the expected dividend value factorwhen using the Black-Scholes option-pricing formula to determine the fair valueof options granted.

 

***Estimated Forfeitures.*** SFAS 123(R) requires forfeitures to be estimated atthe time of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from initial estimates. When estimating forfeitures, theCompany considers historical voluntary and involuntary termination behavior aswell as analysis of actual option forfeitures.

 

Activity under all of the Company’s stockoption plans for the three months ended March 31, 2006 was as follows:

 
| **(in thousands, except exercise price amounts)** | ** ** | **Shares  Available  for Grant** | ** ** | **Shares  Outstanding** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------|------------|--------------------------------------------|------------|
|                                                                       |       |                                  |       |                    |       |                                       |       |
| Balances, December 31, 2005                                                |       | 888                                   |       | 1,471                   |       | $                                          | 6.98       |   |
| Additional shares reserved                                                 |       | 203                                   |       | —                  |       | —                                     |       |
| Granted                                                                    |       | (30                                   | )          | 30                      |       | $                                          | 4.00       |   |
| Exercised                                                                  |       | —                                |       | (6                      | )          | $                                          | 2.88       |   |
| Canceled / forfeited                                                       |       | 33                                    |       | (33                     | )          | $                                          | 4.95       |   |
| Balances, March 31, 2006                                                   |       | 1,094                                 |       | 1,462                   |       | $                                          | 6.97       |   |
| Vested and exercisable at March 31, 2006                                   |       |                                  |       | 1,462                   |       | $                                          | 6.97       |   |

 

The aggregate intrinsicvalue of options outstanding and exercisable at March 31, 2006 was $136,000.Aggregate intrinsic value represents the total intrinsic value (the aggregatedifference between the closing stock price of the Company’s common stock onMarch 31, 2006 and the exercise price for in-the-money options) that would havebeen received by the option holders if all options had been exercised on March31, 2006.  The total intrinsic value of options exercised in the threemonths ended March 31, 2006 was $2,000. The weighted-average remainingcontractual term of options outstanding and exercisable at March 31, 2006 was7.2 years.

 

9

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Asof March 31, 2006, there was no unrecognized compensation cost as all stockoptions outstanding were vested.  The Company’s current practice is toissue new shares to satisfy share option exercise.

 

Cashreceived from option exercises and purchases under the Purchase Plan for thethree months ended March 31, 2006 was $27,000.

 

Therewas no tax benefit attributable to options exercised in the three months endedMarch 31, 2006.

 

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

 

For the three months ended March 31, 2006,three customers accounted for 17%, 12% and 10% of total revenues, respectively.For the three months ended March 31, 2005, one customer accounted for 28%of revenues. At March 31, 2006one customer accounted for 12% of accounts receivable. At December 31, 2005, three customersaccounted for 24%, 11%, and 11% of accounts receivable, respectively.

 

**5. Accrued Expenses**

 

Accrued expenses consist of the following (inthousands):

 
| ** **                             | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                   |       |                     |       |                        |       |
| Accrued lease obligations (see Note 7) |       | $                        | 1,794      |                        | $          | 1,874 |   |
| Accrued employee compensation          |       | 505                      |       | 586                         |       |
| Deferred rent                          |       | 520                      |       | 527                         |       |
| Other                                  |       | 133                      |       | 107                         |       |
| Total                                  |       | $                        | 2,952      |                        | $          | 3,094 |   |

 

**6. Comprehensive Loss**

 

Total comprehensive loss was as follows (inthousands):

 
| ** **                                                             | ** ** | **Three months ended March 31,** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
|                                                                   |       |                                                 |       |   |   |
| Net loss                                                               |       | $                                                    | (1,691     | ) | $ | (1,420 | ) |
| Other comprehensive income - change in  unrealized gain on investments |       | 1                                                    |       | 2 |   |
| Total  comprehensive loss                                              |       | $                                                    | (1,690     | ) | $ | (1,418 | ) |

 

10

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**7. Commitments and Contingencies**

 

**Leases**

 

InsWeb is contractually obligated to makefuture lease payments on certain formerly occupied facilities throughSeptember 2008. As of March 31, 2006, total future obligations for thesefacilities amounted to $6.2 million; these obligations are offset by totalcontractual future sublease income of approximately $5.2 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 amended sublease,InsWeb would be responsible for making the required lease payments to thelandlord through the remaining term of the lease. In connection with this leaseand other lease obligations for formerly occupied facilities, InsWeb must makeassumptions regarding the estimated future sublease income relative to thesefacilities. Based on these assumptions, the Company has recorded an accrual of$1.8 million as of March 31, 2006 for lease commitments related to theseformerly occupied facilities, as compared to an accrual of $1.9 million as ofDecember 31, 2005. These estimates and assumptions are affected byarea-specific conditions such as new commercial development, market occupancyrates and future market prices.

 

**Securities Class Action Lawsuit**

 

A securities class action lawsuit was filedon December 5, 2001 in the United States District Court for the SouthernDistrict of New York, (the “Court”) purportedly on behalf of all persons whopurchased our common stock from July 22, 1999 through December 6,2000. The complaint named as defendants InsWeb, certain current and formerofficers and directors, and three investment banking firms that served asunderwriters for InsWeb’s initial public offering in July 1999. Thecomplaint, as subsequently amended, alleges violations of Sections 11 and 15 ofthe Securities Act of 1933 and Sections 10 and 20 of the Securities ExchangeAct of 1934, on the grounds that the prospectuses incorporated in theregistration statements for the offering failed to disclose, among otherthings, that (i) the underwriters had solicited and received excessive andundisclosed commissions from certain investors in exchange for which theunderwriters allocated to those investors material portions of the shares ofour stock sold in the offerings and (ii) the underwriters had entered intoagreements with customers whereby the underwriters agreed to allocated sharesof the stock sold in the offering to those customers in exchange for which thecustomers agreed to purchase additional shares of InsWeb stock in the aftermarketat pre-determined prices. No specific damages are claimed. Similar allegationshave been made in lawsuits relating to more than 300 other initial publicofferings conducted in 1999 and 2000, all of which have been consolidated forpretrial purposes. In October 2002, all claims against the individualdefendants were dismissed without prejudice. In February 2003, the Courtdismissed the claims in the InsWeb action alleging violations of the SecuritiesExchange Act of 1934 but allowed the plaintiffs to proceed with the remainingclaims. In June 2003, the plaintiffs in all of the cases presented asettlement proposal to all of the issuer defendants. Under the proposedsettlement, the plaintiffs will dismiss and release all claims againstparticipating defendants in exchange for a contingent payment guaranty by theinsurance companies collectively responsible for insuring the issuers in allthe related cases, and the assignment or surrender to the plaintiffs of certainclaims the issuer defendants may have against the underwriters. InsWeb and mostof the other issuer defendants have accepted the settlement proposal. OnApril 24, 2006, a hearing was held to consider final approval of thesettlement; the Court’s ruling on final approval of the settlement remainspending. If the Court does not approve the settlement, InsWeb intends to defendthe lawsuit vigorously. The litigation and settlement process is inherentlyuncertain and we cannot predict the outcome, though, if unfavorable, it couldhave a material adverse effect on InsWeb’s financial condition, results ofoperations and cash flows.

 

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**8. Stockholders’ Equity**

 

#### **Negotiated common stockrepurchases**

####  

In March 2005, the Board of Directorsauthorized management to repurchase 755,821 shares of InsWeb common stock,consisting of 531,947 shares held by Nationwide Mutual Insurance Company and223,874 shares held by Century Capital Partners, L.P. These shares represented16% of the total outstanding shares at that date and were purchased for approximately$1.7 million, or $2.30 per share. Subsequent to the closing of thesetransactions on March 31, 2005, Nationwide Mutual and Century Capital held noshares.

 

**9. Subsequent Events**

 

**Sale of Property and Casualty Agency Book ofBusiness**

 

In March 2006, the InsWeb Insurance Services agency discontinuedselling property and casualty insurance policies, which represented less than7% of the Company’s total revenues in the year ended December 31, 2005 and 5%of total revenues for the three months ended March 31, 2006. The Company’sagency subsidiary will continue to sell term life insurance. In connection withthis action, the Company entered into a definitive agreement to sell InsWebInsurance Services’ property and casualty “book of business,” includingapproximately 9,500 current policy holders. This transaction closed on April 28,2006. Total proceeds from this transaction will be approximately $2.0 million,and substantially all of this amount was paid at or before closing.

 

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

 

*This Quarterly Report onForm 10-Q, and in particular Management’s Discussion and Analysis ofFinancial Condition and Results of Operations, contains “forward-lookingstatements” with respect to InsWeb’s future financial performance. The words orphrases “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,”and similar expressions are generally intended to identify forward-lookingstatements. Such forward-looking statements are subject to various known andunknown risks and uncertainties, and InsWeb cautions you that anyforward-looking information provided by, or on behalf of, InsWeb is not aguarantee of future performance. Actual results could differ materially fromthose anticipated in such forward-looking statements due to a number offactors, some of which are beyond InsWeb’s control, including, but not limitedto, uncertain economic conditions which could result in lower growth rates,decreasing revenue and reduced participation in InsWeb’s marketplace,anticipated losses, the unpredictability of future revenues, reliance on keycustomers—property and casualty insurance carriers- who are themselves subjectto volatility in their operating cycles, reliance on a third party intermediarywho provides leads to local insurance agents on InsWeb’s behalf, competition,risks associated with system development and operation risks, management ofpotential growth and risks of new business areas, business combinations, andstrategic alliances. These risks and uncertainties, as well as other risks anduncertainties, which are described in greater detail in InsWeb’s Annual Reporton Form 10-K for the year ended December 31, 2005 and other documents filedwith the Securities and Exchange Commission, could cause InsWeb’s actualresults to differ materially from historical results or those currentlyanticipated. All forward-looking statements are based on information availableto InsWeb on the date hereof, and InsWeb assumes no obligation to update suchstatements.*

 

**Overview**

 

InsWeb operates an online insurancemarketplace that enables consumers to comparison shop online and to obtaininsurance company-sponsored quotes for a variety of insurance products,including automobile, homeowners and term life. InsWeb’s marketplaceelectronically matches consumers and insurance providers. InsWeb has combinedextensive knowledge of the insurance industry, technological expertise andclose relationships with a significant number of insurance companies to developan integrated online marketplace.

 

InsWeb’s principal source of revenues is transactionfees from participating insurance providers, either directly from an insurancecompany or from a local insurance agent. While quotes obtained through InsWeb’sonline insurance marketplace are provided to consumers free of charge, InsWebearns revenues from participating insurance companies or agents based on thedelivery of qualified leads. These fees are earned either from an insurancecompany based on a closed policy, from the delivery of a lead to aparticipating insurance provider or local agent, or from a commission earned byInsWeb’s insurance agency subsidiary, InsWeb Insurance Services, Inc. Incertain instances, consumers are provided the opportunity to link directly to athird party insurance provider’s website. In these situations, which we referto as InsWeb’s Sponsored Web Link program, the consumer will complete the thirdparty company’s online application, and InsWeb will be paid a fee for thatconsumer link or click-through.

 

In 2004, InsWeb launched its term life agencybusiness in an effort to increase revenue per consumer within the term lifemarketplace. The conversion from a lead-based revenue model to acommission-based revenue model resulted in a delay in revenue recognition, asit typically takes 90 to 120 days to complete the sales process for a term lifepolicy. At the time the term life agency business was launched, the Company wasuncertain whether the transaction data available was sufficient to reliablyestimate cancellations for purposes of satisfying the criteria in Statement ofFinancial Accounting Standards No. 48, “Revenue Recognition When Right ofReturn Exists,” for service transactions subject to customer cancellationprivileges. Accordingly, during the initial deployment period of thecommission-based model, the Company recognized commission revenue on a ratablebasis over the initial term of the related policy as the cancellationprivileges expired. Based on term life agency activity and cancellation dataaccumulated since the launch, management determined in April 2005 that it isappropriate to use the historical cancellation rate to estimate a cancellationallowance for term life agency transactions and the Company, therefore,recognizes revenue from its term life agency business when commissions areearned, net of an estimate for future cancellations based on its historicalcancellation rate.

 

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Alsoin 2004, InsWeb launched its agent network program which provides online autoinsurance consumers access to local insurance agents. Prior to September 12,2005, the agent network program was conducted exclusively through anintermediary, NetQuote, Inc. During the year ended December 31, 2005, NetQuoterepresented 29% of auto transaction fees, compared to 8% during the year endedDecember 31, 2004. For the three months ended March 31, 2006 and 2005, NetQuoterepresented 21% and 27% of auto transaction fees, respectively. InsWeb does nothave an exclusive or long-term contract with this intermediary.

 

To lessen InsWeb’s relianceon this intermediary, and to maximize its revenue potential, InsWeb launched aproprietary agent network program (“AgentInsider”) to provide leads directly tolocal insurance agents who have registered with InsWeb. Generally, leads are delivered to the highestbidding agents; however, InsWeb may enter into agreements with insurancecompanies, large agencies and insurance related entities by which theseproviders pay a set fee for each lead. However, as is the case with many new initiatives, we have experienceda reduction in revenue per consumer, compared to the revenue per consumer wewould have received from our intermediary for the same consumer lead, in theinitial phases of the program. The length of time and extent of this reductionwill depend on the rate of registration of local personal lines insuranceagents and the degree of participation of these agents throughout the country.We expect that the agent network program, both through the intermediary andthrough our internally developed network, will continue to represent asignificant percentage of auto transaction fees. At March 31, 2006, theAgentInsider program had approximately 2,100 local insurance agents activelypurchasing consumer leads, representing 39% of the consumers who shop theInsWeb auto insurance marketplace. This is an increase from 1,500 agents purchasingleads, representing 29% of the auto insurance consumers at December 31, 2005.

 

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 79% of our transaction revenues in 2005, approximately 77% in2004 and approximately 79% in 2003. We anticipate that automobile insurancewill continue to account for a substantial portion of our revenues for theforeseeable future.

 

InsWeb has incurred operating losses of $6.3 millionin 2005, $9.2 million in 2004, and $7.0 million in 2003, and as of March 31,2006, our accumulated deficit was $190.3 million. In addition, InsWeb’s operating activities to date have consumedsubstantial amounts of cash, cash equivalents and short-term investments ($5.3million in 2005, $8.7 million in 2004, and $4.2 million in 2003) and willcontinue to require capital in the near future. At March 31, 2006, InsWeb had $8.0million in cash, cash equivalents and short-term investments. The losses and the related accumulateddeficit are a result of the significant costs incurred in the development ofInsWeb’s technology 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 of compliancewith the provisions of the Sarbanes-Oxley Act of 2002, among other things, eventhough the Company will not be required to comply with Section 404 of the Sarbanes-Oxley Act until 2007. Asa result, InsWeb believes that it will continue to incur operating losses forthe next six to nine months. 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 as required,it may delay, significantly reduce or cease certain of its operations, whichcould adversely affect its results of operations and financial position.

 

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**Results of Operations**

 

The following table sets forth statement ofoperations data with the respective percentage change from the prior year:

 
| ** **                       | ** ** | **Three months ended March 31,** | ** ** | **Percentage  change from** | ** ** |
|----------------------------------|------------|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                       | ** ** | **2006**                                             | ** ** | **2005**                         | ** ** | **prior period** | ** ** |
| Revenues:                        |       |                                                 |       |                             |       |   |   |
| Transaction fees:                |       |                                                 |       |                             |       |   |   |
| Auto insurance                   |       | $                                                    | 5,998      |                             | $          | 4,698 |   | 28 | % |
| Term life insurance              |       | 1,321                                                |       | 828                              |       | 59 | % |
| Other insurance offerings        |       | 246                                                  |       | 80                               |       | 208 | % |
|                             |       | 7,565                                                |       | 5,606                            |       | 35 | % |
| Development and maintenance fees |       | 90                                                   |       | 88                               |       | 3 | % |
| Total revenues                   |       | 7,655                                                |       | 5,694                            |       | 34 | % |
| Operating expenses:              |       |                                                 |       |                             |       |   |   |
| Direct marketing                 |       | 4,945                                                |       | 3,156                            |       | 57 | % |
| Sales and marketing              |       | 2,064                                                |       | 1,546                            |       | 33 | % |
| Technology                       |       | 1,253                                                |       | 1,372                            |       | (9 | )% |
| General and administrative       |       | 1,176                                                |       | 1,132                            |       | 4 | % |
| Total operating expenses         |       | 9,438                                                |       | 7,206                            |       | 31 | % |
| Loss from operations             |       | $                                                    | (1,783     | )                                | $          | (1,512 | ) | 18 | % |

 

The following table sets forth statement ofoperations data as a percentage of total revenues:

 
| ** **                       | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------------|------------|------------------------------------------------------|------------|
| ** **                       | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| Revenues:                        |       |                                                 |       |   |   |
| Transaction fees:                |       |                                                 |       |   |   |
| Auto insurance                   |       | 78.3                                                 | %          | 82.5 | % |
| Term life insurance              |       | 17.3                                                 | %          | 14.6 | % |
| Other insurance                  |       | 3.2                                                  | %          | 1.4 | % |
| Development and maintenance fees |       | 1.2                                                  | %          | 1.5 | % |
| Total revenues                   |       | 100.0                                                | %          | 100.0 | % |
| Operating expenses:              |       |                                                 |       |   |   |
| Direct marketing                 |       | 64.6                                                 | %          | 55.4 | % |
| Sales and marketing              |       | 27.0                                                 | %          | 27.2 | % |
| Technology                       |       | 16.4                                                 | %          | 24.1 | % |
| General and administrative       |       | 15.3                                                 | %          | 19.9 | % |
| Total operating expenses         |       | 123.3                                                | %          | 126.6 | % |
| Loss from operations             |       | (23.3                                                | )%         | (26.6 | )% |

 

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Directmarketing (consumer acquisition) metrics and costs and revenue per consumer wereas follows:

 
| ** **                                                                                                 | ** ** | **Quarter ended March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **(In thousands,**** except percentages and per consumer amounts****)** | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| Direct marketing costs                                                                                     |       | $                                          | 4,945      |   | $ | 3,156 |   |
| Direct marketing costs as a percent of  transaction fees                                                   |       | 65                                         | %          | 56 | % |
| Number of consumers                                                                                        |       | 1,556                                      |       | 1,091 |   |
| Direct marketing cost per consumer                                                                         |       | $                                          | 3.18       |   | $ | 2.89 |   |
| Transaction fee revenue per consumer                                                                       |       | $                                          | 4.86       |   | $ | 5.14 |   |

 

Automarketplace metrics were as follows:

 
| ** **                                                                       | ** ** | **Quarter ended March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **(In thousands,**** except per consumer amounts****)** | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| Auto insurance  transaction revenues                                             |       | $                                          | 5,998      |   | $ | 4,698 |   |
| Number of  consumers                                                             |       | 1,424                                      |       | 968 |   |
| Auto insurance transaction fees per  consumer                                    |       | $                                          | 4.21       |   | $ | 4.85 |   |

 

Term lifemarketplace metrics were as follows:

 
| ** **                                                                       | ** ** | **Quarter ended March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **(In thousands,**** except per consumer amounts****)** | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| Term life  insurance transaction revenues                                        |       | $                                          | 1,321      |   | $ | 828 |   |
| Number of  consumers                                                             |       | 87                                         |       | 93 |   |
| Term life insurance transaction fees per  consumer                               |       | $                                          | 15.18      |   | $ | 8.90 |   |

 

Definitions:

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

 

**Revenues**

 

**Transaction Fees.**Transaction fees (consisting of lead fees,closed policy fees and sponsored link fees) relating to automobile insuranceincreased to $6.0 million for the three months ended March 31, 2006, from$4.7 million for the comparable period in 2005, an increase of 28%. Theincrease was attributable to a 47% increase in consumer traffic (consumers whohave started the InsWeb auto application) from the comparable period in 2005, offsetby a decrease in the revenue per consumer. Revenue per auto consumer decreased to $4.21 for the three months ended March 31, 2006 from $4.85 for the comparable period in 2005; this decrease is primarily a result of a lower rate ofconversion of consumers who start an application and ultimately purchase apolicy, as well as the transition from our third party intermediary agentnetwork to our proprietary agent network, AgentInsider, which was launched inSeptember 2005. Management’scurrent expectations are for revenue per auto consumer to increase from currentlevels throughout 2006, due to continued growth and improvement of the AgentInsiderprogram.

 

Transaction fees (consisting of agency commissionsand to a lesser extent lead fees) relating to term life insurance increased to$1.3 million for the three months ended March 31, 2006 from$0.8 million for the comparable period in 2005. The increase in revenues reflects thecompleted transition of our term life agency to a commission-based revenuemodel from a lead-based revenue model, as discussed above.

 

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**Operating Expenses**

 

**DirectMarketing.**Directmarketing expenses consist of advertising, promotions and fees paid to onlinecompanies to drive consumer traffic to the InsWeb online marketplace. InsWeb’smarketing strategy is designed to increase consumer traffic to its website andto drive awareness of its insurance products and services. The Company employsvarious means of advertising, which consist primarily of online advertising,sponsored search, portal advertising, e-mail campaigns and strategicpartnerships with high-profile online companies that can drive significanttraffic to the InsWeb site. Fees related to the Company’s online marketing areexpensed in the period the related consumer click-through occurs or in somecases, when the consumer leads are generated. Direct marketing expenses increased 57% to $4.9 million in the three months ended March 31, 2006, compared to $3.2 million in the sameperiod of 2005. This increase in spending drove a 43% increase in consumertraffic, compared to the 2005 level. Direct marketing cost per consumeracquired increased to $3.18 for thethree months ended March 31, 2006,compared to $2.89 per acquired consumer for the same period of 2005. The increasein the direct marketing cost per consumer is a result of the highly competitivemarket for on-line consumers, especially the on-line advertising market.Management expects that for the remainder of 2006, direct marketing costs perconsumer acquired will remain at or increase from current levels; and while theamount of consumer traffic driven to the InsWeb marketplace will fluctuateduring the year due to seasonality and the competitive environment for onlineconsumers, we currently expect that overall consumer traffic for 2006 will beat levels greater than 2005.

 

**Salesand Marketing.**Salesand marketing expenses consist primarily of payroll and related expenses,including employee benefits, facility costs, telecommunications and systemscosts, for InsWeb’s sales and marketing personnel and the personnel and relatedcosts for InsWeb’s Insurance Agency operations, which include selling agents,underwriters, supervisors and customer service and support groups. Sales andmarketing expenses increased to $2.1 million for the three months ended March 31, 2006 from $1.5 million for the comparable period in 2005, a 33% increase. This increase was a resultof the expansion of the term life agency and the launch of the AgentInsiderprogram (i.e., sales, customer support and agent marketing costs). Sales andmarketing expenditures are expected to increase throughout 2006, as the termlife agency operations continue to expand and as the AgentInsider programcontinues to grow with additional sales and support staff.

 

**Technology.**Technology expenses consist primarily ofpayroll and related expenses, including employee benefits, facility and systemscosts, for product and site development personnel involved with the planning,design and implementation of carrier and partner integration to the InsWebonline insurance marketplace, as well as hosting and supporting the technologyneeds of the InsWeb site. Technologyexpenses decreased to $1.3 million for the three months ended March 31,2006, from $1.4 million for the comparable period in 2005. The decreasewas primarily attributable to a reduction in headcount. Technology expenses forthe remainder of 2006 are expected to remain at or near current levels.

 

**General and Administrative.**General and administrative expenses consistprimarily of payroll and related expenses, including employee benefits,facility costs, telecommunications and systems costs, for InsWeb’s generalmanagement, administrative and accounting personnel, as well as other generalcorporate expenses. General andadministrative expenses increased to $1.2 million for the three monthsended March 31, 2006 from $1.1 million for the comparable period in 2005.The increase was primarily due to an increase in professional fees. General andadministrative expenses are expected to remain at or near current levels forthe remainder of 2006.

 

**Interest Income**

 

Interest income was $92,000 for the three monthsended March 31, 2006 and 2005. Interest income represents interest earned onInsWeb’s short-term investments.

 

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**Critical Accounting Policies**

 

InsWeb’s discussion and analysis of itsfinancial condition and results of operations are based on InsWeb’sconsolidated financial statements which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires InsWeb to make estimates and judgmentsthat affect the reported amounts of assets and liabilities and the disclosureof contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during the reporting period.InsWeb bases its estimates and judgments on historical experience and onvarious other factors that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates under differentassumptions or conditions. InsWeb believes the following critical accountingpolicies affect its more significant judgments and estimates used in thepreparation of its consolidated financial statements.

 

**Accrual for Lease Obligations.** InsWeb is contractuallyobligated to make future lease payments on certain formerly occupied facilitiesthrough September 2008. As of March 31, 2006 total future obligationsfor these facilities amounted to $6.2 million; these obligations are offset bytotal contractual future sublease income of approximately $5.2 million.Substantially all future sublease income is due from a sublessee who is astart-up company with a limited operating history and, therefore, there areinherent risks and uncertainties associated with its future operations and itsability to discharge its obligations through the term of the sublease. In theevent that the sublessee defaults on its contractual obligations under theamended sublease, InsWeb would be responsible for making the required leasepayments to the landlord through the remaining term of the lease. In connectionwith this lease and other lease obligations for formerly occupied facilities,InsWeb must make assumptions regarding the potential future sublease incomerelative to these facilities. These estimates and assumptions are affected byarea-specific conditions such as new commercial development, market occupancyrates and future market prices. Based on these assumptions, the Companymaintains an accrual for formerly occupied facilities. The remaining accrualfor lease obligation of formerly occupied facilities was $1.8 million at March31, 2006 as compared to an accrual of $1.9 million as of December 31, 2005.

 

**Contingencies.** As discussed in Note 7 of Notesto Condensed Consolidated Financial Statements in Part I of this report, aclass action lawsuit has been filed that alleges InsWeb violated certainfederal securities laws at the time of its initial public offering. Althoughsome claims against InsWeb in this class action have been dismissed and asettlement of these proceedings has been proposed and conditionally accepted,InsWeb cannot accurately predict the ultimate outcome of this matter at thistime and therefore, cannot estimate the range of probable loss, if any, due to theinherent uncertainties of litigation. InsWeb believes it has meritoriousdefenses; however InsWeb cannot assure that it will prevail in this action. Anunfavorable outcome could have a material adverse effect on InsWeb’s financialcondition, results of operations and cash flows.

 

**IncomeTaxes.** InsWebaccounts for income taxes in accordance with Statement of Financial AccountingStandards No. 109 (SFAS 109), *Accountingfor Income Taxes*. The deferred tax assets and/or liabilities aredetermined by multiplying the differences between the financial reporting andtax reporting bases for assets and liabilities by the enacted tax ratesexpected to be in effect when such differences are recovered or settled.

 

Thecarrying value of our deferred tax assets, which was $74 million at December31, 2005, is dependent upon our ability to generate sufficient future taxableincome. We have established a full valuation allowance against our net deferredtax assets for continuing operations to reflect the uncertainty of realizingthe deferred tax benefits, given historical losses. A valuation allowance isrequired when it is more likely than not that all or a portion of a deferredtax asset will not be realized. A review of all available positive and negativeevidence needs to be considered, including our past and future performance, themarket environment in which we operate, the utilization of tax attributes inthe past, and the length of carryforward periods and evaluation of potentialtax planning strategies. We expect to continue to maintain a full valuationallowance until an appropriate level of profitability is sustained or we areable to develop tax strategies that would enable us to conclude that it is morelikely than not that a portion of our deferred tax assets would be realizable.

 

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**Liquidity and Capital Resources**

 

At March 31, 2006, InsWeb’s principal source ofliquidity and overall cash position was $8.0 million, consisting of cash, cashequivalents and short-term investments, a decrease from $10.3 million atDecember 31, 2005. The decrease resulted from the use of $2.3 million ofcash in operating activities. The primary driver that impacts changes in theCompany’s overall cash position is its operating loss.

 

For the three months ended March 31, 2006, net cashused in operating activities was $2.3 million. The primary components of thequarterly use of cash was the net loss of $1.7 million and an increase inaccounts receivable of $0.7 million, partially offset by an increase inaccounts payable of $0.2 million. The increase in accounts receivable was aresult of the revenue growth during the quarter, with days sales outstanding at31 days for March 31, 2006. The increase in accounts payable was a result ofthe significant increase in direct marketing activities during the quarter,increasing consumer traffic to the InsWeb marketplace and a correspondingincrease in direct marketing costs.

 

For the three months ended March 31, 2006, net cashprovided by investing activities was $0.5 million, which primarily consisted ofredemptions of short-term investments offset by the purchases of short-terminvestments. Investing activities will generally fluctuate in conjunction withoperating activity needs.

 

For the three months ended March 31, 2006, net cashprovided by financing activities was $17,000 and was attributable to theexercise of employee stock options.

 

InsWeb leases its current office facilities undernon-cancelable operating leases, which expire at various dates throughApril 2011, including a 10-year lease agreement through 2011 for officespace in the Sacramento area which houses its corporate headquarters and agencyoperations. InsWeb has options to extend the lease at the end of the leaseterm, and has the right of first refusal on other office space in the complex.In addition, InsWeb has entered into various sublease arrangements associatedwith previously exited facilities that have terms extending throughSeptember 2008.

 

Aggregate contractual cash obligations as of March31, 2006 are summarized as follows (in thousands):

 
| ** **                           | ** ** | **Gross lease  commitments** | ** ** | **Sublease  income** | ** ** | **Net lease  commitment** | ** ** |
|--------------------------------------|------------|-----------------------------------|------------|----------------------|------------|--------------------------------|------------|
| Nine months ending December 31, 2006 |       | $                                 | 2,556      |                 | $          | (1,527                         | )          | $ | 1,029 |   |
| Year ending December 31, 2007        |       | 3,483                             |       | (2,100               | )          | 1,383                          |       |
| Year ending December 31, 2008        |       | 2,936                             |       | (1,615               | )          | 1,321                          |       |
| Year ending December 31, 2009        |       | 1,078                             |       | —               |       | 1,078                          |       |
| Year ending December 31, 2010        |       | 1,078                             |       | —               |       | 1,078                          |       |
| Thereafter                           |       | 359                               |       | —               |       | 359                            |       |
|                                 |       | $                                 | 11,490     |                 | $          | (5,242                         | )          | $ | 6,248 |   |

 

Our operations to date have consumed substantial amounts of cash, cashequivalents and short-term investments ($5.3 million in 2005 and $8.7 in 2004)and will continue to require capital in the near future. In order to remaincompetitive, we must continue to make investments which are essential to ourability to operate, including investments in direct marketing, technology andgeneral administration, including the governance and compliance costs requiredof a public 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 year.Longer-term, if the enhancements to our auto marketplace, including theexpansion of our agent network program, and the growth 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.

 

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

 

There have been no material changes to the Company’sdisclosures related to certain market risks as reported under Part II, Item 7A,“Quantitative and Qualitative Disclosures About Market Risk,” in our AnnualReport on Form 10-K for the year ended December 31, 2005, as filed withthe U.S. Securities and Exchange Commission.

 

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

 

(a)                                                 Under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, we evaluated the effectiveness of our disclosurecontrols and procedures, as such term is defined under Rule 13a-15(e)promulgated under the Securities Exchange Act of 1934, as amended. Based uponthat evaluation, our Chief Executive Officer and Chief Financial 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 March 31, 2006that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

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

 

**ITEM 1.****                                                    ****LEGAL PROCEEDINGS**

 

See Part I, Item 1, “Financial Statements —Note 7 — Commitments and Contingencies.”

 

**ITEM1A.****                                            RISKFACTORS.**

 

Our future business, operating results and financialcondition are subject to various risks and uncertainties, including thosedisclosed in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-Kfor the year ended December 31, 2005, as filed with the U.S. Securitiesand Exchange Commission. There have been no material changes to the riskfactors as disclosed

 

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**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. |

 

 

### **SIGNATURE**

###  

Inaccordance with the requirements of the Securities Exchange Act of 1934, theregistrant has caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 

 
| Dated: May 15, 2006 | **INSWEB  CORPORATION**     |
|---------------------|-----------------------------|
| ** **          | **(Registrant)**            |
|                |                        |
| ** **          | **/s/ WILLIAM  D. GRIFFIN** | ** ** |
|                | William D. Griffin          |
|                | Chief Financial Officer     |

 

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