**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

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**FORM 10-Q**

 
| **ý**                                                                                                                                                                                        | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                        | ** ** | ** **                                                                                               |
| **For the quarterly period ended September 30, 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**

 

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**INSWEB CORPORATION**

(Exact name of Registrant asspecified in its charter)

 
| **Delaware**                                                   | ** ** | **94-3220749**                      |
|----------------------------------------------------------------|------------|-------------------------------------|
| (State or other jurisdiction ofincorporation or organization)  |       | (IRS EmployerIdentification Number) |
|                                                           |       |                                |
| **11290 Pyrites Way, Suite 200 Gold River, California  95670** |
| (Address of principal executive offices)                       |

 

**(916)853-3300**

(Registrant’s telephonenumber, including area code)

 

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

 

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

 

Indicate by check mark whether the Registrantis a shell company (as defined in Rule12b-2 of the Exchange Act). Yes o No ý

 

The number of outstanding shares of theRegistrant’s Common Stock, par value $0.001 per share, on October 28, 2005 were4,057,626 shares.

 

 

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**FORM 10-Q**

**INSWEB CORPORATION**

**INDEX**

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

 

2

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

 

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

 

**INSWEB CORPORATION**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 

*(in thousands)*

*(unaudited)*

 
| ** **                                      | ** ** | **September 30****,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                      |       |                        |       |                        |       |
| **Assets**                                      |       |                        |       |                        |       |
| Current  assets:                                |       |                        |       |                        |       |
| Cash and cash equivalents                       |       | $                           | 8,573      |                        | $          | 9,334 |   |
| Short-term investments                          |       | 3,029                       |       | 8,145                       |       |
| Accounts receivable, net                        |       | 2,710                       |       | 1,025                       |       |
| Prepaid expenses and other current assets       |       | 679                         |       | 707                         |       |
| Total current assets                            |       | 14,991                      |       | 19,211                      |       |
| Property and  equipment, net                    |       | 562                         |       | 814                         |       |
| Other assets                                    |       | 378                         |       | 450                         |       |
| Total assets                                    |       | $                           | 15,931     |                        | $          | 20,475 |   |
|                                            |       |                        |       |                        |       |
| **Liabilities  and stockholders’ equity**  |       |                        |       |                        |       |
| Current  liabilities:                           |       |                        |       |                        |       |
| Accounts payable                                |       | $                           | 2,522      |                        | $          | 1,248 |   |
| Accrued expenses                                |       | 3,152                       |       | 3,456                       |       |
| Deferred revenue                                |       | 91                          |       | 56                          |       |
| Total current liabilities                       |       | 5,765                       |       | 4,760                       |       |
|                                            |       |                        |       |                        |       |
| Commitments and contingencies                   |       |                        |       |                        |       |
|                                            |       |                        |       |                        |       |
| Stockholders’  equity:                     |       |                        |       |                        |       |
| Common stock                                    |       | 7                           |       | 7                           |       |
| Paid-in capital                                 |       | 203,010                     |       | 202,961                     |       |
| Treasury stock                                  |       | (6,334                      | )          | (4,596                      | )          |
| Accumulated other comprehensive loss            |       | (1                          | )          | (8                          | )          |
| Accumulated deficit                             |       | (186,516                    | )          | (182,649                    | )          |
| Total stockholders’ equity                 |       | 10,166                      |       | 15,715                      |       |
| Total liabilities and stockholders’ equity |       | $                           | 15,931     |                        | $          | 20,475 |   |

 

See accompanying notes.

 

3

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**INSWEB CORPORATION**

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

 

*(in thousands, except per share amounts)*

*(unaudited)*

 
| ** **                                                                     | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                                                      | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Transaction fees                                                               |       | $                                     | 6,799      |                                 | $          | 3,228 |   | $ | 18,927 |   | $ | 10,246 |   |
| Development and  maintenance fees                                              |       | 99                                    |       | 147                                  |       | 269 |   | 550 |   |
| Total revenues                                                                 |       | 6,898                                 |       | 3,375                                |       | 19,196 |   | 10,796 |   |
|                                                                           |       |                                  |       |                                 |       |   |   |   |   |
| Operating expenses:                                                            |       |                                  |       |                                 |       |   |   |   |   |
| Technology                                                                     |       | 1,332                                 |       | 1,268                                |       | 4,121 |   | 4,188 |   |
| Sales and  marketing                                                           |       | 6,064                                 |       | 3,299                                |       | 16,054 |   | 9,967 |   |
| General and  administrative                                                    |       | 974                                   |       | 1,112                                |       | 3,177 |   | 3,551 |   |
| Total operating  expenses                                                      |       | 8,370                                 |       | 5,679                                |       | 23,352 |   | 17,706 |   |
| Loss from  operations                                                          |       | (1,472                                | )          | (2,304                               | )          | (4,156 | ) | (6,910 | ) |
| Interest income                                                                |       | 101                                   |       | 80                                   |       | 289 |   | 225 |   |
| Other expense                                                                  |       | —                                |       | —                               |       | — |   | (30 | ) |
|                                                                           |       |                                  |       |                                 |       |   |   |   |   |
| Net loss                                                                       |       | $                                     | (1,371     | )                                    | $          | (2,224 | ) | $ | (3,867 | ) | $ | (6,715 | ) |
|                                                                           |       |                                  |       |                                 |       |   |   |   |   |
| Net loss per share-basic and diluted                                           |       | $                                     | (0.34      | )                                    | $          | (0.47 | ) | $ | (0.90 | ) | $ | (1.43 | ) |
|                                                                           |       |                                  |       |                                 |       |   |   |   |   |
| Weighted-average  shares used in computing per share amounts-basic and diluted |       | 4,051                                 |       | 4,716                                |       | 4,291 |   | 4,690 |   |

 

See accompanying notes.

 

4

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**INSWEB CORPORATION**

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

*(in thousands)*

*(unaudited)*

 
| ** **                                                                   | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Cash flows  from operating activities:                                       |       |                                 |       |   |   |
| Net loss                                                                     |       | $                                    | (3,867     | ) | $ | (6,715 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                                 |       |   |   |
| Depreciation and amortization                                                |       | 412                                  |       | 672 |   |
| Net changes in operating assets and  liabilities:                            |       |                                 |       |   |   |
| Accounts receivable                                                          |       | (1,686                               | )          | (127 | ) |
| Prepaid expenses and other current assets                                    |       | 29                                   |       | 81 |   |
| Other assets                                                                 |       | (15                                  | )          | 4 |   |
| Accounts payable                                                             |       | 1,274                                |       | 865 |   |
| Accrued expenses                                                             |       | (250                                 | )          | (1,041 | ) |
| Deferred revenue                                                             |       | 36                                   |       | (175 | ) |
| Net cash used in operating activities                                        |       | (4,067                               | )          | (6,436 | ) |
| Cash flows  from investing activities:                                       |       |                                 |       |   |   |
| Redemptions of short-term investments                                        |       | 11,591                               |       | 26,041 |   |
| Purchases of short-term investments                                          |       | (6,468                               | )          | (23,473 | ) |
| Purchases of property and equipment                                          |       | (73                                  | )          | (137 | ) |
| Net cash provided by investing activities                                    |       | 5,050                                |       | 2,431 |   |
| Cash flows  from financing activities:                                       |       |                                 |       |   |   |
| Repayments of debt                                                           |       | (54                                  | )          | (65 | ) |
| Proceeds from issuance of common stock  through stock plans                  |       | 48                                   |       | 294 |   |
| Repurchase of common stock                                                   |       | (1,738                               | )          | — |   |
| Net cash (used in) provided by financing  activities                         |       | (1,744                               | )          | 229 |   |
| Net decrease  in cash and cash equivalents                                   |       | (761                                 | )          | (3,776 | ) |
| Cash and  cash equivalents, beginning of period                              |       | 9,334                                |       | 15,223 |   |
| Cash and  cash equivalents, end of period                                    |       | $                                    | 8,573      |   | $ | 11,447 |   |

 

See accompanying notes.

 

5

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**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, homeowners and term lifeinsurance coverage 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. These fees are earned either from aninsurance company based on a closed policy, from the delivery of a lead to aparticipating insurance provider or local agent, or from a commission or brokerfee earned by InsWeb’s insurance agencies, InsWeb Insurance Services, Inc.and Goldrush Insurance Services, Inc. In certain instances, consumers areprovided the opportunity to link directly to a third party insurance provider’swebsite. In these situations, the consumer will complete the third partycompany’s online application, and InsWeb will be paid a fee for that consumerlink 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 ina delay in revenue recognition, 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 are earned, net of anestimate for future cancellations based on its historical cancellation rate. 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.

 

In 2004,InsWeb launched its agent network program which provides online auto insuranceconsumers access to local insurance agents. Prior to September 12, 2005,the agent network program was conducted exclusively through an intermediary,NetQuote, Inc. During the three and nine months ended September 30, 2005,NetQuote, Inc. represented 31% of auto transaction fees, compared to 7% and 5%during the three and nine months ended September 30, 2004, respectively. InsWebdoes not have an exclusive or long-term contract with this intermediary.

 

6

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To lessen InsWeb’s reliance on thisintermediary, 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. AgentInsider waslaunched September 12, 2005 and complements the offering of our intermediary.However, we may experience a reduction in revenues during the initial roll-outof AgentInsider, depending on the rate of registration of local personal linesinsurance agents and the degree of participation of these agents throughout thecountry. We expect that the agent network program, both through theintermediary and through our internally developed network, will continue torepresent a significant percentage of auto transaction fees. However, the agentnetwork is subject to a number of uncertainties, including the cost ofdeveloping and marketing the program, and the continued participation of ourthird party intermediary. If we are unable to create a positive offering, ifNetQuote should cease to serve as our intermediary and we are unsuccessful insecuring a replacement, or if the transition of the agent network program fromthe intermediary to our internally developed AgentInsider program is delayed orotherwise unsuccessful, the Company’s business may be harmed.

 

InsWeb has focused its efforts on developing insurance company coveragefor automobile insurance in order to be able to offer true comparative onlineshopping for this important segment of the insurance market. Automobileinsurance accounted for approximately 74% of transaction revenues in 2004 and80% in the first nine months of 2005. We anticipate that automobile insurancewill continue to account for a significant portion of InsWeb’s revenues for theforeseeable future.

 

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 —insurancecarriers, agents and other providers — who are themselves subject to volatilityin their operating cycles, and reliance on a third party intermediary who providesleads to local insurance agents on InsWeb’s behalf. These risks anduncertainties, 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. Moreover, there is no assurance that InsWeb will be able toachieve or sustain profitability.

 

Sinceits inception, InsWeb has incurred significant losses, and as of September 30,2005, InsWeb had an accumulated deficit of $186.5 million. InsWeb’s operations to date have consumedsubstantial amounts of cash, cash equivalents and short-term investments ($8.7million in 2004 and $9.6 million in 2003) and will continue to require capitalin the near future. These losses, andthis accumulated deficit, have resulted from the significant costs incurred inthe development of InsWeb’s technology platform, the establishment ofrelationships with insurance companies, their integration with the InsWeb site,and InsWeb’s marketing and sales activities. In orderto remain competitive, the Company must continue to make investments essentialto its ability to operate, and InsWebintends to continue to invest in product development and maintenance, and salesand marketing. In addition, the Company will continue to incur the costsassociated with continuing to function as a publicly listed company, includingthe costs of compliance with the provisions of the Sarbanes-Oxley Act of 2002,among other things, the Company will be required to comply withSection 404 of the Sarbanes-Oxley Act in 2007. As a result, InsWeb believes that it will continue to incur operatinglosses for at least the next three to six months. In the event that InsWeb is unable to generate revenuessufficient to offset its costs, or if its costs of marketing and operations aregreater than it anticipates, the Company may be unable to grow its business atthe rate desired or may be required to delay, reduce, or cease certain of itsoperations, any of which could materially harm its business and financialresults. In addition, if InsWeb isunable to ultimately achieve profitability, the Company may need to seekadditional financing to continue its business operations. The Company cannot becertain that additional financing will be available when required, on favorableterms or 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.

 

7

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**2.* *Basis of Presentation**

 

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

 

Theaccompanying unaudited interim financial statements have been prepared inaccordance with U.S. generally accepted accounting principles for interimfinancial information and with the instructions to Form 10-Q and Rule 10-01 ofRegulation S-X.  Accordingly, they do notcontain all of the information and footnotes required by U.S. generallyaccepted accounting principles for complete financial statements.  In the opinion of management, theaccompanying unaudited interim condensed consolidated financial statementsreflect all adjustments, which include only normal recurring adjustments,necessary to present fairly InsWeb’s financial position as of September 30,2005, its results of operations for the three and nine months ended September30, 2005 and 2004 and its cash flows for the nine months ended September 30,2005 and 2004.  The financial data andother information disclosed in these notes to the condensed consolidatedfinancial statements related to these periods are unaudited.  The results for the three and nine monthsended September 30, 2005 are not necessarily indicative of the results to beexpected for the year ending December 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**

 

For the three months and nine months ended September 30, 2005, onecustomer accounted for 27% and 28% of total revenues, respectively. Thiscustomer also represented 20% of accounts receivable at September 30, 2005.  At December 31, 2004, one customer accountedfor 14% accounts receivable. Forthe nine months ended September 30, 2004, two customers each accounted for 10%of total revenues.

 

**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 nine month period endedSeptember 30, 2005 and 2004, common equivalent shares from stock options were excludedfrom the computation of net loss per share-diluted as their effect wasantidilutive. Total common stock options outstanding at September 30, 2005 and2004 were 1,499,000 and 1,391,000, respectively.

 

8

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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****September  30****,** | ** ** | **Nine months ended****September  30****,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                              | ** ** | **2005**                                     | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net loss, as  reported                                                                                                                  |       | $                                            | (1,371     | )                                           | $          | (2,224 | ) | $ | (3,867 | ) | $ | (6,715 | ) |
| Deduct: Stock-based employee compensation  expense determined under fair value based method for all awards, net of related  tax effects |       | (156                                         | )          | (179                                        | )          | (414 | ) | (515 | ) |
| Pro forma  net loss                                                                                                                     |       | $                                            | (1,527     | )                                           | $          | (2,403 | ) | $ | (4,281 | ) | $ | (7,230 | ) |
|                                                                                                                                    |       |                                         |       |                                        |       |   |   |   |   |
| Net loss per  share:                                                                                                                    |       |                                         |       |                                        |       |   |   |   |   |
| Basic and diluted—as reported                                                                                                      |       | $                                            | (0.34      | )                                           | $          | (0.47 | ) | $ | (0.90 | ) | $ | (1.43 | ) |
| Basic and diluted—pro forma                                                                                                        |       | $                                            | (0.38      | )                                           | $          | (0.51 | ) | $ | (1.00 | ) | $ | (1.54 | ) |

 

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 generallyvest over several years.

 

**5.Accrued Expenses**

 

Accruedexpenses consist of the following (in thousands):

 
| ** **                              | ** ** | **September 30****,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                                    |       |                        |       |                        |       |
| Accrued  lease obligations (see Note 7) |       | $                           | 1,943      |                        | $          | 2,172 |   |
| Accrued  employee compensation          |       | 532                         |       | 559                         |       |
| Deferred  rent                          |       | 526                         |       | 522                         |       |
| Other                                   |       | 151                         |       | 203                         |       |
| Total                                   |       | $                           | 3,152      |                        | $          | 3,456 |   |

 

**6.  Comprehensive Loss**

 

Totalcomprehensive loss for the three months and nine months ended September 30,2005 and 2004 was as follows (in thousands):

 
| ** **                                                                           | ** ** | **Three months ended****September  30****,** | ** ** | **Nine months ended****September  30****,** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                           | ** ** | **2005**                                     | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                 |       |                                         |       |                                        |       |   |   |   |   |
| Net loss                                                                             |       | $                                            | (1,371     | )                                           | $          | (2,224 | ) | $ | (3,867 | ) | $ | (6,715 | ) |
| Other comprehensive income (loss) - change  in unrealized gain (loss) on investments |       | 1                                            |       | 2                                           |       | 7 |   | (6 | ) |
| Comprehensive  loss                                                                  |       | $                                            | (1,370     | )                                           | $          | (2,222 | ) | $ | (3,860 | ) | $ | (6,721 | ) |

 

9

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**7.  Commitments and Contingencies**

 

**Leases**

 

InsWeb iscontractually obligated to make future lease payments on certain formerlyoccupied facilities through September 2008. As of September 30, 2005,total future obligations for these facilities amounted to $7,353,000; theseobligations are offset by total estimated future sublease income ofapproximately $6,258,000. Substantially all future sublease income is due froma sublessee who is an early-stage company with a limited operating history and,therefore, there are inherent risks and uncertainties associated with itsfuture operations and its ability to discharge its obligations through the termof the sublease. In the event that the sublessee defaults on its obligationsunder the 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 estimated future sublease incomerelative to these facilities. Based on these assumptions, the Company hasrecorded an accrual of $1,943,000 as of September 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**

 

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 statement for the offering failed to disclose, among other things,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 offering and (ii) the underwriters had entered intoagreements with customers whereby the underwriters agreed to allocate shares ofthe stock sold in the offering to those customers in exchange for which thecustomers agreed to purchase additional shares of InsWeb stock in theaftermarket at pre-determined prices. No specific damages are claimed. Similarallegations have been made in lawsuits relating to more than 300 other initialpublic offerings conducted in 1999 and 2000, all of which have beenconsolidated for pretrial purposes. In October 2002, all claims againstthe 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, 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. On September 1, 2005, the Court issued anorder providing preliminary approval of the proposed settlement and set ahearing for April 24, 2006 to consider final approval of the settlement. If theCourt does not approve the settlement, InsWeb would defend the lawsuitvigorously. However, the litigation is in the preliminary stage, and we cannotpredict its outcome. The litigation process is inherently uncertain. Anunfavorable outcome could have a material adverse effect on InsWeb’s financialcondition, results of operations and cash flows.

 

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**8.  Stockholders’ Equity**

 

**Negotiated common stock repurchases**

 

In March 2005, the Board of Directorsauthorized management to repurchase 755,821 shares of InsWeb Corporation commonstock, consisting of 531,947 shares held by Nationwide Mutual Insurance Companyand 223,874 shares held by Century Capital Partners, L.P. These sharesrepresented 16% of InsWeb’s total outstanding common stock at that date andwere purchased for $1,738,000, or $2.30 per share. Subsequent to the closing ofthese transactions on March 31, 2005, Nationwide Mutual and Century Capitalhold no shares.

 

**9.  Recent Accounting Pronouncements**

 

On December 16, 2004, the FinancialAccounting Standards Board (“FASB”) issued Statement No. 123(R), “Share-Based Payment,”which is a revision of FASB Statement No. 123, “Accounting for Stock-BasedCompensation.” Statement 123(R) supersedes APB No. 25, “Accounting for StockIssued to Employees,” and amends FASB Statement No. 95, “Statement of CashFlows.” Generally, the approach in Statement 123(R) is similar to the approachdescribed in Statement 123. However, Statement 123(R) requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the income statement based on their fair values. Pro formadisclosure is no longer an alternative.

 

Statement 123(R) originally required adoptionno later than July 1, 2005. In April 2005, the Securities and ExchangeCommission (“SEC”) issued a release that amends the compliance dates forStatement 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 to restate,based on the amounts previously recognized under Statement 123, for purposes ofpro forma disclosures. The Company plans to adopt Statement 123(R) using themodified prospective method.

 

As permitted by Statement 123, the Companycurrently accounts for share-based payments to employees using APB No. 25’sintrinsic value method and, as such, generally recognizes no compensation costfor employee and director stock options. Accordingly, the adoption of Statement123(R)’s fair value method could have a significant impact on InsWeb’s resultsof operations, although it will have no impact on its overall financialposition. The impact of adoption of Statement 123(R) cannot be predicted atthis time because it will depend on levels of share-based payments granted inthe future.

 

**10.  Subsequent Event**

 

On October 19, 2005, the Compensation Committee of theBoard of Directors of InsWeb Corporation approved the acceleration of vestingof all stock options outstanding as of October 19, 2005 held by employees andthe Company’s Section 16 officers (the “Acceleration”).  Options to purchase approximately 496,000shares of common stock, or 33% of the total outstanding options, with varyingremaining vesting schedules, were subject to the Acceleration and became immediatelyexercisable. All other terms and conditions applicable to such options,including the exercise prices, remain unchanged.

 

As a result of the Acceleration, the Company expectsto reduce its exposure to the effects of Financial Accounting Standards BoardStatement No. 123(R), “Share-Based Payment,” which will require companiesto recognize stock-based compensation expense associated with stock optionsbased on the fair value method. The Company currently estimatesa reduction of $350,000 in stock-based compensation expense in 2006from that which would have otherwise been associated with the stock optionsaffected by the Acceleration. However, the Company may be required to record anearnings charge in future periods if an employee terminates his/her employmentand exercises options that were subject to the Acceleration.

 

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

**AND RESULTSOF OPERATIONS**

 

*This Quarterly Report on Form 10-Q, and in particularManagement’s Discussion and Analysis of Financial Condition and Results ofOperations, contains “forward-looking statements” with respect to InsWeb’sfuture financial performance. The words or phrases “expects,” “anticipates,” “intends,”“plans,” “believes,” “seeks,” “estimates,” and similar expressions aregenerally intended to identify forward-looking statements. Such forward-lookingstatements are subject to various known and unknown risks and uncertainties,and InsWeb cautions you that any forward-looking information provided by, or onbehalf of, InsWeb is not a guarantee of future performance. Actual resultscould differ materially from those anticipated in such forward-lookingstatements due to a number of factors, some of which are beyond InsWeb’scontrol, including, but not limited to, uncertain economic conditions whichcould result in lower growth rates, decreasing revenue and reducedparticipation in InsWeb’s marketplace, anticipated losses, the unpredictabilityof future revenues, reliance on key customers—insurance carriers, agents andother insurance providers- who are themselves subject to volatility in theiroperating cycles, reliance on a third party intermediary who provides leads tolocal insurance agents on InsWeb’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 ExchangeCommission, could cause InsWeb’s actual results to differ materially fromhistorical results or those currently anticipated. All forward-lookingstatements are based on information available to InsWeb on the date hereof, andInsWeb assumes no 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, homeowners and term lifeinsurance coverage 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. These fees are earned either from aninsurance company based on a closed policy, from the delivery of a lead to aparticipating insurance provider or local agent, or from a commission or brokerfee earned by InsWeb’s insurance agencies, InsWeb Insurance Services, Inc.and Goldrush Insurance Services, Inc. In certain instances, consumers areprovided the opportunity to link directly to a third party insurance provider’swebsite. In these situations, the consumer will complete the third partycompany’s online application, and InsWeb will be paid a fee for that consumerlink 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 ina delay in revenue recognition, 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 are earned, net of anestimate for future cancellations based on its historical cancellation rate. 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.

 

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In 2004,InsWeb launched its agent network program which provides online auto insuranceconsumers access to local insurance agents. Prior to September 12, 2005,the agent network program was conducted exclusively through an intermediary,NetQuote, Inc. During the three and nine months ended September 30, 2005,NetQuote, Inc. represented 31% of auto transaction fees, compared to 7% and 5%during the three and nine months ended September 30, 2004, respectively. InsWebdoes not have an exclusive or long-term contract with this intermediary.

 

To lessen InsWeb’s reliance on thisintermediary, and to maximize its revenue potential, InsWeb launched a proprietaryagent network program (“AgentInsider”) to provide leads directly to localinsurance agents who have registered with InsWeb. AgentInsider was launchedSeptember 12, 2005 and complements the offering of our intermediary. However,we may experience a reduction in revenues during the initial roll-out ofAgentInsider, depending on the rate of registration of local personal linesinsurance agents and the degree of participation of these agents throughout thecountry. We expect that the agent network program, both through theintermediary and through our internally developed network, will continue torepresent a significant percentage of auto transaction fees. However, the agentnetwork is subject to a number of uncertainties, including the cost ofdeveloping and marketing the program, and the continued participation of ourthird party intermediary. If we are unable to create a positive offering, ifNetQuote should cease to serve as our intermediary and we are unsuccessful insecuring a replacement, or if the transition of the agent network program fromthe intermediary to our internally developed AgentInsider program is delayed orotherwise unsuccessful, the Company’s business may be harmed.

 

InsWeb has focused its efforts on developing insurance company coveragefor automobile insurance in order to be able to offer true comparative onlineshopping for this important segment of the insurance market. Automobileinsurance accounted for approximately 74% of transaction revenues in 2004 and80% in the first nine months of 2005. We anticipate that automobile insurancewill continue to account for a significant portion of InsWeb’s revenues for theforeseeable future.

 

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 – insurancecarriers, agents and other providers – who are themselves subject to volatilityin their operating cycles, and reliance on a third party intermediary whoprovides leads to local insurance agents on InsWeb’s behalf. These risks anduncertainties, 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. Moreover, there is no assurance that InsWeb will be able toachieve or sustain profitability.

 

Since its inception, InsWeb has incurred significant losses, and as ofSeptember 30, 2005, InsWeb had an accumulated deficit of $186.5 million. InsWeb’s operations to date have consumedsubstantial amounts of cash, cash equivalents and short-term investments ($8.7million in 2004 and $9.6 million in 2003) and will continue to require capitalin the near future. These losses, andthis accumulated deficit, have resulted from the significant costs incurred inthe development of InsWeb’s technology platform, the establishment ofrelationships with insurance companies, their integration with the InsWeb site,and InsWeb’s marketing and sales activities. In orderto remain competitive, the Company must continue to make investments essentialto its ability to operate, and InsWebintends to continue to invest in product development and maintenance, and salesand marketing. In addition, the Company will continue to incur the costsassociated with continuing to function as a publicly listed company, includingthe costs of compliance with the provisions of the Sarbanes-Oxley Act of 2002,among other things, the Company will be required to comply withSection 404 of the Sarbanes-Oxley Act in 2007. As a result, InsWeb believes that it will continue to incur operatinglosses for at least the next three to six months. In the event that InsWeb is unable to generaterevenues sufficient to offset its costs, or if its costs of marketing andoperations are greater than it anticipates, the Company may be unable to growits business at the rate desired or may be required to delay, reduce, or ceasecertain of its operations, any of which could materially harm its business andfinancial results. In addition, ifInsWeb is unable to ultimately achieve profitability, the Company may need toseek additional financing to continue its business operations. The Company cannot becertain that additional financing will be available when required, on favorableterms or 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.

 

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**Results ofOperations**

 

Thefollowing tables set forth certain statement of operations highlights for thethree and nine months ended September 30, 2005 and 2004:

 

**Revenues and operating expenses as a percentage of total revenues:**

 
|                              |   | **Three months  ended  September 30,** | ** ** | **Nine**** ****months ended  September 30,** |       |
|-----------------------------------|--------|----------------------------------------|------------|---------------------------------------------------|------------|
|                              |   | **2005**                               | ** ** | **2004**                                          | ** ** | **2005** | ** ** | **2004** |   |
|                              |   |                                   |       |                                              |       |   |   |   |   |
| Revenues:                         |   |                                   |       |                                              |       |   |   |   |   |
| Transaction fees                  |   | 99                                     | %          | 96                                                | %          | 99 | % | 95 | % |
| Development and  maintenance fees |   | 1                                      |       | 4                                                 |       | 1 |   | 5 |   |
| Total                             |   | 100                                    |       | 100                                               |       | 100 |   | 100 |   |
| Operating expenses:               |   |                                   |       |                                              |       |   |   |   |   |
| Technology                        |   | 19                                     |       | 37                                                |       | 21 |   | 39 |   |
| Direct marketing                  |   | 63                                     |       | 58                                                |       | 58 |   | 54 |   |
| Sales and  marketing              |   | 25                                     |       | 40                                                |       | 26 |   | 38 |   |
| General and  administrative       |   | 14                                     |       | 33                                                |       | 17 |   | 33 |   |
| Total                             |   | 121                                    |       | 168                                               |       | 122 |   | 164 |   |
| Loss from operations              |   | (21                                    | )%         | (68                                               | )%         | (22 | )% | (64 | )% |

 

**Revenues:**

 
| ** **                        | ** ** | **Three months  ended  September 30,** | ** ** | **Nine****months  ended  September 30,** | ** ** |
|-----------------------------------|------------|----------------------------------------|------------|------------------------------------------|------------|
| **(In thousands)**                | ** ** | **2005**                               | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|                              |       |                                   |       |                                     |       |   |   |   |   |
| Transaction fees:                 |       |                                   |       |                                     |       |   |   |   |   |
| Auto insurance                    |       | $                                      | 5,509      |                                     | $          | 2,445 |   | $ | 15,095 |   | $ | 7,587 |   |
| Term life  insurance              |       | 1,219                                  |       | 711                                      |       | 3,616 |   | 2,452 |   |
| Other insurance                   |       | 71                                     |       | 72                                       |       | 216 |   | 207 |   |
| Total transaction  fees           |       | 6,799                                  |       | 3,228                                    |       | 18,927 |   | 10,246 |   |
| Development  and maintenance fees |       | 99                                     |       | 147                                      |       | 269 |   | 550 |   |
| Total revenues                    |       | $                                      | 6,898      |                                     | $          | 3,375 |   | $ | 19,196 |   | $ | 10,796 |   |

 

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

 
| ** **                                             | ** ** | **Three months  ended  September 30,** | ** ** | **Nine**** ****months ended  September 30,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------------------|------------|
| **(In thousands,****except per consumer amounts****)** | ** ** | **2005**                               | ** ** | **2004**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                   |       |                                   |       |                                              |       |   |   |   |   |
| Direct  marketing costs                                |       | $                                      | 4,365      |                                              | $          | 1,964 |   | $ | 11,026 |   | $ | 5,875 |   |
| Number of  consumers                                   |       | 1,584                                  |       | 665                                               |       | 3,995 |   | 2,082 |   |
| Direct  marketing cost per consumer                    |       | $                                      | 2.76       |                                              | $          | 2.95 |   | $ | 2.76 |   | $ | 2.82 |   |
| Total transaction  fees per consumer                   |       | $                                      | 4.29       |                                              | $          | 4.85 |   | $ | 4.74 |   | $ | 4.92 |   |

 

**AutoMarketplace Metrics:**

 
| ** **                                             | ** ** | **Three months  ended  September 30,** | ** ** | **Nine**** ****months ended  September 30,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------------------|------------|
| **(In thousands,****except per consumer amounts****)** | ** ** | **2005**                               | ** ** | **2004**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                   |       |                                   |       |                                              |       |   |   |   |   |
| Auto insurance  transaction fees                       |       | $                                      | 5,509      |                                              | $          | 2,445 |   | $ | 15,095 |   | $ | 7,587 |   |
| Number of  consumers                                   |       | 1,496                                  |       | 570                                               |       | 3,667 |   | 1,735 |   |
| Transaction  fees per consumer                         |       | $                                      | 3.68       |                                              | $          | 4.29 |   | $ | 4.12 |   | $ | 4.37 |   |

 

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**Term Life MarketplaceMetrics:**

 
| ** **                                             | ** ** | **Three months  ended  September 30,** | ** ** | **Nine****months  ended  September 30,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------|------------|------------------------------------------|------------|
| **(In thousands,****except per consumer amounts****)** | ** ** | **2005**                               | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                   |       |                                   |       |                                     |       |   |   |   |   |
| Term life  insurance transaction fees                  |       | $                                      | 1,219      |                                     | $          | 711 |   | $ | 3,616 |   | $ | 2,452 |   |
| Number of  consumers                                   |       | 62                                     |       | 69                                       |       | 239 |   | 242 |   |
| Transaction  fees per consumer                         |       | $                                      | 19.66      |                                     | $          | 10.30 |   | $ | 15.13 |   | $ | 10.13 |   |

 

**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 relating toautomobile insurance (consisting of lead fees, closed policy fees, commissionsand sponsored link fees) increased to $5.5 million and $15.1 million forthe three and nine months ended September 30, 2005, respectively, from$2.4 million and $7.6 million for the comparable periods in 2004. Theseincreases were primarily attributable to 162% and 111% increases in consumertraffic (consumers who have started the InsWeb auto application) from thecomparable periods in 2004, respectively. Revenue per auto consumer decreasedfor the three and nine months ending 2005 to $3.68 and $4.12 compared to $4.29and $4.37 from the comparable periods in 2004, respectively. The decrease inrevenue per auto consumer was a result of the launch of AgentInsider within ourauto offering and a reduced rate of closed policies, and therefore reducedearned revenues, from our instant quoting insurance companies.

 

Transaction fees relating to term life insurance(primarily commissions earned on closed policies) increased to$1.2 million and $3.6 million for the three and nine months endedSeptember 30, 2005 from $0.7 million and $2.5 million for the comparableperiods in 2004. These increases reflect the completed transition of ourterm life agency to a commission-based revenue model.

 

**OperatingExpenses**

 

**Technology.**  Technology expenses consist primarily of payrolland related expenses, including employee benefits, facility and systems costs,for product and site development personnel involved with the planning, designand implementation of the agent network program discussed previously, as wellas carrier integration and other enhancements to the InsWeb online insurancemarketplace. Technology expensesremained level at $1.3 million for the three months ended September 30,2005 and 2004.  Technology expensesdecreased slightly to $4.1 million for the nine months ended September 30,2005 from $4.2 million for the comparable period in 2004. Technologyexpenses for the remainder of 2005 are expected to remain at or near currentlevels.

 

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**Sales and Marketing.**  Sales and marketing expenses consist of twocomponents:  direct marketingexpenditures such as advertising, promotions and fees paid to online companiesto drive consumer traffic to the InsWeb online marketplace; and payroll andrelated expenses, including employee benefits, facility costs,telecommunications and systems costs, for InsWeb’s sales and marketing personnel,its recently introduced agent network program (“AgentInsider”) and itsinsurance agency operations (auto and term life). InsWeb’s current consumermarketing program is focused on developing and retaining key onlinerelationships and selective cost-effective marketing campaigns designed tomaintain consumer awareness of InsWeb and its online insurance marketplace. Overall sales and marketing expensesincreased to $6.1 million and $16.1 million for the three and nine months endedSeptember 30, 2005, from $3.3 million and $10.0 million for the comparableperiods in 2004. These increases were primarily a result of increases in directmarketing costs to $4.4 million and $11.0 million for the three and ninemonths ended September 30, 2005, respectively, compared to $2.0 millionand $5.9 million for the comparable periods in 2004. For the nine months endedSeptember 30, 2005, the number of consumers increased by 111% over the ninemonths ended September 30, 2004, while the average cost of acquiring a consumerdecreased 2% to $2.76 per consumer. For the three months ended September 30,2005, the number of consumers increased by 138% over the third quarter of 2004,while the average cost of acquiring a consumer decreased 6% to $2.76 perconsumer. The increase in numbers of consumers was a result of successfulonline advertising campaigns, while the decrease in cost per consumer was attributable to improvementsin and increased effectiveness of our online advertising efforts. The Company expects that for the remainder of 2005, direct marketingcosts per consumer acquired will increase from current levels due to theholiday season online advertising environment. However, total direct marketingcosts will fluctuate based on the actual amount of consumer traffic driven tothe InsWeb marketplace. All other sales and marketing expenditures are expectedto increase for the remainder 2005 as the AgentInsider program and theoperations of the term life agency are expanded.

 

**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 decreased to $1.0 million and $3.2 million for thethree and nine months ended September 30, 2005, respectively, from$1.1 million and $3.6 million for the comparable periods in 2004. Thedecrease was primarily due to a decrease in depreciation and insuranceexpenses. General and administrative expenses are expected to remain at or nearcurrent levels for the remainder of 2005.

 

**Interest Income.**  Interest income increased to$101,000 and $289,000 for the three and nine months ended September 30, 2005,respectively, from $80,000 and $225,000 for the comparable periods in 2004.Interest income is income earned on InsWeb’s short-term investments.

 

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**Critical Accounting Policies**

 

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

 

***Accrual for Lease Obligations.***  InsWeb iscontractually obligated to make future lease payments on certain formerly occupiedfacilities through September 2008. As of September 30, 2005, total futureobligations for these facilities amounted to $7.4 million. However, theseobligations are offset by total estimated future sublease income ofapproximately $6.2 million. Substantially all future sublease income is duefrom a sublessee who is an early-stage company with a limited operating historyand, therefore, there are inherent risks and uncertainties associated with itsfuture operations and its ability to discharge its obligations through the termof the sublease. In the event that the sublessee defaults on its obligationsunder the 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 estimated future sublease incomerelative to these facilities. Based on these assumptions, the Company hasrecorded an accrual of $1.9 million as of September 30, 2005 for leasecommitments related to these formerly occupied facilities, as compared to anaccrual of $2.2 million 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.

 

***Contingencies*****.**  Asdiscussed in “Item 1 — Note 7 of Notes to Condensed ConsolidatedFinancial Statements,” a class action lawsuit has been filed that allegesInsWeb violated certain federal securities laws at the time of its initialpublic offering. Although some claims against InsWeb in this class action havebeen dismissed and a settlement of these proceedings has been proposed andconditionally accepted, InsWeb cannot accurately predict the ultimate outcomeof this matter at this time and therefore, cannot estimate the range ofprobable loss, if any, due to the inherent uncertainties of litigation. InsWebbelieves it has meritorious defenses; however InsWeb cannot assure that it willprevail in this action. An unfavorable outcome could have a material adverseeffect on InsWeb’s financial condition, 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.

 

The carrying value of InsWeb’s deferred tax assets, which were $70.4million at December 31, 2004, are dependent upon our ability to generatesufficient future taxable income. The Company has established a full valuationallowance against its net deferred tax assets for continuing operations to reflectthe uncertainty of realizing the deferred tax benefits, given historicallosses. A valuation allowance is required when it is more likely than not thatall or a portion of a deferred tax asset will not be realized. A review of allavailable positive and negative evidence needs to be considered, includingInsWeb’s past and future performance, the market environment in which itoperates, the utilization of tax attributes in the past, and the length ofcarryforward periods and evaluation of potential tax planning strategies.InsWeb expects to continue to maintain a full valuation allowance until anappropriate level of profitability is sustained or it is able to develop taxstrategies that would enable it to conclude that it is more likely than not thata portion of its deferred tax assets would be realizable. In addition, InsWeb’s ability to utilize its net operating losscarry forwards (which make-up the majority of the Company’s deferred taxassets) to offset future taxable income may be subject to restrictionsattributable to equity transactions that result in changes in ownership asdefined in the Tax Reform Act of 1986. These restrictions may significantlylimit, on an annual basis, InsWeb’s future use of its net operating loss carryforwards. The amount, if any, of such limitations has not yet been determined.

 

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**Liquidity and Capital Resources**

 

AtSeptember 30, 2005, InsWeb’s principal source of liquidity and overall cashposition was $11.6 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 $5.8million of cash in operating and financing activities during the first ninemonths of 2005. The primary driver that impacts changes in the Company’soverall cash position is its operating loss.

 

Forthe nine months ended September 30, 2005, net cash used in operating activitieswas $4.1 million. The primary components of the use of cash was the net loss of$3.9 million and an increase in accounts receivable of $1.7 million, partiallyoffset by an increase in accounts payable of $1.3 million. The increase inaccounts receivable was a result of the revenue growth during the period, withdays sales outstanding increasing to 36 days at September 30, 2005, compared to26 days outstanding at December 31, 2004. The increase in accounts payable was a result of the significantincrease in direct marketing activities during the period, increasing consumertraffic to the InsWeb marketplace and a corresponding increase in directmarketing costs.

 

Forthe nine months ended September 30, 2005, net cash provided by investingactivities was $5.0 million, which primarily consisted of redemptions ofshort-term investments offset by the purchases of short-term investments.Investing activities will generally fluctuate in conjunction with cash requiredto meet working capital requirements.

 

Forthe nine months ended September 30, 2005, net cash used in financing activitieswas $1.7 million, consisting entirely of the repurchase of common stock (seeNote 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 September 30, 2005 are summarized as follows(in thousands):

 
| **Years ending December 31,** | ** ** | **Gross lease  commitments** | ** ** | **Sublease  income** | ** ** | **Net lease  commitment** | ** ** |
|------------------------------------|------------|------------------------------|------------|----------------------|------------|---------------------------|------------|
| 2005                               |       | $                            | 827        |                 | $          | (503                      | )          | $ | 324 |   |
| 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                     |       |
|                               |       | $                            | 13,152     |                 | $          | (6,248                    | )          | $ | 6,904 |   |

 

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 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. We anticipate that our cash, cash equivalents andshort-term investments will be sufficient to meet our anticipated cash needsfor working capital and capital expenditures for at least the next12 months. Longer-term, if the enhancements toour auto marketplace, 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 notanticipate the need for additional financing, we nevertheless may requireadditional funds to meet operating needs. We cannot be certain that additionalfinancing will be available when required, on favorable terms or at all. If weare not successful in raising additional capital as required, we may delay,significantly reduce or cease certain of our operations, which could adverselyaffect our results of operations and financial position.

 

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**Factors That MayAffect Our Future Performance**

 

*Our futurebusiness, operating results and financial condition are subject to variousrisks and uncertainties, including those described below.*

 

**Our business isdifficult to evaluate because our market is evolving rapidly and our businessmodel 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 ourcommon stock 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 toretain customers.

 

Our business strategy may not besuccessful and we may not be able to successfully address these uncertainties.Moreover, our ability to take the foregoing steps may be hampered by ourlimited financial resources should we fail to rapidly increase revenues orshould increased revenues be more than offset by increased operating expenses.

 

**We have a history oflosses, we expect future losses, and we may not achieve or maintainprofitability**

 

Given planned investment levels,our ability to achieve profitability will depend upon our ability to generateand sustain substantially increased revenues. As a result, we believe that wewill incur operating losses for at least the next three to six months. Weincurred operating losses of $9.2 million for 2004, $7.0 million for2003, and $15.5 million for 2002. As of September 30, 2005, ouraccumulated deficit was $186.5 million. Our operating results for futureperiods are subject to numerous uncertainties, and we may not achievesufficient revenues to become profitable. Even if we achieve profitability, wemay not sustain or increase profitability on a quarterly or annual basis in thefuture. If we are unable to achieve profitability or if our profitability isdelayed we may need to seek additional financing to continue our businessoperations. Such financing could be on terms that are dilutive to our existingstockholders or could involve the issuance of securities that have rights andpreferences that are senior to those associated with our common stock.Moreover, if such financing were not available or were available only uponterms that were unacceptable to us, we could be required to delay, reduce, or cease certain of ouroperations, any of which could materially harm our business and financialresults.

 

**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**

 

Ouroperations to date have consumed substantial amounts of cash, cash equivalentsand short-term investments ($8.6 million in 2004 and $9.6 million in 2003) andwill continue to require capital in the near future. In order to remaincompetitive, we must continue to make investments essential to our ability tooperate, including investments in direct marketing, technology and generaladministration. In addition, we willcontinue to face the costs of being apublic company. In the event that we are unable to generate revenues sufficientto offset our costs, or if our costs of marketing and operations are greaterthan we anticipate, we may be unable to grow our business at the rate desiredor may be required to delay, reduce, or cease certain of our operations, any ofwhich could materially harm our business and financial results.

 

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**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**

 

In 2004,InsWeb launched its agent network program which provides online auto insurance consumersaccess to local insurance agents. Prior to September 12, 2005, the agentnetwork program was conducted exclusively through an intermediary, NetQuote,Inc. During the three and nine months ended September 30, 2005, NetQuote, Inc.represented 31% of auto transaction fees, compared to 7% and 5% during thethree and nine months ended September 30, 2004, respectively. InsWeb does nothave an exclusive or long-term contract with this intermediary.

 

To lessenInsWeb’s reliance on this intermediary, and to maximize its revenue potential,InsWeb launched a proprietary agent network program (“AgentInsider”) to provideleads directly to local insurance agents who have registered with InsWeb.AgentInsider was launched September 12, 2005 and complements the offering ofour intermediary. However, we may experience a reduction in revenues during theinitial roll-out of AgentInsider, depending on the rate of registration oflocal personal lines insurance agents and the degree of participation of theseagents throughout the country. We expect that the agent network program,both through the intermediary and through our internally developed network,will continue to represent a significant percentage of auto transaction fees.However, the agent network is subject to a number of uncertainties, includingthe cost of developing and marketing the program, and the continuedparticipation of our third party intermediary. If we are unable to create apositive offering, if NetQuote should cease to serve as our intermediary and weare unsuccessful in securing a replacement, or if the transition of the agentnetwork program from the intermediary to our internally developed AgentInsiderprogram is delayed or otherwise unsuccessful, the Company’s business may beharmed.

 

In August 2004, InsWeblaunched its term life agency business in an effort to achieve increased revenue per consumerwithin its term life marketplace, resulting in a shift from a lead payment to acommission-based revenue model, which the Company believes will offer greaterlong-term financial benefit. This initiative is subject to a number ofuncertainties, including the cost of developing the agency operations, and thecontinued participation of insurance carriers. Moreover, there are manyinsurance agencies selling term life insurance online, and it is increasinglydifficult to find reliable sources of consumer traffic on reasonable terms. Ifwe are unable to create a positive offering with this initiative or generatesufficient consumer traffic, we may lose business to competitors and/or ourbusiness may be harmed.

 

**Our future revenuesare unpredictable, our operating results are likely to fluctuate from quarterto quarter, and if we fail to meet the expectations of investors, our stockprice could decline significantly**

 

Due to the evolving nature ofour 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 business model,including the evolution 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, our expenselevels are based largely on our investment plans and estimates of futurerevenues. We may be unable to adjust our spending to compensate for anunexpected shortfall in revenues. Accordingly, any significant shortfall inrevenues relative to our planned expenditures would harm our results ofoperations and could cause our stock price to fall sharply, particularlyfollowing quarters in which our operating results fail to meet the expectationsof investors.

 

Factors that may causefluctuations in our operating results include the following, many of which areoutside our control:

 

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

 

•                  Consumer traffic on our online marketplace maydecline as a result of the announcement or introduction of a competing onlineinsurance marketplace or other new websites, products or services offered byour competitors;

 

•                  Consumer traffic may also fluctuate as a result ofchanges in level of advertising by entities with which we have insurancemarketing relationships;

 

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

 

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•                  Our revenues may be harmed by inadequatelevels of participation by local personal lines insurance agents in our new agent network initiative, if the agent network program offered by ourcurrent third party intermediary is unsuccessful or if our current intermediaryshould cease to serve in this capacity and we are unsuccessful in securing areplacement;

 

•                  Use of the Internet by consumers may fluctuate dueto seasonal factors or other uncontrollable factors affecting consumer behaviorand may be affected by slow Internet performance due to technical problems ortraffic 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 may beadversely affected by changes in the underwriting criteria used by our participatinginsurance companies to determine which consumers will be offered quotes; and

 

•                  Our ability to generate transaction fees and/orrevenue from insurance agency activities may also be harmed due to technicaldifficulties on our website that hamper a consumer’s ability to start orcomplete a shopping session.

 

**We areexposed to increased costs and risks associated with complying with theincreasing regulation of corporate governance and disclosure standards**

 

We are spending an increased amount of managementtime and external resources to comply with changing laws, regulations andstandards relating to corporate governance and public disclosure, including theSarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq Stock Market rules.In particular, Section 404 of the Sarbanes-Oxley Act of 2002 requiresmanagement’s annual review and evaluation of our internal control systems, andattestations of the effectiveness of these systems by our independent auditors.We have commenced documenting our internal control systems and procedures andwill need to consider improvements that may be necessary in order for us tocomply with the requirements of Section 404 by the end of 2007. This processmay require us to hire additional personnel and outside advisory services andwill result in significant additional accounting and legal expenses. We mayencounter problems or delays in completing the review and evaluation, theimplementation of improvements and we may be unsuccessful in obtaining anunqualified report on our assessment of, and/or the effectiveness of, ourinternal controls over financial reporting from our independent auditors. Whilewe believe that we currently have adequate internal controls over financialreporting, in the event that our chief executive officer or chief financialofficer determine that our controls over financial reporting are not effectiveas defined under Section 404, investor perceptions of our company may beadversely affected and could cause a decline in the market price of our stock.

 

**Seasonality affectinginsurance shopping and Internet usage may cause fluctuations in our operatingresults**

 

We have experienced seasonalityin our business associated with general slowness in the insurance industryduring the year-end holiday period. We expect to continue to experienceseasonality as our business matures. Because of this seasonality, investors maynot 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 significantportion of our revenue is attributable to automobile insurance shopping on ouronline marketplace, we are especially vulnerable to risks related to the onlinemarket for automobile insurance or the automobile insurance industry generally**

 

Automobile insurance accountedfor approximately 77% of our transaction revenues in 2004, approximately 79% in2003 and approximately 83% in 2002. For the nine months endedSeptember 30, 2005, auto insurance accounted for approximately 80% of ourtransaction revenues. We anticipate thatautomobile insurance will continue to account for a substantial portion of ourrevenues for the foreseeable future. As a result, if we fail to attract a broadbase of consumers to shop for automobile insurance on our site, our ability togenerate revenue will be reduced and our business will be harmed. In addition,property and casualty insurance, including automobile insurance, is subject tooperating cycles. During a cycle in which loss ratios rise, insurance companiesmay choose to restrict the amount of business they write while they awaitapproval of rate increases from the various state insurance departments. Ourbusiness could be harmed if our participating insurance companies reduce theirparticipation in our online marketplace.

 

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**If we are unable topromote our brand and expand our brand recognition, our ability to drawconsumers 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, strengtheningour relationships with participating insurance companies and attracting newinsurance companies. In order to attract and retain consumers and insurancecompanies and to promote and maintain our brand, we are continuing ourfinancial commitment to create and maintain brand awareness. Our currentmarketing program consists of the maintenance of certain network onlinerelationships and other selective cost effective marketing campaigns, designedto maintain consumer awareness of InsWeb and our online insurance marketplace.If our marketing efforts do not generate a corresponding increase in revenuesor we otherwise fail to successfully promote our brand, or if these effortsrequire excessive expenditures, our business will be harmed. Moreover, if visitorsto our website do not perceive our existing services or the products andservices of our participating insurance companies to be of high quality, or ifwe 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 themarket for online distribution of insurance is intense, and if we are unable tocompete effectively with current competitors or new competitors that enter themarket, the fees paid to us by participating insurance companies may fall, thefees charged by online companies with which we have strategic relationships mayrise, and our market share 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 marketing campaigns fortheir brands and services;

•                  devote more resources to website and systemsdevelopment;

•                  adopt more aggressive pricing policies; and

•                  make more attractive offers to potentialemployees, online companies and third-party service providers.

 

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

 

**We may havedifficulty integrating new insurance companies into our online marketplace oragency operations, which could harm our ability to offer improved comparison-shoppingopportunities and thus limit the attractiveness 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 nine 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.

 

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**We do not haveexclusive relationships or long-term contracts with insurance companies, whichmay limit our ability to retain these insurance companies as participants inour marketplace and maintain the attractiveness of our 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 also offer their products directly toconsumers through insurance agents, mass marketing campaigns or through othertraditional methods of insurance distribution. In many cases, our participatinginsurance companies also offer their products and services over the Internet,either directly to consumers or through one or more of our online competitors,or both. In addition, most of our agreements with our participating insurancecompanies are cancelable at the option of either party upon 90 days’notice or less. Furthermore, our agreements permit the insurance company tolimit its participation to certain states. We have experienced, and expect tocontinue to experience, reductions in the level of participation in ourmarketplace or complete termination by participating insurance companies. Thesereductions in participation, terminations, or an inability to attractadditional insurance companies to our marketplace could materially affect ourrevenues and harm our business.

 

**The outcome andimpact of the securities class action lawsuit involving 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 theunderwriters agreed to allocated shares of the stock sold in the offering tothose customers in exchange for which the customers agreed to purchaseadditional shares of InsWeb stock in the aftermarket at pre-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 butallowed the plaintiffs to proceed with the remaining claims. In June 2003,the plaintiffs in all of the cases presented a settlement proposal to all ofthe issuer defendants. Under the proposed settlement, the plaintiffs willdismiss and release all claims against participating defendants in exchange fora contingent payment guaranty by the insurance companies collectivelyresponsible for insuring the issuers in all the related cases, and theassignment or surrender to the plaintiffs of certain claims the issuerdefendants may have against the underwriters. InsWeb and most of the otherissuer defendants have accepted the settlement proposal. On September 1, 2005,the Court issued an order providing preliminary approval of the proposedsettlement and set a hearing for April 24, 2006 to consider final approval ofthe settlement. If the Court does not approve the settlement, 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.

 

**Laws and regulationsthat govern the insurance industry could expose us, or our participatinginsurance companies, our officers, or agents with whom we contract, to legalpenalties if we fail to comply, and could require changes 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 regulatoryclimate or the enforcement or interpretation of existing law, could expose usto additional 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.

 

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**If we are unable tosafeguard the security and privacy of consumers’ and participating insurancecompanies’ confidential data, consumers and insurance companies may not use ourservices 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 and authenticationnecessary to effect secure transmission of confidential information, such asnames, addresses, Social Security and credit card numbers, user names andpasswords and insurance company rate information. Advances in computercapabilities, new discoveries in the field of cryptography, or other events ordevelopments could result in a compromise or breach of the algorithms we use toprotect consumers’ and insurance companies’ confidential information.

 

**System failures couldreduce or limit traffic on our website or interrupt our communications withindividual insurance companies and harm our 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 andsystems are vulnerable to natural disasters and other unexpected losses, and wemay not have adequate insurance to cover such losses**

 

Our computer hardware operationsare 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 theservices of our executive officers and other key personnel, whose knowledge ofour business and the insurance industry and technical expertise would beextremely 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.

 

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**Any acquisitions thatwe undertake could be difficult to integrate, disrupt our business, dilutestockholder value and harm our operating 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 mayresult in 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 toclaims for infringement of intellectual property, with or without merit, whichcould 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-partytechnologies and services into our online marketplace, and if the providers ofthese technologies and services fail in a timely manner to develop, license orsupport technology necessary to our services, market acceptance of our onlinemarketplace could be harmed**

 

We have incorporated technologydeveloped by third parties into our online marketplace, and we will continue toincorporate third-party technology in our future products and services.We have limited control over whether or when these third-partytechnologies will be developed or enhanced. If a third-party fails totimely develop, license or support technology necessary to our services, marketacceptance of our online marketplace could be harmed.

 

**Our stock price hasfluctuated widely, and Internet stocks in general have been extremely volatile**

 

The trading price of our commonstock has been highly volatile and may be significantly affected by factorsincluding actual or anticipated fluctuations in our operating results, newproducts 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 oftenhave been 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.

 

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

 

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

 

**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 September 30,2005 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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

 

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

 

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 statement for the offering failed to disclose, among other things,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 offering and (ii) the underwriters had entered intoagreements with customers whereby the underwriters agreed to allocate shares ofthe stock sold in the offering to those customers in exchange for which thecustomers agreed to purchase additional shares of InsWeb stock in theaftermarket at pre-determined prices. No specific damages are claimed. Similarallegations have been made in lawsuits relating to more than 300 other initialpublic offerings conducted in 1999 and 2000, all of which have beenconsolidated for pretrial purposes. In October 2002, all claims againstthe 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, 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. On September 1, 2005, the Court issued anorder providing preliminary approval of the proposed settlement and set ahearing for April 24, 2006 to consider final approval of the settlement. If theCourt does not approve the settlement, InsWeb would defend the lawsuitvigorously. However, the litigation is in the preliminary stage, and we cannotpredict its outcome. The litigation process is inherently uncertain. Anunfavorable outcome could have a material adverse effect on InsWeb’s financialcondition, results of operations and cash flows.

 

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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**

 

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

 

 
| Dated: November 10, 2005 | **INSWEB  CORPORATION**    |
|--------------------------|----------------------------|
| ** **               | **(Registrant)**           |
|                     |                       |
| ** **               | **/s/ WILLIAM D. GRIFFIN** | ** ** |
|                     | William D. Griffin         |
|                     | Chief Financial Officer    |

 

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