**SECURITIES AND EXCHANGECOMMISSION**

**Washington, DC 20549**

** **

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** **

**FORM 10–Q**

 
| ý | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------|---------------------------------------------------------------------------------------------------|

 

**For the quarterly periodended September 30, 2001**

**or**

** **
| o | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES**

**EXCHANGE ACT OF 1934** |
|---|---------------------------------------------------------------------------------------------------------|

** **

**For the transitionperiod from ________________ to _________________________**

 

**Commission file number 0–26083**

 

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**INSWEB CORPORATION**

(Exact name of Registrant as specified inits charter)

 

** **
| **Delaware**

(State or other jurisdiction of

incorporation or organization**)** | **94–3220749**

(IRS Employer

Identification Number**)** |
|-----------------------------------------------------------------------------------|----------------------------------------------------------------|
|                                                                              |                                                           |

 

**11290 Pyrites Way, Suite200**

**Gold River, California95670**

(Address of principal executive offices)

 

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**(916) 853-3300**

(Registrant's telephone number, includingarea code)

 

 

----

 

Indicate by check mark whether theRegistrant (1) has filed all reports required to be filed bySections 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the Registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý  No o

 

The number of outstanding shares of theRegistrant's Common Stock, par value $0.001 per share, on October 31, 2001was 42,176,921 shares.

** **

** **

 

**FORM 10–Q**

**INSWEB CORPORATION**

**INDEX**

** **
|        |                                                                                                                          |   |
|-------------|-------------------------------------------------------------------------------------------------------------------------------|--------|
|        |                                                                                                                          |   |
| **PART I**  | **FINANCIAL INFORMATION**                                                                                                     |   |
|        |                                                                                                                          |   |
| ITEM 1:     | Financial Statements                                                                                                          |   |
|        | Condensed  Consolidated Balance Sheets as of September 30, 2001 (unaudited) and December  31, 2000                            |   |
|        | Condensed  Consolidated Statements of Operations for the three and nine months ended  September 30, 2001 and 2000 (unaudited) |   |
|        | Condensed  Consolidated Statements of Cash Flows for the nine months ended September 30,  2001 and 2000 (unaudited)           |   |
|        | 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                                                                   |   |
|        |                                                                                                                          |   |
|        |                                                                                                                          |   |
| **PART II** | **OTHER INFORMATION**                                                                                                         |   |
|        |                                                                                                                          |   |
| ITEM 6:     | Exhibits  and Reports on Form 8-K                                                                                             |   |
|        | Signature                                                                                                                     |   |

 

 

 

**PART I: FINANCIALINFORMATION**

 

**ITEM 1.   FINANCIALSTATEMENTS**

 

**INSWEB CORPORATION ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATEDBALANCE SHEETS**

*(in thousands)*

* *
|                                        |   | **September  30,** |   | **December  31,** |   |
|---------------------------------------------|--------|--------------------|--------|-------------------|--------|
|                                        |   | **2001**           |   | **2000**          |   |
|                                        |   | **(unaudited)**    |   |              |   |
| **Assets**                                  |   |               |   |              |   |
| Current  assets:                            |   |               |   |              |   |
| Cash  and cash equivalents                  |   | $                  | 14,009 |              | $      | 24,795 |   |
| Short-term  investments                     |   | 23,139             |   | 26,331            |   |
| Total cash  and short-term investments      |   | 37,148             |   | 51,126            |   |
| Accounts  receivable, net                   |   | 3,165              |   | 2,935             |   |
| Prepaid  expenses and other current assets  |   | 1,305              |   | 3,852             |   |
| Total  current assets                       |   | 41,618             |   | 57,913            |   |
| Property and  equipment, net                |   | 5,613              |   | 8,666             |   |
| Intangible  assets, net                     |   | 11,293             |   | 295               |   |
| Deposits and  other assets                  |   | 3,344              |   | 3,023             |   |
| Investment  in joint venture                |   | 1,661              |   | 1,908             |   |
| Capitalized  website development costs, net |   | 888                |   | 1,203             |   |
| Total assets                                |   | $                  | 64,417 |              | $      | 73,008 |   |
|                                        |   |               |   |              |   |
| **Liabilities and stockholders' equity**    |   |               |   |              |   |
| Current  liabilities:                       |   |               |   |              |   |
| Accounts  payable                           |   | $                  | 1,154  |              | $      | 1,010 |   |
| Accrued  expenses                           |   | 1,824              |   | 2,036             |   |
| Deferred  revenue                           |   | 1,190              |   | 3,124             |   |
| Restructuring  accrual                      |   | -                  |   | 86                |   |
| Total  current liabilities                  |   | 4,168              |   | 6,256             |   |
| Note payable  to related party              |   | 1,258              |   | 1,312             |   |
| Security  deposit payable                   |   | 1,125              |   | 1,020             |   |
| Deferred  rent                              |   | 876                |   | 536               |   |
| Total  liabilities                          |   | 7,427              |   | 9,124             |   |
| Commitments  and contingencies              |   |               |   |              |   |
| Stockholders'  equity:                      |   |               |   |              |   |
| Common stock                                |   | 42                 |   | 35                |   |
| Additional  paid-in capital                 |   | 201,734            |   | 189,356           |   |
| Accumulated  other comprehensive loss       |   | (216               | )      | (53               | )      |
| Common stock  warrants                      |   | 389                |   | 113               |   |
| Deferred  stock compensation                |   | (77                | )      | (309              | )      |
| Accumulated  deficit                        |   | (144,882           | )      | (125,258          | )      |
| Total  stockholders' equity                 |   | 56,990             |   | 63,884            |   |
| Total  liabilities and stockholders' equity |   | $                  | 64,417 |              | $      | 73,008 |   |

 

See accompanying notes.

**INSWEBCORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS**

*(in thousands exceptper share amounts)*

** **
|                                                                            |   | **Three Months Ended****September 3****0,** |       | **Nine Months  Ended September****30,** |       |
|---------------------------------------------------------------------------------|--------|---------------------------------------------|------------|-----------------------------------------|------------|
|                                                                            |   | **2001**                                    |       | **2000**                                |       | **2001** |   | **2000** |   |
|                                                                            |   | **(unaudited**)                             |       | **(unaudited)**                         |       |
| Revenues:                                                                       |   |                                        | ** ** |                                    | ** ** |   | ** ** |   | ** ** |
| Transaction  fees                                                               |   | $                                           | 4,958      |                                    | $          | 3,638 |   | $ | 15,945 |   | $ | 14,211 |   |
| Agency  commissions                                                             |   | 449                                         |       | 130                                     |       | 1,231 |   | 531 |   |
| Development  and maintenance fees                                               |   | 423                                         |       | 462                                     |       | 1,371 |   | 3,065 |   |
| Total  revenues                                                                 |   | 5,830                                       |       | 4,230                                   |       | 18,547 |   | 17,807 |   |
|                                                                            |   |                                        |       |                                    |       |   |   |   |   |
| Operating expenses:                                                             |   |                                        |       |                                    |       |   |   |   |   |
| Sales  and marketing                                                            |   | 7,185                                       |       | 6,168                                   |       | 20,653 |   | 27,409 |   |
| Technology                                                                      |   | 3,523                                       |       | 5,951                                   |       | 11,400 |   | 18,954 |   |
| General  and administrative                                                     |   | 1,731                                       |       | 3,223                                   |       | 5,865 |   | 8,979 |   |
| Amortization  of intangible assets                                              |   | 655                                         |       | 40                                      |       | 1,802 |   | 1,110 |   |
| Amortization  of stock-based compensation                                       |   | 48                                          |       | 186                                     |       | 178 |   | 797 |   |
| Impairment  of goodwill and other intangibles                                   |   | -                                           |       | -                                       |       | - |   | 4,418 |   |
| Restructuring  charge                                                           |   | -                                           |       | 638                                     |       | - |   | 2,167 |   |
| Total  operating expenses                                                       |   | 13,142                                      |       | 16,206                                  |       | 39,898 |   | 63,834 |   |
| Loss  from operations                                                           |   | (7,312                                      | )          | (11,976                                 | )          | (21,351 | ) | (46,027 | ) |
| Other income, net                                                               |   | -                                           |       | 132                                     |       | 43 |   | 36 |   |
| Interest income, net                                                            |   | 369                                         |       | 1,028                                   |       | 1,684 |   | 3,454 |   |
| Loss before cumulative  effect of a change in accounting principle              |   | (6,943                                      | )          | (10,816                                 | )          | (19,624 | ) | (42,537 | ) |
| Cumulative effect of a  change in accounting principle                          |   | -                                           |       | -                                       |       | - |   | (1,635 | ) |
| Net loss                                                                        |   | $                                           | (6,943     | )                                       | $          | (10,816 | ) | $ | (19,624 | ) | $ | (44,172 | ) |
|                                                                            |   |                                        |       |                                    |       |   |   |   |   |
| Net loss per  share-basic and diluted:                                          |   |                                        |       |                                    |       |   |   |   |   |
| Loss  before cumulative effect of a change in accounting principle              |   | $                                           | (0.16      | )                                       | $          | (0.31 | ) | $ | (0.47 | ) | $ | (1.21 | ) |
| Cumulative  effect of a change in accounting principle                          |   | -                                           |       | -                                       |       | - |   | (0.05 | ) |
| Net  loss per share-basic and diluted                                           |   | $                                           | (0.16      | )                                       | $          | (0.31 | ) | $ | (0.47 | ) | $ | (1.26 | ) |
| Weighted  average shares used in computing net loss per share-basic and diluted |   | 42,153                                      |       | 35,238                                  |       | 41,695 |   | 35,100 |   |

 

 

See accompanying notes.

**INSWEB CORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

*(in thousands)*

* *
|                                                                                                                |   | **For the Nine Months****Ended September 30,** |       |
|---------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|------------|
|                                                                                                                |   | **2001**                                       |       | **2000** |   |
| **Cash flows from  operating activities:**                                                                          |   | **(unaudited)**                                | ** ** |
| Net loss                                                                                                            |   | $                                              | (19,624    | ) | $ | (44,172 | ) |
| Adjustments to reconcile net loss to  net cash used in operating activities:                                        |   |                                           |       |   |   |
| Depreciation and amortization                                                                                       |   | 4,231                                          |       | 2,588 |   |
| Amortization of stock-based  compensation                                                                           |   | 178                                            |       | 796 |   |
| Issuance of common stock warrants                                                                                   |   | 276                                            |       | - |   |
| Loss on disposal/sale of equipment                                                                                  |   | 663                                            |       | 40 |   |
| Foreign currency translation gain on  note payable                                                                  |   | (54                                            | )          | (74 | ) |
| Amortization of intangible assets                                                                                   |   | 1,802                                          |       | 1,110 |   |
| Equity loss from joint venture                                                                                      |   | 82                                             |       | 11 |   |
| Cumulative effect of a change in  accounting principle                                                              |   | -                                              |       | 1,635 |   |
| Write-down of leasehold improvements  included in restructuring                                                     |   | -                                              |       | 1,269 |   |
| Impairment of Goodwill                                                                                              |   | -                                              |       | 4,418 |   |
| Changes in operating assets and  liabilities:                                                                       |   |                                           |       |   |   |
| Accounts receivable                                                                                                 |   | (230                                           | )          | 1,031 |   |
| Prepaid expenses and other current  assets                                                                          |   | 2,547                                          |       | (3,017 | ) |
| Deposits and other assets                                                                                           |   | (321                                           | )          | (876 | ) |
| Accounts payable                                                                                                    |   | 144                                            |       | 231 |   |
| Accrued expenses                                                                                                    |   | (212                                           | )          | 303 |   |
| Restructuring  accrual                                                                                              |   | (86                                            | )          | 495 |   |
| Deferred revenue                                                                                                    |   | (1,934                                         | )          | 1,218 |   |
| Other liabilities                                                                                                   |   | 445                                            |       | 213 |   |
| Net cash used in operating activities                                                                               |   | (12,093                                        | )          | (32,781 | ) |
| Cash flows from investing activities:                                                                               |   |                                           |       |   |   |
| Sales of investments - net                                                                                          |   | 3,196                                          |       | 26,973 |   |
| Investment  in joint venture                                                                                        |   | -                                              |       | (708 | ) |
| Purchases  of property and equipment                                                                                |   | (684                                           | )          | (6,074 | ) |
| Capitalized acquisition costs                                                                                       |   | (263                                           | )          | - |   |
| Capitalized website development costs                                                                               |   | (832                                           | )          | (664 | ) |
| Net cash provided by investing  activities                                                                          |   | 1,417                                          |       | 19,527 |   |
| Cash flows from financing activities:                                                                               |   |                                           |       |   |   |
| Proceeds from employee stock plans                                                                                  |   | 94                                             |       | 2,786 |   |
| Treasury stock                                                                                                      |   | (204                                           | )          | - |   |
| Net cash (used in) provided by  financing activities                                                                |   | (110                                           | )          | 2,786 |   |
| Net decrease  in cash and cash equivalents                                                                          |   | (10,786                                        | )          | (10,468 | ) |
| Cash and cash equivalents, beginning of  period                                                                     |   | 24,795                                         |       | 25,689 |   |
| Cash and cash equivalents, end of period                                                                            |   | $                                              | 14,009     |   | $ | 15,221 |   |
| Supplemental disclosure of cash flow  information:                                                                  |   |                                           |       |   |   |
| Cash paid  during the period for interest                                                                           |   | $                                              | 49         |   | $ | 53 |   |
| Supplemental  disclosure of noncash investing and financing activities:                                             |   |                                           |       |   |   |
| Issuance  of common stock in conjunction with the purchase of selected assets from  Intuit Insurance Services, Inc. |   | $                                              | 12,547     |   | $ | - |   |

 

See accompanying notes.

**INSWEB CORPORATION ANDSUBSIDIARIES**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**(Unaudited)**

 

 

**1.  Basis of Presentation and Significant Accounting Policies**

 

                ***Basis of Presentation***

 

                Theconsolidated financial statements include the accounts of InsWeb Corporationand its wholly owned subsidiary, InsWeb Insurance Services, Inc. (“InsWeb”or the “Company”). In May 2001, Benelytics, Inc. was merged into InsWeb and allaccounts and transactions are included in the accounts of InsWebCorporation.  All significantinter-company accounts and transactions have been eliminated in theconsolidated financial statements.

 

                Theaccompanying unaudited interim financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial information and with the instructions to Form 10–Qand Rule 10–01 of Regulation S–X. Accordingly, they do not contain all of the information and footnotesrequired by accounting principles generally accepted in the United States ofAmerica for complete financial statements. In the opinion of management, the accompanying unaudited interimcondensed consolidated financial statements reflect all adjustments, which includeonly normal recurring adjustments, necessary to present fairly InsWeb’sfinancial position, results of operations and cash flows as of and for theperiods ended September 30, 2001.  Thefinancial data and other information disclosed in these notes to the condensedconsolidated financial statements related to these periods are unaudited.  The results for the three and nine monthsended September 30, 2001 are not necessarily indicative of the results to beexpected for the year ending December 31, 2001.

 

                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, as filed with the Securities and ExchangeCommission on March 30, 2001, and other information filed with theCommission.  The balance sheet atDecember 31, 2000 is derived from the audited financial statements included inInsWeb’s Annual Report on Form 10-K for the year ended December 31, 2000.

 

***Significant Customers***

 

                Forthe three months ended September 30, 2001, three customers accounted for 13%,11% and 9%, respectively, of total revenues.

 

***Net Loss Per Share – Basic and Diluted***

 

                Basic earnings per share iscomputed using the weighted average number of shares of common stockoutstanding.  Diluted earnings per sharereflect the potential dilution that would occur if stock options and warrantshad been exercised.  For all periodspresented common equivalent shares from stock options and warrants have beenexcluded from the computation of net loss per share–diluted, as theireffect is antidilutive.

 

                ***Reclassification***

 

***               ***Duringthe quarter ended September 30, 2001, InsWeb has reclassified certainoverhead-related costs, including facilities, telecommunications and systemsexpenses from general and administrative expenses to sales and marketing, andtechnology expenses. Such reclassifications have been presented for the threeand nine months ended September 30, 2001, and for all prior periods.

 

**2.  Comprehensive Loss**

 

                Total comprehensive loss for thethree and nine months ended September 30, 2001 and 2000 were as follows (*in thousands*):

                
|                                     |   | **Three Months****Ended September 30,** |       | **Nine Months****Ended September 30,** |       |
|------------------------------------------|--------|-----------------------------------------|------------|---------------------------------------------|------------|
|                                     |   | **2001**                                |       | **2000**                                    |       | **2001** |   | **2000** |   |
|                                     |   | **(unaudited)**                         | ** ** | ** **(unaudited)                       | ** ** |
| Net loss                                 |   | $                                       | (6,943     | )                                           | $          | (10,816 | ) | $ | (19,624 | ) | $ | (44,172 | ) |
| Other  comprehensive loss:               |   |                                    |       |                                        |       |   |   |   |   |
| Foreign currency translation adjustments |   | -                                       |       | (34                                         | )          | (165 | ) | (86 | ) |
| Unrealized  (loss) gain on investments   |   | (1                                      | )          | (2                                          | )          | 2 |   | 35 |   |
| Total  comprehensive loss                |   | $                                       | (6,944     | )                                           | $          | (10,852 | ) | $ | (19,787 | ) | $ | (44,223 | ) |

 

**3.  Related Party Transactions**

 

***Stockholder and Customer***

 

                Astockholder, who is also a customer, accounted for $4,000 and $601,000 ofInsWeb's revenues for the nine months ended September 30, 2001 and 2000,respectively.  For the three monthsended September 30, 2001 and 2000, the customer accounted for $1,000 and$239,000 of InsWeb’s revenues, respectively. This customer accounted for $0 and$74,000 of InsWeb’s accounts receivable at September 30, 2001 and December 31,2000, respectively.

 

***Affiliate and Customer***

 

                Anaffiliate, who owns a majority interest in a stockholder, is also a customerand accounted for $222,000 and $205,000 of InsWeb's revenues for the ninemonths ended September 30, 2001 and 2000, respectively.  For the three months ended September 30,2001 and 2000, the customer accounted for $51,000 and $66,000 of InsWeb’srevenues, respectively. This customer accounted for $30,000 and $4,000 ofInsWeb’s accounts receivable at September 30, 2001 and December 31, 2000,respectively.

 

***Marketing Agreements***

 

                Duringthe three and nine months ended September 30, 2001, InsWeb recognized$1,025,000 and $3,075,000, respectively, in marketing expense under a marketingagreement with an Internet company compared to $1,260,000 and $3,784,000 forthe comparable periods in 2000.  Abeneficial owner of a significant number of shares of the Internet company is aprincipal stockholder of InsWeb.

 

**4.  InsWeb Japan**

 

                In1998, InsWeb entered into a Joint Venture Agreement with a strategic partnerand significant stockholder to develop, implement and market an onlineinsurance marketplace in Japan and the Republic of Korea.  The joint venture is carried out exclusivelythrough InsWeb Japan K.K., a Japanese corporation, in which InsWeb owned a 25%interest.  In conjunction with thisagreement, InsWeb also entered into an agreement in August 1999 to provideconsulting and hosting services to assist InsWeb Japan K.K. in developing itsInternet strategy.  Although thisagreement has not been terminated, InsWeb did not provide consulting servicesduring the three and nine months ended September 30, 2001 and does not expectto provide such consulting and hosting services, in the future, to InsWeb JapanK.K.  For the three and nine months endedSeptember 30, 2000, $0 and $1,414,000 were billed to InsWeb Japan K.K. underthis agreement and are included in development and maintenance fees.

 

                InsWeb's initial interest in InsWeb Japan K.K.was purchased in exchange for a promissory note due to a significant owner ofInsWeb's common stock.  Interest expenserelated to this note for the three and nine months ended September 30, 2001,was $18,000 and $49,000, respectively, and for the three and nine months endedSeptember 30, 2000, was $17,000 and $53,000, respectively.  As of September 30, 2001 and December 31,2000, $1,258,000 and $1,312,000 were outstanding under the note.  In August 2000, InsWeb invested anadditional $708,000 as part of an additional sale of capital stock by InsWebJapan K.K.  As a result of thisadditional investment, InsWeb maintained its 25% interest in InsWeb Japan K.K

                InMarch 2001, the parties to the Joint Venture Agreement entered into anagreement, whereby a new holding company, Finance All K.K., controls InsWebJapan K.K. and two other Internet companies in which InsWeb does not currentlyhold a financial interest.  In exchangefor its shares in InsWeb Japan K.K., InsWeb's ownership interest in Finance AllK.K. in March 2001 was 14.4%.  InsWeb'sinvestment interest in Finance All K.K is being accounted for under the costmethod effective March 2001.

 

**5.  Recent Accounting Pronouncements**

 

                InJune 1998, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standard No. 133, *Accounting for Derivative Instrumentsand Hedging Activities,* or SFAS No. 133. SFAS No. 133establishes accounting and reporting standards for derivative instruments andhedging activities.  InsWeb’s adoptionof SFAS No. 133 in 2001 did not have a material effect on InsWeb's resultsof operations or financial condition.

 

In June 2001, the FASBissued Statement of Financial Accounting Standard No. 141 – *Business Combinations* (SFAS 141). SFAS 141requires that the purchase method of accounting be used for all business combinationsinitiated after June 30, 2001. Additionally, the use of the pooling-of-interests method is prohibited.InsWeb’s adoption of SFAS 141 is not expected to have a material effect onInsWeb’s results of operations or financial condition.

 

                In June 2001, the FASB issuedStatement of Financial Accounting Standard No. 142, *Goodwill and Other Intangible Assets* (SFAS 142).  SFAS 142 changes the accounting for goodwillfrom an amortization method to an impairment-only approach.  Amortizationof goodwill, including goodwill recorded in past business combinations, willcease upon adoption of SFAS 142.  SFAS142 will be effective for InsWeb’s fiscal year beginning January 1, 2002.  InsWeb’s adoption of SFAS 142 is notexpected to have a material effect on InsWeb’s results of operations orfinancial condition.

 

**6**.**Change in Accounting Principle**

 

Effective January 1,2000, InsWeb changed its revenue recognition policy for set-up fees, which areincluded in development and maintenance fees, to comply with SEC Staff AccountingBulletin No. 101: *Revenue Recognition*. Prior to this accounting change, InsWeb recognized revenue from set-upfees received from a participating insurance carrier when that carrier’sintegration with the InsWeb site became operational (“Live Date”) on InsWeb’smarketplace.  As a result of SAB 101,InsWeb continues to defer set-up revenue until the Live Date, but has changedits revenue recognition policy from full recognition at the Live Date torecognizing the revenue ratably over the estimated life of the carrierrelationship.  This accounting changeresulted in a cumulative effect of a change in accounting principle, for yearsprior to 2000, of $1,635,000, and is reflected in the results for the nine monthsended September 30, 2000.  During thethree months ended September 30, 2001 and 2000, $189,000 (or $0.01 per share)and ($162,000) (or ($0.01) per share), respectively, of the cumulative effectfor years prior to 2000 was recognized as revenue, and for the nine monthsended September 30, 2001 and 2000, $706,000 (or $0.02) and $160,000 (or $0.01per share), respectively, of the cumulative effect for years prior to 2000 wasrecognized as revenue.

 

**7.  Restructuring**

 

In March 2001, InsWebcompleted a restructuring plan approved by the Board of Directors in May2000.  The restructuring plan includedthe closure of InsWeb’s facilities in Redwood City, San Carlos and WestlakeVillage, California and Bel Air, Maryland, the relocation of InsWeb’soperations to the Sacramento, California area, and the discontinuance ofcertain strategic initiatives.  As aresult of this restructuring, approximately 190 individuals have left InsWebacross all functions.  Of these,approximately 80 left InsWeb as a result of a reduction in workforce, andapproximately 110 did not relocate with InsWeb and were replaced in conjunctionwith the hiring of the Sacramento area workforce.

 

Inthe second quarter of 2000, InsWeb recorded a related restructuring charge of$1,528,000.  The charge consisted ofemployee separation costs of $926,000, asset impairments of $1,066,000, andother exit costs of $536,000 offset by a lease termination fee of $1,000,000received as a result of InsWeb’s termination of its lease on its San Carlosfacility.  In the third quarter of 2000,InsWeb recorded additional restructuring charges of $639,000 based on revisionsto the restructuring plan.  The chargeconsisted of additional employee separation costs of $77,000, asset impairmentsof $203,000, and other exit costs, primarily representing future rent paymentsfor facilities being exited, of $359,000.

 

In addition to theseverance costs included in the restructuring charge, InsWeb offered retentionbonuses to certain employees for their commitment to stay with InsWeb forperiods of six to eighteen months beginning May 2000.  For the three and nine months ended September 30, 2001, $165,000and $1,118,000 respectively, of retention bonuses were included in operatingexpenses.

 

**8.   Acquisition of Selected Assets of IntuitInsurance Services, Inc.**

 

In January 2001, InsWeb acquired fromIntuit certain assets and related liabilities associated with an onlineinsurance shopping and purchasing service operated by Intuit InsuranceServices, Inc., a wholly owned subsidiary of Intuit.  InsWeb did not acquire any of Intuit's revenue producingrelationships with insurance carriers. Pursuant to related agreements, a representative from Intuit has beenelected to the InsWeb Board of Directors, and certain restrictions were placedon the ability of Intuit to conduct future acquisitions or dispositions ofInsWeb’s common stock.

 

The purchase price ofapproximately $13,100,000 consisted of an exchange of 7,019,389 shares ofInsWeb's common stock with a fair value of $12,500,000, and other acquisitionrelated expenses of approximately $600,000 consisting primarily of payments fora financial advisor and other professional fees.  The aggregate purchase pricewas allocated to a non–compete agreement of $13,040,000, and patents andother intellectual property $60,000. These intangible assets are being amortized on a straight-line basisover five years.  Amortization expensefor the quarter ended September 30, 2001 was $655,000 and for the ninemonths ended September 30, 2001 was $1,802,000. Intellectual property acquiredvalued at $10,000 was considered to have no future value to InsWeb.   Accordingly, such amount was written off in the quarter ended March 31, 2001.

 

In connection with theacquisition, InsWeb and Intuit entered into a license and distributionagreement, under which Intuit and InsWeb have granted one another licenses tocreate links between their respective websites in order to create and operate aco-branded insurance center.  Thisagreement also provides that InsWeb will be the exclusive aggregator of onlineconsumer insurance services for Quicken.com, an Intuit website. Subject to thedelivery of certain minimum impressions to the insurance center, InsWeb willpay Intuit fixed fees and a portion of the revenues associated with consumerslinking from the Quicken.com website. InsWeb also acquired the right to the traffic from various formerpartners of Intuit. During thethree and nine months ended September 30, 2001, InsWeb has paid $625,000 and$1,875,000, respectively, under this agreement.

 

**9.  Stockholders’Equity**

 

**               **In connection with a service agreement with athird-party insurance carrier, in March 2001, InsWeb issued warrants topurchase an aggregate of 350,000 shares of InsWeb’s common stock at a purchaseprice of $5.00 per share.  The warrantsbecame exercisable on March 31, 2001, and expire on March 1, 2006.  The fair value of the common stock warrantsof $276,000 was derived using the Black-Scholes model, and is included in salesand marketing expense in the quarter ended March 31, 2001.  As of September 30, 2001, none of the commonstock warrants had been exercised.

 

In June 2001, InsWeb’s Boardof Directors approved the repurchase of up to 1,000,000 shares of InsWeb commonstock.  As of September 30, 2001, InsWeb had repurchased222,500 shares under the repurchase program at an aggregate cost of $204,000.

 

InSeptember 2001 the Board of Directors of InsWeb approved a special meeting ofthe InsWeb stockholders to consider an amendment to the articles ofincorporation to effect a reverse stock split.  If approved by the stockholders at the special meeting on October29, 2001, the Board would be authorized to institute a reverse stock split inany ratio between 1-for-4 and 1-for-8. The exact ratio would be determined by the Board based on prevailing marketconditions at the time the reverse stock split is implemented.  However, the Board would not be required toimplement the reverse stock split and may abandon the split if it deems it tobe in the best interests of InsWeb and its stockholders.  The purposes of the reverse stock split areto reduce the number of common shares outstanding, to increase the per sharetrading price of the InsWeb common stock, and to support InsWeb’s efforts toremain listed on the Nasdaq National Market.

 

**10.  Commitments andContingencies**

 

                ***Marketing Agreements***

 

                InsWebis required to make fixed payments under various marketing agreements, whichexpire at various dates through 2005. In addition to the fixed fees, certain of these agreements requireInsWeb to pay fees for each user delivered to InsWeb's website in excess ofcertain minimums.

 

                InFebruary 1998, InsWeb and Yahoo! entered into an agreement pursuant to whichYahoo! offers a co-branded version of the InsWeb online insurance marketplaceon the Yahoo! website.  The agreementhas been renewed several times for one-year periods. The agreement provides forInsWeb to be the exclusive provider of online insurance quotation services onthe Yahoo! site for automobile, homeowners and term life insurance.  Under the most recent renewal, inSeptember 2001, InsWeb has agreed to pay fixed fees, plus a fee for eachcompleted shopping session in excess of certain minimum targets.  InsWeb will continue to be promoted in theYahoo! Insurance Center but will not be the exclusive provider of insurancequotation services after December 31, 2001.

 

                InDecember 1999, InsWeb and Microsoft entered into a two-year agreementpursuant to which Microsoft's MSN Insurance Center on MSN MoneyCentral offersco-branded comparative shopping services provided by InsWeb.  The agreement provides for InsWeb to be theexclusive provider of online insurance quotation services on the MSN InsuranceCenter.  Under the agreement, InsWeb hasagreed to pay to MSN fixed fees for certain traffic guarantees, plus a fee foreach user delivered to an InsWeb quote form from the co-branded site in excessof certain minimums.  In June 2001, thisagreement was amended, to reduce the minimum delivery requirements from MSN toInsWeb, reduce the amount of fixed fees that InsWeb is required to pay MSN, andalso reduce the per user fee paid by InsWeb.

 

                InFebruary 2000, InsWeb and America On-line entered into a two-yearagreement pursuant to which America Online offers a co-branded version of theInsWeb online insurance marketplace across the Netscape Netcenter, Compuserveand Digital City websites. The agreement provides for InsWeb to be theexclusive provider of online insurance quotation services on the Netscapewebsite and the premier insurance comparison–shopping aggregator ofinsurance offerings for Compuserve and Digital City.  Under the agreement, InsWeb has agreed to pay to AOL fixed feesfor certain impression targets plus a fee for each click–through over acumulative minimum threshold.  InFebruary 2001, InsWeb and AOL amended the original contract to adjust theamount of fixed fees and targeted impressions for the remainder of the originalterm of the contract.  As a result ofthis amendment, effective November 1, 2001, InsWeb will no longer be theexclusive provider of online insurance quotations on Netscape, but willcontinue to be a preferred provider of these services.

 

                InAugust 2001, InsWeb and Lycos entered into a two-year agreement pursuant towhich visitors to the Lycos website have access to a co-branded version of theInsWeb online insurance marketplace through links placed on several pageswithin the Lycos website. The agreement requires InsWeb to pay Lycos fixedintegration fees, and a fee for each completed shopping session on theco-branded website in excess of certain minimums. The amount of fixed fees duefor the second year may be reduced or increased based on certain performancetargets set for the first year. In addition, InsWeb is entitled to a percentageof fees generated by Lycos from advertising placed on the Lycos InsuranceCenter.

 

As mentioned elsewhere, InsWeb andIntuit entered into a license and distribution agreement in January 2001 inconnection with InsWeb’s purchase of selected assets of Intuit InsuranceServices, Inc.  This agreement providesthat InsWeb will be the exclusive aggregator of online consumer insuranceservices within the insurance center on Quicken.com, an Intuit website. Subjectto the delivery of certain minimum impressions to the insurance center, InsWebwill pay Intuit fixed fees and a portion of the revenues associated withconsumers linking from the Quicken.com website through December 2005.

 

                AtSeptember 30, 2001, future minimum payments under these agreements are$2,000,000 for the remainder of 2001, and $19,200,000 thereafter.

 

***eHealthInsuranceLitigation***

 

In February 2001, InsWeb temporarily suspended its onlinehealth-insurance quoting services due to the decision by eHealthInsurance,formerly InsWeb’s exclusive provider of online health-insurance quotes, to unilaterallyterminate the relationship. In April 2000, the two companies signed a two-yearonline distribution agreement by which eHealthInsurance became the exclusiveprovider of individual health, small-group health and Medicare supplementinsurance quotes to InsWeb's users through a co-branded website.  In February 2001, eHealthInsurance filedsuit in the U.S. District Court for the Northern District of Californiaalleging InsWeb’s failure to perform its obligations under the agreement. InMarch 2001, eHealthinsurance amended its suit to add allegations that InsWebinterfered with its business relationships. The complaint as amended seeks unspecified compensatory and punitivedamages. InsWeb believes that all of eHealthInsurance's claims are withoutmerit and that the outcome of this lawsuit will not have a material adverseeffect on InsWeb’s financial results, cash flow or financial position.  In addition, in March 2001, InsWeb filed acounter claim alleging that eHealthInsurance wrongfully terminated the linkingagreement and pursued a course of conduct aimed at damaging InsWeb’s business.

 

InJune 2001, InsWeb entered into a two-year agreement with QuickQuote Financial,Inc. pursuant to which QuickQuote became the exclusive provider of onlinehealth insurance services to InsWeb consumers.

 

**ITEM 2. MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**

**AND RESULTS OFOPERATIONS**

 

 

 

*                InsWebhas included in this filing certain "forward–lookingstatements" within the meaning of the Private Securities Litigation ReformAct of 1995 concerning InsWeb's business, operations and financialcondition.  The words or phrases"expects," "anticipates," "intends,""plans," "believes," "seeks,""estimates," and similar expressions are generally intended toidentify forward–looking statements. Such forward–looking statements are subject to various known andunknown risks and uncertainties, and InsWeb cautions you that any forward–lookinginformation provided by, or on behalf of, InsWeb is not a guarantee of futureperformance.  Actual results coulddiffer 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, declining economic conditions includinga possible recession which could result in lower growth rates, decreasingrevenue and reduced participation in InsWeb’s marketplace, limited operatinghistory, anticipated losses, the unpredictability of its future revenues,reliance on key customers – property and casualty insurance carriers,  who are subject themselves to volatility intheir operating cycles, competition, risks associated with system developmentand operation risks, management of potential growth and risks of new businessareas, business combinations, and strategic alliances.  These risks and uncertainties, as well asother risks and uncertainties are described in greater detail in the sectionentitled “Factors That May Affect Future Performance.” All forward–lookingstatements are based on information available to InsWeb on the date hereof, andInsWeb assumes no obligation to update such statements.*

 

 

 

**Overview**

 

                InsWeb operates a leading online insurance marketplace that enablesconsumers to comparison shop online and obtain insurance company–sponsoredquotes for a variety of insurance products, including automobile, term life andhomeowners insurance.  Inorder to create this marketplace, InsWeb has established business relationshipswith 40 insurance companies throughout the United States as of September 30,2001.

 

                InsWeb'sprincipal source of revenues is transaction fees.  While quotes obtained through InsWeb's online insurancemarketplace are provided to consumers free of charge, InsWeb's participatinginsurance companies pay transaction fees to InsWeb generally based on thedelivery of qualified leads.  Qualified leads are produced in two ways: for insurance companiesproviding instant online quotes, a qualified lead is produced when a consumerclicks to request insurance coverage based on a specific quote; for insurancecompanies providing e-mail or other offline quotes, a qualified lead isproduced when a consumer clicks to request the quote itself.  In either case, InsWeb is generally paid atransaction fee whether or not the consumer actually purchases a policy,although, in certain instances, InsWeb is paid a transaction fee only after theconsumer has purchased a policy.

 

Once a lead is generated by the consumer's request for anapplication or offline quote, InsWeb transmits the lead either to InsWeb’ssubsidiary, InsWeb Insurance Services, a licensed agency, or to the selectedinsurance company by e-mail, file transfer or direct connection to theinsurance company's information system. Revenue from transaction fees isgenerally recognized at the time the lead is generated or, where required, whenthe consumer purchases the policy.  However, InsWeb defers the recognition of revenues on contracts withminimum click-through requirements until all contingencies have been met.

 

In October 1999, InsWeb began generatingcommission revenue as an insurance agent based on activities it performsrelated to the sale of certain automobile insurance policies inCalifornia.  Since that date, InsWeb hasexpanded its insurance agency operations. As of September 30, 2001, InsWeb’ssubsidiary, InsWeb Insurance Services, Inc., has been appointed as anauthorized automobile insurance agent by 10 participating insurance companiesand is acting as an agent in the states of Arizona, California, Illinois, NewYork, Ohio, Oregon, Pennsylvania, Virginia and Washington.  InsWeb receives a commission based on apercentage of the insurance policy premium related to each insurance policysale where InsWeb has acted as the agent. InsWeb recognizes the revenue from these activities on the effectivedate of the policy.   InsWeb alsorecognizes revenue when an applicable policy is renewed.  InsWeb intends to expand its onlineinsurance agency operations by adding additional participating insurancecompanies and by expanding into additional states.

 

InsWeb alsogenerates development and maintenance fees from its participating insurancecompanies.  InsWeb charges a fee todesign and develop customized interfaces between an insurance company'sinformation system and the InsWeb site. InsWeb recognizes revenue from set-upfees received from a participating insurance carrier ratably over the estimatedlife of the carrier relationship, after the development work is complete andthe insurance company’s integration with the Company’s site has becomeoperational (“Live Date”). Additional development fees are charged as insurance companies add newproducts, increase their geographic coverage and convert to instant quotingcapability on the InsWeb online insurance marketplace, as well as for periodicupgrades and changes to insurance companies' information resident on the InsWebsite. InsWeb charges maintenance fees for maintaining and servicing theprograms of the individual insurance companies and for maintaining any hardwareat InsWeb's facility that is dedicated to specific insurance companies. Thesemaintenance fees are typically payable monthly and are recognized as revenueratably over the term of the maintenance agreement. Prepaid development andmaintenance fees are recorded as deferred revenue until earned. Development andmaintenance fees are expected to account for a declining percentage of totalrevenues as transaction fees and agency commission revenues increase.

 

                Sales and marketing expensesconsist of payroll and related expenses, including employee benefits, facilitycosts, telecommunications and systems costs, for InsWeb's sales and marketingpersonnel and the personnel and related costs for the InsWeb Insurance Agency,which includes selling agents, underwriters, supervisors and customer serviceand support groups. Also included in sales and marketing expense are directmarketing expenditures that include advertising, promotions and fees paid toonline companies with which InsWeb has contractual relationships to drive consumertraffic to the InsWeb online marketplace. InsWeb’s current consumer marketing program is focused on maintainingkey online relationships and selective cost-effective marketing campaignsdesigned to maintain consumer awareness of InsWeb and its online insurancemarketplace; prior to the first quarter of 2000, InsWeb’s marketing program wasconcentrated on various forms of offline and online advertising and marketingin an effort to attract consumer traffic to the InsWeb site and especially todevelop the InsWeb brand.  As a resultof this change in focus, InsWeb’s direct marketing expenses in the first ninemonths of 2001 are significantly below those reported in the first nine monthsof 2000.  Direct marketing expenses willfluctuate based on the amount of consumer traffic driven to the InsWeb onlinemarketplace; additionally, the costs associated with the InsWeb InsuranceAgency may increase as the program expands into additional states and addsadditional insurance carriers.

 

                Technology expenses consistprimarily of payroll and related expenses, including employee benefits,facility costs, telecommunications and systems costs, for the planning anddesign, carrier implementation and integration, and product and sitedevelopment personnel.  InsWeb implementedEmerging Issues Task Force (EITF) Issue 00-02, *Accountingfor Website Development Costs*, during the third quarter of2000.  This resulted in thecapitalization of website development costs directly related to the enhancementand upgrade of the InsWeb site.  Suchcosts had previously been expensed as period costs.  Consistent with the guidance of EITF Issue 00-02 and otherapplicable accounting guidance, all other software development costs have beenexpensed as incurred.  Technologyexpenses declined for the three and nine months ended September 30, 2001 fromamounts reported for the three and nine months ended September 30, 2000 as aresult of the restructuring plan announced in May 2000.  InsWeb does not  expect a significant increase in technology costs over the nextsix months.

 

                Generaland administrative expenses consist primarily of payroll and related expenses, includingemployee benefits, facility costs, telecommunications and systems costs, forInsWeb's general management, administrative and accounting personnel, as wellas other general corporate expenses. InsWeb believes that although itscompleted restructuring plan has led to a decrease in general andadministrative expenses, general and administrative expenses may increase inthe future as InsWeb expands its operations.

 

                Sinceits inception, InsWeb has incurred significant losses, and as of September 30,2001, InsWeb had an accumulated deficit of $145 million.  These losses, and this accumulated deficit,have resulted from the significant costs incurred in the development ofInsWeb's technology platform, the establishment of relationships with insurancecompanies, their integration with the InsWeb site, and InsWeb's marketing andsales activities.  InsWeb intends tocontinue to invest in technology, sales and marketing and in its administrativeinfrastructure.  As a result, InsWebbelieves that it will continue to incur operating losses throughout the currentfiscal year.  Although InsWeb hasexperienced revenue growth in recent periods, its operating results for futureperiods are subject to numerous uncertainties. InsWeb's growth in revenue maycontinue, however, there can be no assurance that InsWeb will be able tosustain revenue growth or achieve profitability.  In view of the rapidly evolving nature of InsWeb's business andits limited operating history, InsWeb believes that period-to-periodcomparisons of its operating results are not necessarily meaningful and shouldnot be relied upon as an indication of future performance.

 

**Results of Operations**

 

                Thefollowing table sets forth certain statement of operations items as apercentage of total revenues for the three and nine months ended September 30,2001 and 2000:

 

 
|                               |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                               |   | **2001**                               |   | **2000**                              |   | **2001** |   | **2000** |   |
| Revenues:                          |   |                                   |   |                                  |   |   |   |   |   |
| Transaction  fees                  |   | 85                                     | %      | 86                                    | %      | 86 | % | 80 | % |
| Agency  commissions                |   | 8                                      | %      | 3                                     | %      | 7 | % | 3 | % |
| Development  and maintenance fees  |   | 7                                      | %      | 11                                    | %      | 7 | % | 17 | % |
| Total                              |   | 100                                    | %      | 100                                   | %      | 100 | % | 100 | % |
| Operating  expenses:               |   |                                   |   |                                  |   |   |   |   |   |
| Sales  and marketing               |   | 123                                    | %      | 146                                   | %      | 111 | % | 154 | % |
| Technology                         |   | 60                                     | %      | 141                                   | %      | 62 | % | 106 | % |
| General  and administrative        |   | 30                                     | %      | 76                                    | %      | 32 | % | 50 | % |
| Amortization  of intangible assets |   | 11                                     | %      | 1                                     | %      | 10 | % | 6 | % |
| Amortization  of stock-based comp. |   | 1                                      | %      | 4                                     | %      | 1 | % | 5 | % |
| Impairment  of goodwill            |   | —                                 |   | —                                |   | — |   | 25 | % |
| Restructuring  charge              |   | —                                 |   | 15                                    | %      | — |   | 12 | % |
| Total                              |   | 225                                    | %      | 383                                   | %      | 216 | % | 358 | % |
| Loss  from operations              |   | (125                                   | %)     | (283                                  | %)     | (116 | %) | (258 | %) |

 

 

***Revenues***

 

*Transaction Fees.*  Transaction fees accounted for $5.0 millionand $15.9 million of total revenues, for the three and nine months endedSeptember 30, 2001, compared to $3.6 million and $14.2 million of totalrevenues, for the comparable periods in 2000. The increase for the three andnine months ended September 30, 2001 was primarily the result of the number ofleads generated by the increase in the number of completed shopping sessions.

 

During the first ninemonths of 2001, approximately 2.1 million shopping sessions were completed atInsWeb, a 23.5% increase from the approximate 1.7 million shopping sessionscompleted in the first nine months of 2000. InsWeb recorded approximately 10.4 million visitor sessions during thefirst nine months of 2001, an increase of 5.1% from the approximate 9.9 millionvisitor sessions recorded in the comparable period in 2000.  The increase in completed shopping sessionsis the result of InsWeb’s marketing efforts attracting higher quality visitors.

 

*Agency Commissions. *Agencycommissions accounted for $0.4 million and $1.2 million of total revenues forthe three and nine months ended September 30, 2001, compared to $0.1 millionand $0.5 million of total revenues for the comparable periods in 2000. Theincrease was primarily due to an increase in carrier participation and anincrease in expansion of geographic territory from three to nine states.

 

*Development andMaintenance Fees.*  Development and maintenance fees accountedfor $0.4 million and $1.4 million of total revenues, for the three and ninemonths ended September 30, 2001, compared to $0.5 million and $3.1 million of totalrevenues, for the comparable periods in 2000. The decrease for the nine months ended September 30, 2001 was primarilyattributable to $1.4 million in revenues recognized from consulting and hostingservices provided to InsWeb Japan K.K. for the nine months ended September 30,2000.  InsWeb did not provide consultingand hosting services to InsWeb Japan K.K. during the three and nine monthsended September 30, 2001 and does not expect to provide such consulting andhosting services in the future.

 

***OperatingExpenses***

 

*                Sales and Marketing.*  Sales and marketing expenses increased to$7.2 and decreased to $20.7 million for the three and nine months endedSeptember 30, 2001, from $6.2 and $27.4 million for the comparable periods in2000.  Direct marketing expensesincreased to $4.6 and decreased to $13.1 million for the three and nine monthsended September 30, 2001, from $4.2 and $19.4 million for the comparableperiods in 2000.  The increases wereprimarily attributed to the significant increase in consumer traffic andcompleted shopping sessions. The decreases were primarily attributed tosignificant reductions in offline advertising relationships combined with areduction in headcount resulting from InsWeb’s restructuring efforts.

 

*                Technology.*  Technology expenses decreased to $3.5 and$11.4 million for the three and nine months ended September 30, 2001, from $6.0and $19.0 million for the comparable periods in 2000.  The decreases were primarily attributable to reduced headcountresulting from InsWeb’s restructuring efforts. Capitalized web developmentcosts during the three and nine months ended September 30, 2001 were, $0 and$0.8 million, respectively, and $0.7 million was capitalized for the comparableperiods in 2000.  Amortization of webdevelopment costs for the three and nine months ended September 30, 2001 were$0.6 and $1.1 million, respectively.

 

*                General and Administrative.*  General and administrative expensesdecreased to $1.7 and $5.9 million for the three and nine months endedSeptember 30, 2001, from $3.2 and $9.0 million for the comparable periods in2000.  These decreases were primarilydue to decreased personnel associated with InsWeb’s restructuring efforts.

 

***OtherOperating Expenses***

 

*Amortization ofIntangible Assets.  Amortization of intangibleassets during the three and nine months ended September 30,*2001 was $0.7 and $1.8 million, compared to amortization of $40,000 and $1.1million for the comparable periods in 2000. This expense was attributable to the amortization of intangiblesassociated with the acquisition of certain assets of Intuit Insurance Servicesin January 2001.  For the comparableprior periods, amortization was solely attributable to the intangiblesassociated with the acquisition of the Benelytics, Inc.

 

*                Amortizationof Stock-based Compensation.*  Amortization of stock–basedcompensation for the three and nine months ended September 30, 2001 was $48,000 and $178,000, compared to $186,000 and $797,000 for thecomparable periods in 2000.  Thisdecrease was attributable to the reduction in employees in conjunction withInsWeb’s restructuring plan.

 

***InterestIncome, Net***

 

                Interest income, net, includesincome earned on InsWeb's invested cash and investments and expense related toits note payable to InsWeb Japan K.K. Net interest income for the three and nine months ended September 30,2001 was $0.4 and $1.7 million compared to net interest income of $1.0 and $3.5million for the comparable periods in 2000. The decrease was primarily due to the decline in the principal balanceof short-term investments and cash equivalents and, to a lesser degree, to thedecline in interest rates.

 

**Liquidity and Capital Resources**

 

                At September 30, 2001, InsWeb'sprincipal source of liquidity is $37.1 million in cash, cash equivalents andshort–term investments.

 

                The use of cash primarilyconsisted of InsWeb's operating loss before non-cash items.  For the nine months ended September 30 2001,net cash used in operating activities was $12.1 million compared to $32.8million for the comparable period in 2000. For the nine months ended September 30, 2001, non-cash items includedamortization of intangibles of $1.8 million, loss on disposal of equipment of$0.6 million and depreciation and amortization of fixed assets of $4.2million.  A decrease in deferred revenuealso contributed to the cash used in operations for the nine months endedSeptember 30, 2001.

 

                Forthe nine months ended September 30, 2001, net cash provided by investingactivities was $1.7 million, which primarily consisted of the sale of short–terminvestments offset by purchases of equipment and furniture and capitalizedwebsite costs.

 

                In September 2000, InsWeb signed a 10-year lease agreement through 2010for office space in the Sacramento area to house its corporate headquarters andagency operations.  InsWeb incurredadditional costs for leasehold improvements and furniture and equipmentassociated with this lease through the second quarter of 2001.   InsWeb has subleased portions of itsRedwood City operating facility, however, the remainder of the Redwood Cityfacility and its facility in West Lake Village, California remain unoccupiedand are not subleased.  There can be noassurances that InsWeb will be able to sublease the Redwood City facility orits West Lake Village facility, or that the revenue from subletting suchfacilities will cover the ongoing lease obligations.

 

Inaddition, under various marketing agreements with its online partners, InsWebis obligated to make minimum payments totaling $21.2 million through 2005.

 

                InsWeb currently anticipates,based on current revenue and expense trends, that its balances of cash and cashequivalents and short-term investments, together with cash generated by itsoperations, will be sufficient to meet its anticipated cash needs for workingcapital and capital expenditures for at least the next 12 months.  Although InsWeb does not anticipate the needfor additional financing to meet its current anticipated operating needs,nevertheless additional funds may be needed to expand business internally, tofacilitate an acquisition, or if current operating plans are unsuccessful.  InsWeb cannot be certain that additionalfinancing will be available if or when required, on favorable terms, or atall.  If InsWeb is not successful in raisingadditional capital as required, its business could be materially harmed.  If additional funds were raised through theissuance of equity securities, the percentage ownership of InsWeb'sthen-current stockholders would be reduced.

 

**Financial Outlook**

 

                The following forward-lookingstatements reflect InsWeb management’s expectations as of October 17, 2001.Given the potential changes in general economic conditions and consumerspending, the emerging nature of the online marketplace, and various other riskfactors, actual results may differ materially. See section entitled “Factors ThatMay Affect Our Future Performance.”

 

*Guidance for the quarter ending December 31, 2001:*

 

•      Completed shopping sessionsfor the quarter are expected to be between 575,000 and 625,000;

•      Revenues are expected to bebetween $4.2 million and $4.8 million; and

•      InsWeb’s net loss is expectedto be between $5.6 million and $6.4 million, or between $0.13 per share and $0.15 per share.

 

*Guidance for the full year ending December 31, 2001:*

 

•      Completed shopping sessionsfor the year are expected to be between 2.6 million and 2.7 million;

•      Revenues are expected to bebetween $22.7 million and $23.3 million;

•      InsWeb’s net loss is expectedto be between $25.2 million and $26.0 million, or between $0.60 per share and $0.62 per share; and

•      InsWeb’s total headcount at year-end is expected to bebetween 190 and 200. This anticipated increase is tied to expected growth inInsWeb’s auto insurance agency operations.

**Factors That May Affect Our Future Performance**

 

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

 

 

**Our limited operating history makes an evaluation of ourfuture prospects very difficult.**

 

 Ourstockholders must consider the uncertainties frequently encountered by earlystage companies in new and rapidly evolving markets. These uncertaintiesinclude:

 

o      an evolving and unpredictable businessmodel, which makes prediction of future results uncertain and an investment inour common stock highly speculative;

 

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

 

o      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;

 

o      our potential inability to successfullymanage our anticipated growth, which could lead to management distractions andincreased operating expenses;

 

o      our ability to attract and retain highlyskilled employees; and

 

o      our reliance on key customers and abilityto retain customers.

 

                Toaddress these uncertainties, we must, among other things:

 

o      refine our business model;

 

o      work to expand the efficiencies andgeographic coverage of our agency activities;

 

o      enhance the brand identity of our onlineinsurance marketplace;

 

o      maintain and increase our strategicalliances with other online businesses to increase traffic to our website;

 

o      maintain, increase and geographicallydiversify our base of participating insurance companies;

 

o      continue to ensure that our participatinginsurance companies offer competitive insurance products;

 

o      satisfy legal and regulatory requirementsapplicable to the insurance industry; and

 

o      continue to address consumer privacyconcerns.

 

Our business strategy may not be successful andwe may not be able to successfully address these uncertainties. Moreover, ourability to take the foregoing steps may be hampered by our limited financialresources should we fail to rapidly increase revenues or should increasedrevenues be more than offset by increased operating expenses.

 

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

 

Given current and planned investment levels, ourability to achieve profitability will depend upon our ability to generate andsustain increased revenues. As a result, we believe that we will incuroperating losses for the foreseeable future (the next 18 to 24 months). Weincurred operating losses of $21.9 million, $38.4 million and $53.6million for the years ended December 31, 1998, 1999 and 2000, respectively. Forthe nine months ended September 30, 2001 we incurred an operating loss of $21.4million.  As of September 30, 2001, ouraccumulated deficit was $144.9 million. Our operating results for future periods are subject to numerousuncertainties, and we may not achieve sufficient revenues to becomeprofitable.  Even if we achieveprofitability, we may not sustain or increase profitability on a quarterly orannual basis in the future.  If we areunable to achieve profitability, or if our profitability is delayed we may needto seek additional financing to continue our business operations.  Such financing could be on terms that aredilutive to our existing stockholders or could involve the issuance ofsecurities that have rights and preferences that are senior to those associatedwith our common stock.  Moreover, ifsuch financing were not available or were available only upon terms that wereunacceptable to us, we could be required to significantly curtail our operations.

 

**Ourfuture revenues are unpredictable, our operating results are likely tofluctuate from quarter to quarter, and if we fail to meet the expectations ofsecurities analysts or investors, our stock price could decline significantly**

 

Due to our limited operating history, theemerging nature of the market in which we compete and the high proportion ofour revenues that are derived from consumer traffic on our website, our futurerevenues are inherently difficult to forecast. We believe that period-to-period comparisons of our operating results maynot be meaningful, and you should not rely upon them as an indication of ourfuture performance.  Moreover, ourexpense levels are based largely on our investment plans and estimates offuture revenues.  We may be unable toadjust our spending to compensate for an unexpected 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 securities analysts or investors.

 

Factors that may cause fluctuations inour operating results include the following, many of which are outside ourcontrol:

 

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

 

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

 

o      Such consumer traffic may also fluctuateas a result of changes in consumer acceptance of Internet commerce,particularly in connection with shopping for insurance;

 

o      Our revenues may be harmed if we lose oneor more significant insurance company relationships or if an insurance companyreduces its participation on our marketplace;

 

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

 

o      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 or changesin the underwriting criteria used by our participating insurance companies todetermine which consumers will be offered quotes; and

 

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

 

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

 

We have experienced seasonality in our businessassociated with general slowness in the insurance industry during the year-endholiday period.  We expect to continueto experience seasonality as our business matures.  Because of this seasonality, investors may not be able to predictour annual operating results based on a quarter-to-quarter comparison of ouroperating results.  We believeseasonality will have an ongoing impact on our business.

 

**Becausea significant portion of our revenue is attributable to automobile insuranceshopping on our online marketplace, we are especially vulnerable to risksrelated to the online market for automobile insurance or the automobileinsurance industry generally**

 

Automobile insurance accounted forapproximately 75%, 78% and 69% of total revenues in the years ended December31, 1998, 1999 and 2000, respectively, and approximately 68% of total revenuesin the nine months ended September 30, 2001. We anticipate that automobile insurance will continue to account for asubstantial portion of our revenues for the foreseeable future.  As a result, if we fail to attract a broadbase of consumers to shop for automobile insurance on our site, or if changesin the automobile insurance industry make electronic commerce a less attractivemeans to shop for this type of insurance, our ability to generate revenue willbe reduced and our business will be harmed. In addition, property and casualty insurance, including automobileinsurance, is subject to operating cycles. During a cycle in which loss ratiosrise, insurance companies may choose to restrict the amount of business theywrite while they await approval of rate increases from the various stateinsurance departments. Our business could be harmed if our participatinginsurance companies reduce their participation in our online marketplace.

 

**Ifwe are unable to promote our brand and expand our brand recognition, ourability to draw ­consumers to our website will be limited**

 

A number of websites offer services thatare similar to and competitive with the services offered on our onlineinsurance marketplace.  Therefore, apositive recognition of our brand is critical to attracting additional consumersto our website, strengthening our relationships with participating insurancecompanies and attracting new insurance companies.  In order to attract and retain consumers and insurance companiesand to promote and maintain our brand, through the first quarter of 2000, weincreased our financial commitment to creating and maintaining prominent brandawareness.  Beginning in the secondquarter of 2000, our consumer-marketing program has been reduced and currentlyconsists of the maintenance of certain network online relationships, and otherselective cost-effective marketing campaigns, designed to maintain consumerawareness of InsWeb and our online insurance marketplace.  If our marketing efforts do not generate acorresponding increase in revenues or we otherwise fail to successfully promoteour brand, or if these efforts require excessive expenditures, our businesswill 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.

 

**Ourplans include new and expanded initiatives that could result in significantexpenditures, and we may not generate sufficient revenue to offset theseexpenditures**

 

We intend to offer additional servicesincluding, among other things:

 

o      performing activities on behalf of anincreased number of insurance companies as an authorized agent;

 

o      adding new insurance companies and helpingour existing insurance companies to expand the number of states in which theyare offering coverage in our online marketplace;

 

o      working on refining the technology of ouronline insurance agency;

 

o      increasing the level of technologyintegration between our platform and the systems of our participating insurancecompanies; and

 

o      continuing our market presence throughrelationships with Internet portals, financial institutions, websites orientedto activities that involve the purchase of insurance, such as automobileshopping sites, and other online companies.

 

We may not be able to accomplish thesenew and expanded initiatives in a cost-effective or timely manner, or theseefforts may not increase the overall market acceptance of our products andservices.  Expansion of our operationsin this manner could also require significant additional expenditures andstrain our management, financial and operational resources.  The lack of market acceptance of theseefforts, regulatory issues, or our inability to generate enough revenue fromthese expanded services or products to offset their cost could harm ourbusiness.

 

**Competitionin the market for online distribution of insurance is intense, and if we areunable to compete effectively with current competitors or new competitors thatenter the market, the fees paid to us by participating insurance companies mayfall, the fees charged by online companies with which we have strategicrelationships may rise, and our market share may suffer**

 

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

 

o      undertake more extensive marketingcampaigns for their brands and services;

 

o      devote more resources to website andsystems development;

 

o      adopt more aggressive pricing policies;and

 

o      make more attractive offers to potentialemployees, online companies and third–party service providers.

 

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

 

**If our participating insurance companies or our insuranceagency do not continue to provide high quality products and service toconsumers, our brand will be harmed and our ability to attract consumers to ourwebsite will be limited**

 

Our ability to maintain a positiverecognition of our brand depends in part on the quality and competitiveness ofthe products and services consumers receive from our participating insurancecompanies or our insurance agency, including timely response to requests forquotes or coverage.  If we are unable toprovide consumers with high-quality products and services, the value of ourbrand may be harmed and the number of consumers using our services may decline.  We have from time to time receivedcomplaints from consumers who have not received a timely response to a requestfor an insurance quote.  Although wehave taken steps to increase responsiveness to consumer requests, these stepsand/or proposed methods may not be successful. In addition, if any of our major participating insurance companies wereto discontinue their business, be downgraded by insurance company ratingservices or be financially harmed by trends in the insurance industry, ourbrand may be harmed.

 

**Ourplan to expand our online insurance agency operations will require significantresources and we may not be able to generate sufficient revenues to recover ourexpenses**

** **

Since October 1999, InsWeb has beenoperating an online insurance agency business. As of September 30, 2001, our online agency sells automobile policies toconsumers in nine states.  Though InsWebrepresents ten carriers as an agent, these carriers do not participate in everystate.   Our online agency receives acommission on the sale and renewal of the automobile insurance polices soldthough its offices.  Our plan to expandour online agency operations requires that we attract and retain highly skilledsales agents and customer care personnel. We will face competition from other agencies and insurance companies forthese agents.  In addition, we will needadditional carriers to appoint us as an agent and pay us commissions. Althoughthe agency infrastructure is already in place, integration of additionalcarriers into our online agency operations may take more time and be moreexpensive than we project.  If we areunable to implement our expansion in a timely and cost-effective manner, we maynot be able to recover our costs and our business will be harmed.

 

**Becausea limited number of customers account for a majority of our revenues, the lossof a single customer relationship could result in a substantial drop in ourrevenues**

 

Revenues from StateFarm, AIG and American Family accounted for approximately 31%, 11% and 11%,respectively, of our revenues for the year ended December 31, 1999, andrevenues from State Farm, AIG, and GE Financial Assurance accounted forapproximately 14%, 11% and 9%, respectively, of our revenues for the year endedDecember 31, 2000.  In May 2000, StateFarm discontinued participating in InsWeb's marketplaces for automobile, termlife, homeowners, condominium and renters insurance.  As a result of State Farm’s withdrawal, revenues for the secondquarter of 2000 from State Farm declined to approximately 15% of totalrevenues, and no revenue from State Farm has subsequently been recognized. Forthe three months ended March 31, 2001, revenues from our partnership witheHealthinsurance represented 22% of total revenues.  In June 2001,InsWeb entered into a two-year agreement with QuickQuote Financial, Inc.pursuant to which QuickQuote became the exclusive provider of online healthinsurance services to InsWeb consumers. However,InsWeb does not currently project significant future revenues from this newagreement. Should one or more of our other key insurance company partners ceaseto participate in our online marketplace, change its underwriting criteria orgeographic coverage in a way that reduces the proportion of consumers that areoffered quotes from that insurance company, or suffer a significant decline inits ratings, our operating results could be materially harmed.  Because of the broad market presence of someof our participating insurance companies, we expect to continue to generate asubstantial portion of our revenues from a limited number of insurancecompanies for the foreseeable future. Although InsWeb continually seeks new carriers to participate in theonline marketplace, we may be unable to add any new carriers.

 

**Inmost jurisdictions, we rely on the participation of a limited number ofinsurance companies on our online marketplace, and the loss of any of theseinsurance companies could make our online ­marketplace less attractive toconsumers**

 

Consumer demand forthe services offered on our website in any jurisdiction is substantiallydependent upon the participation of competing brand-name insurance companiesoffering competitive quotes for a given insurance product in thatjurisdiction.  Accordingly, the successof our business depends on our ability to attract and retain well-knowninsurance companies to participate in our marketplace.  Although we currently have relationshipswith a significant number of insurance companies overall, in individualjurisdictions where competing quotes for comparable products are available onour online marketplace, the number of companies offering quotes ranges from oneto 14.  If we are unable to increase thenumber of insurance companies that participate in our online marketplace,particularly in the jurisdictions where we currently offer comparable insuranceproducts from only three or fewer insurance companies, we may not be able toattract additional consumers or may lose our existing consumers to other onlinecompetitors offering a wider variety of insurance companies.  At September 30, 2001, there were 19jurisdictions in which three or fewer insurance companies were offeringautomobile insurance quotes on our online marketplace.  No automobile insurance quotes are availablein New Jersey, and as of September 30, 2001, there were four jurisdictions inwhich only one insurance company is offering automobile quotes on our onlinemarketplace.  If any insurance companyparticipating in a number of jurisdictions discontinued or significantlyreduced its participation in our online marketplace, the attractiveness of themarketplace to consumers in these jurisdictions would be diminished.

 

In addition, we believe that there is ageneral trend toward consolidation in the insurance industry.  In the jurisdictions where we currentlyoffer comparable insurance products from three or fewer insurance companies,the loss of one or more of these companies, whether due to industryconsolidation or otherwise, could materially reduce the selection of insurancecompanies available to consumers on our website, thereby substantially reducingthe attraction of our online marketplace to consumers.

 

**Wemay have difficulty integrating new insurance companies into our onlinemarketplace or agency operations, which could harm our ability to offerimproved comparison-shopping opportunities and thus limit the attractiveness ofour service to consumers**

 

Integration of an insurance company intoour online marketplace requires a significant commitment of time and resourceson our part and on the part of the insurance company, and is a technologicallydifficult process.  This integrationprocess typically takes from three to six months to complete and typicallyrequires us to expend between 160 and 2,000 man-hours.  To develop company-sponsored quotes forconsumers, the integration requires either the development of a customizedinterface with the carrier’s own rating system, accessing a third party ratingengine of the carrier’s choice, or adding the carrier’s rating information intoInsWeb’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.

 

**Wedo not have exclusive relationships or long-term contracts with insurancecompanies, which may limit our ability to retain these insurance companies asparticipants in our marketplace and maintain the attractiveness of our servicesto consumers**

 

Wedo not have an exclusive relationship with any of the insurance companies whoseinsurance products are offered on our online marketplace, and thus, consumersmay obtain quotes and coverage from these insurance companies without using ourwebsite.  Our participating insurancecompanies offer their products directly to consumers through insurance agents,mass marketing campaigns or through other traditional methods of insurancedistribution.  These insurance companiescan also offer their products and services over the Internet, either directlyto consumers or through one or more of our online competitors, or both.  In addition, most of our agreements with ourparticipating insurance companies are cancelable at the option of either partyupon 90 days' notice or less.  Wehave experienced, and expect to continue to experience, reductions in the levelof participation in our marketplace or complete termination by participatinginsurance companies. These reductions in participation, terminations, or aninability to attract additional insurance companies to our marketplace couldmaterially affect our revenues and harm our business.

 

**The outcome and impact of litigation with our former healthinsurance provider is uncertain**

 

InFebruary 2001, InsWeb temporarily suspended its online health-insurance quotingservices due to the decision by eHealthInsurance, formerly InsWeb’s exclusiveprovider of online health-insurance quotes, to unilaterally terminate therelationship. In April 2000, the two companies signed a two-year onlinedistribution agreement by which eHealthInsurance became the exclusive providerof individual health, small-group health and Medicare supplement insurancequotes to InsWeb's users through a co-branded website.  In February 2001, eHealthInsurance disabledthe co-branded website and filed suit in the U.S. District Court for theNorthern District of California alleging InsWeb’s failure to perform itsobligations under the agreement. In March 2000, eHealthinsurance amended itssuit to add allegations that InsWeb interfered with its businessrelationships.  The complaint as amendedseeks unspecified compensatory and punitive damages. InsWeb filed acounterclaim in March 2001 alleging that eHealthInsurance wrongfully terminatedthe linking agreement and pursued a course of conduct aimed at damagingInsWeb’s business.

 

Theoutcome of the lawsuit is uncertain. Even if InsWeb is successful in itscounterclaims and receives a significant judgment at trial, it may be difficultto collect. Moreover, our business would be harmed if a significant portion ofour assets would have to be used to satisfy an adverse judgment, and an adversejudgment could damage our reputation and make it more difficult to maintain orexpand our business relationships. Although InsWeb maintains customary types ofinsurance, these policies may not provide adequate coverage for the types ofclaims asserted by eHealthInsurance.

 

**Trafficon our website is heavily dependent on our online relationships. Theserelationships may not generate sufficient revenues to justify the fees we payto online companies. Further, our consumer traffic may decline in the event anonline relationship is unsuccessful**

 

We rely on relationshipswith a variety of Internet portals, financial institutions, and other onlinecompanies to attract consumers to our website. In a typical arrangement, the online company includes a "link"on its website on which a user can click to jump to our website or to a sitethat we operate under the online company's name; as part of the arrangement, wetypically pay the online company a portion of the resulting transaction feesand in some cases a fixed fee.  Theserelationships may not continue to generate a substantial amount of new trafficon our website, or the revenues generated by these relationships may beinsufficient to justify our payment obligations.  We have experienced occasional fluctuations in the traffic fromour online partners, often as a result of redesigns of their websites.Furthermore, the value of these relationships is based on the continued positivemarket presence, reputation and growth of these online companies' websites andservices.  Any decline in the marketpresence, business or reputation of these online companies' websites andservices will reduce the value of these relationships to us and could harm ourbusiness.

 

We have entered intoexclusive arrangements with Yahoo! Inc. and MSN under which our website isthe exclusive insurance site included in their website.  We have also entered into a significantmarketing agreement with AOL.  In January2001 we entered into an agreement with Intuit, Inc by which InsWeb will serveas the exclusive aggregator of online consumer insurance services forQuicken.com®, QuickenInsurance and certain Quicken consumer desktop products.  For the quarter ended September 30, 2001 and2000, we received approximately 37.1% and 34.3% of our website traffic fromthese online relationships and 72.2% and 68.8% from all of our onlinerelationships combined, respectively. For the years ended December 31, 2000 and 1999, we receivedapproximately 31.9% and 10.1% of our website traffic from these onlinerelationships, respectively, and approximately 59.0% and 33.7% of our trafficfrom all of our online relationships combined, respectively.  Our ability to increase our revenues willdepend, in part, on increased traffic to our website that we expect to generatethrough these significant online relationships.

 

Most of ourrelationships with online companies, excluding Yahoo!, MSN, Lycos, AOL andIntuit, typically have a 12-month term, and these agreements are typicallyterminable by either party on 30 to 90 days' notice.  We may not be able to negotiate or renewmarketing agreements with online companies on terms that are acceptable tous.  The termination, non-renewal orrenewal on unfavorable terms of a relationship from which we generatesignificant traffic to our website would harm our business.  If the recent trend of failing onlinecompanies continues, the traffic currently being received as well as theability to attract new consumer traffic to our site could be harmed.  Additionally, an online company's failure tomaintain efficient and uninterrupted operation of its computer andcommunications hardware systems would likely reduce the amount of traffic wereceive at our site, harming our business.

 

**Lawsand regulations that govern the insurance industry could expose us, or ourparticipating ­insurance companies, our officers, or agents with whom wecontract, to legal penalties if we fail to comply, and could require changes toour business**

 

We perform functions for licensedinsurance companies and are, therefore, required to comply with a complex setof rules and regulations that often vary from state to state.  If we fail to comply with these rules andregulations, we, an insurance company doing business with us, our officers, oragents with whom we contract, could be subject to various sanctions, includingcensure, fines, a cease-and-desist order or other penalties.  This risk, as well as changes in theregulatory climate or the enforcement or interpretation of existing laws, couldexpose us to additional costs, including indemnification of participatinginsurance companies for their costs, and could require changes to our businessor otherwise harm our business. Furthermore, because the application of online commerce to the consumerinsurance market is relatively new, the impact of current or future regulationson InsWeb's business is difficult to anticipate.

 

**TheGramm–Leach–Bliley Act may alter the traditional structure ofinsurance ­regulation and impose new or additional legal requirements on ourbusiness**

 

                TheNovember 1999 passage of the Gramm–Leach–Bliley Act (S.900)increased the potential for significant changes in the structure and regulationof the insurance industry. Traditionally, regulation of insurance has been almost exclusively theprovince of the states, including regulation of sales practices, underwritingrequirements and claims payments. Moreover, with limited exceptions, securities firms and banking institutionshistorically were prohibited from engaging in the business of insurance, andwere regulated by federal agencies.  TheGramm–Leach–Bliley Act eliminated these legislative barriersbetween segments of the financial services industry.  Although insurance will still be regulated primarily by thestates, insurance entities that become part of a financial services institutionmay be indirectly affected by the federal regulatory requirements pertaining tobanks or securities firms.

 

**Theintended expansion of our business, including, in particular, our agencyactivities, will subject us to additional regulations which may delay orprevent our expansion and harm our business**

 

Over time, we intend toexpand our operations to include new products and services and to offerexisting and new products in new jurisdictions, which may require us to complywith additional laws and regulations. If we fail to adequately comply with these laws and regulations, ourability to offer some of our products or services in a particular jurisdictioncould be delayed or prevented and our business could be harmed.  Compliance with these laws and regulationsand those of other jurisdictions into which we expand may require us to obtainappropriate business licenses, make necessary filings and obtain necessarybonds, appoint foreign agents and make periodic business reports.

 

**Ifwe are unable to safeguard the security and privacy of consumers' andparticipating insurance companies' confidential data, consumers and insurancecompanies may not use our services and our business may be harmed**

 

A significant barrier toelectronic commerce and communications is the secure transmission of personallyidentifiable information of Internet users as well as other confidentialinformation over public networks.  Ifany compromise or breach of security were to occur, it could harm ourreputation and expose us to possible liability.  A party who is able to circumvent our security measures couldmisappropriate proprietary information or cause interruptions in ouroperations.  We may be required to makesignificant expenditures to protect against security breaches or to alleviateproblems caused by any breaches.  Todate, we have experienced no breaches in our network security.  We rely on encryption and authenticationtechnology licensed from third parties to provide the security andauthentication necessary to effect secure transmission of confidentialinformation, such as names, addresses, Social Security and credit card numbers,user names and passwords and insurance company rate information.  Advances in computer capabilities, newdiscoveries in the field of cryptography, or other events or developments couldresult in a compromise or breach of the algorithms we use to protect consumers'and insurance companies' confidential information.

 

**Uncertaintyin the marketplace regarding the use of Internet users' personal information,or proposed legislation limiting such use, could reduce demand for our servicesand result in increased expenses**

 

                Concernamong consumers and legislators regarding the use of personal informationgathered from Internet users could create uncertainty in the marketplace.  This could reduce demand for our services,increase the cost of doing business as a result of litigation costs orincreased service delivery costs, or otherwise harm our business.  Legislation has been proposed and enacted atboth the federal and state levels that would further limit the uses ofpersonally identifiable information of Internet users gathered online orrequire online services to establish privacy policies.  In addition, the Federal Trade Commissionhas adopted regulations affecting the information gathering practices of onlinecompanies, and it has brought suit against several high profile companies forfailing to adhere to the privacy policies posted on their websites.  Many state insurance codes limit thecollection and use of personal information by insurance companies, agents, orinsurance service organizations. Failure to adhere to the growing body of privacy regulations couldresult in administrative actions or private litigation and harm our business.

 

**System failures could reduce or limit traffic on our websiteand harm our ability to generate revenue**

 

                Sincelaunching our online marketplace, we have experienced occasional minor systemfailures or outages that have resulted in the online marketplace being out ofservice for a period ranging from several minutes to three hours while ourtechnicians brought backup systems online. We may experience further system failures or outages in the future thatcould disrupt the operation of our website and could harm our business.  Our revenues depend in large part on thevolume of traffic on our website and, more particularly, on the number ofinsurance quotes generated by our website in response to consumerinquiries.  Accordingly, theperformance, reliability and availability of our website, quote–generatingsystems and network infrastructure are critical to our reputation and ourability to attract a high volume of traffic to our website and to attract andretain participating insurance companies. Moreover, we believe that consumers who have a negative experience withan electronic commerce website may be reluctant to return to that site.  Thus, a significant failure or outageaffecting our systems could result in severe long-term damage to our business.

 

**Ourwebsite may not perform at levels that are satisfactory to consumers**

 

                Weare continually enhancing and expanding our technology, quote generatingsystems, network infrastructure and other technologies to accommodate thevolume of traffic on our website.  Wemay be unsuccessful in these efforts or we may be unable to accurately projectthe rate or timing in the volume of traffic on our website.  In addition, we cannot predict whetheradditional network capacity will be available from third party suppliers as weneed it.  Also, our network or oursuppliers' networks might be unable to timely achieve or maintain asufficiently high capacity of data transmission to timely process orders oreffectively download data, especially if our website traffic increases.  Our failure to achieve or maintain highcapacity data transmission could significantly reduce consumer demand for ourservices.

 

**Ourfacilities and systems are vulnerable to natural disasters and other unexpectedlosses, and we may not have adequate insurance to cover such losses**

 

                Ourcomputer hardware operations are located in leased facilities in Gold River,California.  A full backup system is locatedin Irvine, California.   If both ofthese locations experienced a system failure, the performance of our websitewould 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 our systems at other locations, we willface a number of technical challenges, particularly with respect to databasereplications, which we may not be able to address successfully.  Although we carry property and businessinterruption insurance, our coverage may not be adequate to compensate us forall losses that may occur.  Our serversmay also be vulnerable to computer viruses, physical or electronic break-ins andsimilar disruptions.

** **

**Wemay experience technological problems or service interruptions with individualinsurance ­companies, which could harm the quality of service on our website**

 

                Severalof our participating insurance companies have chosen a technical solution thatrequires that our Web 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 quotes from a given insurance company maydepend in large part upon the reliability of that insurance company's owncomputer systems, over which we have no control.  A malfunction in an insurance company's computer system or in theInternet connection between our Web servers and the insurance company's system,or an excess of data traffic on that system, could result in a delay in thedelivery of e-mail quotes or could cause an insurance company that providesinstant quotes to go offline until the problem can be remedied.  Moreover, the malfunction could cause thecarrier to dispute the number of leads it received from InsWeb.  Further, a computer malfunction could causean insurance company to quote erroneous rates, in which case the insurancecompany would be required to take itself offline until the malfunction can becorrected.  Any technological problemswith or interruption of communications with an insurance company's computersystems could materially reduce the number of competing insurance companiesavailable to provide quotes, and therefore the level of service perceived byconsumers, on our online marketplace.

 

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

 

                Ourfuture success is substantially dependent on the continued services andcontinuing contributions of our senior management and other key personnel,particularly Hussein A. Enan, our Chairman and Chief Executive Officer; andMark P. Guthrie, our President and Chief Operating Officer.  The loss of the services of any of ourexecutive officers or other key employees could harm our business.

 

We have no long-termemployment agreements with any of our key personnel other than Mr. Enan,whose employment agreement expires in July 2002.  We maintain $2 million life insurance policies onMr. Enan and Mr. Guthrie that names us as the beneficiary, but maintain nosimilar insurance on any of our other key employees.  Additionally, InsWeb granted stock options as incentives toexecutive officers and new employees, including Mr. Guthrie, and certain otherkey personnel.  As the value of theseincentives are highly dependent on an increase in the market price of ourcommon stock, we may be unable to retain such key employees, nor retain orrecruit other officers and key employees in the future.

 

**Becauseof competition for personnel, we may not be able to recruit or retain ­necessarypersonnel, which could slow the process of adding new insurance companies toour website or otherwise harm our business**

 

                Ourfuture success depends on our continuing ability to attract, retain andmotivate highly skilled employees, particularly with respect to technologydevelopment and implementation and insurance sales.  If we are not able to attract and retain new personnel,particularly to expand our technology development and implementation team, ourbusiness will be harmed.  Theimplementation of new insurance companies on our site is a technologicallycomplex and labor–intensive process. Accordingly, any difficulty we face in attracting and retaining talenteddevelopment and implementation personnel could slow the process of adding newinsurance companies to our online marketplace and therefore limit our abilityto increase the attractiveness of our services to consumers.  Likewise, any difficulty we encounter inhiring and retaining highly skilled insurance sales agents will result indelays in responding to consumer needs and lower sales volume. Given thecurrent competition for personnel, we may be unable to retain our key employeesor attract, assimilate or retain other highly qualified employees in thefuture.  We have from time to timeexperienced, and we may experience in the future, difficulty in hiring andretaining employees with appropriate qualifications.

 

**Ifthe Internet does not continue to develop and reliably support the demandsplaced on it by ­electronic commerce and other high volume applications, ourbusiness will suffer**

 

                TheInternet may not become a viable medium for commerce or comparison insuranceshopping for a number of reasons, including potentially inadequate developmentof the necessary network infrastructure or delayed development of enablingtechnologies and performance improvements. If the Internet continues to experience significant growth in the numberof users, levels of traffic or networks' capacities for transmitting largeamounts of data, the Internet's infrastructure may not be able to support thedemands placed upon it.  The Internethas experienced a variety of outages and other delays as a result of damage toportions of its infrastructure, and it could face additional outages and delaysin the future.  These outages and delayscould reduce the level of traffic and therefore the number of consumerinsurance inquiries on our website.  Inaddition, the Internet could lose its viability due to delays in thedevelopment or adoption of new standards and protocols required to handleincreased levels of Internet activity, or due to increased governmentalregulation.  Changes in or insufficientavailability of telecommunications services to support the Internet could alsoresult in slower response times and reduced use of the Internet.

 

**Regulationof the Internet is unsettled, and future regulations could inhibit the growthof the Internet and otherwise harm our business**

 

                Thelaws governing the Internet remain largely unsettled, even in areas where therehas been some legislative action. Furthermore, the growth and development of the market for electroniccommerce may prompt the enactment of more stringent consumer protection lawsthat may impose additional burdens on companies conducting businessonline.  The adoption of additional lawsor regulations may inhibit the growth of the Internet as a medium for commerceand comparison insurance shopping, which could, in turn, decrease demand forour services, increase our cost of doing business, or otherwise harm ourbusiness.  In addition, applicability tothe Internet of existing laws governing issues including property ownership,copyrights and other intellectual property issues, taxation, libel and personalprivacy is uncertain.  The vast majorityof these laws were adopted prior to the advent of the Internet and relatedtechnologies and, as a result, do not contemplate or address the unique issuesof the Internet and related technologies.

 

**Anyacquisitions that we undertake could be difficult to integrate, disrupt ourbusiness, dilute ­stockholder value and harm our operating results**

 

We may acquire or makeinvestments in complementary businesses, technologies, services or products ifappropriate opportunities arise.  Forexample, in December 1998, we acquired Benelytics, Inc., a developerof employee health benefits selection and management software and referencedata products.  The process ofintegrating any acquired business, technology, service or product into ourbusiness and operations may result in unforeseen operating difficulties andexpenditures.  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 anyacquisition may not be realized.  We maybe unable to identify, negotiate or finance future acquisitions successfully,or to integrate successfully any acquisitions with our current business.  Future acquisitions could result inpotentially dilutive issuances of equity securities or the incurrence of debt,contingent liabilities or amortization expenses related to goodwill and otherintangible assets, any of which could harm our business.  For example, in connection with theBenelytics acquisition, we recorded $7.3 million in goodwill and$1.4 million to software and other intangible assets.  In the second quarter of 2000, we wrote offthe remainder of the goodwill from the Benelytics acquisition.  In January 2001, we acquired certain assetsof Intuit Insurance Services for approximately 7.0 million shares or approximately19.9% of the then outstanding shares of InsWeb. In conjunction with thisagreement we recorded approximately $13.1 million in goodwill and otherintangible assets that will be amortized to expense over the five years.

 

**We maybe unable to protect our intellectual property rights**

 

                Weregard our intellectual property as critical to our success.  We rely on patent, trademark, copyright andtrade secret laws to protect our proprietary rights.  We have registered the INSWEB mark in the United States, and manyother countries, including Japan, France, Germany, South Korea, Japan and theUnited Kingdom. Applications are pending in several other countries.  Other United States and worldwide trademarkapplications include, but are not limited to, eAgent, InsWeb.com, Powered byInsWeb, and Where You and Your Insurance Really Click.  We have patent applications on file in theUnited States.  Our trademarkregistration and patent applications may not be approved or granted, or, ifgranted, may be successfully challenged by others or invalidated throughadministrative process or litigation. Notwithstanding these laws, we may beunsuccessful in protecting our intellectual property rights or in obtainingpatents or registered trademarks for which we apply.

 

**Wemay be subject to claims for infringement of intellectual property, with orwithout merit, which could be costly to defend or settle**

 

                Wemay from time to time be subject to claims of infringement of other parties'proprietary rights or claims that our own trademarks, patents or otherintellectual property rights are invalid. We have been subject to infringement claims in the ordinary course ofbusiness, including claims of alleged infringement of the patent and trademarkrights of third parties by us and companies with which we have business relationships.  Any claims of this type, with or withoutmerit, could be time-consuming to defend, result in costly litigation, divertmanagement attention and resources or require us to enter into royalty orlicense agreements.  License agreementsmay not be available on reasonable terms, if at all, and the assertion orprosecution of any infringement claims could significantly harm our business.

 

**Weincorporate third–party technologies and services into our onlinemarketplace, and if the providers of these technologies and services fail in atimely manner to develop, license or support technology necessary to ourservices, market acceptance of our online marketplace could be harmed**

 

                Wehave incorporated technology developed by third parties into our onlinemarketplace, and we will continue to incorporate third–party technologyin our future products and services.  Wehave limited control over whether or when these third–party technologieswill be developed or enhanced. If a third–party fails to timely develop,license or support technology necessary to our services, market acceptance ofour online marketplace could be harmed.

 

**Ourstock price has fluctuated widely, and Internet stocks in general have beenextremely volatile**

 

                The trading price of our common stockhas been highly volatile and may be significantly affected by factors includingactual or anticipated fluctuations in our operating results, new products ornew contracts by us or our competitors, loss of key customers, conditions andtrends in the electronic commerce and insurance industries, changes infinancial estimates by securities analysts, general market conditions and otherfactors.  The trading prices of manyInternet stocks have experienced extreme price and volume fluctuations.  These fluctuations often have been unrelatedor disproportionate to the operating performance of these companies.  These fluctuations may continue and couldharm our stock price. Any negative change in the public's perception of theprospects of Internet or electronic commerce companies could also depress ourstock price regardless of our results.

 

**Our stock may be delisted from the NASDAQ National Market**

 

                To maintain the listing of ourcommon stock on The Nasdaq National Market we are required to meet certainlisting requirements including aminimum bid price of $1.00 per share. If we fail to meet the minimum bid price or other listing requirements,our common stock may be delisted from The Nasdaq National Market.  Our stock price has been below the $1.00minimum bid price since June 21, 2001. Nasdaq notified us of thedeficiency on August 3, 2001 and we were given 90 calendar days to cure thedeficiency by meeting the $1.00 per share trading price for 10 consecutivedays.  The 90-calendar days grace periodends November 1, 2001.  During thisgrace period, however, Nasdaq implemented an across-the-board moratorium on the minimumbid requirements for continued listing on Nasdaq. This moratorium applies toall companies listed on Nasdaq and is in effect until January 2, 2002.Accordingly, the minimum bid price compliance period will restart on January 2,2002 and InsWeb would not be subject to delisting before May 1, 2002.

 

Even if we are able to comply with the minimum bidrequirement during the moratorium and any future grace period, there is noassurance that in the future we will continue to satisfy Nasdaq listingrequirements, with the result that our common stock may be delisted from The Nasdaq NationalMarket.  Should our common stock bedelisted from The Nasdaq National Market, it would likely be traded on theso-called "pink sheets" or the "Electronic Bulletin Board"of the National Association of Securities Dealers, Inc.  Consequently, it would likely be moredifficult to trade in or obtain accurate quotations as to the market price ofour common stock.  Delisting of ourcommon stock could materially adversely affect the market price, the marketliquidity of our common stock and our ability to raise necessary capital.

 

**Delawarelaw and our charter documents contain provisions that could discourage orprevent a ­potential takeover, even if such a transaction would be beneficialto our stockholders**

 

                Provisions of Delaware law andour certificate of incorporation and bylaws could make more difficult theacquisition of us by means of a tender offer, a proxy contest, or otherwise,and the removal of incumbent officers and directors.

 

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

 

InsWeb is exposed to financial marketrisks including changes in interest rates and, to a lesser degree, foreigncurrency exchange rates.  The fair valueof InsWeb's investment portfolio or related income would not be significantlyaffected by either a 10% increase or decrease in interest rates due mainly tothe short term nature of the major portion of InsWeb's investmentportfolio.  InsWeb's interest income issensitive to changes in the general level of U.S. interest rates, because allof our funds are invested in instruments with maturities less than oneyear.  InsWeb's policy is to limit therisk of principal loss and ensure the safety of invested funds by limitingmarket and credit risk.  Funds in excessof current operating requirements are invested in obligations of the U.S. governmentand its agencies and investment grade obligations of state and localgovernments and large corporations.

 

The table below represents carrying amounts andrelated weighted–average interest rates of InsWeb's investment portfolioat September 30, 2001:

 
|                                      |   | **2001** |   |
|-------------------------------------------|--------|----------|--------|
| **(In thousands, except interest rates)** |   |     |   |
| Cash and  money market funds              |   | $        | 7,337  |   |
| Average  interest rate                    |   | 2.2      | %      |
| Investments                               |   | $        | 29,811 |   |
| Average  interest rate                    |   | 3.5      | %      |
| Total                                     |   | $        | 37,148 |   |
| Average  interest rate                    |   | 3.3      | %      |

 

 

                InsWeb'srevenue and capital spending is transacted in U.S. dollars.  As discussed in the notes to the condensedconsolidated financial statements, InsWeb investment in InsWeb Japan K.K. andthe note payable to strategic partner and shareholder is denominated inJapanese Yen.  InsWeb has not engaged inhedging transactions to reduce its exposure to fluctuations that may arise fromchanges in foreign exchange rates. Based on InsWeb's overall currency rate exposure at September 30, 2001 anear-term 10% appreciation or depreciation would have an immaterial affect onInsWeb's operating results or financial condition.

 

**PART II: OTHERINFORMATION**

**ITEM6.   EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)           Exhibits: None

 

(b)           Reports on Form 8-K: None

 

 

SIGNATURE

 

In accordance with the requirements ofthe Securities Exchange Act of 1934, the registrant has caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 

 
| Dated: November 6, 2001 |   | **INSWEB CORPORATION  (Registrant)** |
|-------------------------|--------|--------------------------------------|
|                    |   |                                 |
|                    |   |                                 |
|                    |   | /s/ William D. Griffin               |
|                    |   | William D. Griffin                   |
|                    |   | Chief Financial Officer              |