**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

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**FORM 10-Q**

 

**x**         QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

**For the quarterly periodended June 30, 2006**

 

**Or**

 

**o**            TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

 

**For the transition periodfrom               to               **

 

**Commission file number0-26083**

 

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**INSWEB CORPORATION**

(Exact name of Registrant as specified in its charter)

 

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

 

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

(Address of principal executive offices)

 

**(916) 853-3300**

(Registrant’s telephone number, including area code)

 

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

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

LargeAccelerated Filer o  Accelerated Filer o Non-Accelerated Filer  x

Indicateby check mark whether the registrant is a shell company (as defined byRule 12b-2 of the Exchange Act).

Yes o  No x

Thenumber of outstanding shares of the Registrant’s Common Stock, par value $0.001per share, on July 28, 2006 were 4,090,786 shares.

 

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**FORM 10-Q**

**INSWEB CORPORATION**

**INDEX**

 
| **PART I**  | **FINANCIAL INFORMATION**                                                                                   |       |
|-------------|-------------------------------------------------------------------------------------------------------------|------------|
| ITEM  1:    | Financial Statements  (unaudited)                                                                           |       |
|        | Condensed Consolidated  Balance Sheets as of June 30, 2006 and December 31, 2005                       |       |
|        | Condensed Consolidated  Statements of Operations for the three and six months ended June 30, 2006 and  2005 |       |
|        | Condensed Consolidated  Statements of Cash Flows for the six months ended June 30, 2006 and 2005            |       |
|        | Notes to Condensed  Consolidated Financial Statements                                                       |       |
| ITEM  2:    | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                 |       |
| ITEM  3:    | Quantitative and  Qualitative Disclosures About Market Risk                                                 |       |
| ITEM  4:    | Controls and Procedures                                                                                     |       |
|        |                                                                                                        |       |
| **PART II** | **OTHER INFORMATION**                                                                                       | ** ** |
| ITEM  1:    | Legal Proceedings                                                                                           |       |
| ITEM 1A:    | Risk Factors                                                                                                |       |
| ITEM  6:    | Exhibits                                                                                                    |       |
|        |                                                                                                        |       |
| Signature   |                                                                                                        |       |

 

2

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**PART I:****                 FINANCIAL INFORMATION**

**ITEM 1.****                  FINANCIAL STATEMENTS**

**INSWEBCORPORATION**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

*(in thousands)*

*(unaudited)*

 
| ** **                                       | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Assets**                                       |       |                    |       |                        |       |
| Current assets:                                  |       |                    |       |                        |       |
| Cash and cash  equivalents                       |       | $                       | 7,707      |                        | $          | 9,073 |   |
| Short-term  investments                          |       | 438                     |       | 1,233                       |       |
| Accounts  receivable, net                        |       | 3,236                   |       | 2,297                       |       |
| Prepaid expenses  and other current assets       |       | 724                     |       | 545                         |       |
| Total current  assets                            |       | 12,105                  |       | 13,148                      |       |
| Property and equipment,  net                     |       | 483                     |       | 524                         |       |
| Other assets                                     |       | 337                     |       | 346                         |       |
| Total assets                                     |       | $                       | 12,925     |                        | $          | 14,018 |   |
|                                             |       |                    |       |                        |       |
| **Liabilities and stockholders’  equity**   |       |                    |       |                        |       |
| Current liabilities:                             |       |                    |       |                        |       |
| Accounts payable                                 |       | $                       | 2,897      |                        | $          | 2,655 |   |
| Accrued expenses                                 |       | 2,999                   |       | 3,094                       |       |
| Deferred revenue                                 |       | 171                     |       | 128                         |       |
| Total current  liabilities                       |       | 6,067                   |       | 5,877                       |       |
|                                             |       |                    |       |                        |       |
| Commitments and contingencies                    |       |                    |       |                        |       |
|                                             |       |                    |       |                        |       |
| Stockholders’ equity:                       |       |                    |       |                        |       |
| Common stock                                     |       | 7                       |       | 7                           |       |
| Paid-in capital                                  |       | 203,219                 |       | 203,059                     |       |
| Treasury stock                                   |       | (6,334                  | )          | (6,334                      | )          |
| Accumulated  other comprehensive loss            |       | —                  |       | (1                          | )          |
| Accumulated  deficit                             |       | (190,034                | )          | (188,590                    | )          |
| Total  stockholders’ equity                 |       | 6,858                   |       | 8,141                       |       |
| Total liabilities and  stockholders’ equity |       | $                       | 12,925     |                        | $          | 14,018 |   |

 

See accompanying notes.

3

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**INSWEBCORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

*(in thousands, except per share amounts)*

*(unaudited)*

 
| ** **                                                                                   | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                                                                    | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Transaction fees                                                                             |       | $                                               | 7,429      |                                          | $          | 6,522 |   | $ | 14,994 |   | $ | 12,128 |   |
| Development and maintenance fees                                                             |       | 88                                              |       | 82                                            |       | 178 |   | 170 |   |
| Total revenues                                                                               |       | 7,517                                           |       | 6,604                                         |       | 15,172 |   | 12,298 |   |
|                                                                                         |       |                                            |       |                                          |       |   |   |   |   |
| Operating expenses:                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Technology                                                                                   |       | 1,216                                           |       | 1,417                                         |       | 2,469 |   | 2,789 |   |
| Sales and marketing                                                                          |       | 7,125                                           |       | 5,288                                         |       | 14,134 |   | 9,990 |   |
| General and administrative                                                                   |       | 1,074                                           |       | 1,071                                         |       | 2,250 |   | 2,203 |   |
| Total operating expenses                                                                     |       | 9,415                                           |       | 7,776                                         |       | 18,853 |   | 14,982 |   |
| Loss from operations                                                                         |       | (1,898                                          | )          | (1,172                                        | )          | (3,681 | ) | (2,684 | ) |
| Interest income                                                                              |       | 101                                             |       | 96                                            |       | 193 |   | 188 |   |
| Other income (expense), net *(Note 9)*                                                       |       | 2,044                                           |       | —                                        |       | 2,044 |   | — |   |
| Net income (loss)                                                                            |       | $                                               | 247        |                                          | $          | (1,076 | ) | $ | (1,444 | ) | $ | (2,496 | ) |
|                                                                                         |       |                                            |       |                                          |       |   |   |   |   |
| Net income (loss) per share - basic and diluted                                              |       | $                                               | 0.06       |                                          | $          | (0.27 | ) | $ | (0.35 | ) | $ | (0.57 | ) |
|                                                                                         |       |                                            |       |                                          |       |   |   |   |   |
| Weighted-average shares  used in computing per share amounts - basic and  diluted *(Note 2)* |       | 4,089                                           |       | 4,044                                         |       | 4,087 |   | 4,412 |   |

 

See accompanying notes.

4

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**INSWEBCORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

*(in thousands)*

*(unaudited)*

 
| ** **                                                                   | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                                       |       |                                          |       |   |   |
| Net loss                                                                     |       | $                                             | (1,444     | ) | $ | (2,496 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                          |       |   |   |
| Stock-based  compensation                                                    |       | 125                                           |       | — |   |
| Depreciation and  amortization                                               |       | 116                                           |       | 288 |   |
| Net changes in  operating assets and liabilities:                            |       |                                          |       |   |   |
| Accounts  receivable                                                         |       | (939                                          | )          | (1,626 | ) |
| Prepaid expenses  and other current assets                                   |       | (179                                          | )          | 269 |   |
| Other assets                                                                 |       | 9                                             |       | (15 | ) |
| Accounts payable                                                             |       | 242                                           |       | 1,232 |   |
| Accrued expenses                                                             |       | (85                                           | )          | 73 |   |
| Deferred revenue                                                             |       | 43                                            |       | 17 |   |
| Net cash used in  operating activities                                       |       | (2,112                                        | )          | (2,258 | ) |
|                                                                         |       |                                          |       |   |   |
| Cash flows from  investing activities:                                       |       |                                          |       |   |   |
| Redemptions of  short-term investments                                       |       | 1,024                                         |       | 8,417 |   |
| Purchases of  short-term investments                                         |       | (228                                          | )          | (4,992 | ) |
| Purchases of  property and equipment                                         |       | (75                                           | )          | (61 | ) |
| Net cash  provided by investing activities                                   |       | 721                                           |       | 3,364 |   |
|                                                                         |       |                                          |       |   |   |
| Cash flows from  financing activities:                                       |       |                                          |       |   |   |
| Repayments of  debt                                                          |       | (10                                           | )          | (41 | ) |
| Proceeds from  issuance of common stock through stock plans                  |       | 35                                            |       | 24 |   |
| Repurchase of  common stock                                                  |       | —                                        |       | (1,738 | ) |
| Net cash  provided by (used in) financing activities                         |       | 25                                            |       | (1,755 | ) |
| Net decrease in cash  and cash equivalents                                   |       | (1,366                                        | )          | (649 | ) |
| Cash and cash  equivalents, beginning of period                              |       | 9,073                                         |       | 9,334 |   |
| Cash and cash equivalents, end of period                                     |       | $                                             | 7,707      |   | $ | 8,685 |   |

 

See accompanying notes.

5

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**INSWEBCORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

***(unaudited)***

**1. Business of InsWeb**

InsWeb Corporationoperates an online insurance marketplace that enables consumers to comparisonshop online and to obtain insurance company-sponsored quotes for avariety of insurance products, including automobile, homeowners and term life.InsWeb’s marketplace electronically matches consumers and insurance providers.InsWeb has combined extensive knowledge of the insurance industry,technological expertise and close relationships with a significant number ofinsurance companies to develop an integrated online marketplace.

InsWeb’s principal sourceof revenues is transaction fees from participating insurance providers, eitherdirectly from an insurance company or from a local insurance agent. Whilequotes obtained through InsWeb’s online insurance marketplace are provided toconsumers free of charge, InsWeb earns revenues from participating insurancecompanies or agents based on the delivery of qualified leads. These fees areearned either from an insurance company based on a closed policy, from thedelivery of a lead to a participating insurance provider or local agent, orfrom a commission earned by InsWeb’s insurance agency, InsWeb InsuranceServices, Inc. In certain instances, consumers are provided theopportunity to link directly to a third party insurance provider’s website. Inthese situations, the consumer will complete the third party company’s onlineapplication, and InsWeb will be paid a fee for that consumer link orclick-through.

InsWeb is subject to allof the risks inherent in the electronic commerce industry and special risksrelated to the online insurance industry. These risks include, but are notlimited to, uncertain economic conditions which could result in lower growthrates, the changing nature of the electronic commerce industry, variations inthe availability and cost of acquiring consumer traffic, unpredictability offuture revenues, reliance on key customers – insurance carriers, agents andother providers – who are themselves subject to volatility in their operatingcycles, and reliance on a third party intermediary who provides leads to localinsurance agents on InsWeb’s behalf. These risks and uncertainties, amongothers, could cause InsWeb’s actual results to differ materially fromhistorical results or those currently anticipated.  In light of the evolving nature of InsWeb’sbusiness to better capitalize on its position as a leading insurance portal,including the current expansion of InsWeb’s agent network program, InsWebbelieves that period-to-period comparisons of its operating results are notnecessarily meaningful and should not be relied upon as an indication of futureperformance. Moreover, there is no assurance that InsWeb will be able toachieve or sustain profitability.

InsWeb has incurredoperating losses of $6.3 million in 2005, $9.2 million in 2004, and $7.0million in 2003, and as of June 30, 2006, its accumulated deficit was $190.0million. In addition, InsWeb’s operating activities to date have consumedsubstantial amounts of cash, cash equivalents and short-term investments ($5.3million in 2005, $8.7 million in 2004, and $4.2 million in 2003) and willcontinue to require capital in the near future. The Company used $2.1 millionto fund operating activities in the six months ended June 30, 2006 and had $8.1million in cash, cash equivalents and short-term investments at June 30, 2006. Theseoperating losses and the related accumulated deficit are a result of thesignificant costs incurred in the development of InsWeb’s technology platform,the establishment of relationships with insurance companies, their integrationwith the InsWeb site, and InsWeb’s marketing and sales activities. In orderto remain competitive, the Company must continue to make investments essentialto its ability to operate, and InsWeb intends to continue to invest inproduct development and maintenance, and sales and marketing. In addition, theCompany will continue to incur the costs associated with continuing to functionas a publicly listed company, including the costs of compliance with theprovisions of the Sarbanes-Oxley Act of 2002, among other things, even thoughthe Company will not be required tocomply with Section 404 of the Sarbanes-Oxley Act until 2007. As aresult, InsWeb believes that it will continue to incur operating losses for atleast the next six to nine months. In the event that InsWeb is unable to generaterevenues sufficient to offset its costs, or if its costs of marketing andoperations are greater than it anticipates, the Company may be unable to growits business at the rate desired or may be required to delay, reduce, or ceasecertain of its operations, any of which could materially harm its business andfinancial results. In addition, if InsWeb is unable to ultimatelyachieve profitability, the Company may need to seek additional financing tocontinue its business operations. The Company cannot be certain that additionalfinancing will be available when required, on favorable terms or at all. IfInsWeb is not successful in raising additional capital as required, it maydelay, significantly reduce or cease certain of its operations, which couldadversely affect its results of operations and financial position.

6

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**2.* *Basis of Presentation**

The condensedconsolidated financial statements include the accounts of InsWeb Corporationand its wholly-owned subsidiaries, InsWeb Insurance Services, Inc. andGoldrush Insurance Services, Inc. (“InsWeb” or the “Company”).  All significant inter-company accounts andtransactions have been eliminated in the consolidated financial statements.

The accompanyingunaudited interim financial statements have been prepared in accordance withU.S. generally accepted accounting principles for interim financial informationand with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not contain all of theinformation and footnotes required by U.S. generally accepted accountingprinciples for complete financial statements. In the opinion of management, theaccompanying unaudited interim condensed consolidated financial statementsreflect all adjustments, which include only normal recurring adjustments,necessary to present fairly InsWeb’s financial position as of June 30, 2006 andthe results of operations for the three and six months ended June 30, 2006 and2005, and cash flows for the six months ended June 30, 2006 and 2005. 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 six monthsended June 30, 2006 are not necessarily indicative of the results to beexpected for the year ending December 31, 2006.

These condensedconsolidated financial statements should be read in conjunction with theconsolidated financial statements and notes thereto included in InsWeb’s AnnualReport on Form 10-K and other information as filed with the Securities andExchange Commission. Certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with accountingprinciples generally accepted in the United States have been condensed oromitted pursuant to such rules and regulations.  The December 31, 2005condensed consolidated balance sheet was derived from audited financialstatements, but does not include all disclosures required by accountingprinciples generally accepted in the United States.  However, the Companybelieves the disclosures are adequate to make the information presented notmisleading.

Basic earnings per shareis computed using the weighted-average number of shares of common stockoutstanding. Diluted earnings per share would reflect the potential dilutionthat would occur if stock options and warrants had been exercised.    The number of shares used in thecomputation of diluted earnings per share for the three months ended June 30,2006 is not significantly different than the number of shares used in thecomputation of basic earnings per share. For the six month period ended June30, 2006 and the three and six month periods ended June 30, 2005, commonequivalent shares from stock options and warrants were excluded from thecomputation of diluted net loss per share as their effect was antidilutive.

**3.  Stock-BasedCompensation**

In July 1997, InsWebauthorized the 1997 Stock Option Plan (the “Option Plan”) and the SeniorExecutive Option Plan (the “Executive Plan”). Under the Option Plan, the Boardof Directors may issue incentive stock options to employees of InsWeb and itssubsidiaries and may also issue nonqualified stock options to employees,officers, directors, independent contractors and consultants of InsWeb and itssubsidiaries. Under the Executive Plan, the Board of Directors may issuenonqualified stock options to employees, officers and directors of InsWeb andits subsidiaries. In May 2003, the Option Plan was amended, withstockholder approval, to provide that each director would receive a fully-vestedoption to purchase 5,000 shares of common stock on July 1st (or the first business day thereafter) of eachyear in which the director remains in office. This option grant is in lieu ofpreviously granted options for each Board or committee meeting attended. TheOption Plan provides for an automatic annual increase in the share reserve, tobe effective on the first day of each fiscal year, by a number of shares equalto 5% of the number of common shares outstanding as of the last day of the precedingfiscal year. Options granted under both plans are priced at the fair marketvalue on the date of grant and prior to January 1, 2006 generally vested inequal monthly installments over a three year period; options granted subsequentto January 1, 2006 will generally vest ratably over a one year period. Certainoptions granted to members of InsWeb’s Board of Directors vest immediately.Prior to January 1, 2006, options expired ten years from the date of grant;options granted subsequent to January 1, 2006 expire five years from the dateof grant.

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On October 19, 2005, theCompensation Committee of the Board of Directors of InsWeb approved theacceleration of vesting of all stock options outstanding as of October 19, 2005held by employees.  Options to purchaseapproximately 496,000 shares of common stock, or 33% of the total outstandingoptions, with varying remaining vesting schedules, were subject to theacceleration and became immediately exercisable. All other terms and conditionsapplicable to such options, including the exercise prices, remained unchanged.

InsWeb has an EmployeeStock Purchase Plan (the “Purchase Plan”) under which eligible employees mayauthorize payroll deductions of up to 15% of their compensation to purchaseshares at 85% of the lower of the fair market value of the common stock on thedate of commencement of the offering or on the last day of the six-monthpurchase period. During the three and six months ended June 30, 2006, 0 and4,500 shares were distributed to employees at the price of $2.48 per share. Theweighted average fair value of these awards was $0.86 per share. At June 30,2006, InsWeb had 369,000 shares of its common stock reserved for futureissuance under the Purchase Plan.

On January 1, 2006, theCompany adopted the provisions of Statement of Financial Accounting StandardsNo. 123(R) (“SFAS 123(R)”), “Share-Based Payments,” requiring it torecognize expense related to the fair value of its share-based compensationawards. The Company elected to use the modified prospective transition methodas permitted by SFAS 123(R) and therefore has not restated its financialresults for prior periods. Under this transition method, share-basedcompensation expense for the three and six months ended June 30, 2006 includesall share-based compensation awards granted subsequent to January 1, 2006 basedon the grant-date fair value estimated in accordance with the provisions ofSFAS 123(R). The Company recognizes compensation expense for stock optionawards issued subsequent to January 1, 2006 on a straight-line basis over therequisite service period of the award.  All options issued prior toJanuary 1, 2006 were fully vested at the date of adoption of SFAS 123(R), andtherefore, no compensation expense was recognized for these options for thethree and six months ended June 30, 2006.

The following table setsforth the total share-based compensation expense resulting from stock optionsand the Purchase Plan included in the Company’s operating expenses in itsCondensed Consolidated Statements of Operations for the three and six monthsended June 30, 2006 (in thousands):

 

|                                | ** ** | **Three Months Ended  June 30, 2006** | ** ** | **Six Months Ended  June 30, 2006** | ** ** |
|--------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| Sales and marketing            |       | $                                                         | 27         |                                                    | $          | 71 |   |
| Technology                     |       | 10                                                        |       | 10                                                      |       |
| General and administrative     |       | 44                                                        |       | 44                                                      |       |
| Total stock-based compensation |       | $                                                         | 81         |                                                    | $          | 125 |   |

 

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Prior to the adoption ofSFAS 123(R), InsWeb accounted for its stock-based compensation plans under therecognition and measurement principles of APB Opinion No. 25, “Accounting forStock Issued to Employees,” and related interpretations.  The following table illustrates the effect onnet loss and net loss per share if InsWeb had applied the fair valuerecognition provisions of Financial Accounting Standards Board Statements No.123 “Accounting for Stock-Based Compensation” and No. 148, “Accounting forStock-Based Compensation-Transition and Disclosure*,*” to stock-based employee compensation for the three andsix months ended June 30, 2005 (in thousands, except per share amounts):
|                                                                                                             | ** ** | **Three Months Ended**                                            | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                  | ** ** | **    June 30, 2005    ** | ** ** | **June 30, 2005**    | ** ** |
| Net loss, as reported                                                                                       |       | $                                                                           | (1,076     | )                              | $          | (2,496 | ) |
| Deduct: Stock-based  employee compensation expense determined under fair value based method for  all awards |       | (126                                                                        | )          | (258                           | )          |
| Pro forma net loss                                                                                          |       | $                                                                           | (1,202     | )                              | $          | (2,754 | ) |
| Net loss per share:                                                                                         |       |                                                                        |       |                           |       |
| Basic and  diluted—as reported                                                                         |       | $                                                                           | (0.27      | )                              | $          | (0.57 | ) |
| Basic and diluted—pro  forma                                                                           |       | $                                                                           | (0.30      | )                              | $          | (0.62 | ) |

 

The fair value ofstock-based awards granted pursuant to the Company’s stock option plans wasestimated using the Black-Scholes model with the following assumptions for thesix months ended June 30, 2006:
| Expected term (in years)                   |   | 3.00 |   |
|--------------------------------------------|--------|------|--------|
| Expected  volatility                       |   | 0.69 |   |
| Risk-free  interest rate                   |   | 4.0  | %      |
| Expected  dividend                         |   | 0    | %      |
| Weighted-average fair  value at grant date |   | $    | 1.07   |   |
|                                            |        |      |        |  |

 

***ExpectedTerm.*** The expected term represents the period that theCompany’s stock-based awards are expected to be outstanding. As permitted byStaff Accounting Bulletin No. 107, Topic 14, “Share Based Payment,” theCompany adopted a temporary “simplified” method to developing the estimate ofthe expected term of an employee stock option. Under the “simplified” method,the expected term is calculated by adding the vesting term to the contractualterm of the option grant and dividing the total by two. This simplified methodis permitted until, at which time, more detailed information about exercisebehavior is known.

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

***Risk-FreeInterest Rate.*** The Company bases the risk-free interestrate used in the Black-Scholes valuation method on the implied yield currentlyavailable on U.S. Treasury zero-coupon issues with the same or substantiallyequivalent remaining term.

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

***EstimatedForfeitures.*** SFAS 123(R) requires forfeitures to beestimated at the time of grant and revised, if necessary, in subsequent periodsif actual forfeitures differ from initial estimates. When estimatingforfeitures, the Company considers historical voluntary and involuntarytermination behavior as well as analysis of actual option forfeitures.

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Activity under all of the Company’s stock option plans for the sixmonths ended June 30, 2006 was as follows:

 

| (in thousands, except exercise price amounts) | ** ** | **Shares  Available  for Grant** | ** ** | **Shares  Outstanding** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------|------------|--------------------------------------------|------------|
|                                                                   |       |                                  |       |                    |       |                                       |       |
| Balances, December 31,  2005                                           |       | 888                                   |       | 1,471                   |       | $                                          | 6.98       |   |
| Additional shares  reserved                                            |       | 203                                   |       | —                  |       | —                                     |       |
| Granted                                                                |       | (447                                  | )          | 447                     |       | $                                          | 2.18       |   |
| Exercised                                                              |       | —                                |       | (10                     | )          | $                                          | 2.55       |   |
| Canceled / forfeited                                                   |       | 53                                    |       | (53                     | )          | $                                          | 6.78       |   |
| Balances, June 30, 2006                                                |       | 697                                   |       | 1,855                   |       | $                                          | 5.83       |   |
| Vested and exercisable at June 30, 2006                                |       |                                  |       | 1,485                   |       | $                                          | 6.77       |   |

 

The aggregate intrinsicvalues of options outstanding and exercisable at June 30, 2006 was $303,000 and$162,000, respectively. Aggregate intrinsic value represents the totalintrinsic value (the aggregate difference between the closing stock price ofthe Company’s common stock on June 30, 2006 and the exercise price forin-the-money options) that would have been received by the option holders ifall options had been exercised on June 30, 2006. The total intrinsic value ofoptions exercised in the three and six months ended June 30, 2006 was $3,000and $5,000, respectively. The weighted-average remaining contractual terms ofoptions outstanding and exercisable at June 30, 2006 was 6.45 and 6.86 years,respectively.

As of June 30, 2006,there was $364,000 in unrecognized compensation cost for all stock optionsoutstanding that were unvested.  The Company’s current practice is toissue new shares to satisfy share option exercises.

Cash received from optionexercises and purchases under the Purchase Plan for the three and six monthsended June 30, 2006 was $8,000 and $35,000 respectively.

There was no tax benefitattributable to options exercised in the three and six months ended June 30,2006.

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

For the three and sixmonths ended June 30, 2006, three customers accounted for 15%, 11% and 10%, and16%, 11% and 10% of total revenues, respectively. For the three and six monthsended June 30, 2005, one customer accounted for 30% and 29% of total revenues,respectively. At June 30, 2006, one customer accounted for 11% of accountsreceivable. At December 31, 2005, three customers accounted for 24%, 11%,and 11% of accounts receivable, respectively.

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**5.Accrued Expenses**

Accrued expenses consistof the following (in thousands):

 

|                                         | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                                    |       |                    |       |                        |       |
| Accrued lease  obligations (see Note 8) |       | $                       | 1,717      |                        | $          | 1,874 |   |
| Accrued employee  compensation          |       | 637                     |       | 586                         |       |
| Deferred rent                           |       | 501                     |       | 527                         |       |
| Other                                   |       | 144                     |       | 107                         |       |
| Total                                   |       | $                       | 2,999      |                        | $          | 3,094 |   |

 

**6. Comprehensive Loss**

Totalcomprehensive loss was as follows (in thousands):

 

|                                                                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                             | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Net income (loss)                                                      |       | $                                               | 247        |                                          | $          | (1,076 | ) | $ | (1,444 | ) | $ | (2,496 | ) |
| Other comprehensive  income - change in unrealized gain on investments |       | 1                                               |       | 4                                             |       | 2 |   | 6 |   |
| Comprehensive income (loss)                                            |       | $                                               | 248        |                                          | $          | (1,072 | ) | $ | (1,442 | ) | $ | (2,490 | ) |

 

**7.  Stockholders’ Equity**

InMarch 2005, the Board of Directors authorized management to repurchase 755,821shares of InsWeb common stock, consisting of 531,947 shares held by NationwideMutual Insurance Company and 223,874 shares held by Century Capital Partners,L.P. These shares represented 16% of the total outstanding shares at that dateand were purchased for approximately $1.7 million, or $2.30 per share.Subsequent to the closing of these transactions on June 30, 2005, NationwideMutual and Century Capital held no shares.

**8.  Commitments and Contingencies**

**Leases**

InsWeb iscontractually obligated to make future lease payments on certain formerlyoccupied facilities through September 2008. As of June 30, 2006, totalfuture obligations for these facilities amounted to $5.9 million; theseobligations are offset by total contractual future sublease income ofapproximately $4.7 million. Substantially all future sublease income is duefrom a sublessee who is an early-stage company with a limited operating historyand, therefore, there are inherent risks and uncertainties associated with itsfuture operations and its ability to discharge its obligations through the termof the sublease. In the event that the sublessee defaults on its obligationsunder the amended sublease, InsWeb would be responsible for making the requiredlease payments to the landlord through the remaining term of the lease. In connectionwith this lease and other lease obligations for formerly occupied facilities,InsWeb must make assumptions regarding the estimated future sublease incomerelative to these facilities. These estimates and assumptions are affected byarea-specific conditions such as new commercial development, market occupancyrates and future market prices. Based on these assumptions, the Company hasrecorded an accrual of $1.7 million as of June 30, 2006 for lease commitmentsrelated to these formerly occupied facilities, as compared to an accrual of$1.9 million as of December 31, 2005.

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**Securities ClassAction Lawsuit**

A securities class action lawsuitwas filed on December 5, 2001 in the United States District Court for theSouthern District of New York, (the “Court”) purportedly on behalf of allpersons who purchased our common stock from July 22, 1999 throughDecember 6, 2000. The complaint named as defendants InsWeb, certaincurrent and former officers and directors, and three investment banking firms thatserved as underwriters for InsWeb’s initial public offering in July 1999.The complaint, as subsequently amended, alleges violations of Sections 11 and15 of the Securities Act of 1933 and Sections 10 and 20 of the SecuritiesExchange Act of 1934, on the grounds that the prospectuses incorporated in theregistration statements for the offering failed to disclose, among otherthings, that (i) the underwriters had solicited and received excessive andundisclosed commissions from certain investors in exchange for which theunderwriters allocated to those investors material portions of the shares ofour stock sold in the offerings and (ii) the underwriters had entered intoagreements with customers whereby the underwriters agreed to allocated sharesof the stock sold in the offering to those customers in exchange for which thecustomers agreed to purchase additional shares of InsWeb stock in theaftermarket at pre-determined prices. No specific damages are claimed. Similarallegations have been made in lawsuits relating to more than 300 other initialpublic offerings conducted in 1999 and 2000, all of which have beenconsolidated for pretrial purposes. In October 2002, all claims againstthe individual defendants were dismissed without prejudice. In February 2003,the Court dismissed the claims in the InsWeb action alleging violations of theSecurities Exchange Act of 1934 but allowed the plaintiffs to proceed with theremaining claims. In June 2003, the plaintiffs in all of the casespresented a settlement proposal to all of the issuer defendants. Under theproposed settlement, the plaintiffs will dismiss and release all claims againstparticipating defendants in exchange for a contingent payment guaranty by theinsurance companies collectively responsible for insuring the issuers in allthe related cases, and the assignment or surrender to the plaintiffs of certainclaims the issuer defendants may have against the underwriters. InsWeb and mostof the other issuer defendants have accepted the settlement proposal. On April24, 2006, a hearing was held to consider final approval of the settlement; theCourt’s ruling on final approval of the settlement remains pending.  If the Court does not approve the settlement,InsWeb intends to defend the lawsuit vigorously. The litigation and settlementprocess is inherently uncertain and we cannot predict the outcome, though, ifunfavorable, it could have a material adverse effect on InsWeb’s financialcondition, results of operations and cash flows.

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

In March 2006, theInsWeb Insurance Services agency discontinued selling property and casualtyinsurance policies, which represented less than 7% of the Company’s totalrevenues in the year ended December 31, 2005. The Company’s agency subsidiary will continue to sell term lifeinsurance. In connection with this action, the Company entered into adefinitive agreement to sell InsWeb Insurance Services’ property and casualty “bookof business,” including rights related to approximately 9,500 current policyholders. This transaction closed on April 28, 2006. Total proceeds from thistransaction will be approximately $2.0 million, of which approximately $1.8million was received during April 2006.

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** **

**ITEM 2.       MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

*This Quarterly Report onForm 10-Q, and in particular Management’s Discussion and Analysis ofFinancial Condition and Results of Operations, contains “forward-lookingstatements” with respect to InsWeb’s future financial performance. The words orphrases “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,”and similar expressions are generally intended to identify forward-lookingstatements. Such forward-looking statements are subject to various known andunknown risks and uncertainties, and InsWeb cautions you that anyforward-looking information provided by, or on behalf of, InsWeb is not aguarantee of future performance. Actual results could differ materially from thoseanticipated in such forward-looking statements due to a number of factors, someof which are beyond InsWeb’s control, including, but not limited to, uncertaineconomic conditions which could result in lower growth rates, decreasingrevenue and reduced participation in InsWeb’s marketplace, anticipated losses,the unpredictability of future revenues, reliance on key customers—property andcasualty insurance carriers- who are themselves subject to volatility in theiroperating cycles, reliance on a third party intermediary who provides leads tolocal insurance agents on InsWeb’s behalf, competition, risks associated withsystem development and operation risks, management of potential growth andrisks of new business areas, business combinations, and strategic alliances.These risks and uncertainties, as well as other risks and uncertainties, whichare described in greater detail in InsWeb’s Annual Report on Form 10-K for theyear ended December 31, 2005 and other documents filed with the Securities andExchange Commission, could cause InsWeb’s actual results to differ materiallyfrom historical results or those currently anticipated. All forward-lookingstatements are based on information available to InsWeb on the date hereof, andInsWeb assumes no obligation to update such statements.*

**Overview**

InsWeb operates an online insurance marketplace thatenables consumers to comparison shop online and to obtain insurance company-sponsoredquotes for a variety of insurance products, including automobile, homeownersand term life. InsWeb’s marketplace electronically matches consumers andinsurance providers. InsWeb has combined extensive knowledge of the insuranceindustry, technological expertise and close relationships with a significantnumber of insurance companies to develop an integrated online marketplace.

InsWeb’sprincipal source of revenues is transaction fees from participating insuranceproviders, either directly from an insurance company or from a local insuranceagent. While quotes obtained through InsWeb’s online insurance marketplace areprovided to consumers free of charge, InsWeb earns revenues from participatinginsurance companies or agents based on the delivery of qualified leads. Thesefees are earned either from an insurance company based on a closed policy, fromthe delivery of a lead to a participating insurance provider or local agent, orfrom a commission earned by InsWeb’s insurance agency subsidiary, InsWebInsurance Services, Inc. In certain instances, consumers are provided theopportunity to link directly to a third party insurance provider’s website. Inthese situations, which we refer to as InsWeb’s Sponsored Web Link program, theconsumer will complete the third party company’s online application, and InsWebwill be paid a fee for that consumer link or click-through.

In2004, InsWeb launched its term life agency business in an effort to increaserevenue per consumer within the term life marketplace. The conversion from alead-based revenue model to a commission-based revenue model resulted in adelay in revenue recognition, as it typically takes 90 to 120 days to completethe sales process for a term life policy. At the time the term life agencybusiness was launched, the Company was uncertain whether the transaction dataavailable was sufficient to reliably estimate cancellations for purposes ofsatisfying the criteria in Statement of Financial Accounting Standards No. 48, “RevenueRecognition When Right of Return Exists,” for service transactions subject tocustomer cancellation privileges. Accordingly, during the initial deploymentperiod of the commission-based model, the Company recognized commission revenueon a ratable basis over the initial term of the related policy as thecancellation privileges expired. Based on term life agency activity andcancellation data accumulated since the launch, management determined in April2005 that it was appropriate to use the historical cancellation rate toestimate a cancellation allowance for term life agency transactions and theCompany, therefore, recognizes revenue from its term life agency business whencommissions are earned, net of an estimate for future cancellations based onits historical cancellation rate.

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Also in 2004,InsWeb launched its agent network program which provides online auto insuranceconsumers access to local insurance agents. Prior to September 12, 2005, theagent network program was conducted exclusively through an intermediary,NetQuote, Inc. During the year ended December 31, 2005, NetQuote represented29% of auto transaction fees, compared to 8% during the year ended December 31,2004. For the six months ended June 30, 2006 and 2005, NetQuote represented 19%and 29% of auto transaction fees, respectively. InsWeb does not have anexclusive or long-term contract with this intermediary.

To lessen InsWeb’s reliance on this intermediary, andto maximize its revenue potential, InsWeb launched a proprietary agent networkprogram (“AgentInsider”) to provide leads directly to local insurance agentswho have registered with InsWeb. Generally, leads are delivered to the highest bidding agents; however,InsWeb may enter into agreements with insurance companies, large agencies andinsurance related entities by which these providers pay a set fee for eachlead. However, as is the case with many new initiatives, we haveexperienced a reduction in revenue per consumer, compared to the revenue perconsumer we would have received from our intermediary for the same consumerlead, in the initial phases of the program. The length of time and extent ofthis reduction will depend on the rate of registration of local personal linesinsurance agents and the degree of participation of these agents throughout thecountry. We expect that the agent network program, both through theintermediary and through our internally developed network, will continue torepresent a significant percentage of auto transaction fees. At June 30, 2006,the AgentInsider program had approximately 2,600 local insurance agentsactively purchasing consumer leads, representing 46% of the consumers who shopthe InsWeb auto insurance marketplace. This is an increase from 1,500 agentspurchasing leads, representing 29% of the auto insurance consumers at December31, 2005.

InsWeb has focused its efforts on developing insurance company coveragefor automobile insurance in order to be able to offer true comparative onlineshopping for this important segment of the insurance market. Automobileinsurance accounted for approximately 79% of our transaction revenues in 2005,approximately 77% in 2004 and approximately 79% in 2003. We anticipate thatautomobile insurance will continue to account for a substantial portion of ourrevenues for the foreseeable future.

InsWeb has incurred operating losses of $6.3 million in2005, $9.2 million in 2004, and $7.0 million in 2003, and as of June 30, 2006,its accumulated deficit was $190.0 million. In addition, InsWeb’soperating activities to date have consumed substantial amounts of cash, cashequivalents and short-term investments ($5.3 million in 2005, $8.7 million in2004, and $4.2 million in 2003) and will continue to require capital in thenear future. The Company used $2.1 million to fund operating activities in thesix months ended June 30, 2006 and had $8.1 million in cash, cash equivalentsand short-term investments at June 30, 2006. These operating losses and the related accumulated deficit are a resultof the significant costs incurred in the development of InsWeb’s technologyplatform, the establishment of relationships with insurance companies, theirintegration with the InsWeb site, and InsWeb’s marketing and sales activities. In orderto remain competitive, the Company must continue to make investments essentialto its ability to operate, and InsWebintends to continue to invest in product development and maintenance, and salesand marketing. In addition, the Company will continue to incur the costsassociated with continuing to function as a publicly listed company, includingthe costs of compliance with the provisions of the Sarbanes-Oxley Act of 2002,among other things, even though the Company will not be required to comply with Section 404 of theSarbanes-Oxley Act until 2007. As aresult, InsWeb believes that it will continue to incur operating losses for atleast the next six to nine months. In the event that InsWeb is unable togenerate revenues sufficient to offset its costs, or if its costs of marketingand operations are greater than it anticipates, the Company may be unable togrow its business at the rate desired or may be required to delay, reduce, orcease certain of its operations, any of which could materially harm itsbusiness and financial results. Inaddition, if InsWeb is unable to ultimately achieve profitability, the Companymay need to seek additional financing to continue its business operations. TheCompany cannot be certain that additional financing will be available whenrequired, on favorable terms or at all. If InsWeb is not successful in raisingadditional capital as required, it may delay, significantly reduce or ceasecertain of its operations, which could adversely affect its results ofoperations and financial position.

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**Results of Operations**

The following tables set forth statement of operations data with therespective percentage change from the prior year:

 

|                                   | ** ** | **Three Months Ended June 30,** | ** ** | **Percentage  change from** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **2006**                                            | ** ** | **2005**                         | ** ** | **prior period** | ** ** |
| Revenues:                         |       |                                                |       |                             |       |   |   |
|                              |       |                                                |       |                             |       |   |   |
| Transaction  fees:                |       |                                                |       |                             |       |   |   |
| Auto insurance                    |       | $                                                   | 5,692      |                             | $          | 4,888 |   | 17 | % |
| Term life  insurance              |       | 1,267                                               |       | 1,569                            |       | (19 | )% |
| Other insurance  offerings        |       | 470                                                 |       | 65                               |       | 623 | % |
|                              |       | 7,429                                               |       | 6,522                            |       | 14 | % |
| Development and  maintenance fees |       | 88                                                  |       | 82                               |       | 8 | % |
| Total revenues                    |       | 7,517                                               |       | 6,604                            |       | 14 | % |
| Operating expenses:               |       |                                                |       |                             |       |   |   |
| Direct marketing                  |       | 5,158                                               |       | 3,506                            |       | 47 | % |
| Sales and  marketing              |       | 1,967                                               |       | 1,783                            |       | 10 | % |
| Technology                        |       | 1,216                                               |       | 1,417                            |       | (10 | )% |
| General and  administrative       |       | 1,074                                               |       | 1,070                            |       | 0 | % |
| Total operating  expenses         |       | 9,415                                               |       | 7,776                            |       | 21 | % |
| Loss from operations              |       | $                                                   | (1,898     | )                                | $          | (1,172 | ) | 62 | % |

 

|                                   | ** ** | **Six Months Ended June 30,** | ** ** | **Percentage  change from** | ** ** |
|-----------------------------------|------------|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **2006**                                          | ** ** | **2005**                         | ** ** | **prior period** | ** ** |
| Revenues:                         |       |                                              |       |                             |       |   |   |
|                              |       |                                              |       |                             |       |   |   |
| Transaction  fees:                |       |                                              |       |                             |       |   |   |
| Auto insurance                    |       | $                                                 | 11,690     |                             | $          | 9,586 |   | 22 | % |
| Term life  insurance              |       | 2,588                                             |       | 2,397                            |       | 8 | % |
| Other insurance  offerings        |       | 716                                               |       | 145                              |       | 394 | % |
|                              |       | 14,994                                            |       | 12,128                           |       | 24 | % |
| Development and  maintenance fees |       | 178                                               |       | 170                              |       | 5 | % |
| Total revenues                    |       | 15,172                                            |       | 12,298                           |       | 23 | % |
| Operating expenses:               |       |                                              |       |                             |       |   |   |
| Direct marketing                  |       | 10,103                                            |       | 6,661                            |       | 52 | % |
| Sales and  marketing              |       | 4,031                                             |       | 3,330                            |       | 21 | % |
| Technology                        |       | 2,469                                             |       | 2,789                            |       | (11 | )% |
| General and  administrative       |       | 2,250                                             |       | 2,202                            |       | 2 | % |
| Total operating expenses          |       | 18,853                                            |       | 14,982                           |       | 26 | % |
| Loss from operations              |       | $                                                 | (3,681     | )                                | $          | (2,684 | ) | 37 | % |

 

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The following table sets forth statement of operationsdata as a percentage of total revenues:****

|                                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                             | ** ** | **   2006   **    | ** ** | **   2005   **  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                              |       |                                            |       |                                          |       |   |   |   |   |
| Auto insurance  transaction fees       |       | 76                                              | %          | 74                                            | %          | 77 | % | 78 | % |
| Term life  insurance  transaction fees |       | 17                                              | %          | 24                                            | %          | 17 | % | 20 | % |
| Other insurance transaction fees       |       | 6                                               | %          | 1                                             | %          | 5 | % | 1 | % |
| Development and maintenance fees       |       | 1                                               | %          | 1                                             | %          | 1 | % | 1 | % |
| Total                                  |       | 100                                             | %          | 100                                           | %          | 100 | % | 100 | % |
| Operating expenses:                    |       |                                            |       |                                          |       |   |   |   |   |
| Technology                             |       | 16                                              | %          | 22                                            | %          | 16 | % | 23 | % |
| Direct marketing                       |       | 69                                              | %          | 53                                            | %          | 67 | % | 55 | % |
| Sales and marketing                    |       | 26                                              | %          | 27                                            | %          | 27 | % | 26 | % |
| General and administrative             |       | 14                                              | %          | 16                                            | %          | 15 | % | 18 | % |
| Total                                  |       | 125                                             | %          | 118                                           | %          | 125 | % | 122 | % |
| Loss from operations                   |       | (25                                             | )%         | (18                                           | )%         | (25 | )% | (22 | )% |

 

Direct marketing (consumer acquisition)metrics and costs and revenue per consumer were as follows:

 

|                                                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(In thousands,  except per consumer amounts)**         | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                     |       |                                            |       |                                          |       |   |   |   |   |
| Direct marketing costs                                   |       | $                                               | 5,158      |                                          | $          | 3,505 |   | $ | 10,103 |   | $ | 6,661 |   |
| Direct marketing costs  as a percent of transaction fees |       | 69                                              | %          | 53                                            | %          | 67 | % | 54 | % |
| Number of consumers                                      |       | 1,518                                           |       | 1,320                                         |       | 3,074 |   | 2,411 |   |
| Direct marketing cost  per consumer                      |       | $                                               | 3.40       |                                          | $          | 2.66 |   | $ | 3.29 |   | $ | 2.76 |   |
| Total transaction fees per consumer                      |       | $                                               | 4.89       |                                          | $          | 4.94 |   | $ | 4.88 |   | $ | 5.03 |   |

 

Automarketplace metrics were as follows:

|                                                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(In thousands,  except per consumer amounts)** | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                             |       |                                            |       |                                          |       |   |   |   |   |
| Auto insurance  transaction fees                 |       | $                                               | 5,692      |                                          | $          | 4,888 |   | $ | 11,690 |   | $ | 9,586 |   |
| Number of consumers                              |       | 1,378                                           |       | 1,203                                         |       | 2,802 |   | 2,171 |   |
| Transaction fees per consumer                    |       | $                                               | 4.13       |                                          | $          | 4.06 |   | $ | 4.17 |   | $ | 4.42 |   |

 

Termlife marketplace metrics were as follows:

|                                                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(In thousands,  except per consumer amounts)** | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                             |       |                                            |       |                                          |       |   |   |   |   |
| Term life insurance  transaction fees            |       | $                                               | 1,267      |                                          | $          | 1,569 |   | $ | 2,588 |   | $ | 2,397 |   |
| Number of consumers                              |       | 68                                              |       | 84                                            |       | 155 |   | 177 |   |
| Transaction fees per  consumer                   |       | $                                               | 18.63      |                                          | $          | 18.68 |   | $ | 16.70 |   | $ | 13.54 |   |
| Number of closed term  life policies             |       | 1,451                                           |       | 1,382                                         |       | 2,887 |   | 2,355 |   |
| Transaction fees per closed policy               |       | $                                               | 87         |                                          | $          | 114 |   | $ | 90 |   | $ | 102 |   |

 

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Definition of terms are as follows:

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

 

**Revenues**

**Transaction Fees.** Transaction fees (consisting of lead fees, closed policy fees andsponsored link fees) relating to automobile insurance increased to$5.7 million and $11.7 million for the three and six months ended June 30,2006, respectively, from $4.9 million and $9.6 million for the comparableperiods in 2005.  The 17% increase forthe three months ended June 30, 2006 was attributable to a 15% increase inconsumer traffic (consumers who have started the InsWeb auto application). Revenueper auto consumer increased to $4.13 forthe three months ended June 30, 2006 from $4.06 for the comparable period in 2005. The 22% increase for the six monthsended June 30, 2006 was attributable to a 29% increase in consumer traffic,offset by a 6 % decrease in the revenue per consumer.

Transaction fees (consisting of agency commissionsand to a lesser extent lead fees) relating to term life insurance decreased to$1.3 million for the three months ended June 30, 2006 from$1.6 million for the same period in 2005. Term life revenues for the sixmonths ended June 30, 2006 increased to $2.6 million from$2.4 million for the comparable period in 2005. In connection with theCompany’s completed transition of its term life agency to a commission-basedrevenue model from a lead-based revenue model, as discussed above, werecognized commission revenue of $286,000 in the quarter ended June 30, 2005relating to commissions earned on term life policies closed in prior quarters.

**Operating Expenses**

**DirectMarketing.**  Direct marketing expenses consist ofadvertising, promotions and fees paid to online companies to drive consumertraffic to the InsWeb online marketplace. InsWeb’s marketing strategy isdesigned to increase consumer traffic to its website and to drive awareness ofits insurance products and services. The Company employs various means ofadvertising, which consist primarily of online advertising, sponsored search,portal advertising, e-mail campaigns and strategic partnerships withhigh-profile online companies that can drive significant traffic to the InsWebsite. Fees related to the Company’s online marketing are expensed in the periodthe related consumer click-through occurs or in some cases, when the consumerleads are generated. Direct marketing expenses increased to $5.2 millionand $10.1 million for the three and six months ended June 30, 2006, respectively, compared to $3.5 million and $6.7 million in thesame periods of 2005. Direct marketing cost per consumer acquired increased to$3.40 and $3.29 for the threeand six months ended June 30, 2006,respectively, compared to $2.66 and $2.76 per acquired consumer for the sameperiod of 2005.   The increase in directmarketing cost per consumer is a result of the highly competitive market foron-line consumers, especially the on-line advertising market. Managementexpects that for the remainder of 2006, direct marketing costs per consumeracquired will remain at or increase from current levels; and while the amountof consumer traffic driven to the InsWeb marketplace will fluctuate during theyear due to seasonality and the competitive environment for online consumers,we currently expect that overall consumer traffic for 2006 will be at levelsgreater than 2005.

**Sales andMarketing.**  Sales and marketing expenses consistprimarily of payroll and related expenses, including employee benefits,facility costs, telecommunications and systems costs, for InsWeb’s sales andmarketing personnel and the personnel and related costs for InsWeb’s InsuranceAgency operations, which include selling agents, case managers, supervisors andcustomer service, support and fulfillment groups. Sales and marketing expensesincreased to $2.0 million and $4.0 million for the three and six months ended June 30, 2006, respectively, from $1.8 million and $3.3 million for the comparable periods in 2005. This increase was a result of the expansion ofthe term life agency and the launch of the AgentInsider program (i.e., sales,customer support and agent marketing costs). Sales and marketing expenses for the remainder of 2006 areexpected to remain at or near current levels.

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**Technology.**  Technology expenses consist primarily of payrolland related expenses, including employee benefits, facility and systems costs,for product and site development personnel involved with the planning, design andimplementation of carrier and partner integration to the InsWeb onlineinsurance marketplace, as well as hosting and supporting the technology needsof the InsWeb site. Technologyexpenses decreased to $1.2 million and $2.5 million for the three and sixmonths ended June 30, 2006, respectively, from $1.4 million and $2.8 millionfor the comparable periods in 2005. The decrease was primarily attributable toa reduction in headcount. Technology expenses for the remainder of 2006 areexpected to remain at or near current levels.

**General and Administrative.** General and administrative expenses consistprimarily of payroll and related expenses, including employee benefits,facility costs, telecommunications and systems costs, for InsWeb’s generalmanagement, administrative and accounting personnel, as well as other generalcorporate expenses. General andadministrative expenses remained relatively unchanged at $1.1 million and $2.2million for the three and six months ended June 30, 2006 and 2005,respectively. General and administrative expenses are expected to remain at ornear current levels for the remainder of 2006.

**Interest Income**

Interest income was $101,000 and $193,000 for thethree and six months ended June 30, 2006, respectively, and $96,000 and $188,000,respectively, for the comparable period in 2005. Interest income representsinterest earned on InsWeb’s short-term investments.

**Other Income**

Other income was $2,044,000 for the three and six months ended June 30,2006, and represents the gain recorded in connection with the sale of InsWebInsurance Services’ property and casualty agency book of business. Thistransaction closed on April 28, 2006.

**Critical Accounting Policies**

InsWeb’s discussion and analysis of its financialcondition and results of operations are based on InsWeb’s consolidatedfinancial statements which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of thesefinancial statements requires InsWeb to make estimates and judgments thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.InsWeb bases its estimates and judgments on historical experience and onvarious other factors that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates underdifferent assumptions or conditions. InsWeb believes the following criticalaccounting policies affect its more significant judgments and estimates used inthe preparation of its consolidated financial statements.

**Accrual forLease Obligations.** InsWebis contractually obligated to make future lease payments on certain formerlyoccupied facilities through September 2008. As of June 30, 2006, totalfuture obligations for these facilities amounted to $5.9 million; theseobligations are offset by total contractual future sublease income ofapproximately $4.7 million. Substantially all future sublease income isdue from a sublessee who is a start-up company with a limited operating historyand, therefore, there are inherent risks and uncertainties associated with itsfuture operations and its ability to discharge its obligations through the termof the sublease. In the event that the sublessee defaults on its contractualobligations under the amended sublease, InsWeb would be responsible for makingthe required lease payments to the landlord through the remaining term of thelease. In connection with this lease and other lease obligations for formerlyoccupied facilities, InsWeb must make assumptions regarding the potentialfuture sublease income relative to these facilities. These estimates andassumptions are affected by area-specific conditions such as new commercialdevelopment, market occupancy rates and future market prices. Based on theseassumptions, the Company maintains an accrual for formerly occupied facilities.The remaining accrual for lease obligation of formerly occupied facilities was$1.7 million at June 30, 2006 as compared to an accrual of $1.9 million as ofDecember 31, 2005.

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**Contingencies.** As discussed in Note 8 of Notes to CondensedConsolidated Financial Statements in Part I of this report, a class actionlawsuit has been filed that alleges InsWeb violated certain federal securitieslaws at the time of its initial public offering. Although some claims againstInsWeb in this class action have been dismissed and a settlement of theseproceedings has been proposed and conditionally accepted, InsWeb cannotaccurately predict the ultimate outcome of this matter at this time andtherefore, cannot estimate the range of probable loss, if any, due to theinherent uncertainties of litigation. InsWeb believes it has meritoriousdefenses; however InsWeb cannot assure that it will prevail in this action. Anunfavorable outcome could have a material adverse effect on InsWeb’s financialcondition, results of operations and cash flows.

**Stock-Based Compensation.**InsWeb accountsfor stock-based compensation in accordance with Statement of FinancialAccounting Standards (SFAS) No. 123(R), “Shared-Based Payment.” Under theprovisions of SFAS No. 123(R), stock-based compensation cost is generallyestimated at the grant date based on the award’s fair value as calculated bythe Black-Scholes-Merton (BSM) option-pricing model and is recognized asexpense over the requisite service period. The BSM model requires varioushighly judgmental assumptions including expected option life, volatility, andforfeiture rates. If any of the assumptions used in the BSM model change significantly,stock-based compensation expense may differ materially in the future from thatrecorded in the current period. See additional discussion in Note 3 of theCondensed Consolidated Financial Statements.

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

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

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**Liquidity and Capital Resources**

At June 30, 2006, InsWeb’s principal source ofliquidity and overall cash position was $8.1 million, consisting of cash, cashequivalents and short-term investments, a decrease from $10.3 million atDecember 31, 2005.  The decreaseresulted primarily from the use of $2.1 million of cash in operatingactivities. The primary driver that impacts changes in the Company’s overallcash position is its operating loss.

For the six months ended June 30, 2006, net cashused in operating activities was $2.1 million. The primary components of theuse of cash was the net loss of $1.4 million and an increase in accountsreceivable of $0.9 million, partially offset by an increase in accounts payableof $0.2 million. The increase in accounts receivable was a result of therevenue growth during the six month period, with days sales outstanding at 38days as of June 30, 2006.  The increasein accounts payable was a result of the significant increase in directmarketing activities during the year, increasing consumer traffic to the InsWebmarketplace and a corresponding increase in direct marketing costs.

For the six months ended June 30, 2006, net cashprovided by investing activities was $0.7 million, which primarily consisted ofredemptions of short-term investments offset by the purchases of short-terminvestments. Investing activities will generally fluctuate in conjunction withoperating activity needs.

For the six months ended June 30, 2006, net cashprovided by financing activities was $25,000 and was attributable to the sharesissued pursuant to the employee stock purchase plan and the exercise ofemployee stock options.

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

Aggregate contractual cash obligations as of June30, 2006 are summarized as follows (in thousands):

|                                      | ** ** | **Gross lease  commitments** | ** ** | **Sublease  income** | ** ** | **Net lease  commitment** | ** ** |
|--------------------------------------|------------|-----------------------------------|------------|----------------------|------------|--------------------------------|------------|
| Six months ending  December 31, 2006 |       | $                                 | 1,710      |                 | $          | (1,024                         | )          | $ | 686 |   |
| Year ending December  31, 2007       |       | 3,483                             |       | (2,100               | )          | 1,383                          |       |
| Year ending December  31, 2008       |       | 2,936                             |       | (1,615               | )          | 1,321                          |       |
| Year ending December  31, 2009       |       | 1,078                             |       | —               |       | 1,078                          |       |
| Year ending December  31, 2010       |       | 1,078                             |       | —               |       | 1,078                          |       |
| Thereafter                           |       | 359                               |       | —               |       | 359                            |       |
|                                 |       | $                                 | 10,644     |                 | $          | (4,739                         | )          | $ | 5,905 |   |

 

Our operations to date have consumed substantial amounts of cash, cashequivalents and short-term investments ($5.3 million in 2005 and $8.7 in 2004)and will continue to require capital in the near future. In order to remaincompetitive, we must continue to make investments which are essential to ourability to operate, including investments in direct marketing, technology andgeneral administration, including the governance and compliance costs requiredof a public company. We anticipate that our cash, cash equivalents andshort-term investments will be sufficient to meet our anticipated cash needsfor working capital and capital expenditures through at least June 30, 2007. Longer-term, if the enhancements to our automarketplace, including the expansion of our agent network program, and thegrowth of our term life agency are unable to generate revenues sufficient to offsetour costs, or if our costs of marketing and operations are greater than weanticipate, we may be unable to grow our business at the rate desired; or wemay be required to delay, reduce, or cease certain of our operations, any ofwhich could materially harm our business and financial results. Although we do notanticipate the need for additional financing, we nevertheless may requireadditional funds to meet operating needs. We cannot be certain that additionalfinancing will be available when required, on favorable terms or at all. If weare not successful in raising additional capital as required, we may delay,significantly reduce or cease certain of our operations, which could adverselyaffect our results of operations and financial position.

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

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

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

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

(b)                                             There has been no change in our internalcontrol over financial reporting during the three months ended June 30, 2006that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

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

**ITEM 1.                  LEGAL PROCEEDINGS**

See Part I, Item 1, “Financial Statements — Note8 — Commitments and Contingencies.”

**ITEM 1A.****                                            RISKFACTORS.**

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

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**ITEM 6.                  EXHIBITS**
| Exhibit  Number | ** ** | **Description of  Document**                                                                                        |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------|
| 10.21           |       | Agreement  for Purchase of Agency Assets between Registrant and Brooke Franchise  Corporation dated April 11, 2006. |
|            |       |                                                                                                                |
| 31.1            |       | Certification  of Chief Executive Officer, pursuant to Exchange Act Rule 13a-14(a).                                 |
|            |       |                                                                                                                |
| 31.2            |       | Certification  of Chief Financial Officer, pursuant to Exchange Act Rule 13a-14(a).                                 |
|            |       |                                                                                                                |
| 32              |       | Certification  of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C.  Section 1350.    |

 

### **SIGNATURE**

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

 

 
| Dated:  August 9, 2006 | **INSWEB  CORPORATION**     |
|------------------------|-----------------------------|
|                   |                        |
| ** **             | **/s/ WILLIAM  D. GRIFFIN** | ** ** |
|                   | William  D. Griffin         |
|                   | Chief  Financial Officer    |

 

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