Table of Contents

 

 

** **

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

----

 

**FORM 10-Q**

 
| **x**                                                                                            | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|--------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                                                       | ** ** | ** **                                                                                               |
| **For the quarterly period ended September 30,  2008**                                      |
| ** **                                                                                       | ** ** | ** **                                                                                               |
| **Or**                                                                                           |
| ** **                                                                                       | ** ** | ** **                                                                                               |
| **o**                                                                                            | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
| ** **                                                                                       | ** ** | ** **                                                                                               |
| **For the transition period from     to     ** |
| ** **                                                                                       | ** ** | ** **                                                                                               |
| **Commission file number 0-26083**                                                               |

 

**INSWEB CORPORATION**

(Exact name of Registrant asspecified in its charter)

 

| **Delaware**                                                        | ** ** | **94-3220749**                      |
|---------------------------------------------------------------------|------------|-------------------------------------|
| (State or other jurisdiction ofincorporation or organization)       |       | (IRS EmployerIdentification Number) |
|                                                                |       |                                |
| **11290 Pyrites Way, Suite 200 Gold River,  California 95670** |
| (Address of principal executive offices)                            |
| ** **                                                          | ** ** | ** **                          |
| **(916) 853-3300**                                                  |
| (Registrant’s telephone number, including area code)           |

 

----

 

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

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 

| Large  accelerated filer o                     |   | Accelerated  filer o         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                       |   | Smaller  reporting company x |
| (Do  not check if a smaller reporting company) |   |                              |

 

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

Yes o No x

 

Thenumber of outstanding shares of the Registrant’s Common Stock, par value $0.001per share, on October 30, 2008 were 4,779,874 shares.

 

 

 

----

Table of Contents

 

**FORM 10-Q**

**INSWEB CORPORATION**

**INDEX**

 
| **PART I**  | **FINANCIAL  INFORMATION**                                                                                             | **3**  |
|------------------|------------------------------------------------------------------------------------------------------------------------|--------|
| ITEM 1:          | Financial Statements (unaudited)                                                                                       | 3      |
|             | Condensed Consolidated Balance Sheets as of  September 30, 2008 and December 31, 2007                        | 3      |
|             | Condensed  Consolidated Statements of Operations for the three and nine months ended  September 30, 2008 and 2007 | 4      |
|             | Condensed Consolidated Statements of Cash Flows for  the nine months ended September 30, 2008 and 2007            | 5      |
|             | Notes to Condensed Consolidated Financial Statements                                                                   | 6      |
| ITEM 2:          | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                            | 12     |
| ITEM 3:          | Quantitative and Qualitative Disclosures  About Market Risk                                                            | 19     |
| ITEM 4T:         | Controls and Procedures                                                                                                | 19     |
|             |                                                                                                                   |   |
| **PART II** | **OTHER INFORMATION**                                                                                                  | **19** |
| ITEM 1:          | Legal Proceedings                                                                                                      | 19     |
| ITEM 1A:         | Risk Factors                                                                                                           | 19     |
| ITEM 6:          | Exhibits                                                                                                               | 19     |
|             |                                                                                                                   |   |
| Signature        |                                                                                                                   | 20     |
| Certifications   |                                                                                                                   |   |

 

2

----

Tableof Contents

 

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

 

**ITEM1.****                  FINANCIALSTATEMENTS**

 

**INSWEB CORPORATION**

 

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 

*(in thousands)*

*(unaudited)*

 
| ** **                                      | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **Assets**                                      |       |                         |       |                        |       |
| Current assets:                                 |       |                         |       |                        |       |
| Cash and cash equivalents                       |       | $                            | 9,125      |                        | $          | 10,777 |   |
| Accounts receivable, net                        |       | 2,410                        |       | 2,428                       |       |
| Related party receivables                       |       | 302                          |       | 48                          |       |
| Prepaid expenses and other current assets       |       | 1,240                        |       | 548                         |       |
| Total current assets                            |       | 13,077                       |       | 13,801                      |       |
| Property and equipment, net                     |       | 284                          |       | 257                         |       |
| Other assets                                    |       | 281                          |       | 75                          |       |
| Total assets                                    |       | $                            | 13,642     |                        | $          | 14,133 |   |
|                                            |       |                         |       |                        |       |
| **Liabilities and stockholders’ equity**   |       |                         |       |                        |       |
| Current liabilities:                            |       |                         |       |                        |       |
| Accounts payable                                |       | $                            | 2,338      |                        | $          | 2,118 |   |
| Accrued expenses                                |       | 1,107                        |       | 1,426                       |       |
| Deferred revenue                                |       | 267                          |       | 246                         |       |
| Total current liabilities                       |       | 3,712                        |       | 3,790                       |       |
|                                            |       |                         |       |                        |       |
| Commitments and  contingencies                  |       |                         |       |                        |       |
|                                            |       |                         |       |                        |       |
| Stockholders’ equity:                      |       |                         |       |                        |       |
| Common stock                                    |       | 8                            |       | 8                           |       |
| Paid-in capital                                 |       | 206,655                      |       | 206,208                     |       |
| Treasury stock                                  |       | (6,334                       | )          | (6,334                      | )          |
| Other comprehensive income (loss)               |       | (1                           | )          | 1                           |       |
| Accumulated deficit                             |       | (190,398                     | )          | (189,540                    | )          |
| Total stockholders’ equity                 |       | 9,930                        |       | 10,343                      |       |
| Total liabilities and stockholders’ equity |       | $                            | 13,642     |                        | $          | 14,133 |   |

 

See accompanying notes.

 

3

----

Tableof Contents

 

**INSWEB CORPORATION**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

 

*(in thousands, except per share amounts)*

*(unaudited)*

 
| ** **                                                   | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                   | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues:                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Transaction fees                                             |       | $                                                    | 8,955      |                                                | $          | 9,167 |   | $ | 30,677 |   | $ | 25,273 |   |
| Other                                                        |       | 55                                                   |       | 64                                                  |       | 174 |   | 197 |   |
| Total revenues                                               |       | 9,010                                                |       | 9,231                                               |       | 30,851 |   | 25,470 |   |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Operating  expenses:                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Direct marketing                                             |       | 6,497                                                |       | 5,899                                               |       | 22,040 |   | 15,024 |   |
| Sales and  marketing                                         |       | 1,505                                                |       | 1,251                                               |       | 4,233 |   | 4,056 |   |
| Technology                                                   |       | 774                                                  |       | 691                                                 |       | 2,401 |   | 2,344 |   |
| General and  administrative                                  |       | 877                                                  |       | 1,034                                               |       | 3,276 |   | 3,259 |   |
| Total operating  expenses                                    |       | 9,653                                                |       | 8,875                                               |       | 31,950 |   | 24,683 |   |
| Income (loss) from  operations                               |       | (643                                                 | )          | 356                                                 |       | (1,099 | ) | 787 |   |
| Interest income                                              |       | 47                                                   |       | 108                                                 |       | 196 |   | 287 |   |
| Other income                                                 |       | —                                               |       | —                                              |       | — |   | 6 |   |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Income (loss)  before income taxes                           |       | (596                                                 | )          | 464                                                 |       | (903 | ) | 1,080 |   |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Income tax  benefit                                          |       | 44                                                   |       | —                                              |       | 44 |   | — |   |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Net income (loss)                                            |       | $                                                    | (552       | )                                                   | $          | 464 |   | $ | (859 | ) | $ | 1,080 |   |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Net income (loss)  per share:                                |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                        |       | $                                                    | (0.12      | )                                                   | $          | 0.10 |   | $ | (0.18 | ) | $ | 0.25 |   |
| Diluted                                                      |       | $                                                    | (0.12      | )                                                   | $          | 0.08 |   | $ | (0.18 | ) | $ | 0.21 |   |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted-average  shares used in computing per share amounts |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                        |       | 4,703                                                |       | 4,495                                               |       | 4,677 |   | 4,331 |   |
| Diluted                                                      |       | 4,703                                                |       | 5,515                                               |       | 4,677 |   | 5,108 |   |

 

Seeaccompanying notes.

 

4

----

Tableof Contents

 

**INSWEB CORPORATION**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

 

*(in thousands)*

*(unaudited)*

 
| ** **                                                                                          | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Cash flows from operating activities:                                                               |       |                                                |       |   |   |
| Net income (loss)                                                                                   |       | $                                                   | (859       | ) | $ | 1,080 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities: |       |                                                |       |   |   |
| Share-based compensation                                                                            |       | 576                                                 |       | 838 |   |
| Depreciation and amortization                                                                       |       | 119                                                 |       | 121 |   |
| Net changes in operating assets and  liabilities:                                                   |       |                                                |       |   |   |
| Accounts receivable                                                                                 |       | 18                                                  |       | (2,300 | ) |
| Interest receivable on notes due from  employees                                                    |       | (2                                                  | )          | — |   |
| Prepaid expenses and other current assets                                                           |       | (356                                                | )     | (50 | ) |
| Other assets                                                                                        |       | —                                              |       | 1 |   |
| Accounts payable                                                                                    |       | 220                                                 |       | 479 |   |
| Accrued expenses                                                                                    |       | (319                                                | )     | 244 |   |
| Deferred revenue                                                                                    |       | 21                                                  |       | (46 | ) |
| Net cash provided by (used in) operating  activities                                                |       | (582                                                | )     | 367 |   |
|                                                                                                |       |                                                |       |   |   |
| Cash flows from investing activities:                                                               |       |                                                |       |   |   |
| Purchases of property, equipment and  intangibles                                                   |       | (354                                                | )          | (15 | ) |
| Notes receivable from employees                                                                     |       | (252                                                | )          | — |   |
| Net cash used in investing activities                                                               |       | (606                                                | )          | (15 | ) |
|                                                                                                |       |                                                |       |   |   |
| Cash flows from financing activities:                                                               |       |                                                |       |   |   |
| Proceeds from issuance of common stock  through stock plans                                         |       | 386                                                 |       | 1,389 |   |
| Settlement of equity awards                                                                         |       | (850                                                | )          | — |   |
| Net cash provided by (used in) financing  activities                                                |       | (464                                                | )          | 1,389 |   |
| Net increase (decrease) in cash and cash  equivalents                                               |       | (1,652                                              | )          | 1,741 |   |
| Cash and cash equivalents, beginning of  period                                                     |       | 10,777                                              |       | 6,750 |   |
| Cash and cash equivalents, end of period                                                            |       | $                                                   | 9,125      |   | $ | 8,491 |   |

 

See accompanying notes.

 

5

----

Tableof Contents

 

**INSWEB CORPORATION**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

***(unaudited)***

 

**1. Business of InsWeb**

 

InsWebCorporation operates an online insurance marketplace that enables consumers toobtain multiple insurance quotes for a variety of insurance products, includingautomobile, homeowners and term life. InsWeb’s marketplace electronicallymatches consumers and insurance providers. InsWeb has combined knowledge of theinsurance industry, technological expertise and close relationships withinsurance companies, agents and other providers to develop an integrated onlinemarketplace. InsWeb’s marketplace enables consumers to researchinsurance-related topics, search for, analyze and compare insurance products,and apply for and receive quotes for coverage for automobile, homeowners andterm life insurance. Management believes that InsWeb provides insuranceproviders with pre-qualified consumers at attractive acquisition costs, withthe scalable, cost-efficient distribution capabilities of InsWeb’sInternet-based model.

 

InsWebis subject to all of the risks inherent in the electronic commerce industry andspecial risks related to the online insurance industry. These risks include,but are not limited to, uncertain economic conditions which could result inlower growth rates, the changing nature of the electronic commerce industry,variations in the availability and cost of acquiring consumer traffic,unpredictability of future revenues, reliance on key customers —insurancecarriers, agents and other providers – who are themselves subject to volatilityin their operating cycles, and reliance on a third party intermediary whoprovides leads to local insurance agents on InsWeb’s behalf. These risks anduncertainties, among others, could cause InsWeb’s actual results to differmaterially from historical results or those currently anticipated. In light ofInsWeb’s ongoing modifications to its business model to better capitalize onits position as a leading insurance portal, InsWeb believes thatperiod-to-period comparisons of its operating results are not necessarilymeaningful and should not be relied upon as an indication of futureperformance. Moreover, there is no assurance that InsWeb will be able to returnto and sustain profitability.

 

**2. Basis of Presentation**

 

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

 

Theaccompanying unaudited interim financial statements have been prepared inaccordance with U.S. generally accepted accounting principles for interimfinancial information and with the instructions to Form 10-Q and Rule 10-01of Regulation S-X. Accordingly, they do not contain all of the information andfootnotes required by U.S. generally accepted accounting principles forcomplete financial statements. In the opinion of management, the accompanyingunaudited interim condensed consolidated financial statements reflect alladjustments, which include only normal recurring adjustments, necessary topresent fairly InsWeb’s financial position as of September 30, 2008 andthe results of operations and cash flows for the three and nine months ended September 30,2008 and 2007. The financial data and other information disclosed in thesenotes to the condensed consolidated financial statements related to theseperiods are unaudited. The results for the three and nine months ended September 30,2008 are not necessarily indicative of the results to be expected for anyfuture period.

 

Thesecondensed consolidated financial statements should be read in conjunction withthe consolidated financial statements and notes thereto included in InsWeb’sAnnual Report on Form 10-K and other information as filed with theSecurities and Exchange Commission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States have been condensed or omitted pursuantto such rules and regulations. The September 30, 2008 condensedconsolidated balance sheet was derived from unaudited financial statements, butdoes not include all disclosures required by accounting principles generallyaccepted in the United States. However, the Company believes the disclosuresare adequate to make the information presented not misleading.

 

6

----

Tableof Contents

 

**I****NSWEB CORPORATION**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)**

 

***(unaudited)***

 

InSeptember 2006, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards No. 157, *Fair Value Measurements*(“Statement 157”).Statement 157 does not require any new fair value measurements but clarifiesthe fair value definition, establishes a fair value hierarchy that prioritizesthe information used to develop assumptions used for measuring fair value, andexpands disclosures about fair value measurements. Statement 157 clarifies thatfair value is the exchange price in an orderly transaction between marketparticipants to sell the asset or transfer the liability in the market. Thefair value hierarchy gives the highest priority to quoted prices in activemarkets and the lowest priority to unobservable data, for example, thereporting entity’s own data. It emphasizes that fair value is a market-basedmeasurement, not an entity-specific measurement, and a fair value measurementshould therefore be based on the assumptions that market participants would usein pricing the asset or liability. Statement 157 expands disclosures about theuse of fair value to measure assets and liabilities in interim and annualperiods subsequent to initial recognition, including the inputs used to measurefair value and the effect of such measurements on earnings for the period.

 

Atits February 6, 2008 meeting, the FASB decided to (i) partially deferthe effective date of Statement 157 for one year for certain nonfinancialassets and nonfinancial liabilities and (ii) remove certain leasingtransactions from the scope of Statement 157. The partial deferral isapplicable to nonfinancial assets and nonfinancial liabilities that arerecognized or disclosed at fair value in the financial statements on anonrecurring basis. Companies will still need to apply Statement 157’srecognition and disclosure requirements for financial assets and financialliabilities or for nonfinancial assets or nonfinancial liabilities that areremeasured at least annually. The FASB also decided to amend Statement 157 toexclude Statement No. 13, *Accountingfor Leases*, and its related interpretive accounting pronouncementsthat address leasing transactions. The exclusion does not apply to fair valuemeasurements of assets and liabilities recorded as a result of a leasetransaction but measured pursuant to other pronouncements within the scope ofStatement 157.

 

Statement157 is effective for financial statements issued for fiscal years beginningafter November 15, 2007 and interim periods within those fiscal years.InsWeb adopted Statement 157 at the beginning of 2008. There was no materialimpact to the Company’s financial statements due to the adoption of Statement157.

 

InFebruary 2007, the FASB issued Statement of Financial Accounting StandardsNo. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities, Including an Amendment of FASBStatement No. 115*(“Statement 159”). Statement 159 allowsentities to voluntarily choose to measure many financial assets and financialliabilities as well as certain nonfinancial instruments that are similar tofinancial instruments (collectively, eligible items) at fair value (the fairvalue option). The election is made on an instrument-by-instrument basis and isirrevocable. If the fair value option is elected for an instrument, Statement159 specifies that all subsequent changes in fair value for that instrumentshall be reported in earnings and is effective as of the beginning of anentity’s first fiscal year that begins after November 15, 2007. Uponinitial adoption, Statement 159 provides entities with a one-time chance toelect the fair value option for eligible items. The effect of the firstmeasurement to fair value should be reported as a cumulative-effect adjustmentto the opening balance of retained earnings or accumulated deficit in the yearthe statement is adopted. InsWeb adopted Statement 159 at the beginning of 2008and did not make any elections for fair value accounting. Therefore, InsWeb didnot record a cumulative-effect adjustment to its opening accumulated deficitbalance.

 

**3. Share-Based Payments**

 

InsWebmaintains a stock option plan and an employee stock purchase plan. Thefollowing table sets forth the total share-based compensation expense relatingto these plans included in InsWeb’s operating expenses in its condensedconsolidated statements of operations for the three and nine months ended September 30,2008 and 2007 (in thousands):

 
| ** **                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                  | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|                        |       |                                                 |       |                                                |       |   |   |   |   |
| Technology                  |       | $                                                    | 2          |                                                | $          | 21 |   | $ | 57 |   | $ | 70 |   |
| Sales and  marketing        |       | 21                                                   |       | 65                                                  |       | 152 |   | 179 |   |
| General and  administrative |       | 141                                                  |       | 178                                                 |       | 367 |   | 589 |   |
|                        |       | $                                                    | 164        |                                                | $          | 264 |   | $ | 576 |   | $ | 838 |   |

 

7

----

Tableof Contents

 

**I****NSWEB CORPORATION**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)**

 

***(unaudited)***

 

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

 

For the three and nine months ended September 30, 2008, threecustomers accounted for 15%, 14% and 10% and 16%, 15%, and 11% of totalrevenues, respectively.  For the three and nine months ended September30, 2007, two customers accounted for 17% and 16%  and three customersaccounted for 16%, 13% and 12% of total revenues, respectively. AtSeptember 30, 2008 three customers each accounted for 18%, 17% and 15% ofaccounts receivable, respectively, At December 31,2007, two customers each accounted for17% of accounts receivable, respectively.

 

**5.Related party receivables**

** **

As ofSeptember 30, 2008, related party receivables relate to promissory notestotaling $300,000 received from three non-officer employees of InsWeb inexchange for cash.  These notes areunsecured loans with a per annum rate of 2.42%. Principal and interest are payable in full on or before July, 2011.

 

As of December31, 2007, related party receivables relate to amounts paid by InsWeb to the respective governmental agencies onbehalf of the Chairman and CEO to cover his portion of withholding taxes forexercises of non-qualified stock options. This amount was subsequently repaidby the Chairman and CEO to InsWeb in January 2008.

 

**6.Prepaid expenses and other current assets**

** **

Prepaidexpenses and other current assets consist of the following (in thousands):

** **
| ** **                                          | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                          | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Prepaid software licenses                           |       | 345                          |       | 28                          |       |
| Prepaid insurance                                   |       | 199                          |       | 151                         |       |
| Prepaid rent and current portion of lease  deposits |       | 134                          |       | 158                         |       |
| Other prepaid and current assets                    |       | 562                          |       | 211                         |       |
|                                                |       | $                            | 1,240      |                        | $          | 548 |   |
|                                                     |            |                              |            |                             |            |  |  |

 

**7.Accrued Expenses**

 

Accruedexpenses consist of the following (in thousands):

 
| ** **                          | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Amounts due to fee sharing partners |       | $                            | 494        |                        | $          | 373 |   |
| Deferred rent                       |       | 290                          |       | 374                         |       |
| Accrued employee compensation       |       | 315                          |       | 402                         |       |
| Accrued lease obligations           |       | —                       |       | 248                         |       |
| Other                               |       | 8                            |       | 29                          |       |
|                                |       | $                            | 1,107      |                        | $          | 1,426 |   |

 

8

----

Tableof Contents

 

**I****NSWEB CORPORATION**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)**

 

***(unaudited)***

 

**8. Comprehensive Income (Loss)**

 

Totalcomprehensive income (loss) was as follows (in thousands):

 
| ** **                                                                     | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                     | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss)                                                              |       | $                                                    | (552       | )                                                   | $          | 464 |   | $ | (859 | ) | $ | 1,080 |   |
| Other comprehensive income - change in  unrealized gain or loss on investments |       | (1                                                   | )     | 1                                                   |       | (2 | )  | 1 |   |
| Comprehensive income (loss)                                                    |       | $                                                    | (553       | )                                                   | $          | 465 |   | $ | (861 | ) | $ | 1,081 |   |

** **

**9. Net Income (Loss) Per Share**

 

Basicnet income (loss) per share is computed using the weighted-average number ofshares of common stock outstanding. Diluted earnings per share is a measure ofthe potential dilution that would occur if stock options had been exercised.

 

Thefollowing table reconciles the numerator and denominator used to calculatebasic and diluted net income per share of common stock:

 
| ** **                                                            | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands, except per share amounts)** | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Numerator for basic and diluted net income  (loss) per share:         |       |                                                 |       |                                                |       |   |   |   |   |
| Net income (loss) available to common  stockholders                   |       | $                                                    | (552       | )                                                   | $          | 464 |   | $ | (859 | ) | $ | 1,080 |   |
|                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Denominator for net income (loss) per  share:                         |       |                                                 |       |                                                |       |   |   |   |   |
| Basic—weighted average shares of common  stock outstanding       |       | 4,703                                                |       | 4,495                                               |       | 4,677 |   | 4,331 |   |
| Dilutive effect of employee stock options                             |       | 699                                                  |       | 1,020                                               |       | 914 |   | 777 |   |
| Diluted                                                               |       | 5,402                                                |       | 5,515                                               |       | 5,591 |   | 5,108 |   |
|                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Net income (loss) per share:                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Basic—as reported                                                |       | $                                                    | (0.12      | )                                                   | $          | 0.10 |   | $ | (0.18 | ) | $ | 0.25 |   |
| Diluted—as reported                                              |       | $                                                    | (0.12      | )                                                   | $          | 0.08 |   | $ | (0.18 | ) | $ | 0.21 |   |

 

9

----

Tableof Contents

 

**I****NSWEB CORPORATION**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)**

 

***(unaudited)***

 

**10.Commitments and Contingencies**

** **

**Securities Class Action**

 

A securities class action lawsuit was filed on December 5, 2001 inthe United States District Court for the Southern District of New York, (the“Court”) purportedly on behalf of all persons who purchased our common stockfrom July 22, 1999 through December 6, 2000. The complaint named asdefendants InsWeb, certain current and former officers and directors, and threeinvestment banking firms that served as underwriters for InsWeb’s initialpublic offering in July 1999. The complaint, as subsequently amended,alleges violations of Sections 11 and 15 of the Securities Act of 1933 andSections 10 and 20 of the Securities Exchange Act of 1934, on the grounds thatthe prospectuses incorporated in the registration statements for the offeringfailed to disclose, among other things, that (i) the underwriters hadsolicited and received excessive and undisclosed commissions from certaininvestors in exchange for which the underwriters allocated to those investorsmaterial portions of the shares of our stock sold in the offerings and (ii) theunderwriters had entered into agreements with customers whereby theunderwriters agreed to allocated shares of the stock sold in the offering tothose customers in exchange for which the customers agreed to purchaseadditional shares of InsWeb stock in the aftermarket at pre-determined prices.No specific damages are claimed. Similar allegations have been made in lawsuitsrelating to more than 300 other initial public offerings conducted in 1999 and2000, all of which have been consolidated for pretrial purposes. In October 2002,all claims against the individual defendants were dismissed without prejudice.In February 2003, the Court dismissed the claims in the InsWeb actionalleging violations of the Securities Exchange Act of 1934 but allowed theplaintiffs to proceed with the remaining claims. In June 2003, theplaintiffs in all of the cases presented a settlement proposal to all of theissuer defendants. Under the proposed settlement, the plaintiffs would dismissand release all claims against participating defendants in exchange for acontingent payment guaranty by the insurance companies collectively responsiblefor insuring the issuers in all the related cases, and the assignment orsurrender to the plaintiffs of certain claims the issuer defendants may haveagainst the underwriters. InsWeb and most of the other issuer defendants haveaccepted the settlement proposal. While the District Court was consideringfinal approval of the settlement, the Second Circuit Court of Appeals vacatedthe class certification of plaintiffs’ claims against the underwriters in sixcases designated as focus or test cases. On December 14, 2006, theDistrict Court ordered a stay of all proceedings in all of the lawsuits pendingthe outcome of plaintiffs’ petition to the Second Circuit for rehearing en bancand resolution of the class certification issue. On April 6, 2007, theSecond Circuit denied plaintiffs’ petition for rehearing, but clarified thatthe plaintiffs may seek to certify a more limited class in the District Court.Because of the significant technical barriers presented by the Court’sdecision, the parties withdrew the proposed settlement and the plaintiffs filedan amended complaint. Following the District Court’s denial of the defendants’motions to dismiss the amended complaint, the parties filed briefs onplaintiff’s renewed motion for class certification. There is no assurance thata new settlement will be negotiated, and then approved.  If the settlement is not negotiated andsubsequently approved, InsWeb intends to defend the lawsuit vigorously. Thelitigation and settlement process is inherently uncertain and management cannotpredict the outcome, though, if unfavorable, it could have a material adverseeffect on InsWeb’s financial condition, results of operations and cash flows.

 

10

----

Table of Contents

 

**I****NSWEB CORPORATION**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)**

 

***(unaudited)***

 

**10.Commitments and Contingencies****(continued)**

** **

**Section 16(b) Lawsuit**

 

OnOctober 12, 2007, Vanessa Simmonds, a purported stockholder of InsWeb,filed a complaint in the United States District Court for the Western Districtof Washington, against InsWeb and two investment banking firms that served asunderwriters for the initial public offering of our common stock in July 1999.The complaint alleges that:  (i) the defendants, other underwritersof the offering, and unspecified officers, directors and principal stockholdersof InsWeb constituted a “group” that owned in excess of 10% of InsWeb’soutstanding common stock between July 23, 1999 and July 20, 2000; (ii) thedefendants were therefore subject to the “short swing” prohibitions of Section 16(b) ofthe Securities Exchange Actgroup of 1934; and (iii) the defendants engagedin purchases and sales, or sales and purchases, of the Company’s common stockwithin periods of less than six months in violation of the provisions of Section 16(b).The complaint seeks disgorgement of all profits allegedly received by thedefendants, with interest and attorneys fees, for transactions in violation of Section 16(b).InsWeb, as the statutory beneficiary of any potential Section 16(b) recovery,is named as a nominal defendant in the complaint. A number of similar lawsuitsagainst underwriters of other public offerings have recently been filed by thesame plaintiff and law firm. On February 11, 2008, the court approved astipulated order that InsWeb need not answer or otherwise respond to thecomplaint. On February 28, 2008, the plaintiff filed an amended complaint,and InsWeb has again been excused from filing an answer. Consolidated motionsto dismiss are expected to be filed on behalf of the issuer and underwriterdefendants. InsWeb intends to defend the lawsuit vigorously. The litigation andsettlement process is inherently uncertain and management cannot predict theoutcome, though, if unfavorable, it could have a material adverse effect onInsWeb’s financial condition, results of operations and cash flows.

 

**Patent Litigation**

 

OnNovember 30, 2007, Autobytel, Inc.filed a complaint in the UnitedStates District Court for the Eastern District of Texas against InsWeb andthree other defendants. The complaint alleges that InsWeb and the otherdefendants infringed U.S. Patent No. 6,282,517 (the “‘517 patent”), whichappears to disclose a method and apparatus to allow a potential automobilepurchaser to create and submit a purchase request for a new or used automobileover a computer network. The complaint contains generic allegations that InsWebinfringed the ‘517 patent by making, using, offering to sell and sellingsystems and/or methods that embody the invention claimed in the ‘517 patentand/or actively inducing and/or contributing to others’ infringement of suchinventions. The complaint seeks unspecified monetary damages and injunctiverelief. On February 25, 2008, InsWeb filed an answer and counterclaimdenying infringement of the ‘517 patent and asserting invalidity of the patentand other affirmative defenses. The court set May 2, 2011 as the trial date.

 

OnMarch 11, 2008, InsWeb filed a complaint in the United States DistrictCourt for the Southern District of California against Autobytel, Inc.,Autobytel I Corporation (formerly known as AVV, Inc.) and DominionEnterprises. InsWeb filed an amended complaint on July 3, 2008 addingOneCommand, Inc. as a defendant.The amended complaint alleges that thedefendants have infringed InsWeb’s U.S. Patent No. 6,898,597, whichrelates to an event logging system that monitors for the occurrence ofpredefined website usage events. Defendant Autobytel, through its wholly-ownedsubsidiary AVV, marketed and sold a product known as WebControl that embodiesthe invention claimed in the ‘597 patent. In January 2008, Autobytel soldAVV, including the WebControl product, to Dominion Enterprises. Autobytel alsoowned an asset named Retention Performance Marketing (RPM) that embodied theinvention claimed in InsWeb’s patent. Autobytel sold the RPM asset toOneCommand in July 2007. The amended complaint also adds Internet Brands, Inc.,Leadpoint, Inc., and Auto Internet Marketing, Inc. as co-plaintiffswith InsWeb following InsWeb’s assignment of a partial interest in the ‘597Patent to these companies. InsWeb and its co-plaintiff are seeking monetarydamages in an amount to be determined at trial from each defendant and apermanent injunction against further acts of infringement.

 

InsWebintends to vigorously defend the Texas lawsuit and prosecute the Californiaaction. The litigation and settlement process is inherently uncertain andmanagement cannot predict the outcome, though, if unfavorable, it could have amaterial adverse effect on InsWeb’s financial condition, results of operationsand cash flows.

 

11

----

Tableof Contents

 

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

 

*This Quarterly Report on Form 10-Q, and in particularManagement’s Discussion and Analysis of Financial Condition and Results ofOperations, contains “forward-looking statements” with respect to InsWeb’sfuture financial performance. The words or phrases “expects,” “anticipates,”“intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressionsare generally intended to identify forward-looking statements. Suchforward-looking statements are subject to various known and unknown risks anduncertainties, and InsWeb cautions you that any forward-looking informationprovided by, or on behalf of, InsWeb is not a guarantee of future performance.Actual results could differ materially from those anticipated in suchforward-looking statements due to a number of factors, some of which are beyondInsWeb’s control, including, but not limited to, uncertain economic conditionswhich could result in lower growth rates, fluctuations in revenues, anticipatedand unanticipated losses, the unpredictability of consumer shopping and/orbuying behavior, especially on the internet, potential increases in advertisingand marketing costs on the internet, the rate of participation by insurancecompanies and agents, reliance on key customers, who are themselves subject tovolatility in their operating cycles, reliance on a third party intermediarywho provides leads to local insurance agents on InsWeb’s behalf,competition,risks associated with system development and operation risks,management of potential growth and risks of new business areas, businesscombinations, litigation in which InsWeb is a party, 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 forthe year ended December 31, 2007 and other documents filed with theSecurities and Exchange Commission, could cause InsWeb’s actual results todiffer materially from historical results or those currently anticipated. Allforward-looking statements are based on information available to InsWeb on thedate hereof, and InsWeb assumes no obligation to update such statements.*

 

**Overview**

 

InsWeb (the “Company,” “InsWeb,” “we,” “us,”or “our”) operates an online insurance marketplace that enablesconsumers to comparison shop online and to obtain insurance company-sponsored quotesfor a variety of insurance products, including automobile, homeowners and termlife. InsWeb’s marketplace electronically matches consumers and insuranceproviders. InsWeb has combined extensive knowledge of the insurance industry,technological expertise and close relationships with a significant number ofinsurance companies, agents and insurance providers to develop an integratedonline marketplace.

 

Forthe automobile and homeowners insurance products, our principal source ofrevenues is transaction fees from participating insurance providers. Whilequotes obtained through our online insurance marketplace are provided toconsumers free of charge, we earn revenues when a qualified lead is deliveredto a participating insurance provider or local agent. In certain instances,consumers are provided the opportunity to link directly to a third partyinsurance provider’s website. In these situations, we will be paid a fee forthat consumer link or click-through whether or not the consumer completes the thirdparty’s online application.

 

Forterm life insurance, the majority of our revenues prior to April 2007consisted of commissions earned by our insurance agency subsidiary, InsWebInsurance Services, Inc., upon the sale of a term life insurance policy.We discontinued the term life agency operation in April 2007 but continuedto earn commissions throughout 2007  (indecreasing amounts) on a limited number of policies written prior to thediscontinuation of the agency operations Beginning in 2008, substantially allof our term life insurance were being generated by the sale of leads to thirdparties and to local agents.

 

Beginning in 2008, InsWeb also generates revenue from the sale of bothsubscription and display advertising on its Agent Directory pages. These pages displaylistings of several insurance companies and not more than eight local agentsfor the consumer to contact.

 

Fora variety of other insurance products, including renters and health insurance,we are paid a fee for the click through of a consumer from our website to athird party’s website.

 

Wehave focused our efforts on automobile insurance, which accounted forapproximately 84% of our transaction revenues in 2007, and 76% in 2006. For thenine month period ending September 30, 2008, automobile insuranceaccounted for 85% of our transaction revenues. We anticipate that automobileinsurance will continue to account for a substantial portion of our revenuesfor the foreseeable future.

 

12

----

Tableof Contents

 

**Results of Operations**

 

Financialhighlights and key metrics are as follows:

 
| ** **                                       | ** ** | **Three months Ended** | ** ** | **Nine months Ended** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                       | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues (in thousands):                         |       |                             |       |                            |       |   |   |   |   |
| Auto                                             |       | $                                | 7,574      |                            | $          | 7,995 |   | $ | 26,036 |   | $ | 20,972 |   |
| Home/condo/renters                               |       | 862                              |       | 554                             |       | 2,807 |   | 1,331 |   |
| Term life                                        |       | 377                              |       | 611                             |       | 1,222 |   | 2,933 |   |
| Agent Directory                                  |       | 134                              |       | —                          |       | 590 |   | — |   |
| Other                                            |       | 8                                |       | 7                               |       | 22 |   | 37 |   |
| Total transaction fees                           |       | $                                | 8,955      |                            | $          | 9,167 |   | $ | 30,677 |   | $ | 25,273 |   |
| # of consumers (in thousands):                   |       |                             |       |                            |       |   |   |   |   |
| Auto                                             |       | 2,245                            |       | 1,802                           |       | 7,140 |   | 4,568 |   |
| Home/condo/renters                               |       | 212                              |       | 150                             |       | 607 |   | 297 |   |
| Term life                                        |       | 17                               |       | 14                              |       | 42 |   | 88 |   |
| Agent Directory                                  |       | 383                              |       | N/A                             |       | 1,579 |   | N/M |   |
| Total                                            |       | 2,857                            |       | 1,966                           |       | 9,368 |   | 4,953 |   |
| Transaction revenue per consumer:                |       |                             |       |                            |       |   |   |   |   |
| Auto                                             |       | $                                | 3.37       |                            | $          | 4.44 |   | $ | 3.64 |   | $ | 4.59 |   |
| Home/condo/renters                               |       | $                                | 4.06       |                            | $          | 3.69 |   | $ | 4.62 |   | $ | 4.48 |   |
|                                             |       |                             |       |                            |       |   |   |   |   |
| Auto Segment B revenue per click:                |       | $                                | 6.30       |                            | $          | 6.49 |   | $ | 6.47 |   | $ | 6.14 |   |
| Avg. times lead sold (auto and home):            |       | 3.93                             |       | N/M                             |       | 3.78 |   | N/M |   |
| Agent network (auto and home):                   |       |                             |       |                            |       |   |   |   |   |
| AgentInsider approved agents                     |       | 6,775                            |       | 4,902                           |       | 6,775 |   | 4,902 |   |
|                                             |       |                             |       |                            |       |   |   |   |   |
| Direct marketing costs (in thousands):           |       | $                                | 6,497      |                            | $          | 5,899 |   | $ | 22,040 |   | $ | 15,024 |   |
| Marketing costs per consumer:                    |       |                             |       |                            |       |   |   |   |   |
| Total                                            |       | $                                | 2.27       |                            | $          | 3.00 |   | $ | 2.35 |   | $ | 3.03 |   |
| Excluding Agent Directory                        |       | $                                | 2.59       |                            | $          | 3.00 |   | $ | 2.75 |   | $ | 3.03 |   |
| Direct marketing costs as a percent of revenues: |       | 73                               | %          | 64                              | %          | 72 | % | 59 | % |
|                                             |       |                             |       |                            |       |   |   |   |   |
| Cash and cash equivalents (in thousands):        |       | $                                | 9,125      |                            | $          | 8,491 |   | $ | 9,125 |   | $ | 8,491 |   |
| Account receivable (in thousands):               |       | $                                | 2,410      |                            | $          | 5,104 |   | $ | 2,410 |   | $ | 5,104 |   |
| Day sales outstanding (DSO):                     |       | 24                               |       | 43                              |       | 24 |   | 43 |   |
| Staffing:                                        |       | 89                               |       | 59                              |       | 89 |   | 59 |   |

 

13

----

Tableof Contents

 
| Definitions:                             |   |                                                                                                                                      |
|------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|
|                                     |   |                                                                                                                                      |
| “# of consumers”               |   | Represents consumers acquired  from marketing activities                                                                                  |
|                                     |   |                                                                                                                                      |
| “Per consumer information”     |   | Represents revenues earned  or marketing costs incurred per consumer who has started an InsWeb quote form                                 |
|                                     |   |                                                                                                                                      |
| “Segment B”                    |   | Auto insurance consumers  classified as non-standard (bad driving record, not enough experience, or not  permanently insured for 3 years) |
|                                     |   |                                                                                                                                      |
| “Avg. times lead sold               |   | Total # of times a lead is  sold, including leads sold by NetQuote on our behalf                                                          |
|                                     |   |                                                                                                                                      |
| “AgentInsider approved agents” |   | # of agents approved to buy  leads through AgentInsider                                                                                   |
|                                     |   |                                                                                                                                      |
| “Direct marketing costs”       |   | Represents expenses  incurred by InsWeb to acquire the consumers to InsWeb’s online insurance  marketplace                           |
|                                     |   |                                                                                                                                      |
| “N/M”

 

“N/A” |   | Information not meaningful

 

Information not applicable                                                                            |

 

***Transaction Fees.***Automobile insurancetransaction fees (consisting of lead fees and click through fees) decreased to$7.6 million for the three months ended September 30, 2008 from $8.0million for the three months ended September 30, 2007 due to a reduction inleads from several direct auto carriers. Automobile insurance transaction feesfor the automobile product increased to $26.0 million for the nine months endedSeptember 30, 2008, from $21.0 million for the nine months ended September 30, 2007, due to improvements to our lead generationprogram and a 56% increase in traffic from the comparable period in 2007. Withthe significant increase in traffic, our agent network’s ability to absorb thetraffic decreased, and as a result, our revenue per consumer decreased to $3.37and $3.64 for the three and nine months ended September 30, 2008, from$4.44 and $4.59 for thecomparable periods in 2007.

 

Homeowners,condominium and renters transaction fees (consisting primarily of lead fees)were $0.9 million and $2.8 million for the three and nine months endedSeptember 30, 2008, as compared to $0.6 million and $1.3 million for the comparable periods in 2007. The increases for the three and nine monthsended September 30, 2008 were primarily the result of our increased marketingefforts to attract more consumers for homeowners, condominium and renters. We expect revenue from the propertyinsurance marketplace to decrease during the remainder of 2008 due totraditional seasonality factors.

 

Termlife insurance transaction fees (consisting primarily of lead fees) decreasedto $0.4 million and $1.2 million for the three and nine months ended September 30,2008, from $0.6 million and $2.9 million for the comparable periods in 2007. The decrease in term life revenues isattributable to the absence of commission based revenue following our decisionin April 2007 to wind-down our term life agency in order to focuson lead generation opportunities. Beginning in 2008, term life insuranceproducts are being offered to our consumers only through our online insurancemarketplace, using a lead generation model.

 

Agentdirectory fees (consisting of both advertising revenues as well as subscriptionrevenues) were $0.1 million and $0.6 million for the three and nine monthsended September 30, 2008, as compared to $0 for the comparable periods in 2007.

 

14

----

Tableof Contents

 

**Operating Expenses**

 
| ** **                                                    | ** ** | **Three months ended  September 30,** | ** ** | **Percentage  change from** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------|------------|
| **(in thousands,**** except percentages****)** | ** ** | **2008**                                             | ** ** | **2007**                         | ** ** | **prior period** | ** ** |
|                                                          |       |                                                 |       |                             |       |   |   |
| Operating expenses:                                           |       |                                                 |       |                             |       |   |   |
| Direct marketing                                              |       | $                                                    | 6,497      |                             | $          | 5,899 |   | 10 | % |
| Sales and marketing                                           |       | 1,505                                                |       | 1,251                            |       | 20 |   |
| Technology                                                    |       | 774                                                  |       | 691                              |       | 12 |   |
| General and administrative                                    |       | 877                                                  |       | 1,034                            |       | (15 | ) |
|                                                               |            |                                                      |            |                                  |            |  |  |  |  |

 
| ** **                                                    | ** ** | **Nine months ended  September 30,** | ** ** | **Percentage  change from** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------|------------|
| **(in thousands,**** except percentages****)** | ** ** | **2008**                                            | ** ** | **2007**                         | ** ** | **prior period** | ** ** |
|                                                          |       |                                                |       |                             |       |   |   |
| Operating expenses:                                           |       |                                                |       |                             |       |   |   |
| Direct marketing                                              |       | $                                                   | 22,040     |                             | $          | 15,024 |   | 47 | % |
| Sales and marketing                                           |       | 4,233                                               |       | 4,056                            |       | 4 |   |
| Technology                                                    |       | 2,401                                               |       | 2,344                            |       | 2 |   |
| General and administrative                                    |       | 3,276                                               |       | 3,259                            |       | 1 |   |
|                                                               |            |                                                     |            |                                  |            |  |  |  |  |

 

***Direct Marketing.*** Direct marketing expenses consist ofadvertising, promotions and fees incurred to acquire consumer traffic for theInsWeb online marketplace. Our marketing strategy is designed toincrease consumer traffic to our website and to drive awareness of ourinsurance products and services. We employ various means of advertising, whichconsist primarily of online advertising, sponsored search, portal advertising,e-mail campaigns and strategic partnerships with high-profile online companiesthat can acquire significant traffic to the InsWeb site or the sites of otheronline lead generators that use our network. Fees related to our online marketingare expensed in the period in which the consumer clicks through from apartner’s website to InsWeb’s website, or in some cases, when the consumer’sactivity on the InsWeb website generates a lead to an insurance provider. Direct marketing expenses for the three andnine months ending September 30, 2008 increased to $6.5 million and $22.0million from $5.9 million and $15.0 million for the comparable periods in 2007.Direct marketing expense as a percent of total revenues was 72% and 71% for thethree and nine months ended September 30, 2008, compared to 64% and 59%for the comparable periods in2007, which were aided in part, by revenues from the winding down of theterm-life agency, with no associated marketing costs. Direct marketing expenses per consumer were$2.27 and $2.35 for the three and nine months ended September 30, 2008, adecrease from $3.00 and $3.03 for the comparable periods in 2007. Direct marketing expenses for the remainderof 2008 are expected to decrease, due to traditional seasonality factors of thebusiness.

 

***Sales and Marketing.*** Sales and marketing expenses consistprimarily of payroll and related expenses, including employee benefits,facility costs, telecommunications and systems costs, for our sales andmarketing personnel. Sales and marketing expenses increased to $1.5 million and$4.2 million for the three and nine months ended September 30, 2008, from$1.3 million and $4.1 million for thecomparable periods in 2007. Theincrease for the three and nine months ended September 30, 2008 wasprimarily due to an increase in headcount related expenses. Sales and marketing expenses for theremainder of 2008 are expected to remain at current levels.

 

***Technology.*** Technology expenses consist primarily ofpayroll and related expenses, including employee benefits, facility and systemscosts, for product and site development personnel involved with our technologyinitiatives. Technology expenses increased to $0.8 million and $2.4 million forthe three and nine months ended September 30, 2008 from $0.7 million and$2.3 million for the comparable periods in 2007. The increase for the three andnine months ended September 30, 2008 was primarily due to an increase inheadcount related expenses. Technologyexpenses for the remainder of 2008 are expected to remain at current levels.

 

15

----

Tableof Contents

 

***General and Administrative.*** General and administrative expenses consistprimarily of payroll and related expenses, including employee benefits,facility costs, telecommunications and systems costs, for our generalmanagement, administrative and accounting personnel, as well as other generalcorporate expenses. General and administrative expenses were $0.9 million and $3.3million for the three and nine months ended September 30, 2008, comparedto $1.0 million and $3.3 million for the comparable periods in 2007. General and administrative expenses decreased for the three monthsended September 30, 2008 due to decrease in headcount related expenses,recruiting fees, share based compensation expense and rent, offset by legalcosts associated with patent litigation.

 

**Interestand Other Income**

 

***Interest Income***.Interest income was $47,000 and $196,000 for the three and nine months ended September 30,2008, a decrease from $108,000 and $287,000 for the comparable periods in 2007.The decrease is primarily attributed to declines in interest rates and averageinvestment balance. Interest income represents interest earned on InsWeb’sinvestment securities.

 

**Provision (Benefit) for Income Taxes**

 

A benefit of $44,000 was recognized for the three and nine months endedSeptember 30, 2008. No benefits were recognized for the comparable periodsin 2007.

 

**Critical Accounting Policies**

 

InsWeb’sdiscussion and analysis of its financial condition and results of operationsare based on InsWeb’s consolidated financial statements which have beenprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requires InsWeb tomake estimates and judgments that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period. InsWeb bases its estimates and judgments onhistorical experience and on various other factors that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions. InsWeb believes thefollowing critical accounting policies affect its more significant judgmentsand estimates used in the preparation of its consolidated financial statements.

 

**Contingencies.** As discussed in Part I, Item 3 (“Legal Proceedings”) of thisreport, InsWeb is a defendant in: i) a class action lawsuit has been filed thatalleges InsWeb violated certain federal securities laws at the time of itsinitial public offering; ii) a securities lawsuit alleging certain officers anddirectors and significant shareholders violated the short swing tradingprohibition of Section 16(b) of the Securities Exchange Act; and iii)a patent infringement lawsuit in the Eastern district of Texas. InsWeb is aplaintiff in a patent infringement lawsuit in the Southern District ofCalifornia. InsWeb cannot accurately predict the ultimate outcome of thesematters at this time and therefore, cannot estimate the range of probable loss,if any, due to the inherent uncertainties of litigation. InsWeb believes it hasmeritorious defenses; however InsWeb cannot assure that it will prevail in anyof these actions. An unfavorable outcome could have a material adverse effecton InsWeb’s financial condition, results of operations and cash flows.

 

**Share-Based Compensation.**InsWeb accounts for share-based compensationin accordance with Statement of Financial Accounting Standards No. 123(R),*Share-Based Payment*(“Statement 123(R)”). Under theprovisions of Statement 123(R), share-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 changesignificantly, share-based compensation expense may differ materially in thefuture from that recorded in the current period.

 

16

----

Tableof Contents

 

**Income Taxes.**InsWeb accounts for income taxes inaccordance with Statement of Financial Accounting Standards No. 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 approximately $73 millionat December 31, 2007, is dependent upon our ability to generate sufficientfuture taxable income. We have established a full valuation allowance againstour net deferred tax assets to reflect the uncertainty of realizing thedeferred 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. This assessment requires a review andconsideration of all available positive and negative evidence, including ourpast and future performance, the market environment in which we operate, theutilization of tax attributes in the past, and the length of carry-forwardperiods and evaluation of potential tax planning strategies. We expect tocontinue to maintain a full valuation allowance until an appropriate level ofprofitability is sustained or we are able to develop tax strategies that wouldenable us to conclude that it is more likely than not that a portion of ourdeferred tax assets would be realizable.

 

17

----

Tableof Contents

 

**Liquidity and Capital Resources**

 

Summarized cash flow information is asfollows (in thousands):

 
| ** **                                       | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                       | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Cash provided by (used in) operating  activities |       | $                                                   | (582       | )  | $ | 367 |   |
| Cash used in investing activities                |       | (606                                                | )          | (15 | ) |
| Cash provided by (used in) financing  activities |       | (464                                                | )          | 1,389 |   |
|                                                  |            |                                                     |            |  |  |  |  |

 

At September 30, 2008,InsWeb’s principal source of liquidity was $9.1 million in cash and cashequivalents. Since inception, we have financed our operations primarily throughthe sale of preferred and common stock.

 

For the nine months ended September 30, 2008, netcash used by operating activities was $582,000, primarily due to our net lossof $859,000 as adjusted for non-cash share-based compensation of $576,000,depreciation and amortization of property, equipment and intangible assets of $119,000,a decrease in accounts receivable of $18,000, an increase in prepaid expensesof $356,000 and accrued expenses of $319,000, offset by an increase in accountspayable of $220,000.  For the comparable ninemonth period ended September 30,2007, net cash providedby operating activities was $367,000 primarily consisting of our net income of$1.1 million, increased by non-cash share-based compensation of $838,000 anddepreciation and amortization of property and equipment of $121,000. An increasein accounts receivable of $2.3 million decreased cash provided by operations,while an increase in accounts payable of $479,000 increased cash provided byoperations. The increase in accountsreceivable was a result of the revenue growth during the year.

 

For the nine months ended September 30, 2008, net cash used in investing activities was $606,000primarily due to purchases of property, equipment and intangibles of $354,000and notes receivable from employees for $252,000. For the comparable nine monthperiod ended September 30, 2007 net cash used in investing activities was$15,000, primarily due to purchases from property and equipment.

 

For the nine months ended September 30, 2008, net cash used by financing activities was $464,000,representing principally of $850,000 for the cash settlement of equity awardsin connection with the departure of the president and COO in June, 2008, offsetby proceeds from the exercise of stock options and stock issued from our employeestock purchase plan of $386,000. For the nine months ended September 30, 2007, net cash provided by financing activitieswas $1.4 million, primarily attributable to the exercise of employee stockoptions.

 

We lease office facilities under non-cancelable operating leases, whichexpire at various dates through April 2011, including a 10-year leaseagreement through 2011 for office space in the Sacramento area which currentlyhouses our corporate headquarters. We have options to extend the lease at theend of the lease term, and have the right of first refusal on other officespace in the complex.

 

Aggregatecontractual cash obligations, net of contractual sublease income, as of September 30,2008 is summarized as follows (in thousands):

 
| **Periods ending December 31,** | ** ** | **Gross lease  commitments** | ** ** | **Sublease  income** | ** ** | **Net lease  commitment** | ** ** |
|------------------------------------------------|------------|-----------------------------------|------------|----------------------|------------|--------------------------------|------------|
| Three months ending December 31, 2008     |       | $                                 | 269        |                 | $          | (30                            | )          | $ | 239 |   |
| Year ending December 31, 2009             |       | 1,078                             |       | (120                 | )          | 958                            |       |
| Year ending December 31, 2010             |       | 1,078                             |       | (120                 | )          | 958                            |       |
| Year ending December 31, 2011             |       | 359                               |       | (20                  | )          | 339                            |       |
|                                           |       | $                                 | 2,784      |                 | $          | (290                           | )          | $ | 2,494 |   |

 

18

----

Tableof Contents

 

**Liquidity and Capital Resources (continued)**

 

We currently anticipate that our cash andcash equivalents will be sufficient to meet our anticipated cash needs forworking capital and capital expenditures for at least the next 12 months.Although we do not anticipate the need for additional financing, wenevertheless may require additional funds to meet operating needs, or to expandour business internally or through acquisition. We cannot be certain thatadditional financing will be available when required, on favorable terms or atall. If we are not successful in raising additional capital as required, ourbusiness could be materially harmed. If additional funds were raised throughthe issuance of equity securities, the percentage ownership of our then-currentstockholders would be reduced.

 

**ITEM3.****                  QUANTITATIVEAND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.**

 

Therehave been no material changes to our disclosures related to certain marketrisks as reported under Part II, Item 7A, “Quantitative and QualitativeDisclosures About Market Risk,” in our Annual Report on Form 10-K for theyear ended December 31, 2007, as filed with the U.S. Securities andExchange Commission.

 

**ITEM4T.****               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) promulgatedunder the Securities Exchange Act of 1934, as amended. Based upon that evaluation,our Chief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective as of the end of the periodcovered by this quarterly report.

 

(b)              There has been no change in our internalcontrol over financial reporting during the three months ended September 30,2008 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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

 

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

 

See Part I, Item 1, “Financial Statements — Note 10 —Commitments and Contingencies.”

 

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

 

Ourfuture business, operating results and financial condition are subject tovarious risks and uncertainties, including those disclosed in Part I, Item1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31,2007, as filed with the U.S. Securities and Exchange Commission. There havebeen no material changes to the risk factors as so disclosed.

 

**ITEM 6.****                 ****EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description  of Document**                                                                                              |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                      |
| 10.24†         |       | Amendment to InsWeb’s Services Agreement between  registrant and NetQuote, Inc. dated as of July 21, 2008. |
|                |       |                                                                                                                      |
| 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.           |

 

----

†                                        Confidentialtreatment has been requested as to a portion of this Exhibit.

 

19

----

Table of Contents

 

### **SIGNATURE**

 

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

 
|                     | ** **               |
|--------------------------|--------------------------|
| Dated: November 12, 2008 | **INSWEB  CORPORATION**  |
| ** **               | **(Registrant)**         |
|                     |                     |
| ** **               | **/s/ STEVEN J. YASUDA** |
|                     | Steven J. Yasuda         |
|                     | Chief Accounting Officer |

 

20

----