**SECURITIESAND EXCHANGE COMMISSION**

**Washington,DC 20549**

 

----

 

**FORM 10-Q**

 
| **ý**                                                                                                                                                                                                                | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                      |
| **For the quarterly period ended June 30, 2004**                                                                                                                                                                     |
|                                                                                                                                                                                                                      |
| **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**                                                                                                                                                                                        |

 

----

 

**INSWEBCORPORATION**

(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 ý No o

 

Indicateby check mark whether the Registrant is an accelerated filer (as defined inRule12b-2 of theExchange Act.) Yeso No ý

 

Thenumber of outstanding shares of the Registrant’s Common Stock, par value $0.001per share, on July 29, 2004 were 4,706,719 shares.

 

 

----

 

**FORM 10-Q**

**INSWEB CORPORATION**

**INDEX**

 
| **PART I**  | **FINANCIAL INFORMATION**                                                                                      |   |
|-------------|----------------------------------------------------------------------------------------------------------------|--------|
| ITEM  1:    | Financial  Statements (unaudited)                                                                              |   |
|        | Condensed  Consolidated Balance Sheets as of June 30, 2004 and December 31,  2003                    |   |
|        | Condensed  Consolidated Statements of Operations for the three and six months endedJune 30, 2004 and 2003 |   |
|        | Condensed  Consolidated Statements of Cash Flows for the six months ended  June 30, 2004 and 2003         |   |
|        | Notes  to Condensed Consolidated Financial Statements                                                          |   |
| ITEM  2:    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                    |   |
| ITEM  3:    | Quantitative  and Qualitative Disclosures About Market Risk                                                    |   |
| ITEM  4:    | Controls and Procedures                                                                                        |   |
|        |                                                                                                           |   |
| **PART II** | **OTHER INFORMATION**                                                                                          |   |
| ITEM 4:     | Submission  of Matters to a Vote of Security Holders                                                           |   |
| ITEM  6:    | Exhibits  and Reports on Form 8-K                                                                              |   |
|        |                                                                                                           |   |
| Signature   |                                                                                                           |   |

 

2

----

 

**PARTI:****                                                   FINANCIALINFORMATION**

 

**ITEM1.****                                                     FINANCIALSTATEMENTS**

 

**INSWEB CORPORATION**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 

*(in thousands)*

*(unaudited)*

 
|                                             |   | **June 30,  2004** |   | **December 31,  2003** |   |
|--------------------------------------------------|--------|-------------------------|--------|-----------------------------|--------|
| **Assets**                                       |   |                    |   |                        |   |
| Current  assets:                                 |   |                    |   |                        |   |
| Cash and cash equivalents                        |   | $                       | 9,033  |                        | $      | 15,223 |   |
| Short-term  investments                          |   | 13,179                  |   | 10,868                      |   |
| Accounts  receivable, net                        |   | 951                     |   | 1,006                       |   |
| Prepaid  expenses and other current assets       |   | 475                     |   | 785                         |   |
| Total  current assets                            |   | 23,638                  |   | 27,882                      |   |
| Property  and equipment, net                     |   | 1,106                   |   | 1,386                       |   |
| Other  assets                                    |   | 553                     |   | 614                         |   |
| Total  assets                                    |   | $                       | 25,297 |                        | $      | 29,882 |   |
|                                             |   |                    |   |                        |   |
| **Liabilities  and stockholders’ equity**   |   |                    |   |                        |   |
| Current  liabilities:                            |   |                    |   |                        |   |
| Accounts  payable                                |   | $                       | 1,258  |                        | $      | 524 |   |
| Accrued  expenses                                |   | 3,937                   |   | 4,804                       |   |
| Deferred  revenue                                |   | 150                     |   | 275                         |   |
| Total  current liabilities                       |   | 5,345                   |   | 5,603                       |   |
|                                             |   |                    |   |                        |   |
| Commitments and contingencies                    |   |                    |   |                        |   |
|                                             |   |                    |   |                        |   |
| Stockholders’  equity:                      |   |                    |   |                        |   |
| Common  stock                                    |   | 7                       |   | 7                           |   |
| Paid-in  capital, less treasury stock            |   | 198,152                 |   | 197,988                     |   |
| Accumulated  deficit                             |   | (178,207                | )      | (173,716                    | )      |
| Total  stockholders’ equity                 |   | 19,952                  |   | 24,279                      |   |
| Total  liabilities and stockholders’ equity |   | $                       | 25,297 |                        | $      | 29,882 |   |

 

See accompanying notes.

 

3

----

 

**INSWEB CORPORATION**

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

 

*(in thousands, except per share amounts)*

*(unaudited)*

 
|                                                                           |   | **Three Months  Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|--------------------------------------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------|--------|
|                                                                           |   | **2004**                              |   | **2003**                            |   | **2004** |   | **2003** |   |
| Revenues:                                                                      |   |                                  |   |                                |   |   |   |   |   |
| Transaction fees                                                               |   | $                                     | 3,188  |                                | $      | 6,094 |   | $ | 7,018 |   | $ | 13,322 |   |
| Development and maintenance fees                                               |   | 178                                   |   | 230                                 |   | 403 |   | 483 |   |
| Total revenues                                                                 |   | 3,366                                 |   | 6,324                               |   | 7,421 |   | 13,805 |   |
|                                                                           |   |                                  |   |                                |   |   |   |   |   |
| Operating expenses:                                                            |   |                                  |   |                                |   |   |   |   |   |
| Technology                                                                     |   | 1,450                                 |   | 2,223                               |   | 2,920 |   | 4,671 |   |
| Sales and marketing                                                            |   | 3,334                                 |   | 4,106                               |   | 6,668 |   | 8,789 |   |
| General and administrative                                                     |   | 1,157                                 |   | 1,452                               |   | 2,439 |   | 3,232 |   |
| Total operating expenses                                                       |   | 5,941                                 |   | 7,781                               |   | 12,027 |   | 16,692 |   |
| Loss from operations                                                           |   | (2,575                                | )      | (1,457                              | )      | (4,606 | ) | (2,887 | ) |
| Interest expense                                                               |   | —                                |   | (23                                 | )      | — |   | (63 | ) |
| Interest income                                                                |   | 74                                    |   | 78                                  |   | 145 |   | 166 |   |
| Other (expense) income                                                         |   | (30                                   | )      | 16                                  |   | (30 | ) | 809 |   |
|                                                                           |   |                                  |   |                                |   |   |   |   |   |
| Net loss                                                                       |   | $                                     | (2,531 | )                                   | $      | (1,386 | ) | $ | (4,491 | ) | $ | (1,975 | ) |
|                                                                           |   |                                  |   |                                |   |   |   |   |   |
| Net loss per share-basic and diluted                                           |   | $                                     | (0.54  | )                                   | $      | (0.30 | ) | $ | (0.96 | ) | $ | (0.37 | ) |
|                                                                           |   |                                  |   |                                |   |   |   |   |   |
| Weighted-average shares used in computing  per share amounts-basic and diluted |   | 4,690                                 |   | 4,693                               |   | 4,677 |   | 5,390 |   |

 

See accompanying notes.

 

4

----

 

**INSWEB CORPORATION**

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

*(in thousands)*

*(unaudited)*

 
|                                                                         |   | **Six Months  Ended  June 30,** |   |
|------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                         |   | **2004**                             |   | **2003** |   |
| Cash flows from operating activities:                                        |   |                                 |   |   |   |
| Net loss                                                                     |   | $                                    | (4,491 | ) | $ | (1,975 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |                                 |   |   |   |
| Amortization of prepaid marketing costs                                      |   | 58                                   |   | 135 |   |
| Depreciation and amortization                                                |   | 405                                  |   | 554 |   |
| Other                                                                        |   | 30                                   |   | (9 | ) |
| Net changes in operating assets and  liabilities:                            |   |                                 |   |   |   |
| Accounts receivable                                                          |   | 55                                   |   | 19 |   |
| Prepaid expenses and other current assets                                    |   | 310                                  |   | 558 |   |
| Deposits and other assets                                                    |   | 2                                    |   | 67 |   |
| Accounts payable                                                             |   | 735                                  |   | 702 |   |
| Accrued expenses                                                             |   | (824                                 | )      | (529 | ) |
| Deferred revenue                                                             |   | (124                                 | )      | (150 | ) |
|                                                                         |   | 154                                  |   | 667 |   |
| Net cash used in operating activities                                        |   | (3,844                               | )      | (628 | ) |
| Cash flows from investing activities:                                        |   |                                 |   |   |   |
| Redemptions of short-term investments                                        |   | (15,027                              | )      | 11,232 |   |
| Purchases of short-term investments                                          |   | 12,708                               |   | (6,370 | ) |
| Purchases of property and equipment                                          |   | (125                                 | )      | (39 | ) |
| Net cash (used in) provided by investing  activities                         |   | (2,444                               | )      | 4,823 |   |
| Cash flows  from financing activities:                                       |   |                                 |   |   |   |
|                                                                         |   |                                 |   |   |   |
| Repayments of debt                                                           |   | (74                                  | )      | (1,972 | ) |
| Proceeds from issuance of common stock  through stock plans                  |   | 172                                  |   | 19 |   |
| Repurchase of common stock                                                   |   | —                               |   | (3,904 | ) |
| Net cash provided by (used in) financing  activities                         |   | 98                                   |   | (5,857 | ) |
| Net decrease in cash and cash equivalents                                    |   | (6,190                               | )      | (1,662 | ) |
| Cash and cash equivalents, beginning of  period                              |   | 15,223                               |   | 12,382 |   |
| Cash and cash equivalents, end of period                                     |   | $                                    | 9,033  |   | $ | 10,720 |   |
|                                                                         |   |                                 |   |   |   |
| Supplemental disclosure of cash flow information:                            |   |                                 |   |   |   |
| Cash paid during the period for interest                                     |   | $                                    | — |   | $ | 63 |   |

 

See accompanying notes.

 

5

----

 

**INSWEB CORPORATION**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

***(unaudited)***

 

**1.  Business of InsWeb**

 

InsWebCorporation operates an online insurance marketplace that enables consumers tocomparison shop online and obtain insurance company-sponsored quotes for avariety of insurance products, including automobile and term life. InsWeb’smarketplace electronically matches consumers and insurance companies. InsWebhas combined extensive knowledge of the insurance industry, technologicalexpertise and close relationships with a significant number of insurancecompanies to develop an integrated online marketplace. InsWeb’s marketplaceenables consumers to research insurance-related topics, search for, analyze andcompare insurance products, apply for and receive insurance company-sponsoredquotes for actual coverage and to purchase automobile and term life insurancecoverage through InsWeb’s insurance agencies.

 

Quotesobtained through the online marketplace are free to consumers, whileparticipating insurance companies pay a transaction fee to InsWeb. These feesare earned either from a fee paid by an insurance company for each closedpolicy, from the delivery of a lead to a participating insurance company, orfrom a commission or broker fee earned by InsWeb’s insurance agencies, InsWebInsurance Services, Inc. and Goldrush Insurance Services, Inc.

 

Certainconsumers, depending on their responses to several preliminary screeningquestions, are provided the opportunity to link directly to an insurancecompany’s website. In these situations, the consumer will complete theinsurance company’s online application, and InsWeb will be paid a fee for thatconsumer link or click-through.

 

InsWebis subject to all of the risks inherent in an early stage business in theelectronic commerce industry and special risks related to the online insuranceindustry. These risks include, but are not limited to, unpredictable businessmodel, limited management resources, Internet related security risks, thechanging nature of the electronic commerce industry, and variations in consumertraffic (consumers shopping for insurance on the Internet) and insurancecompany participation. Due to the foregoing and other factors, InsWeb’s futureoperating results may be materially affected.

 

Sinceits inception, InsWeb has incurred significant losses, and as of June 30,2004, InsWeb had an accumulated deficit of $178.2 million. These losses,and this accumulated deficit, have resulted from the significant costs incurredin the development of InsWeb’s technology platform, the establishment ofrelationships with insurance companies, their integration with the InsWeb site,and InsWeb’s marketing and sales activities. InsWeb intends to continue toinvest in product development and maintenance, sales and marketing. As aresult, InsWeb believes that it will continue to incur operating losses atleast for the next twelve months. InsWeb’s operating results for future periodsare subject to numerous uncertainties, and there can be no assurance thatInsWeb will be able to achieve and sustain profitability. In view of therapidly evolving nature of InsWeb’s business, InsWeb believes thatperiod-to-period comparisons of its operating results are not necessarilymeaningful and should not be relied upon as an indication of futureperformance.

 

**2.* *Basis of Presentation**

 

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

 

Theaccompanying unaudited interim financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial information and with the instructions to Form 10-Q andRule 10-01 of Regulation S-X. Accordingly, they do not contain all of the information and footnotesrequired by accounting principles generally accepted in the United States forcomplete financial statements.  In theopinion of management, the accompanying unaudited interim condensedconsolidated financial statements reflect all adjustments, which include onlynormal recurring adjustments, necessary to present fairly InsWeb’s financialposition as of June 30, 2004 and the results of operations for the threeand six months ended June 30, 2004 and 2003 and cash flows for the sixmonths ended June 30, 2004 and 2003. The financial data and other information disclosed in these notes to thecondensed consolidated financial statements related to these periods areunaudited.  The results for the threeand six months ended June 30, 2004 are not necessarily indicative of theresults to be expected for the year ending December 31, 2004.

 

6

----

 

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 the Securitiesand Exchange Commission.

 

**3.  Concentration of Risk — SignificantCustomers**

 

Progressive Casualty Insurance Company (“Progressive”) and John HancockLife Insurance Company (“John Hancock”) each accounted for 11% of totalrevenues for the three months ended June 30, 2004.  For the six months ended June 30, 2004,Progressive and John Hancock accounted for 12% and 11% of total revenues,respectively. John Hancock terminated its participation in the InsWebterm life insurance marketplace on June 14, 2004. Revenues from Progressive, GE FinancialAssurance (“GEFA”), and American Family accounted for approximately 16%, 15%and 10%, respectively, of InsWeb’s revenues for the three months endedJune 30, 2003. For the six months ended June 30, 2003, revenues fromGEFA, Progressive, and American Family accounted for approximately 17%, 14%,and 10%, respectively, of InsWeb’s revenues.

 

**4.  Concentration of Risk — Marketing Partners**

 

InsWeb relies onrelationships with Internet portals and other online companies to attractconsumers to its website. In a typical arrangement, the online company includesa “link” on its website on which a user can click to jump to InsWeb’s websiteor to a site that InsWeb operates under the online company’s name; as part ofthe arrangement, InsWeb typically pays the online company a portion of theresulting transaction fees. These relationships may not continue to generate asubstantial amount of new traffic on InsWeb’s website, or the revenuesgenerated by these relationships may be insufficient to justify InsWeb’spayment obligations. InsWeb has experienced fluctuations in the traffic fromits online partners as a result of redesigns of their websites or being outbidfor promotions by other online insurance providers. Furthermore, the value ofthese relationships is based on the continued positive market presence,reputation and growth of these online companies’ websites and services. Anydecline in the market presence, business or reputation of these onlinecompanies’ websites and services will reduce the value of these relationshipsto InsWeb and could harm its business.

 

**5.  Per ShareInformation**

 

Basicearnings per share, is computed using the weighted-average number of shares ofcommon stock outstanding. Diluted earnings per share would reflect thepotential dilution that would occur if stock options and warrants had beenexercised.  For the three and six monthperiods ended June 30, 2004 and 2003, common equivalent shares from stockoptions and warrants were excluded from the computation of net loss per share-dilutedas their effect was antidilutive.

 

InsWebaccounts for its stock-based compensation plans under the recognition andmeasurement principles of APB Opinion No. 25, “Accounting for Stock Issued toEmployees,” and related interpretations. The following table illustrates the effect on net loss and net loss pershare if InsWeb had applied the fair value recognition provisions of FinancialAccounting Standards Board Statements No. 123 “Accounting for Stock-BasedCompensation” and No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure*,*”to stock-based employee compensation (in thousands, except per share amounts):

 
|                                                                                                       |   | **Three  months ended  June 30,** |   | **Six months  ended  June 30,** |   |
|------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|                                                                                                       |   | **2004**                               |   | **2003**                             |   | **2004** |   | **2003** |   |
| Net loss, as reported                                                                                      |   | $                                      | (2,531 | )                                    | $      | (1,386 | ) | $ | (4,491 | ) | $ | (1,975 | ) |
| Deduct: Stock-based employee compensation expense  determined under fair value based method for all awards |   | (194                                   | )      | (371                                 | )      | (336 | ) | (773 | ) |
| Pro forma net loss                                                                                         |   | $                                      | (2,725 | )                                    | $      | (1,757 | ) | $ | (4,827 | ) | $ | (2,748 | ) |
|                                                                                                       |   |                                   |   |                                 |   |   |   |   |   |
| Net loss per share:                                                                                        |   |                                   |   |                                 |   |   |   |   |   |
| Basic and diluted—as reported                                                                         |   | $                                      | (0.54  | )                                    | $      | (0.30 | ) | $ | (0.96 | ) | $ | (0.37 | ) |
| Basic and diluted—pro forma                                                                           |   | $                                      | (0.58  | )                                    | $      | (0.37 | ) | $ | (1.03 | ) | $ | (0.51 | ) |

 

7

----

 

Optionvaluation models require the input of highly subjective assumptions. BecauseInsWeb’s employee and director stock options have characteristics significantlydifferent from those of traded options, and because changes in the subjectiveinput assumptions can materially affect the fair value estimate, inmanagement’s opinion, the existing models do not necessarily provide a reliablemeasure of the fair value of its employee stock options. For purposes of proforma disclosures, the estimated fair value of the options is amortized over theoptions’ vesting period. The above pro forma disclosures are not necessarilyrepresentative of the effects on reported income or loss for future periods, asadditional grants are made each year and options vest over several years.

 

**6. Accrued Expenses**

 

Accruedexpenses consist of the following (in thousands):

 
|                                   |   | **June 30,  2004** |   | **December 31,  2003** |   |
|----------------------------------------|--------|-------------------------|--------|-----------------------------|--------|
|                                   |   |                    |   |                        |   |
| Accrued lease obligations (see Note 9) |   | $                       | 2,355  |                        | $      | 2,584 |   |
| Accrued employee compensation          |   | 593                     |   | 1,208                       |   |
| Deferred rent                          |   | 515                     |   | 513                         |   |
| Other                                  |   | 474                     |   | 499                         |   |
| Total                                  |   | $                       | 3,937  |                        | $      | 4,804 |   |

 

**7.  Comprehensive Loss**

 

Totalcomprehensive loss for the three and six months ended June 30, 2004 and2003 was as follows (in thousands):

 
|                                                                        |   | **Three  months ended  June 30,** |   | **Six months  ended  June 30,** |   |
|-----------------------------------------------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|                                                                        |   | **2004**                               |   | **2003**                             |   | **2004** |   | **2003** |   |
|                                                                        |   |                                   |   |                                 |   |   |   |   |   |
| Net loss                                                                    |   | $                                      | (2,531 | )                                    | $      | (1,386 | ) | $ | (4,491 | ) | $ | (1,975 | ) |
| Other comprehensive loss - change in  unrealized gain (loss) on investments |   | (9                                     | )      | (3                                   | )      | (8 | ) | — |   |
| Comprehensive loss                                                          |   | $                                      | (2,540 | )                                    | $      | (1,389 | ) | $ | (4,499 | ) | $ | (1,975 | ) |

 

**8.  Related PartyTransactions**

 

Duringthe three and six months ended June 30, 2004, InsWeb recognized $181,000and $309,000, respectively, in marketing expenses under a marketing agreementwith an Internet company, compared to $121,000 and $242,000, for the comparableperiods in 2003, respectively.  Anaffiliate of the Internet company became a stockholder of InsWeb inDecember 1998.

 

8

----

 

**9. Commitments and Contingencies**

 

**Leases**

 

In July 2002, InsWeb and one of itssublessees agreed to amend the sublease covering portions of the propertyInsWeb formerly occupied as its headquarters in Redwood City, California. Underthe terms of the amendment, the sublessee agreed to rent the entire facilityfor the duration of InsWeb’s lease (through September 2008). All rent andoperating expenses otherwise payable by InsWeb to the landlord are required tobe paid directly by the sublessee. Therefore, the amended sublease offsetsInsWeb’s aggregate operating lease commitments by approximately $8,119,000through the remainder of the lease. However, the sublessee is a start-up company with a limited operatinghistory and, therefore, there are inherent risks and uncertainties associatedwith its future operations and its ability to discharge its obligations throughthe term of the sublease.  In the eventthat the sublessee defaults on its obligations under the amended sublease,InsWeb would be responsible for making the required lease payments to thelandlord throughout the remaining term of the lease. The Company maintains anaccrual of $1,000,000 as of June 30, 2004 due to the uncertaintiesassociated with the subleasee.

 

In connection with InsWeb’s other leaseobligations for its formerly occupied facilities, InsWeb must make assumptionsregarding the estimated future sublease income relative to thesefacilities.  As a result of the declinein the real estate market in the geographic areas where these properties arelocated, the Company maintains an accrual of $1,355,000 as of June 30,2004, which is management’s estimate of the difference between future subleaseincome as compared to the remaining lease obligations payable by InsWeb forthese formerly occupied facilities. This compares to an accrual of $1,584,000as of December 31, 2003. These estimates and assumptions are affected byarea-specific conditions such as new commercial development, market occupancyrates and future market prices.

 

If these estimates or their relatedassumptions change in the future, InsWeb may be required to record additional adjustmentsto increase or decrease its accrual, as conditions warrant.

 

**Securities Class Action Lawsuit**

 

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 InsWeb common stockfrom July 22, 1999 through December 6, 2000.  The complaint named as defendants InsWeb,certain current and former officers and directors, and three investment bankingfirms that served as underwriters for InsWeb’s initial public offering inJuly 1999.  The complaint, assubsequently amended, alleges violations of Sections 11 and 15 of theSecurities Act of 1933 and Sections 10 and 20 of the Securities Exchange Act of1934, on the grounds that the prospectuses incorporated in the registrationstatements for the offering failed to disclose, among other things, that (i)the underwriters had solicited and received excessive and undisclosedcommissions from certain investors in exchange for which the underwritersallocated to those investors material portions of the shares of our stock soldin the offerings and (ii) the underwriters had entered into agreements withcustomers whereby the underwriters agreed to allocated shares of the stock soldin the offering to those customers in exchange for which the customers agreedto purchase additional shares of InsWeb stock in the aftermarket atpre-determined prices.  No specificdamages are claimed.  Similarallegations have been made in lawsuits relating to more than 300 other initialpublic offerings conducted in 1999 and 2000, all of which have beenconsolidated for pretrial purposes.  InOctober 2002, all claims against the individual defendants were dismissedwithout prejudice.  In February 2003,the Court dismissed the claims in the InsWeb action alleging violations of theSecurities Exchange Act of 1934 but allowed the plaintiffs to proceed with theremaining claims.  In June 2003, theplaintiffs in all of the cases presented a settlement proposal to all of theissuer defendants.  Under the proposedsettlement, the plaintiffs will dismiss and release all claims againstparticipating defendants in exchange for a contingent payment guaranty by theinsurance companies collectively responsible for insuring the issuers in allthe related cases, and the assignment or surrender to the plaintiffs of certainclaims the issuer defendants may have against the underwriters.  InsWeb and most of the other issuer defendantshave accepted the settlement proposal. The settlement is subject to approval ofthe Court, which cannot be assured.  Ifthe settlement is not approved by the Court, InsWeb would defend the lawsuitvigorously.  However, the litigation isin the preliminary stage, and we therefore cannot predict its outcome.  The litigation process is inherentlyuncertain.  An unfavorable outcome couldhave a material adverse effect on InsWeb’s financial condition, results ofoperations and cash flows.

 

9

----

 

**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, decreasing revenue and reducedparticipation in InsWeb’s marketplace, limited operating history, anticipatedlosses, the unpredictability of future revenues, reliance on keycustomers—property and casualty insurance carriers- who are themselves subjectto volatility in their operating cycles, competition, risks associated withsystem development and operation risks, management of potential growth andrisks of new business areas, business combinations, and strategic alliances.These risks and uncertainties, as well as other risks and uncertainties, whichare described in greater detail in the section entitled “Factors That MayAffect Future Performance” and other documents filed with the Securities andExchange Commission, could cause InsWeb’s actual results to differ materiallyfrom historical results or those currently anticipated. All forward-lookingstatements are based on information available to InsWeb on the date hereof, andInsWeb assumes no obligation to update such statements.*

 

**Overview**

 

InsWeboperates an online insurance marketplace that enables consumers to shop onlinefor a variety of insurance products, including automobile and term life, andobtain insurance company-sponsored quotes for actual coverage. In order tocreate this marketplace, InsWeb has established close relationships with asignificant number of insurance companies throughout the United States.

 

InsWeb’sprincipal source of revenues is transaction fees from participating insurancecompanies. While quotes obtained through InsWeb’s online insurance marketplaceare provided to consumers free of charge, InsWeb earns revenues fromparticipating insurance companies based on the delivery of qualified leads.With most insurance companies, InsWeb is paid a fee only when the consumerpurchases an insurance policy, and with others, InsWeb is paid a transactionfee based on the delivery of a lead, regardless of whether or not the consumeractually purchases a policy. Qualified leads are produced in two ways: forinsurance companies providing instant online quotes, a qualified lead isproduced when a consumer clicks to request insurance coverage based on aspecific quote; for insurance companies providing e-mail or other offlinequotes, a qualified lead is produced when a consumer clicks to request thequote itself. Once a lead is generated by the consumer’s request for anapplication or offline quote, InsWeb transmits the lead either to InsWebInsurance Services or to the selected insurance company or other entity bye-mail, file transfer or direct connection to the insurance company’sinformation system. InsWeb provides each participating insurance company withcustom-formatted lead information based on the insurance companies individualrequirements.

 

InsWebalso generates commission revenue and broker fees from the operations of itsinsurance agent subsidiaries. As of June 30, 2004, InsWeb’s wholly-ownedsubsidiaries, InsWeb Insurance Services, Inc. and Goldrush InsuranceServices, Inc. (collectively “InsWeb’s Insurance Agency”), function asauthorized automobile insurance agents for nine participating insurancecompanies in nine states. InsWeb’s Insurance Agency receives a commission basedon a percentage of the initial insurance policy premium related to eachinsurance policy sale where InsWeb has acted as the agent. InsWeb recognizesthe revenue from these activities on the effective date of the policy, less anestimate for early cancellations of the underlying insurance policies. InsWebalso recognizes revenue when an applicable policy is renewed. Commissionrevenue and broker fees are included in transaction fees. InsWeb may expand itsonline insurance agency operations by adding additional participating insurancecompanies and by expanding into additional states.

 

InOctober 2003, InsWeb began providing “Sponsored Web Links,” wherebycertain consumers, depending on their responses to several preliminaryscreening questions, are provided with the opportunity to link directly to aninsurance company’s website. In these situations, the consumer will completethe insurance company’s online application, and InsWeb will be paid a fee forthat consumer link or click-through. Fees paid to InsWeb for Sponsored WebLinks are included in transaction fees.

 

10

----

 

Aless significant and declining source of revenues for InsWeb are developmentand maintenance fees that are paid by insurance companies that participate onthe InsWeb insurance marketplace. Development fees are generated from thedesign and development of customized interfaces between an insurance company’sinformation system and the InsWeb site. InsWeb charges maintenance fees formaintaining and servicing the programs of the individual insurance companiesand for maintaining any hardware at InsWeb’s facility that is dedicated tospecific insurance companies.

 

InsWebhas focused its efforts on developing insurance company coverage for automobileinsurance in order to be able to offer true comparative online shopping forthis important segment of the insurance market. Automobile insurance accountedfor approximately 75% and 73% of transaction revenues for the three and sixmonths ended June 30, 2004 and 77% and 82% of transaction revenues for thecomparable periods in 2003. We anticipate that automobile insurance willcontinue to account for a substantial portion of InsWeb’s revenues for theforeseeable future.

 

InsWebhas been dependent on a limited number of insurance companies for a significantportion of its revenues. Revenues from Progressive and John Hancock eachaccounted for approximately 11% of InsWeb’s revenues for the three months endedJune 30, 2004, and 12% and 11%, respectively, for the six months endedJune 30, 2004. JohnHancock terminated its participation in the InsWeb term life insurance marketplaceon June 14, 2004. InsWeb expects to continue to generate revenue from JohnHancock over the next six month period as in-process term life policies areissued and paid.  Furthermore, the Company expects that the majority ofleads that would have been directed to John Hancock will be directed to othercarriers, new or existing. Revenuesfrom Progressive, GE Financial Assurance, and American Family accounted forapproximately 16%, 15% and 10%, respectively, of InsWeb’s revenues for thethree months ended June 30, 2003. For the six months ended June 30,2003, revenues from GE Financial Assurance, Progressive, and American Familyaccounted for approximately 17%, 14%, and 10%, respectively, of InsWeb’srevenues.  Because of the broad marketpresence of some of InsWeb’s participating insurance companies, InsWeb expectsto continue to generate a substantial portion of its revenues from a limitednumber of insurance companies for the foreseeable future.

 

InApril 2004, we announced that we intended to seek a strategic partnershipwith one or more firms that have access to a large number of qualifiedconsumers and that such a partnership could result in the sale of all or a partof InsWeb to achieve this goal.  Ourmanagement is continuing to pursue this effort, although there can be noassurance that any such partnership arrangement or sale will result.  In the meantime, this effort will consumesubstantial management time and attention that may have an adverse effect on day-to-dayoperational matters.  In addition, ourannouncement may cause some of our employees to experience uncertainty aboutthe future direction of InsWeb and their continuing roles, and may adverselyaffect our ability to attract and retain employees.  Uncertainty regarding our future direction could also adverselyaffect relations with our insurance company customers or our online partnersand cause them to alter or delay decisions regarding their relationship withInsWeb.

 

Sinceits inception, InsWeb has incurred significant losses, and as of June 30,2004, InsWeb had an accumulated deficit of $178.2 million. These losses,and this accumulated deficit, have resulted from the significant costs incurredin the development of InsWeb’s technology platform, the establishment ofrelationships with insurance companies, their integration with the InsWeb site,and InsWeb’s marketing and sales activities. InsWeb intends to continue toinvest in product development and maintenance, sales and marketing. As aresult, InsWeb believes that it will continue to incur operating losses atleast for the next twelve months. InsWeb’s operating results for future periodsare subject to numerous uncertainties, and there can be no assurance thatInsWeb will be able to achieve and sustain profitability. In view of the rapidlyevolving nature of InsWeb’s business, InsWeb believes that period-to-periodcomparisons of its operating results are not necessarily meaningful and shouldnot be relied upon as an indication of future performance.

 

11

----

 

**Results of Operations**

 

Thefollowing table sets forth certain statement of operations items as apercentage of total revenues for the three and six months ended June 30,2004 and 2003:

 
|                              |   | **Three months ended  June 30,** |   | **Six months ended  June 30,** |   |
|-----------------------------------|--------|---------------------------------------|--------|-------------------------------------|--------|
|                              |   | **2004**                              |   | **2003**                            |   | **2004** |   | **2003** |   |
| Revenues:                         |   |                                  |   |                                |   |   |   |   |   |
| Transaction  fees                 |   | 95                                    | %      | 96                                  | %      | 95 | % | 97 | % |
| Development  and maintenance fees |   | 5                                     | %      | 4                                   | %      | 5 | % | 3 | % |
| Total                             |   | 100                                   | %      | 100                                 | %      | 100 | % | 100 | % |
| Operating  expenses:              |   |                                  |   |                                |   |   |   |   |   |
| Technology                        |   | 43                                    | %      | 35                                  | %      | 39 | % | 34 | % |
| Sales and  marketing              |   | 99                                    | %      | 65                                  | %      | 90 | % | 64 | % |
| General  and administrative       |   | 35                                    | %      | 23                                  | %      | 33 | % | 23 | % |
| Total                             |   | 177                                   | %      | 123                                 | %      | 162 | % | 121 | % |
| Loss  from operations             |   | (77                                   | )%     | (23                                 | )%     | (62 | )% | (21 | )% |

 

**Revenues**

 
|                   |   | **Three months ended June 30,** |   | **Six months ended June 30,** |   |
|------------------------|--------|--------------------------------------|--------|------------------------------------|--------|
| **(In thousands)**     |   | **2004**                             |   | **2003**                           |   | **2004** |   | **2003** |   |
| Transaction fees:      |   |                                 |   |                               |   |   |   |   |   |
| Auto insurance         |   | $                                    | 2,406  |                               | $      | 4,699 |   | $ | 5,142 |   | $ | 10,913 |   |
| Term life insurance    |   | 708                                  |   | 1,191                              |   | 1,741 |   | 2,100 |   |
| Other insurance        |   | 74                                   |   | 204                                |   | 135 |   | 309 |   |
| Total transaction fees |   | $                                    | 3,188  |                               | $      | 6,094 |   | $ | 7,018 |   | $ | 13,322 |   |

 

**Direct Marketing (Consumer Acquisition)**

 
|                                              |   | **Three months ended June 30,** |   | **Six months ended June 30,** |   |
|---------------------------------------------------|--------|--------------------------------------|--------|------------------------------------|--------|
| **(In thousands, except per consumer amounts)**   |   | **2004**                             |   | **2003**                           |   | **2004** |   | **2003** |   |
| Direct marketing costs                            |   | $                                    | 2,057  |                               | $      | 2,192 |   | $ | 3,911 |   | $ | 5,125 |   |
| Direct marketing as a percent of transaction fees |   | 61                                   | %      | 35                                 | %      | 53 | % | 37 | % |
| Number of consumers                               |   | 684                                  |   | 1,769                              |   | 1,417 |   | 3,919 |   |
| Direct marketing cost per consumer                |   | $                                    | 3.01   |                               | $      | 1.24 |   | $ | 2.76 |   | $ | 1.31 |   |
| Transaction fees per consumer                     |   | $                                    | 4.92   |                               | $      | 3.57 |   | $ | 5.24 |   | $ | 3.52 |   |

 

**Auto Marketplace**

 
|                                            |   | **Three months ended June 30,** |   | **Six months ended June 30,** |   |
|-------------------------------------------------|--------|--------------------------------------|--------|------------------------------------|--------|
| **(In thousands, except per consumer amounts)** |   | **2004**                             |   | **2003**                           |   | **2004** |   | **2003** |   |
| Auto insurance transaction fees                 |   | $                                    | 2,406  |                               | $      | 4,699 |   | $ | 5,142 |   | $ | 10,913 |   |
| Number of consumers                             |   | 580                                  |   | 1,532                              |   | 1,165 |   | 3,432 |   |
| Transaction fees per consumer                   |   | $                                    | 4.15   |                               | $      | 3.07 |   | $ | 4.41 |   | $ | 3.18 |   |

 

**Term Life Marketplace**

 
|                                            |   | **Three months ended June 30,** |   | **Six months ended June 30,** |   |
|-------------------------------------------------|--------|--------------------------------------|--------|------------------------------------|--------|
| **(In thousands, except per consumer amounts)** |   | **2004**                             |   | **2003**                           |   | **2004** |   | **2003** |   |
| Term life insurance transaction fees            |   | $                                    | 708    |                               | $      | 1,191 |   | $ | 1,741 |   | $ | 2,100 |   |
| Number of consumers                             |   | 74                                   |   | 129                                |   | 174 |   | 278 |   |
| Transaction fees per consumer                   |   | $                                    | 9.57   |                               | $      | 9.23 |   | $ | 10.01 |   | $ | 7.55 |   |

 

***Definitions:***

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

 

12

----

 

**Summary**

 

Revenuesfor the three and six month periods ended June 30, 2004 reflect thechallenging advertising environment for personal lines insurance (auto and termlife insurance) that InsWeb must compete in. While direct marketing costs perconsumer are up, there has yet to be an increase in the number of consumerscoming to the InsWeb site, and management expects that this trend will continuefor the near-term. The Company continues to work toward modifying itsadvertising strategies to improve these results and to find dependable andaffordable sources of consumers. While dealing with the challenges on theconsumer marketing side of the business, the Company continues to improve itsAuto product offering by implementing a shortened quote form, sharing consumersamongst its insurance company partners to increase the overall sold policies,and adding new carriers to the Sponsored Web Link bidding platform. Within theTerm Life product offering, the Company continues to shift its revenue modelfrom a lead payment to a commission payment, and has also added several newcarriers to its consumer offering.

 

**Revenues**

 

**Transaction Fees.**  Transaction fees from the saleof automobile insurance through the InsWeb online marketplace decreased to$2.4 million and $5.1 million, for the three and six months endedJune 30, 2004, respectively from $4.7 million and $10.9 million forthe comparable periods in 2003, a decrease of 49% and 53%, respectively. Thesedecreases for the three and six months ended June 30, 2004 areattributable to a 62% and 66% decrease, respectively, in consumer traffic(consumers who have started the InsWeb auto application) from the comparableperiods in 2003.  Revenue per auto consumerincreased to $4.15 and $4.41 for the three and six months ended June 30,2004, compared to $3.07 and $3.18 for the comparable period in 2003 as a resultof the Sponsored Web Link initiative discussed above. Management expectsrevenue per auto consumer to increase in 2004 as InsWeb continues to expand itsSponsored Web Links program and implements other initiatives to increase thesale of automobile insurance policies to consumers that shop the InsWeb autoinsurance marketplace.

 

Transactionfees from the sale of term life insurance through the InsWeb online marketplacedecreased to $0.7 million and $1.7 million for the three and six monthsended June 30, 2004 from $1.2 million and $2.1 for the comparableperiods in 2003. The decrease in revenues was a result of a significantdecrease in consumer traffic (consumers who have started the InsWeb term lifeapplication).  Revenue per term lifeconsumer increased to $9.57 and $10.01 for the three and six months endedJune 30, 2004, compared to $9.23 and $7.55 for the comparable periods in2003, on a 43% and 37% decrease, respectively, in consumer traffic. Revenue perterm life consumer is expected to be negatively impacted in the near term,however, as additional insurance companies convert to a commission-basedrevenue model. The conversion by an insurance company from a lead-based revenuemodel to a commission-based model results in lower revenues in short-term, asit takes 90 to 120 days to complete the sale of a term life policy. Inaddition, John Hancockterminated its participation on the InsWeb term life insurance marketplace onJune 14, 2004, as a result of its acquisition by Manulife FinancialCorporation. InsWeb expects to continue to generate revenue from JohnHancock over the next six month period as the in-process term life policies areissued and paid.  Furthermore, the Company expects that the majority ofleads that would have been directed to John Hancock will be directed to othercarriers, new or existing.

 

**OperatingExpenses**

 

**Technology.**  Technology expenses consistprimarily of payroll and related expenses, including employee benefits,facility and systems costs, for product and site development personnel involvedwith the planning, design and implementation of carrier integration to the InsWebonline insurance marketplace. Technology expenses decreased to$1.5 million and $2.9 million for the three and six months endedJune 30, 2004, from $2.2 million and $4.7 million for the comparableperiods in 2003. The decrease was primarily attributable to a reduction inheadcount. Technology expenses in 2004 are expected to be lower than 2003.

 

13

----

 

**Sales and Marketing.**  Sales and marketing expensesinclude direct marketing expenditures that include advertising, promotions andfees paid to online companies with which InsWeb has contractual relationshipsto drive consumer traffic to the InsWeb online marketplace. InsWeb’s currentconsumer marketing program is focused on maintaining key online relationships andselective cost-effective marketing campaigns designed to maintain consumerawareness of InsWeb and its online insurance marketplace. InsWeb hasexperienced occasional fluctuations in the traffic from its online partners asa result of redesigns of their websites or being outbid for promotions by otheronline insurance providers. Also included in sales and marketing expenses arepayroll and related expenses, including employee benefits, facility costs,telecommunications and systems costs, for InsWeb’s sales and marketingpersonnel and the personnel and related costs for InsWeb’s insurance agencyoperations, which includes selling agents, underwriters, supervisors andcustomer service and support groups. Overall sales and marketing expensesdecreased to $3.3 million and $6.7 million for the three and six months endedJune 30, 2004, from $4.1 million and $8.8 million for the comparableperiods in 2003. Direct marketing costs decreased to $2.1 million and $3.9million for the three and six months ended June 30, 2004, from$2.2 million and $5.1 million for the comparable periods in 2003. Howeverdirect marketing expense as a percent of transaction fee revenues was 65% and56% for the three and six months ended June 30, 2004, as compared to 36%and 38% for the comparable periods in 2003. The Company expects that for 2004,direct marketing expense as a percent of revenues will continue to besignificantly higher as compared to 2003. Direct marketing costs will fluctuatebased on the amount of consumer traffic driven to the InsWeb marketplace, whileall other sales and marketing expenditures are expected to remain at currentlevels for the remainder of 2004.

 

**General and Administrative.** General and administrative expenses consist primarily of payroll andrelated expenses, including employee benefits, facility costs,telecommunications and systems costs, for InsWeb’s general management,administrative and accounting personnel, as well as other general corporateexpenses. General and administrative expenses decreased to $1.2 millionand $2.4 million for the three and six months ended June 30, 2004 from$1.5 million and $3.2 million for the comparable periods in 2003, adecrease of 20% and 25%, respectively. The decrease was primarily due to areduction in headcount and a decrease in legal expenses due to the settlementof litigation with eHealthInsurance in March 2003. General andadministrative expenses are expected to remain at current levels for theremainder of 2004.

 

**Interest Expense**

 

Nointerest expense was incurred during the three and six months endedJune 30, 2004.  Interest expenseincurred for the comparable periods in 2003 totaled $23,000 and $63,000 and wasprimarily attributable to the fixed portion of InsWeb’s long-term marketingcommitment, which was paid in May 2003.

 

**Interest Income**

 

Interestincome was $74,000 and $145,000 for the three and six months endedJune 30, 2004 and $78,000 and $166,000 for the three and six months endedJune 30, 2003. Interest income is income earned on InsWeb’s investments.

 

**Other Income(Expense)**

 

Forthe six months ended June 30, 2003, other income primarily consisted of$0.8 million paid by eHealthinsurance to InsWeb for services performed byInsWeb prior to the termination of a marketing agreement between the twocompanies.

 

14

----

 

**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.

 

**Accrual for Lease Obligations.**  InsWebis contractually obligated to make future lease payments on certain formerlyoccupied facilities through September 2008. As of June 30, 2004,total future obligations for these facilities amounted to $10.2 million;these obligations are offset by total future sublease income of approximately$8.7 million. Substantially all future sublease income is due from asublessee which is a start-up company with a limited operating history and,therefore, there are inherent risks and uncertainties associated with itsfuture operations and its ability to discharge its obligations through the termof the sublease. In the event that the sublessee defaults on its obligationsunder the amended sublease, InsWeb would be responsible for making the requiredlease payments to the landlord through the remaining term of the lease. Inconnection with this lease and other lease obligations for formerly occupiedfacilities, InsWeb must make assumptions regarding the estimated futuresublease income relative to these facilities. The Company maintains an accrualof $2.4 million as of June 30, 2004 for lease commitments related tothese formerly occupied facilities, as compared to an accrual of$2.6 million as of December 31, 2003. These estimates and assumptionsare affected by area-specific conditions such as new commercial development,market occupancy rates and future market prices. If these estimates or theirrelated assumptions change in the future, InsWeb may be required to recordadjustments to increase or decrease its accrual, as conditionswarrant.

 

**Contingencies.**  As discussed in “Item 1 — Note9 of Notes to CondensedConsolidated Financial Statements” and “Part II – Item 1,” a class action lawsuit has been filed thatalleges InsWeb violated certain federal securities laws at the time of itsinitial public offering. Although some claims against InsWeb in this classaction have been dismissed and a settlement of these proceedings has beenproposed and conditionally accepted, InsWeb cannot accurately predict theultimate outcome of this matter at this time and therefore, cannot estimate therange of probable loss, if any, due to the inherent uncertainties oflitigation. InsWeb believes it has meritorious defenses; however InsWeb cannotassure that it will prevail in this action. An unfavorable outcome could have amaterial adverse effect on InsWeb’s financial condition, results of operationsand cash flows.

 

15

----

 

**Liquidity and Capital Resources**

 

Summarizedcash flow information is as follows (in thousands):

 
|                                             |   | **Six months ended  June 30,** |   |
|--------------------------------------------------|--------|-------------------------------------|--------|
|                                             |   | **2004**                            |   | **2003** |   |
|                                             |   |                                |   |   |   |
| Cash used in operating activities                |   | $                                   | (3,844 | ) | $ | (628 | ) |
| Cash (used in) provided by investing  activities |   | (2,444                              | )      | 4,823 |   |
| Cash provided by (used in) financing  activities |   | 98                                  |   | (5,857 | ) |
|                                                  |        |                                     |        |  |  |  |  |

 

AtJune 30, 2004, InsWeb’s principal source of liquidity was $22.2 million incash, cash equivalents and short-term investments, which decreased from $26.1million as of December 31, 2003. The decrease resulted from the use of $3.8 million from operatingactivities.

 

Forthe six months ended June 30, 2004, net cash used in operating activitieswas $3.8 million compared to cash used in operating activities of $0.6 millionfor the comparable period in 2003.  Forthe six months ended June 30, 2004, non-cash items included depreciationand amortization of assets of $0.5 million. InsWeb’s net loss of $4.5 million for the first six months of 2004 waspartially offset by a decrease in prepaid expenses and other current assets of$0.3 million, which contributed to cash used in operations for the six monthsended June 30, 2004.

 

Forthe six months ended June 30 2004, net cash used in investing activitieswas $2.4 million, which primarily consisted of redemptions of short-term investments offset by the purchases ofshort-term investments.

 

Forthe six months ended June 30, 2004, net cash provided by financingactivities was $0.1 million.  Cashprovided by financing activities was attributable to the proceeds fromexercises of stock options of $0.2 million offset by repayments of $74,000 debtto a marketing partner.

 

InsWebleases its current office facilities under non-cancelable operating leases,which expire at various dates through April 2011, including a 10-yearlease agreement through 2011 for office space in the Sacramento area whichhouses its corporate headquarters and agency operations. InsWeb has options toextend the lease at the end of the lease term, and has the right of firstrefusal on other office space in the complex. In addition, InsWeb has enteredinto various sublease arrangements associated with previously exited facilitiesthat have terms extending through September 2008.

 

Aggregatecontractual cash obligations as of June 30, 2004 are summarized as follows(in thousands):

 
| **Years ending December 31,** |   | **Gross  lease  commitments** |   | **Sublease  income** |   | **Net lease  commitment** |   |
|------------------------------------|--------|-------------------------------|--------|----------------------|--------|---------------------------|--------|
| 2004                               |   | $                             | 1,649  |                 | $      | (971                      | )      | $ | 678 |   |
| 2005                               |   | 3,257                         |   | (1,961               | )      | 1,296                     |   |
| 2006                               |   | 3,391                         |   | (2,030               | )      | 1,361                     |   |
| 2007                               |   | 3,483                         |   | (2,100               | )      | 1,383                     |   |
| 2008                               |   | 2,936                         |   | (1,615               | )      | 1,321                     |   |
| Thereafter                         |   | 2,515                         |   | —               |   | 2,515                     |   |
|                               |   | $                             | 17,231 |                 | $      | (8,677                    | )      | $ | 8,554 |   |

 

InsWebcurrently anticipates that its cash, cash equivalents and short-terminvestments will be sufficient to meet its anticipated cash needs for workingcapital and capital expenditures for at least the next 12 months. AlthoughInsWeb does not anticipate the need for additional financing, InsWebnevertheless may require additional funds to meet operating needs, or to expandits business internally or through acquisition. InsWeb cannot be certain thatadditional financing will be available when required, on favorable terms or atall. If InsWeb is not successful in raising additional capital as required, itsbusiness could be materially harmed. If additional funds were raised throughthe issuance of equity securities, the percentage ownership of InsWeb’sthen-current stockholders would be reduced.

 

16

----

 

**Factors That May Affect Our FuturePerformance**

 

*Our future business, operating results andfinancial condition are subject to various risks and uncertainties, includingthose described below.*

 

**Our business is difficult to evaluate becauseour market is evolving rapidly and our business model is unpredictable**

 

An investor in our common stock must consider the uncertaintiesfrequently encountered by early stage companies in new and rapidly evolvingmarkets. These uncertainties include:

 

•                  an evolving andunpredictable business model, which makes prediction of future resultsuncertain and an investment in our common stock highly speculative;

•                  the developmentof comparable services by competitors, which may reduce our market share;

•                  the uncertaintyof the extent to which the consumer market will adopt the Internet as thepreferred medium for comparison shopping for and purchase of insuranceproducts, which may limit our ability to generate revenue from consumers thatvisit our online marketplace or our insurance agency;

•                  our ability toretain key employees; and

•                  our reliance onkey customers and ability to retain customers.

 

Our business strategy may not be successful and we may not be able tosuccessfully address these uncertainties. Moreover, our ability to take theforegoing steps may be hampered by our limited financial resources should wefail to rapidly increase revenues or should increased revenues be more thanoffset by increased operating expenses.

 

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

 

Given planned investment levels, our ability to achieve profitabilitywill depend upon our ability to generate and sustain substantially increasedrevenues. As a result, we believe that we will incur operating losses at leastfor the next twelve months. We incurred operating losses of $7.0 millionfor 2003, $15.5 million for 2002, and $46.0 million for 2001. As ofJune 30, 2004, our accumulated deficit was $178.2 million. Ouroperating results for future periods are subject to numerous uncertainties, andwe may not achieve sufficient revenues to become profitable. Even if we achieveprofitability, we may not sustain or increase profitability on a quarterly orannual basis in the future. If we are unable to achieve profitability or if ourprofitability is delayed we may need to seek additional financing to continue ourbusiness operations. Such financing could be on terms that are dilutive to ourexisting stockholders or could involve the issuance of securities that haverights and preferences that are senior to those associated with our commonstock. Moreover, if such financing were not available or were available onlyupon terms that were unacceptable to us, we could be required to significantlycurtail our operations.

 

**Our current efforts to seek a strategic partnership couldhave an adverse effect on our operations and our relationships with employees,insurance company customers and online partners.**

 

InApril 2004, we announced that we intended to seek a strategic partnershipwith one or more firms that have access to a large number of qualifiedconsumers and that such a partnership could result in the sale of all or a partof InsWeb to achieve this goal.  Ourmanagement is continuing to pursue this effort, although there can be noassurance that any such partnership arrangement or sale will result.  In the meantime, this effort will consumesubstantial management time and attention that may have an adverse effect onday-to-day operational matters.  Inaddition, our announcement may cause some of our employees to experience uncertaintyabout the future direction of InsWeb and their continuing roles, and mayadversely affect our ability to attract and retain employees.  Uncertainty regarding our future directioncould also adversely affect relations with our insurance company customers orour online partners and cause them to alter or delay decisions regarding theirrelationship with InsWeb.

 

17

----

 

**Our future revenues are unpredictable, ouroperating results are likely to fluctuate from quarter to quarter, and if wefail to meet the expectations of securities analysts or investors, our stockprice could decline significantly**

 

Due to the emerging nature of the market in which we compete and thehigh proportion of our revenues that are derived from consumer traffic on ourwebsite, our future revenues are inherently difficult to forecast. We believethat period-to-period comparisons of our operating results may not bemeaningful, and you should not rely upon them as an indication of our futureperformance. Moreover, our expense levels are based largely on our investmentplans and estimates of future revenues. We may be unable to adjust our spendingto compensate for an unexpected shortfall in revenues. Accordingly, anysignificant shortfall in revenues relative to our planned expenditures wouldharm our results of operations and could cause our stock price to fall sharply,particularly following quarters in which our operating results fail to meet theexpectations of investors.

 

Factors that may cause fluctuations in our operating results includethe following, many of which are outside our control:

 

•                                          Wemay experience consumer dissatisfaction with our online marketplace as we addor change features, or as the insurance coverage offered by participatinginsurance companies varies;

•                                          Consumertraffic on our online marketplace may decline as a result of the announcementor introduction of a competing online insurance marketplace or other newwebsites, products or services offered by our competitors;

•                                          Consumertraffic may also fluctuate as a result of changes in level of advertising byentities with which we have insurance marketing relationships;

•                                          Ourrevenues may be harmed if we lose one or more significant insurance companyrelationships or if any of our participating insurance companies merge with oneanother;

•                                          Useof the Internet by consumers may fluctuate due to seasonal factors or otheruncontrollable factors affecting consumer behavior and may be affected by slowInternet performance due to technical problems or traffic bottlenecks on thenetwork;

•                                          Ourability to convert site visits into transaction fees may fluctuate due tochanges in our user interface or other features on our site;

•                                          Ourability to generate transaction fees may be adversely affected by changes inthe underwriting criteria used by our participating insurance companies todetermine which consumers will be offered quotes; and

•                                          Ourability to generate transaction fees may also be harmed due to technicaldifficulties on our website that hamper a consumer’s ability to start orcomplete a shopping session.

 

**Seasonality affecting insurance shopping andInternet usage may cause fluctuations in our operating results**

 

We have experienced seasonality in our business associated with generalslowness in the insurance industry during the year-end holiday period. Weexpect to continue to experience seasonality as our business matures. Becauseof this seasonality, investors may not be able to predict our annual operatingresults based on a quarter-to-quarter comparison of our operating results. Webelieve seasonality will have an ongoing impact on our business.

 

**Because a significant portion of our revenueis attributable to automobile insurance shopping on our online marketplace, weare especially vulnerable to risks related to the online market for automobileinsurance or the automobile insurance industry generally**

 

Automobile insurance accounted for approximately 79% of our transactionrevenues in 2003, approximately 83% in 2002 and approximately 69% in 2001. Forthe six months ended June 30, 2004, auto insurance accounted forapproximately 73% of our transaction revenues. We anticipate that automobile insurance will continue to account for asubstantial portion of our revenues for the foreseeable future. As a result, ifwe fail to attract a broad base of consumers to shop for automobile insuranceon our site, our ability to generate revenue will be reduced and our businesswill be harmed. In addition, property and casualty insurance, includingautomobile insurance, is subject to operating cycles. During a cycle in whichloss ratios rise, insurance companies may choose to restrict the amount ofbusiness they write while they await approval of rate increases from thevarious state insurance departments. Our business could be harmed if ourparticipating insurance companies reduce their participation in our onlinemarketplace.

 

18

----

 

**If we are unable to promote our brand andexpand our brand recognition, our ability to draw consumers to our website willbe limited**

 

A growing number of websites offer services that are similar to andcompetitive with the services offered on our online insurance marketplace. Therefore, a positiverecognition of our brand is critical to attracting additional consumers to ourwebsite, strengthening our relationships with participating insurance companiesand attracting new insurance companies. In order to attract and retainconsumers and insurance companies and to promote and maintain our brand, we arecontinuing our financial commitment to create and maintain brand awareness. Ourcurrent marketing program consists of the maintenance of certain network onlinerelationships and other selective cost effective marketing campaigns, designedto maintain consumer awareness of InsWeb and our online insurance marketplace.If our marketing efforts do not generate a corresponding increase in revenuesor we otherwise fail to successfully promote our brand, or if these effortsrequire excessive expenditures, our business will be harmed. Moreover, ifvisitors to our website do not perceive our existing services or the productsand services of our participating insurance companies to be of high quality, orif we alter or modify our brand image, introduce new services or enter into newbusiness ventures that are not favorably received, the value of our brand couldbe harmed.

 

Our ability tomaintain a positive recognition of our brand also depends in part on thequality of the products and services consumers receive from our participatinginsurance companies or our insurance agency, including timely response torequests for quotes or coverage. If we are unable to provide consumers withhigh-quality products and services, the value of our brand may be harmed andthe number of consumers using our services may decline.

 

**Competition in the market for onlinedistribution of insurance is intense, and if we are unable to competeeffectively with current competitors or new competitors that enter the market,the fees paid to us by participating insurance companies may fall, the feescharged by online companies with which we have strategic relationships mayrise, and our market share may suffer**

 

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

 

•                  undertake moreextensive marketing campaigns for their brands and services;

•                  devote moreresources to website and systems development;

•                  adopt moreaggressive pricing policies; and

•                  make moreattractive offers to potential employees, online companies and third-partyservice providers.

 

Accordingly, we may not be able to maintain or grow consumer traffic toour website and our base of participating insurance companies, our competitorsmay grow faster than we do, or companies with whom we have strategicrelationships may discontinue their relationships with us, any of which wouldharm our business.

 

**Because a limited number of insurancecompanies account for a majority of our revenues, the loss of a singleinsurance company relationship could result in a substantial drop in ourrevenues**

 

InsWeb has been dependent on a limited number of insurance companiesfor a majority of its revenues. Revenues from Progressive, GE FinancialAssurance (“GEFA”)and American Family accounted for approximately 14%, 14% and 10%,respectively, of InsWeb’s revenues for the year ended December 31, 2003.Revenues from Amica, GEFAand Kemper Direct accounted for approximately 14%, 14% and 10%, respectively,of InsWeb’s revenues for the year ended December 31, 2002. Revenues fromAmica, GEFA andAIG accounted for approximately 11%, 11% and 10%, respectively, of InsWeb’srevenues for the year ended December 31, 2001. Revenues from Progressive and John Hancock accounted forapproximately 12% and 11%, respectively, of our revenues for the six monthsended June 30, 2004. JohnHancock terminated its participation in the InsWeb term life insurancemarketplace on June 14, 2004, as a result of its acquisition by ManulifeFinancial Corporation. InsWeb expects to continue to generate revenue fromJohn Hancock over the next six month period as the in-process term lifepolicies are issued and paid.  Furthermore, the Company expects that themajority of leads that would have been directed to John Hancock will bedirected to other carriers, new or existing.

 

19

----

 

InSeptember 2003, Progressive discontinued its participation as a quotingcompany in the InsWeb market place; however, in October 2003, Progressivesigned an agreement to participate in the Sponsored Web Link program. InNovember 2003, GEFA’sparticipation as an instant quoting carrier within the InsWeb marketplace wasterminated as a result of its acquisition by AIG, Inc., who is and willcontinue as a quoting company in the InsWeb marketplace.

 

Should one or moreof our other key insurance company partners cease to participate in our onlinemarketplace, change its underwriting criteria or geographic coverage in a waythat reduces the proportion of consumers that are offered quotes from thatinsurance company, or suffer a significant decline in its ratings, ouroperating results could be materially harmed. Because of the broad marketpresence of some of our participating insurance companies, we expect tocontinue to generate a substantial portion of our revenues from a limitednumber of insurance companies for the foreseeable future. Although InsWebcontinually seeks new insurance companies to participate in the onlinemarketplace, we may be unable to add any new insurance companies.

 

**We may have difficulty integrating newinsurance companies into our online marketplace or agency operations, whichcould harm our ability to offer improved comparison-shopping opportunities andthus limit the attractiveness of our service to consumers**

 

Integration of an insurance company into our online marketplacerequires a significant commitment of time and resources on our part and on thepart of the insurance company, and is a technologically difficult process. Thisintegration process typically takes from three to six months to complete andtypically requires us to expend between 160 and 2,000 man-hours. To developcompany-sponsored quotes for consumers, the integration requires either thedevelopment of a customized interface with the insurance company’s own ratingsystem, accessing a third-party rating engine of the insurance company’schoice, or adding the insurance company’s rating information into InsWeb’sproprietary rating engines. Though integration into our agency operations mayrequire fewer resources to implement than integration of an insurance companyinto our online marketplace, potential participating insurance companies maynot be willing to invest the time and resources necessary to achieve thisintegration, or we may not be able to overcome the technological difficultiesassociated with, or devote the time and resources necessary to, successfullyintegrate the insurance company into our online marketplace or our agencyoperations.

 

**We do not have exclusive relationships orlong-term contracts with insurance companies, which may limit our ability toretain these insurance companies as participants in our marketplace andmaintain the attractiveness of our services to consumers**

 

We do not have an exclusive relationship with any of the insurancecompanies whose insurance products are offered on our online marketplace, andthus, consumers may obtain quotes and coverage from these insurance companieswithout using our website. Our participating insurance companies offer theirproducts directly to consumers through insurance agents, mass marketingcampaigns or through other traditional methods of insurance distribution. Theseinsurance companies can also offer their products and services over theInternet, either directly to consumers or through one or more of our onlinecompetitors, or both. In addition, most of our agreements with ourparticipating insurance companies are cancelable at the option of either partyupon 90 days’ notice or less. We have experienced, and expect to continueto experience, reductions in the level of participation in our marketplace orcomplete termination by participating insurance companies. These reductions inparticipation, terminations, or an inability to attract additional insurancecompanies to our marketplace could materially affect our revenues and harm ourbusiness.

 

20

----

 

**The outcome and impact of the securitiesclass action lawsuit involving InsWeb is uncertain**

 

A securities classaction lawsuit was filed on December 5, 2001 in the United States DistrictCourt for the Southern District of New York, (the “Court”) purportedly onbehalf of all persons who purchased our common stock from July 22, 1999through December 6, 2000.  Thecomplaint named as defendants InsWeb, certain current and former officers anddirectors, and three investment banking firms that served as underwriters forInsWeb’s initial public offering in July 1999.  The complaint, as subsequently amended, alleges violations ofSections 11 and 15 of the Securities Act of 1933 and Sections 10 and 20 of theSecurities Exchange Act of 1934, on the grounds that the prospectusesincorporated in the registration statements for the offering failed todisclose, among other things, that (i) the underwriters had solicited andreceived excessive and undisclosed commissions from certain investors inexchange for which the underwriters allocated to those investors materialportions of the shares of our stock sold in the offerings and (ii) theunderwriters had entered into agreements with customers whereby theunderwriters agreed to allocated shares of the stock sold in the offering tothose customers in exchange for which the customers agreed to purchaseadditional shares of InsWeb stock in the aftermarket at pre-determined prices.  No specific damages are claimed.  Similar allegations have been made inlawsuits relating to more than 300 other initial public offerings conducted in1999 and 2000, all of which have been consolidated for pretrial purposes.  In October 2002, all claims against theindividual defendants were dismissed without prejudice.  In February 2003, the Court dismissedthe claims in the InsWeb action alleging violations of the Securities ExchangeAct of 1934 but allowed the plaintiffs to proceed with the remainingclaims.  In June 2003, theplaintiffs in all of the cases presented a settlement proposal to all of theissuer defendants.  Under the proposedsettlement, the plaintiffs will dismiss and release all claims againstparticipating defendants in exchange for a contingent payment guaranty by theinsurance companies collectively responsible for insuring the issuers in allthe related cases, and the assignment or surrender to the plaintiffs of certainclaims the issuer defendants may have against the underwriters.  InsWeb and most of the other issuerdefendants have accepted the settlement proposal. The settlement is subject toapproval of the Court, which cannot be assured.  If the settlement is not approved by the Court, InsWeb would defendthe lawsuit vigorously.  However, thelitigation is in the preliminary stage, and we therefore cannot predict itsoutcome.  The litigation process isinherently uncertain.  An unfavorableoutcome could have a material adverse effect on InsWeb’s financial condition,results of operations and cash flows.

 

**Traffic on our website is heavily dependenton our online relationships. These relationships may not generate sufficientrevenues to justify the fees we pay to online companies and our consumertraffic may decline in the event an online relationship is unsuccessful**

 

We rely on relationships with a variety of Internet portals, financialinstitutions, and other online companies to attract consumers to our website.In a typical arrangement, the online company includes a “link” on its websiteon which a user can click to jump to our website or to a site that we operateunder the online company’s name; as part of the arrangement, we typically paythe online company a portion of the resulting transaction fees and in somecases a fixed fee. These relationships may not continue to generate asubstantial amount of new traffic on our website, or the revenues generated bythese relationships may be insufficient to justify our payment obligations. Wehave experienced occasional fluctuations in the traffic from our onlinepartners as a result of redesigns of their websites or being outbid forpromotions by other online insurance providers. Furthermore, the value of theserelationships is based on the continued positive market presence, reputationand growth of these online companies’ websites and services. Any decline in themarket presence, business or reputation of these online companies’ websites andservices will reduce the value of these relationships to us and could harm ourbusiness.

 

For 2003, 2002 and 2001,we received approximately 13%, 11% and 32%, respectively of our website trafficfrom the major Internet portals Yahoo! Inc., MSN and AOL. For the six monthsended June 30, 2004, we received approximately 31% of our website trafficfrom these online relationships. During 2002, InsWeb significantly expanded itson-line marketing relationship with LowerMyBills.com, Inc., as a result ofwhich LowerMyBills.com delivered approximately 34% and 21% of InsWeb’s websitetraffic for 2002 and 2003, respectively.  For the remainder of 2004, the Company’s expects LowerMyBills.comto provide little consumer traffic. We expect revenues andoperating results for 2004 to be negatively impacted by the reduction inconsumer traffic from LowerMyBills.com, as well as by increasing pricecompetition in the marketplace for the online insurance consumer. We haveexperienced and expect to continue to experience increases in our directmarketing costs per online insurance consumer acquired.

 

Most of our relationships with online companies are terminable byeither party on 30 to 90 days’ notice. We may not be able to negotiate orrenew marketing agreements with online companies on terms that are acceptableto us. The termination, non-renewal or renewal on unfavorable terms of a relationshipfrom which we generate significant traffic to our website would harm ourbusiness. If the recent trend of failing online companies continues, thetraffic currently being received as well as the ability to attract new consumertraffic to our site could be harmed. Additionally, an online company’s failureto maintain efficient and uninterrupted operation of its computer andcommunications hardware systems would likely reduce the amount of traffic wereceive at our site, harming our business.

 

21

----

 

**Laws and regulations that govern theinsurance industry could expose us, or our participating insurance companies,our officers, or agents with whom we contract, to legal penalties if we fail tocomply, and could require changes to our business**

 

We perform functions for licensed insurance companies and are,therefore, required to comply with a complex set of rules and regulations thatoften vary from state to state. If we fail to comply with these rules and regulations,we, an insurance company doing business with us, our officers, or agents withwhom we contract, could be subject to various sanctions, including censure,fines, a cease-and-desist order or other penalties. This risk, as well aschanges in the regulatory climate or the enforcement or interpretation ofexisting law, could expose us to additional costs, including indemnification ofparticipating insurance companies for their costs, and could require changes toour business or otherwise harm our business. Furthermore, because theapplication of online commerce to the consumer insurance market is relativelynew, the impact of current or future regulations on InsWeb’s business isdifficult to anticipate.

 

**If we are unable to safeguard the securityand privacy of consumers’ and participating insurance companies’ confidentialdata, consumers and insurance companies may not use our services and ourbusiness may be harmed**

 

A significant barrier to electronic commerce and communications is thesecure transmission of personally identifiable information of Internet users aswell as other confidential information over public networks. If any compromiseor breach of security were to occur, it could harm our reputation and expose usto possible liability. A party who is able to circumvent our security measurescould misappropriate proprietary information or cause interruptions in ouroperations. We may be required to make significant expenditures to protectagainst security breaches or to alleviate problems caused by any breaches. Todate, we have experienced no breaches in our network security. We rely onencryption and authentication technology licensed from third parties to providethe security and authentication necessary to effect secure transmission ofconfidential information, such as names, addresses, Social Security and creditcard numbers, user names and passwords and insurance company rate information.Advances in computer capabilities, new discoveries in the field ofcryptography, or other events or developments could result in a compromise orbreach of the algorithms we use to protect consumers’ and insurance companies’confidential information.

 

**System failures could reduce or limit trafficon our website or interrupt our communications with individual insurancecompanies and harm our ability to generate revenue**

 

Since launching our online marketplace, we have experienced occasionalminor system failures or outages that have resulted in the online marketplacebeing out of service for a period ranging from several minutes to three hourswhile our technicians brought backup systems online. We may experience furthersystem failures or outages in the future that could disrupt the operation ofour website and could harm our business. Our revenues depend in large part onthe volume of traffic on our website and, more particularly, on the number ofinsurance quotes generated by our website in response to consumer inquiries.Accordingly, the performance, reliability and availability of our website,quote-generating systems and network infrastructure are critical to ourreputation and our ability to attract a high volume of traffic to our websiteand to attract and retain participating insurance companies. Moreover, webelieve that consumers who have a negative experience with an electroniccommerce website may be reluctant to return to that site. Thus, a significantfailure or outage affecting our systems could result in severe long-term damageto our business.

 

Additionally, several of our participating insurance companies havechosen a technical solution that requires that our website servers communicatewith these insurance companies’ computer systems in order to perform theunderwriting and risk analysis and rating functions required to generatequotes. Thus, the availability of quotes from a given insurance company maydepend in large part upon the reliability of that insurance company’s owncomputer systems, over which we have no control

 

**Our facilities and systems are vulnerable tonatural disasters and other unexpected losses, and we may not have adequateinsurance to cover such losses**

 

Our computer hardware operations are located in leased facilities inGold River, California. A third-party service provider located in theSacramento, California area maintains a backup of our critical systems. If bothof these locations experienced a system failure, the performance of our websitewould be harmed. These systems are also vulnerable to damage from fire, powerloss, telecommunications failures, break-ins, natural disasters and similarevents. If we seek to replicate our systems at other locations, we will face anumber of technical challenges, particularly with respect to databasereplications, which we may not be able to address successfully. Although wecarry property and business interruption insurance, our coverage may not beadequate to compensate us for all losses that may occur. Our servers may alsobe vulnerable to computer viruses, physical or electronic break-ins and similardisruptions.

 

22

----

 

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

 

Our future success is substantially dependent on the continued servicesand continuing contributions of our senior management and other key personnel,particularly Hussein A. Enan, Chairman of our Board, and Chief ExecutiveOfficer, and the loss of the services of any of our executive officers or otherkey employees could harm our business.

 

We have no long-term employment agreements with any of our keypersonnel, although executive officers and key personnel are entitled tocertain severance benefits should their employment be involuntarily terminated.In addition, InsWeb has granted stock options as incentives to executiveofficers and certain other key personnel. As the value of these incentives ishighly dependent on an increase in the market price of our common stock, we maybe unable to retain such key employees, nor retain or recruit other officersand key employees in the future.

 

**Regulation of the Internet is unsettled, andfuture regulations could inhibit the growth of the Internet and otherwise harmour business**

 

The laws governing the Internet remain largely unsettled, even in areaswhere there has been some legislative action. Furthermore, the growth anddevelopment of the market for electronic commerce may prompt the enactment ofmore stringent consumer protection laws that may impose additional burdens oncompanies conducting business online. For example, the recent enactment offederal legislation restricting the sending of unsolicited commercial email, or“spam”, may impede the implementation of national email-based marketingcampaigns. New laws also may inhibit the growth of the Internet as a medium forcommerce and comparison insurance shopping, which could, in turn, decreasedemand for our services, increase our cost of doing business, or otherwise harmour business. In addition, applicability to the Internet of existing lawsgoverning issues including property ownership, copyrights and otherintellectual property issues, taxation, libel and personal privacy isuncertain. The vast majority of these laws was adopted prior to the advent ofthe Internet and related technologies and, as a result, do not contemplate oraddress the unique issues of the Internet and related technologies.

 

**Any acquisitions that we undertake could bedifficult to integrate, disrupt our business, dilute stockholder value and harmour operating results**

 

We may acquire or make investments in complementary businesses,technologies, services or products if appropriate opportunities arise. Theprocess of integrating any acquired business, technology, service or productinto our business and operations may result in unforeseen operatingdifficulties and expenditures. Integration of an acquired company also mayconsume much of our management’s time and attention that would otherwise beavailable for ongoing development of our business. Moreover, the anticipatedbenefits of any acquisition may not be realized. We may be unable to identify,negotiate or finance future acquisitions successfully, or to integratesuccessfully any acquisitions with our current business. Future acquisitionscould result in potentially dilutive issuances of equity securities or theincurrence of debt, contingent liabilities or amortization expenses related togoodwill and other intangible assets, any of which could harm our business.

 

**We may be subject to claims for infringementof intellectual property, with or without merit, which could be costly todefend or settle**

 

We may from time to time be subject to claims of infringement of otherparties’ proprietary rights or claims that our own trademarks, patents or otherintellectual property rights are invalid. We have been subject to infringementclaims in the ordinary course of business, including claims of allegedinfringement of the patent and trademark rights of third parties us or bycompanies with which we have business relationships. Any claims of this type,with or without merit, could be time-consuming to defend, result in costlylitigation, divert management attention and resources or require us to enterinto royalty or license agreements. License agreements may not be available onreasonable terms, if at all, and the assertion or prosecution of anyinfringement claims could significantly harm our business.

 

23

----

 

**We incorporate third-party technologies andservices into our online marketplace, and if the providers of thesetechnologies and services fail in a timely manner to develop, license orsupport technology necessary to our services, market acceptance of our onlinemarketplace could be harmed**

 

We have incorporated technology developed by third parties into ouronline marketplace, and we will continue to incorporate third-party technologyin our future products and services. We have limited control over whether orwhen these third-party technologies will be developed or enhanced. If athird-party fails to timely develop, license or support technology necessary toour services, market acceptance of our online marketplace could be harmed.

 

**Our stock price has fluctuated widely, andInternet stocks in general have been extremely volatile**

 

The trading price of our common stock has been highly volatile and maybe significantly affected by factors including actual or anticipatedfluctuations in our operating results, new products or new contracts by us orour competitors, loss of key customers, conditions and trends in the electroniccommerce and insurance industries, changes in financial estimates by securitiesanalysts, general market conditions and other factors. The trading prices ofmany Internet stocks have experienced extreme price and volume fluctuations.These fluctuations often have been unrelated or disproportionate to theoperating performance of these companies. These fluctuations may continue andcould harm our stock price. Any negative change in the public’s perception ofthe prospects of Internet or electronic commerce companies could also depressour stock price regardless of our results.

 

**Delaware law and our charter documentscontain provisions that could discourage or prevent a potential takeover, evenif such a transaction would be beneficial to our stockholders**

 

Provisions of Delaware law and our certificate of incorporation andbylaws could make more difficult the acquisition of us by means of a tenderoffer, a proxy contest, or otherwise, and the removal of incumbent officers anddirectors.

 

24

----

 

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

 

Therehave been no material changes to the Company’s disclosures related to certainmarket risks as reported under Part II, Item 7A, “Quantitative and QualitativeDisclosures About Market Risk,” in the Annual Report of InsWeb to the U.S.Securities and Exchange Commission on Form 10-K for the year ended December 31,2003.

 

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

 

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

 

(b)                                             There has been no change in our internalcontrol over financial reporting during the quarter ended June 30, 2004that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

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

 

**ITEM 4.****                                                    ****SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

InsWeb’s 2004 Annual Meeting of Stockholders was held on June 21,2004.  At the meeting, James M. Corroonand Thomas W. Orr, the nominees of management, were elected to serve as ClassII directors, until InsWeb’s 2007 Annual Meeting of Stockholders.  The vote for Mr. Corroon and Mr. Orr was3,934,355 shares for and 555,652 shares withheld.

 

Also voted upon at the meeting was a proposal to ratify the appointmentof Ernst & Young LLP as InsWeb’s independent auditor for the year endingDecember 31, 2004, which was approved by a vote of 4,075,380 shares for;7,421 shares against; and 50,490 shares abstaining.

 

**ITEM 6****.  EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)                                  Exhibits

 
| **Exhibit  Number** |   | **Description  of Document**                                                                                     |
|---------------------|--------|------------------------------------------------------------------------------------------------------------------|
| 10.13               |   | InsWeb  Corporation Executive Retention and Severance Plan                                                       |
|                |   |                                                                                                             |
| 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. |

 

(b)                                 Reportson Form 8-K:

 

On April 30, 2004, we filed areport on Form 8-K, under Item 12, announcing InsWeb Corporation’s financialresults for the quarter ended March 31, 2004.

 

25

----

 

**SIGNATURE**

 

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

 
| Dated: August 9, 2004 | **INSWEB  CORPORATION**    |
|----------------------------|----------------------------|
|                       | **(Registrant)**           |
|                       |                       |
|                       | **/s/ WILLIAM D. GRIFFIN** |   |
|                       | William D. Griffin         |
|                       | Chief Financial Officer    |

 

26

----