**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

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**FORM 10-Q**
| **x**                                                                                                                                                                                                                      | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                 |
| **For the  quarterly period ended September 30, 2006**                                                                                                                                                                     |
| ** **                                                                                                                                                                                                                 |
| **Or**                                                                                                                                                                                                                     |
| ** **                                                                                                                                                                                                                 |
| **o**                                                                                                                                                                                                                      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                 |
| **For the  transition period  from               to               ** |
| ** **                                                                                                                                                                                                                 |
| **Commission  file number 0-26083**                                                                                                                                                                                        |

 

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**INSWEBCORPORATION**

(Exact name of Registrant as specified in itscharter)

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

 

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

(Address of principal executive offices)

** **

**(916) 853-3300**

(Registrant’s telephone number, including area code)

 

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

Indicateby check mark whether the registrant is a large accelerated filer, an acceleratedfiler, or a non-accelerated filer (see definition of “large accelerated filerand accelerated filer” in Rule 12b-2 of the Exchange Act).

LargeAccelerated Filer o  Accelerated Filer o Non-Accelerated Filer  x

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

Yes o  No x

The number of outstanding shares of theRegistrant’s Common Stock, par value $0.001 per share, on October 27, 2006 were4,094,543 shares.

 

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**FORM 10-Q**

**INSWEB CORPORATION**

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

 

2

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

**ITEM1.****  FINANCIAL STATEMENTS**

**INSWEBCORPORATION**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

*(in thousands)*

*(unaudited)*
| ** **                                       | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **Assets**                                       |       |                         |       |                        |       |
| Current assets:                                  |       |                         |       |                        |       |
| Cash and cash  equivalents                       |       | $                            | 7,474      |                        | $          | 9,073 |   |
| Short-term  investments                          |       | —                       |       | 1,233                       |       |
| Accounts  receivable, net                        |       | 2,927                        |       | 2,297                       |       |
| Prepaid expenses  and other current assets       |       | 651                          |       | 545                         |       |
| Total current  assets                            |       | 11,052                       |       | 13,148                      |       |
| Property and equipment,  net                     |       | 434                          |       | 524                         |       |
| Other assets                                     |       | 337                          |       | 346                         |       |
| Total assets                                     |       | $                            | 11,823     |                        | $          | 14,018 |   |
|                                             |       |                         |       |                        |       |
| **Liabilities and stockholders’  equity**   |       |                         |       |                        |       |
| Current liabilities:                             |       |                         |       |                        |       |
| Accounts payable                                 |       | $                            | 3,604      |                        | $          | 2,655 |   |
| Accrued expenses                                 |       | 2,638                        |       | 3,094                       |       |
| Deferred revenue                                 |       | 185                          |       | 128                         |       |
| Total current  liabilities                       |       | 6,427                        |       | 5,877                       |       |
|                                             |       |                         |       |                        |       |
| Commitments and contingencies                    |       |                         |       |                        |       |
|                                             |       |                         |       |                        |       |
| Stockholders’ equity:                       |       |                         |       |                        |       |
| Common stock                                     |       | 7                            |       | 7                           |       |
| Paid-in capital                                  |       | 203,347                      |       | 203,059                     |       |
| Treasury stock                                   |       | (6,334                       | )          | (6,334                      | )          |
| Accumulated  other comprehensive loss            |       | —                       |       | (1                          | )          |
| Accumulated  deficit                             |       | (191,624                     | )          | (188,590                    | )          |
| Total  stockholders’ equity                 |       | 5,396                        |       | 8,141                       |       |
| Total liabilities and  stockholders’ equity |       | $                            | 11,823     |                        | $          | 14,018 |   |

 

See accompanying notes.

3

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**INSWEBCORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

*(in thousands, except per share amounts)*

*(unaudited)*
| ** **                                                                                  | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                                                                   | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Transaction fees                                                                            |       | $                                                    | 7,421      |                                                | $          | 6,799 |   | $ | 22,415 |   | $ | 18,927 |   |
| Development and maintenance fees                                                            |       | 84                                                   |       | 99                                                  |       | 262 |   | 269 |   |
| Total revenues                                                                              |       | 7,505                                                |       | 6,898                                               |       | 22,677 |   | 19,196 |   |
|                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Operating expenses:                                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Technology                                                                                  |       | 1,269                                                |       | 1,332                                               |       | 3,738 |   | 4,121 |   |
| Sales and marketing                                                                         |       | 7,094                                                |       | 6,064                                               |       | 21,227 |   | 16,054 |   |
| General and administrative                                                                  |       | 829                                                  |       | 974                                                 |       | 3,080 |   | 3,177 |   |
| Total operating expenses                                                                    |       | 9,192                                                |       | 8,370                                               |       | 28,045 |   | 23,352 |   |
| Loss from operations                                                                        |       | (1,687                                               | )          | (1,472                                              | )          | (5,368 | ) | (4,156 | ) |
| Interest income                                                                             |       | 92                                                   |       | 101                                                 |       | 286 |   | 289 |   |
| Other income (expense), net (*Note 9*)                                                      |       | 5                                                    |       | —                                              |       | 2,048 |   | — |   |
|                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Net loss                                                                                    |       | $                                                    | (1,590     | )                                                   | $          | (1,371 | ) | $ | (3,034 | ) | $ | (3,867 | ) |
|                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Net loss per share - basic and diluted                                                      |       | $                                                    | (0.39      | )                                                   | $          | (0.34 | ) | $ | (0.74 | ) | $ | (0.90 | ) |
|                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted-average shares  used in computing per share amounts - basic and diluted (*Note 2*) |       | 4,093                                                |       | 4,051                                               |       | 4,089 |   | 4,291 |   |

 

See accompanying notes.

4

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**INSWEBCORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

*(in thousands)*

*(unaudited)*
| ** **                                                                   | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                                       |       |                                                |       |   |   |
| Net loss                                                                     |       | $                                                   | (3,034     | ) | $ | (3,867 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                                |       |   |   |
| Stock-based  compensation                                                    |       | 246                                                 |       | — |   |
| Depreciation and  amortization                                               |       | 165                                                 |       | 412 |   |
| Net changes in  operating assets and liabilities:                            |       |                                                |       |   |   |
| Accounts  receivable                                                         |       | (631                                                | )          | (1,686 | ) |
| Prepaid expenses  and other current assets                                   |       | (105                                                | )          | 29 |   |
| Other assets                                                                 |       | 9                                                   |       | (15 | ) |
| Accounts payable                                                             |       | 949                                                 |       | 1,274 |   |
| Accrued expenses                                                             |       | (446                                                | )          | (250 | ) |
| Deferred revenue                                                             |       | 57                                                  |       | 36 |   |
| Net cash used in  operating activities                                       |       | (2,790                                              | )          | (4,067 | ) |
|                                                                         |       |                                                |       |   |   |
| Cash flows from  investing activities:                                       |       |                                                |       |   |   |
| Redemptions of  short-term investments                                       |       | 1,462                                               |       | 11,591 |   |
| Purchases of  short-term investments                                         |       | (228                                                | )          | (6,468 | ) |
| Purchases of  property and equipment                                         |       | (75                                                 | )          | (73 | ) |
| Net cash provided  by investing activities                                   |       | 1,159                                               |       | 5,050 |   |
|                                                                         |       |                                                |       |   |   |
| Cash flows from  financing activities:                                       |       |                                                |       |   |   |
| Repayments of  debt                                                          |       | (10                                                 | )          | (54 | ) |
| Proceeds from  issuance of common stock through stock plans                  |       | 42                                                  |       | 48 |   |
| Repurchase of  common stock                                                  |       | —                                              |       | (1,738 | ) |
| Net cash  provided by (used in) financing activities                         |       | 32                                                  |       | (1,744 | ) |
| Net decrease in cash  and cash equivalents                                   |       | (1,599                                              | )          | (761 | ) |
| Cash and cash  equivalents, beginning of period                              |       | 9,073                                               |       | 9,334 |   |
| Cash and cash equivalents, end of period                                     |       | $                                                   | 7,474      |   | $ | 8,573 |   |

 

See accompanying notes.

5

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**INSWEBCORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

***(unaudited)***

**1. Business of InsWeb**

InsWeb Corporation operates anonline insurance marketplace that enables consumers to comparison shop onlineand to obtain insurance company-sponsored quotes for a variety ofinsurance products, including automobile, homeowners and term life. InsWeb’smarketplace electronically matches consumers and insurance providers. 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 principal source of revenues is transactionfees from participating insurance providers, either directly from an insurancecompany or from a local insurance agent. While quotes obtained through InsWeb’sonline insurance marketplace are provided to consumers free of charge, InsWebearns revenues from participating insurance companies or agents based on thedelivery of qualified leads. These fees are earned either from an insurancecompany based on a closed policy, from the delivery of a lead to aparticipating insurance provider or local agent, or from a commission earned byInsWeb’s insurance agency, InsWeb Insurance Services, Inc. In certaininstances, consumers are provided the opportunity to link directly to a thirdparty insurance provider’s website. In these situations, the consumer willcomplete the third party company’s online application, and InsWeb will be paida fee for that consumer link or click-through.

InsWeb is subject to all of the risks inherent in theelectronic commerce industry and special risks related to the online insuranceindustry. These risks include, but are not limited to, uncertain economic conditionswhich could result in lower growth rates, the changing nature of the electroniccommerce industry, variations in the availability and cost of acquiringconsumer traffic, unpredictability of future revenues, reliance on keycustomers –insurance carriers, agents and other providers – who are themselvessubject to volatility in their operating cycles, and reliance on a third partyintermediary who provides leads to local insurance agents on InsWeb’s behalf.These risks and uncertainties, among others, could cause InsWeb’s actualresults to differ materially from historical results or those currentlyanticipated.  In light of the evolvingnature of InsWeb’s business to better capitalize on its position as a leadinginsurance portal, including the current expansion of InsWeb’s agent networkprogram, InsWeb believes that period-to-period comparisons of its operatingresults are not necessarily meaningful and should not be relied upon as anindication of future performance. Moreover, there is no assurance that InsWebwill be able to achieve or sustain profitability.

InsWeb has incurred operatinglosses of $6.3 million in 2005, $9.2 million in 2004, and $7.0 million in 2003,and as of September 30, 2006, its accumulated deficit was $191.6 million. Inaddition, InsWeb’s operating activities to date have consumedsubstantial amounts of cash, cash equivalents and short-term investments ($5.3million in 2005, $8.7 million in 2004, and $4.2 million in 2003) and willcontinue to require capital in the near future. The Company used $2.8 millionto fund operating activities in the nine months ended September 30, 2006 andhad $7.5 million in cash, cash equivalents and short-term investments atSeptember 30, 2006. These operatinglosses and the related accumulated deficit are a result of the significantcosts incurred in the development of InsWeb’s technology platform, theestablishment of relationships with insurance companies, their integration withthe InsWeb site, and InsWeb’s marketing and sales activities. In orderto remain competitive, the Company must continue to make investments essentialto its ability to operate, and InsWebintends to continue to invest in product development and maintenance, and salesand marketing. In addition, the Company will continue to incur the costsassociated with continuing to function as a publicly listed company, including,among other things, the costs of compliance with the provisions of theSarbanes-Oxley Act of 2002, and, in particular, the costs of complying with Section 404 of the Sarbanes-Oxley Actbeginning in 2007. As a result,InsWeb believes that it will continue to incur operating losses for at leastthe next three to six months. In the event that InsWeb is unable to generaterevenues sufficient to offset its costs, or if its costs of marketing andoperations are greater than it anticipates, the Company may be unable to growits business at the rate desired or may be required to delay, reduce, or ceaseoperations, any of which could materially harm its business and financial results. In addition, if InsWeb is unable to ultimatelyachieve profitability, the Company may need to seek additional financing tocontinue its business operations. The Company cannot be certain that additionalfinancing will be available when required, on favorable terms or at all. IfInsWeb is not successful in raising additional capital as required, it maydelay, significantly reduce, or cease operations, which could adversely affectits results of operations and financial position.

6

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**2.* *Basis of Presentation**

The condensed consolidatedfinancial statements include the accounts of InsWeb Corporation and itswholly-owned subsidiaries, InsWeb Insurance Services, Inc. and GoldrushInsurance Services, Inc. (“InsWeb” or the “Company”).  All significant inter-company accounts andtransactions have been eliminated in the consolidated financial statements.

The accompanying unauditedinterim financial statements have been prepared in accordance with U.S.generally accepted accounting principles for interim financial information andwith the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not contain all of theinformation and footnotes required by U.S. generally accepted accountingprinciples for complete financial statements. In the opinion of management, theaccompanying unaudited interim condensed consolidated financial statementsreflect all adjustments, which include only normal recurring adjustments,necessary to present fairly InsWeb’s financial position as of September 30, 2006and the results of operations for the three and nine months ended September 30,2006 and 2005, and cash flows for the nine months ended September 30, 2006 and2005. The financial data and other information disclosed in these notes to thecondensed consolidated financial statements related to these periods areunaudited.  The results for the three andnine months ended September 30, 2006 are not necessarily indicative of theresults to be expected for the year ending December 31, 2006.

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

Basic earnings per share is computed using theweighted-average number of shares of common stock outstanding. Diluted earningsper share would reflect the potential dilution that would occur if stock optionsand warrants had been exercised. For the three and nine month periods endedSeptember 30, 2006 and 2005, common equivalent shares from stock options andwarrants were excluded from the computation of diluted net loss per share astheir effect was antidilutive.

**3.  Stock-BasedCompensation**

In July 1997, InsWebauthorized the 1997 Stock Option Plan (the “Option Plan”) and the SeniorExecutive Option Plan (the “Executive Plan”). Under the Option Plan, the Boardof Directors may issue incentive stock options to employees of InsWeb and itssubsidiaries and may also issue nonqualified stock options to employees,officers, directors, independent contractors and consultants of InsWeb and itssubsidiaries. Under the Executive Plan, the Board of Directors may issuenonqualified stock options to employees, officers and directors of InsWeb andits subsidiaries. In May 2003, the Option Plan was amended, withstockholder approval, to provide that each director would receive a fully-vestedoption to purchase 5,000 shares of common stock on July 1st (or thefirst business day thereafter) of each year in which the director remains inoffice. The Option Plan provides for an automatic annual increase in the sharereserve, to be effective on the first day of each fiscal year, by a number ofshares equal to 5% of the number of common shares outstanding as of the lastday of the preceding fiscal year. Options granted under both plans are pricedat the fair market value on the date of grant and prior to January 1, 2006generally vested in equal monthly installments over a three-year period;options granted subsequent to January 1, 2006 generally vest ratably over aone-year period. Certain options granted to members of InsWeb’s Board ofDirectors vest immediately. Prior to January 1, 2006, options expired ten yearsfrom the date of grant; options granted subsequent to January 1, 2006 expirefive years from the date of grant.

7

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**3.* *Stock-Based Compensation(continued)**

On October 19, 2005, the Compensation Committee of theBoard of Directors of InsWeb approved the acceleration of vesting of all stockoptions outstanding as of October 19, 2005 held by employees.  Options to purchase approximately 496,000shares of common stock, or 33% of the total outstanding options, with varyingremaining vesting schedules, were subject to the acceleration and becameimmediately exercisable. All other terms and conditions applicable to suchoptions, including the exercise prices, remained unchanged.

InsWeb has an Employee StockPurchase Plan (the “Purchase Plan”) under which eligible employees mayauthorize payroll deductions of up to 15% of their compensation to purchaseshares at 85% of the lower of the fair market value of the common stock on thedate of commencement of the offering or on the last day of the nine-monthpurchase period. During the nine months ended September 30, 2006, 8,200 shareswere sold to employees at the price of $2.42 per share. The weighted averagefair value of these awards was $0.85 per share. At September 30, 2006, InsWeb had365,000 shares of its common stock reserved for future issuance under thePurchase Plan.

On January 1, 2006, the Company adopted the provisionsof Statement of Financial Accounting Standards No. 123(R) (“SFAS 123(R)”),“Share-Based Payments,” requiring it to recognize expense related to the fairvalue of its share-based compensation awards. The Company elected to use themodified prospective transition method as permitted by SFAS 123(R) andtherefore has not restated its financial results for prior periods. Under thistransition method, share-based compensation expense for the three and ninemonths ended September 30, 2006 includes all share-based compensation awardsgranted subsequent to January 1, 2006 based on the grant-date fair valueestimated in accordance with the provisions of SFAS 123(R). The Companyrecognizes compensation expense for stock option awards issued subsequent toJanuary 1, 2006 on a straight-line basis over the requisite service period ofthe award.  All options issued prior to January 1, 2006 were fully vestedat the date of adoption of SFAS 123(R), and therefore, no compensation expensewas recognized for these options for the three and nine months ended September30, 2006.

The following table sets forth the total share-basedcompensation expense resulting from stock options and the Purchase Planincluded in the Company’s operating expenses in its condensed consolidatedstatements of operations for the three and nine months ended September 30, 2006(in thousands):
|                                | ** ** | **Three Months Ended  September 30, 2006** | ** ** | **Nine Months Ended  September 30, 2006** | ** ** |
|--------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Sales and marketing            |       | $                                                              | 25         |                                                          | $          | 96 |   |
| Technology                     |       | 11                                                             |       | 21                                                            |       |
| General and administrative     |       | 85                                                             |       | 129                                                           |       |
| Total stock-based compensation |       | $                                                              | 121        |                                                          | $          | 246 |   |

 

8

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Prior to the adoption of SFAS 123(R), InsWeb accounted for its stock-basedcompensation plans under the recognition and measurement principles of APBOpinion No. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations.  The following tableillustrates the effect on net loss and net loss per share if InsWeb had appliedthe fair value recognition provisions of Financial Accounting Standards BoardStatements No. 123 “Accounting for Stock-Based Compensation” and No. 148, “Accountingfor Stock-Based Compensation-Transition and Disclosure*,*” to stock-based employee compensationfor the three and nine months ended September 30, 2005 (in thousands, exceptper share amounts):
|                                                                                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                  | ** ** | **September 30, 2005** | ** ** | **September 30, 2005** | ** ** |
|                                                                                                        |       |                             |       |                             |       |
| Net loss, as  reported                                                                                      |       | $                                | (1,371     | )                                | $          | (3,867 | ) |
| Deduct:  Stock-based employee compensation expense determined under fair value based  method for all awards |       | (156                             | )          | (414                             | )          |
| Pro forma net  loss                                                                                         |       | $                                | (1,527     | )                                | $          | (4,281 | ) |
| Net loss per  share:                                                                                        |       |                             |       |                             |       |
| Basic and diluted—as reported                                                                          |       | $                                | (0.34      | )                                | $          | (0.90 | ) |
| Basic and  diluted—pro forma                                                                           |       | $                                | (0.38      | )                                | $          | (1.00 | ) |

 

The fair value of stock-based awards granted pursuantto the Company’s stock option plans was estimated using the Black-Scholes modelwith the following assumptions for the nine months ended September 30, 2006:
| Expected term (in years)                   |   | 3.00 |   |
|--------------------------------------------|--------|------|--------|
| Expected  volatility                       |   | 0.69 |   |
| Risk-free  interest rate                   |   | 4.0  | %      |
| Expected  dividend                         |   | 0    | %      |
| Weighted-average fair  value at grant date |   | $    | 1.07   |   |
|                                            |        |      |        |  |

 

***Expected Term.*** The expected term represents the periodthat the Company’s stock-based awards are expected to be outstanding. Aspermitted by Staff Accounting Bulletin No. 107, Topic 14, “Share BasedPayment,” the Company adopted a temporary “simplified” method to developing theestimate of the expected term of an employee stock option. Under the “simplified”method, the expected term is calculated by adding the vesting term to thecontractual term of the option grant and dividing the total by two. Thissimplified method is permitted until such time as more detailed informationabout exercise behavior is known.

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

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

***Expected Dividend.***The Company has not declared dividends todate. Therefore, the Company uses a zero value for the expected dividend valuefactor when using the Black-Scholes option-pricing formula to determine thefair value of options granted.

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

9

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Activity under all of the Company’sstock option plans for the nine months ended September 30, 2006 was as follows:
| (in thousands, except exercise price amounts) | ** ** | **Shares  Available  for Grant** | ** ** | **Shares  Outstanding** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------|------------|--------------------------------------------|------------|
|                                                                   |       |                                  |       |                    |       |                                       |       |
| Balances,  December 31, 2005                                           |       | 888                                   |       | 1,471                   |       | $                                          | 6.98       |   |
| Additional  shares reserved                                            |       | 203                                   |       | —                  |       | —                                     |       |
| Granted                                                                |       | (503                                  | )          | 503                     |       | $                                          | 2.24       |   |
| Exercised                                                              |       | —                                |       | (10                     | )          | $                                          | 2.55       |   |
| Canceled /  forfeited                                                  |       | 66                                    |       | (66                     | )          | $                                          | 7.54       |   |
|                                                                   |       |                                  |       |                    |       |                                       |       |
| Balances,  September 30, 2006                                          |       | 654                                   |       | 1,898                   |       | $                                          | 5.70       |   |
|                                                                   |       |                                  |       |                    |       |                                       |       |
| Vested and exercisable  at September 30, 2006                          |       |                                  |       | 1,577                   |       | $                                          | 6.44       |   |

 

The aggregate intrinsic values of options outstandingand exercisable at September 30, 2006 was $154,000 and $83,000, respectively.Aggregate intrinsic value represents the total intrinsic value (the aggregatedifference between the closing stock price of the Company’s common stock onSeptember 30, 2006 and the exercise price for in-the-money options) that wouldhave been received by the option holders if all options had been exercised onSeptember 30, 2006. The total intrinsic value of options exercised in the threeand nine months ended September 30, 2006 was $0 and $5,000, respectively. Theweighted-average remaining contractual terms of options outstanding andexercisable at September 30, 2006 was 6.17 and 6.48 years, respectively.

Asof September 30, 2006, there was $322,000 in unrecognized compensation cost forall stock options outstanding that were unvested.  The Company’s currentpractice is to issue new shares to satisfy share option exercises.

Cashreceived from option exercises and purchases under the Purchase Plan for thethree and nine months ended September 30, 2006 was $9,000 and $44,000respectively.

Therewas no tax benefit attributable to options exercised in the three and ninemonths ended September 30, 2006.

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

For the three and nine months ended September 30,2006, three customers accounted for 19%, 10% and 9%, and 17%, 11% and 10% oftotal revenues, respectively. For the three and nine months ended September 30,2005, one customer accounted for 27% and 28% of total revenues, respectively.At September 30, 2006, three customers accounted for 15%, 14%, and 10% ofaccounts receivable, respectively. At December 31, 2005, three customersaccounted for 24%, 11%, and 11% of accounts receivable, respectively.

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**5. AccruedExpenses**

Accruedexpenses consist of the following (in thousands):
|                                         | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                    |       |                         |       |                        |       |
| Accrued lease  obligations (see Note 8) |       | $                            | 1,639      |                        | $          | 1,874 |   |
| Accrued employee  compensation          |       | 387                          |       | 586                         |       |
| Deferred rent                           |       | 482                          |       | 527                         |       |
| Other                                   |       | 130                          |       | 107                         |       |
| Total                                   |       | $                            | 2,638      |                        | $          | 3,094 |   |

 

**6. Comprehensive Loss**

Total comprehensive loss was as follows (inthousands):
|                                                                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                             | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Net loss                                                               |       | $                                                    | (1,590     | )                                                   | $          | (1,371 | ) | $ | (3,034 | ) | $ | (3,867 | ) |
| Other  comprehensive income - change in unrealized gain on investments |       | 0                                                    |       | 1                                                   |       | 2 |   | 7 |   |
| Comprehensive loss                                                     |       | $                                                    | (1,590     | )                                                   | $          | (1,370 | ) | $ | (3,032 | ) | $ | (3,860 | ) |

 

**7.  Stockholders’ Equity**

In March 2005, the Board ofDirectors authorized management to repurchase 755,821 shares of InsWeb common stock,consisting of 531,947 shares held by Nationwide Mutual Insurance Company and223,874 shares held by Century Capital Partners, L.P. These shares represented16% of the total outstanding shares at that date and were purchased forapproximately $1.7 million, or $2.30 per share. Subsequent to the closing ofthese transactions on September 30, 2005, Nationwide Mutual and Century Capitalheld no shares.

**8.  Commitments and Contingencies**

**Leases**

InsWeb iscontractually obligated to make future lease payments on certain formerlyoccupied facilities through September 2008. As of September 30, 2006,total future obligations for these facilities amounted to $5.6 million; theseobligations are offset by total contractual future sublease income ofapproximately $4.2 million. Substantially all future sublease income is duefrom a sublessee who is an early-stage company with a limited operating historyand, therefore, there are inherent risks and uncertainties associated with itsfuture operations and its ability to discharge its obligations through the termof the sublease. In the event that the sublessee defaults on its obligationsunder the 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. These estimates and assumptionsare affected by area-specific conditions such as new commercial development,market occupancy rates and future market prices. Based on these assumptions,the Company has recorded an accrual of $1.6 million as of September 30, 2006for lease commitments related to these formerly occupied facilities, ascompared to an accrual of $1.9 million as of December 31, 2005.

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**Securities ClassAction Lawsuit**

A securities class action lawsuitwas filed on December 5, 2001 in the United States District Court for theSouthern District of New York, (the “Court”) purportedly on behalf of allpersons who purchased our common stock from July 22, 1999 throughDecember 6, 2000. The complaint named as defendants InsWeb, certaincurrent and former officers and directors, and three investment banking firmsthat served as underwriters for InsWeb’s initial public offering inJuly 1999. The complaint, as subsequently amended, alleges violations ofSections 11 and 15 of the Securities Act of 1933 and Sections 10 and 20 of theSecurities Exchange Act of 1934, on the grounds that the prospectusesincorporated in the registration statements for the offering failed todisclose, among other things, that (i) the underwriters had solicited andreceived excessive and undisclosed commissions from certain investors inexchange for which the underwriters allocated to those investors materialportions of the shares of our stock sold in the offerings and (ii) theunderwriters had entered into agreements with customers whereby theunderwriters agreed to allocated shares of the stock sold in the offering tothose customers in exchange for which the customers agreed to purchaseadditional shares of InsWeb stock in the aftermarket at pre-determined prices.No specific damages are claimed. Similar allegations have been made in lawsuitsrelating to more than 300 other initial public offerings conducted in 1999 and2000, all of which have been consolidated for pretrial purposes. InOctober 2002, all claims against the individual defendants were dismissedwithout prejudice. In February 2003, the Court dismissed the claims in theInsWeb action alleging violations of the Securities Exchange Act of 1934 butallowed the plaintiffs to proceed with the remaining claims. InSeptember 2003, the plaintiffs in all of the cases presented a settlementproposal to all of the issuer defendants. Under the proposed settlement, theplaintiffs will dismiss and release all claims against participating defendantsin exchange for a contingent payment guaranty by the insurance companiescollectively responsible for insuring the issuers in all the related cases, andthe assignment or surrender to the plaintiffs of certain claims the issuerdefendants may have against the underwriters. InsWeb and most of the otherissuer defendants have accepted the settlement proposal. On April 24, 2006, ahearing was held to consider final approval of the settlement; the Court’sruling on final approval of the settlement remains pending.  If the Court does not approve the settlement,InsWeb intends to defend the lawsuit vigorously. The litigation and settlementprocess is inherently uncertain and we cannot predict the outcome, though, ifunfavorable, it could have a material adverse effect on InsWeb’s financialcondition, results of operations and cash flows.

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

InMarch 2006, the InsWeb Insurance Services agency discontinued selling propertyand casualty insurance policies, which represented less than 7% of the Company’stotal revenues in the year ended December 31, 2005.  The Company’s agency subsidiary will continueto sell term life insurance. In connection with this action, in April 2006 theCompany sold InsWeb Insurance Services’ property and casualty “book ofbusiness,” including rights related to approximately 9,500 policy holders.Total proceeds from this transaction were approximately $2.0 million.

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

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

**Overview**

InsWeb operates an onlineinsurance marketplace that enables consumers to comparison shop online and toobtain insurance company-sponsored quotes for a variety of insuranceproducts, including automobile, homeowners and term life. InsWeb’s marketplaceelectronically matches consumers and insurance providers. InsWeb has combinedextensive knowledge of the insurance industry, technological expertise andclose relationships with a significant number of insurance companies to developan integrated online marketplace. 

InsWeb’s principal source of revenues is transactionfees from participating insurance providers, either directly from an insurancecompany or from a local insurance agent. While quotes obtained through InsWeb’sonline insurance marketplace are provided to consumers free of charge, InsWebearns revenues from participating insurance companies or agents based on thedelivery of qualified leads. These fees are earned either from an insurancecompany based on a closed policy, from the delivery of a lead to aparticipating insurance provider or local agent, or from a commission earned byInsWeb’s insurance agency subsidiary, InsWeb Insurance Services, Inc. Incertain instances, consumers are provided the opportunity to link directly to athird party insurance provider’s website. In these situations, which we referto as InsWeb’s Sponsored Web Link program, the consumer will complete the thirdparty company’s online application, and InsWeb will be paid a fee for thatconsumer link or click-through.

InsWeb has focused its efforts on developing insurancecompany coverage for automobile insurance in order to be able to offer truecomparative online shopping for this important segment of the insurance market.Automobile insurance accounted for approximately 79% of our transactionrevenues in 2005, approximately 77% in 2004 and approximately 79% in 2003. Weanticipate that automobile insurance will continue to account for a substantialportion of our revenues for the foreseeable future. 

In 2004, InsWeb launched its term life agency businessin an effort to increase revenue per consumer within the term life marketplace.The conversion from a lead-based revenue model to a commission-based revenuemodel resulted in a delay in revenue recognition, as it typically takes 90 to120 days to complete the sales process for a term life policy. At the time theterm life agency business was launched, the Company was uncertain whether thetransaction data available was sufficient to reliably estimate cancellationsfor purposes of satisfying the criteria in Statement of Financial AccountingStandards No. 48, “Revenue Recognition When Right of Return Exists,” forservice transactions subject to customer cancellation privileges. Accordingly,during the initial deployment period of the commission-based model, the Companyrecognized commission revenue on a ratable basis over the initial term of therelated policy as the cancellation privileges expired. Based on term lifeagency activity and cancellation data accumulated since the launch, managementdetermined in April 2005 that it was appropriate to use the historicalcancellation rate to estimate a cancellation allowance for term life agencytransactions and the Company, therefore, recognizes revenue from its term lifeagency business when commissions are earned, net of an estimate for futurecancellations based on its historical cancellation rate.

13

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Also in 2004, InsWeblaunched its agent network program which provides online auto insuranceconsumers access to local insurance agents. Prior to September 12, 2005, theagent network program was conducted exclusively through an intermediary,NetQuote, Inc. During the year ended December 31, 2005, NetQuote represented 29%of auto transaction fees, compared to 8% during the year ended December 31,2004. For the nine months ended September 30, 2006 and 2005, NetQuoterepresented 20% and 31% of auto transaction fees, respectively. On September29, 2006, the Company entered into a one year agreement with NetQuoteconcerning InsWeb’s delivery of both automobile and homeowners leads toNetQuote. Under the terms of the new agreement, InsWeb will be paid a fee foreach automobile or homeowners lead that is delivered to NetQuote, with theamount of the fee varying according to the state, the consumer profile and thenumber of times InsWeb delivered the lead to its own network of insuranceproviders. The agreement does not specify a minimum or maximum number of leadsthat InsWeb is required to deliver to NetQuote.

To lessen InsWeb’s reliance on this intermediary, andto maximize its revenue potential, InsWeb launched a proprietary agent networkprogram (“AgentInsider”) to provide leads directly to local insurance agentswho have registered with InsWeb. Generally, leads are delivered to the highestbidding agents; however, InsWeb may enter into agreements with insurancecompanies, large agencies and insurance related entities by which theseproviders pay a set fee for each lead. However, as is the case with many newinitiatives, we have experienced a reduction in revenue per consumer, comparedto the revenue per consumer we would have received from our intermediary forthe same consumer lead, in the initial phases of the program. The length oftime and extent of this reduction will depend on the rate of registration oflocal personal lines insurance agents and the degree of participation of theseagents throughout the country. We expect that the agent network program, boththrough the intermediary and through our internally developed network, willcontinue to represent a significant percentage of auto transaction fees. AtSeptember 30, 2006, the AgentInsider program had approximately 2,600 localinsurance agents actively purchasing consumer leads, representing 53% of theconsumers who shop the InsWeb auto insurance marketplace (percentage of autoconsumers who receive a quote from an AgentInsider agent). This is an increasefrom 1,500 agents purchasing leads, representing 29% of the auto insuranceconsumers at December 31, 2005. 

InsWeb has incurred operatinglosses of $6.3 million in 2005, $9.2 million in 2004, and $7.0 million in 2003,and as of September 30, 2006, its accumulated deficit was $191.6 million. Inaddition, InsWeb’s operating activities to date have consumedsubstantial amounts of cash, cash equivalents and short-term investments ($5.3million in 2005, $8.7 million in 2004, and $4.2 million in 2003) and willcontinue to require capital in the near future. The Company used $2.8 millionto fund operating activities in the nine months ended September 30, 2006 andhad $7.5 million in cash, cash equivalents and short-term investments atSeptember 30, 2006. These operatinglosses and the related accumulated deficit are a result of the significantcosts incurred in the development of InsWeb’s technology platform, theestablishment of relationships with insurance companies, their integration withthe InsWeb site, and InsWeb’s marketing and sales activities. In orderto remain competitive, the Company must continue to make investments essentialto its ability to operate, and InsWebintends to continue to invest in product development and maintenance, and salesand marketing. In addition, the Company will continue to incur the costs associatedwith continuing to function as a publicly listed company, including, amongother things, the costs of compliance with the provisions of the Sarbanes-OxleyAct of 2002, and, in particular, the costs of complying with Section 404 of the Sarbanes-Oxley Actbeginning in 2007. As a result,InsWeb believes that it will continue to incur operating losses for at leastthe next three to six months. In the event that InsWeb is unable to generaterevenues sufficient to offset its costs, or if its costs of marketing andoperations are greater than it anticipates, the Company may be unable to growits business at the rate desired or may be required to delay, reduce, or ceasecertain operations, any of which could materially harm its business andfinancial results. In addition, ifInsWeb is unable to ultimately achieve profitability, the Company may need toseek additional financing to continue its business operations. The Companycannot be certain that additional financing will be available when required, onfavorable terms or at all. If InsWeb is not successful in raising additionalcapital as required, it may delay, significantly reduce or cease certainoperations, which could adversely affect its results of operations andfinancial position. 

In September 2006, InsWeb completed a headcount reduction in areasprimarily related to technology initiatives that have been substantiallycompleted.  The total headcount atSeptember 30, 2006 was reduced to 95, compared to 127 at June 30, 2006. Thisaction resulted in a charge of approximately $240,000 for severance relatedcosts which were included as a component of operating expenses for the threeand nine months ended September 30, 2006. These headcount reductions, inaddition to other operating expense reductions implemented during the threemonths ended September 30, 2006, are expected to result in approximately $3million in cost savings in the Company’s non-marketing expenses over the nextyear.   

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**Results ofOperations**

The following tables set forthstatement of operations data with the respective percentage change from theprior year: 
|                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Percentage  change from** | ** ** |
|----------------------------------|------------|------------------------------------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **2006**                                             | ** ** | **2005**                    | ** ** | **prior period** | ** ** |
| Revenues:                        |       |                                                 |       |                        |       |   |   |
|                             |       |                                                 |       |                        |       |   |   |
| Transaction fees:                |       |                                                 |       |                        |       |   |   |
| Auto insurance                   |       | $                                                    | 5,549      |                        | $          | 5,509 |   | 1 | % |
| Term life insurance              |       | 1,310                                                |       | 1,219                       |       | 8 | % |
| Other insurance offerings        |       | 562                                                  |       | 71                          |       | 689 | % |
|                             |       | 7,421                                                |       | 6,799                       |       | 9 | % |
| Development and maintenance fees |       | 84                                                   |       | 99                          |       | (15 | )% |
|                             |       |                                                 |       |                        |       |   |   |
| Total revenues                   |       | 7,505                                                |       | 6,898                       |       | 9 | % |
| Operating  expenses:             |       |                                                 |       |                        |       |   |   |
| Direct marketing                 |       | 5,198                                                |       | 4,365                       |       | 19 | % |
| Sales and marketing              |       | 1,896                                                |       | 1,699                       |       | 12 | % |
| Technology                       |       | 1,269                                                |       | 1,332                       |       | (5 | )% |
| General and administrative       |       | 829                                                  |       | 974                         |       | (15 | )% |
| Total operating  expenses        |       | 9,192                                                |       | 8,370                       |       | 10 | % |
| Loss from operations             |       | $                                                    | (1,687     | )                           | $          | (1,472 | ) | 15 | % |

 
|                                  | ** ** | **Nine Months Ended  September 30,** | ** ** | **Percentage  change from** | ** ** |
|----------------------------------|------------|-----------------------------------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **2006**                                            | ** ** | **2005**                    | ** ** | **prior period** | ** ** |
| Revenues:                        |       |                                                |       |                        |       |   |   |
|                             |       |                                                |       |                        |       |   |   |
| Transaction fees:                |       |                                                |       |                        |       |   |   |
| Auto insurance                   |       | $                                                   | 17,239     |                        | $          | 15,095 |   | 14 | % |
| Term life insurance              |       | 3,898                                               |       | 3,616                       |       | 8 | % |
| Other insurance offerings        |       | 1,278                                               |       | 216                         |       | 491 | % |
|                             |       | 22,415                                              |       | 18,927                      |       | 18 | % |
| Development and maintenance fees |       | 262                                                 |       | 269                         |       | (2 | )% |
|                             |       |                                                |       |                        |       |   |   |
| Total revenues                   |       | 22,677                                              |       | 19,196                      |       | 18 | % |
| Operating  expenses:             |       |                                                |       |                        |       |   |   |
| Direct marketing                 |       | 15,300                                              |       | 11,026                      |       | 39 | % |
| Sales and marketing              |       | 5,927                                               |       | 5,028                       |       | 18 | % |
| Technology                       |       | 3,738                                               |       | 4,121                       |       | (9 | )% |
| General and administrative       |       | 3,080                                               |       | 3,177                       |       | (3 | )% |
| Total operating  expenses        |       | 28,045                                              |       | 23,352                      |       | 20 | % |
| Loss from operations             |       | $                                                   | (5,368     | )                           | $          | (4,156 | ) | 29 | % |

 

15

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The following table sets forthstatement of operations data as a percentage of total revenues:****
|                                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                            |       |                                                 |       |                                                |       |   |   |   |   |
| Auto insurance transaction fees      |       | 74                                                   | %          | 80                                                  | %          | 76 | % | 79 | % |
| Term life insurance transaction fees |       | 18                                                   |       | 18                                                  |       | 17 |   | 19 |   |
| Other insurance transaction fees     |       | 7                                                    |       | 1                                                   |       | 6 |   | 1 |   |
| Development  and maintenance fees    |       | 1                                                    |       | 1                                                   |       | 1 |   | 1 |   |
| Total                                |       | 100                                                  |       | 100                                                 |       | 100 |   | 100 |   |
| Operating expenses:                  |       |                                                 |       |                                                |       |   |   |   |   |
| Technology                           |       | 17                                                   |       | 19                                                  |       | 17 |   | 22 |   |
| Direct  marketing                    |       | 69                                                   |       | 63                                                  |       | 68 |   | 57 |   |
| Sales and  marketing                 |       | 25                                                   |       | 25                                                  |       | 26 |   | 26 |   |
| General  and administrative          |       | 11                                                   |       | 14                                                  |       | 13 |   | 17 |   |
| Total                                |       | 122                                                  |       | 121                                                 |       | 124 |   | 122 |   |
| Loss from operations                 |       | (22                                                  | )%         | (21                                                 | )%         | (24 | )% | (22 | )% |

 

Directmarketing (consumer acquisition) metrics and costs and revenue per consumerwere as follows:
|                                                                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands, except per consumer amounts**) | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Direct marketing  costs                                                  |       | $                                                    | 5,198      |                                                | $          | 4,365 |   | $ | 15,300 |   | $ | 11,026 |   |
| Direct marketing  costs as a percent of total revenues                   |       | 69                                                   | %          | 63                                                  | %          | 68 | % | 57 | % |
| Number of  consumers                                                     |       | 1,514                                                |       | 1,584                                               |       | 4,588 |   | 3,995 |   |
| Direct marketing  cost per consumer                                      |       | $                                                    | 3.43       |                                                | $          | 2.76 |   | $ | 3.34 |   | $ | 2.76 |   |
| Total transaction fees  per consumer                                     |       | $                                                    | 4.90       |                                                | $          | 4.29 |   | $ | 4.89 |   | $ | 4.74 |   |

 

Automarketplace metrics were as follows:
|                                                                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands, except per consumer amounts**) | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Auto insurance  transaction fees                                         |       | $                                                    | 5,549      |                                                | $          | 5,509 |   | $ | 17,239 |   | $ | 15,095 |   |
| Number of  consumers                                                     |       | 1,359                                                |       | 1,496                                               |       | 4,161 |   | 3,667 |   |
| Transaction fees per  consumer                                           |       | $                                                    | 4.08       |                                                | $          | 3.68 |   | $ | 4.14 |   | $ | 4.12 |   |

 

Termlife marketplace metrics were as follows:
|                                                                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands, except per consumer amounts**) | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Term life  insurance transaction fees                                    |       | $                                                    | 1,310      |                                                | $          | 1,219 |   | $ | 3,898 |   | $ | 3,616 |   |
| Number of  consumers                                                     |       | 70                                                   |       | 62                                                  |       | 225 |   | 239 |   |
| Transaction fees  per consumer                                           |       | $                                                    | 18.71      |                                                | $          | 19.66 |   | $ | 17.32 |   | $ | 15.13 |   |
| Number of closed term  life policies                                     |       | 1,381                                                |       | 1,292                                               |       | 4,268 |   | 3,647 |   |

 

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

 

**Revenues**

**TransactionFees.**  Transaction fees (consisting of lead fees,closed policy fees and sponsored link fees) relating to automobile insurancewere $5.5 million and $17.2 million for the three and nine months endedSeptember 30, 2006, respectively, compared to $5.5 million and $15.1million for the comparable periods in 2005. The increase for the nine month period was a primarily a result of a 13%increase in auto consumers. Revenue per auto consumer increased to $4.08and $4.14 for the three and nine monthsended September 30, 2006 from $3.68 and $4.12 for the comparable periods in 2005. The increase in the three monthperiod revenue per auto consumer is primarily a result of the launch andexpansion of the AgentInsider program over the past year.

Transaction fees (consistingof agency commissions and to a lesser extent lead fees) relating to term lifeinsurance increased to $1.3 million for the three months ended September30, 2006 from $1.2 million for the same period in 2005. Term life revenuesfor the nine months ended September 30, 2006 increased to $3.9 millionfrom $3.6 million for the comparable period in 2005. The increases for thethree and nine month periods was a result of an increase in closed term lifepolicies.

**Operating Expenses**

**Direct Marketing.**  Direct marketing expenses consist ofadvertising, promotions and fees paid to online companies to drive consumertraffic to the InsWeb online marketplace. InsWeb’s marketing strategy isdesigned to increase consumer traffic to its website and to drive awareness ofits insurance products and services. The Company employs various means ofadvertising, which consist primarily of online advertising, sponsored search,portal advertising, e-mail campaigns and strategic partnerships with high-profileonline companies that can drive significant traffic to the InsWeb site. Feesrelated to the Company’s online marketing are expensed in the period therelated consumer click-through occurs or in some cases, when the consumer leadsare generated. Direct marketing expenses increased to $5.2 million and$15.3 million for the three and nine months ended September 30, 2006, respectively, compared to $4.4 million and$11.0 million in the same periods of 2005. Direct marketing cost per consumeracquired increased to $3.43 and $3.34 for the three and nine months ended September 30, 2006, respectively, compared to $2.76 and $2.76 peracquired consumer for the same period of 2005.  The increase in direct marketing cost per consumer is a result of thehighly competitive market for on-line consumers, especially the on-lineadvertising market. Management expects that for the remainder of 2006,direct marketing costs per consumer acquired will remain at or increase fromcurrent levels while the amount of consumer traffic driven to the InsWebmarketplace is expected to decrease due to seasonality and competition withbusinesses conducting year-end and holiday advertising. 

**Sales and Marketing.**  Sales and marketing expenses consistprimarily of payroll and related expenses, including employee benefits,facility costs, telecommunications and systems costs, for InsWeb’s sales andmarketing personnel and the personnel and related costs for InsWeb’s InsuranceAgency operations, which include selling agents, case managers, supervisors andcustomer service, support and fulfillment groups. Sales and marketing expensesincreased to $1.9 million and $5.9 million for the three and nine months ended September 30, 2006, respectively, from $1.7 million and $5.0 million for the comparable periods in 2005. This increase was a result of the expansion ofthe term life agency and the launch of the AgentInsider program (i.e., sales,customer support and agent marketing costs). Sales and marketing expenses for the remainder of 2006 willdecrease as a result of the headcount reduction previously discussed.

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**Technology.**  Technology expenses consist primarily of payrolland related expenses, including employee benefits, facility and systems costs,for product and site development personnel involved with the planning, designand implementation of carrier and partner integration to the InsWeb onlineinsurance marketplace, as well as hosting and supporting the technology needsof the InsWeb site. Technologyexpenses decreased to $1.3 million and $3.7 million for the three and ninemonths ended September 30, 2006, respectively, from $1.3 million and $4.1million for the comparable periods in 2005. Technology expenses will continueto decrease over the remainder of 2006 as a result of the headcount reductionpreviously discussed.

**General andAdministrative.** Generaland administrative expenses consist primarily of payroll and related expenses,including employee benefits, facility costs, telecommunications and systemscosts, for InsWeb’s general management, administrative and accountingpersonnel, as well as other general corporate expenses. General and administrative expenses decreasedto $829,000 and $3.1 million for the three and nine months ended September 30,2006 and 2005, respectively from $1.0 million and $3.2 million for thecomparable periods in 2005. General and administrative expenses will continueto decrease over the remainder of 2006 as a result of the headcount reductionand other expense reduction initiatives previously discussed.

**Interest Income**

Interest income was $92,000and $286,000 for the three and nine months ended September 30, 2006,respectively, and $101,000 and $289,000, respectively, for the comparableperiod in 2005. Interest income represents interest earned on InsWeb’sshort-term investments.

**Other Income**

Other income was $2,048,000 for the nine monthsended September 30, 2006, and represents the gain recorded in connection withthe sale of InsWeb Insurance Services’ property and casualty agency bookof business. This transaction closed on April 28, 2006.

**Critical Accounting Policies**

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

**Accrual for Lease Obligations.** InsWeb is contractually obligated to make futurelease payments on certain formerly occupied facilities throughSeptember 2008. As of September 30, 2006, total future obligations forthese facilities amounted to $5.6 million; these obligations are offset bytotal contractual future sublease income of approximately $4.2 million.Substantially all future sublease income is due from a sublessee who is astart-up company with a limited operating history and, therefore, there areinherent risks and uncertainties associated with its future operations and itsability to discharge its obligations through the term of the sublease. In theevent that the sublessee defaults on its contractual obligations under theamended sublease, InsWeb would be responsible for making the required leasepayments to the landlord through the remaining term of the lease. In connectionwith this lease and other lease obligations for formerly occupied facilities,InsWeb must make assumptions regarding the potential future sublease incomerelative to these facilities. These estimates and assumptions are affected byarea-specific conditions such as new commercial development, market occupancyrates and future market prices. Based on these assumptions, the Companymaintains an accrual for formerly occupied facilities. The remaining accrualfor lease obligation of formerly occupied facilities was $1.6 million atSeptember 30, 2006 as compared to an accrual of $1.9 million as of December 31,2005. 

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

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

**Income Taxes.**InsWebaccounts for income taxes in accordance with Statement of Financial AccountingStandards No. 109 (SFAS 109), *Accountingfor Income Taxes*. The deferred tax assets and/or liabilities aredetermined by multiplying the differences between the financial reporting andtax reporting bases for assets and liabilities by the enacted tax ratesexpected to be in effect when such differences are recovered or settled.

The carrying value of our deferred tax assets, whichwas $74 million at December 31, 2005, is dependent upon our ability to generatesufficient future taxable income. We have established a full valuationallowance against our net deferred tax assets for continuing operations toreflect the uncertainty of realizing the deferred tax benefits, givenhistorical losses. A valuation allowance is required when it is more likelythan not that all or a portion of a deferred tax asset will not be realized. Areview of all available positive and negative evidence needs to be considered,including our past and future performance, the market environment in which weoperate, the utilization of tax attributes in the past, and the length ofcarryforward periods and evaluation of potential tax planning strategies. Weexpect to continue to maintain a full valuation allowance until an appropriatelevel of profitability is sustained or we are able to develop tax strategiesthat would enable us to conclude that it is more likely than not that a portionof our deferred tax assets would be realizable. 

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**Liquidity and Capital Resources**

At September 30, 2006,InsWeb’s principal source of liquidity and overall cash position was $7.5million, consisting of cash, cash equivalents and short-term investments, adecrease from $10.3 million at December 31, 2005.  The decrease resulted primarily from the useof $2.8 million of cash in operating activities during the first nine months of2006. The primary driver that impacts changes in the Company’s overall cashposition is its operating loss. 

For the nine months endedSeptember 30, 2006, net cash used in operating activities was $2.8 million. Theprimary components of the use of cash was the net loss of $3.0 million and anincrease in accounts receivable of $0.6 million, partially offset by anincrease in accounts payable of $0.9 million. The increase in accountsreceivable was a result of the revenue growth during the nine month period,with days sales outstanding at 38 days as of September 30, 2006.  The increase in accounts payable was a resultof the significant increase in direct marketing activities during the year,increasing consumer traffic to the InsWeb marketplace and a correspondingincrease in direct marketing costs.

For the nine months endedSeptember 30, 2006, net cash provided by investing activities was $1.2 million,which primarily consisted of redemptions of short-term investments offset bythe purchases of short-term investments. Investing activities will generallyfluctuate in conjunction with operating activity needs. 

For the nine months endedSeptember 30, 2006, net cash provided by financing activities was $32,000 andwas attributable to the shares issued pursuant to the employee stock purchaseplan and the exercise of employee stock options.

InsWeb leases its currentoffice facilities under non-cancelable operating leases, which expire atvarious dates through April 2011, including a 10-year lease agreementthrough 2011 for office space in the Sacramento area which houses its corporateheadquarters and agency operations. InsWeb has options to extend the lease atthe end of the lease term, and has the right of first refusal on other officespace in the complex. In addition, InsWeb has entered into various subleasearrangements associated with previously exited facilities that have termsextending through September 2008.

Aggregate contractual cashobligations as of September 30, 2006 are summarized as follows (in thousands):
|                                        | ** ** | **Gross lease  commitments** | ** ** | **Sublease  income** | ** ** | **Net lease  commitment** | ** ** |
|----------------------------------------|------------|-----------------------------------|------------|----------------------|------------|--------------------------------|------------|
| Three months  ending December 31, 2006 |       | $                                 | 863        |                 | $          | (520                           | )          | $ | 343 |   |
| Year ending  December 31, 2007         |       | 3,483                             |       | (2,100               | )          | 1,383                          |       |
| Year ending  December 31, 2008         |       | 2,936                             |       | (1,615               | )          | 1,321                          |       |
| Year ending  December 31, 2009         |       | 1,078                             |       | —               |       | 1,078                          |       |
| Year ending  December 31, 2010         |       | 1,078                             |       | —               |       | 1,078                          |       |
| Thereafter                             |       | 359                               |       | —               |       | 359                            |       |
|                                   |       | $                                 | 9,797      |                 | $          | (4,235                         | )          | $ | 5,562 |   |

 

Our operations to date have consumed substantialamounts of cash, cash equivalents and short-term investments ($5.3 million in 2005and $8.7 in 2004) and will continue to require capital in the near future. Inorder to remain competitive, we must continue to make investments which areessential to our ability to operate, including investments in direct marketing,technology, general administration, and the governance and compliance costsrequired of a public company. We anticipate that our cash, cash equivalents andshort-term investments will be sufficient to meet our anticipated cash needsfor working capital and capital expenditures through at least the next twelvemonths. Longer-term, if the enhancements toour auto marketplace, including the expansion of our agent networkprogram,  and the growth of our term life agency are unable togenerate revenues sufficient to offset our costs, or if our costs of marketingand operations are greater than we anticipate, we may be unable to grow ourbusiness at the rate desired; or we may be required to delay, reduce, or ceasecertain operations, any of which could materially harm our business andfinancial results. Although we do not anticipate the need for additional financing, wenevertheless may require additional funds to meet operating needs. We cannot becertain that additional financing will be available when required, on favorableterms or at all. If we are not successful in raising additional capital asrequired, we may delay, significantly reduce or cease certain of ouroperations, which could adversely affect our results of operations andfinancial position. 

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**ITEM 3.****                  QUANTITATIVE AND QUALITATIVEDISCLOSURE ABOUT MARKET RISK.**

There have been no materialchanges to the Company’s disclosures related to certain market risks asreported under Part II, Item 7A, “Quantitative and Qualitative DisclosuresAbout Market Risk,” in our Annual Report on Form 10-K for the year endedDecember 31, 2005, as filed with the U.S. Securities and ExchangeCommission.

**ITEM 4.****                  CONTROLS AND PROCEDURES**

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

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

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

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

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

**ITEM 1A.****               RISK FACTORS.**

Our future business,operating results and financial condition are subject to various risks anduncertainties, including those disclosed in Part I, Item 1A, “Risk Factors,” ofour Annual Report on Form 10-K for the year ended December 31, 2005, asfiled with the U.S. Securities and Exchange Commission. There have been nomaterial changes to the risk factors as so disclosed.

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**ITEM 6. ****               ****EXHIBITS**
| Exhibit  Number | ** ** | **Description of  Document**                                                                                     |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                             |
| 10.22           |       | InsWeb Services Agreement by and between Registrant  and NetQuote, Inc., dated as of September 26, 2006.         |
|            |       |                                                                                                             |
| 31.1            |       | Certification  of Chief Executive Officer, pursuant to Exchange Act Rule 13a-14(a).                              |
|            |       |                                                                                                             |
| 31.2            |       | Certification  of Chief Financial Officer, pursuant to Exchange Act Rule 13a-14(a).                              |
|            |       |                                                                                                             |
| 32              |       | Certification  of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C.  Section 1350. |

 

 

### **SIGNATURE**

Inaccordance with the requirements of the Securities Exchange Act of 1934, theregistrant has caused this report to be signed on its behalf by the undersignedthereunto duly authorized.
| Dated:  November 9, 2006 | **INSWEB  CORPORATION**     |
|--------------------------|-----------------------------|
|                     |                        |
| ** **               | **/s/ WILLIAM  D. GRIFFIN** | ** ** |
|                     | William  D. Griffin         |
|                     | Chief  Financial Officer    |

 

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