**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC. 20549**

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FORM 10-K

**(Mark One)**

**x**                               Annual reportpursuant to Section 13 or 15(d) of the Securities Exchange Act of1934

**for the fiscal year ended December 31, 2004**

**or**

**o**                                  Transitionreport pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934

**for the transition period from            to             **

**Commission File Number 0-26083**

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INSWEB CORPORATION

(Exactname of registrant as specified in its charter)
| **DELAWARE**                                                    | **94-3220749**                        |
|-----------------------------------------------------------------|---------------------------------------|
| (State or other jurisdiction of  Incorporation or organization) | (I.R.S. Employer  Identification No.) |

 

**11290Pyrites Way, Gold River, California 95670**

(Addressof principal executive offices)

**(916) 853-3300**

(Registrant’stelephone number, including area code)

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Securities registeredpursuant to Section 12(b) of the Act:
|      | **Title of each class** | ** ** | ** ** | ** ** | **Name of Exchange on which registered** | ** ** |
|------|-------------------------|------------|------------|------------|------------------------------------------|------------|
| None |                    | None       |

 

Securitiesregistered pursuant to Section 12(g) of the Act:

**CommonStock, $0.001 par value**

(Titleof Class)

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for thepast 90 days. YES x  NO o

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. x

Indicateby check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2of the Act). YES o  NO x

Theaggregate market value of registrant’s voting and non-voting common equity heldby non-affiliates of registrant, based upon the closing sale price of thecommon stock as of the last business day of registrant’s most recentlycompleted second fiscal quarter (June 30, 2004), as reported on the NasdaqNational Market, was approximately $11,422,000. Shares of common stock held byeach officer, director and holder of 5% or more of the outstanding common stockhave been excluded in that such persons may be deemed to be affiliates. Thisdetermination of affiliate status is not necessarily a conclusive determinationfor other purposes.

Outstandingshares of registrant’s common stock, $0.001 par value, as of March 1,2005: 4,792,413

**DOCUMENTS INCORPORATED BY REFERENCE**

Parts of the definitive Proxy Statement for registrant’s2005 Annual Meeting of Stockholders to be filed with the Commission pursuant toRegulation 14A not later than 120 days after the end of the fiscalyear covered by this Report are incorporated by reference into Part III ofthis Form 10-K Report.

 

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**INSWEB CORPORATION**

**AnnualReport on Form 10-KFor the Fiscal Year Ended December 31, 2004**

**Table of Contents**
|                                                     | **PART I**                                                                                                     | ** ** | ** ** | ** ** |
|-----------------------------------------------------|---------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| Item 1.                                             | Business                                                                                                            |       | 2          |       |
| Item 2.                                             | Properties                                                                                                          |       | 12         |       |
| Item 3.                                             | Legal  Proceedings                                                                                                  |       | 12         |       |
| Item 4.                                             | Submission  of Matters to a Vote of Security Holders                                                                |       | 13         |       |
| ** **                                          | **PART II**                                                                                                    | ** ** | ** ** | ** ** |
| Item 5.                                             | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities |       | 14         |       |
| Item 6.                                             | Selected  Financial Data                                                                                            |       | 14         |       |
| Item 7.                                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |       | 17         |       |
| Item 7A.                                            | Quantitative  and Qualitative Disclosures About Market Risk                                                         |       | 35         |       |
| Item 8.                                             | Consolidated  Financial Statements and Supplementary Data                                                           |       | 36         |       |
| Item 9.                                             | Changes  in and Disagreements With Accountants on Accounting and Financial Disclosure                          |       | 37         |       |
| Item 9A.                                            | Controls  and Procedures                                                                                            |       | 37         |       |
| Item 9B.                                            | Other  Information                                                                                                  |       | 37         |       |
| ** **                                          | **PART III**                                                                                                   | ** ** | ** ** | ** ** |
| Item 10.                                            | Directors  and Executive Officers of the Registrant                                                                 |       | 37         |       |
| Item 11.                                            | Executive  Compensation                                                                                             |       | 37         |       |
| Item 12.                                            | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters     |       | 37         |       |
| Item 13.                                            | Certain  Relationships and Related Transactions                                                                     |       | 37         |       |
| Item 14.                                            | Principal  Accounting Fees and Services                                                                             |       | 38         |       |
| ** **                                          | **PART IV**                                                                                                    | ** ** | ** ** | ** ** |
| Item 15.                                            | Exhibits,  Financial Statement Schedules                                                                            |       | 38         |       |
| Signatures                                          |                                                                                                                | 39         |       |
| Exhibit Index                                  |                                                                                                                | 40         |       |
| Schedule II—Valuation and  Qualifying Accounts |                                                                                                                | 42         |       |

 

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**PART I**

*This report includes a number of forward-lookingstatements. Such statements reflect our current views with respect to futureevents and our potential financial performance and are subject to risks anduncertainties that could cause our actual results and financial position todiffer materially from what we say in this report. These factors include, butare not limited to, our ability to generate significant revenues from our corebusiness; our ability to achieve or maintain profitability; our reliance onautomobile insurance; our ability to expand our operations; our reliance on alimited number of insurance companies for our current revenues; and our successin developing and maintaining cost efficient online relationships to attractconsumers to our website. We more fully discuss these and other risk factors in“Item 7—Management’s Discussion and Analysis of Financial Condition and Resultsof Operations—Factors That May Affect Our Future Performance” andelsewhere in this report and in our other filings with the Securities andExchange Commission. InsWeb undertakes no obligation to revise or updatepublicly any forward-looking statements for any reason.*

**Item 1.**                        Business.

InsWeb Corporation(InsWeb) was originally incorporated in California in February 1995 andre-incorporated in Delaware in October 1996, and is headquartered outsideSacramento, California. InsWeb’s headquarters mailing address is 11290 PyritesWay, Gold River CA, 95670, and the telephone number at that location is(916) 853-3300. The InsWeb website is *www.InsWeb.com.*All periodic and current reports that have been filed with, or furnished to,the SEC are available on our website within 24 hours of the electronicfiling.

**The InsWeb OnlineInsurance Marketplace**

InsWeb Corporation operates an online insurancemarketplace that enables consumers to comparison shop online and obtaininsurance company-sponsored quotes for a variety of insurance products,including automobile and term life. InsWeb’s marketplace electronically matchesconsumers and insurance companies. InsWeb has combined extensive knowledge ofthe insurance industry, technological expertise and close relationships with asignificant number of insurance companies to develop an integrated onlinemarketplace. InsWeb’s marketplace enables consumers to research insurance-relatedtopics, search for, analyze and compare insurance products, apply for andreceive insurance company-sponsored quotes for actual coverage andpurchase automobile and term life insurance coverage through InsWeb’s insuranceagencies. Management believes that InsWeb provides insurance companies withpre-qualified consumers at attractive acquisition costs, with the scalable,cost-efficient distribution capabilities of InsWeb’s Internet-basedmodel.

Quotes obtained through the online marketplace arefree to consumers, while participating insurance companies pay a transactionfee to InsWeb. These fees are earned either from the delivery of a lead to aparticipating insurance company, from a fee paid by an insurance company foreach closed policy, or from a commission earned by InsWeb’s wholly-ownedinsurance agencies, InsWeb Insurance Services, Inc. and Goldrush InsuranceServices, Inc. (collectively, “InsWeb’s Insurance Agency”).

InsWeb’s business model has evolved significantly overthe past twelve months to better capitalize on its position as a leadinginsurance portal. Within the auto insurance marketplace, consumers now havenumerous options to find the carrier best suited to their needs based oninitiatives implemented during 2004, including: expansion of the InsWebsponsored web link program, which providescertain consumers the opportunity to link directly to an insurance company’swebsite, a shortened online application process, the approach ofallowing multiple insurance carriers access to individual consumers, andlastly, the successful launch of an agent network program with a third partythat provides consumer leads to local insurance agents.

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In addition, InsWeb laidthe foundation to achieve increased revenue per consumer within its term lifemarketplace through the launch of its Term Life agency and the shift from alead payment to a commission payment revenue model, which the Company believeswill offer greater long-term financial benefit.

***The Quote Generation and Purchase Process***

The quotegeneration and purchase process involves the following steps:

·       dataentry by the consumer;

·       electronicunderwriting;

·       electronicrating and generation of price quotes;

·       presentationof quotes to the consumer;

·       deliveryof leads to participating insurance companies, local agents and/or InsWeb’sInsurance Agency;

·       purchaseof the insurance policy; and

·       customerservice and customer care.

***Data Entry.  ***Tocomplete a shopping session, a consumer completes an online form that requestsinformation such as the consumer’s age, address and coverage requirements, aprocess that InsWeb estimates takes approximately 10 minutes, depending on thetype of insurance sought and the complexity of the consumer’s profile. Thequote form captures a comprehensive set of information designed to addressbasic underwriting and rating criteria. To assist consumers in evaluating andfulfilling their insurance needs, InsWeb provides consumers with a variety ofinteractive website features and insurance-related information. Inaddition, InsWeb provides online help and customer service throughout the dataentry process. The consumer is required to complete only one form to obtainquotes for a particular type of insurance from participating companies offeringthat type of insurance in the consumer’s state, if the participating companyhas qualified that consumer. Throughout the data entry process, consumers arepresented with the option of saving their data into their personal insuranceprofile. Consumers who are returning to the online marketplace can simply entertheir user name and password to retrieve information they entered duringprevious visits. This information can be used to automatically completeportions of the quote form for other insurance products. Because theinformation insurance companies use to underwrite, rate and provide quotes to aconsumer is entered directly by the consumer, the insurance companies canreduce or eliminate the expense associated with collecting consumer data. Moreover,information entered directly by consumers typically contains fewer errors thaninformation provided orally to an agent or insurance company representative,who must then enter that information manually into the insurance company’ssystem.

***Underwriting.  ***InsWeb’ssoftware uses criteria set by each participating insurance company to analyze aconsumer’s data and determine whether it fits within the insurance company’stargeted risk profile. InsWeb’s system can provide rapid feedback to aninsurance company regarding the impact that particular criteria are having onthe number of leads being directed to that company, and also permits individualcriteria to be easily added or removed. Electronic underwriting eliminates theexpense of screening and quoting risks that an insurance company ultimately maynot want to accept. Electronic underwriting also ensures that consumers areonly presented with quotes from companies who are interested in doing businesswith them.

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***Rating.  ***InsWeb integrates eachof its participating insurance companies’ rating criteria into its onlinemarketplace through one of several rating solutions, depending on the insurancecompany’s preference. These solutions include:

·       acustomized interface between InsWeb’s site and the insurance company’s ownrating engine;

·       aninterface between InsWeb’s site and a third-party rating engine; or

·       anintegration of the insurance company’s rating criteria into an InsWebmaintained rating engine.

In each case, the rating process is developed inconjunction with the participating insurance company.

***Presentation ofQuotes.  ***After a consumer has completed the form fora particular product and has requested quotes, the consumer is presented with a“quote pad.” The quote pad contains the logos of insurance companies interestedin providing quotes, along with prices for the insurance companies offeringinstant quotes. The quote pad also informs the consumer which insurancecompanies will provide quotes on a delayed basis, either via e-mail ortelephone. The response method varies among insurance products and companies.

***Deliveryof Leads.  ***InsWebearns revenues from participating insurance companies based on the delivery ofqualified leads. With most insurance companies, InsWeb is paid a feeonly when the consumer purchases an insurance policy, and with others, InsWebis paid a transaction fee based on the delivery of a lead, whether or not theconsumer actually purchases a policy. For auto insurance coverage, qualifiedleads are produced when a consumer clicks to view insurance company quotes.These leads are produced both for insurance companies providing instant onlinequotes and for insurance companies providing e-mail or other offline quotes.For term life insurance coverage, a qualifiedlead is produced only when a consumer clicks to request insurance coveragebased on a specific quote. Once the leads are generated by the consumer’srequest to view quotes, InsWeb transmits the leads either to InsWeb’s insuranceagency subsidiaries or to the selected insurance company or other entity bye-mail, file transfer or direct connection to the insurance company’sinformation system. InsWeb provides each participating insurance company withcustom-formatted lead information based on the insurance companies individualrequirements.

***Purchase of Policy.  ***AfterInsWeb generates and delivers a qualified lead, insurance companies, or InsWeb’sinsurance agency subsidiary, may respond directly to the interested consumer bye-mail or telephone to close the purchase of the policy or direct the lead toan agent for follow-up. The delivery of a qualified lead to the insurancecompany does not require further involvement by InsWeb, although InsWebmonitors insurance company responses and works with companies and agents toensure that they are responding to leads generated from the online insurancemarketplace in a timely fashion. In addition, InsWeb performs closing services,through InsWeb’s insurance agency, as a traditional agency, for someparticipating insurance companies. These closing services include advisingconsumers about coverage options, confirming consumer information, selling thepolicy and taking a premium deposit. In either case, the insurance companygenerally performs the ongoing servicing of the insurance policy after it hasbeen sold. As of December 31, 2004, InsWeb’s insurance agency sellspolicies on behalf of 13 auto insurance companies in nine states and for sixterm life insurance companies in all states.

***Customer Care.  ***InsWeb providesassistance to consumers throughout the data entry, quote-generation anddelivery process through embedded help icons, which link to explanations of thevarious steps in the process and through e-mail support. InsWeb’s Customer CareCenter provides additional help to consumers working through the process ofshopping for insurance online through email and live telephone support.

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***Interactive Website Features and Information***

To assist consumersin evaluating and fulfilling their insurance needs, InsWeb provides consumerswith a variety of interactive website features and insurance-relatedinformation, including:

·       toolsto help consumers estimate their coverage requirements for auto and term lifeinsurance;

·       researchcapabilities to help consumers review the financial strength of insurancecompanies nationwide;

·       answersto frequently asked questions on insurance;

·       articleson a wide variety of insurance and personal finance topics;

·       glossariesof insurance-related terms; and

·       email and 800 phoneservice.

**Products andServices**

Insurance companies participating in InsWeb’s onlineinsurance marketplace currently offer automobile, term life, homeowners,renters, condominium, home warranty, RV and motorcycle insurance. InsWeb’smarketplace enables consumers to analyze and compare insurance products, applyfor and receive insurance company-sponsored quotes for actual coverageand purchase automobile and term life insurance coverage through an InsWebinsurance company partner or directly through InsWeb’s Insurance Agency.

In addition, InsWeb has contractual relationships withthird-party providers for critical illness and health insurance.

***AutomobileInsurance.  ***Automobile insurance comprises thelargest segment of the consumer insurance market, and, to date, has accountedfor most of the consumer traffic on InsWeb’s online marketplace, and a majorityof its revenues. At December 31, 2004, InsWeb’s online marketplace offeredquotes or web-sponsored links to consumers in all 50 states, plus the Districtof Columbia, from 25 participating insurance companies.

***Term Life Insurance.  ***AtDecember 31, 2004, the InsWeb online marketplace offered comparativequotes for term life insurance from nine companies in all 50 states, plus theDistrict of Columbia.

***Other Products and Services.  ***InsWeb’sonline marketplace also allows consumers to shop for homeowners, renters andcondominium insurance, as well as home warranty, motorcycle and RV insurance,and health and critical illness insurance in certain states. At present, theInsWeb online marketplace does not offer multiple quotes with respect to thesetypes of insurance, which are offered by a single insurance company for each productin the states in which it is available.

**Insurance CompanyRelationships**

InsWeb believes that establishing long-termrelationships with reputable insurance companies is essential to its ability tooffer a desirable insurance marketplace on its website. InsWeb’s focus is tomaintain and expand the product offerings available on the online marketplaceby selling InsWeb’s services to new companies and expanding InsWeb’srelationship with participating insurance companies.

Once an insurance company decides to participate inInsWeb’s online insurance marketplace, InsWeb’s implementation team works withthe insurance company to integrate its insurance product information, whichentails a process of specification development, education, planning andactivation. Because of the complexity of interfacing with an insurance company’slegacy computer systems, the implementation team conducts a thorough assessmentof the insurance company’s business processes, 

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technical capabilities anddesired interface to develop a comprehensive integration plan. Once aninsurance company’s initial implementation is complete, InsWeb works with theinsurance company to expand its geographic coverage.

At December 31,2004, InsWeb had relationships with 34 insurance companies for automobile andterm life insurance, including many large companies with established brandnames that InsWeb believes are attractive to consumers. These companies are:
| **Type of  Insurance**          | ** ** | ** **                                                                                                                                           | ** ** | **Insurance Companies**                                                                                                                    |
|---------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|
| Automobile                      |       | AIG  Allied Insurance  American Family  Amica Mutual  Deerbrook Insurance  Electric Insurance  Esurance  Explorer  Financial Indemnity  GMAC Integon |       | Hartford  Infinity  Leader  Liberty Mutual  Republic Indemnity  Response Insurance  Safeco Insurance  Travelers  Tri-State  Unitrin Direct |
| Automobile Sponsored Web  Links |       | 21st  Century  GEICO  Permanent General                                                                                                              |       | Progressive  State Fund                                                                                                                    |
| Term Life                       |       | American General Life  Amica Life  GE Financial Assurance  Great West  Lincoln National Life                                                         |       | Northwestern Mutual Life  Ohio National  Physicians Life  Transamerica Occidental Life                                                     |

 

To date, InsWeb has beendependent on a limited number of insurance companies for a significant portionof its revenues. Revenues from the top three insurance companies thatparticipate in InsWeb’s marketplace represented 27%, 38% and 38% of total revenuesfor the years ended December 31, 2004, 2003 and 2002, respectively. See “Item7—Management’s Discussion and Analysis of Financial Condition and Results ofOperations.”

**Marketing and Sales**

InsWeb’s marketing programconsists of a two-pronged effort, with substantial resources directed both atattracting increased consumer traffic to the InsWeb website, and building andexpanding relationships with participating insurance companies. InsWeb believesthat increased traffic will encourage insurance companies to develop and expandtheir relationship with InsWeb, and that enhancing the comparative shoppingopportunities available through increased insurance company participation willdrive further increases in consumer traffic.

***Consumer Marketing***

InsWeb’s consumer marketing program seeks to increaseconsumer traffic and brand awareness through the establishment of relationshipswith online companies as well as through direct online consumer advertising andmarketing.

***OnlineRelationships.  ***InsWeb seeks out relationships withcompanies whose websites feature a high volume of traffic or a substantivefocus that is related to the purchase of insurance coverage, such as sites 

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related to automobiles,homes or personal finances. Agreements with these online companies typicallyprovide that InsWeb pay the online company a transaction fee (based onclick-throughs or consumer leads) and in some cases, a fixed fee. Onlinecompanies integrate links into their websites connecting to InsWeb’smarketplace. InsWeb provides functionality to further integrate with onlinecompanies and, in some cases, provides co-branding functionality whereby theonline company’s logo is presented on the InsWeb marketplace to those consumersdirected to InsWeb’s marketplace from a company’s site. InsWeb’s agreementswith online companies typically have a 12-month term, with either partyhaving a right to terminate the agreement on 30 to 90 day notice.

***Online Direct-ResponseAdvertising.  ***InsWeb’s online direct-responseadvertising is intended to create a presence for InsWeb on a wide range ofwebsites whose audiences closely match its target audience. InsWeb’s keyadvertisements are delivered through content sponsorships, banners and keywordson financial, news, real estate, classifieds, automobile, directory and generalinterest sites. InsWeb and some of its third-party marketing providersalso conduct advertising campaigns promoting InsWeb through emails andelectronic newsletters. InsWeb’s advertisements are targeted primarily atconsumers who may be actively seeking insurance.

***Traditional Consumer Marketing.  ***Currently,InsWeb’s consumer marketing is focused on online marketing efforts. However, inthe past, InsWeb has engaged in traditional advertising, including radio,television and print advertising, and may do so again in the future.

**Technology**

***Architecture and Interfaces***

Since its inception, InsWeb has invested significantresources to develop and deploy its proprietary technology platform that InsWebbelieves constitutes a significant competitive advantage.

InsWeb’s software architecture facilitatesinteroperability among software components to maximize responsiveness,flexibility and reliability. This architecture enables InsWeb to efficientlydevelop and deploy new insurance company-specific modules forunderwriting, rating and data delivery. It also simplifies the process ofproviding InsWeb’s core marketplace functionality for use on insurance companysites. In order to speed implementation for each participating insurancecompany, InsWeb has developed transmission software components which allowconsumer data to be custom-formatted for delivery to each insurancecompany based on the requirements of the insurance company’s computer system.InsWeb has developed custom communication software to provide multiple types ofreal-time telecommunication links to its participating insurance companies.These components provide a variety of solutions to the insurance companies tobest meet their needs and interface with their legacy systems. InsWeb hasdevoted significant time and resources to maximize the efficiency ofintegrating new insurance companies into its online marketplace and to create aflexible, customizable Web interface. InsWeb’s front-end user interface isaccessible to consumers via standard Web browsers and is designed withoutunnecessary graphics that would increase download time.

InsWeb’s server software is designed as a high-volumetransaction-processing environment, with a focus on reliability,redundancy and around-the-clock availability. It is designed to enable thesystem to respond rapidly and to simultaneously underwrite and rate a consumer’sprofile against all participating insurance companies’ criteria. The software isalso designed for scalability, enabling InsWeb to expand processing capacitythrough the addition of more processors and servers as transaction volumesincrease.

InsWeb has also integratedsystems to facilitate incoming consumers through InsWeb’s Customer Care Centerand the processing of leads and sale of insurance policies through its agencyoperations. InsWeb’s agency technology systems use a combination of its ownproprietary technologies and commercially available, licensed technologies.These technologies include an array of proprietary advanced 

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telephonyand network tools to manage leads delivered from InsWeb’s marketplace and emailand telephone calls received in the customer service center. InsWeb’sproprietary automated customer management system has been developed tocommunicate and process data with the InsWeb marketplace, outside ratingservices, credit bureaus, third-party data providers, and an onlinecredit card processing company to facilitate the sale of insurance policies toconsumers. Once a policy is sold, data is entered into an agency managementsystem, where upload and download interfaces between its agency managementsystem and various insurance company back office systems have been developed tostreamline the proper fulfillment and servicing of sold policies***.***

***Security***

InsWeb employs third-partyfirewall technology to protect its corporate network from intrusion and usesproprietary designs to isolate confidential data on its network so that onlyselected information is publicly available on its website. Consumer informationis transmitted to InsWeb’s site using Secure Socket Layer encryptiontechnology, a widely used technology for transmitting encoded data via a Webbrowser. InsWeb employs a number of other encryption methods for delivery ofconsumer information to insurance companies. InsWeb protects its systemmanagement functions using security models integrated with the operatingsystem. Additionally, some sensitive software applications incorporateproprietary authentication schemes.

***Site Operations***

InsWeb’s hardware servers,storage systems, Internet connections, back-up strategies and network aredesigned to allow its online marketplace to operate continuously. InsWeb’s mainWeb servers are located at its headquarters facility in Gold River, California.InsWeb uses multiple service providers to access the Internet over multiplededicated communication lines. InsWeb uses a separate server to operate thesoftware for each primary insurance product, as well as at least one redundantserver for each core product. InsWeb uses a number of internally-developedand third-party software products to monitor the performance andavailability of its website and core products. InsWeb continuously monitorsconsumer traffic, response times and capacity to ensure a high quality ofservice for consumers and insurance companies. InsWeb maintains a disasterrecovery site in the Sacramento, California area through a third-partyservice provider to facilitate the operation of its online marketplace in caseof a failure at its main facility.

**Product Development**

InsWeb devotes significant resources to improving thestructure of its products and delivering additional tools that allow insurancecompanies to effectively reach consumers. InsWeb generally follows a monthlyrelease schedule for new versions of its online user interface, which mayincorporate technology advances, new product features and improvements inconsumer interactivity. InsWeb also devotes resources to refining its onlineconsumer tools and research materials, as well as developing new supportproducts. InsWeb is also researching new methods of designing more usefulinsurance-related material and presenting it to the consumer in a moremeaningful context.

InsWeb’s technologyexpenses were approximately $5.4 million in 2004, $9.0 million in2003, and $10.3 million in 2002.

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**Privacy Policy**

InsWeb believes that theprivacy of personally identifiable information of Internet users is becomingincreasingly important as the use of the Internet for electronic commercecontinues to grow. InsWeb has adopted a privacy policy regarding the use anddisclosure of consumer information that is collected on its online marketplace.InsWeb is a licensee of the TRUSTe Privacy Program and adheres to thesestandards regarding the protection of the personally identifiable informationof Internet users.

**Competition**

The onlineinsurance distribution market, like the broader electronic commerce market, israpidly evolving and is highly competitive. InsWeb competes with othercompanies that provide quotes and sell insurance policies online, as well as with:

·       singleinsurance company websites that offer quotes for their own insurance productsonline or by telephone;

·       Web-basedinformation delivery services that use generic filings with state regulators todeliver estimated price quotes from various insurance companies;

·       Web-assistedagency distribution services, that provide an Internet-based distributionchannel for traditional insurance agencies;

·       onlineworkplace marketers that sell insurance to employees over their employer’sintranet; and

·       providersof software technology to insurance companies and other competitors that maytarget electronic commerce solutions for the insurance industry.

InsWeb believes the principal bases for competition inthe online insurance distribution market include:

·       brandawareness;

·       varietyand quality of insurance company selection;

·       strengthof relationships and depth of technology integration with insurance companies;

·       accuracyof insurance quotes;

·       breadthand pricing of insurance product selection;

·       speed,accessibility and convenience;

·       qualityand quantity of website content; and

·       relationships with otheronline companies.

**GovernmentRegulation**

The insurance industry is subject to extensiveregulation under state laws. Insurance laws and regulations cover all aspectsof the insurance process, including sales techniques, underwriting foreligibility, rates, compensation, claim payments and record keeping by licensedinsurance companies and insurance agents. InsWeb performs functions forlicensed insurance companies and is, therefore, required to comply with acomplex set of rules and regulations that often vary from state to state.If InsWeb fails to comply with these rules and regulations, InsWeb, aninsurance company doing business with InsWeb, our officers, or agents with whomwe contract could be subject to various sanctions, including censure, fines, acease-and-desist order or other penalties. This risk, as well as changes in theregulatory climate or the enforcement or interpretation of existing law, couldrequire changes to InsWeb’s business or otherwise 

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harm InsWeb’s business.Furthermore, because the application of online commerce to the insurance marketis relatively new, the impact of current or future regulations on InsWeb’sbusiness is difficult to anticipate.

In order to provide the types of services that requirean insurance license, InsWeb established two wholly-owned subsidiaries.InsWeb Insurance Services, Inc. was established in 1998 and currentlymaintains property and casualty licenses and life and health licenses in 50jurisdictions (including the District of Columbia). Goldrush Insurance Services, Inc.was established in 2002 and is licensed as an insurance broker in five states.In addition, officers and employees who are engaged in the sale of insuranceare licensed as insurance agents. InsWeb’s operations depend on the validity ofand continued good standing under the licenses and approvals pursuant to whichInsWeb’s subsidiaries, licensed officers and agents operate. Licensing laws andregulations vary depending on the jurisdiction. The applicable licensing lawsand regulations are subject to amendment or interpretation by regulatoryauthorities. Such authorities generally are vested with broad discretionconcerning the allowance, renewal and revocation of licenses and approvals. Theinability to obtain the requisite agent licenses or other necessary licenses,permits, or authorizations could harm InsWeb’s business.

Offering services throughInsWeb’s subsidiaries or through licensed officers and agents, could createconflicts with insurance companies that have policies prohibiting them fromemploying insurance agents or from selling insurance through agents thatcompete with their own exclusive agents. These conflicts could result in a lossof business from these insurance companies and could harm InsWeb’s business.

**IntellectualProperty**

InsWeb regards its intellectual property as criticalto its success, and relies upon trademark, copyright and trade secrets laws inthe United States and other jurisdictions to protect its proprietary rights.The INSWEB mark has been registered in the United States, France, Germany,South Korea, Japan and the United Kingdom, and many other countries. Other U.S.and worldwide trademark applications include, but are not limited to, eAgent,InsWeb.com, Powered by InsWeb, Where You and Your Insurance Really Click, andLower Your Insurance Costs, Not Your Expectations. InsWeb has applied forpatents on its core technology and related patentable subject matter; howeverno patent has been issued, and thus InsWeb cannot currently prevent acompetitor from independently using similar functionality. In connection withits acquisition of assets from Intuit in January 2001, InsWeb obtained therights to patent applications filed by Intuit relating to Intuit’s onlineinsurance shopping and purchasing service. InsWeb’s pending trademarkregistrations and patent applications may not be approved or granted; or, ifgranted, may be successfully challenged by others or invalidated throughadministrative process or litigation. In addition, effective patent, copyright,trademark, and trade secret protection may be unavailable or limited in someforeign countries. InsWeb also seeks to protect its proprietary rights throughphysical and technological security measures, and through the use ofconfidentiality or license agreements with its business partners, employees,consultants, advisors and others. Despite InsWeb’s efforts to protect itsproprietary rights from unauthorized use or disclosure, employees, consultants,advisors or others may not maintain the confidentiality of InsWeb’s proprietaryinformation, and this proprietary information may otherwise become known, or beindependently developed, by competitors. The steps InsWeb has taken may notprevent misappropriation of its proprietary rights, particularly in foreigncountries where laws or law enforcement practices may not protect itsproprietary rights as fully as in the United States.

InsWeb licenses its trademarks and similar proprietaryrights to third parties. While InsWeb attempts to ensure that the quality ofits brand is maintained by these companies, they may take actions that couldharm the value of InsWeb’s proprietary rights or the reputation of InsWeb orits services.

InsWeb may receive noticeof claims of infringement of other parties’ proprietary rights or claims thatits own patents or other intellectual property rights are invalid. From time totime InsWeb has been subject 

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toinfringement claims in the ordinary course of its business, including claims ofalleged infringement of the trademark rights of third parties by InsWeb and thecompanies with which it does business. Any of these claims, with or withoutmerit, could be time consuming to defend, result in costly litigation, divertmanagement attention and resources or require InsWeb to enter into royalty orlicensing agreements. Licenses may not be available on reasonable terms, if atall, and the assertion or prosecution of any infringement claims could significantlyharm InsWeb’s business.

**Employees**

As of December 31, 2004, InsWeb had 105 full-timeemployees. InsWeb has never had a work stoppage, and none of its employees arecurrently represented under collective bargaining agreements. InsWeb considersits relations with its employees to be good. InsWeb believes that its futuresuccess will depend in part on the continued service of its senior managementand key technical personnel and its ability to attract, integrate, retain andmotivate highly qualified technical and managerial personnel. Competition forqualified personnel in InsWeb’s industry and geographical location is intense.InsWeb may not continue to be successful in attracting and retaining asufficient number of qualified personnel to conduct its business in the future.

Wehave no long-term employment agreements with any of our key personnel. However,the executive officers and certain other key members of management are eligibleto participate in the InsWeb Executive Retention and Severance Plan approved bythe Board of Directors on June 14, 2004. Participants in the Plan areentitled to receive cash severance payments and health and medical benefits inthe event their employment is terminated in connection with a change incontrol. Participants will also receive the benefits if InsWeb terminates theiremployment other than for “cause” or if the participant voluntarily terminateshis employment for “good reason” following certain specified actions by InsWeb.Upon any other termination of employment, the participant will be entitled onlyto accrued salary through the date of termination and any other vestedbenefits.

**Executive Officersof the Registrant**

As of March 1,2005, InsWeb’s executive officers were as follows:
| **Name**           | ** ** | ** **                                           | ** ** | **Position With InsWeb** | ** ** | ** ** | **Age** | ** ** |
|--------------------|------------|------------------------------------------------------|------------|--------------------------|------------|------------|---------|------------|
| Hussein A. Enan    |       | Chairman of the Board  and Chief Executive Officer   |       | 59                       |
| William D. Griffin |       | Chief Financial Officer                              |       | 47                       |
| L. Eric Loewe      |       | Senior Vice President, General Counsel and Secretary |       | 47                       |

 

***Hussein A. Enan***co-founded InsWeb in February 1995 and has served as its Chairman of theBoard since its inception. Mr. Enan served as InsWeb’s Chief ExecutiveOfficer from February 1995 to June 2002 and was reinstated to thatposition in August 2004. Mr. Enan also served as InsWeb’s Presidentfrom May 1999 to June 2000. From March 1992 to November 1994,Mr. Enan was a general partner at E.W. Blanch, a reinsuranceintermediary that merged with his own wholly-owned company, Enan &Company, a reinsurance intermediary, in March 1992. Mr. Enan foundedEnan & Company in February 1979.

***William D. Griffin***joined InsWeb in May 2001 as Chief Financial Officer. From August 1999to February 2001, Mr. Griffin was Chief Financial Officer of ZipSend, Inc.,an Internet services company, of which he was a co-founder. From October 1998through August 1999, Mr. Griffin provided consulting services tovarious early stage Internet and technology companies. Prior to that, from May 1990through September 1998, Mr. Griffin was Senior Vice President andChief Financial Officer of Inference Corporation, a customer services softwarecompany.

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***L. Eric Loewe*** joined InsWeb in October 1998as Corporate Counsel, Legal and Regulatory, responsible for all regulatorycompliance issues, and has served as Senior Vice President and General Counselsince September 2000 and as Secretary since July 2001. Mr. Loeweheld various positions with the National Association of Independent Insurersfrom January 1980 to September 1998. As Senior Counsel for the NAII, Mr. Loewewas responsible for legislation and regulations affecting the association’s 570member companies. Mr. Loewe is a member of the Illinois and Californiabars.

**Item 2.**                        Properties.

InsWeb’s corporate headquarters and its principaladministrative, product development, sales and marketing operations are locatedin a 55,000 square foot facility in the Sacramento, California area, whichInsWeb occupies under a lease expiring in 2011. InsWeb also leasesapproximately 75,000 square feet of office space in Redwood City, Californiaunder leases expiring through September 2008. These facilities wereformerly occupied by InsWeb as its headquarters and were vacated by InsWeb in December 2000when it consolidated its operations at its present facility.

One of the vacated office leases is for a 65,000square foot building in Redwood City, California. Under the terms of thislease, InsWeb is responsible for taxes, insurance and maintenance expenses.InsWeb had previously subleased a portion of the Redwood City facility under afour-year sublease agreement. In July 2002, InsWeb and its sublesseeagreed to amend the sublease. Under the terms of the amendment, the sublesseeagreed to rent the entire facility for the duration of the InsWeb lease(through September 2008) and to pay all rent and operating expensesotherwise payable by InsWeb directly to the landlord. However, the sublessee isa start-up company with 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 obligations under the amendedsublease, InsWeb would be responsible for making the required lease payments tothe landlord through the remaining term of the lease. In connection with thislease and other lease obligations for formerly occupied facilities, InsWeb mustmake assumptions regarding the estimated future sublease income relative tothese facilities. These estimates and assumptions are affected by area-specificconditions such as new commercial development, market occupancy rates andfuture market prices. If these estimates or their related assumptions change inthe future, InsWeb may be required to record a charge to increase its existingaccrual.

InsWeb believes that itsexisting facilities are adequate to meet its needs for future growth, and thereshould be no need to lease additional or alternative space in the near term.

**Item 3.**                        LegalProceedings.

A securities class actionlawsuit was filed on December 5, 2001 in the United States District Courtfor the Southern District of New York, (the “Court”) purportedly on behalf ofall persons who purchased InsWeb’s 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 in July 1999.The complaint, as subsequently amended, alleges violations of Sections 11 and15 of the Securities Act of 1933 and Sections 10 and 20 of the SecuritiesExchange Act of 1934, on the grounds that the prospectuses incorporated in theregistration statements for the offering failed to disclose, among otherthings, that (i) the underwriters had solicited and received excessive andundisclosed commissions from certain investors in exchange for which theunderwriters allocated to those investors material portions of the shares ofour stock sold in the offerings and (ii) the underwriters had entered intoagreements with customers whereby the underwriters agreed to allocated sharesof the stock sold in the offering to those customers in exchange for which thecustomers agreed to purchase additional shares of InsWeb stock in theaftermarket at pre-determined prices. No specific damages are claimed. Similarallegations have been made in lawsuits relating to more than 300 

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otherinitial public offerings conducted in 1999 and 2000, all of which have beenconsolidated for pretrial purposes. In October 2002, all claims againstthe individual defendants were dismissed without prejudice. In February 2003,the Court dismissed the claims in the InsWeb action alleging violations of theSecurities Exchange Act of 1934 but allowed the plaintiffs to proceed with theremaining claims. In June 2003, the plaintiffs in all of the casespresented a settlement proposal to all of the issuer defendants. Under theproposed settlement, the plaintiffs will dismiss and release all claims againstparticipating defendants in exchange for a contingent payment guaranty by theinsurance companies collectively responsible for insuring the issuers in allthe related cases, and the assignment or surrender to the plaintiffs of certainclaims the issuer defendants may have against the underwriters. InsWeb and mostof the other issuer defendants have accepted the settlement proposal. Thesettlement was given preliminary approval by the Court in February 2005,pending a modification to the settlement documents. If the settlement is notapproved in final form by the Court, InsWeb would defend the lawsuitvigorously. However, the litigation is in the preliminary stage, and we cannotpredict its outcome. The litigation process is inherently uncertain. Anunfavorable outcome could have a material adverse effect on InsWeb’s financialcondition, results of operations and cash flows.

**Item 4.**                        Submissionof Matters to a Vote of Security Holders.

InsWeb did not submit any matters to a vote of oursecurity holders during the fourth quarter of 2004.

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**PART II**

**Item 5.**                        Market forthe Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities.

InsWeb’scommon stock is quoted on the Nasdaq National Market under the symbol “INSW.”As of December 31, 2004, there were approximately 2,800 stockholders ofrecord. Certain shares are held by brokers and other institutions on behalf ofstockholders, and we are unable to determine the total number of stockholdersrepresented by these record holders. The following table sets forth, for thequarters indicated, the high and low sales price per share of InsWeb’s commonstock as reported on the Nasdaq National Market:
| ** **               | ** ** | **Price Range  Quarter Ended** | ** ** |
|--------------------------|------------|------------------------------------------|------------|
| ** **               | ** ** | **High**                                 | ** ** | **Low** | ** ** |
| **2004**                 |       |                                     |       |   |   |
| December 31,  2004  |       | $                                        | 3.16       |   | $ | 2.11 |   |
| September 30,  2004 |       | $                                        | 4.35       |   | $ | 2.64 |   |
| June 30,  2004      |       | $                                        | 5.30       |   | $ | 4.40 |   |
| March 31,  2004     |       | $                                        | 5.77       |   | $ | 4.55 |   |
| **2003**                 |       |                                     |       |   |   |
| December 31,  2003  |       | $                                        | 5.21       |   | $ | 4.21 |   |
| September 30,  2003 |       | $                                        | 6.49       |   | $ | 4.51 |   |
| June 30,  2003      |       | $                                        | 4.90       |   | $ | 2.05 |   |
| March 31, 2003      |       | $                                        | 2.25       |   | $ | 1.50 |   |

 

InsWeb has not paid anycash dividends on its capital stock. InsWeb currently intends to retain futureearnings, if any, for use in the operation and expansion of our business and,therefore, does not anticipate paying any cash dividends in the foreseeablefuture.

**Item 6.**                        SelectedFinancial Data.

The following selectedconsolidated financial data should be read in conjunction with “Item7—Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and the consolidated financial statements and the notes theretoincluded elsewhere in this Annual Report on Form 10-K.

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**CONSOLIDATED STATEMENT OF OPERATIONS DATA:**

*(in thousands, except per share amounts)*
| ** **                                                                  | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                  | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| Revenues:                                                                   |       |                                       |       |   |   |   |   |   |   |   |   |
| Transaction fees                                                            |       | $                                          | 13,987     |   | $ | 23,192 |   | $ | 24,107 |   | $ | 22,976 |   | $ | 19,561 |   |
| Development and maintenance fees                                            |       | 673                                        |       | 939 |   | 1,448 |   | 1,880 |   | 3,649 |   |
| Total revenues                                                              |       | 14,660                                     |       | 24,131 |   | 25,555 |   | 24,856 |   | 23,210 |   |
| Operating expenses:                                                         |       |                                       |       |   |   |   |   |   |   |   |   |
| Technology                                                                  |       | 5,416                                      |       | 9,014 |   | 10,322 |   | 14,041 |   | 22,890 |   |
| Sales and marketing                                                         |       | 13,868                                     |       | 16,011 |   | 18,329 |   | 28,821 |   | 34,020 |   |
| General and administrative                                                  |       | 4,544                                      |       | 5,883 |   | 6,850 |   | 7,345 |   | 11,207 |   |
| Amortization of intangible assets                                           |       | —                                     |       | — |   | — |   | — |   | 1,150 |   |
| Amortization of stock-based compensation                                    |       | —                                     |       | — |   | — |   | 256 |   | 912 |   |
| Impairment of long-lived assets(1)                                          |       | —                                     |       | 214 |   | 3,707 |   | 18,519 |   | 4,418 |   |
| Restructuring and other charges(2)                                          |       | —                                     |       | — |   | 1,800 |   | 1,843 |   | 2,167 |   |
| Total operating  expenses                                                   |       | 23,828                                     |       | 31,122 |   | 41,008 |   | 70,825 |   | 76,764 |   |
| Loss from  operations                                                       |       | (9,168                                     | )          | (6,991 | ) | (15,453 | ) | (45,969 | ) | (53,554 | ) |
| Interest expense                                                            |       | —                                     |       | (86 | ) | (465 | ) | (1,043 | ) | (87 | ) |
| Interest and  other income, net(3)                                          |       | 235                                        |       | 8,123 |   | 11,340 |   | 2,086 |   | 4,429 |   |
| Income (loss)  before cumulative effect of a change in accounting principle |       | (8,933                                     | )          | 1,046 |   | (4,578 | ) | (44,926 | ) | (49,212 | ) |
| Cumulative effect  of a change in accounting principle(4)                   |       | —                                     |       | — |   | — |   | — |   | (1,635 | ) |
| Net income (loss)                                                           |       | $                                          | (8,933     | ) | $ | 1,046 |   | $ | (4,578 | ) | $ | (44,926 | ) | $ | (50,847 | ) |
| Per share  data—basic:                                                 |       |                                       |       |   |   |   |   |   |   |   |   |
| Income (loss) before cumulative effect of a change  in accounting principle |       | $                                          | (1.90      | ) | $ | 0.21 |   | $ | (0.65 | ) | $ | (6.45 | ) | $ | (8.40 | ) |
| Cumulative effect of a change in accounting  principle(4)                   |       | —                                     |       | — |   | — |   | — |   | (0.28 | ) |
| Net income (loss) per share—basic                                      |       | $                                          | (1.90      | ) | $ | 0.21 |   | $ | (0.65 | ) | $ | (6.45 | ) | $ | (8.68 | ) |
| Per share  data—diluted:                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Income (loss) before cumulative effect of a change  in accounting principle |       | $                                          | (1.90      | ) | $ | 0.20 |   | $ | (0.65 | ) | $ | (6.45 | ) | $ | (8.40 | ) |
| Cumulative effect of a change in accounting  principle(4)                   |       | —                                     |       | — |   | — |   | — |   | (0.28 | ) |
| Net income (loss) per share—diluted                                    |       | $                                          | (1.90      | ) | $ | 0.20 |   | $ | (0.65 | ) | $ | (6.45 | ) | $ | (8.68 | ) |
| Shares used in  computing net income (loss) per share—basic            |       | 4,711                                      |       | 5,030 |   | 7,035 |   | 6,969 |   | 5,857 |   |
| Shares used in computing  net income (loss) per share—diluted          |       | 4,711                                      |       | 5,283 |   | 7,035 |   | 6,969 |   | 5,857 |   |

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(1)          Represents thewrite-down of long-lived assets in 2003, 2002 and 2001 related to theacquisition of certain assets of Intuit Insurance Services, Inc. (See Note8 of Notes to the Consolidated Financial Statements) and the write-off of assetsin 2000 related to the Benelytics acquisition.

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(2)          Represents chargesrecorded pursuant to InsWeb’s restructuring plan and related vacatedfacilities. See also Item 7, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations.”

(3)          In 2003, the Companysold its interest in Finance All K.K. and recognized a gain of$6.8 million (See Note 7 of Notes to Consolidated FinancialStatements). Also in 2003, InsWeb and eHealthInsurance.com agreed to settleongoing litigation in the U.S. District Court for Northern California, andeHealthInsurance agreed to pay InsWeb $0.8 million for the servicesperformed by InsWeb prior to the termination of the marketing agreement (SeeNote 10 of Notes to Consolidated Financial Statements). In 2002, InsWebrecognized a gain of $10.6 million from the renegotiation and amendment ofthe obligations under a license and distribution agreement, which wasoriginally entered into in 2001 in connection with the purchase of certainassets of Intuit Insurance Services, Inc. A portion of the fixed paymentspreviously payable to Intuit was eliminated (See Note 8 of Notes toConsolidated Financial Statements).

(4)          Reflectsthe impact of the adoption of SEC Staff Accounting Bulletin No. 101, “RevenueRecognition in Financial Statements” as of January 1, 2000.

**CONSOLIDATED BALANCE SHEET DATA:**

*(in thousands)*
| ** **                                        | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                        | ** ** | **2004**                              | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| Cash and cash  equivalents                        |       | $                                     | 9,334      |   | $ | 15,223 |   | $ | 12,382 |   | $ | 14,627 |   | $ | 24,795 |   |
| Short-term  investments                           |       | 8,145                                 |       | 10,868 |   | 16,541 |   | 20,936 |   | 26,331 |   |
| Working capital                                   |       | 14,451                                |       | 22,279 |   | 21,787 |   | 30,324 |   | 51,657 |   |
| Total assets                                      |       | 20,475                                |       | 29,882 |   | 37,692 |   | 54,342 |   | 73,008 |   |
| Long-term  liabilities, excluding current portion |       | —                                |       | — |   | — |   | 13,490 |   | 1,312 |   |
| Total stockholders’  equity                  |       | 15,715                                |       | 24,279 |   | 27,088 |   | 31,772 |   | 63,884 |   |
|                                                   |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Item 7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operation.

*This Annual Report on Form 10-K and in particularManagement’s Discussion and Analysis of Financial Condition and Results ofOperations contains “forward-looking statements” with respect to InsWeb’sfuture financial performance. The words or phrases “expects,” “anticipates,” “intends,”“plans,” “believes,” “seeks,” “estimates,” and similar expressions aregenerally intended to identify forward-looking statements. Such forward-lookingstatements are subject to various known and unknown risks and uncertainties,and InsWeb cautions you that any forward-looking information provided by,or on behalf of, InsWeb is not a guarantee of future performance. Actualresults could differ materially from those anticipated in such forward-lookingstatements due to a number of factors, some of which are beyond InsWeb’scontrol, including, but not limited to, uncertain economic conditions whichcould result in continued decreases in revenue and reduced participation inInsWeb’s marketplace, anticipated losses, the unpredictability of futurerevenues, reliance on key customers—property and casualty insurance carriers—whoare themselves subject to volatility in their operating cycles, competition,risks associated with system development and operation risks, management ofpotential growth and risks of new business areas, business combinations, andstrategic alliances. These risks and uncertainties, as well as other risks anduncertainties, which are described in greater detail in the section entitled “FactorsThat May Affect Future Performance” and other documents filed with theSecurities and Exchange Commission, could cause InsWeb’s actual results todiffer materially from historical results or those currently anticipated. Allforward-looking statements are based on information available to InsWebon the date hereof, and InsWeb assumes no obligation to update such statements.*

**Overview**

InsWeb operates an online insurance marketplace that enablesconsumers to shop online for a variety of insurance products, includingautomobile and term life, and obtain insurance company-sponsored quotes. Inorder to create this marketplace, InsWeb has established close relationshipswith a significant number of insurance companies throughout the United States.

InsWeb’s principal source of revenues is transactionfees from participating insurance companies. While quotes obtained throughInsWeb’s online insurance marketplace are provided to consumers free of charge,InsWeb earns revenues from participating insurance companies based on thedelivery of qualified leads. With most insurance companies, InsWeb is paid afee only when the consumer purchases an insurance policy, and with others,InsWeb is paid a transaction fee based on the delivery of a lead, regardless ofwhether or not the consumer actually purchases a policy. For auto insurancecoverage, qualified leads are produced when a consumer clicks to view insurancecompany quotes. These leads are produced both for insurance companies providinginstant online quotes and for insurance companies providing e-mail or otheroffline quotes. For term life insurance coverage, a qualified lead is produced only when a consumer clicks to requestinsurance coverage based on a specific quote. Once the leads aregenerated by the consumer’s request to view quotes, InsWeb transmits the leadseither to InsWeb Insurance Services or to the selected insurance company orother entity by e-mail, file transfer or direct connection to the insurancecompany’s information system. InsWeb provides each participating insurancecompany with custom-formatted lead information based on the insurance companiesindividual requirements.

InsWeb also generates commission revenue and brokerfees from the operations of its insurance agent subsidiaries. As of December 31,2004, InsWeb’s wholly owned subsidiaries, InsWeb Insurance Services, Inc.and Goldrush Insurance Services, Inc. (collectively “InsWeb’s InsuranceAgency”), function as authorized automobile insurance agents for nineparticipating insurance companies in nine states. Since August 18, 2004,InsWeb’s Insurance Agency has been selling term life insurance policies in allstates on behalf of six insurance companies. Where InsWeb’s Insurance Agencyacts as the selling agent, it receives a commission based on a percentage ofthe initial insurance policy premium related to each insurance policy sale, andin some cases each renewal of a policy. InsWeb recognizes the revenue fromthese activities as the 

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insurance policies arepaid, less an estimate for early cancellations. Commission revenue and brokerfees are included in transaction fees.

In October 2003, InsWeb began providing “Sponsored Web Links,” whereby certainconsumers, depending on their responses to several preliminary screeningquestions, are provided with the opportunity to link directly to an insurancecompany’s website. In these situations, the consumer will complete theinsurance company’s online application, and InsWeb is paid a fee for thatconsumer link or click-through. Fees paid to InsWeb for Sponsored Web Links areincluded in transaction fees.

A less significant and declining source of revenuesfor InsWeb are development and maintenance fees that are paid by insurancecompanies that participate on the InsWeb insurance marketplace. Developmentfees are generated from the design and development of customized interfacesbetween an insurance company’s information system and the InsWeb site. InsWebcharges maintenance fees for maintaining and servicing the programs of theindividual insurance companies and for maintaining any hardware at InsWeb’sfacility that is dedicated to specific insurance companies.

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 77% of transaction revenues in2004, 79% in 2003 and 83% in 2002. We anticipate that automobile insurance willcontinue to account for a significant portion of InsWeb’s revenues for theforeseeable future.

InsWeb has been dependent on a limited number ofinsurance companies for a majority of its revenues, although recent expansion ofInsWeb’s offering has reduced that dependency to some extent. Revenues fromProgressive accounted for approximately 10% of InsWeb’s revenues for the yearended December 31, 2004. Revenues from Progressive, GE Financial Assurance(“GEFA”) and American Family accounted for approximately 14%, 14% and 10%,respectively, of InsWeb’s revenues for the year ended December 31, 2003.Revenues from Amica, GEFA and Kemper Direct accounted for approximately 14%,14% and 10%, respectively, of InsWeb’s revenues for the year ended December 31,2002.

Since its inception, InsWeb has incurred significantlosses, and as of December 31, 2004, InsWeb had an accumulated deficit of$182.6 million. These losses, and this accumulated deficit, have resultedfrom the significant costs incurred in the development of InsWeb’s technologyplatform, the establishment of relationships with insurance companies, theirintegration with the InsWeb site, and InsWeb’s marketing and sales activities.InsWeb intends to continue to invest in product development and maintenance,sales and marketing, as well as the costs associated with continuing tofunction as a publicly listed company, including the costs of compliance withthe provisions of the Sarbanes-Oxley Act of 2002, which will require the Companyto comply with Section 404 of theSarbanes-Oxley Act in fiscal 2006. As a result, InsWeb believes that itwill continue to incur operating losses at least through fiscal year 2005. In addition,if InsWeb is unable to ultimately achieve profitability the Company may need toseek additional financing to continue its business operations.

InsWeb’s operating results for future periods aresubject to numerous uncertainties, and there can be no assurance that InsWebwill be able to achieve and sustain profitability. In light of the evolvingnature of InsWeb’s business, InsWeb believes that period-to-period comparisonsof its operating results are not necessarily meaningful and should not berelied upon as an indication of future performance.

Our operations to date have consumed substantial amounts of cash,cash equivalents and short-term investments ($8.6 million in 2004 and $9.6 in2003) and will continue to require significant amounts of capital in the nearfuture. In order to remain competitive, we must continue to make investmentsessential to our ability to operate. In the event that we 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 our 

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business at the rate desired or may berequired to delay, reduce, or cease certain of our operations, any of whichcould materially harm our business and financial results.

**Results ofOperations**

*Revenue highlights for the years ended December 31:*
| ** **                        | ** ** | **2004**                | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                        | ** ** | **(In thousands)** | ** ** |
| Transaction fees:                 |       |                    |       |     |       |     |       |
| Auto insurance                    |       | $                       | 10,705     |     | $          | 18,250   |       | $ | 19,914 |   |
| Term life insurance               |       | 3,021                   |       | 4,470    |       | 3,814    |       |
| Other insurance offerings         |       | 261                     |       | 472      |       | 379      |       |
|                              |       | 13,987                  |       | 23,192   |       | 24,107   |       |
| Development and  maintenance fees |       | 673                     |       | 939      |       | 1,448    |       |
| Total revenues                    |       | $                       | 14,660     |     | $          | 24,131   |       | $ | 25,555 |   |

 

*Direct marketing (consumer acquisition) metrics andcosts for the years ended December 31:*
| ** **                                         | ** ** | **2004**                                                                                       | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                         | ** ** | **(In thousands, except percentages  and per consumer amounts)** | ** ** |
| Direct marketing costs                             |       | $                                                                                              | 8,327      |     | $          | 8,916    |       | $ | 10,985 |   |
| Direct marketing  as a percent of transaction fees |       | 60                                                                                             | %          | 38       | %          | 46       | %          |
| Number of  consumers                               |       | 2,822                                                                                          |       | 6,658    |       | 6,590    |       |
| Direct marketing  cost per consumer                |       | $                                                                                              | 2.95       |     | $          | 1.34     |       | $ | 1.67 |   |
| Transaction fees  per consumer                     |       | $                                                                                              | 4.96       |     | $          | 3.48     |       | $ | 3.66 |   |

 

*Auto marketplace metrics and costs for the years endedDecember 31:*
| ** **                          | ** ** | **2004**                                                                                       | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                          | ** ** | **(In thousands, except percentages  and per consumer amounts)** | ** ** |
| Auto insurance transaction revenues |       | $                                                                                              | 10,705     |     | $          | 18,250   |       | $ | 19,914 |   |
| Number of consumers                 |       | 2,370                                                                                          |       | 5,779    |       | 5,683    |       |
| Transaction fees per  consumer      |       | $                                                                                              | 4.52       |     | $          | 3.16     |       | $ | 3.50 |   |

 

*Term life marketplace metrics and costs for the yearsended December 31:*
| ** **                               | ** ** | **2004**                                                                                       | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                               | ** ** | **(In thousands, except percentages  and per consumer amounts)** | ** ** |
| Term life insurance transaction revenues |       | $                                                                                              | 3,021      |     | $          | 4,470    |       | $ | 3,814 |   |
| Number of consumers                      |       | 325                                                                                            |       | 528      |       | 567      |       |
| Transaction fees  per consumer           |       | $                                                                                              | 9.30       |     | $          | 8.47     |       | $ | 6.73 |   |

 

*Definitions:*
| “Direct marketing costs” |   | Represents expenses incurred by the company to drive  consumer traffic to InsWeb’s online insurance marketplace; |
|------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------|
| “Number of  consumers”   |   | Represents a consumer who has started an InsWeb  application;                                                         |

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| “Transaction Fee per  consumer” |   | Represents transaction revenue earned per consumer  who has started an application. |
|-------------------------------------------|--------|-------------------------------------------------------------------------------------|

 

Thefollowing table sets forth statement of operations data as a percentage oftotal revenues for the years ended December 31:
| ** **                       | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Revenues:                        |       |     |       |     |       |     |       |
| Transaction fees                 |       | 95.4     | %          | 96.1     | %          | 94.3     | %          |
| Development and maintenance fees |       | 4.6      | %          | 3.9      | %          | 5.7      | %          |
| Total revenues                   |       | 100.0    | %          | 100.0    | %          | 100.0    | %          |
| Operating  expenses:             |       |     |       |     |       |     |       |
| Technology                       |       | 36.9     | %          | 37.4     | %          | 40.4     | %          |
| Sales and marketing              |       | 94.6     | %          | 66.3     | %          | 71.7     | %          |
| General and administrative       |       | 31.0     | %          | 24.4     | %          | 26.8     | %          |
| Impairment of long-lived assets  |       | —   |       | 0.9      | %          | 14.5     | %          |
| Restructuring and other charges  |       | —   |       | —   |       | 7.1      | %          |
| Total operating expenses         |       | 162.5    | %          | 129.0    | %          | 160.5    | %          |
| Loss from operations             |       | (62.5    | )%         | (29.0    | )%         | (60.5    | )%         |

 

**Years ended December 31,2004 and 2003**

**Summary**

InsWeb’s business model has evolved significantly overthe past twelve months to better capitalize on its position as a leadinginsurance portal. Within the auto insurance marketplace, consumers now havenumerous options to find the carrier best suited to their needs based oninitiatives implemented during 2004, including: expansion of the Sponsored WebLink program, a shortened online application process, the approach of allowingmultiple insurance carriers access to individual consumers, and lastly, thesuccessful launch of an agent network program with a third party that providesconsumer leads to local insurance agents. During the fourth quarter, this agentnetwork program represented 14% of total revenues and 18% of auto transactionfees. Going forward, the Company expects that the agent network program willrepresent an increasing percent of auto transaction fees. Accordingly, theCompany is planning to develop internally a local agent network to lessen itsreliance on the third party organization that is currently providing the InsWebleads to local insurance agents. This initiative is expected to launch in thelater half of 2005.

In addition, InsWeb laidthe foundation to achieve increased revenue per consumer within its term lifemarketplace through the launch of its Term Life agency and the shift from alead payment to a commission payment revenue model, which the Company believeswill offer greater long-term financial benefit. The conversion from alead-based revenue model to a commission-based model results in lower revenuesin the short-term, as it takes 90 to 120 days to complete the salesprocess for a term life policy and revenue is recognized as the policy is paidby the consumer. While this transition has had a negative effect on currentrevenues, it should result in an increase in term life revenues by the thirdquarter of 2005.

**Revenues**

***TransactionFees.  ***Transaction fees (consisting of lead fees,commissions and Sponsored Web Link fees) relating to automobile insurancedecreased to $10.7 million in 2004 from $18.3 million in 2003. The 41%decrease in transaction fees is primarily attributable to a 59% decrease in thenumber of consumers shopping for automobile insurance on the InsWeb platform in2004 compared to 2003. Revenue per auto consumer increased to $4.52 in 2004from $3.16 in 2003 primarily as a result of the Sponsored Web Link program andthe establishment of an agent network program with a third party that providesconsumer 

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leads to local insuranceagents. Management expects revenue per auto consumer to increase in throughout2005 as InsWeb continues to implement initiatives to increase the sale ofautomobile insurance policies to consumers that shop the InsWeb auto insurancemarketplace, in particular the expansion of the agent network program.

Transaction fees (consisting of lead fees andcommissions) from the sale of term life insurance through the InsWeb onlinemarketplace decreased to $3.0 million in 2004 from $4.5 million in2003, a decrease of 32%. The decrease in revenues was a result of a 38%decrease in the number of consumers shopping for term life insurance on theInsWeb platform in 2004 compared to 2003 and the conversion of a number ofinsurance companies to a commission based model. Revenue per term life consumerincreased to $9.30 in 2004, compared to $8.48 in 2003; however, revenue perterm life consumer is expected to be negatively impacted in the near term asadditional insurance companies convert to a commission-based revenue model. Theconversion of an insurance company from a lead-based revenue model to acommission-based model results in lower revenues in the short-term, as it takes90 to 120 days to complete the sale of a term life policy and revenue isrecognized as the policy is paid by the consumer.

***Development and Maintenance Fees.  ***Developmentand maintenance fees accounted for $0.7 million, or 4.6%, of totalrevenues in 2004, compared to $0.9 million, or 3.9%, in 2003. Developmentand maintenance fees are expected to continue to decline as set-up programshave become a less significant component in an insurance company’s initialparticipation.

**Operating Expenses**

***Technology.  ***Technologyexpenses consist primarily of payroll and related expenses, including employeebenefits, facility and systems costs, for product and site developmentpersonnel involved with the planning, design and implementation of carrierintegration to the InsWeb online insurance marketplace. Technology expensesdecreased to $5.4 million in 2004 from $9.0 million in 2003. Thedecrease was primarily attributable to a reduction in headcount. Technologyexpenses in 2005 are expected to remain at comparable levels to 2004 expenses.

***Sales andMarketing.  ***Sales and marketing expenses consist ofdirect marketing expenditures that include advertising, promotions and feespaid to online companies with which InsWeb has contractual relationships todrive consumer traffic to the InsWeb online marketplace. InsWeb’s currentconsumer marketing program is focused on maintaining key online relationshipsand selective cost-effective marketing campaigns designed to maintain consumerawareness of InsWeb and its online insurance marketplace. Also included insales and marketing expenses are payroll and related expenses, includingemployee benefits, facility costs, telecommunications and systems costs, forInsWeb’s sales and marketing personnel and the personnel and related costs for InsWeb’sInsurance Agency operations, which includes selling agents, underwriters,supervisors and customer service and support groups. Overall sales andmarketing expenses decreased to $13.9 million in 2004 from$16.0 million in 2003, while direct marketing costs decreased 7% to$8.3 million in 2004, compared to $8.9 million in 2003. Directmarketing expense as a percent of transaction revenues was 60% in 2004, ascompared to 38% in 2003. The increase was primarily attributable to asignificant increase in the cost of online consumer advertising and onlinemarketing relationships in 2004. The Company expects that for 2005, directmarketing costs per consumer acquired will remain at levels comparable to 2004,while total direct marketing costs will fluctuate based on the amount ofconsumer traffic driven to the InsWeb marketplace. Other sales and marketingexpenditures are expected to increase in early 2005, as the term life agencyoperations are expanded.

***General and Administrative.  ***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 andadministrative expenses decreased to $4.5 million in 2004 from 

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$5.9 millionin 2003. The decrease was primarily due to a reduction in headcount and adecrease in legal expenses due to the settlement of litigation witheHealthInsurance in March 2003. General and administrative expenses in2005 are expected to remain at comparable levels to 2004 expenses.

**Interest Expense**

Interest expense was $0 in2004 and $86,000 in 2003. The decrease in interest expense was attributable toa reduction in the liability due to Intuit Insurance Services, Inc. as aresult of payments made by InsWeb.

**Interest**and Other Income, Net 

Interest and other incomefor 2004 was $0.2 million compared to $8.1 million in 2003. Interest income representsincome earned on InsWeb’s short-term investments. Interest and other income for 2003 included a gain of $6.8 millionrecognized on the sale of InsWeb’s interest in Finance All K.K. Additionally in2003, InsWeb and eHealthInsurance.com agreed to settle ongoing litigation inthe U.S. District Court for Northern California, and eHealthInsurance agreed topay InsWeb $0.8 million for services performed by InsWeb prior to thetermination of the marketing agreement.

**Years endedDecember 31, 2003 and 2002**

**Revenues**

***Transaction Fees.  ***Transactionfees from the sale of automobile insurance decreased to $18.3 million in2003 from $19.9 million in 2002, a decrease of 8%. Revenue per autoconsumer decreased to $3.16 in 2003, compared to $3.50 in 2002, on a 2%increase in the number of consumers to the InsWeb auto insurance marketplace.The decrease in revenues was primarily attributable to lower fees paid byparticipating insurance companies, resulting from lower policy close rates bysuch insurance companies.

Transaction fees from the sale of term life insuranceincreased to $4.5 million in 2003 from $3.8 million in 2002, anincrease of 17%. Revenue per term life consumer increased to $8.48 in 2003,compared to $6.73 in 2002, on a 7% decrease in the number of consumers to theInsWeb term life insurance marketplace. The increase in revenues was primarilyattributable to the conversion (which commenced in late 2002) of a significantparticipating insurance company from a payment-per-lead-generated arrangementto a commission-based model where revenue is recognized upon the closingof a term life policy. This conversion resulted in lower revenues in 2002 (asit takes 60 to 120 days to close a term life policy), but increasedrevenues in 2003 (as revenues on a commission basis are generally greater thanon a per-lead basis).

***Development and Maintenance Fees.  ***Developmentand maintenance fees accounted for $0.9 million, or 3.9%, of totalrevenues in 2003, compared to $1.4 million, or 5.7%, in 2002.

**Operating Expenses**

***Technology.  ***Technologyexpenses decreased to $9.0 million in 2003 from $10.3 million in2002. The decrease was primarily attributable to a reduction in headcount. 

***Sales and Marketing.  ***Salesand marketing expenses decreased to $16.0 million in 2003 from$18.3 million in 2002, while direct marketing costs decreased 19% to$8.9 million in 2003, compared to $11.0 million in 2002. The decreasewas primarily attributable to significant reductions in the price paid foronline consumer marketing relationships. Direct marketing expense as a percentof transaction revenues was 38% in 2003, as compared to 46% in 2002.

***General andAdministrative.  ***General and administrative expensesdecreased to $5.9 million in 2003 from $6.9 million in 2002. Thedecrease was primarily due to a reduction in headcount and a decrease in legalexpenses due to the settlement of the matter with eHealthInsurance in March 2003.

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***Impairment ofLong-Lived Assets.  ***In January 2001, InsWebacquired from Intuit, Inc. certain assets and related liabilitiesassociated with an online insurance shopping and purchasing service operated byIntuit Insurance Services, Inc., a wholly-owned subsidiary ofIntuit. In connection with the acquisition, InsWeb and Intuit entered into alicense and distribution agreement under which Intuit and InsWeb granted oneanother licenses to create links between their respective websites in order tocreate and operate a co-branded insurance center. InsWeb recorded an intangibleasset of $30.1 million in connection with this transaction. The fair valueof the intangible asset was estimated based on the expected cash flows from theInternet traffic to be received from Intuit by InsWeb. In 2003 and 2002, as aresult of significantly lower than anticipated traffic levels, InsWebreassessed the recoverability of the asset recorded in connection with thistransaction by comparing the estimated future undiscounted cash flows expectedto be generated relating to this asset to its carrying amount. Based on thisevaluation, InsWeb determined that the acquired asset was impaired, as thecarrying value of the asset was in excess of fair value, and therefore recordedimpairment charges of $0.2 million in 2003 and $3.7 million in 2002.The fair value of the acquired asset was based on estimated future cash flowsto be generated from the Internet traffic to be received from Intuit by InsWeb,discounted using a rate commensurate with the risk involved.

***Restructuring and Other Charges.  ***Asa result of the continued decline in the real estate markets where the InsWebproperties are located and the inherent risk associated with its sublessee, theCompany recorded an additional charge of $1.8 million in 2002 to increasethe accrual for lease obligations relating to formerly occupied facilities. Inevaluating these lease obligations, InsWeb must make assumptions regarding theestimated future sublease income relative to these facilities. These estimatesand assumptions are affected by area-specific conditions such as new commercialdevelopment, market occupancy rates and future market prices. If theseestimates or their related assumptions change in the future, InsWeb may berequired to record a charge to increase its existing accrual.

**Interest Expense**

Interest expense was$86,000 in 2003, compared to $465,000 in 2002. The decrease in interest expensewas primarily attributable to lower imputed interest associated with thelong-term marketing commitments (fixed payments) due Intuit Insurance Services, Inc.as a result of payments made by InsWeb that reduced the outstanding liability.

**Interest and OtherIncome, Net**

Interest and other incomefor 2003 included a gain of $6.8 million recognized on the sale of InsWeb’sinterest in Finance All K.K. Additionally in 2003, InsWeb andeHealthInsurance.com agreed to settle ongoing litigation in the U.S. DistrictCourt for Northern California, and eHealthInsurance agreed to pay InsWeb$0.8 million for services performed by InsWeb prior to the termination of themarketing agreement. In 2002, InsWeb recognized a gain of $10.6 millionfrom the renegotiation and amendment of the obligations under a license anddistribution agreement, which was originally entered into in 2001 in connectionwith the purchase of certain assets of Intuit Insurance Services, Inc. Aportion of the fixed payments previously payable to Intuit was eliminated.

**Critical AccountingPolicies**

InsWeb’s discussion and analysis of its financialcondition and results of operations are based on InsWeb’s consolidatedfinancial statements which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of thesefinancial statements requires InsWeb to make estimates and judgments thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.InsWeb bases its estimates and judgments on historical experience and onvarious other factors that are believed to be reasonable under the 

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circumstances, the resultsof which form the basis for making judgments about the carrying values ofassets and liabilities that are not readily apparent from other sources. Actualresults may differ from these estimates under different assumptions orconditions. InsWeb believes the following critical accounting policies affectits more significant judgments and estimates used in the preparation of its consolidatedfinancial statements.

***Accrual for LeaseObligations.  ***InsWeb is contractually obligated tomake future lease payments on certain formerly occupied facilities through September 2008.As of December 31, 2004 total future obligations for these facilitiesamounted to $9.1 million; these obligations are offset by total estimatedfuture sublease income of approximately $7.7 million. Substantially allfuture sublease income is due from a sublessee who is a start-up company with alimited operating history and, therefore, there are inherent risks anduncertainties associated with its future operations and its ability todischarge its obligations through the term of the sublease. In the event thatthe sublessee defaults on its obligations under the amended sublease, InsWebwould be responsible for making the required lease payments to the landlordthrough the remaining term of the lease. In connection with this lease andother lease obligations for formerly occupied facilities, InsWeb must makeassumptions regarding the estimated future sublease income relative to thesefacilities. As a result of the above, the Company has recorded an accrual of$2.2 million as of December 31, 2004 for lease commitments related tothese formerly occupied facilities, as compared to an accrual of$2.6 million as of December 31, 2003. These estimates and assumptionsare affected by area-specific conditions such as new commercial development,market occupancy rates and future market prices. If these estimates or theirrelated assumptions change in the future, InsWeb may be required to record a chargeto increase its accrual.

***Contingencies.  ***Asdiscussed in Item 3—“Legal Proceedings,” a class action lawsuit has been filedthat alleges InsWeb violated certain federal securities laws at the time of itsinitial public offering. Although some claims against InsWeb in this classaction have been dismissed and a settlement of these proceedings has beenproposed and conditionally accepted, InsWeb cannot accurately predict theultimate outcome of this matter at this time and therefore, cannot estimate therange of probable loss, if any, due to the inherent uncertainties oflitigation. InsWeb believes it has meritorious defenses; however InsWeb cannotassure that it will prevail in this action. An unfavorable outcome could have amaterial adverse effect on InsWeb’s financial condition, results of operationsand cash flows.

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

The carrying value of ourdeferred tax assets, which was $70.4 million at December 31, 2004, isdependent upon our ability to generate sufficient future taxable income. Wehave established a full valuation allowance against our net deferred tax assetsfor continuing operations to reflect the uncertainty of realizing the deferredtax benefits, given historical losses. A valuation allowance is required whenit is more likely than not that all or a portion of a deferred tax asset willnot be realized. A review of all available positive and negative evidence needsto be considered, including our past and future performance, the marketenvironment in which we operate, the utilization of tax attributes in the past,and the length of carryforward periods and evaluation of potential tax planningstrategies. We expect to continue to maintain a full valuation allowance untilan appropriate level of profitability is sustained or we are able to developtax strategies that would enable us to conclude that it is more likely than notthat a portion of our deferred tax assets would be realizable.

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**Liquidity andCapital Resources**

Summarizedcash flow information is as follows (in thousands):
| ** **                                       | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                       | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Cash used in  operating activities               |       | $                                          | (8,722     | ) | $ | (4,196 | ) | $ | (4,118 | ) |
| Cash provided by  investing activities           |       | 2,548                                      |       | 14,467 |   | 4,579 |   |
| Cash provided by (used  in) financing activities |       | 285                                        |       | (7,430 | ) | (2,706 | ) |
|                                                  |            |                                            |            |  |  |  |  |  |  |  |

 

At December 31, 2004, InsWeb’s principal sourceof liquidity was $17.5 million in cash, cash equivalents and short-terminvestments. Since inception, InsWeb has financed its operations primarilythrough the sale of preferred and common stock.

Net cash used in operating activities was$8.7 million in 2004 compared to $4.2 million in 2003 and$4.1 million in 2002. In 2004, net cash used in operating activitiesprimarily consisted of net loss, partially offset by depreciation andamortization of fixed assets of $0.7 million. Decreases in accruedexpenses, partially offset by the increase in accounts payable affected cashused in operations in 2004. In 2003, net cash used in operating activities,primarily consisted of net income, offset by the gain on the sale of itsinvestment in Finance All K.K. of $6.8 million; depreciation andamortization of fixed assets of $1.0 million; and amortization ofintangible assets and prepaid marketing costs of $0.4 million. Decreasesin accounts receivable and prepaid expenses, partially offset by the decreasesin accrued expenses and accounts payable affected cash used in operations in2003. In 2002, the use of cash primarily consisted of InsWeb’s operating loss,excluding non-cash items of: other income of $10.6 million; charge for theimpairment of long-lived asset of $3.7 million; depreciation andamortization of fixed assets of $1.8 million; restructuring and other chargesof $1.8 million; and amortization of prepaid marketing costs of$1.5 million. Decreases in other assets partially offset by the decreasein accrued expenses affected cash used in operations in 2002.

Net cash provided by investing activities was$2.5 million in 2004 compared to $14.5 million in 2003 and$4.6 million in 2002. Net cash provided by investing activities in 2004primarily consisted of net maturities of short-term investments of$2.7 million. Net cash provided by investing activities in 2003 primarilyconsisted of proceeds from the sale of InsWeb’s investment in Finance All K.K.of $8.9 million and net maturities of short-term investments of$5.7 million. Net cash provided by investing activities in 2002 consistedof net maturities of short-term investments of $4.4 million, proceeds fromthe sale of property and equipment of $0.9 million partially offset bycapital expenditures of $0.7 million.

Net cash provided by financing activities was$0.3 million in 2004 compared to net cash used in financing activities of$7.4 million in 2003 and $2.7 million in 2002. Net cash provided byfinancing activities in 2004 primarily represented proceeds from issuance ofcommon stock through employee stock plans of $0.4 million, partially offset byrepayment of debt of $0.1 million. Net cash used in financing activities in2003 related to repayments of debt of $3.3 million and the repurchase ofcommon stock for $4.2 million. Net cash used in financing activities in2002 related to repayments of debt of $2.6 million.

InsWeb leases its current office facilities undernon-cancelable operating leases, which expire at various dates through April 2011,including a 10-year lease agreement through 2011 for office space in theSacramento area which houses its corporate headquarters and agency operations.InsWeb has options to extend the lease at the end of the lease term, and hasthe right of first refusal on other office space in the complex. In addition,InsWeb has entered into various sublease arrangements associated withpreviously exited facilities that have terms extending through September 2008.

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Aggregatecontractual cash obligations, net of sublease income, as of December 31,2004 is summarized as follows (in thousands):
| **Years ending December 31,** | ** ** | ** ** | ** ** | **Gross lease  commitments** | ** ** | **Sublease  income** | ** ** | **Net lease  commitment** | ** ** |
|----------------------------------------------|------------|------------|------------|-----------------------------------|------------|----------------------|------------|--------------------------------|------------|
| 2005                                         |       |       | $          | 3,257                             |       |                 | $          | (1,961                         | )          |   | $ | 1,296 |   |   |
| 2006                                         |       |       | 3,391      |                              |       | (2,030               | )          |                           | 1,361      |   |   |
| 2007                                         |       |       | 3,483      |                              |       | (2,100               | )          |                           | 1,383      |   |   |
| 2008                                         |       |       | 2,936      |                              |       | (1,615               | )          |                           | 1,321      |   |   |
| 2009                                         |       |       | 1,078      |                              |       | —               |       |                           | 1,078      |   |   |
| Thereafter                                   |       |       | 1,437      |                              |       | —               |       |                           | 1,437      |   |   |
|                                         |       |       | $          | 15,582                            |       |                 | $          | (7,706                         | )          |   | $ | 7,876 |   |   |

 

In July 2002, InsWeb and one of its sublesseesagreed to amend the sublease covering portions of the property InsWeb formerlyoccupied as its headquarters in Redwood City. Under the terms of the amendment,the sublessee agreed to rent the entire facility for the duration of InsWeb’slease (through September 2008) and to pay all rent and operating expensesotherwise payable by InsWeb directly to the landlord. Therefore, the amendedsublease agreement resulted in a reduction in InsWeb’s operating leasecommitments by $7.2 million, through the remainder of the lease. However,the sublessee is a start-up company with a limited operating history and,therefore, there are inherent risks and uncertainties associated with its futureoperations and its ability to discharge its obligations through the term of thesublease. In the event that the sublessee defaults on its 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 estimated future sublease incomerelative to these facilities. These estimates and assumptions are affected byarea-specific conditions such as new commercial development, market occupancyrates and future market prices. If these estimates or their related assumptionschange in the future, InsWeb may be required to record a charge to increase itsexisting reserves.

InsWeb currentlyanticipates that its cash, cash equivalents and short-term investments will besufficient to meet its anticipated cash needs for working capital and capitalexpenditures for at least the next 12 months. Although InsWeb does notanticipate the need for additional financing, InsWeb nevertheless may requireadditional funds to meet operating needs, or to expand its business internallyor through acquisition. InsWeb cannot be certain that additional financing willbe available when required, on favorable terms or at all. If InsWeb is notsuccessful in raising additional capital as required, its business could bematerially harmed. If additional funds were raised through the issuance ofequity securities, the percentage ownership of InsWeb’s then-currentstockholders would be reduced.

**Recently issuedaccounting standards**

***Statement of Financial Accounting Standard No. 123(R)***

On October 13, 2004,the FASB concluded that Statement 123R, *Share-BasedPayment,*which would require all companies to measure compensationcost for all share-based payments (including employee stock options) at fairvalue, would be effective for public companies for interim or annual periodsbeginning after June 15, 2005. We could adopt the new standard in one oftwo ways—the modified prospective transition method or the modifiedretrospective transition method. We plan to adopt Statement 123R in ourthird quarter of fiscal 2005 and are currently evaluating the effect that theadoption of Statement 123R will have on our financial position and resultsof operations.

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**Factors That May AffectOur Future Performance**

*Our future business, operating results and financialcondition are subject to various risks and uncertainties, including those describedbelow.*

**Our business is difficult to evaluate because ourmarket is evolving rapidly and our business model is unpredictable**

An evaluation ofour future prospects is very difficult. An investor in our common stock mustconsider the uncertainties frequently encountered by early stage companies innew and rapidly evolving markets. These uncertainties include:

·       anevolving and unpredictable business model, which makes prediction of futureresults uncertain and an investment in our common stock highly speculative;

·       thedevelopment of comparable services by competitors, which may reduce our marketshare;

·       theuncertainty of the extent to which the consumer market will adopt the Internetas the preferred medium for comparison shopping for and purchase of insuranceproducts, which may limit our ability to generate revenue from consumers thatvisit our online marketplace or our insurance agency;

·       ourability to retain key employees; and

·       ourreliance on key customers and ability to retain customers.

Our business strategy maynot be successful and we may not be able to successfully address theseuncertainties. Moreover, our ability to take the foregoing steps may behampered by our limited financial resources should we fail to rapidly increaserevenues or should increased revenues be more than offset by increasedoperating expenses.

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

Given planned investmentlevels, our ability to achieve profitability will depend upon our ability togenerate and sustain substantially increased revenues. As a result, we believethat we will incur operating losses at least through 2005. We incurredoperating losses of $9.2 million for 2004, $7.0 million for 2003, and$15.5 million for 2002. As of December 31, 2004, our accumulateddeficit was $182.6 million. Our operating results for future periods aresubject to numerous uncertainties, and we may not achieve sufficient revenuesto become profitable. Even if we achieve profitability, we may not sustain orincrease profitability on a quarterly or annual basis in the future. If we areunable to achieve profitability or if our profitability is delayed we may needto seek additional financing to continue our business operations. Suchfinancing could be on terms that are dilutive to our existing stockholders orcould involve the issuance of securities that have rights and preferences thatare senior to those associated with our common stock. Moreover, if suchfinancing were not available or were available only upon terms that wereunacceptable to us, we could be required to significantly curtail ouroperations.

**If we are unable to achieve cash flow breakeven orgenerate working capital that may be required in the future, our ability tooperate could suffer or cease**

Our operations to date have consumed substantial amounts of cash,cash equivalents and short-term investments ($8.6 million in 2004 and $9.6 in2003) and will continue to require significant amounts of capital in the nearfuture. In order to remain competitive, we must continue to make investmentsessential to our ability to operate, including investments in direct marketing,technology and general administration, including the costs of being a publiccompany. In the event that we are unable to generate revenues sufficient tooffset our costs, or if our costs of marketing and operations are greater thanwe anticipate, we 

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may be unable to grow our business at therate desired or may be required to delay, reduce, or cease certain of ouroperations, any of which could materially harm our business and financialresults.

**Wemay incur unexpected costs or receive less revenue than we planned frominitiatives that are part of our evolving business model, and our operationscould be harmed**

InsWeb’s business model has evolved significantly overthe past twelve months to better capitalize on its position as a leadinginsurance portal. Within the auto insurance marketplace, consumers now havenumerous options to find the carrier best suited to their needs based oninitiatives implemented during 2004, including: expansion of the Sponsored WebLink program, a shortened online application process, the approach of allowingmultiple insurance carriers access to individual consumers, and lastly, the launchof an agent network program with a third party that provides consumer leads tolocal insurance agents. During the fourth quarter, this agent network programrepresented 14% of total revenues and 18% of auto transaction fees. Goingforward, the Company expects that the agent network program will represent anincreasing percent of auto transaction fees. Accordingly, the Company isdeveloping internally a local agent network to lessen its reliance on the thirdparty organization that is currently providing the InsWeb leads to localinsurance agents. This initiative is expected to launch in the later half of2005.

In addition, InsWeb laid the foundation to achieveincreased revenue per consumer within its term life marketplace through thelaunch of its Term Life agency and the shift from a lead payment to acommission payment revenue model, which the Company believes will offer greaterlong-term financial benefit.

These initiatives aresubject to a number of uncertainties, including the cost of developing andmarketing these new products, and the continued participation of insurancecarriers and our third party agent network partner. Moreover, there are manyinsurance agencies selling term life insurance online, and there are a numberof online networks providing consumer leads to local insurance agents. If weare unable to create a positive offering with these initiatives, we may losebusiness to competitors and/or our business may be harmed.

**Our current efforts to seek a strategic partnershipcould have an adverse effect on our operations and our relationships withemployees, insurance company customers and online partners.**

In April 2004, weannounced that we intended to seek a strategic partnership with one or morefirms that have access to a large number of qualified consumers and that such apartnership could result in the sale of all or a part of InsWeb to achieve thisgoal. Although several potential strategic partners were identified during thisprocess, the preliminary discussions did not produce an acceptable level ofinterest for either party. Therefore, management is now devoting its attentionto current initiatives to improve our operating results. We will continue toexplore strategic opportunities if and when they arise, although there can be noassurance that any such partnership arrangement or sale will result.

**Our future revenues are unpredictable, our operatingresults are likely to fluctuate from quarter to quarter, and if we fail to meetthe expectations of investors, our stock price could decline significantly**

Due to the emerging nature of the market in which wecompete and the high proportion of our revenues that are derived from consumertraffic on our website, our future revenues are inherently difficult toforecast. We believe that period-to-period comparisons of our operating resultsmay not be meaningful, and you should not rely upon them as an indication ofour future performance. Moreover, our expense levels are based largely on ourinvestment plans and estimates of future revenues. We may be unable to adjustour spending to compensate for an unexpected shortfall in revenues.Accordingly, any significant shortfall in revenues relative to our plannedexpenditures would harm our results of operations and could 

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cause our stock price tofall sharply, particularly following quarters in which our operating resultsfail to meet the expectations of investors.

Factors that maycause fluctuations in our operating results include the following, many ofwhich are outside our control:

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

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

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

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

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

·       Ourability to convert site visits into transaction fees and/or revenue frominsurance agency activities may fluctuate due to changes in our user interfaceor other features on our site;

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

·       Our ability to generatetransaction fees and/or revenue from insurance agency activities may also beharmed due to technical difficulties on our website that hamper a consumer’sability to start or complete a shopping session.

**We are exposed to increased costs and risks associatedwith complying with the increasing regulation of corporate governance anddisclosure standards**

We are spending anincreased amount of management time and external resources to comply withchanging laws, regulations and standards relating to corporate governance andpublic disclosure, including the Sarbanes-Oxley Act of 2002, new SECregulations and Nasdaq Stock Market rules. In particular, Section 404 ofthe Sarbanes-Oxley Act of 2002 requires management’s annual review andevaluation of our internal control systems, and attestations of theeffectiveness of these systems by our independent auditors. We have commenceddocumenting our internal control systems and procedures and will need toconsider improvements that may be necessary in order for us to comply with therequirements of Section 404 by the end of 2006. This process may requireus to hire additional personnel and outside advisory services and will resultin significant additional accounting and legal expenses. In addition, theevaluation and attestation processes required by Section 404 are new andneither companies nor auditing firms have significant experience in testing orcomplying with these requirements. Accordingly, we may encounter problems ordelays in completing the review and evaluation, the implementation ofimprovements and the receipt of a positive attestation by our independentauditors. While we believe that we currently have adequate internal controlsover financial reporting, in the event that our chief executive officer orchief financial officer determine that our controls over financial reportingare not effective as defined under Section 404, investor perceptions of ourcompany may be adversely affected and could cause a decline in the market priceof our stock.

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**Seasonality affecting insurance shopping and Internetusage may cause fluctuations in our operating results**

We have experiencedseasonality in our business associated with general slowness in the insuranceindustry during the year-end holiday period. We expect to continue toexperience seasonality as our business matures. Because of this seasonality,investors may not be able to predict our annual operating results based on aquarter-to-quarter comparison of our operating results. We believe seasonalitywill have an ongoing impact on our business.

**Because a significant portion of our revenue isattributable to automobile insurance shopping on our online marketplace, we areespecially vulnerable to risks related to the online market for automobileinsurance or the automobile insurance industry generally**

Automobile insuranceaccounted for approximately 77% of our transaction revenues in 2004,approximately 79% in 2003 and approximately 83% in 2002. We anticipate thatautomobile insurance will continue to account for a substantial portion of ourrevenues for the foreseeable future. As a result, if we fail to attract a broadbase of consumers to shop for automobile insurance on our site, our ability togenerate revenue will be reduced and our business will be harmed. In addition,property and casualty insurance, including automobile insurance, is subject tooperating cycles. During a cycle in which loss ratios rise, insurance companiesmay choose to restrict the amount of business they write while they await approvalof rate increases from the various state insurance departments. Our businesscould be harmed if our participating insurance companies reduce theirparticipation in our online marketplace.

**If we are unable to promote our brand and expand ourbrand recognition, our ability to draw consumers to our website will be limited**

A growing number of websites offer services that aresimilar to and competitive with the services offered on our online insurancemarketplace. Therefore, a positive recognition of our brand is critical toattracting additional consumers to our website, strengthening our relationshipswith participating insurance companies and attracting new insurance companies.In order to attract and retain consumers and insurance companies and to promoteand maintain our brand, we are continuing our financial commitment to createand maintain brand awareness. Our current marketing program consists of themaintenance of certain network online relationships and other selective costeffective marketing campaigns, designed to maintain consumer awareness ofInsWeb and our online insurance marketplace. If our marketing efforts do notgenerate a corresponding increase in revenues or we otherwise fail tosuccessfully promote our brand, or if these efforts require excessiveexpenditures, our business will be harmed. Moreover, if visitors to our websitedo not perceive our existing services or the products and services of ourparticipating insurance companies to be of high quality, or if we alter ormodify our brand image, introduce new services or enter into new businessventures that are not favorably received, the value of our brand could beharmed.

Our ability to maintain apositive recognition of our brand also depends in part on the quality of theproducts and services consumers receive from our participating insurancecompanies or our insurance agency, including timely response to requests forquotes or coverage. If we are unable to provide consumers with high-qualityproducts and services, the value of our brand may be harmed and the number ofconsumers using our services may decline.

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**Competition in the market for online distribution ofinsurance is intense, and if we are unable to compete effectively with currentcompetitors or new competitors that enter the market, the fees paid to us byparticipating insurance companies may fall, the fees charged by onlinecompanies with which we have strategic relationships may rise, and our marketshare may suffer**

The onlineinsurance distribution market is a new industry and, like the broaderelectronic commerce market, is both rapidly evolving and highly competitive.Increased competition, particularly by companies offering online insurancedistribution, could reduce the fees we are able to charge our participatinginsurance companies or increase the fees we are required to pay to onlinecompanies with which we have strategic relationships, resulting in reducedmargins or loss of market share, any of which could harm our business. Inaddition, our current and future competitors may be able to:

·       undertakemore extensive marketing campaigns for their brands and services;

·       devotemore resources to website and systems development;

·       adoptmore aggressive pricing policies; and

·       makemore attractive offers to potential employees, online companies and third-partyservice providers.

Accordingly, we may not beable to maintain or grow consumer traffic to our website and our base ofparticipating insurance companies, our competitors may grow faster than we do,or companies with whom we have strategic relationships may discontinue theirrelationships with us, any of which would harm our business.

**We may have difficulty integrating new insurancecompanies into our online marketplace or agency operations, which could harmour ability to offer improved comparison-shopping opportunities and thuslimit the attractiveness of our service to consumers**

Integration of aninsurance company into our online marketplace requires a significant commitmentof time and resources on our part and on the part of the insurance company, andis a technologically difficult process. This integration process typicallytakes from three to six months to complete and typically requires us to expendbetween 160 and 2,000 man-hours. To develop company-sponsored quotes forconsumers, the integration requires either the development of a customizedinterface with the insurance company’s own rating system, accessing a third-partyrating engine of the insurance company’s choice, or adding the insurancecompany’s rating information into InsWeb’s proprietary rating engines. Thoughintegration into our agency operations may require fewer resources to implementthan integration of an insurance company into our online marketplace, potentialparticipating insurance companies may not be willing to invest the time andresources necessary to achieve this integration, or we may not be able toovercome the technological difficulties associated with, or devote the time andresources necessary to, successfully integrate the insurance company into ouronline marketplace or our agency operations.

**We do not have exclusive relationships or long-termcontracts with insurance companies, which may limit our ability to retain theseinsurance companies as participants in our marketplace and maintain theattractiveness of our services to consumers**

We do not have anexclusive relationship with any of the insurance companies whose insuranceproducts are offered on our online marketplace, and thus, consumers may obtainquotes and coverage from these insurance companies without using our website.Our participating insurance companies offer their products directly toconsumers through insurance agents, mass marketing campaigns or through othertraditional methods of insurance distribution. These insurance companies canalso offer their products and services over the Internet, either directly toconsumers or through one or more of our online competitors, or both. Inaddition, most of our agreements with our participating insurance companies arecancelable at 

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theoption of either party upon 90 days’ notice or less. We have experienced,and expect to continue to experience, reductions in the level of participationin our marketplace or complete termination by participating insurancecompanies. These reductions in participation, terminations, or an inability toattract additional insurance companies to our marketplace could materiallyaffect our revenues and harm our business.

**The outcome and impact of the securities class actionlawsuit involving InsWeb is uncertain**

A securities class actionlawsuit was filed on December 5, 2001 in the United States District Courtfor the Southern District of New York, (the “Court”) purportedly on behalf ofall persons who purchased our common stock from July 22, 1999 through December 6,2000. The complaint named as defendants InsWeb, certain current and formerofficers and directors, and three investment banking firms that served asunderwriters for InsWeb’s initial public offering in July 1999. Thecomplaint, as subsequently amended, alleges violations of Sections 11 and 15 ofthe Securities Act of 1933 and Sections 10 and 20 of the Securities ExchangeAct of 1934, on the grounds that the prospectuses incorporated in theregistration statements for the offering failed to disclose, among otherthings, that (i) the underwriters had solicited and received excessive andundisclosed commissions from certain investors in exchange for which theunderwriters allocated to those investors material portions of the shares ofour stock sold in the offerings and (ii) the underwriters had entered intoagreements with customers whereby the underwriters agreed to allocated sharesof the stock sold in the offering to those customers in exchange for which thecustomers agreed to purchase additional shares of InsWeb stock in theaftermarket at pre-determined prices. No specific damages are claimed. Similarallegations have been made in lawsuits relating to more than 300 other initialpublic offerings conducted in 1999 and 2000, all of which have been consolidatedfor pretrial purposes. In October 2002, all claims against the individualdefendants were dismissed without prejudice. In February 2003, the Courtdismissed the claims in the InsWeb action alleging violations of the SecuritiesExchange Act of 1934 but allowed the plaintiffs to proceed with the remainingclaims. In June 2003, the plaintiffs in all of the cases presented asettlement proposal to all of the issuer defendants. Under the proposedsettlement, the plaintiffs will dismiss and release all claims againstparticipating defendants in exchange for a contingent payment guaranty by theinsurance companies collectively responsible for insuring the issuers in allthe related cases, and the assignment or surrender to the plaintiffs of certainclaims the issuer defendants may have against the underwriters. InsWeb and mostof the other issuer defendants have accepted the settlement proposal. Thesettlement was given preliminary approval by the Court in February 2005,pending a modification to the settlement documents. If the settlement is notapproved in final form by the Court, InsWeb would defend the lawsuitvigorously. However, the litigation is in the preliminary stage, and we cannotpredict its outcome. The litigation process is inherently uncertain. Anunfavorable outcome could have a material adverse effect on InsWeb’s financialcondition, results of operations and cash flows.

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

We perform functions forlicensed insurance companies and are, therefore, required to comply with acomplex set of rules and regulations that often vary from state to state.If we fail to comply with these rules and regulations, we, an insurancecompany doing business with us, our officers, or agents with whom we contract,could be subject to various sanctions, including censure, fines, acease-and-desist order or other penalties. This risk, as well as changes in theregulatory climate or the enforcement or interpretation of existing law, couldexpose us to additional costs, including indemnification of participatinginsurance companies for their costs, and could require changes to our businessor otherwise harm our business. Furthermore, because the application of onlinecommerce to the consumer insurance market is relatively new, the impact ofcurrent or future regulations on InsWeb’s business is difficult to anticipate.

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**If we are unable to safeguard the security and privacyof consumers’ and participating insurance companies’ confidential data,consumers and insurance companies may not use our services and our business maybe harmed**

A significant barrier toelectronic commerce and communications is the secure transmission of personallyidentifiable information of Internet users as well as other confidentialinformation over public networks. If any compromise or breach of security were tooccur, it could harm our reputation and expose us to possible liability. Aparty who is able to circumvent our security measures could misappropriateproprietary information or cause interruptions in our operations. We may berequired to make significant expenditures to protect against security breachesor to alleviate problems caused by any breaches. To date, we have experiencedno breaches in our network security. We rely on encryption and authenticationtechnology licensed from third parties to provide the security andauthentication necessary to effect secure transmission of confidentialinformation, such as names, addresses, Social Security and credit card numbers,user names and passwords and insurance company rate information. Advances incomputer capabilities, new discoveries in the field of cryptography, or otherevents or developments could result in a compromise or breach of the algorithmswe use to protect consumers’ and insurance companies’ confidential information.

**System failures could reduce or limit traffic on ourwebsite or interrupt our communications with individual insurance companies andharm our ability to generate revenue**

Since launching our online marketplace, we haveexperienced occasional minor system failures or outages that have resulted inthe online marketplace being out of service for a period ranging from severalminutes to three hours while our technicians brought backup systems online. Wemay experience further system failures or outages in the future that coulddisrupt the operation of our website and could harm our business. Our revenuesdepend in large part on the volume of traffic on our website and, moreparticularly, on the number of insurance quotes generated by our website inresponse to consumer inquiries. Accordingly, the performance, reliability andavailability of our website, quote-generating systems and networkinfrastructure are critical to our reputation and our ability to attract a highvolume of traffic to our website and to attract and retain participating insurancecompanies. Moreover, we believe that consumers who have a negative experiencewith an electronic commerce website may be reluctant to return to that site.Thus, a significant failure or outage affecting our systems could result insevere long-term damage to our business.

Additionally, several ofour participating insurance companies have chosen a technical solution thatrequires that our website servers communicate with these insurance companies’computer systems in order to perform the underwriting and risk analysis andrating functions required to generate quotes. Thus, the availability of quotesfrom a given insurance company may depend in large part upon the reliability ofthat insurance company’s own computer systems, over which we have no control

**Our facilities and systems are vulnerable to naturaldisasters and other unexpected losses, and we may not have adequate insuranceto cover such losses**

Our computer hardwareoperations are located in leased facilities in Gold River, California. A third-partyservice provider located in the Sacramento, California area maintains a backupof our critical systems. If both of these locations experienced a systemfailure, the performance of our website would be harmed. These systems are alsovulnerable to damage from fire, power loss, telecommunications failures,break-ins, natural disasters and similar events. If we seek to replicate oursystems at other locations, we will face a number of technical challenges,particularly with respect to database replications, which we may not be able toaddress successfully. Although we carry property and business interruptioninsurance, our coverage may not be adequate to compensate us for all lossesthat may occur. Our servers may also be vulnerable to computer viruses, physicalor electronic break-ins and similar disruptions.

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**We rely on the services of our executive officers andother key personnel, whose knowledge of our business and the insurance industryand technical expertise would be extremely difficult to replace**

Our future success is substantially dependent on thecontinued services and continuing contributions of our senior management andother key personnel, particularly Hussein A. Enan, Chairman of our Board andChief Executive Officer, and the loss of the services of any of our executiveofficers or other key employees could harm our business.

We have no long-term employmentagreements with any of our key personnel. However, the executiveofficers and certain other key members of management are eligible to participatein the InsWeb Executive Retention and Severance Plan approved by the Board ofDirectors on June 14, 2004. Participants in the Plan are entitled toreceive cash severance payments and health and medical benefits in the eventtheir employment is terminated in connection with a change in control.Participants will also receive the benefits if InsWeb terminates theiremployment other than for “cause” or if the participant voluntarily terminateshis employment for “good reason” following certain specified actions by InsWeb.Upon any other termination of employment, the participant will be entitled onlyto accrued salary through the date of termination and any other vestedbenefits.

InsWeb has granted stockoptions as incentives to executive officers, new employees and certain otherkey personnel. As the value of these incentives is highly dependent on anincrease in the market price of our common stock, we may be unable to retainsuch key employees, nor retain or recruit other officers and key employees in thefuture.

**Regulation of the Internet is unsettled, and futureregulations could inhibit the growth of the Internet and otherwise harm ourbusiness**

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

**Any acquisitions that we undertake could be difficultto integrate, disrupt our business, dilute stockholder value and harm ouroperating results**

We may acquire or makeinvestments in complementary businesses, technologies, services or products ifappropriate opportunities arise. The process of integrating any acquired business,technology, service or product into our business and operations may result inunforeseen operating difficulties and expenditures. Integration of an acquiredcompany also may consume much of our management’s time and attention that wouldotherwise be available for ongoing development of our business. Moreover, theanticipated benefits of any acquisition may not be realized. We may be unableto identify, negotiate or finance future acquisitions successfully, or tointegrate successfully any acquisitions with our current business. Futureacquisitions could result in potentially dilutive issuances of equitysecurities or the incurrence of debt, contingent liabilities or amortizationexpenses related to goodwill and other intangible assets, any of which couldharm our business.

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**We may be subject to claims for infringement ofintellectual property, with or without merit, which could be costly to defendor settle**

We may from time to timebe subject to claims of infringement of other parties’ proprietary rights orclaims that our own trademarks, patents or other intellectual property rightsare invalid. We have been subject to infringement claims in the ordinary courseof business, including claims of alleged infringement of the patent andtrademark rights of third parties by companies and us with which we havebusiness relationships. Any claims of this type, with or without merit, couldbe time-consuming to defend, result in costly litigation, divert managementattention and resources or require us to enter into royalty or licenseagreements. License agreements may not be available on reasonable terms, if atall, and the assertion or prosecution of any infringement claims couldsignificantly harm our business.

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

We have incorporatedtechnology developed by third parties into our online marketplace, and we willcontinue to incorporate third-party technology in our future products andservices. We have limited control over whether or when these third-partytechnologies will be developed or enhanced. If a third-party fails totimely develop, license or support technology necessary to our services, marketacceptance of our online marketplace could be harmed.

**Our stock price has fluctuated widely, and Internetstocks in general have been extremely volatile**

The trading price of ourcommon stock has been highly volatile and may be significantly affected byfactors including actual or anticipated fluctuations in our operating results,new products or new contracts by us or our competitors, loss of key customers,conditions and trends in the electronic commerce and insurance industries,changes in financial estimates by securities analysts, general marketconditions and other factors. The trading prices of many Internet stocks haveexperienced extreme price and volume fluctuations. These fluctuations oftenhave been unrelated or disproportionate to the operating performance of thesecompanies. These fluctuations may continue and could harm our stock price. Anynegative change in the public’s perception of the prospects of Internet orelectronic commerce companies could also depress our stock price regardless ofour results.

**Delaware law and our charter documents containprovisions that could discourage or prevent a potential takeover, even if sucha transaction would be beneficial to our stockholders**

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

**Item 7A.**                Quantitative andQualitative Disclosures About Market Risk.

InsWeb is exposed to financial market risks primarilydue to changes in interest rates. The fair value of InsWeb’s investmentportfolio or related income would not be significantly impacted by either a 10%increase or decrease in interest rates due mainly to the short-term nature ofthe major portion of InsWeb’s investment portfolio. InsWeb’s interest income issensitive to changes in the general level of U.S. interest rates, particularlysince all of our funds are invested in instruments with maturities currentlyless than one year. InsWeb’s policy is to limit the risk of principal loss andensure the safety of invested funds by limiting market and credit risk. Fundsin excess of current operating requirements are invested in obligations of theU.S. government and its agencies and investment grade obligations of state andlocal governments and large corporations.

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Thetable below represents carrying amounts and related weighted-averageinterest rates of InsWeb’s investment portfolio at December 31, 2004 (inthousands, except interest rates):
| Cash equivalents             |   | $    | 8,659  |   |
|------------------------------|--------|------|--------|--------|
| Average interest  rate       |   | 2.25 | %      |
| Short-term  investments      |   | $    | 8,145  |   |
| Average interest rate        |   | 1.97 | %      |
| Total investment  securities |   | $    | 16,804 |   |
| Average interest rate        |   | 2.12 | %      |

 

**Item 8.**                        FinancialStatements and Supplementary Data.

The Report of Independent Registered Public AccountingFirm, Consolidated Financial Statements and Notes to Consolidated FinancialStatements follow below on pages F-1 to F-22.

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**INSWEB CORPORATION**

**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**
| Report of Independent  Registered Public Accounting Firm                                                         |   | F-2 |
|------------------------------------------------------------------------------------------------------------------|--------|-----|
| Consolidated  Balance Sheets as of December 31, 2004 and 2003                                               |   | F-3 |
| Consolidated  Statements of Operations for the years ended December 31, 2004, 2003 and  2002                |   | F-4 |
| Consolidated  Statements of Stockholders’ Equity for the years ended December 31,  2004, 2003 and 2002 |   | F-5 |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2004, 2003 and  2002                |   | F-6 |
| Notes to Consolidated Financial  Statements                                                                      |   | F-7 |

 

F-1

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**Reportof Independent Registered Public Accounting Firm**

**The Board ofDirectors and Stockholders of InsWeb Corporation**

We have audited the accompanying consolidated balancesheets of InsWeb Corporation as of December 31, 2004 and 2003, and therelated consolidated statements of operations, stockholders’ equity, and cashflows for each of the three years in the period ended December 31, 2004.Our audits also included the financial statement schedule listed in the Indexat Item 15(a). These financial statements and schedule are the responsibilityof the Company’s management. Our responsibility is to express an opinion onthese financial statements and schedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged toperform an audit of the Company’s internal control over financial reporting. Ouraudit included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of InsWeb Corporation atDecember 31, 2004 and 2003, and the consolidated results of its operationsand its cash flows for each of the three years in the period ended December 31,2004, in conformity with U.S. generally accepted accounting principles. Also,in our opinion, the related financial statement schedule, when considered inrelation to the basic financial statements taken as a whole, presents fairly inall material respects the information set forth therein.
|                        | /s/ ERNST &  YOUNG LLP |
|------------------------|---------------------------------|
| Sacramento, California |
| January 21, 2005  |

 

F-2

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**INSWEB CORPORATIONCONSOLIDATED BALANCE SHEETS(Amounts in thousands, except per share amounts)**
| ** **                                                                                                                                                                   | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                   | ** ** | **2004**              | ** ** | **2003** | ** ** |
| **Assets**                                                                                                                                                                   |       |                  |       |   |   |
| Current assets:                                                                                                                                                              |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                    |       | $                     | 9,334      |   | $ | 15,223 |   |
| Short-term investments                                                                                                                                                       |       | 8,145                 |       | 10,868 |   |
| Accounts receivable, net of allowances of $27 at  2004 and $47 at 2003                                                                                                       |       | 1,025                 |       | 1,006 |   |
| Prepaid expenses and other current assets                                                                                                                                    |       | 707                   |       | 785 |   |
| Total current assets                                                                                                                                                         |       | 19,211                |       | 27,882 |   |
| Property and  equipment                                                                                                                                                      |       | 814                   |       | 1,386 |   |
| Other assets                                                                                                                                                                 |       | 450                   |       | 614 |   |
| Total assets                                                                                                                                                                 |       | $                     | 20,475     |   | $ | 29,882 |   |
| **Liabilities  and stockholders’ equity**                                                                                                                               |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                         |       |                  |       |   |   |
| Accounts payable                                                                                                                                                             |       | $                     | 1,248      |   | $ | 524 |   |
| Accrued expenses                                                                                                                                                             |       | 3,456                 |       | 4,804 |   |
| Deferred revenue                                                                                                                                                             |       | 56                    |       | 275 |   |
| Total current liabilities                                                                                                                                                    |       | 4,760                 |       | 5,603 |   |
| Commitments and contingencies                                                                                                                                                |       |                  |       |   |   |
| Stockholders’ equity:                                                                                                                                                   |       |                  |       |   |   |
| Convertible preferred stock, $0.001 par value.  Authorized: 5,000 shares; no shares issued or outstanding at 2004 and 2003                                                   |       | —                |       | — |   |
| Common stock, $0.001 par value. Authorized: 25,000  shares; 7,257 shares issued and 4,789 shares outstanding at 2004, and 7,113  shares issued and 4,645 outstanding at 2003 |       | 7                     |       | 7 |   |
| Paid-in capital                                                                                                                                                              |       | 202,961               |       | 202,584 |   |
| Treasury stock, 2,468 shares at 2004 and 2003                                                                                                                                |       | (4,596                | )          | (4,596 | ) |
| Accumulated other comprehensive loss                                                                                                                                         |       | (8                    | )          | — |   |
| Accumulated deficit                                                                                                                                                          |       | (182,649              | )          | (173,716 | ) |
| Total stockholders’ equity                                                                                                                                              |       | 15,715                |       | 24,279 |   |
| Total liabilities  and stockholders’ equity                                                                                                                             |       | $                     | 20,475     |   | $ | 29,882 |   |

 

See accompanying notes.

F-3

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**INSWEB CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS(Amounts in thousands, except per share amounts)**
| ** **                                             | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                             | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| Revenues:                                              |       |                                        |       |   |   |   |   |
| Transaction fees                                       |       | $                                           | 13,987     |   | $ | 23,192 |   | $ | 24,107 |   |
| Development and maintenance fees                       |       | 673                                         |       | 939 |   | 1,448 |   |
| Total revenues                                         |       | 14,660                                      |       | 24,131 |   | 25,555 |   |
| Operating expenses:                                    |       |                                        |       |   |   |   |   |
| Technology                                             |       | 5,416                                       |       | 9,014 |   | 10,322 |   |
| Sales and marketing                                    |       | 13,868                                      |       | 16,011 |   | 18,329 |   |
| General and administrative                             |       | 4,544                                       |       | 5,883 |   | 6,850 |   |
| Impairment of long-lived assets                        |       | —                                      |       | 214 |   | 3,707 |   |
| Restructuring and other charges                        |       | —                                      |       | — |   | 1,800 |   |
| Total operating expenses                               |       | 23,828                                      |       | 31,122 |   | 41,008 |   |
| Loss from  operations                                  |       | (9,168                                      | )          | (6,991 | ) | (15,453 | ) |
| Interest expense                                       |       | —                                      |       | (86 | ) | (465 | ) |
| Interest and  other income, net                        |       | 235                                         |       | 8,123 |   | 11,340 |   |
| Net income (loss)                                      |       | $                                           | (8,933     | ) | $ | 1,046 |   | $ | (4,578 | ) |
| Net income (loss)  per share:                          |       |                                        |       |   |   |   |   |
| Basic                                                  |       | $                                           | (1.90      | ) | $ | 0.21 |   | $ | (0.65 | ) |
| Diluted                                                |       | $                                           | (1.90      | ) | $ | 0.20 |   | $ | (0.65 | ) |
| Shares used in  computing net income (loss) per share: |       |                                        |       |   |   |   |   |
| Basic                                                  |       | 4,711                                       |       | 5,030 |   | 7,035 |   |
| Diluted                                                |       | 4,711                                       |       | 5,283 |   | 7,035 |   |

 

See accompanying notes.

F-4

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**INSWEB CORPORATIONCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYYears ended December 31, 2004, 2003 and 2002(Amounts in thousands, except per share amounts)**
| ** **                                                                     | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Treasury Stock** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | ** Accumulated ** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-------------------------|------------|---------------------------------------|------------|-----------------------------|------------|------------|------------|
| ** **                                                                     | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**             | ** ** | **Shares**                            | ** ** | **Amount**                  | ** ** | **Loss**   | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| Balances,  December 31, 2001                                              |       | 7,067                 |       |        | $          | 7                       |       |                                  | $          | 202,361                     |       | (37        | )          | $ | (204 | ) |   | $ | (208 | ) |   |   | $ | (170,184 | ) |   | $ | 31,772 |   |
| Issuance of  shares through employee stock purchase plan and stock option plan |       | 20                    |       |        | —     |                    |       | 65                                    |       | —                      |       | —     |       |   | — |   |   |   | — |   |   | 65 |   |
| Shares  repurchased                                                            |       | —                |       |        | —     |                    |       | —                                |       | (112                        | )          | (171       | )          |   | — |   |   |   | — |   |   | (171 | ) |
| Net loss                                                                       |       | —                |       |        | —     |                    |       | —                                |       | —                      |       | —     |       |   | — |   |   |   | (4,578 | ) |   | (4,578 | ) |
| Balances,  December 31, 2002                                              |       | 7,087                 |       |        | 7          |                    |       | 202,426                               |       | (149                        | )          | (375       | )          |   | (208 | ) |   |   | (174,762 | ) |   | 27,088 |   |
| Issuance of shares  through employee stock purchase plan                       |       | 26                    |       |        | —     |                    |       | 133                                   |       | —                      |       | —     |       |   | — |   |   |   | — |   |   | 133 |   |
| Issuance of  common stock warrants in connection with a service agreement      |       | —                |       |        | —     |                    |       | 25                                    |       | —                      |       | —     |       |   | — |   |   |   | — |   |   | 25 |   |
| Shares  repurchased                                                            |       | —                |       |        | —     |                    |       | —                                |       | (2,319                      | )          | (4,221     | )          |   | — |   |   |   | — |   |   | (4,221 | ) |
| Comprehensive income  (loss):                                                  |       |                  |       |        |       |                    |       |                                  |       |                        |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Reclassification adjustment                                                    |       | —                |       |        | —     |                    |       | —                                |       | —                      |       | —     |       |   | 211 |   |   |   | — |   |   | 211 |   |
| Change in unrealized gain on investments                                       |       | —                |       |        | —     |                    |       | —                                |       | —                      |       | —     |       |   | (3 | ) |   |   | — |   |   | (3 | ) |
| Net income                                                                     |       | —                |       |        | —     |                    |       | —                                |       | —                      |       | —     |       |   | — |   |   |   | 1,046 |   |   | 1,046 |   |
| Comprehensive  income                                                          |       | —                |       |        | —     |                    |       | —                                |       | —                      |       | —     |       |   | — |   |   |   | — |   |   | 1,254 |   |
| Balances,  December 31, 2003                                              |       | 7,113                 |       |        | 7          |                    |       | 202,584                               |       | (2,468                      | )          | (4,596     | )          |   | — |   |   |   | (173,716 | ) |   | 24,279 |   |
| Issuance of  shares through employee stock purchase plan                       |       | 144                   |       |        | —     |                    |       | 377                                   |       | —                      |       | —     |       |   | — |   |   |   | — |   |   | 377 |   |
| Comprehensive loss:                                                            |       |                  |       |        |       |                    |       |                                  |       |                        |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Change in unrealized loss on investments                                       |       | —                |       |        | —     |                    |       | —                                |       | —                      |       | —     |       |   | (8 | ) |   |   | — |   |   | (8 | ) |
| Net loss                                                                       |       | —                |       |        | —     |                    |       | —                                |       | —                      |       | —     |       |   | — |   |   |   | (8,933 | ) |   | (8,933 | ) |
| Comprehensive  loss                                                            |       | —                |       |        | —     |                    |       | —                                |       | —                      |       | —     |       |   | — |   |   |   | — |   |   | (8,941 | ) |
| Balances,  December 31, 2004                                              |       | 7,257                 |       |        | $          | 7                       |       |                                  | $          | 202,961                     |       | (2,468     | )          | $ | (4,596 | ) |   | $ | (8 | ) |   |   | $ | (182,649 | ) |   | $ | 15,715 |   |

 

See accompanying notes.

F-5

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**INSWEB CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWSINCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS(Amounts in thousands)**
| ** **                                                                            | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                            | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| Cash flows from  operating activities:                                                |       |                                        |       |   |   |   |   |
| Net income (loss)                                                                     |       | $                                           | (8,933     | ) | $ | 1,046 |   | $ | (4,578 | ) |
| Adjustments to  reconcile net income (loss) to net cash used in operating activities: |       |                                        |       |   |   |   |   |
| Gain on sale of investment in Finance All K.K.                                        |       | —                                      |       | (6,838 | ) | — |   |
| Impairment of long-lived assets and restructuring                                     |       | —                                      |       | 214 |   | 5,507 |   |
| Other income                                                                          |       | 70                                          |       | (150 | ) | (10,611 | ) |
| Amortization of intangible asset                                                      |       | 116                                         |       | 362 |   | 1,505 |   |
| Depreciation and amortization                                                         |       | 715                                         |       | 987 |   | 1,839 |   |
| Issuance of common stock warrants in connection with  service agreements              |       | —                                      |       | 25 |   | — |   |
| Foreign currency transaction gain                                                     |       | —                                      |       | (36 | ) | (48 | ) |
| Net changes in  operating assets and liabilities:                                     |       |                                        |       |   |   |   |   |
| Accounts receivable                                                                   |       | (19                                         | )          | 1,230 |   | 436 |   |
| Prepaid expenses and other current assets                                             |       | 78                                          |       | 447 |   | (63 | ) |
| Other assets                                                                          |       | 48                                          |       | 109 |   | 2,535 |   |
| Accounts payable                                                                      |       | 724                                         |       | (364 | ) | (14 | ) |
| Accrued expenses                                                                      |       | (1,302                                      | )          | (844 | ) | 964 |   |
| Deferred revenue                                                                      |       | (219                                        | )          | (300 | ) | (581 | ) |
| Other                                                                                 |       | —                                      |       | (84 | ) | (1,009 | ) |
| Net cash used in operating activities                                                 |       | (8,722                                      | )          | (4,196 | ) | (4,118 | ) |
| Cash flows from  investing activities:                                                |       |                                        |       |   |   |   |   |
| Redemptions of short-term investments                                                 |       | 30,995                                      |       | 24,911 |   | 42,840 |   |
| Purchases of short-term investments                                                   |       | 28,305                                      |       | (19,242 | ) | (38,444 | ) |
| Proceeds from sale of investment in Finance All K.K                                   |       | —                                      |       | 8,878 |   | — |   |
| Proceeds from sale of property and equipment                                          |       | —                                      |       | — |   | 926 |   |
| Purchases of property and equipment                                                   |       | (142                                        | )          | (80 | ) | (743 | ) |
| Net cash provided by investing activities                                             |       | 2,548                                       |       | 14,467 |   | 4,579 |   |
| Cash flows from  financing activities:                                                |       |                                        |       |   |   |   |   |
| Proceeds from issuance of common stock through stock  plans                           |       | 402                                         |       | 133 |   | 65 |   |
| Repurchases of common stock                                                           |       | —                                      |       | (4,221 | ) | (171 | ) |
| Repayment of debt                                                                     |       | (117                                        | )          | (3,342 | ) | (2,600 | ) |
| Net cash provided by (used in) financing activities                                   |       | 285                                         |       | (7,430 | ) | (2,706 | ) |
| Net (decrease)  increase in cash and cash equivalents                                 |       | (5,889                                      | )          | 2,841 |   | (2,245 | ) |
| Cash and cash  equivalents, beginning of year                                         |       | 15,223                                      |       | 12,382 |   | 14,627 |   |
| Cash and cash  equivalents, end of year                                               |       | $                                           | 9,334      |   | $ | 15,223 |   | $ | 12,382 |   |
| Cash paid during the  year for interest                                               |       | $                                           | —     |   | $ | 86 |   | $ | 465 |   |

 

See accompanying notes.

F-6

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**INSWEB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.   Businessof InsWeb**

InsWeb Corporation operates an online insurancemarketplace that enables consumers to comparison shop online and obtaininsurance company-sponsored quotes for a variety of insurance products,including automobile and term life. InsWeb’s marketplace electronically matchesconsumers and insurance companies. InsWeb has combined extensive knowledge ofthe insurance industry, technological expertise and close relationships with asignificant number of insurance companies to develop an integrated onlinemarketplace. InsWeb’s marketplace enables consumers to research insurance-relatedtopics, search for, analyze and compare insurance products, apply for andreceive insurance company-sponsored quotes for actual coverage and topurchase automobile and term life insurance coverage through InsWeb’s insuranceagencies.

Quotes obtained through the online marketplace arefree to consumers, while participating insurance companies pay a transactionfee to InsWeb. These fees are earned either from the delivery of a lead to aparticipating insurance company, from a fee paid by an insurance company foreach closed policy, or from a commission or broker fee earned by InsWeb’sinsurance agency subsidiaries, InsWeb Insurance Services, Inc. andGoldrush Insurance Services, Inc.

Certain consumers, depending on their responses toseveral preliminary screening questions, are provided the opportunity to linkdirectly to an insurance company’s website. In these situations, the consumerwill complete the insurance company’s online application, and InsWeb is paid afee for that consumer link or click-through.

InsWeb is subject to allof the risks inherent in an early stage business in the electronic commerceindustry and special risks related to the online insurance industry. Theserisks include, but are not limited to, a limited operating history, limitedmanagement resources, dependence upon consumer acceptance of the Internet,Internet related security risks, the changing nature of the electronic commerceindustry, and variations in consumer traffic and insurance companyparticipation. InsWeb’s future operating results may be materially affected bythe foregoing and other factors.

**2.   Summary ofSignificant Accounting Policies**

***Basis of presentation***

The consolidated financialstatements include the accounts of InsWeb Corporation and its wholly-ownedsubsidiaries, InsWeb Insurance Services, Inc. and Goldrush InsuranceServices, Inc. (“InsWeb” or the “Company”). All significant inter-companyaccounts and transactions have been eliminated in the consolidated financialstatements.

***Use of estimates***

The preparation offinancial statements in conformity with United States generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates.

F-7

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**INSWEB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***Cash, cash equivalents and short-term investments***

InsWeb considers allhighly liquid investments with original maturities of three months or less atthe date of purchase to be cash equivalents. Investments with maturitiesgreater than three months at the date of purchase but less than one year areclassified as short-term investments. Cash and cash equivalents are stated atcost, which approximates fair value, given the relatively short duration of theunderlying securities.

***Revenue recognition***

The Company recognizes revenue when (i) persuasiveevidence of an arrangement between the Company and the customer exists, (ii) deliveryof the product to the customer has occurred or service has been provided to thecustomer, (iii) the price to the customer is fixed or determinable and (iv) collectibilityof the sales price is reasonably assured.

Transaction fee revenue from consumer leads, for bothauto insurance and term life insurance, is recognized when such lead (either asa consumer click-through or after completion of the InsWeb application)is delivered to a participating insurance company. Transaction fee revenue fromclosed policies is recognized in the period that the insurance company has soldan insurance policy from a qualified consumer lead.

Automobile agency commission revenue is based on apercentage of the insurance policy premium related to each insurance policysale where InsWeb has acted as the agent. Automobile agency commission revenueis recognized on the effective date of the policy, less an estimate for earlycancellations of the underlying insurance policies. InsWeb is also entitled,generally, to a commission when the auto insurance policy is renewed.

Term life agencycommission revenue is based upon the first year premium of the policy. InsWebrecognizes revenue on a cash-basis as the commission payment is received fromthe respective term life insurance company. InsWeb generally does not receive acommission for term life policy renewals.

***Online marketing and direct marketing expense***

InsWeb’s marketing strategy is designed to increaseconsumer traffic to its website and to drive awareness of its insuranceproducts and services. The Company employs various means of advertising, whichconsist primarily of online advertising, sponsored search, portal advertising,e-mail campaigns and strategic partnerships with high-profile online companiesthat can drive significant traffic to its site. Fees related to the Company’sonline marketing are expensed in the period the related consumer click-throughoccurs or in some cases, when the consumer leads are generated. Fixed feepayments, which are part of certain strategic partnership agreements, aregenerally expensed on a straight-line basis over the term of the agreement, orratably based on delivery of the specified consumer traffic targets, whichevermethod results in a greater expense during the period. Online advertisingpayments based on per unit transactions are expensed in the period in which theconsumer traffic occurred and are included in direct marketing expense.

Costs related toadvertising and promotions of products are charged to sales and marketingexpense as incurred. Direct marketing expense for the years ended December 31,2004, 2003 and 2002 were $8,327,000, $8,916,000 and $10,985,000, respectively.

F-8

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**INSWEB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***Property and equipment and other long-lived assets***

Property and equipment are stated at cost lessaccumulated depreciation. Depreciation on computer and office equipment,furniture and fixtures and purchased software is calculated using thestraight-line method over the estimated useful lives of the assets, generallytwo to five years. Amortization on leasehold improvements is calculated usingthe straight-line method over the estimated useful lives of the improvements orthe remaining term of the lease, whichever is shorter. Expenditures formaintenance and repairs are charged to expense as incurred.

InsWeb evaluates therecoverability of its long-lived assets in accordance with Statement ofFinancial Accounting Standard No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets” (“SFAS 144”). SFAS 144 requires therecognition of impairment losses related to long-lived assets in the event thenet carrying value of such assets exceeds fair value. InsWeb assesses theimpairment of its long-lived assets annually or when events or changes incircumstances indicate that the carrying value of an asset may not berecoverable.

***Foreign currency transactions***

Prior to repayment in September 2003, thepromissory note payable to a strategic partner and stockholder was remeasuredfrom Japanese yen into U.S. dollars in accordance with Statement of FinancialAccounting Standard No. 52, “Foreign Currency Translation.” Accordingly,it was remeasured at the current exchange rate as of the applicable balance sheetdate and the resulting foreign currency gain (loss) was included in theconsolidated statements of operations as a component of interest and otherincome, net. See further discussion of InsWeb’s investment in Finance All K.K.in Note 7.

In March 2001, the Company exchanged its equityinterest in InsWeb Japan K.K. for a non-controlling interest in Finance AllK.K. Through the date of the exchange, the Company translated its investment inInsWeb Japan K.K. at the applicable balance sheet rate and recorded theresulting translation adjustment in accumulated other comprehensive income(loss), a separate component of stockholders’ equity. Subsequent to theexchange, the Company revalued its investment in Finance All K.K. at theapplicable foreign currency exchange rate and the resulting foreign currencygain (loss) was included in the consolidated statement of operations as acomponent of interest and other income, net. In 2003, InsWeb sold itsinvestment in Finance All K.K. and recognized the cumulative translationadjustment of $211,000, as a component of the total gain on sale of thisinvestment.

The Company recognizedforeign currency gains of $36,000 and $48,000 for the years ending December 31,2003 and 2002, respectively.

***Concentration of risk—credit***

Financial instruments that potentially subject InsWebto concentrations of credit risk, as defined by Statement of FinancialAccounting Standard No. 105, “Disclosure of Information about FinancialInstruments with Off-Balance-Sheet Risk and Financial Instruments withConcentrations of Credit Risk,” consist principally of cash, cash equivalents,short-term investments and accounts receivable. InsWeb deposits its cash andcash equivalents with various domestic financial institutions. Such depositsmay exceed federal deposit insurance limits.

F-9

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**INSWEB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

InsWeb’s short-term investments consist of diversifiedinvestment grade securities. InsWeb’s investment policy limits the amount ofcredit exposure to investments in any one issue, and InsWeb believes nosignificant concentration of credit risk exists with respect to theseinvestments.

InsWeb’s customer base isdispersed across many different geographic areas, and most customers are in theinsurance industry in the United States. Collection of trade receivables may beaffected by changes in economic or other industry conditions and may,accordingly, impact InsWeb’s overall credit risk. InsWeb performs ongoingcredit evaluations of its customers and generally does not require collateral.InsWeb reviews the need for allowances for potential credit losses based onhistorical losses, and records a provision when collectibility is uncertain.The Company has not experienced significant credit losses to date. Generally,receivables are due 30 days from the invoice date and are considered pastdue after this date.

***Concentration of risk—significant customers***

For the year ended December 31,2004, one customer (Progressive) accounted for 10% of total revenues. For theyear ended December 31, 2003, three customers (Progressive, GE Financial Assuranceand American Family) accounted for 14%, 14% and 10% of total revenues,respectively. For the year ended December 31, 2002, three customers(Amica, GE Financial Assurance and Kemper Direct) accounted for 14%, 14%, and10% of total revenues, respectively. At December 31, 2004 and 2003 onecustomer accounted for 14% and 13% of accounts receivable, respectively.

***Income (loss) per share***

Basic income (loss) per share is computed using theweighted-average number of shares of common stock outstanding. Dilutedearnings per share is a measure of the potential dilution that would occur ifstock options and warrants had been exercised. In 2004 and 2002, potentiallydilutive securities have been excluded from the computation of diluted net lossper share, as their effect would be antidilutive.

Thefollowing table reconciles the numerator and denominator used to calculatebasic and diluted income (loss) per share of common stock:
| ** **                                                      | ** ** | **Year Ended December 31,**                                       | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **      2004      ** | ** ** | **      2003      ** | ** ** | **      2002      ** | ** ** |
| ** **                                                      | ** ** | **(In thousands, except per share amounts)**            | ** ** |
| Numerator for  basic and diluted income (loss) per share:       |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Net income (loss) available to common stockholders              |       |                                                                             | $          | (8,933 | ) |   |   | $ | 1,046 |   |   |   | $ | (4,578 | ) |   |
| Denominator for  income (loss) per share:                       |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Basic—weighted average shares of common stock  outstanding |       |                                                                             | 4,711      |   |   |   | 5,030 |   |   |   | 7,035 |   |   |
| Dilutive effect of employee stock options                       |       |                                                                             | —     |   |   |   | 253 |   |   |   | — |   |   |
| Diluted                                                         |       |                                                                             | 4,711      |   |   |   | 5,283 |   |   |   | 7,035 |   |   |
| Income (loss) per share:                                        |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Basic—as reported                                          |       |                                                                             | $          | (1.90 | ) |   |   | $ | 0.21 |   |   |   | $ | (0.65 | ) |   |
| Diluted—as  reported                                       |       |                                                                             | $          | (1.90 | ) |   |   | $ | 0.20 |   |   |   | $ | (0.65 | ) |   |

 

F-10

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**INSWEB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Potentially dilutivesecurities that are not included in the diluted income (loss) calculationbecause they would be antidilutive are employee stock options of 273,000 as of December 31,2004, 1,190,000 as of December 31, 2003 and 1,275,000 as of December 31,2002, and common stock warrants of 17,000 as of December 31, 2003 and60,000 as of December 31, 2002.

***Other comprehensive income (loss)***

Other comprehensive income(loss) includes reclassification adjustments and changes in unrealized gains(losses) on investments. There were no other comprehensive income (loss) itemsfor the year ended December 31, 2002.

***Stock-based compensation***

At December 31, 2004, InsWeb has two stock-basedemployee compensation plans, which are described more fully in Note 11.InsWeb accounts for these plans under the recognition and measurementprinciples of Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees,” and related interpretations (“APB 25”). Under APB25, stock-based compensation expense is based on the difference, if any,between the fair value of InsWeb’s stock and the exercise price of the optionon the measurement date, which is typically the date of grant.

InsWeb accounts for options granted to non-employeesin accordance with the provisions of Emerging Issues Task Force Issue No. 96-18,“Accounting for Equity Instruments that are Issued to Other Than Employees forAcquiring, or in Conjunction with Selling Goods and Services.” Under theseprovisions, options are recorded at their estimated fair value on themeasurement date.

Thefollowing table illustrates the effect on net loss and net loss per share ifInsWeb had applied the fair value recognition provisions of FinancialAccounting Standards Board Statement No. 148, (“SFAS 148”) “Accountingfor Stock-Based Compensation—Transition and Disclosure*,*” to stock-based employeecompensation. The fair value of each option grant is estimated on the date of grantusing the Black-Scholes multiple option-pricing model.
| ** **                                                                                                  | ** ** | **Year Ended December 31,**                                       | ** **   |
|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|--------------|
| ** **                                                                                                  | ** ** | **      2004      ** | ** **   | **      2003      ** | ** ** | **      2002      ** | ** ** |
| ** **                                                                                                  | ** ** | **(In thousands, except per share amounts)**            | *** *** |
| Net income  (loss), as reported                                                                             |       |                                                                             | $            | (8,933 | ) |   |   | $ | 1,046 |   |   |   | $ | (4,578 | ) |   |
| Deduct: Stock-based  employee compensation expense determined under fair value based method for  all awards |       |                                                                             | (586         | ) |   |   | (1,517 | ) |   |   | (2,196 | ) |   |
| Pro forma net  loss                                                                                         |       |                                                                             | $            | (9,519 | ) |   |   | $ | (471 | ) |   |   | $ | (6,774 | ) |   |
| Income (loss) per  share:                                                                                   |       |                                                                             |         |   |   |   |   |   |   |   |   |   |   |
| Basic—as reported                                                                                      |       |                                                                             | $            | (1.90 | ) |   |   | $ | 0.21 |   |   |   | $ | (0.65 | ) |   |
| Diluted—as reported                                                                                    |       |                                                                             | $            | (1.90 | ) |   |   | $ | 0.20 |   |   |   | $ | (0.65 | ) |   |
| Basic—pro forma                                                                                        |       |                                                                             | $            | (2.02 | ) |   |   | $ | (0.09 | ) |   |   | $ | (0.96 | ) |   |
| Diluted—pro forma                                                                                      |       |                                                                             | $            | (2.02 | ) |   |   | $ | (0.09 | ) |   |   | $ | (0.96 | ) |   |
| Stock-based  compensation costs included in the determination of net income (loss), as  reported            |       |                                                                             | $            | — |   |   |   | $ | 25 |   |   |   | $ | — |   |   |

 

F-11

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**INSWEB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Option valuation modelsrequire the input of highly subjective assumptions. Because InsWeb’s employeeand director stock options have characteristics significantly different from thoseof traded options, and because changes in the subjective input assumptions canmaterially affect the fair value estimate, in management’s opinion, theexisting models do not necessarily provide a reliable measure of the fair valueof its employee stock options. For purposes of pro forma disclosures, theestimated fair value of the options is amortized over the options’ vestingperiod. InsWeb is unable to estimate the number of options that employees willultimately retain that otherwise would have been forfeited, absent themodification of options vesting period. Therefore no compensation expenseresulting from the new measurement date is recognized prior to the employee’stermination. The above pro forma disclosures are not necessarily representativeof the effects on reported income or loss for future periods as additionalgrants are made each year and options vest over several years.

***Segment information***

InsWeb operates in onesegment, business-to-consumer electronic insurance services. InsWeb markets itsonline marketplace in the United States. The Chief Executive Officer has beenidentified as the Chief Operating Decision Maker because he has final authorityover resource allocation decisions and performance assessment.

***Recently issued accounting standards***

**Statement ofFinancial Accounting Standard No. 123(R)**

On October 13, 2004,the FASB concluded that Statement 123R, *Share-BasedPayment,*which would require all companies to measure compensationcost for all share-based payments (including employee stock options) at fairvalue, would be effective for public companies for interim or annual periodsbeginning after June 15, 2005. InsWeb may adopt the new standard in one oftwo ways—the modified prospective transition method or the modified retrospectivetransition method. InsWeb plans to adopt Statement 123R in the thirdquarter of fiscal 2005 and is currently evaluating the effect that the adoptionof Statement 123R will have on its financial position and results ofoperations.

**3.   Cash, cashequivalents and short-term investments**

Cashand cash equivalents consist of the following (in thousands):
| ** **              | ** ** | **December 31,** | ** ** |
|-------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Cash                    |       | $                     | 675        |   | $ | 264 |   |
| Money market  funds     |       | 957                   |       | 715 |   |
| Municipal  securities   |       | —                |       | 8,150 |   |
| Commercial paper        |       | 6,105                 |       | 5,195 |   |
| U.S. Agency  securities |       | 1,597                 |       | 899 |   |
|                    |       | $                     | 9,334      |   | $ | 15,223 |   |

 

InsWeb accounts for its short-term investments underStatement of Financial Accounting Standards No. 115, “Accounting forCertain Investments in Debt and Equity Securities” (“SFAS 115”).SFAS 115 requires the classification of investments in debt and equitysecurities with readily determinable fair values as “held-to-maturity,” “available-for-sale,”Por “trading.” Management determines the appropriate 

F-12

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**INSWEB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

classification of its debtsecurities at the time of purchase and reevaluates such designation as of eachbalance sheet date. Securities are classified as held-to-maturity when InsWebhas the positive intent and ability to hold the securities to maturity.Securities classified as held-to-maturity are carried at amortized cost, whichis adjusted for amortization of premiums and accretion of discounts tomaturity. Such amortization is included in interest income. Securities notclassified as held-to-maturity are classified as available-for-sale and arecarried at fair value based on quoted market prices, with unrealized gains andlosses reported as a component of other comprehensive income (loss) instockholders’ equity. The cost of securities sold is based on the specificidentification method.

InsWeb’s investmentportfolio consists of the following (in thousands):
| ** **              | ** ** | **December 31,** | ** ** |
|-------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Available-for-sale:     |       |                  |       |   |   |
| Money market funds      |       | $                     | 957        |   | $ | 715 |   |
| Certificates of deposit |       | 2,247                 |       | 2,164 |   |
| Commercial paper        |       | 6,703                 |       | 6,392 |   |
| Municipal securities    |       | —                |       | 10,150 |   |
| Corporate bonds         |       | 1,991                 |       | 1,683 |   |
| U.S. Agency securities  |       | 4,906                 |       | 4,723 |   |
|                    |       | $                     | 16,804     |   | $ | 25,827 |   |
| Cash equivalents        |       | $                     | 8,659      |   | $ | 14,959 |   |
| Short-term  investments |       | 8,145                 |       | 10,868 |   |
|                    |       | $                     | 16,804     |   | $ | 25,827 |   |

 

At December 31, 2004and 2003, the carrying value of available-for sale securities is shown net ofgross unrealized losses of $8,000 and $0, respectively, which are included as acomponent of stockholders’ equity, and are attributable to InsWeb’s investmentsin commercial paper and other debt securities. At December 31, 2004, thecontractual maturities of InsWeb’s investment portfolio are less than one year.The gains and losses from the sale of available-for-sale securities have notbeen significant to date.

**4.   PrepaidExpenses and Other Current Assets**

Prepaid expenses and other current assets consist ofthe following (in thousands):
| ** **              | ** ** | **December 31,** | ** ** |
|-------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Prepaid insurance       |       | $                     | 331        |   | $ | 417 |   |
| Prepaid marketing  fees |       | —                |       | 144 |   |
| Other                   |       | 376                   |       | 224 |   |
|                    |       | $                     | 707        |   | $ | 785 |   |

 

F-13

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**INSWEB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**5.   Propertyand Equipment**

Propertyand equipment, net, consists of the following (in thousands):
| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Computer and  office equipment |       | $                     | 5,593      |   | $ | 6,163 |   |
| Furniture and  fixtures        |       | 1,208                 |       | 1,208 |   |
| Leasehold  improvements        |       | 687                   |       | 685 |   |
| Software                       |       | 3,220                 |       | 3,166 |   |
|                           |       | 10,708                |       | 11,222 |   |
| Less accumulated  depreciation |       | (9,894                | )          | (9,836 | ) |
|                           |       | $                     | 814        |   | $ | 1,386 |   |

 

Depreciation expense was$715,000, $891,000 and $1,419,000 for the years ended December 31, 2004,2003 and 2002, respectively.

**6.   Other Assets**

Otherassets consist of the following (in thousands):
| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Intangible asset  (see Note 8) |       | $                     | 116        |   | $ | 232 |   |
| Deposits for  operating leases |       | 332                   |       | 375 |   |
| Other                          |       | 2                     |       | 7 |   |
|                           |       | $                     | 450        |   | $ | 614 |   |

 

**7.   FinanceAll K.K. (formerly InsWeb Japan K.K.)**

In 1998, InsWeb entered into an agreement with astrategic partner and stockholder to develop, implement and market an onlineinsurance marketplace in Japan and the Republic of Korea. The venture wascarried out exclusively through InsWeb Japan K.K., a Japanese corporation, inwhich InsWeb owned an equity interest.

InsWeb’s investment in InsWeb Japan K.K. was purchasedin exchange for a promissory note payable to a stockholder. The promissory notewas payable in Japanese yen and accrued interest at 5% per annum, which waspayable quarterly. The promissory note, together with all accrued and unpaidinterest, was repaid in 2003. Interest expense related to this note for theyears ended December 31, 2003 and 2002, were $58,000 and $64,000,respectively.

In 2001, InsWeb and other investors entered into anagreement pursuant to which a new privately-held holding company, Finance AllK.K., controlled InsWeb Japan K.K. and two other Internet companies in whichInsWeb did not hold a financial interest (the “Reorganization”). The purpose ofthe Reorganization was to create a holding company that would collectivelycreate an online financial marketplace consisting of variousbusiness-to-consumer financial services. The online market place would provideservices in the insurance, consumer loan, and home loan (mortgage) marketplacein Japan and the Republic of Korea. In exchange for its shares in InsWeb JapanK.K., InsWeb acquired an ownership interest in Finance All K.K.

F-14

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**INSWEB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

In 2003, InsWeb sold its investment in Finance AllK.K. for gross proceeds of $8,878,000 and recognized a related gain of$6,838,000, which is included as a component of interest and other income, net.

InsWeb’s investmentinterest in Finance All K.K. was being accounted for under the cost method.Prior to the Reorganization, InsWeb accounted for its investment in InsWebJapan K.K. under the equity method, under which InsWeb’s proportionate share ofFinance All K.K. net losses were included as a component of interest and otherincome, net.

**8.   Impairmentof long-lived assets**

***Intuit Insurance Services, Inc.***

In January 2001, InsWeb acquired from Intuit, Inc.certain assets and related liabilities associated with an online insuranceshopping and purchasing service operated by Intuit Insurance Services, Inc.,a wholly-owned subsidiary of Intuit for $30,117,000, comprised of commonstock and fixed payments due over the term of a license and distributionagreement. In connection with the acquisition, InsWeb and Intuit entered into alicense and distribution agreement under which Intuit and InsWeb granted oneanother licenses to create links between their respective websites in order tocreate and operate a co-branded insurance center. InsWeb recorded an intangibleasset of $30,117,000 in connection with this transaction. The fair value of theintangible asset was estimated based on the expected cash flows from theInternet traffic to be received from Intuit by InsWeb.

In 2003 and 2002, as aresult of significantly lower than anticipated traffic levels, InsWebreassessed the recoverability of the assets recorded in connection with thistransaction by comparing the estimated future undiscounted cash flows expectedto be generated relating to this asset to its carrying amount. Based on theseevaluations, InsWeb determined that the acquired asset was impaired, as thecarrying value of the asset was in excess of fair value, and therefore recordedimpairment charges of $214,000 in 2003 and $3,707,000 in 2002. The fair valueof the acquired asset was based on estimated future cash flows to be generatedfrom the Internet traffic to be received from Inuit by InsWeb, discounted usinga rate commensurate with the risk involved.

**9.   AccruedExpenses**

Accruedexpenses consist of the following (in thousands):
| ** **                               | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Accrued employee  compensation           |       | $                     | 559        |   | $ | 1,208 |   |
| Deferred rent                            |       | 522                   |       | 513 |   |
| Accrued marketing  fees                  |       | 83                    |       | 95 |   |
| Marketing  commitment                    |       | 79                    |       | 126 |   |
| Accrued lease  obligations (see Note 10) |       | 2,172                 |       | 2,584 |   |
| Other                                    |       | 41                    |       | 278 |   |
|                                     |       | $                     | 3,456      |   | $ | 4,804 |   |

 

On March 28, 2002, InsWeb and Intuit amendedtheir existing license and distribution agreement. Under the amended agreement,InsWeb made the originally agreed upon fixed payments through July 31, 

F-15

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**INSWEB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

2003. Fixed paymentspreviously payable to Intuit after July 31, 2003 were eliminated. The gainfrom this amended contract was $10,611,000 and was accounted for as otherincome in InsWeb’s results of operations for the year ended December 31,2002.

In connection with theamended license and distribution agreement with Intuit, effective August 1,2003 and through the remainder of the agreement (January 2006), InsWebwill make variable payments to Intuit for a portion of the transaction feesreceived by InsWeb from the Intuit Internet traffic. The remaining marketingcommitment of $79,000 at December 31, 2004 represents the present value ofamounts that are estimated by management to be payable for the remaining termof the agreement. For the year ending December 31, 2004 and 2003, InsWebmade variable payments to Intuit of $123,000 and $57,000, respectively.

**10.   Commitmentsand Contingencies**

***Leases***

InsWeb leases its current office facilities undernon-cancelable operating leases, which expire at various dates through April 2011,including a 10-year lease agreement through 2011 for office space in theSacramento area which houses its corporate headquarters and agency operations.InsWeb has options to extend the lease at the end of the lease term, and hasthe right of first refusal on other office space in the complex. In addition,InsWeb has entered into various sublease arrangements associated withpreviously exited facilities that have terms extending through September 2008.

Net leasecommitments as of December 31, 2004 are summarized as follows (inthousands):
| **Years ending December 31,** | ** ** | ** ** | ** ** | **Gross lease  commitments** | ** ** | **Sublease  income** | ** ** | **Net lease  commitment** | ** ** |
|----------------------------------------------|------------|------------|------------|-----------------------------------|------------|----------------------|------------|--------------------------------|------------|
| 2005                                         |       |       | $          | 3,257                             |       |                 | $          | (1,961                         | )          |   | $ | 1,296 |   |   |
| 2006                                         |       |       | 3,391      |                              |       | (2,030               | )          |                           | 1,361      |   |   |
| 2007                                         |       |       | 3,483      |                              |       | (2,100               | )          |                           | 1,383      |   |   |
| 2008                                         |       |       | 2,936      |                              |       | (1,615               | )          |                           | 1,321      |   |   |
| 2009                                         |       |       | 1,078      |                              |       | —               |       |                           | 1,078      |   |   |
| Thereafter                                   |       |       | 1,437      |                              |       | —               |       |                           | 1,437      |   |   |
|                                         |       |       | $          | 15,582                            |       |                 | $          | (7,706                         | )          |   | $ | 7,876 |   |   |

 

Rent expense for the years ended December 31,2004, 2003, and 2002 was $990,000, $985,000 and $1,043,000 (net of subleaserental income of $1,983,000, $2,074,000 and $3,494,000), respectively.

Security deposits payable (under sublease agreements)as of December 31, 2004 and 2003 were $21,000 and $34,000, respectively.

One of InsWeb’s operating leases is for a 65,000square foot building in Redwood City, California. Under the terms of thislease, InsWeb is responsible for taxes, insurance and maintenance expenses.InsWeb had previously subleased a portion of the Redwood City facility under a four-yearsublease agreement. In July 2002, InsWeb and its sublessee agreed to amendthe sublease, whereby, the sublessee agreed to rent the entire facility for theduration of InsWeb’s lease (through September 2008) and to pay all rentand operating expenses otherwise payable by InsWeb directly to the landlord.Therefore, the amended sublease agreement resulted in a reduction in InsWeb’soperating lease commitments of $7,223,000, through the remainder of the lease.However, the sublessee is a start-up company with limited 

F-16

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**INSWEB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

operating history and,therefore, there are inherent risks and uncertainties associated with itsfuture operations and its ability to discharge its obligations through the termof the sublease. In the event that the sublessee defaults on its obligationsunder the amended sublease, InsWeb would be responsible for making the requiredlease payments to the landlord through the remaining term of the lease.

In connection with thislease and other lease obligations for formerly occupied facilities, InsWeb mustmake assumptions regarding the estimated future sublease income relative tothese facilities. These estimates and assumptions are affected by area-specificconditions such as new commercial development, market occupancy rates andfuture market prices. In 2002, as result of the continued decline in the realestate markets where the InsWeb properties are located and the inherent riskassociated with its sublessee, and due to actions by the sublessee inattempting to renegotiate and/or terminate the amended sublease agreement, theCompany recorded an additional charge of $1,800,000 to increase its accrual forformerly occupied facilities. The remaining accrued lease obligation forformerly occupied facilities was $2,172,000 at December 31, 2004. If theseestimates or their related assumptions change in the future, InsWeb may berequired to record a charge to increase its existing accrual.

***eHealthInsurance litigation***

In February 2001,InsWeb temporarily suspended its online health insurance quoting services dueto the decision by eHealthInsurance, Inc., formerly InsWeb’s exclusiveprovider of online health insurance quotes, to unilaterally terminate theirmarketing agreement. eHealthInsurance filed suit in the U.S. District Court forNorthern California alleging InsWeb’s failure to perform its obligations underthe agreement. In March 2001, InsWeb filed a counterclaim alleging thateHealthInsurance wrongfully terminated the agreement and pursued a course ofconduct aimed at damaging InsWeb’s business. In March 2003, InsWeb andeHealthInsurance agreed to settle ongoing litigation in the U.S. District Courtfor the Northern California. Although specific terms of the settlementagreement are confidential, eHealthInsurance agreed to pay InsWeb $800,000 forthe services performed by InsWeb prior to the termination of the marketingagreement. In addition, the parties released all claims against each otherrelating to the marketing agreement.

***Securities Class Action Lawsuit***

A securities class actionlawsuit was filed on December 5, 2001 in the United States District Courtfor the Southern District of New York, (the “Court”) purportedly on behalf ofall persons who purchased our common stock from July 22, 1999 through December 6,2000. The complaint named as defendants InsWeb, certain current and formerofficers and directors, and three investment banking firms that served asunderwriters for InsWeb’s initial public offering in July 1999. Thecomplaint, as subsequently amended, alleges violations of Sections 11 and 15 ofthe Securities Act of 1933 and Sections 10 and 20 of the Securities ExchangeAct of 1934, on the grounds that the prospectuses incorporated in theregistration statements for the offering failed to disclose, among otherthings, that (i) the underwriters had solicited and received excessive andundisclosed commissions from certain investors in exchange for which theunderwriters allocated to those investors material portions of the shares ofour stock sold in the offerings and (ii) the underwriters had entered intoagreements with customers whereby the underwriters agreed to allocated sharesof the stock sold in the offering to those customers in exchange for which thecustomers agreed to purchase additional shares of InsWeb stock in the aftermarketat pre-determined prices. No specific damages are claimed. Similar allegationshave been made in lawsuits relating to more than 300 other initial publicofferings conducted in 1999 and 2000, all of which have been consolidated forpretrial 

F-17

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**INSWEB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

purposes.In October 2002, all claims against the individual defendants weredismissed without prejudice. In February 2003, the Court dismissed theclaims in the InsWeb action alleging violations of the Securities Exchange Actof 1934 but allowed the plaintiffs to proceed with the remaining claims. In June 2003,the plaintiffs in all of the cases presented a settlement proposal to all ofthe issuer defendants. Under the proposed settlement, the plaintiffs willdismiss and release all claims against participating defendants in exchange fora contingent payment guaranty by the insurance companies collectivelyresponsible for insuring the issuers in all the related cases, and theassignment 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. The settlement wasgiven preliminary approval by the Court in February 2005, pending amodification to the settlement documents. If the settlement is not approved infinal form by the Court, InsWeb would defend the lawsuit vigorously. However,the litigation is in the preliminary stage, and we cannot predict its outcome.The litigation process is inherently uncertain. An unfavorable outcome couldhave a material adverse effect on InsWeb’s financial condition, results ofoperations and cash flows.

**11.   Stockholders’Equity**

***Common stock repurchase program***

In 2002, the Board of Directors authorized managementto repurchase shares of InsWeb’s common stock for a total purchase price of upto $1,000,000 over the succeeding 12-month period, which was subsequentlyextended through December 31, 2003. As of December 31, 2002, a totalof 4,400 shares had been repurchased at a cost of $11,000, or an average priceof $2.50 per share. In 2003, 72,565 shares were repurchased at a cost of$349,000, or an average price of $4.81 per share.

In January 2003,InsWeb implemented a voluntary no-cost program through which stockholdersholding fewer than 100 shares of InsWeb’s common stock were given the option tosell their shares back to the Company at $2.35 per share. In total, 5,377shares were repurchased through this program at a total cost of $13,000. Thisprogram expired in March 2003.

***Negotiated common stock repurchases***

In 2002, the Board of Directors authorized managementto repurchase 107,445 shares of InsWeb’s common stock held by SOFTBANK Ventures, Inc.at a cost of $160,000.

In 2003, the Board of Directors authorized managementto repurchase 2,241,440 shares of InsWeb’s common stock, consisting of1,169,898 shares held by Intuit Insurance Services, Inc. and 1,071,542shares held by SOFTBANK America, Inc. The shares were purchased for$3,810,000, or $1.70 per share. With the closing of this transaction, SOFTBANKCorporation’s holdings of InsWeb common stock were reduced to 353,032 shares,while Intuit Insurance Services, Inc. held no shares.

F-18

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**INSWEB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***Stock option plans***

In July 1997, InsWeb authorized the 1997 StockOption Plan (the “Option Plan”) and the Senior Executive Option Plan (the “ExecutivePlan”). Under the Option Plan, the Board of Directors may issue incentive stockoptions to employees of InsWeb and its subsidiaries and may also issuenonqualified stock options to employees, officers, directors, independentcontractors and consultants of InsWeb and its subsidiaries. Under the ExecutivePlan, the Board of Directors may issue nonqualified stock options to employees,officers and directors of InsWeb and its subsidiaries. In May 2003, theOption Plan was amended, with stockholder approval, to provide that eachdirector would receive a fully-vested option to purchase 5,000 shares ofcommon stock on July 1st (or the first business day thereafter)of each year in which the director remains in office. This option grant is inlieu of previously granted options for each Board or committee meetingattended. The Option Plan provides for an automatic annual increase in theshare reserve, to be effective on the first day of each fiscal year, by anumber of shares equal to 5% of the number of common shares outstanding as ofthe last day of the preceding fiscal year. Options granted under both plans arepriced at the fair market value on the date of grant and generally vest inequal monthly installments over a one to three year period, except for certainoptions granted to members of InsWeb’s Board of Directors, which vestimmediately. Options generally expire ten years from the date of grant. 

Activityunder all of the Company’s stock option plans is as follows: 
| ** **                        | ** ** | **Shares Available  for Grant**                                  | ** ** | **Shares  Outstanding** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|-----------------------------------|------------|----------------------------------------------------------------------------|------------|-------------------------|------------|------------------------------------------------|------------|
| ** **                        | ** ** | **(in thousands, except exercise price amounts)** | ** ** |
| Balances, December 31,  2001 |       |                                                                       | 704        |                    |       |                                           | 700        |   |   |   | $ | 37.81 |   |   |
| Additional shares  reserved       |       |                                                                       | 353        |                    |       |                                           | —     |   |   |   | — |   |   |
| Granted                           |       |                                                                       | (702       | )                       |       |                                           | 702        |   |   |   | $ | 4.54 |   |   |
| Canceled/forfeited                |       |                                                                       | 127        |                    |       |                                           | (127       | ) |   |   | $ | 31.62 |   |   |
| Balances,  December 31, 2002 |       |                                                                       | 482        |                    |       |                                           | 1,275      |   |   |   | $ | 20.08 |   |   |
| Additional shares  reserved       |       |                                                                       | 347        |                    |       |                                           | —     |   |   |   | — |   |   |
| Granted                           |       |                                                                       | (584       | )                       |       |                                           | 584        |   |   |   | $ | 2.69 |   |   |
| Exercised                         |       |                                                                       | —     |                    |       |                                           | (8         | ) |   |   | $ | 2.98 |   |   |
| Canceled/forfeited                |       |                                                                       | 120        |                    |       |                                           | (120       | ) |   |   | $ | 15.68 |   |   |
| Balances,  December 31, 2003 |       |                                                                       | 365        |                    |       |                                           | 1,731      |   |   |   | $ | 14.62 |   |   |
| Additional shares  reserved       |       |                                                                       | 232        |                    |       |                                           | —     |   |   |   | — |   |   |
| Granted                           |       |                                                                       | (271       | )                       |       |                                           | 271        |   |   |   | $ | 4.51 |   |   |
| Exercised                         |       |                                                                       | —     |                    |       |                                           | (137       | ) |   |   | $ | 2.55 |   |   |
| Canceled/forfeited                |       |                                                                       | 721        |                    |       |                                           | (721       | ) |   |   | $ | 22.94 |   |   |
| Balances,  December 31, 2004 |       |                                                                       | 1,047      |                    |       |                                           | 1,144      |   |   |   | $ | 8.54 |   |   |

 

F-19

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**INSWEB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Optionsoutstanding and currently exercisable by exercise price at December 31, 2004are as follows: 
| ** **               | ** ** | **Options Outstanding**                                                                                   | ** ** | ** **                           | ** ** |
|--------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **               | ** ** | ** **                                                                                                     | ** ** | **Weighted Average  Remaining** | ** ** | **Options Currently Exercisable** | ** ** |
| **Exercise Prices** | ** ** | ** **                                                                                                     | ** ** | **Number  Outstanding**              | ** ** | **Contractual  Life (in years)** | ** ** | **Number  Outstanding** | ** ** | **Weighted Average  Exercise Price** | ** ** |
| ** **               | ** ** | **(in thousands, except contractual life and exercise price amounts)** | ** ** |
| $1.40 - $2.05            |       |                                                                                                           | 263        |                                 |       |   | 8.24 |   |   |   | 144 |   |   |   | $ | 2.03 |   |   |
| $2.21 - $4.74            |       |                                                                                                           | 173        |                                 |       |   | 8.85 |   |   |   | 80 |   |   |   | $ | 4.23 |   |   |
| $4.75 - $4.95            |       |                                                                                                           | 353        |                                 |       |   | 7.47 |   |   |   | 293 |   |   |   | $ | 4.93 |   |   |
| $4.97 - $5.00            |       |                                                                                                           | 141        |                                 |       |   | 9.25 |   |   |   | 32 |   |   |   | $ | 5.00 |   |   |
| $5.05 - $12.75           |       |                                                                                                           | 122        |                                 |       |   | 6.34 |   |   |   | 119 |   |   |   | $ | 6.70 |   |   |
| $12.94 - $19.50          |       |                                                                                                           | 47         |                                 |       |   | 5.48 |   |   |   | 47 |   |   |   | $ | 13.98 |   |   |
| $24.19 - $270.00         |       |                                                                                                           | 45         |                                 |       |   | 4.72 |   |   |   | 45 |   |   |   | $ | 102.18 |   |   |
|                     |       |                                                                                                           | 1,144      |                                 |       |   | 7.76 |   |   |   | 760 |   |   |   | $ | 10.96 |   |   |
|                          |            |                                                                                                                |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Theper share weighted average fair value of options granted in 2004, 2003 and 2002of $2.04, $1.82 and $3.19, respectively, was estimated on the date of grantusing the Black-Scholes options pricing model with the followingassumptions: 
| ** **                | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------|------------|--------------------------------------------|------------|
| ** **                | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Risk-free  interest rate  |       | 3.3                                        | %          | 2.8 | % | 3.7 | % |
| Expected  Volatility      |       | 0.57                                       |       | 0.88 |   | 0.90 |   |
| Expected life (in  years) |       | 4.76                                       |       | 4.79 |   | 4.90 |   |
| Assumed dividend yield    |       | 0                                          | %          | 0 | % | 0 | % |

 

***Employee stock purchase plan***

InsWeb has an EmployeeStock Purchase Plan (the “1999 Plan”) under which eligible employees may authorizepayroll deductions of up to 15% of their compensation to purchase shares at 85%of the lower of the fair market value of the Common Stock on the date ofcommencement of the offering or on the last day of the six-month purchaseperiod. During 2004, 2003 and 2002, 7,574, 19,034 and 19,905 shares,respectively, were distributed to employees at prices ranging from $1.84 pershare to $4.54 per share. The weighted average fair value of the 2004, 2003 and2002 awards were $3.85, $1.84 and $3.21 per share, respectively. At December 31,2004, InsWeb had 281,000 shares of its common stock reserved for futureissuance under the 1999 Plan. The number of shares of common stock issuableunder the 1999 Plan is increased by 50,000 shares each year until January 1,2008. 

***Common stock warrants***

In connection with aconsulting agreement with a third party entered into during 2003, InsWeb issuedwarrants to purchase an aggregate of 17,088 shares of InsWeb’s common stock ata purchase price of $4.59 per share. The warrants became exercisable on October 23,2003 and were surrendered and cancelled on October 23, 2004. The fairvalue of the warrants of $25,000 was derived using the Black-Scholesoption-pricing model.

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**INSWEB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**12.   RelatedParty Transactions**

***Marketing agreements***

For 2004, 2003 and 2002, InsWeb recognized $453,000,$338,000 and $1,085,000, respectively in marketing expense under a marketingagreement with an Internet company. An affiliate of the Internet company was astockholder of InsWeb from 1999 through 2004. 

For 2004, 2003 and 2002,InsWeb paid Intuit $123,000, $2,035,000 and $3,000,000, respectively, under thelicense and distribution agreement. See also Notes 8 and 10. 

**13.   IncomeTaxes**

As of December 31, 2004 and 2003, InsWeb had netoperating loss carry forwards of approximately $173,000,000 and $161,000,000for federal income tax purposes and $104,000,000 and $91,000,000 for stateincome tax purposes, respectively. The federal and state net operating losscarry forwards begin to expire in the years 2011 and 2006, respectively. InsWeb’sability to utilize its net operating loss carry forwards to offset futuretaxable income may be subject to restrictions attributable to equitytransactions that result in changes in ownership as defined in the Tax ReformAct of 1986. These restrictions may limit, on an annual basis, InsWeb’s futureuse of its net operating loss carry forwards. The amount, if any, of suchlimitations has not yet been determined. 

Thecomponents of the net deferred tax assets and liabilities are presented below(in thousands): 
| ** **                         | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Net operating  loss carry forwards |       | $                     | 64,781     |   | $ | 59,939 |   |
| Tax credit carry  forwards         |       | 1,228                 |       | 880 |   |
| Accruals and  allowances           |       | 8,437                 |       | 8,810 |   |
| Other                              |       | (4,000                | )          | (2,941 | ) |
|                               |       | 70,446                |       | 66,688 |   |
| Less valuation  allowance          |       | (70,446               | )          | (66,688 | ) |
| Net deferred tax asset             |       | $                     | —     |   | $ | — |   |

 

Due to uncertainty surrounding the realization of thefavorable tax attributes in future tax returns, InsWeb has recorded a valuationallowance against its net deferred tax asset. The valuation allowance recordedfor the years ended December 31, 2004 and 2003 increased by $3,758,000 and$1,400,000, respectively. Deferred tax assets relating to net operating losscarryforwards for federal and state purposes as of December 31, 2004 and December 31,2003 include approximately $3,140,000associated with stock compensation activity for which subsequent realized taxbenefits, if any, will be credited directly to equity in the future. 

Thedifference between the income tax benefit at the federal statutory rate of 34%and InsWeb’s effective tax rate is due primarily to the valuation allowanceestablished to offset the deferred tax assets.

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**INSWEB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The provision for incometaxes is different than the amount computed using the applicable statutoryfederal income tax rate with the difference for each year summarized below: 
| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2004**              | ** ** | **2003** | ** ** | **2002** | ** ** |
| Federal tax (benefit) at  statutory rate         |       | 34                    | %          | 34 | % | (34 | )% |
| State taxes, net of  federal benefit             |       | —                | %          | — | % | (5 | )% |
| Other                                            |       | —                | %          | 1 | % | — | % |
| Adjustment due to change  in valuation allowance |       | (34                   | )%         | (35 | )% | 39 | % |
| Provision for income taxes                       |       | 0                     | %          | 0 | % | 0 | % |

 

**14.   Employee Benefit Plan**

InsWeb has a definedcontribution plan offered to all eligible employees, which is qualified undersection 401(k) of the Internal Revenue Code. InsWeb will match 50% ofthe first 6% of elective contributions made by each qualifying employee. Eachparticipant is 100% vested in elective contributions and is incrementallyvested one-third at the end of each of three consecutive years of service inemployer contributions. Employer contributions for 2004, 2003 and 2002 were$161,000, $219,000 and $158,000, respectively.

**15.   Quarterly Financial Information (unaudited)**
| ** **                                           | ** ** | **Quarter ended**                                                             | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **Mar. 31**                                                                   | ** ** | **Jun. 30** | ** ** | **Sept. 30** | ** ** | **Dec. 31** | ** ** |
| ** **                                           | ** ** | **(amounts in thousands, except per share amounts)** | ** ** |
| **Fiscal 2004:**                                     |       |                                                                               |       |   |   |   |   |   |   |
| Total revenues                                       |       | $                                                                                  | 4,055      |   | $ | 3,366 |   | $ | 3,375 |   | $ | 3,864 |   |
| Operating expenses                                   |       | 6,086                                                                              |       | 5,941 |   | 5,679 |   | 6,122 |   |
| Loss from operations                                 |       | (2,031                                                                             | )          | (2,575 | ) | (2,304 | ) | (2,258 | ) |
| Other income (expense),  net                         |       | 71                                                                                 |       | 44 |   | 80 |   | 40 |   |
| Net (loss) income                                    |       | $                                                                                  | (1,960     | ) | $ | (2,531 | ) | $ | (2,224 | ) | $ | (2,218 | ) |
| Net (loss) income per  share—basic and diluted: |       | $                                                                                  | (0.42      | ) | $ | (0.54 | ) | $ | (0.47 | ) | $ | (0.46 | ) |
| **Fiscal 2003 (notes 1 and 2):**                     |       |                                                                               |       |   |   |   |   |   |   |
| Total revenues                                       |       | $                                                                                  | 7,481      |   | $ | 6,324 |   | $ | 6,186 |   | $ | 4,140 |   |
| Operating expenses                                   |       | 8,911                                                                              |       | 7,781 |   | 7,667 |   | 6,763 |   |
| Loss from operations                                 |       | (1,430                                                                             | )          | (1,457 | ) | (1,481 | ) | (2,623 | ) |
| Other income (expense),  net                         |       | 841                                                                                |       | 71 |   | 886 |   | 6,239 |   |
| Net income (loss)                                    |       | $                                                                                  | (589       | ) | $ | (1,386 | ) | $ | (595 | ) | $ | 3,616 |   |
| Net (loss) income per share:                         |       |                                                                               |       |   |   |   |   |   |   |
| Basic                                                |       | $                                                                                  | (0.10      | ) | $ | (0.30 | ) | $ | (0.13 | ) | $ | 0.74 |   |
| Diluted                                              |       | $                                                                                  | (0.10      | ) | $ | (0.30 | ) | $ | (0.13 | ) | $ | 0.73 |   |

----

(1)          Includedin other income for the quarter ended March 31, 2003 was $800,000 relatingto the litigation settlement with eHealthInsurance, Inc. *See Note 10.*

(2)          Includedin other income for the quarters ended September 30 and December 31,2003 was $850,000 and $6,016,000, respectively, relating to the gain from thesale of InsWeb’s investment in Finance All K.K. *See Note 7.*

F-22

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**Item 9.**                        Changes inand Disagreements With Accountants on Accounting and Financial Disclosure.

None.

**Item 9A.**                Controls andProcedures.

**(a)****        *****Evaluation of disclosurecontrols and procedures***.   Under the supervision and withthe participation of our management, including our principal executive officerand principal financial officer, we evaluated the effectiveness of ourdisclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended. Based upon thatevaluation, our principal executive officer and principal financial officerconcluded that our disclosure controls and procedures were effective as of theend of the period covered by this annual report.

**(b)****        *****Changes in internalcontrol over financial reporting.***   There has been no changein the Company’s internal control over financial reporting during the quarterended December 31, 2004 that has materially affected, or is reasonablylikely to affect, the Company’s internal control over financial reporting.

**Item 9B.**               Other Information.

None.

**PART III**

The SEC allows us toinclude information required in this report by referring to other documents orreports we have already filed or will soon be filing. This is called “incorporationby reference.” We intend to file our definitive proxy statement pursuant toRegulation 14A not later than 120 days after the end of the fiscalyear covered by this report, and certain information therein is incorporated inthis report by reference.

**Item 10.**                 Directors andExecutive Officers of the Registrant.

The information requiredby this Item is incorporated by reference to information set forth in ourdefinitive proxy statement under the heading “Management.”

**Item 11.**                 ExecutiveCompensation.

The information requiredby this Item is incorporated by reference to information set forth in ourdefinitive proxy statement under the heading “Executive Compensation and OtherMatters.”

**Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters.

The information requiredby this Item is incorporated by reference to information set forth in ourdefinitive proxy statement under the heading “Stock Ownership of CertainBeneficial Owners and Management.”

**Item 13.**                 CertainRelationships and Related Transactions.

The information requiredby this Item is incorporated by reference to information set forth in ourdefinitive proxy statement under the heading “Certain Relationships And RelatedTransactions.”

37

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**Item 14.**                 PrincipalAccountant Fees and Services

The information requiredby this Item is incorporated by reference to information set forth in ourdefinitive proxy statement under the heading “Principal Accountant Fees andServices.”

**PART IV**

**Item 15.      Exhibits, Financial Statement Schedules.**

**(a)  **Thefollowing documents are filed as part of this Form:

1.      Financial Statements:
|                                                          | ** ** | **Page** |
|----------------------------------------------------------|------------|----------|
| Report  of Independent Registered Public Accounting Firm |       | F-2      |
| Consolidated  Balance Sheets                             |       | F-3      |
| Consolidated  Statements of Operations                   |       | F-4      |
| Consolidated  Statements of Stockholders’ Equity    |       | F-5      |
| Consolidated  Statements of Cash Flows                   |       | F-6      |
| Notes to Consolidated Financial  Statements              |       | F-7      |

 

2.      FinancialStatement Schedules:

Thefollowing financial statement schedule of InsWeb Corporation for the yearsended December 31, 2004, 2003 and 2002 is filed as part of this report andshould be read in conjunction with the consolidated financial statements ofInsWeb Corporation.
| Schedule II—Valuation and  Qualifying Accounts |   | 41 |
|-----------------------------------------------------|--------|----|

 

Other schedules have beenomitted because the required information is not present or not present inamounts sufficient to require submission of the schedules or because theinformation required is included in the consolidated financial statements ornotes thereto.

3.      Exhibits:

See Index to Exhibits. The Exhibits listed in theaccompanying Index are filed as part of this report.

38

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934 the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, on March 25, 2005.
|        | INSWEB CORPORATION |
|--------|--------------------|
|   | By:                | /s/ WILLIAM D. GRIFFIN |
|   |               | William D. Griffin*Chief Financial Officer* |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated:
|                            | **Signature** | ** **                                         | ** ** | ** **          | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|----------------------------|---------------|----------------------------------------------------|------------|---------------------|-----------|------------|------------|------------|----------|------------|
| /s/  HUSSEIN A. ENAN       |          | Chairman of the Board  and Chief Executive Officer |       | March 25, 2005 |
| Hussein A. Enan            |          |                                               |       |                |
| /s/  WILLIAM D. GRIFFIN    |          | Chief Financial Officer                            |       | March 25, 2005 |
| William D.  Griffin        |          | (Principal Financial and Accounting Officer)       |       |                |
| /s/  JAMES M. CORROON      |          | Vice Chairman of the  Board                        |       | March 25, 2005 |
| James M. Corroon           |          |                                               |       |                |
| /s/  DENNIS H. CHOOKASZIAN |          | Director                                           |       | March 25, 2005 |
| Dennis H.  Chookaszian     |          |                                               |       |                |
| /s/  THOMAS W. ORR         |          | Director                                           |       | March 25, 2005 |
| Thomas W. Orr              |          |                                               |       |                |
| /s/  ROBERT A. PUCCINELLI  |          | Director                                           |       | March 25, 2005 |
| Robert A.  Puccinelli      |          |                                               |       |                |

 

39

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**INSWEB CORPORATION**

**EXHIBITSTO FORM 10-K ANNUAL REPORT**

**FORTHE YEAR ENDED DECEMBER 31, 2004**
| Exhibit Number | ** ** | **Description of Document**                                                                                                                                                                       |
|----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1            |       | Asset Purchase Agreement by and between Registrant,  Intuit Insurance Services, Inc. and Intuit Inc., dated as of  November 25, 2000.(1)                                                |
| 2.2†      |       | License and Distribution  Agreement by and between Registrant and Intuit Inc., dated as of  January 24, 2001.(1)                                                                             |
| 2.3†      |       | Second Amendment to  License and Distribution Agreement by and between Registrant and Intuit Inc.,  dated as of March 28, 2002.(2)                                                           |
| 3.1            |       | Amended and Restated  Certificate of Incorporation of Registrant.(3)                                                                                                                              |
| 3.2            |       | Bylaws of Registrant.(3)                                                                                                                                                                          |
| 4.1            |       | Fourth Amended and  Restated Investor Rights Agreement between Registrant and certain  Stockholders of Registrant, dated as of January 24, 2001.(4)                                          |
| 10.1*          |       | Form of  Indemnification Agreement between Registrant and Registrant’s directors and  officers.(3)                                                                                      |
| 10.2*          |       | Registrant’s 1997 Stock  Option Plan.(3)                                                                                                                                                     |
| 10.3*          |       | Registrant’s 1999  Employee Stock Purchase Plan.(3)                                                                                                                                          |
| 10.4*          |       | Employment Agreement  between Registrant and Hussein A. Enan, dated July 1, 1999.(5)                                                                                                    |
| 10.5           |       | Joint Venture Agreement  by and between Registrant and SOFTBANK Corp., dated as of December 15,  1998.(6)                                                                                    |
| 10.6           |       | Shareholders Agreement  by and among SOFTBANK Finance Corporation, Registrant, E-LOAN, Inc.  and Marsh & McLennan Risk Capital Holdings, Ltd., dated as of  March 28, 2001.(5) |
| 10.7†     |       | License Agreement  between Registrant and Yahoo! Inc., dated as of February 12, 1999.(7)                                                                                                     |
| 10.8†     |       | Third Amendment to  License Agreement between Registrant and Yahoo! Inc., dated as of  September 24, 2001.(5)                                                                                |
| 10.9           |       | Assignment of Lease and  Profit Sharing Agreement by and between Registrant and Spieker Properties  L.P. dated June 28, 2000.(8)                                                             |
| 10.10*         |       | Retention Agreement  between Registrant and Mark P. Guthrie, dated June 23, 2000.(9)                                                                                                         |
| 10.11          |       | Lease Agreement between  Registrant and Oates/Allegheny Venture I, LLC, dated September 29,  2000.(10)                                                                                  |
| 10.12          |       | Third Amendment to  Sublease Agreement between Registrant and Seven Networks, Inc., dated May 1,  2002.(11)                                                                             |
| 10.13†    |       | Fifth Amendment to  License Agreement between Registrant and Yahoo! Inc., dated as of  September 30, 2002.(11)                                                                               |
| 10.14          |       | Promissory Note between  Registrant and SOFTBANK Finance Corporation, dated March 13, 2003.(11)                                                                                              |
| 10.15          |       | Stock Purchase Agreement  between Registrant and SOFTBANK Ventures, Inc., dated December 12,  2002.(11)                                                                                 |
| 10.16*         |       | InsWeb Corporation Executive Retention and Severance Plan.(12)                                                                                                                                    |
| 10.17          |       | Stock Purchase Agreement  between Registrant and Softbank America, Inc., dated February 20,  2003.(13)                                                                                  |

40

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| 10.18 |   | Stock Purchase Agreement  between Registrant and Intuit Insurance Services, Inc., dated  February 20, 2003.(13)                                      |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.20 |   | Compensation  Arrangements for Named Executive Officers.(14)                                                                                                   |
| 14.1  |   | Code of Business Conduct  and Ethics.(13)                                                                                                                      |
| 21.1  |   | Subsidiaries of  Registrant.(14)                                                                                                                               |
| 23.1  |   | Consent of Independent  Registered Public Accounting Firm.(14)                                                                                                 |
| 31.1  |   | Certification of  Chief Executive Officer, pursuant to Rule 13a-14(a) and  Rule 15d-14(a) of the Securities Exchange Act, as  amended.(14) |
| 31.2  |   | Certification of Chief  Financial Officer, pursuant to Rule 13a-14(a) and  Rule 15d-14(a) of the Securities Exchange Act, as  amended.(14) |
| 32.1  |   | Certification of Chief  Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C.  Section 1350.(14)                                      |

----

(1)          Incorporated byreference to identically numbered exhibit to Registrant’s Current Report on Form 8-Kfiled on February 8, 2002.

(2)          Incorporated byreference to identically numbered exhibit to Registrant’s Quarterly Report on Form 10-Qfor the quarter ended March 31, 2002.

(3)          Incorporated byreference to identically numbered exhibit to Registrant’s RegistrationStatement on Form S-1 (File No. 333-78095), as amended(the “Form S-1”).

(4)          Incorporated byreference to Exhibit 2.3 to Registrant’s Current Report on Form 8-Kfiled on February 8, 2002.

(5)          Incorporated byreference to identically numbered exhibit to Registrant’s Annual Report on Form 10-Kfor the year ended December 31, 2001.

(6)          Incorporated byreference to Exhibit 10.16 to the Form S-1.

(7)          Incorporated byreference to Exhibit 10.18 to the Form S-1.

(8)          Incorporated byreference to Exhibit 10.21 to Registrant’s Quarterly Report on Form 10-Qfor the quarter ended June 30, 2000.

(9)          Incorporated byreference to Exhibit 10.22 to Registrant’s Quarterly Report on Form 10-Qfor the quarter ended June 30, 2000.

(10)   Incorporated by reference to Exhibit 10.23to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30,2000.

(11)   Incorporated by reference toidentically numbered exhibit to Registrant’s Annual Report on Form 10-Kfor the year ended December 31, 2002.

(12)   Incorporated by reference to Exhibit 10.13to Registrant’s Quarterly Report on Form 10-Q for the three monthsended June 30, 2004.

(13)   Incorporated by reference toidentically numbered exhibit to Registrant’s Annual Report on Form 10-Kfor the year ended December 31, 2003.

(14)   Filed herewith.

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

*                    Constitutes amanagement contract or a compensatory plan or arrangement.

41

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**INSWEB CORPORATION**

**SCHEDULEII**

**VALUATION ANDQUALIFYING ACCOUNTS**

**Yearsended December 31, 2004, 2003 and 2002**
| Description                         | ** ** | ** ** | ** ** | **Balance at  Beginning  of Period** | ** ** | **Charged to  Costs and  Expenses** | ** ** | **Charged  to Other  Accounts** | ** ** | **Deductions** | ** ** | **  Balance at    End of  Period** | ** ** |
|-------------------------------------|------------|------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------|------------|----------------|------------|------------------------------------------------------------------|------------|
| Year ended December 31,  2004: |       |       |       |                                           |       |                                          |       |                                 |       |           |       |                                                             |       |   |   |   |   |
| Allowance for doubtful  accounts    |       | $          | 47,000     |                                           |       | $                                             | —     |                                 |       |           | $          | —                                                           |       |   | $ | (20,000 | ) |   | $ | 27,000 |   |   |
| Year ended  December 31, 2003: |       |       |       |                                           |       |                                          |       |                                 |       |           |       |                                                             |       |   |   |   |   |
| Allowance for  doubtful accounts    |       | $          | 58,000     |                                           |       | $                                             | —     |                                 |       |           | $          | —                                                           |       |   | $ | (11,000 | ) |   | $ | 47,000 |   |   |
| Year ended December 31,  2002: |       |       |       |                                           |       |                                          |       |                                 |       |           |       |                                                             |       |   |   |   |   |
| Allowance for doubtful  accounts    |       | $          | 167,000    |                                           |       | $                                             | —     |                                 |       |           | $          | —                                                           |       |   | $ | (109,000 | ) |   | $ | 58,000 |   |   |

 

42

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