This Quarterly Report on Form 10-Q, and in particular Management's Discussion and Analysis of Financial Condition and Results of Operations, contains "forward-looking statements" with respect to InsWeb's future financial performance. The words or phrases "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," and similar expressions are generally intended to identify forward-looking statements. Such forward-looking statements 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. Actual results could differ materially from those anticipated in such forward-looking statements due to a number of factors, some of which are beyond InsWeb's control, including, but not limited to, uncertain economic conditions which could result in lower growth rates, fluctuations in revenues, anticipated and unanticipated losses, the unpredictability of consumer shopping and/or buying behavior, especially on the internet, potential increases in advertising and marketing costs on the internet, the rate of participation by insurance companies and agents, reliance on key customers, who are themselves subject to volatility in their operating cycles, reliance on a third party intermediary who provides leads to local insurance agents on InsWeb's behalf, competition,risks associated with system development and operation risks, management of potential growth and risks of new business areas, business combinations, litigation in which InsWeb is a party, and strategic alliances. These risks and uncertainties, as well as other risks and uncertainties, which are described in greater detail in InsWeb's Annual Report on Form 10-K for the year ended December 31, 2007 and other documents filed with the Securities and Exchange Commission, could cause InsWeb's actual results to differ materially from historical results or those currently anticipated. All forward-looking statements are based on information available to InsWeb on the date hereof, and InsWeb assumes no obligation to update such statements.

Overview

InsWeb (the "Company," "InsWeb," "we," "us," or "our") operates an online insurance marketplace that enables consumers to comparison shop online and to obtain insurance company-sponsored quotes for a variety of insurance products, including automobile, homeowners and term life. InsWeb's marketplace electronically matches consumers and insurance providers. InsWeb has combined extensive knowledge of the insurance industry, technological expertise and close relationships with a significant number of insurance companies, agents and insurance providers to develop an integrated online marketplace.

For the automobile and homeowners insurance products, our principal source of revenues is transaction fees from participating insurance providers. While quotes obtained through our online insurance marketplace are provided to consumers free of charge, we earn revenues when a qualified lead is delivered to a participating insurance provider or local agent. In certain instances, consumers are provided the opportunity to link directly to a third party insurance provider's website. In these situations, we will be paid a fee for that consumer link or click-through whether or not the consumer completes the third party's online application.

For term life insurance, the majority of our revenues prior to April 2007 consisted of commissions earned by our insurance agency subsidiary, InsWeb Insurance Services, Inc., upon the sale of a term life insurance policy. We discontinued the term life agency operation in April 2007 but continued to earn commissions throughout 2007 (in decreasing amounts) on a limited number of policies written prior to the discontinuation of the agency operations Beginning in 2008, substantially all of our term life insurance were being generated by the sale of leads to third parties and to local agents.

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

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

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

Results of Operations



Financial highlights and key metrics are as follows:



                                                 Three months Ended                   Nine months Ended
                                          September 30,      September 30,     September 30,     September 30,
                                              2008               2007              2008              2007
Revenues (in thousands):
Auto                                     $         7,574    $         7,995   $        26,036   $        20,972
Home/condo/renters                                   862                554             2,807             1,331
Term life                                            377                611             1,222             2,933
Agent Directory                                      134                  -               590                 -
Other                                                  8                  7                22                37
Total transaction fees                   $         8,955    $         9,167   $        30,677   $        25,273
# of consumers (in thousands):
Auto                                               2,245              1,802             7,140             4,568
Home/condo/renters                                   212                150               607               297
Term life                                             17                 14                42                88
Agent Directory                                      383                N/A             1,579               N/M
Total                                              2,857              1,966             9,368             4,953
Transaction revenue per consumer:
Auto                                     $          3.37    $          4.44   $          3.64   $          4.59
Home/condo/renters                       $          4.06    $          3.69   $          4.62   $          4.48

Auto Segment B revenue per click:        $          6.30    $          6.49   $          6.47   $          6.14
Avg. times lead sold (auto and home):               3.93                N/M              3.78               N/M
Agent network (auto and home):
AgentInsider approved agents                       6,775              4,902             6,775             4,902

Direct marketing costs (in thousands):   $         6,497    $         5,899   $        22,040   $        15,024
Marketing costs per consumer:
Total                                    $          2.27    $          3.00   $          2.35   $          3.03
Excluding Agent Directory                $          2.59    $          3.00   $          2.75   $          3.03
Direct marketing costs as a percent of
revenues:                                             73 %               64 %              72 %              59 %

Cash and cash equivalents (in
thousands):                              $         9,125    $         8,491   $         9,125   $         8,491
Account receivable (in thousands):       $         2,410    $         5,104   $         2,410   $         5,104
Day sales outstanding (DSO):                          24                 43                24                43
Staffing:                                             89                 59                89                59

Definitions:

"# of consumers"           Represents consumers acquired from marketing
                           activities

"Per consumer              Represents revenues earned or marketing costs
information"               incurred per consumer who has started an InsWeb quote
                           form

"Segment B"                Auto insurance consumers classified as non-standard
                           (bad driving record, not enough experience, or not
                           permanently insured for 3 years)

"Avg. times lead sold      Total # of times a lead is sold, including leads sold
                           by NetQuote on our behalf

"AgentInsider approved     # of agents approved to buy leads through
agents"                    AgentInsider

"Direct marketing costs"   Represents expenses incurred by InsWeb to acquire the
                           consumers to InsWeb's online insurance marketplace

"N/M"                      Information not meaningful

"N/A"                      Information not applicable

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

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

Term life insurance transaction fees (consisting primarily of lead fees) decreased to $0.4 million and $1.2 million for the three and nine months ended September 30, 2008, from $0.6 million and $2.9 million for the comparable periods in 2007. The decrease in term life revenues is attributable to the absence of commission based revenue following our decision in April 2007 to wind-down our term life agency in order to focus on lead generation opportunities. Beginning in 2008, term life insurance products are being offered to our consumers only through our online insurance marketplace, using a lead generation model.

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

Operating Expenses



                                       Three months ended      Percentage
                                         September 30,        change from
(in thousands, except percentages)      2008         2007     prior period

Operating expenses:
Direct marketing                     $    6,497    $  5,899             10 %
Sales and marketing                       1,505       1,251             20
Technology                                  774         691             12
General and administrative                  877       1,034            (15 )




                                       Nine months ended      Percentage
                                         September 30,       change from
(in thousands, except percentages)      2008        2007     prior period

Operating expenses:
Direct marketing                     $   22,040   $ 15,024             47 %
Sales and marketing                       4,233      4,056              4
Technology                                2,401      2,344              2
General and administrative                3,276      3,259              1

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

Sales and Marketing. Sales and marketing expenses consist primarily of payroll and related expenses, including employee benefits, facility costs, telecommunications and systems costs, for our sales and marketing personnel. Sales and marketing expenses increased to $1.5 million and $4.2 million for the three and nine months ended September 30, 2008, from $1.3 million and $4.1 million for the comparable periods in 2007. The increase for the three and nine months ended September 30, 2008 was primarily due to an increase in headcount related expenses. Sales and marketing expenses for the remainder of 2008 are expected to remain at current levels.

Technology. Technology expenses consist primarily of payroll and related expenses, including employee benefits, facility and systems costs, for product and site development personnel involved with our technology initiatives. Technology expenses increased to $0.8 million and $2.4 million for the three and nine months ended September 30, 2008 from $0.7 million and $2.3 million for the comparable periods in 2007. The increase for the three and nine months ended September 30, 2008 was primarily due to an increase in headcount related expenses. Technology expenses for the remainder of 2008 are expected to remain at current levels.

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

Interest and Other Income

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

Provision (Benefit) for Income Taxes

A benefit of $44,000 was recognized for the three and nine months ended September 30, 2008. No benefits were recognized for the comparable periods in 2007.

Critical Accounting Policies

InsWeb's discussion and analysis of its financial condition and results of operations are based on InsWeb's consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires InsWeb to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. InsWeb bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. InsWeb believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Contingencies. As discussed in Part I, Item 3 ("Legal Proceedings") of this report, InsWeb is a defendant in: i) a class action lawsuit has been filed that alleges InsWeb violated certain federal securities laws at the time of its initial public offering; ii) a securities lawsuit alleging certain officers and directors and significant shareholders violated the short swing trading prohibition of Section 16(b) of the Securities Exchange Act; and iii) a patent infringement lawsuit in the Eastern district of Texas. InsWeb is a plaintiff in a patent infringement lawsuit in the Southern District of California. InsWeb cannot accurately predict the ultimate outcome of these matters at this time and therefore, cannot estimate the range of probable loss, if any, due to the inherent uncertainties of litigation. InsWeb believes it has meritorious defenses; however InsWeb cannot assure that it will prevail in any of these actions. An unfavorable outcome could have a material adverse effect on InsWeb's financial condition, results of operations and cash flows.

Share-Based Compensation. InsWeb accounts for share-based compensation in accordance with Statement of Financial Accounting Standards No. 123(R), Share-Based Payment ("Statement 123(R)"). Under the provisions of Statement
123(R), share-based compensation cost is generally estimated at the grant date based on the award's fair value as calculated by the Black-Scholes-Merton (BSM) option-pricing model and is recognized as expense over the requisite service period. The BSM model requires various highly judgmental assumptions including expected option life, volatility, and forfeiture rates. If any of the assumptions used in the BSM model change significantly, share-based compensation expense may differ materially in the future from that recorded in the current period.

Income Taxes. InsWeb accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. The deferred tax assets and/or liabilities are determined by multiplying the differences between the financial reporting and tax reporting bases for assets and liabilities by the enacted tax rates expected to be in effect when such differences are recovered or settled.

The carrying value of our deferred tax assets, which was approximately $73 million at December 31, 2007, is dependent upon our ability to generate sufficient future taxable income. We have established a full valuation allowance against our net deferred tax assets to reflect the uncertainty of realizing the deferred tax benefits, given historical losses. A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. This assessment requires a review and consideration of all available positive and negative evidence, including our past and future performance, the market environment in which we operate, the utilization of tax attributes in the past, and the length of carry-forward periods and evaluation of potential tax planning strategies. We expect to continue to maintain a full valuation allowance until an appropriate level of profitability is sustained or we are able to develop tax strategies that would enable us to conclude that it is more likely than not that a portion of our deferred tax assets would be realizable.

Liquidity and Capital Resources



Summarized cash flow information is as follows (in thousands):



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

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

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

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

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

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

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

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

Liquidity and Capital Resources (continued)

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