Won't start when key is inserted in slot

I got the opportunity to get myself a 2006 Prius. I am surprised with the 52 mpg that I get for it's age. It came with one key so googled and found myself here. Been reading around and posted at the chicken dance but I think I have a different issue (will delete the other post if required)... I only have one key and it scaring me if something happens to it. The issue I'm having is that, the car won't start if the key is inserted in the slot (flashing LED car on the dashboard continously). What I don't understand is that it works the "smart" way... having the key around without inserting and I can start the car. Reading thru posts it should be the other way around. I have scanned thru the manual a couple of times and can't find anything. I surely hope it is an easy thing but would love to know why it is not working when inserted. Did anyone have experienced this? Can someone give me any assistance on how to approach this issue? Thankls in advance for any

 

Ouch... but now I know what to do. Thanks.