Tableof Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

##### **Washington, DC 20549**

##### ** **

##### ****

##### ** **

**FORM 10-Q**

 

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**x****     ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30,2008**

 

**or**

 

**o****        ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the transition periodfrom              to**

 

**Commission File Number:  001-33613**

 

**HIRERIGHT, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                     | ** ** | **33-0465016**                     |
|----------------------------------|------------|------------------------------------|
| (State or other  jurisdiction of |       | (IRS employer  identification no.) |
| incorporation or  organization)  |       |                               |

 

**5151 California Avenue, Irvine,CA  92617**

**www.hireright.com**

(Address of principal executive offices)

 

**(949) 428-5800**

(Telephone number, including area code)

 

**Not Applicable**

(Former name, former address and formerfiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 

Yes  x              No  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer o  (Do not check if a smaller reporting company) | Smaller reporting company x |
|--------------------------------|--------------------------|-----------------------------------------------------------------------------|--------------------------------------------|

 

Indicated by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

 

Yes  o              No  x

 

Thenumber of shares of the registrant’s common stock, $0.01 par value, outstandingon August 1, 2008 was 11,539,862.

 

 

 

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***HIRERIGHT, INC.***

* *

**INDEX**

 
| ** **                                               | ** ** | ** **                                                                                                                | **Page** |
|----------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|----------|
|                                                     |       |                                                                                                                      |     |
| **Part I.   Financial  Information** |       |
|                                                     |       |                                                                                                                      |     |
| Item 1.                                                  |       | Financial  Statements                                                                                                     |     |
|                                                     |       |                                                                                                                      |     |
|                                                     |       | Condensed, Consolidated  Balance Sheets as of June 30, 2008 and December 31, 2007  (unaudited)                  | 3        |
|                                                     |       |                                                                                                                      |     |
|                                                     |       | Condensed, Consolidated  Statements of Income for the Three and Six Months Ended June 30, 2008  and 2007 (unaudited) | 4        |
|                                                     |       |                                                                                                                      |     |
|                                                     |       | Condensed, Consolidated  Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007  (unaudited)       | 5        |
|                                                     |       |                                                                                                                      |     |
|                                                     |       | Notes to  Condensed, Consolidated Financial Statements (unaudited)                                                        | 6        |
|                                                     |       |                                                                                                                      |     |
| Item 2.                                                  |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                               | 12       |
|                                                     |       |                                                                                                                      |     |
| Item 3.                                                  |       | Quantitative  and Qualitative Disclosures about Market Risk                                                               | 20       |
|                                                     |       |                                                                                                                      |     |
| Item 4T.                                                 |       | Controls and  Procedures                                                                                                  | 20       |
|                                                     |       |                                                                                                                      |     |
| **Part II.   Other  Information**    |       |
|                                                     |       |                                                                                                                      |     |
| Item 1.                                                  |       | Legal Proceedings                                                                                                         | 21       |
|                                                     |       |                                                                                                                      |     |
| Item 1A.                                                 |       | Risk Factors                                                                                                              | 21       |
|                                                     |       |                                                                                                                      |     |
| Item 2.                                                  |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                              | 22       |
|                                                     |       |                                                                                                                      |     |
| Item 3.                                                  |       | Defaults  Upon Senior Securities                                                                                          | 22       |
|                                                     |       |                                                                                                                      |     |
| Item 4.                                                  |       | Submission  of Matters to a Vote of Security Holders                                                                      | 22       |
|                                                     |       |                                                                                                                      |     |
| Item 5.                                                  |       | Other Information                                                                                                         | 22       |
|                                                     |       |                                                                                                                      |     |
| Item  6.                                                 |       | Exhibits                                                                                                                  | 23       |
|                                                     |       |                                                                                                                      |     |
| Signatures                                               | 24         |
|                                                          |            |                                                                                                                           |          |  |  |

 

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**HIRERIGHT, INC.**

**CONDENSED,CONSOLIDATED BALANCE SHEETS**

(Unaudited)

 
| ** **                                                                                                                                                                                                                                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(in thousands, except share amounts)**                                                                                                                                                                                                      | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                        |       |              |       |                  |       |
| CURRENT ASSETS:                                                                                                                                                                                                                                                   |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                                                                         |       | $                 | 46,982     |                  | $          | 17,819 |   |
| Short-term investments                                                                                                                                                                                                                                            |       | 1,550             |       | 29,005                |       |
| Accounts receivable, net of allowance for  doubtful accounts of $109 and $153 at  June 30, 2008 and  December 31, 2007, respectively, and reserve for sales allowances of $147 and $139 at  June 30, 2008 and December 31, 2007, respectively |       | 12,043            |       | 10,002                |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                                         |       | 2,239             |       | 1,216                 |       |
| Deferred tax asset—current                                                                                                                                                                                                                                   |       | 1,301             |       | 1,331                 |       |
|                                                                                                                                                                                                                                                              |       |              |       |                  |       |
| Total current assets                                                                                                                                                                                                                                              |       | 64,115            |       | 59,373                |       |
|                                                                                                                                                                                                                                                              |       |              |       |                  |       |
| Property and equipment, net of accumulated  depreciation and amortization  of $6,407 and $5,597 at  June 30, 2008 and December 31, 2007, respectively                                                                                                   |       | 2,188             |       | 2,003                 |       |
| Long-term investments                                                                                                                                                                                                                                             |       | 9,513             |       | 8,595                 |       |
| Other assets                                                                                                                                                                                                                                                      |       | 523               |       | 486                   |       |
| Deferred tax asset—non-current                                                                                                                                                                                                                               |       | 964               |       | 964                   |       |
| TOTAL                                                                                                                                                                                                                                                             |       | $                 | 77,303     |                  | $          | 71,421 |   |
|                                                                                                                                                                                                                                                              |       |              |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                     |       |              |       |                  |       |
| CURRENT LIABILITIES:                                                                                                                                                                                                                                              |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                                                                                                  |       | $                 | 4,602      |                  | $          | 3,428 |   |
| Accrued liabilities                                                                                                                                                                                                                                               |       | 2,502             |       | 1,228                 |       |
| Accrued payroll and benefits                                                                                                                                                                                                                                      |       | 3,326             |       | 3,790                 |       |
|                                                                                                                                                                                                                                                              |       |              |       |                  |       |
| Total current liabilities                                                                                                                                                                                                                                         |       | 10,430            |       | 8,446                 |       |
|                                                                                                                                                                                                                                                              |       |              |       |                  |       |
| OTHER LIABILITIES                                                                                                                                                                                                                                                 |       | 100               |       | 203                   |       |
|                                                                                                                                                                                                                                                              |       |              |       |                  |       |
| COMMITMENTS AND CONTINGENCIES (Note 7)                                                                                                                                                                                                                            |       |              |       |                  |       |
|                                                                                                                                                                                                                                                              |       |              |       |                  |       |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                                                                                                        |       |              |       |                  |       |
| Common stock, $0.01 par value—100,000,000  shares  authorized; 11,536,114 and 11,233,597 shares issued and outstanding at June 30, 2008  and December 31, 2007, respectively                                                                       |       | 115               |       | 112                   |       |
| Additional paid-in capital                                                                                                                                                                                                                                        |       | 69,359            |       | 68,071                |       |
| Other comprehensive gain—currency  translation                                                                                                                                                                                                               |       | 14                |       | 11                    |       |
| Accumulated deficit                                                                                                                                                                                                                                               |       | (2,715            | )          | (5,422                | )          |
|                                                                                                                                                                                                                                                              |       |              |       |                  |       |
| Net stockholders’ equity                                                                                                                                                                                                                                     |       | 66,773            |       | 62,772                |       |
|                                                                                                                                                                                                                                                              |       |              |       |                  |       |
| TOTAL                                                                                                                                                                                                                                                             |       | $                 | 77,303     |                  | $          | 71,421 |   |

 

The accompanying notes arean integral part of these condensed, consolidated financial statements.

 

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**HIRERIGHT, INC.**

**CONDENSED, CONSOLIDATED STATEMENTS OF INCOME**

(Unaudited)

 
| ** **                                                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                         | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **(in thousands, except per share data)** | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                               |       |                             |       |                           |       |   |   |   |   |
| REVENUE:                                                           |       |                             |       |                           |       |   |   |   |   |
| Service revenue                                                    |       | $                                | 18,013     |                           | $          | 16,806 |   | $ | 33,775 |   | $ | 31,321 |   |
| Reimbursed fee revenue                                             |       | 1,819                            |       | 1,770                          |       | 3,382 |   | 3,275 |   |
|                                                               |       |                             |       |                           |       |   |   |   |   |
| Total revenue                                                      |       | 19,832                           |       | 18,576                         |       | 37,157 |   | 34,596 |   |
|                                                               |       |                             |       |                           |       |   |   |   |   |
| COST OF REVENUE:                                                   |       |                             |       |                           |       |   |   |   |   |
| Cost of service revenue                                            |       | 7,597                            |       | 7,364                          |       | 14,965 |   | 14,380 |   |
| Reimbursed fees paid                                               |       | 1,819                            |       | 1,770                          |       | 3,382 |   | 3,275 |   |
|                                                               |       |                             |       |                           |       |   |   |   |   |
| Total cost of revenue                                              |       | 9,416                            |       | 9,134                          |       | 18,347 |   | 17,655 |   |
|                                                               |       |                             |       |                           |       |   |   |   |   |
| GROSS PROFIT                                                       |       | 10,416                           |       | 9,442                          |       | 18,810 |   | 16,941 |   |
|                                                               |       |                             |       |                           |       |   |   |   |   |
| OPERATING EXPENSES:                                                |       |                             |       |                           |       |   |   |   |   |
| Research and development                                           |       | 1,167                            |       | 1,023                          |       | 2,214 |   | 1,932 |   |
| Sales and marketing                                                |       | 3,177                            |       | 2,706                          |       | 6,114 |   | 5,085 |   |
| General and administrative                                         |       | 4,000                            |       | 2,586                          |       | 6,622 |   | 4,873 |   |
|                                                               |       |                             |       |                           |       |   |   |   |   |
| Total operating expenses                                           |       | 8,344                            |       | 6,315                          |       | 14,950 |   | 11,890 |   |
|                                                               |       |                             |       |                           |       |   |   |   |   |
| INCOME FROM OPERATIONS                                             |       | 2,072                            |       | 3,127                          |       | 3,860 |   | 5,051 |   |
|                                                               |       |                             |       |                           |       |   |   |   |   |
| OTHER INCOME (EXPENSE):                                            |       |                             |       |                           |       |   |   |   |   |
| Interest income                                                    |       | 343                              |       | 120                            |       | 926 |   | 212 |   |
| Interest expense                                                   |       | —                           |       | 2                              |       | — |   | 1 |   |
| Other income (expense)—net                                    |       | (762                             | )          | (6                             | )          | (776 | ) | (7 | ) |
|                                                               |       |                             |       |                           |       |   |   |   |   |
| Total other income (expense) —net                             |       | (419                             | )          | 116                            |       | 150 |   | 206 |   |
|                                                               |       |                             |       |                           |       |   |   |   |   |
| INCOME BEFORE INCOME TAXES                                         |       | 1,653                            |       | 3,243                          |       | 4,010 |   | 5,257 |   |
|                                                               |       |                             |       |                           |       |   |   |   |   |
| INCOME TAX PROVISION                                               |       | 449                              |       | 1,343                          |       | 1,303 |   | 2,180 |   |
|                                                               |       |                             |       |                           |       |   |   |   |   |
| NET INCOME                                                         |       | 1,204                            |       | 1,900                          |       | 2,707 |   | 3,077 |   |
| Preferred stock dividends                                          |       | —                           |       | (544                           | )          | — |   | (1,087 | ) |
| Income allocable to preferred stockholders                         |       | —                           |       | (1,028                         | )          | — |   | (1,509 | ) |
|                                                               |       |                             |       |                           |       |   |   |   |   |
| NET INCOME ALLOCABLE TO COMMON  STOCKHOLDERS                       |       | $                                | 1,204      |                           | $          | 328 |   | $ | 2,707 |   | $ | 481 |   |
|                                                               |       |                             |       |                           |       |   |   |   |   |
| EARNINGS PER SHARE:                                                |       |                             |       |                           |       |   |   |   |   |
| Basic                                                              |       | $                                | 0.10       |                           | $          | 0.17 |   | $ | 0.24 |   | $ | 0.24 |   |
| Diluted                                                            |       | $                                | 0.10       |                           | $          | 0.11 |   | $ | 0.22 |   | $ | 0.16 |   |
|                                                               |       |                             |       |                           |       |   |   |   |   |
| WEIGHTED AVERAGE COMMON AND COMMON  EQUIVALENT  SHARES:            |       |                             |       |                           |       |   |   |   |   |
| Basic                                                              |       | 11,481                           |       | 1,975                          |       | 11,467 |   | 1,966 |   |
| Diluted                                                            |       | 12,190                           |       | 3,086                          |       | 12,169 |   | 3,053 |   |

 

The accompanying notes are an integral part of these condensed,consolidated financial statements.

 

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**HIRERIGHT, INC.**

**CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited)

 
| ** **                                                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **(in thousands)**                                                            | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
|                                                                               |       |                                              |       |   |   |
| CASH PROVIDED BY OPERATING ACTIVITIES:                                             |       |                                              |       |   |   |
| Net income                                                                         |       | $                                                 | 2,707      |   | $ | 3,077 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                              |       |   |   |
| Impairment of auction rate securities                                              |       | 762                                               |       | — |   |
| Depreciation and amortization                                                      |       | 775                                               |       | 623 |   |
| Stock-based compensation expense                                                   |       | 346                                               |       | 153 |   |
| Deferred income taxes                                                              |       | 30                                                |       | 1,317 |   |
| Excess tax benefit from exercise of stock  options                                 |       | (263                                              | )          | — |   |
| Changes in operating assets and  liabilities:                                      |       |                                              |       |   |   |
| Accounts receivable, net                                                           |       | (2,040                                            | )          | (2,278 | ) |
| Prepaid expenses and other current assets                                          |       | (1,023                                            | )          | 237 |   |
| Other assets                                                                       |       | (36                                               | )          | 113 |   |
| Accounts payable                                                                   |       | 1,180                                             |       | (1,253 | ) |
| Accrued liabilities                                                                |       | 1,536                                             |       | 1,615 |   |
| Accrued payroll and benefits                                                       |       | (485                                              | )          | (167 | ) |
| Other liabilities                                                                  |       | (103                                              | )          | 284 |   |
|                                                                               |       |                                              |       |   |   |
| Net cash provided by operating activities                                          |       | 3,386                                             |       | 3,721 |   |
|                                                                               |       |                                              |       |   |   |
| CASH PROVIDED BY (USED IN) INVESTING  ACTIVITIES:                                  |       |                                              |       |   |   |
| Purchases of investments                                                           |       | (17,000                                           | )          | (4,719 | ) |
| Sales of investments                                                               |       | 42,775                                            |       | 1,000 |   |
| Purchases of fixed assets                                                          |       | (959                                              | )          | (882 | ) |
|                                                                               |       |                                              |       |   |   |
| Net cash provided by (used in) investing  activities                               |       | 24,816                                            |       | (4,601 | ) |
|                                                                               |       |                                              |       |   |   |
| CASH PROVIDED BY (USED IN) FINANCING  ACTIVITIES:                                  |       |                                              |       |   |   |
| Proceeds from exercise of stock options                                            |       | 683                                               |       | 143 |   |
| Payment of deferred offering costs                                                 |       | —                                            |       | (1,165 | ) |
| Excess tax benefit from exercise of stock  options                                 |       | 263                                               |       | — |   |
|                                                                               |       |                                              |       |   |   |
| Net cash provided by (used in) financing  activities                               |       | 946                                               |       | (1,022 | ) |
|                                                                               |       |                                              |       |   |   |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH                                            |       | 15                                                |       | 2 |   |
|                                                                               |       |                                              |       |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                              |       | 29,163                                            |       | (1,900 | ) |
|                                                                               |       |                                              |       |   |   |
| CASH AND CASH EQUIVALENTS — Beginning of  period                              |       | 17,819                                            |       | 4,201 |   |
|                                                                               |       |                                              |       |   |   |
| CASH AND CASH EQUIVALENTS — End of period                                     |       | $                                                 | 46,982     |   | $ | 2,301 |   |
|                                                                               |       |                                              |       |   |   |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION:                                |       |                                              |       |   |   |
|                                                                               |       |                                              |       |   |   |
| Income taxes paid                                                                  |       | $                                                 | 1,200      |   | $ | 230 |   |
|                                                                               |       |                                              |       |   |   |
| NON-CASH FINANCING TRANSACTIONS:                                                   |       |                                              |       |   |   |
| Vesting of stock options early exercised                                           |       | $                                                 | —     |   | $ | 44 |   |
|                                                                               |       |                                              |       |   |   |
| Accrued purchases of fixed assets                                                  |       | $                                                 | 101        |   | $ | — |   |

 

The accompanying notes are an integral part of these condensed,consolidated financial statements.

 

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**HIRERIGHT, INC.**

**NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS**

(Unaudited)

 

**1.****                         ****General**

 

**Business. **HireRight, Inc. (the “Company”) wasincorporated in California in 1990 and reincorporated in Delaware in July 2007.Our shares of common stock are listed on the NASDAQ Global Market and tradeunder the symbol “HIRE.”  We are aprovider of on-demand employment screening solutions. Our customers use ourcomprehensive screening services in conjunction with our web-based softwareapplications to conduct and manage their employment screening programsefficiently and effectively, make more informed employment decisions, improveworkplace safety and mitigate risk. We offer a comprehensive set of backgroundscreening services including criminal, motor vehicle and other public recordssearches, employment, education and professional license verifications andcredit checks, as well as drug and health screening services.

 

**Basis of Presentation. **The accompanying condensed, consolidatedfinancial statements have been prepared in accordance with generally acceptedaccounting principles (“GAAP”) in the United States for interim financialinformation, and in accordance with the rules and regulations of theUnited States Securities and Exchange Commission (the “SEC”). Accordingly, theydo not include all of the information and notes required by GAAP in the UnitedStates for annual financial statements as permitted under applicable rules andregulations, and should be read in conjunction with our audited consolidatedfinancial statements and notes thereto for the fiscal year ended December 31,2007 included in the Company’s Annual Report on Form 10-K.

 

The condensed, consolidated financial statementsincluded herein are unaudited; however, they contain all adjustments, includingnormal recurring adjustments, which in the opinion of management are necessaryfor a fair presentation. The results of operations for the six months ended June 30,2008 are not necessarily indicative of results that can be expected for thefull year.

 

The preparation of our condensed, consolidatedfinancial statements in accordance with GAAP in the United States requiresmanagement to make estimates and assumptions that affect the amounts reportedin our condensed, consolidated financial statements and notes thereto. Actualresults could differ materially from those estimates.

 

**Initial Public Offering. **The Registration Statement for the Company’s initial public offering (the “Public Offering”) was declared effective on August 7, 2007 (the “Effective Date”). The Company consummated the Public Offering on August 13, 2007 and sold 2,954,115 shares of its common stock, at a price of $15.00 per share. An additional 1,420,885 shares were sold by selling stockholders. The Company received approximately $39.4 million, net of underwriting discounts, commissions, and other offering costs. Upon the closing of the Public Offering, all of the Company’s outstanding preferred stock automatically converted into an aggregate of 6,201,142 shares of the Company’s common stock.

 

**PendingMerger With USIS.  **On June 9,2008, the Company entered into an Agreement and Plan of Merger (the “MergerAgreement”) with US Investigations Services, LLC (“USIS”) and HerculesAcquisition Corp. (the “Purchaser”), a wholly-owned subsidiary of USIS. The Merger Agreement initially provided that, subject to the terms andconditions of the Merger Agreement, HireRight stockholders would be entitled toreceive $15.60 in cash for each share of common stock that they own.

 

On June 19,2008, the Company received a letter from a third party strategic buyer whichincluded a preliminary, non-binding proposal to acquire HireRight at a priceper share in cash of $17.00, subject to its completion of a due diligencereview of HireRight.  On July 17,2008, following the third party’s completion of due diligence, the Companyreceived another letter from the third party, in which the third party proposedto acquire HireRight for $18.00 per share in cash.

 

On July 23,2008, HireRight and USIS entered into an amendment to the Merger Agreement,which increased the merger consideration payable to HireRight stockholders uponcompletion of the proposed merger to $18.75 per share in cash.  On July 25, 2008, we mailed proxystatements and related materials to stockholders of record as of July 15,2008 and scheduled a special meeting of stockholders on August 18, 2008.

 

Also on July 25,2008, we received a revised proposal from the third party, in which the thirdparty proposed to acquire all outstanding shares of HireRight common stock at aprice of $19.00 per share in cash.  On July 29,2008, HireRight and USIS entered into another amendment to the MergerAgreement, which increased the merger consideration payable to HireRightstockholders upon completion of the proposed merger to $19.75 per share incash.

 

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The MergerAgreement further provides that, following the consummation of the merger, thePurchaser will merge with and into HireRight. The Company will survive themerger as a wholly-owned subsidiary of USIS. The Merger Agreement also containscustomary representations, warranties and covenants made by the Company.  The merger, which is expected to close in thethird calendar quarter, is subject to, among other things, approval byHireRight stockholders and other customary closing conditions.  If the merger is completed, our common stockwill be delisted from and will no longer be traded on the NASDAQ Global Marketand will be deregistered under the Securities Exchange Act of 1934.  Following the completion of the merger,HireRight will no longer be an independent public company.

 

In addition, ifthe transaction contemplated under the Merger Agreement does not occur, wecould be required to pay USIS a termination fee of $6,850,000 if we complete analternative merger or business combination transaction with a party other thanUSIS or under other circumstances described in the Merger Agreement. There areseveral closing conditions that are requirements for the completion of thetransaction, and these closing conditions are described in greater detail inour Definitive Proxy Statement on Schedule 14A, as filed with the SEC on July 25,2008 and in a Proxy Supplement on Schedule 14A, as filed with the SEC on July 31,2008.

 

**2.****                         ****Investments**

 

The Company accounts for its investments in marketable securities underStatements of Financial Accounting Standards (“SFAS”) No. 115, *Accounting for Certain Investments in Debt and EquitySecurities* (“SFAS 115”). Investments consist of auction ratemunicipal and equity securities with interest at rates that are resetperiodically. These securities are recorded at fair value in the accompanyingbalance sheets. The Company evaluates its investments for other-than-temporaryimpairment on a security by security basis. As of June 30, 2008, theCompany determined that its securities were other-than-temporarily impaired andrecorded a write down of auction rate securities of $0.8 million. No impairmentof securities was recorded in the comparable period as of June 30,2007.  As of June 30, 2008, therewas $7,000 in unrealized holding losses. The Company classifies allavailable-for-sale securities as current or non-current assets in theaccompanying balance sheets based on management’s intended holding period andliquidity considerations based on market conditions.

 

At June 30, 2008, the Company held$11.8 million, par value, of securities which have an auction resetfeature. The Dutch auction process that resets the applicable interest rate atpredetermined calendar intervals is intended to provide liquidity to the holderof auction rate securities by matching buyers and sellers within a marketcontext enabling the holder to gain immediate liquidity by selling suchinterests at par or rolling over their investment. If there is an imbalancebetween buyers and sellers the risk of a failed auction exists. Of the sevensecurities held by the Company as of June 30, 2008, five securities havingan aggregate par value of $8.3 million have failed at auction in 2008. Giventhe deteriorating credit markets, and the increased incidence of failure withinthe auction market in 2008, there can be no assurance as to when we will beable to liquidate a particular security. In the case of an auction failure, wewould not be able to access those funds until a future auction of these investmentsis successful, the security is called by the issuer or a buyer is found outsidethe auction process. As a result, we have classified our auction ratesecurities as long-term investments, except for $1.6 million of such securitieswhich have been either sold or redeemed by the issuer at par value subsequentto quarter end.  Additionally, asmentioned above the Company recorded a $0.8 million impairment charge in otherincome (expense) on the Company’s Condensed, Consolidated Statements of Incomefor the three and six months ended June 30, 2008.

 

We will continue to monitor and evaluate these investments, noting thatthere is no assurance as to when the market for this investment class willreturn to orderly operations.

 

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**3.           Fair Value ofFinancial Instruments**

 

OnJanuary 1, 2008, the Company adopted the provisions of SFAS No. 157, *Fair Value Measurements*(“SFAS 157”*),*related to its financial assets and liabilities. The Company measures certainassets and liabilities at fair value as discussed throughout the footnotes toits quarterly and annual financial statements. Assets or liabilities that haverecurring measurements are shown below:

 
| ** **                     | ** ** | ** **                  | ** ** | **Fair Value Measurements at Reporting Date Using** | ** ** |
|--------------------------------|------------|-----------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                     | ** ** | ** **                  | ** ** | **Quoted Prices**                                                            | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | ** **                  | ** ** | **in Active**                                                                | ** ** | **Other** | ** ** | **Significant** | ** ** |
| ** **                     | ** ** | ** **                  | ** ** | **Markets for**                                                              | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **                     | ** ** | ** **                  | ** ** | **Identical Assets**                                                         | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| **Description**                | ** ** | **June 30, 2008** | ** ** | **(Level 1)**                                                                | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| Cash and cash equivalents (1)  |       | $                           | 46,982     |                                                                              | $          | 46,982 |   | $ | — |   | $ | — |   |
| Available-for-sale securities: |       |                        |       |                                                                              |       |   |   |   |   |
| Short-term investments         |       | 1,550                       |       | 1,550                                                                             | (2)        | — |   | — |   |
| Long-term investments          |       | 9,513                       |       | —                                                                            |       | 9,513 | (3) | — |   |
|                           |       | $                           | 58,045     |                                                                              | $          | 48,532 |   | $ | 9,513 |   | $ | — |   |

 

----

| (1) |   | The  carrying amount approximates fair value because of the short maturity of  these instruments.                                                                                                                                                                                                                                         |
|-----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | These  investments consist of auction rate securities which are actively traded.  Recent transaction activity has occurred within identical assets.                                                                                                                                                                                       |
| (3) |   | These  investments consist ofauction  rate securities which have had few transactions due to recent market  conditions. The fair value of such securities is determined by quoted prices  for identical or similar assets in markets that are not active, as well as  inputs other than quoted prices that are observable for the assets. |

 

Asdiscussed in Note 2 above, the Company’s short-term and long-term investmentsconsist of auction rate municipal and equity securities with interest at ratesthat are reset periodically. These securities are publicly traded and theCompany determines its fair value based on the latest available quoted marketprices**. **SeeNote 2 for additional discussion of the Company’s investment securities.

 

The Company also adopted the provisions of SFAS No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities* (“SFAS 159”) as of January 1,2008.  The adoption of SFAS 159 did nothave a material impact on the Company’s financial position, as the Company didnot make any fair value elections under SFAS 159.

 

**4.****                         ****Share-Based Compensation**

 

During the three and sixmonths ended June 30, 2008, stock options for the purchase of 35,328shares of common stock at a weighted average exercise price of $10.25, and335,828 shares of common stock at a weighted average exercise price of $8.38per share were awarded, respectively, with vesting generally over four years.For the comparable periods in 2007, stock options for the purchase of 42,937shares of common stock at a weighted average exercise price of $15.44 per shareand 67,816 shares at a weighted-average exercise price of $13.78 per share,respectively, were awarded.

 

AtJune 30, 2008, there were 750,967 outstanding stock options granted underour Stock Option/Stock Issuance Plan (the “2000 Plan”) and 387,074 outstandingstock options granted under our 2007 Long Term Incentive Plan (the “2007 Plan”).The 2007 Plan became effective on the Effective Date of the Company’s PublicOffering. All stock option awards up until the Effective Date were made underthe 2000 Plan.  Commencing on theEffective Date, new options and other stock awards may only be granted underthe 2007 Plan. The maximum aggregate number of shares of common stock oroptions to purchase shares of the Company’s common stock that may initially beissued under the 2007 Plan is 1,000,000. Outstanding options granted under bothour 2000 Plan and 2007 Plan expire ten years from the grant date and typicallyvest 25% upon completion of one year of service with the remaining optionsvesting in 36 successive equal monthly installments upon completion of eachadditional month of service thereafter.

 

Duringthe three and six months ended June 30, 2008, in accordance with theprospective method of adoption of SFAS No. 123 (revised 2004), *Share-Based Payment* (“SFAS 123(R)”), the Company recognizedshare-based compensation expense of $213,000 and $346,000, respectively,compared to $76,000 and $153,000, respectively, for the comparable 2007periods. At June 30, 2008, there was approximately $2.0 million ofunrecognized compensation cost related to unvested shares that will berecognized over a weighted average period of 1.9 years.

 

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Asummary of significant assumptions used in determining the fair value of theoptions granted is as follows:

 

| ** **              | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------|------------|---------------------------------------------------|------------|
| ** **              | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| Expected life (years)   |       | 6.25                                              |       | 6.25 |   |
| Risk-free interest rate |       | 3.14 – 3.56                                  | %          | 4.69 – 4.82 | % |
| Volatility              |       | 41.56 – 41.77                                | %          | 41.50 – 41.65 | % |
| Dividend yield          |       | 0                                                 | %          | 0 | % |

 

Asof June 30, 2008, the total number of outstanding options vested andexpected to vest (based on anticipated forfeitures) was 1,072,266, which had aweighted-average exercise price of $5.81. The average remaining life of theseoptions was 7.6 years and the aggregate intrinsic value was $12.1 million at June 30,2008.

 

Asof June 30, 2008, the total number of outstanding options currentlyexercisable was 587,715, which had a weighted-average exercise price of $3.67.The average remaining life of these options was 6.3 years and the aggregateintrinsic value was $7.9 million at June 30, 2008.

 

***Employee Stock Purchase Plan***

 

During2007, the Company adopted a qualified employee stock purchase plan, or ESPP,which was implemented during the second quarter of 2008. In connection with theadoption of the ESPP, the Company has reserved for issuance a total of 225,000shares of common stock. Under the terms of the ESPP, rights to purchase commonshares may be granted to eligible qualified employees subject to certainrestrictions. The ESPP enables the Company’s eligible employees, throughpayroll withholdings, to purchase a limited number of common shares at 95% ofthe lesser of the fair market value of a Company’s common share on the firstbusiness day or the last business day of a purchase period. Each purchaseperiod is for a six-month term, with purchases being made at the end of suchperiod.

 

**5.         Calculation of Earningsper Common Share**

 

Basicearnings per common share is calculated by dividing net income allocable tocommon stockholders by the weighted average number of common shares outstandingduring the period. Diluted earnings per common share is calculated by dividingnet income allocable to common stockholders by the weighted average number ofcommon shares outstanding after giving effect to all potentially dilutivecommon shares outstanding during the period. Basic and diluted earnings percommon share were calculated as follows:

 
| ** **                                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                          | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **in thousands, except per share amounts** | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                |       |                             |       |                           |       |   |   |   |   |
| **Numerator:**                                                      |       |                             |       |                           |       |   |   |   |   |
| Net income                                                          |       | $                                | 1,204      |                           | $          | 1,900 |   | $ | 2,707 |   | $ | 3,077 |   |
| Less preferred stock dividends                                      |       | —                           |       | (544                           | )          | — |   | (1,087 | ) |
| Less income allocable to preferred  stockholders                    |       | —                           |       | (1,028                         | )          | — |   | (1,509 | ) |
|                                                                |       |                             |       |                           |       |   |   |   |   |
| Net income allocable to common stockholders                         |       | $                                | 1,204      |                           | $          | 328 |   | $ | 2,707 |   | $ | 481 |   |
|                                                                |       |                             |       |                           |       |   |   |   |   |
| **Denominator:**                                                    |       |                             |       |                           |       |   |   |   |   |
| Weighted average common shares outstanding:                         |       |                             |       |                           |       |   |   |   |   |
| Basic                                                               |       | 11,481                           |       | 1,975                          |       | 11,467 |   | 1,966 |   |
| Effect of dilutive potential common shares:                         |       |                             |       |                           |       |   |   |   |   |
| Weighted average unvested common shares                             |       | —                           |       | 4                              |       | — |   | 7 |   |
| Common equivalent shares from warrants to purchase common stock     |       | 245                              |       | 377                            |       | 236 |   | 367 |   |
| Common equivalent shares from options to purchase common stock      |       | 464                              |       | 730                            |       | 466 |   | 713 |   |
|                                                                |       |                             |       |                           |       |   |   |   |   |
| Diluted                                                             |       | 12,190                           |       | 3,086                          |       | 12,169 |   | 3,053 |   |
|                                                                |       |                             |       |                           |       |   |   |   |   |
| Basic earnings per common share                                     |       | $                                | 0.10       |                           | $          | 0.17 |   | $ | 0.24 |   | $ | 0.24 |   |
|                                                                |       |                             |       |                           |       |   |   |   |   |
| Diluted earnings per common share                                   |       | $                                | 0.10       |                           | $          | 0.11 |   | $ | 0.22 |   | $ | 0.16 |   |

 

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The anti-dilutive effect of 419,927 and 124,655shares from outstanding stock options have been excluded from the earnings pershare calculations for the three and six months ended June 30, 2008,respectively.

 

**6.         RecentAccounting Pronouncements**

 

In February 2008, the FASB issued FASB Staff Position No. 157-2(“Staff Position 157-2”), which deferred the effective date for certainportions of SFAS 157 related to nonrecurring measurements of nonfinancial assetsand liabilities.  That provision ofSFAS 157 will be effective for the Company’s 2009 fiscal year.  We are currently evaluating the effect, ifany, that the adoption of Staff Position 157-2 will have on ourresults of operations, financial position and cash flows.

 

In December 2007, the FASB issued SFAS No. 141—revised 2007, “*Business Combinations”* (“SFAS 141R”).SFAS 141R establishes principles and requirements for how an acquirer in abusiness combination recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, and any noncontrollinginterest; recognizes and measures the goodwill acquired in the businesscombination or a gain from a bargain purchase; and determines what informationto disclose to enable financial statement users to evaluate the nature andfinancial effects of the business combination. SFAS 141R applies tobusiness combinations for which the acquisition date is on or after December 15,2008. Early adoption is prohibited. We are currently evaluating the effect, ifany, that the adoption of SFAS 141R will have on our results ofoperations, financial position and cash flows.

 

In December 2007, the FASB issued SFAS No. 160, *Noncontrolling Interests in Consolidated FinancialStatements—an Amendment to ARB No. 51* (“SFAS 160”).SFAS 160 requires all entities to report noncontrolling (minority)interests in subsidiaries as equity in the consolidated financial statements,but separate from the equity of the parent company. The statement further requiresthat consolidated net income be reported at amounts attributable to the parentand the noncontrolling interest, rather than expensing the income attributableto the minority interest holder. This statement also requires that companiesprovide sufficient disclosures to clearly identify and distinguish between theinterests of the parent company and the interests of the noncontrolling owners,including a disclosure on the face of the consolidated statements for incomeattributable to the noncontrolling interest holder. This statement is effectivefor fiscal years beginning on or after December 15, 2008. Early adoptionis prohibited. We are currently evaluating the effect, if any, that theadoption of SFAS 160 will have on our results of operations, financialposition and cash flows.

 

In May 2008, the FASBissued FASB Statement No. 162, *TheHierarchy of Generally Accepted Accounting Principles*(“SFAS 162”).SFAS 162 identifies the sources of accounting principles and the framework forselecting the principles to be used in the preparation of financial statementsof nongovernmental entities that are presented in conformity with GAAP. SFAS162 will become effective 60 days following the SEC’s approval of the PublicCompany Accounting Oversight Board amendments to AU Section 411, *The Meaning of Present Fairly in Conformity WithGenerally Accepted Accounting Principles*.  We are currently evaluating the effect, ifany, that the adoption of SFAS 162 will have on our results of operations,financial position and cash flows.

 

**7.         Commitments and Contingencies**

 

During the first quarter of 2008, following the Company’sreincorporation into Delaware and 4.5 to 1 reverse stock split, a formeremployee demanded that HireRight reissue him 27,777 shares of the Company’s commonstock in exchange for a 125,000 share (pre-split basis) stock certificate heclaimed was given to him by HireRight and which he claimed was owned by himwithout restrictions. Based on all information available to HireRight, theCompany believed that the former employee received such shares by exercise of unvestedstock options and was only entitled to a portion of such shares.  Theformer employee filed a complaint on February 6, 2008 in the Orange CountySuperior Court, seeking monetary, non-monetary and punitive damages.  Thecomplaint further alleged failure by HireRight to provide annual reports andnotice of annual stockholders meetings. The parties settled this matter onJune 5, 2008, with HireRight receiving a release of claims and dismissalof the action (with prejudice) in exchange for a cash payment of $159,000.

 

The Company is currently involved in certain legal matters that havearisen in the normal course of business. Management believes that the ultimateresolution of such actions will not have a material adverse effect on theCompany’s consolidated financial position and results of operations.

 

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**8.****                         ****SegmentInformation**

 

The Company provides web-based screening services, primarily tocustomers located throughout the United States, and provides similar servicesto similar customers across industries. Separate profitability or financialinformation is not analyzed for particular individual screening services.Management, including the chief operating decision maker, evaluates the Company’sperformance based on its overall operating results for the Company, andtherefore, the Company has determined that it operates under one reportablesegment.

 

**9.        ****IncomeTaxes**

 

At June 30, 2008, theCompany had a federal net operating loss carryforward of approximately $1.8million. The federal net operating losses will begin to expire in 2011. Ingeneral, Section 382 of the Internal Revenue Code includes provisionswhich limit the amount of net operating loss carryforwards and other taxattributes that may be used annually in the event that a 50% ownership change(as defined) occurs in any three-year period. During 2000, the Companyexperienced an ownership change for purposes of Section 382, and theannual utilization of net operating loss carryforwards and credits prior to thechange will be limited accordingly. Such limitation is reflected in thedeferred income tax benefit balances as of June 30, 2008.

 

As of June 30, 2008,the Company had no material unrecognized tax benefits and no adjustments toliabilities or operations were required. The Company recognizes interest andpenalties related to uncertain tax positions in income tax expense. There wasno expense related to interest and penalties for the six months ended June 30,2008.

 

Tax years 2004 through 2007and 2003 through 2007 are subject to examination by the federal and statetaxing authorities, respectively. There are no income tax examinationscurrently in process.

 

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**Item 2.           Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

**Overview**

 

We are a leading provider ofon-demand employment screening solutions. Our customers use ourcomprehensive screening services in conjunction with our web-based softwareapplications to conduct and manage their employment screening programsefficiently and effectively, make more informed employment decisions, improveworkplace safety and mitigate risk. We offer a comprehensive set of backgroundscreening services including criminal, motor vehicle and other public recordssearches, employment, education and professional license verifications and credit checks, as well as drug andhealth screening services.

 

Ourscreening solutions are flexible and scalable, and therefore able to meet thedemands of customers across a range of sizes and industries, with hiringoperations dispersed throughout the United States and internationally. We servea diverse customer base in a variety of industries, such as business services,technology, healthcare, manufacturing, telecommunications and financialservices. As of June 30, 2008, we had 2,839 customers, which included 70of the Fortune 500 companies. Our sales are derived from a combination ofdirect sales efforts as well as through our established network of strategicalliances with many of the leading recruiting software application providersand human resource outsourcing, or HRO, providers.

 

**Cautionary Statement Regarding Forward Looking Statements**

 

Certain statements contained in this Quarterly Reporton Form 10-Q, which are not purely historical, are “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995, Section 27A of the Securities Act of 1933 and Section 21E ofthe Securities Exchange Act of 1934, including but not limited to statementsregarding our expectations, hopes, beliefs, intentions, estimates or strategiesregarding the future, such as our future operating performance and financialresults, as well as those set forth in Part II, Item 1 “Legal Proceedings”below.  Actual results could differmaterially from those projected in any forward-looking statements as a result ofa number of factors, including those detailed below in this “Management’sDiscussion and Analysis” section and elsewhere herein and in our Annual Reporton Form 10-K for the period ended December 31, 2007.  Any forward-looking statements are made as ofthe date hereof, and the Company assumes no obligation to update theforward-looking statements, or to update the reasons why actual results coulddiffer materially from those projected in the forward-looking statements.  For a discussion of risks and uncertaintiesthat should be considered and which could materially adversely affect theCompany and which could cause our actual results to differ materially fromthose anticipated in our forward-looking statements, please see “Risk Factors”below and in Part I, Item 1A of our Annual Report on Form 10-K forthe period ended December 31, 2007 and in Part II, Item 1A of ourQuarterly Report on Form 10-Q for the period ended March 31, 2008.

 

Thefollowing discussion of our financial condition and results of operationsshould be read together with the consolidated financial statements and relatednotes included in theCompany’s Annual Report on Form10-K for the period ended December 31,2007.

 

**Significant Events andDevelopments**

 

**PendingMerger With USIS.  **On June 9,2008, the Company entered into an Agreement and Plan of Merger (the “MergerAgreement”) with US Investigations Services, LLC (“USIS”) and HerculesAcquisition Corp. (the “Purchaser”), a wholly-owned subsidiary of USIS. The Merger Agreement initially provided that, subject to the terms andconditions of the Merger Agreement, HireRight stockholders would be entitled toreceive $15.60 in cash for each share of common stock that they own.

 

On June 19,2008, the Company received a letter from a third party strategic buyer whichincluded a preliminary, non-binding proposal to acquire HireRight at a priceper share in cash of $17.00, subject to its completion of a due diligencereview of HireRight.  On July 17,2008, following the third party’s completion of due diligence, the Companyreceived another letter from the third party, in which the third party proposedto acquire HireRight for $18.00 per share in cash.

 

On July 23,2008, HireRight and USIS entered into an amendment to the Merger Agreement,which increased the merger consideration payable to HireRight stockholders uponcompletion of the proposed merger to $18.75 per share in cash.  On July 25, 2008, we mailed proxystatements and related materials to stockholders of record as of July 15,2008 and scheduled a special meeting of stockholders on August 18, 2008.

 

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Also on July 25,2008, we received a revised proposal from the third party, in which the thirdparty proposed to acquire all outstanding shares of HireRight common stock at aprice of $19.00 per share in cash.  On July 29,2008, HireRight and USIS entered into another amendment to the MergerAgreement, which increased the merger consideration payable to HireRightstockholders upon completion of the proposed merger to $19.75 per share incash.

 

The MergerAgreement further provides that, following the consummation of the merger, thePurchaser will merge with and into HireRight. The Company will survive themerger as a wholly-owned subsidiary of USIS. The Merger Agreement also containscustomary representations, warranties and covenants made by the Company.  The merger, which is expected to close in thethird calendar quarter, is subject to, among other things, approval byHireRight stockholders and other customary closing conditions.  If the merger is completed, our common stockwill be delisted from and will no longer be traded on the NASDAQ Global Market andwill be deregistered under the Securities Exchange Act of 1934.  Following the completion of the merger,HireRight will no longer be an independent public company.

 

In addition, ifthe transaction contemplated under the Merger Agreement does not occur, wecould be required to pay USIS a termination fee of $6,850,000 if we complete analternative merger or business combination transaction with a party other thanUSIS or under other circumstances described in the Merger Agreement. There areseveral closing conditions that are requirements for the completion of thetransaction, and these closing conditions are described in greater detail inour Definitive Proxy Statement on Schedule 14A, as filed with the SEC on July 25,2008 and in a Proxy Supplement on Schedule 14A, as filed with the SEC on July 31,2008.

 

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**Results of Operations**

 

The following table setsforth selected statements of income data for the periods indicated, expressedas a percent of total revenue:

 
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                            | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                            | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                  |       |                             |       |                           |       |   |   |   |   |
| REVENUE:                              |       |                             |       |                           |       |   |   |   |   |
| Service revenue                       |       | 90.8                             | %          | 90.5                           | %          | 90.9 | % | 90.5 | % |
| Reimbursed fee revenue                |       | 9.2                              | %          | 9.5                            | %          | 9.1 | % | 9.5 | % |
|                                  |       |                             |       |                           |       |   |   |   |   |
| Total revenue                         |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |
|                                  |       |                             |       |                           |       |   |   |   |   |
| COST OF REVENUE:                      |       |                             |       |                           |       |   |   |   |   |
| Cost of service revenue               |       | 38.3                             | %          | 39.7                           | %          | 40.3 | % | 41.5 | % |
| Reimbursed fees paid                  |       | 9.2                              | %          | 9.5                            | %          | 9.1 | % | 9.5 | % |
|                                  |       |                             |       |                           |       |   |   |   |   |
| Total cost of revenue                 |       | 47.5                             | %          | 49.2                           | %          | 49.4 | % | 51.0 | % |
|                                  |       |                             |       |                           |       |   |   |   |   |
| GROSS PROFIT                          |       | 52.5                             | %          | 50.8                           | %          | 50.6 | % | 49.0 | % |
|                                  |       |                             |       |                           |       |   |   |   |   |
| OPERATING EXPENSES:                   |       |                             |       |                           |       |   |   |   |   |
| Research and development              |       | 5.9                              | %          | 5.5                            | %          | 6.0 | % | 5.6 | % |
| Sales and marketing                   |       | 16.0                             | %          | 14.6                           | %          | 16.5 | % | 14.7 | % |
| General and administrative            |       | 20.2                             | %          | 13.9                           | %          | 17.8 | % | 14.1 | % |
|                                  |       |                             |       |                           |       |   |   |   |   |
| Total operating expenses              |       | 42.1                             | %          | 34.0                           | %          | 40.3 | % | 34.4 | % |
|                                  |       |                             |       |                           |       |   |   |   |   |
| INCOME FROM OPERATIONS                |       | 10.4                             | %          | 16.8                           | %          | 10.3 | % | 14.6 | % |
|                                  |       |                             |       |                           |       |   |   |   |   |
| OTHER INCOME (EXPENSE):               |       |                             |       |                           |       |   |   |   |   |
| Interest income                       |       | 1.7                              | %          | 0.6                            | %          | 2.5 | % | 0.6 | % |
| Interest expense                      |       | 0.0                              | %          | 0.0                            | %          | 0.0 | % | 0.0 | % |
| Other income (expense)—net       |       | (3.8                             | )%         | 0.0                            | %          | (2.1 | )% | 0.0 | % |
|                                  |       |                             |       |                           |       |   |   |   |   |
| Total other income (expense)—net |       | (2.1                             | )%         | 0.6                            | %          | 0.4 | % | 0.6 | % |
|                                  |       |                             |       |                           |       |   |   |   |   |
| INCOME BEFORE INCOME TAXES            |       | 8.3                              | %          | 17.4                           | %          | 10.7 | % | 15.2 | % |
|                                  |       |                             |       |                           |       |   |   |   |   |
| INCOME TAX PROVISION                  |       | 2.3                              | %          | 7.2                            | %          | 3.5 | % | 6.3 | % |
|                                  |       |                             |       |                           |       |   |   |   |   |
| NET INCOME                            |       | 6.0                              | %          | 10.2                           | %          | 7.2 | % | 8.9 | % |

 

**Three andSix months ended June 30, 2008 and 2007**

 

***Service revenue***

 
| ** **                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| **$ in thousands**    | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                            |       |                             |       |                           |       |   |   |   |   |
| Service revenue                 |       | $                                | 18,013     |                           | $          | 16,806 |   | $ | 33,775 |   | $ | 31,321 |   |
| *As a percent of total revenue* |       | 90.8                             | %          | 90.5                           | %          | 90.9 | % | 90.5 | % |
|                                 |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

Service revenue for thethree months ended June 30, 2008 increased $1.2 million, or 7.2%, comparedto the corresponding prior year period. This increase was primarily due to a$2.1 million increase in service revenue generated from net new customers inthe three months ended June 30, 2008, compared to the 2007 period, offsetby a decrease in service revenue derived from existing customers of $0.9million. We define revenue derived from net new customers to mean revenuederived during the period from customers who had not used our services duringthe 13 months immediately preceding the end of that period, net of revenuederived during the period from customers who had been billed for services inthe prior period and were billed for less than 10% of that prior period amountin the period being analyzed. The increase in service revenue from newcustomers was due to customers that have started using our services in thethird quarter of 2007 or later from whom we had not generated revenue duringthe period prior to June 30, 2007. As of June 30, 2008, we had 2,839 

 

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customers, compared to 1,723customers as of June 30, 2007. The decrease in service revenue fromexisting customers compared to the prior year period was primarily the resultof a slowdown in the number ofbackground screens ordered by these customers in the current quarter, which webelieve is due in most part to less hiring and less movement by employees tonew positions due to the current macro-economic uncertainties.  This slowdown of existing customer revenuereduced our overall service revenue growth rate. We are unable to currentlypredict if this existing customer growth slowdown will continue into the futureand, if so, for how long.

 

Service revenue for the sixmonths ended June 30, 2008 increased $2.5 million, or 7.8%, compared tothe corresponding prior year period. This increase was primarily due to a $3.9million increase in service revenue generated from net new customers in the sixmonths ended June 30, 2008, compared to the 2007 period, offset by adecrease in service revenue derived from existing customers of $1.4 million.The increase in service revenue from new customers was due to customers thathave started using our services in the third quarter of 2007 or later from whomwe had not generated revenue during the period prior to June 30, 2007. Thedecrease in service revenue from existing customers compared to the prior yearperiod was primarily the result of aslowdown in the number of background screens ordered by these customers in thecurrent period, which we believe is due in most part to less hiring and lessmovement by employees to new positions due to the current macro-economicuncertainties.  This slowdown of existingcustomer revenue reduced our overall service revenue growth rate. We are unableto currently predict if this existing customer growth slowdown will continueinto the future and, if so, for how long.

 

***Reimbursed fee revenue***

 
| ** **                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| **$ in thousands**    | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                            |       |                             |       |                           |       |   |   |   |   |
| Reimbursed fee revenue          |       | $                                | 1,819      |                           | $          | 1,770 |   | $ | 3,382 |   | $ | 3,275 |   |
| *As a percent of total revenue* |       | 9.2                              | %          | 9.5                            | %          | 9.1 | % | 9.5 | % |
|                                 |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

Reimbursed fee revenue forthe three months ended June 30, 2008 remained fairly consistent ascompared to the corresponding prior year period.  Similarly, reimbursed fee revenue as apercentage of total revenue also remained fairly consistent.

 

Reimbursed fee revenue forthe six months ended June 30, 2008 remained relatively consistent,increasing only $0.1 million, or 3.3%, compared to the corresponding prior yearperiod.  This increase was a result of anincrease in the number of screening transactions.

 

***Cost of revenue***

 
| ** **                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| **$ in thousands**      | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                              |       |                             |       |                           |       |   |   |   |   |
| Cost of revenue                   |       | $                                | 7,597      |                           | $          | 7,364 |   | $ | 14,965 |   | $ | 14,380 |   |
| *As a percent of service revenue* |       | 42.2                             | %          | 43.8                           | %          | 44.3 | % | 45.9 | % |
|                              |       |                             |       |                           |       |   |   |   |   |
| Gross profit                      |       | $                                | 10,416     |                           | $          | 9,442 |   | $ | 18,810 |   | $ | 16,941 |   |
| *As a percent of service revenue* |       | 57.8                             | %          | 56.2                           | %          | 55.7 | % | 54.1 | % |

 

Cost of revenue for thethree months ended June 30, 2008 increased $0.2 million, or 3.2%, comparedto the three months ended June 30, 2007. The increase was primarily due to an increase in vendor costs. Overall,cost of service revenue as a percent of service revenue declined 1.6 percentagepoints for the three months ended June 30, 2008 compared to the correspondingprior year period. This decline was largely due to improved fixed cost leveragewith respect to our facilities and overhead costs, as well as theimplementation of certain automation projects.

 

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Cost of revenue for the sixmonths ended June 30, 2008 increased $0.6 million, or 4.1%, compared tothe six months ended June 30, 2007. The increase was primarily due to an increase in vendor costs andsalaries and wages. Overall, cost of service revenue as a percent of servicerevenue declined 1.6 percentage points for the six months ended June 30,2008 compared to the corresponding prior year period. This decline was largelydue to improved fixed cost leverage with respect to our facilities and overheadcosts, as well as the implementation of certain automation projects.

 

***Research and development expense***

 
| ** **                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| **$ in thousands**      | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                              |       |                             |       |                           |       |   |   |   |   |
| Research and development expense  |       | $                                | 1,167      |                           | $          | 1,023 |   | $ | 2,214 |   | $ | 1,932 |   |
| *As a percent of service revenue* |       | 6.5                              | %          | 6.1                            | %          | 6.6 | % | 6.2 | % |
|                                   |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

Research and developmentexpense for the three months ended June 30, 2008 increased $0.1 million,or 14.1%, compared to the three months ended June 30, 2007.  The increase was the result of highersalaries and related benefits for existing employees, partially offset bydevelopment costs capitalized in the 2008 period in excess of amountscapitalized in the 2007 period. Research and development expense as a percentof service revenue increased by 0.4 percentage points for the three monthsended June 30, 2008 compared to the corresponding prior year period. Thisincrease as a percentage of service revenue primarily resulted from an increasein the current period in amortization expense from capitalized software as wellas an increase in labor expense resulting from a decrease in capitalized labor.

 

Research and developmentexpense for the six months ended June 30, 2008 increased $0.3 million, or14.6%, compared to the six months ended June 30, 2007.  The increase was the result of highersalaries and related benefits for existing employees, partially offset byincreased development costs capitalized in the 2008 period. Research anddevelopment expense as a percent of service revenue increased by 0.4 percentagepoints for the six months ended June 30, 2008 compared to thecorresponding prior year period. This increase as a percentage of servicerevenue primarily resulted from an increase in the current period inamortization expense from capitalized software as well as an increase in laborexpense resulting from a decrease in capitalized labor.

 

***Sales andmarketing expense***

 
| ** **                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| **$ in thousands**      | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                              |       |                             |       |                           |       |   |   |   |   |
| Sales and marketing expense       |       | $                                | 3,177      |                           | $          | 2,706 |   | $ | 6,114 |   | $ | 5,085 |   |
| *As a percent of service revenue* |       | 17.6                             | %          | 16.1                           | %          | 18.1 | % | 16.2 | % |
|                                   |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

Sales and marketing expensefor the three months ended June 30, 2008 increased $0.5 million, or 17.4%,compared to the corresponding prior year period.  Approximately $0.3 million of the increasewas due to higher salaries and related benefits resulting from 11 additionalfull-time equivalent employees during the three months ended June 30, 2008compared to the 2007 period. The remaining increase in sales and marketingexpense was attributable to higher travel and marketing expenses. We anticipatethat sales and marketing expense will continue to increase as a percentage ofservice revenue through the end of 2008 as we plan to continue to invest in oursales and marketing capabilities, with particular focus on the small andmidsized business markets.

 

Sales and marketing expensefor the six months ended June 30, 2008 increased $1.0 million, or 20.2%,compared to the corresponding prior year period.  Approximately $0.7 million of the increasewas due to higher salaries and related benefits resulting from 11 additionalfull-time equivalent employees during the six months ended June 30, 2008compared to the 2007 period. The remaining increase in sales and marketingexpense was attributable to higher travel and marketing expenses. We anticipatethat sales and marketing expense will continue to increase as a percentage ofservice revenue through the end of 2008 as we plan to continue to invest in oursales and marketing capabilities, with particular focus on the small andmidsized business markets.

 

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***General and administrative expense***

 
| ** **                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| **$ in thousands**      | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                              |       |                             |       |                           |       |   |   |   |   |
| General and adminstrative expense |       | $                                | 4,000      |                           | $          | 2,586 |   | $ | 6,622 |   | $ | 4,873 |   |
| *As a percent of service revenue* |       | 22.2                             | %          | 15.4                           | %          | 19.6 | % | 15.6 | % |
|                                   |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

General and administrativeexpense for the three months ended June 30, 2008 increased $1.4 million,or 54.7%, compared to the three months ended June 30, 2007.  This increase in general and administrativeexpenses was primarily due to $1.2 million in financial advisory, legaladvisory and ancillary costs relating to the pending merger transactiondescribed above. There was also an increase of approximately $0.2 million froma legal settlement involving a former employee. As a percent of service revenue, general and administrative expenseincreased 6.8 percentage points for the three months ended June 30, 2008,compared to the corresponding prior year period.

 

General and administrativeexpense for the six months ended June 30, 2008 increased $1.7 million, or35.9%, compared to the six months ended June 30, 2007.  This increase in general and administrativeexpenses was primarily due to a $1.2 million increase in financial advisory,legal advisory and ancillary costs relating to the pending merger transactiondescribed above, as well as a legal settlement of approximately $0.2 millionpaid to a former employee.  The remainingincrease is due to increases in consulting and professional fees.  As a percent of service revenue, general andadministrative expense increased 4.0 percentage points for the six months endedJune 30, 2008, compared to the corresponding prior year period.

 

***Other income(expense)***

 
| ** **                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| **$ in thousands**      | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                              |       |                             |       |                           |       |   |   |   |   |
| Other income (expense)            |       | $                                | (419       | )                              | $          | 116 |   | $ | 150 |   | $ | 206 |   |
| *As a percent of service revenue* |       | (2.3                             | )%         | 0.7                            | %          | 0.4 | % | 0.7 | % |
|                                   |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

Other income (expense)decreased $0.5 million to a net expense of $0.4 million for the three monthsended June 30, 2008, as compared to $0.1 million in the three months endedJune 30, 2007.  The decrease is aresult of a write down in auction rate securities of $0.8 million, which isoffset by $0.3 million in earnings on the proceeds from our initial publicoffering held in investments and money market accounts.

 

Other income (expense)decreased $0.1 million to $0.1 million for the six months ended June 30,2008, as compared to the $0.2 million in the six months ended June 30,2007.  This decrease was from a writedown in auction rate securities of $0.8 million, which was offset by $0.7million in earnings on the proceeds from our initial public offering held ininvestments and money market accounts.

 

***Income taxes***

 

The effective tax rate for the three and six months ended June 30,2008 was approximately 32.5% compared to approximately 41.5% for the sameperiods in 2007. The decrease in the effective tax rate during the three andsix months ended June 30, 2008 compared to the three and six months ended June 30,2007 period was primarily a result of tax-exempt interest income generated frominvestments in tax-exempt securities during the current periods.

 

**Liquidityand Capital Resources**

 

***Operating Activities*****Our principal uses of cash in operatingactivities are for operating expenses and working capital. Cash flows fromoperations are significantly influenced by the amount of cash invested inpersonnel and infrastructure to support the anticipated future growth in ourbusiness, the increasing number of customers using our services and the amountand timing of payments by these customers.

 

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For the six months ended June 30,2008, cash generated by operating activities of $3.4 million resulted primarilyfrom net income, including adjustments for depreciation and amortization andnon-cash deferred taxes, partially offset by an increase in operating assetsand liabilities primarily as a result of the growth in revenues.  Cash provided by operating activities of $3.7million for the prior year six month period was primarily attributable to netincome, including adjustments for depreciation and amortization and non-cashdeferred taxes, partially offset by an increase in operating assets andliabilities.

 

***Investing Activities*** Net cash provided by investing activities forthe six months ended June 30, 2008 was $24.8 million and was comprised ofnet investment securities sales of $25.8 million, less purchases of fixedassets of $1.0 million. The use of cash for investing activities in the sixmonths ended June 30, 2007 was $4.6 million and represented net investmentsecurities purchases and purchases of fixed assets of $3.7 million and $0.9million, respectively. See also Note 2 of our Notes to Condensed, ConsolidatedFinancial Statements above for additional disclosures about investments.

 

***Financing Activities*** Net cash provided by financing activities forthe six months ended June 30, 2008 was $0.9 million, primarily due to theexercise of stock options. The use of cash for financing activities in the sixmonths ended June 30, 2007 of $1.0 million was primarily for preparationrelating to our initial public offering in August 2007.

 

We currentlybelieve that our existing cash position, cash flows provided by operatingactivities and existing credit facilities will be sufficient to fund ourworking capital requirements and planned investments for at least the nexttwelve months.  We currently have nointerest bearing debt.  If the pendingmerger with USIS does not occur, the Company plans to use the net proceeds fromour initial public offering primarily for working capital and other generalcorporate purposes, including the expansion of our sales and marketingactivities, development of new service offerings and expansion of ourinternational operations. In addition, we may use a portion of the net proceedsfor acquisitions of, or investments in, businesses, products ortechnologies that enhance or add new services or additional functionality,further solidify our market position or allow us to offer complementaryproducts, services or technologies. In the event an acquisition plan isadopted which requires funds exceeding the availability described above, analternate source of funds to accomplish the acquisition would have to bedeveloped.  Following the Company’sreincorporation into Delaware and our initial public offering, which wascompleted on August 13, 2007, the Company had 100,000,000 shares of commonstock authorized, of which 11,536,114 shares were outstanding at June 30,2008, and 10,000,000 shares of preferred stock authorized, of which none wereoutstanding. The board of directors is authorized to issue up to an aggregateof 10,000,000 shares of preferred stock in one or more series without furthervote or action by the stockholders.  TheCompany could issue additional shares of common or preferred stock or enterinto new or revised borrowing arrangements to raise funds.

 

As mentionedabove, we executed a definitive merger agreement, as amended, with USIS wherebyUSIS will seek to acquire all outstanding common stock of HireRight for $19.75per share. In relation to the merger transaction, the Company has incurredtransaction related expenses of approximately $1.2 million during the secondquarter of 2008. These expenses relate primarily to financial and legaladvisory, as well as other due diligence related expenses. Additional mergerexpenses are expected to be incurred in the third quarter.

 

**CriticalAccounting Policies and Estimates**

 

The foregoing discussion and analysis of the Company’sfinancial condition and results of operations are based upon the consolidatedfinancial statements of the Company, which have been prepared in accordancewith accountingprinciples generally accepted in the UnitedStates.  The preparation of ourfinancial statements requires us to make estimates and assumptions that affectthe reported amounts of assets, liabilities, revenues, costs and expenses, aswell as the disclosure of contingent assets and liabilities and other relateddisclosures. We base our estimates on historical experience and on variousother assumptions that we believe to be reasonable under the circumstances, theresults of which form the basis for making judgments about carrying values ofour assets and liabilities that are not readily apparent from other sources. Inmany instances, we could have reasonably used different accounting estimates.Actual results could differ from those estimates. We include any revisions toour estimates in our results for the period in which the actual amounts becomeknown.

 

Webelieve the critical accounting policies described below affect the moresignificant judgments and estimates used in the preparation of our consolidatedfinancial statements. Accordingly, the following are the policies that webelieve are the most critical to aid in fully understanding and evaluating ourhistorical consolidated financial condition and results of operations:

 

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***Allowance for Doubtful Accounts.***  Wemaintain an allowance for doubtful accounts for estimated losses resulting fromthe inability of certain of our customers to pay us. This provision is based onour historical experience and for specific customers that, in our opinion, arelikely to default on our receivables from them. In order to identify thesecustomers, we perform ongoing reviews of all customers that have breached theirpayment terms, as well as those that have filed for bankruptcy or for whominformation has become available indicating a significant risk ofnon-recoverability. We continue to monitor and evaluate our customers overtime. Historically, the allowance for doubtful accounts has been sufficient tocover our uncollectible receivables. To the extent that our future collectionsdiffer from our assumptions based on historical experience, the amount of ourbad debt and allowance recorded may be different. Although no individualcustomer accounted for more than 6% of our total revenue thus far in 2008, ifour historical collection experience changes unexpectedly or if one or more ofour largest customers fails to pay the amounts owed to us, our allowance fordoubtful accounts would likely be inadequate.

 

***Accounting for Income Taxes.***  Werecord income tax expense in accordance with SFAS No. 109, *Accounting for Income Taxes* (“SFAS 109”),which requires that we recognize deferred tax assets and liabilities fortemporary differences in the bases of assets and liabilities for tax andfinancial reporting purposes. We record a valuation allowance related todeferred tax assets when it is more likely than not that some portion or all ofthe deferred tax asset will not be realized. We eliminated our valuationallowance in 2006 because we were profitable in 2006 and expected to beprofitable in future years. The preparation of financial projections involvessignificant subjectivity due to the inherent uncertainty involved in estimatingfuture performance. If we fail to perform as projected, we may need to record avaluation allowance in the future.

 

***Accounting for Stock-BasedCompensation.***  Effective January 1, 2006, we adoptedSFAS 123(R), which requires that all stock-based compensation toemployees, including grants of employee stock options, be expensed in our financialstatements based on their respective grant date fair values. UnderSFAS 123(R), we estimate the fair value of each stock-based payment awardusing the Black-Scholes option pricing model. The determination of the fairvalue of stock-based payment awards using the Black-Scholes model is affectedby our stock price and a number of assumptions, including expected volatility,expected life, risk-free interest rate and expected dividends. We do not have ahistory of market prices of our common stock as we were not a public companyuntil our recent initial public offering, and as such, we estimate volatilityin accordance with Staff Accounting Bulletin No. 107 (“SAB 107”)using historical volatilities of other publicly traded companies in ourindustry. The expected life of the awards is based on the simplified method asdefined in SAB 107. The risk-free interest rate assumption is based onobserved interest rates appropriate for the terms of our awards. The dividendyield assumption is based on our history and expectation of not paying anydividends. Forfeitures are estimated at the time of grant and revised, ifnecessary, in subsequent periods if actual forfeitures differ from thoseestimates. We recognized stock-based compensation expense in our consolidatedfinancial statements based on awards that are ultimately expected to vest. Asummary of significant assumptions used in determining the fair value of theoptions is as follows:

 
| ** **              | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------|------------|---------------------------------------------------|------------|
| ** **              | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| Expected life (years)   |       | 6.25                                              |       | 6.25 |   |
| Risk-free interest rate |       | 3.14 – 3.56                                  | %          | 4.69 – 4.82 | % |
| Volatility              |       | 41.56 – 41.77                                | %          | 41.50 – 41.65 | % |
| Dividend yield          |       | 0                                                 | %          | 0 | % |

 

Iffactors change and we employ different assumptions, stock-based compensationexpense may differ significantly from what we have recorded in the past. Ifthere are any modifications or cancellations of the underlying unvestedsecurities, we may be required to accelerate, increase or cancel any remainingunearned stock-based compensation expense. Future stock-based compensationexpense and unearned stock-based compensation will increase to the extent thatwe grant additional equity awards to employees or we assume unvested equityawards in connection with acquisitions.

 

**Recent Accounting Pronouncements**

 

In February 2008, the FASB issued FASB Staff Position No. 157-2(“Staff Position 157-2”), which deferred the effective date for certainportions of SFAS No. 157, *Fair Value Measurements (“SFAS157”)*related to nonrecurring measurements of nonfinancial assetsand liabilities.  That provision of SFAS157 will be effective for the Company’s 2009 fiscal year.  We are currently evaluating the effect, ifany, that the adoption of Staff Position 157-2 will have on ourresults of operations, financial position and cash flows.

 

In December 2007, the FASB issued SFAS No. 141—revised 2007, “*Business Combinations”* (“SFAS 141R”).SFAS 141R establishes principles and requirements for how an acquirer in abusiness combination recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, and any noncontrollinginterest; recognizes and measures the goodwill acquired in the businesscombination or a gain from a bargain purchase; and determines what informationto disclose to enable financial statement users to evaluate the nature andfinancial effects of the business 

 

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combination.SFAS 141R applies to business combinations for which the acquisition dateis on or after December 15, 2008. Early adoption is prohibited. We arecurrently evaluating the effect, if any, that the adoption of SFAS 141Rwill have on our results of operations, financial position and cash flows.

 

In December 2007, the FASB issued SFAS No. 160, *Noncontrolling Interests in Consolidated FinancialStatements—an Amendment to ARB No. 51* (“SFAS 160”).SFAS 160 requires all entities to report noncontrolling (minority)interests in subsidiaries as equity in the consolidated financial statements,but separate from the equity of the parent company. The statement furtherrequires that consolidated net income be reported at amounts attributable tothe parent and the noncontrolling interest, rather than expensing the incomeattributable to the minority interest holder. This statement also requires thatcompanies provide sufficient disclosures to clearly identify and distinguishbetween the interests of the parent company and the interests of the noncontrollingowners, including a disclosure on the face of the consolidated statements forincome attributable to the noncontrolling interest holder. This statement iseffective for fiscal years beginning on or after December 15, 2008. Earlyadoption is prohibited. We are currently evaluating the effect, if any, thatthe adoption of SFAS 160 will have on our results of operations, financialposition and cash flows.

 

In May 2008, the FASB issued FASB Statement No. 162, *The Hierarchy of Generally Accepted Accounting Principles*(“SFAS 162”). SFAS 162 identifies the sources of accountingprinciples and the framework for selecting the principles to be used in thepreparation of financial statements of nongovernmental entities that arepresented in conformity with GAAP. SFAS 162 will become effective 60 daysfollowing the SEC’s approval of the Public Company Accounting Oversight Boardamendments to AU Section 411, *TheMeaning of Present Fairly in Conformity With Generally Accepted AccountingPrinciples*. We are currently evaluating the effect, if any, that theadoption of SFAS 162 will have on our results of operations, financialposition and cash flows.

 

**Item 3.       Quantitative and Qualitative Disclosures about Market Risk**

 

There are no material changes to the disclosure set forth in the “Quantitative and Qualitative Disclosuresabout Market Risk” section of Management’s Discussion and Analysis ofFinancial Condition and Results of Operations****contained in the Company’s Annual Report on Form 10-Kfor the period ended December 31, 2007, except as discussed in Note 2 of our Notes to Condensed,Consolidated Financial Statements above.

 

**Item 4T.    Controls and Procedures**

** **

The Company’s Chief Executive Officer and Chief Financial Officer, withthe participation of the Company’s management, carried out an evaluation of theeffectiveness of the Company’s disclosure controls and procedures (as definedin Exchange Act Rule 13a-15(e)). Based upon that evaluation, theChief Executive Officer and the Chief Financial Officer concluded that, as ofthe end of the period covered by this report, the Company’s disclosure controlsand procedures are effective at the “reasonable assurance” level in identifyingmaterial information relating to the Company (including its consolidatedsubsidiaries) required to be included in this report.

 

Disclosure controls and procedures, no matter how well designed andimplemented, can provide only reasonable assurance of achieving an entity’sdisclosure objectives. The likelihood of achieving such objectives is affectedby limitations inherent in disclosure controls and procedures. These includethe fact that human judgment in decision-making can be faulty and thatbreakdowns in internal control can occur because of human failures such assimple errors or mistakes or intentional circumvention of the establishedprocess.

 

There were no changes in the Company’s internal controls over financialreporting, identified by the Chief Executive Officer or the Chief FinancialOfficer that occurred during the period covered by this report that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

We are not required to comply with all of the rules andregulations of the Securities and Exchange Commission, particularly therequirement that we include in our annual report on Form 10-K a report ofmanagement and accompanying auditor’s report on the Company’s internal controlover financial reporting (“404 reporting”). Compliance by the Company with the404 reporting rules and regulations will be required in our annual reporton Form 10-K for the fiscal year ending December 31, 2008, unless therules and regulations governing 404 reporting are revised.

 

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***PART II.  OTHER INFORMATION***

* *

**Item 1.       Legal Proceedings**

 

We encounter lawsuits from time to time in the ordinary course ofbusiness and, at June 30, 2008, we were parties to several civil lawsuits.The Company does not expect that the resolution of these lawsuits will have amaterial adverse impact on future results of operations or financial position.Certain lawsuits filed against the Company from time to time contain claims notcovered by insurance, or seek damages in excess of policy limits, and suchclaims could be filed in the future. The Company may file intellectual propertyinfringement and/or other types of lawsuits in the future which may result inmaterially increased costs and other adverse consequences. Any costs and/orlosses that we may suffer from such lawsuits, and the effect such litigation mayhave upon the reputation and marketability of our products and services, couldhave a material adverse impact on the future results of operations, financialcondition and/or prospects of the Company.

 

**Item 1A.    Risk Factors**

 

Except for modifications to the risk factors setforth below and in Part II, Item 1A of our Quarterly Report on Form 10-Qfor the period ended March 31, 2008, there have been no material changesto the risk factors disclosed in Part I, Item 1A in our Annual Report on Form 10-Kfor the period ended December 31, 2007.

 

***Our investments in marketablesecurities are subject to risks which may cause losses.***

 

We invest our cash balances in high-quality issuers and limit theamount of credit exposure to any one issuer other than the United Statesgovernment and its agencies. As of June 30, 2008, our investments inmarketable securities consist primarily of auction rate securities. Our auctionrate securities are investment grade quality as of June 30, 2008. However,such risks, including the systemic failure of future auctions for auction ratesecurities, may result in a loss of liquidity, substantial impairment to ourinvestments, realization of substantial future losses, or a complete loss ofthe investment in the long-term which may have a material adverse effect on ourbusiness, results of operations, liquidity, and financial condition. SeeNote 2 of our Notes to Condensed, Consolidated Financial Statements abovefor additional information about our investments in marketable securities.

 

***Failure to complete the merger forany reason other than acceptance of a superior proposal could adversely affectthe Company’s stock price and the Company’s future business and financialresults.***

 

Completion of the merger is conditioned upon, among other things, thereceipt of certain regulatory and antitrust approvals, including under theHart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and approvalof the Company’s stockholders. There is no assurance that the Company willreceive the necessary approvals or satisfy the other conditions necessary forcompletion of the merger. Failure to complete the merger would prevent theCompany and its stockholders from realizing its anticipated benefits. TheCompany will also incur significant transaction costs, whether or not themerger is completed and, under certain circumstances, may be required to pay anamount up to $6,850,000to USIS if the Merger Agreement is terminated. In addition, the current marketprice of the Company’s common shares likely reflects a market assumption thatthe merger or another change in control transaction will occur, and a failureto complete the merger for reasons other than the acceptance of a superiorproposal could result in a significant decline in the market price of theCompany’s common shares.

 

***The Company’s business could beadversely impacted by uncertainty related to the proposed merger, whether ornot the merger is completed.***

 

Whetheror not the merger is completed, the announcement and pendency of the mergercould impact or cause disruptions in the Company’s business, which could havean adverse effect on the Company’s results of operations, financial conditionand success of the merger, including:

 
| · | the  Company’s employees may experience uncertainty about their future roles with  the current and/or combined company, which might adversely affect the  Company’s ability to retain and hire managers and other employees; |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| · | the  attention of the Company’s management may be directed toward the completion  of the merger and transaction-related considerations and may be diverted from  the day-to-day business operations of the Company’s business; and |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| · | potential  litigation in connection with the merger. |
|--------|------------------------------------------------------|

 

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**Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds**

 

Not applicable

 

**Item 3.       DefaultsUpon Senior Securities**

 

Not applicable

 

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

 

OurAnnual Meeting of Stockholders was held on May 29, 2008 in Irvine,California, at which the following matters were submitted to a vote of ourstockholders:

 

(a)           Votes regarding the election of thepersons named below as Class I directors for a term expiring in 2011 wereas follows:

 
| **Name**            | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|---------------------|------------|------------|------------|--------------|------------|
| Jeffrey H. Anderson |       | 10,525,567 |       | 4,887        |       |
| Thomas B. Blaisdell |       | 10,525,567 |       | 4,887        |       |

 

Inaddition, the persons named below continued as directors following the AnnualMeeting of Stockholders:

 

JohnP. Bowmer

CranstonR. Lintecum

RichardE. Allen

EricJ. Boden

MargaretL. Taylor

 

(b)           Votes regarding ratification of theappointment of Deloitte & Touche LLP as the Company’s independentregistered public accounting firm to serve for the fiscal year ending December 31,2008, were as follows:

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Votes** | ** ** |
|------------|------------|-------------|------------|-------------|------------|---------------------------|------------|
| 10,506,143 |       | 24,200      |       | 111         |       | 0                         |       |

 

**Item 5.       Other Information**

 

Not applicable

 

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**Item 6.       Exhibits**

** **
| **Exhibit** | ** ** | **Description** |
|-------------|------------|-----------------|
| ** **  | ** ** | ** **      |
| 2.1         |       |            | Agreement  and Plan of Merger, dated as of June 9, 2008, by and among  HireRight, Inc., Hercules Acquisition Corp. and US Investigations  Services, LLC. (1) |
|        |       |            |   |
| 2.2         |       |            | Voting  Agreement, dated June 9, 2008, by and among Hercules Acquisition Corp.,  US Investigations Services, LLC and certain stockholders of  HireRight, Inc. (1) |
|        |       |            |   |
| 2.3         |       |            | Amendment No. 1 to the Agreement and Plan of Merger, dated as of  July 23, 2008, by and among HireRight, Inc., US Investigations  Services, LLC, and Hercules Acquisition Corp. (2) |
|        |       |            |   |
| 2.4         |       |            | Amendment No. 2 to the Agreement and Plan of Merger, dated as of  July 29, 2008, by and among HireRight, Inc., US Investigations  Services, LLC, and Hercules Acquisition Corp. (3) |
|        |       |            |   |
| 3.1         |       |            | Certificate  of Incorporation of HireRight, Inc. (4) |
|        |       |            |   |
| 3.2         |       |            | Bylaws  of HireRight, Inc. (4) |
|        |       |            |   |
| 4.1         |       |            | Specimen  common stock certificate(4) |
|        |       |            |   |
| 31.1        | *          |            | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |
|        |       |            |   |
| 31.2        | *          |            | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |
|        |       |            |   |
| 32.1        | *          |            | Certification  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |
|        |       |            |   |
| 32.2        | *          |            | Certification  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |

 

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|   | *   |   | New  exhibit filed with this report.                                                                                                                       |
|--------|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (1) |   | Filed  as an exhibit to the Company’s Current Report on Form 8-K dated June 9,  2008 and incorporated herein by reference.             |
|   | (2) |   | Filed  as an exhibit to the Company’s Current Report on Form 8-K dated July 23,  2008 and incorporated herein by reference.            |
|   | (3) |   | Filed  as an exhibit to the Company’s Current Report on Form 8-K dated July 29,  2008 and incorporated herein by reference.            |
|   | (4) |   | Filed  as an exhibit to the Company’s Registration Statement on Form S-1  Registration No. 333-140613 and incorporated herein by reference. |

 

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***SIGNATURES***

* *

Pursuantto the requirements of the Securities Exchange Act of 1934, as amended, theregistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|     |                 | HIRERIGHT,  INC.                       |
|----------|----------------------|----------------------------------------|
|     |                 |                                   |
|     |                 |                                   |
| Date:    | August 7,  2008 | /s/  Eric J. Boden                     |
|     |                 | Eric  J. Boden                         |
|     |                 | President  and Chief Executive Officer |
| * * | * *             | *(duly  authorized officer)*           |
|     |                 |                                   |
|     |                 |                                   |
| Date:    | August 7,  2008 | /s/  Jeffrey A. Wahba                  |
|     |                 | Jeffrey  A. Wahba                      |
|     |                 | Chief  Financial Officer               |
| * * | * *             | *(principal  financial officer)*       |

 

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