**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

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

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**FORM 10-Q**

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| **x**      | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                  |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                         |
| ** ** | **For the  quarterly period ended June 30, 2007**                                                                                                                                                                  |
| ** ** | ** **                                                                                                                                                                                                         |
| ** ** | **or**                                                                                                                                                                                                             |
| ** ** | ** **                                                                                                                                                                                                         |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                 |
| ** ** | ** **                                                                                                                                                                                                         |
| ** ** | **For the transition period from                  to                ** |

** **

**Commission FileNumber:  001-33613**

**HIRERIGHT,INC.**

(Exact name of registrant as specified in its charter)

| **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 former fiscal year,if changed since last report)

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes o        No x

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct.
| Large  accelerated filer o | Accelerated  filer o | Non-accelerated filer x |
|---------------------------------|---------------------------|------------------------------|

 

Indicated by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

Yes o        No x

Thenumber of shares of the registrant’s common stock, $0.01 par value, outstandingon September 7, 2007 was 11,230,240.

 

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**HIRERIGHT,INC.**

**INDEX**
| **Part I. Financial Information**    |                                                                                                                      |   |
|--------------------------------------|---------------------------------------------------------------------------------------------------------------------------|--------|
|                                 |                                                                                                                      |   |
| Item 1.                              | Financial Statements                                                                                                      |   |   |
|                                 |                                                                                                                      |   |   |
|                                 | Condensed,  Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006  (unaudited)                            |   |   |
|                                 |                                                                                                                      |   |   |
|                                 | Condensed,  Consolidated Statements of Operations for the Three and Six Months Ended June  30,  2007 and 2006 (unaudited) |   |   |
|                                 |                                                                                                                      |   |   |
|                                 | Condensed,  Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007  and  2006 (unaudited)           |   |   |
|                                 |                                                                                                                      |   |   |
|                                 | Notes to Condensed,  Consolidated Financial Statements (unaudited)                                                        |   |   |
|                                 |                                                                                                                      |   |   |
| Item 2.                              | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                               |   |   |
|                                 |                                                                                                                      |   |   |
| Item 3.                              | Quantitative  and Qualitative Disclosures about Market Risk                                                               |   |   |
|                                 |                                                                                                                      |   |   |
| Item 4T.                             | Controls and  Procedures                                                                                                  |   |   |
|                                 |                                                                                                                      |   |   |
| **Part II. Other  Information** |                                                                                                                      |   |
|                                 |                                                                                                                      |   |   |
| Item 1.                              | Legal Proceedings                                                                                                         |   |   |
|                                 |                                                                                                                      |   |   |
| Item 1A.                             | Risk  Factors                                                                                                             |   |   |
|                                 |                                                                                                                      |   |   |
| Item 2.                              | Unregistered  Sales of Equity Securities and Use of Proceeds                                                              |   |   |
|                                 |                                                                                                                      |   |   |
| Item 3.                              | Defaults Upon  Senior Securities                                                                                          |   |   |
|                                 |                                                                                                                      |   |   |
| Item 4.                              | Submission of  Matters to a Vote of Security Holders                                                                      |   |   |
|                                 |                                                                                                                      |   |   |
| Item 5.                              | Other Information                                                                                                         |   |   |
|                                 |                                                                                                                      |   |   |
| Item 6.                              | Exhibits                                                                                                                  |   |   |
|                                 |                                                                                                                      |   |   |
| Signatures                           |                                                                                                                      |   |

 

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**HIRERIGHT, INC.**

**CONDENSED, CONSOLIDATED BALANCE SHEETS**

(Unaudited)
| ** **                                                                                                                                                                                                                                    | ** ** | **June 30, 2007** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------|------------|
| **(in thousands, except share amounts)**                                                                                                                                                                                  | ** ** | **Actual**                  | ** ** | **Pro Forma(1)** | ** ** | **2006** | ** ** |
|                                                                                                                                                                                                                                          |       |                        |       |                  |       |   |   |
| **ASSETS**                                                                                                                                                                                                                                    |       |                        |       |                  |       |   |   |
| CURRENT ASSETS:                                                                                                                                                                                                                               |       |                        |       |                  |       |   |   |
| Cash  and cash equivalents                                                                                                                                                                                                                    |       | $                           | 2,301      |                  | $          | 2,301 |   | $ | 4,201 |   |
| Restricted  cash                                                                                                                                                                                                                              |       | 120                         |       | 120                   |       | 120 |   |
| Short-term  investments                                                                                                                                                                                                                       |       | 7,750                       |       | 7,750                 |       | 4,031 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $128 and $131 at June  30, 2007 and December 31, 2006, respectively, and reserve for sales  allowances of $126 and $154 at June 30, 2007 and December 31, 2006,  respectively |       | 11,906                      |       | 11,906                |       | 9,628 |   |
| Prepaid  expenses and other current assets                                                                                                                                                                                                    |       | 717                         |       | 717                   |       | 955 |   |
| Deferred  tax asset - current                                                                                                                                                                                                                 |       | 2,185                       |       | 2,185                 |       | 3,518 |   |
|                                                                                                                                                                                                                                          |       |                        |       |                  |       |   |   |
| Total  current assets                                                                                                                                                                                                                         |       | 24,979                      |       | 24,979                |       | 22,453 |   |
|                                                                                                                                                                                                                                          |       |                        |       |                  |       |   |   |
| Property and  equipment, net of accumulated depreciation and amortization of $4,829 and  $4,486 at June 30, 2007 and December 31, 2006                                                                                                        |       | 1,843                       |       | 1,843                 |       | 1,583 |   |
| Other assets                                                                                                                                                                                                                                  |       | 1,703                       |       | 1,703                 |       | 646 |   |
| Deferred tax  asset - non-current                                                                                                                                                                                                             |       | 1,167                       |       | 1,167                 |       | 1,151 |   |
|                                                                                                                                                                                                                                          |       |                        |       |                  |       |   |   |
| TOTAL                                                                                                                                                                                                                                         |       | $                           | 29,692     |                  | $          | 29,692 |   | $ | 25,833 |   |
|                                                                                                                                                                                                                                          |       |                        |       |                  |       |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                |       |                        |       |                  |       |   |   |
| CURRENT  LIABILITIES:                                                                                                                                                                                                                         |       |                        |       |                  |       |   |   |
| Accounts  payable                                                                                                                                                                                                                             |       | $                           | 3,227      |                  | $          | 3,227 |   | $ | 4,480 |   |
| Accrued  liabilities                                                                                                                                                                                                                          |       | 2,869                       |       | 2,869                 |       | 1,210 |   |
| Accrued  payroll and benefits                                                                                                                                                                                                                 |       | 3,569                       |       | 3,569                 |       | 3,731 |   |
| Capital  lease liability                                                                                                                                                                                                                      |       | 4                           |       | 4                     |       | 4 |   |
|                                                                                                                                                                                                                                          |       |                        |       |                  |       |   |   |
| Total  current liabilities                                                                                                                                                                                                                    |       | 9,669                       |       | 9,669                 |       | 9,425 |   |
|                                                                                                                                                                                                                                          |       |                        |       |                  |       |   |   |
| Other  liabilities                                                                                                                                                                                                                            |       | 284                         |       | 284                   |       | — |   |
|                                                                                                                                                                                                                                          |       |                        |       |                  |       |   |   |
| Total  liabilities                                                                                                                                                                                                                            |       | 9,953                       |       | 9,953                 |       | 9,425 |   |
|                                                                                                                                                                                                                                          |       |                        |       |                  |       |   |   |
| COMMITMENTS AND  CONTINGENCIES:                                                                                                                                                                                                               |       |                        |       |                  |       |   |   |
|                                                                                                                                                                                                                                          |       |                        |       |                  |       |   |   |
| Series  C redeemable convertible preferred stock, $0.01 par value—6,794,579 shares  authorized, issued and outstanding (aggregate liquidation preference of  $13,000)                                                                    |       | 13,000                      |       | —                |       | 13,000 |   |
| Series  E redeemable convertible preferred stock, $0.01 par value—17,500,000 shares  authorized; 17,246,579 shares issued and outstanding (aggregate liquidation  preference of $12,180)                                                 |       | 12,180                      |       | —                |       | 12,180 |   |
|                                                                                                                                                                                                                                          |       |                        |       |                  |       |   |   |
| STOCKHOLDERS’  EQUITY:                                                                                                                                                                                                                   |       |                        |       |                  |       |   |   |
| Preferred  stock, 50,000,000 shares authorized:                                                                                                                                                                                               |       |                        |       |                  |       |   |   |
| Series  A redeemable convertible preferred stock, $0.01 par value—none issued and  outstanding                                                                                                                                           |       | —                      |       | —                |       | — |   |
| Series  B convertible preferred stock, $0.01 par value—854,632 shares authorized,  issued and outstanding (aggregate liquidation preference of $2,000)                                                                                   |       | 2,000                       |       | —                |       | 2,000 |   |
| Common  stock, $0.01 par value—100,000,000 shares authorized; 1,990,224, 8,191,366  and 1,956,115 shares issued and outstanding at June 30, 2007, pro forma at  June 30, 2007, and December 31, 2006, respectively                       |       | 20                          |       | 82                    |       | 20 |   |
| Additional  paid-in capital                                                                                                                                                                                                                   |       | 1,100                       |       | 28,218                |       | 847 |   |
| Other  comprehensive gain—currency translation                                                                                                                                                                                           |       | 15                          |       | 15                    |       | 14 |   |
| Accumulated  deficit                                                                                                                                                                                                                          |       | (8,576                      | )          | (8,576                | )          | (11,653 | ) |
|                                                                                                                                                                                                                                          |       |                        |       |                  |       |   |   |
| Net  stockholders’ (deficit) equity                                                                                                                                                                                                      |       | (5,441                      | )          | 19,739                |       | (8,772 | ) |
|                                                                                                                                                                                                                                          |       |                        |       |                  |       |   |   |
| TOTAL                                                                                                                                                                                                                                         |       | $                           | 29,692     |                  | $          | 29,692 |   | $ | 25,833 |   |

 

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(1) Reflects on a pro formabasis the conversion of all outstanding preferred stock to an aggregate6,201,142 shares of common stock.

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

1

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**HIRERIGHT, INC.**

**CONDENSED, CONSOLIDATED STATEMENTS OFOPERATIONS**

(Unaudited)
| ** **                                                         | ** ** | **Quarter Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------|------------|---------------------------------------------------|------------|
| **(in thousands, except per share data)** | ** ** | **2007**                                  | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                               | ** ** | ** **                                |       |                                              |       |   |   |   |   |
| REVENUE:                                                           |       |                                      |       |                                              |       |   |   |   |   |
| Service revenue                                                    |       | $                                         | 16,806     |                                              | $          | 14,038 |   | $ | 31,321 |   | $ | 25,666 |   |
| Reimbursed fee revenue                                             |       | 1,770                                     |       | 1,497                                             |       | 3,275 |   | 2,916 |   |
|                                                               |       |                                      |       |                                              |       |   |   |   |   |
| Total revenue                                                      |       | 18,576                                    |       | 15,535                                            |       | 34,596 |   | 28,582 |   |
|                                                               |       |                                      |       |                                              |       |   |   |   |   |
| COST OF REVENUE:                                                   |       |                                      |       |                                              |       |   |   |   |   |
| Cost of service revenue                                            |       | 7,364                                     |       | 6,688                                             |       | 14,380 |   | 12,668 |   |
| Reimbursed fees paid                                               |       | 1,770                                     |       | 1,497                                             |       | 3,275 |   | 2,916 |   |
|                                                               |       |                                      |       |                                              |       |   |   |   |   |
| Total cost of revenue                                              |       | 9,134                                     |       | 8,185                                             |       | 17,655 |   | 15,584 |   |
|                                                               |       |                                      |       |                                              |       |   |   |   |   |
| GROSS PROFIT                                                       |       | 9,442                                     |       | 7,350                                             |       | 16,941 |   | 12,998 |   |
|                                                               |       |                                      |       |                                              |       |   |   |   |   |
| OPERATING  EXPENSES:                                               |       |                                      |       |                                              |       |   |   |   |   |
| Research and development                                           |       | 1,023                                     |       | 928                                               |       | 1,932 |   | 1,789 |   |
| Sales and marketing                                                |       | 2,706                                     |       | 2,238                                             |       | 5,085 |   | 3,994 |   |
| General and administrative                                         |       | 2,586                                     |       | 1,727                                             |       | 4,873 |   | 3,333 |   |
|                                                               |       |                                      |       |                                              |       |   |   |   |   |
| Total operating expenses                                           |       | 6,315                                     |       | 4,893                                             |       | 11,890 |   | 9,116 |   |
|                                                               |       |                                      |       |                                              |       |   |   |   |   |
| INCOME FROM  OPERATIONS                                            |       | 3,127                                     |       | 2,457                                             |       | 5,051 |   | 3,882 |   |
|                                                               |       |                                      |       |                                              |       |   |   |   |   |
| OTHER INCOME  (EXPENSE):                                           |       |                                      |       |                                              |       |   |   |   |   |
| Interest income                                                    |       | 120                                       |       | 32                                                |       | 212 |   | 34 |   |
| Interest expense                                                   |       | 2                                         |       | (16                                               | )          | 1 |   | (38 | ) |
| Other income (expense)—net                                    |       | (6                                        | )          | (11                                               | )          | (7 | ) | (15 | ) |
|                                                               |       |                                      |       |                                              |       |   |   |   |   |
| Total other income (expense)—net                              |       | 116                                       |       | 5                                                 |       | 206 |   | (19 | ) |
|                                                               |       |                                      |       |                                              |       |   |   |   |   |
| INCOME BEFORE  INCOME TAXES                                        |       | 3,243                                     |       | 2,462                                             |       | 5,257 |   | 3,863 |   |
|                                                               |       |                                      |       |                                              |       |   |   |   |   |
| INCOME TAX  PROVISION                                              |       | 1,343                                     |       | 106                                               |       | 2,180 |   | 106 |   |
|                                                               |       |                                      |       |                                              |       |   |   |   |   |
| NET INCOME                                                         |       | 1,900                                     |       | 2,356                                             |       | 3,077 |   | 3,757 |   |
| Preferred stock dividends                                          |       | (544                                      | )          | (544                                              | )          | (1,087 | ) | (1,087 | ) |
| Income allocable to preferred stockholders                         |       | (1,028                                    | )          | (1,389                                            | )          | (1,509 | ) | (2,055 | ) |
|                                                               |       |                                      |       |                                              |       |   |   |   |   |
| NET INCOME  ALLOCABLE TO COMMON STOCKHOLDERS                       |       | $                                         | 328        |                                              | $          | 423 |   | $ | 481 |   | $ | 615 |   |
|                                                               |       |                                      |       |                                              |       |   |   |   |   |
| NET INCOME PER  SHARE ALLOCABLE TO COMMON STOCKHOLDERS:            |       |                                      |       |                                              |       |   |   |   |   |
| Basic                                                              |       | $                                         | 0.17       |                                              | $          | 0.23 |   | $ | 0.24 |   | $ | 0.35 |   |
| Diluted                                                            |       | $                                         | 0.11       |                                              | $          | 0.16 |   | $ | 0.16 |   | $ | 0.24 |   |
|                                                               |       |                                      |       |                                              |       |   |   |   |   |
| WEIGHTED AVERAGE  COMMON AND COMMON EQUIVALENT SHARES:             |       |                                      |       |                                              |       |   |   |   |   |
| Basic                                                              |       | 1,975                                     |       | 1,813                                             |       | 1,966 |   | 1,752 |   |
| Diluted                                                            |       | 3,086                                     |       | 2,674                                             |       | 3,053 |   | 2,553 |   |
|                                                               |       |                                      |       |                                              |       |   |   |   |   |
| PRO FORMA NET  INCOME PER SHARE:                                   |       |                                      |       |                                              |       |   |   |   |   |
| Basic                                                              |       | $                                         | 0.23       |                                              |       |   | $ | 0.38 |   |   |   |
| Diluted                                                            |       | $                                         | 0.20       |                                              |       |   | $ | 0.33 |   |   |   |
|                                                               |       |                                      |       |                                              |       |   |   |   |   |
| PRO FORMA  WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES:   |       |                                      |       |                                              |       |   |   |   |   |
| Basic                                                              |       | 8,176                                     |       |                                              |       | 8,167 |   |   |   |
| Diluted                                                            |       | 9,287                                     |       |                                              |       | 9,254 |   |   |   |

 

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

2

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**HIRERIGHT, INC.**

**CONDENSED,CONSOLIDATED STATEMENTS OF CASHFLOWS**

(Unaudited)
| ** **                                                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **(in thousands)**                                                            | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
|                                                                               | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| CASH PROVIDED BY  OPERATING ACTIVITIES:                                            |       |                                              |       |   |   |
| Net income                                                                         |       | $                                                 | 3,077      |   | $ | 3,757 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                              |       |   |   |
| Depreciation and amortization                                                      |       | 623                                               |       | 575 |   |
| Stock-based compensation expense                                                   |       | 153                                               |       | 33 |   |
| Deferred income taxes                                                              |       | 1,317                                             |       | — |   |
| Changes in operating assets and liabilities:                                       |       |                                              |       |   |   |
| Accounts receivable, net                                                           |       | (2,278                                            | )          | (1,968 | ) |
| Prepaid expenses and other current assets                                          |       | 237                                               |       | (218 | ) |
| Other assets                                                                       |       | 113                                               |       | (4 | ) |
| Accounts payable                                                                   |       | (1,253                                            | )          | 1,787 |   |
| Accrued liabilities                                                                |       | 1,615                                             |       | (922 | ) |
| Accrued payroll and benefits                                                       |       | (167                                              | )          | 944 |   |
| Other liabilities                                                                  |       | 284                                               |       | — |   |
|                                                                               |       |                                              |       |   |   |
| Net cash provided by operating activities                                          |       | 3,721                                             |       | 3,984 |   |
|                                                                               |       |                                              |       |   |   |
| CASH USED IN  INVESTING ACTIVITIES:                                                |       |                                              |       |   |   |
| Purchases of  short-term investments                                               |       | (4,719                                            | )          | — |   |
| Sales of  short-term investments                                                   |       | 1,000                                             |       | — |   |
| Purchases of  fixed assets                                                         |       | (882                                              | )          | (490 | ) |
|                                                                               |       |                                              |       |   |   |
| Net cash used in investing activities                                              |       | (4,601                                            | )          | (490 | ) |
|                                                                               |       |                                              |       |   |   |
| CASH USED IN  FINANCING ACTIVITIES:                                                |       |                                              |       |   |   |
| Payments on  notes payable                                                         |       | —                                            |       | (1,124 | ) |
| Payments on  capital leases                                                        |       | —                                            |       | (30 | ) |
| Proceeds from  exercise of stock options and warrants                              |       | 143                                               |       | 147 |   |
| Payment of  deferred offering costs                                                |       | (1,165                                            | )          | — |   |
|                                                                               |       |                                              |       |   |   |
| Net cash used in financing activities                                              |       | (1,022                                            | )          | (1,007 | ) |
|                                                                               |       |                                              |       |   |   |
| EFFECT OF  EXCHANGE RATE CHANGES ON CASH                                           |       | 2                                                 |       | 12 |   |
|                                                                               |       |                                              |       |   |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                              |       | (1,900                                            | )          | 2,499 |   |
|                                                                               |       |                                              |       |   |   |
| CASH AND CASH  EQUIVALENTS — Beginning of period                              |       | 4,201                                             |       | 1,739 |   |
|                                                                               |       |                                              |       |   |   |
| CASH AND CASH  EQUIVALENTS — End of period                                    |       | $                                                 | 2,301      |   | $ | 4,238 |   |
|                                                                               |       |                                              |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION:                                |       |                                              |       |   |   |
| Interest paid                                                                      |       | $                                                 | —     |   | $ | 46 |   |
|                                                                               |       |                                              |       |   |   |
| Income taxes paid                                                                  |       | $                                                 | 230        |   | $ | 152 |   |
|                                                                               |       |                                              |       |   |   |
| NON-CASH  FINANCING TRANSACTIONS:                                                  |       |                                              |       |   |   |
| Vesting of stock  options early exercised                                          |       | $                                                 | 44         |   | $ | — |   |

 

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

3

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**HIRERIGHT, INC.**

**NOTES TO CONDENSED, CONSOLIDATED FINANCIALSTATEMENTS**

(Unaudited)

 

**1.****                          General**

**Business.**HireRight,Inc. (the “Company”) was incorporated in California in 1990 and reincorporatedin Delaware in July 2007. Our shares of common stock are listed on the NASDAQGlobal Market and trade under the symbol “HIRE.” We are a provider of on-demandemployment screening solutions. Our customers use our comprehensive screeningservices in conjunction with our web-based software applications to conduct andmanage their employment screening programs efficiently and effectively, makemore informed employment decisions, improve workplace safety and mitigate risk.We offer a comprehensive set of background screening services includingcriminal, motor vehicle and other public records searches, employment,education and professional license verifications and credit checks, as well asdrug and health screening services.

**Basis of Presentation.**Theaccompanying condensed, consolidated financial statements have been prepared inaccordance with generally accepted accounting principles (“GAAP”) in the UnitedStates for interim financial information, and in accordance with the rules andregulations of the United States Securities and Exchange Commission (the “SEC”).Accordingly, they do not include all of the information and notes required byGAAP in the United States for annual financial statements as permitted underapplicable rules and regulations, and should be read in conjunction with ouraudited consolidated financial statements and notes thereto for the fiscal yearended December 31, 2006 included in the Company’s Registration Statement onForm S-1, as amended (“Form S-1”), filed with the SEC and declared effective onAugust 7, 2007.

The condensed,consolidated financial statements included herein are unaudited; however, theycontain all adjustments, including normal recurring adjustments, which in theopinion of management are necessary for a fair presentation. The results ofoperations for the three and six months ended June 30, 2007 are not necessarilyindicative of results that can be expected for the full year.

The preparation of ourcondensed, consolidated financial statements in accordance with GAAP in theUnited States requires management to make estimates and assumptions that affectthe amounts reported in our condensed, consolidated financial statements andnotes thereto. Actual results could differ materially from those estimates.

**Reincorporation and Reverse Stock Split.**On July 18, 2007, the Company reincorporated in Delaware and in connection therewith effected a 1-for-4.5 reverse stock split of the Company’s common stock. All share and per share amounts relating to common stock and stock options included in the accompanying condensed, consolidated financial statements and notes thereto have been restated to reflect the reverse stock split.

**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 our 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 $39.7 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.

4

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**Adoption of Incentive Plan.**Onthe Effective Date, the HireRight, Inc. 2007 Long-Term Incentive Plan (the “2007Plan”) became effective. The aggregate number of shares of common stock thatmay initially be issued under all stock-based awards under the 2007 Plan is1,000,000 shares. In addition, the number of shares of common stock reservedunder the 2007 Plan will automatically be increased on the first day of Januaryin each calendar year, beginning on January 1, 2009 and ending on January 1,2013, in an amount equal to the lesser of 2.5% of the shares outstanding onsuch date or a lesser number of shares as determined by the compensationcommittee of the Company’s board of directors. Any employee, officer,consultant, advisor or director providing services to the Company or any of itsaffiliates, who is selected by the committee, is eligible to receive awardsunder the 2007 Plan. With the effectiveness of the 2007 Plan, no further optiongrants will be made under the 2000 Stock Option/Stock Issuance Plan (the “2000Plan”). However, all outstanding options under the 2000 Plan will continue tobe administered under the terms and conditions of the 2000 Plan.

**Adoption of Employee Stock Purchase Plan.**Onthe Effective Date, the HireRight, Inc. Employee Stock Purchase Plan (the “ESPP”or the “Purchase Plan”) became effective. The ESPP is designed to permit ouremployees and our participating subsidiaries’ eligible employees to purchaseshares of our common stock through periodic after-tax payroll deductions and isintended to qualify as a “stock purchase plan” within the meaning of Section423 of the Internal Revenue Code. 225,000 shares of our common stock arereserved for issuance under our ESPP. The Purchase Plan will be implemented bya series of consecutive six-month purchase periods. The initial purchase periodwill begin on the date established by the compensation committee and willterminate on the last business day of the next following six-month period.Eligible employees who elect to participate in the ESPP will be able to directthe Company to make payroll deductions of up to 15% of their regularcompensation for each pay period during a purchase period, for the purchase ofshares of common stock. The applicable purchase price for each purchase periodwill be equal to the price established by the committee prior to the firstbusiness day of that purchase period, which price may, at the discretion of thecompensation committee, be a price which is not fixed or determinable as of thefirst business day of that purchase period. In no event, however, will thepurchase price for any purchase period be less than the lesser of 85% of thefair market value of the Company’s common stock on the first business day andthe last business day of that purchase period.

**2.****                          Share-BasedCompensation**

During the three and six months ended June 30, 2007,stock options for the purchase of 42,937 shares of common stock at a weightedaverage exercise price of $15.44 per share and 67,816 shares at aweighted-average exercise price of $13.78 per share, respectively, wereawarded, with vesting over four years. For the comparable periods in 2006,stock options for the purchase of 17,745 shares of common stock at a weightedaverage exercise price of $4.32 per share and 226,785 shares at aweighted-average exercise price of $3.86 per share, respectively, were awarded.

At June 30, 2007, therewere 1,054,884 outstanding stock options granted under the 2000 Plan. TheCompany now maintains two plans, the 2000 Plan and the 2007 Plan, which becameeffective on the Effective Date of the Company’s initial public offering. Allstock option awards during the fiscal second quarter were made under the 2000Plan. Commencing on the Effective Date, new options and other stock awards mayonly be granted under the 2007 Plan. The maximum aggregate number of shares ofcommon stock or options to purchase shares of the Company’s common stock thatmay initially be issued under the 2007 Plan is 1,000,000. Outstanding optionsgranted under our 2000 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.

5

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During the three and sixmonths ended June 30, 2007, in accordance with the prospective method ofadoption of Statement of Financial Accounting Standard (“SFAS”) No. 123(revised 2004), “*Share-Based Payment*,” the Companyrecognized share-based compensation expense of $76,000 and $153,000,respectively, compared to $27,000 and $33,000, respectively, for the comparable2006 periods. At June 30, 2007, there was $1.0 million of unrecognizedcompensation cost related to unvested shares that will be recognized over aweighted average period of 2.1 years.

A summary of significant assumptions used indetermining the fair value of the options granted is as follows:

|                          | ** ** | **Six Months  Ended  June 30, 2007** | ** ** | **Six Months  Ended  June 30, 2006** | ** ** |
|--------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| Expected life  (years)   |       | 6.25                                                |       | 6.25                                                |       |
| Risk-free  interest rate |       | 4.69                                                | %          | 4.85                                                | %          |
| Volatility               |       | 41.5                                                | %          | 41.5                                                | %          |
| Dividend yield           |       | 0                                                   | %          | 0                                                   | %          |
| Forfeiture rate          |       | 9.25                                                | %          | 9.25                                                | %          |

 

As of June 30, 2007, thetotal number of outstanding options vested and expected to vest (based onanticipated forfeitures) was 1,024,237, which had a weighted-average exerciseprice of $3.75. The average remaining life of these options was 7.2 years andthe aggregate intrinsic value was $12.0 million at June 30, 2007.

As of June 30, 2007, thetotal number of outstanding options currently exercisable was 625,437, whichhad a weighted-average exercise price of $2.29. The average remaining life ofthese options was 6.2 years and the aggregate intrinsic value was $8.2 millionat June 30, 2007.

**3.****         Calculationof Earnings per Common Share**

Basic earnings per commonshare is calculated by dividing net income allocable to common stockholders bythe weighted average number of common shares outstanding during the period.Diluted earnings per common share is calculated by dividing net incomeallocable to common stockholders by the weighted average number of commonshares outstanding after giving effect to all potentially dilutive common sharesoutstanding during the period. Basic and diluted earnings per common share werecalculated as follows:

6

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|                                                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                          | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| **in thousands, except per share amounts** | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                |       |                             |       |                           |       |   |   |   |   |
| **Numerator:**                                                      |       |                             |       |                           |       |   |   |   |   |
| Net income                                                          |       | $                                | 1,900      |                           | $          | 2,356 |   | $ | 3,077 |   | $ | 3,757 |   |
| Less preferred  stock dividends                                     |       | (544                             | )          | (544                           | )          | (1,087 | ) | (1,087 | ) |
| Less income  allocable to preferred stockholders                    |       | (1,028                           | )          | (1,389                         | )          | (1,509 | ) | (2,055 | ) |
|                                                                |       |                             |       |                           |       |   |   |   |   |
| Net income allocable to common stockholders                         |       | $                                | 328        |                           | $          | 423 |   | $ | 481 |   | $ | 615 |   |
|                                                                |       |                             |       |                           |       |   |   |   |   |
| **Denominator:**                                                    |       |                             |       |                           |       |   |   |   |   |
| Weighted average  common shares outstanding:                        |       |                             |       |                           |       |   |   |   |   |
| Basic                                                               |       | 1,975                            |       | 1,813                          |       | 1,966 |   | 1,752 |   |
| Effect of  dilutive potential common shares:                        |       |                             |       |                           |       |   |   |   |   |
| Weighted average unvested common shares                             |       | 4                                |       | 75                             |       | 7 |   | 88 |   |
| Common equivalent shares from warrants to purchase  common stock    |       | 377                              |       | 197                            |       | 367 |   | 142 |   |
| Common equivalent shares from options to purchase  common stock     |       | 730                              |       | 589                            |       | 713 |   | 571 |   |
|                                                                |       |                             |       |                           |       |   |   |   |   |
| Diluted                                                             |       | 3,086                            |       | 2,674                          |       | 3,053 |   | 2,553 |   |
|                                                                |       |                             |       |                           |       |   |   |   |   |
| Basic earnings per common share                                     |       | $                                | 0.17       |                           | $          | 0.23 |   | $ | 0.24 |   | $ | 0.35 |   |
|                                                                |       |                             |       |                           |       |   |   |   |   |
| Diluted earnings  per common share                                  |       | $                                | 0.11       |                           | $          | 0.16 |   | $ | 0.16 |   | $ | 0.24 |   |

 

The anti-dilutive effectof 42,937 shares from outstanding stock options have been excluded from theearnings per share calculations for the three months and six months ended June30, 2007.

**4.****         Recent AccountingPronouncements**

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109* (“FIN 48”), effective for fiscal years beginning after December 15, 2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with SFAS No. 109 by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and transition. The Company adopted FIN 48 as of January 1, 2007. The impact of the Company’s reassessment of its tax positions in accordance with FIN 48 did not have a material effect on its consolidated financial position, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*(“SFAS 157”),which defines fair value, establishes a framework for measuring fair value andexpands disclosures about fair value measurements. SFAS 157 applies to otheraccounting**pronouncements thatrequire or permit fair value measurements. The new guidance is effective for**financial statements issued for fiscal yearsbeginning after November 15, 2007, and for interim periods**within those fiscal years. The Company iscurrently evaluating the impact, if any, that SFAS 157 will have on itsconsolidated financial position, results of operations and cash flows.

In February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities**- Including an amendmentof FASB Statement No. 115* (‘‘SFAS 159’’). SFAS 159 permits entitiesto choose, at specified election dates, to measure eligible items at fair value(the ‘‘Fair Value 

7

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Option’’).A business entity shall report unrealized gains and losses on items for whichthe Fair Value Option has been elected in earnings at each subsequent reportingperiod. SFAS 159 is effective for years beginning after November 15, 2007. TheCompany is currently evaluating the effect, if any, that the adoption of SFAS159 will have on its consolidated financial position, results of operations andcash flows.

**5.****         Commitments and Contingencies**

The Company is involved in certain legal matters thathave arisen in the normal course of business. Management believes that theultimate resolution of such actions will not have a material adverse effect onthe Company’s consolidated financial position and results of operations.

**6.****                          SegmentInformation**

The Company provides web-based screening services,primarily to customers located throughout the United States, and providessimilar services to similar customers across industries. Separate profitabilityor financial information is not analyzed for particular individual screeningservices. Management, including the chief operating decision maker, evaluatesthe Company’s performance based on its overall operating results for theCompany, and therefore, the Company has determined that it operates under onereportable segment.

**7.****                          Related PartyTransaction**

Until May 2007, The Travelers Companies, Inc. (‘‘Travelers’’)owned a controlling interest in certain entities that collectively hold inexcess of 5% of the Company’s capital stock. Travelers is a customer of theCompany. For the three months and six months ended June 30, 2007, servicerevenue from Travelers was $222,000 and $346,000, respectively. The Company’sservice revenue from Travelers was insignificant during the three and sixmonths ended June 30, 2006.

**8.****         Income Taxes**

At June 30, 2007, the Company had federal and statenet operating loss carryforwards of approximately $4.6 million and 0,respectively. The federal net operating losses will begin to expire in 2011. Ingeneral, Section 382 of the Internal Revenue Code includes provisions whichlimit the amount of net operating loss carryforwards and other tax attributesthat may be used annually in the event that a 50% ownership change (as defined)occurs in any three-year period. During 2000, the Company experienced anownership change for purposes of Section 382, and the annual utilization of netoperating loss carryforwards and credits prior to the change will be limitedaccordingly. Such limitation is reflected in the deferred income tax benefitbalances as of June 30, 2007.

The Company adopted the provisions of FIN 48 onJanuary 1, 2007. At the adoption date and as of June 30, 2007, the Company hadno material unrecognized tax benefits and no adjustments to liabilities oroperations were required. The Company recognizes interest and penalties relatedto uncertain tax positions in income tax expense which were $0 for the threeand six months ended June 30, 2007.

Tax years 2003 through 2006 and 2002 through 2006 aresubject to examination by the federal and state taxing authorities,respectively. There are no income tax examinations currently in process.

**9.****         Unaudited Pro Forma Information**

The pro forma balance sheet as of June 30, 2007reflects the mandatory conversion of all of the outstanding shares of theCompany’s preferred stock into an aggregate of 6,201,142 shares of common stockupon completion of the initial public offering of common stock by the Company,which closed on August 13, 2007. Pro forma basic net income per share allocableto common stockholders is computed to give effect to the assumed conversion ofthe preferred stock into common stock on the first day of the period. Pro formadiluted net income per share allocable to common stockholders gives effect to allpotentially dilutive securities. Anti-dilutive securities excluded from the proforma diluted net income per share calculation allocable to common stockholdersfor both the three and six months ended June 30, 2007 consisted of options 

8

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topurchase an aggregate of 42,937 shares of common stock. The weighted averagepro forma common and common equivalent shares outstanding for the three and sixmonths ended June 30, 2007 was computed as follows:
|                                                                       | ** ** | **Three Months**       | ** ** | **Six Months**         | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                            | ** ** | **Ended**                   | ** ** | **Ended**                   | ** ** |
| **shares in thousands**                                     | ** ** | **June 30, 2007** | ** ** | **June 30, 2007** | ** ** |
|                                                                  |       |                        |       |                        |       |
| Weighted average  common shares outstanding                           |       | 1,975                       |       | 1,966                       |       |
| Pro forma shares  issued for conversion of the preferred stock        |       | 6,201                       |       | 6,201                       |       |
|                                                                  |       |                        |       |                        |       |
| Total pro forma  weighted average common shares outstanding - basic   |       | 8,176                       |       | 8,167                       |       |
| Add common stock  equivalents:                                        |       |                        |       |                        |       |
| Options, warrants and unvested common shares                          |       | 1,111                       |       | 1,087                       |       |
|                                                                  |       |                        |       |                        |       |
| Total pro forma  weighted average common shares outstanding - diluted |       | 9,287                       |       | 9,254                       |       |

 

9

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**Item 2.****           Management’s Discussionand Analysis of Financial Condition and Results of Operations**

**Overview**

We are a leading providerof 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.

Our screening solutions are flexible and scalable, andtherefore able to meet the demands of customers across a range of sizes andindustries, with hiring operations dispersed throughout the United States andinternationally. We serve a diverse customer base in a variety of industries,such as business services, technology, healthcare, manufacturing,telecommunications and financial services. During 2006, we served more than1,400 customers, which included 17 of the Fortune 100 companies and 53 of theFortune 500 companies. In 2006, we also provided screening solutions toapproximately 1,300 of our customers’ third-party suppliers andcontractors through our supplier screening solutions, including our ExtendedWorkforce Screening Solution, which was named one of Human Resource ExecutiveMagazine’s 2006 Top HR Products of the Year. Our sales are derived from acombination of direct sales efforts as well as through our established networkof strategic alliances with many of the leading recruiting software applicationproviders and human resource outsourcing, or HRO, providers.

**Cautionary Statement RegardingForward Looking Statements**

Certain statementscontained in this Quarterly Report on Form 10-Q, which are not purelyhistorical, are “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995, Section 27A of the Securities Act of1933 and Section 21E of the Securities Exchange Act of 1934, including but notlimited to statements regarding our expectations, hopes, beliefs, intentions,estimates or strategies regarding the future, such as those set forth in PartII, Item 1 “Legal Proceedings” below. Actual results could differ materially from those projected in anyforward-looking statements as a result of a number of factors, including thosedetailed below in this “Management’s Discussion and Analysis” section andelsewhere herein and in our Registration Statement on Form S-1 (“Form S-1”)filed with the Securities and Exchange Commission (the “SEC”) and declaredeffective on August 7, 2007 (File No. 333-140613).  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”in Part II, Item 1A below.

Thefollowing discussion of our financial condition and results of operationsshould be read together with the consolidated financial statements and relatednotes for the year ended December 31, 2006 and three months ended March31, 2007 included in the Company’s Form S-1.

**Significant Events and Developments**

***Reincorporation and Reverse Stock Split.***** **On July 18, 2007, we reincorporated in Delaware and in connection therewith effected a 1-for-4.5 reverse stock split of our common stock. All share and per share amounts relating to common stock and stock options included in the accompanying condensed, consolidated financial statements and notes thereto have been restated to reflect the reverse stock split.

***Initial Public Offering.***** **The registration statement for our initial public offering (the “Public Offering”) was declared effective on August 7, 2007 (the “Effective Date”). We consummated the Public Offering on August 13, 2007 and sold 2,954,115 shares of our common stock, at a price of $15.00 per share.  An additional 1,420,885 shares were sold by selling stockholders.  We received approximately $39.7 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 our common stock.

10

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***Adoptionof Incentive Plan.* **Onthe Effective Date, the HireRight, Inc. 2007 Long-Term Incentive Plan (the “2007Plan”) became effective. The aggregate number of shares of common stock thatmay initially be issued under all stock-based awards under the 2007 Plan is1,000,000 shares. In addition, the number of shares of common stock reservedunder the 2007 Plan will automatically be increased on the first day of Januaryin each calendar year, beginning on January 1, 2009 and ending on January 1,2013, in an amount equal to the lesser of 2.5% of the shares outstanding onsuch date or a lesser number of shares as determined by the compensationcommittee of the Company’s board of directors. Any employee, officer,consultant, advisor or director providing services to the Company or any of itsaffiliates, who is selected by the committee, is eligible to receive awardsunder the 2007 Plan. With the effectiveness of the 2007 Plan, no further optiongrants will be made under the 2000 Plan. However, all outstanding options underthe 2000 Plan will continue to be administered under the terms and conditionsof the 2000 Plan.

***Adoptionof Employee Stock Purchase Plan.* **On the Effective Date, the HireRight,Inc. Employee Stock Purchase Plan (the “ESPP” or the “Purchase Plan”) becameeffective. The ESPP is designed to permit our employees and our participatingsubsidiaries’ eligible employees to purchase shares of our common stock throughperiodic after-tax payroll deductions and is intended to qualify as a “stockpurchase plan” within the meaning of Section 423 of the Internal RevenueCode.  225,000 shares of our common stockare reserved for issuance under our ESPP. The Purchase Plan will be implementedby a series of consecutive six-month purchase periods. The initial purchaseperiod will begin on the date established by the compensation committee andwill terminate on the last business day of the next following six-month period.Eligible employees who elect to participate in the ESPP will be able to directthe Company to make payroll deductions of up to 15% of their regularcompensation for each pay period during a purchase period, for the purchase ofshares of common stock. The applicable purchase price for each purchase periodwill be equal to the price established by the committee prior to the firstbusiness day of that purchase period, which price may, at the discretion of thecompensation committee, be a price which is not fixed or determinable as of thefirst business day of that purchase period. In no event, however, will thepurchase price for any purchase period be less than the lesser of 85% of thefair market value of the Company’s common stock on the first business day andthe last business day of that purchase period.

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**Results of Operations**

The following table sets forth selected statements ofoperations data for the periods indicated, expressed as a percent of totalrevenue:
| ** **                             | ** ** | **Quarter Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------|------------|-------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                             | ** ** | **2007**                                  | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                   | ** ** | ** **                                |       |                                              |       |   |   |   |   |
| REVENUE:                               |       |                                      |       |                                              |       |   |   |   |   |
| Service revenue                        |       | 90.5                                      | %          | 90.4                                              | %          | 90.5 | % | 89.8 | % |
| Reimbursed fee revenue                 |       | 9.5                                       | %          | 9.6                                               | %          | 9.5 | % | 10.2 | % |
|                                   |       |                                      |       |                                              |       |   |   |   |   |
| Total revenue                          |       | 100.0                                     | %          | 100.0                                             | %          | 100.0 | % | 100.0 | % |
|                                   |       |                                      |       |                                              |       |   |   |   |   |
| COST OF REVENUE:                       |       |                                      |       |                                              |       |   |   |   |   |
| Cost of service revenue                |       | 39.7                                      | %          | 43.1                                              | %          | 41.5 | % | 44.3 | % |
| Reimbursed fees paid                   |       | 9.5                                       | %          | 9.6                                               | %          | 9.5 | % | 10.2 | % |
|                                   |       |                                      |       |                                              |       |   |   |   |   |
| Total cost of revenue                  |       | 49.2                                      | %          | 52.7                                              | %          | 51.0 | % | 54.5 | % |
|                                   |       |                                      |       |                                              |       |   |   |   |   |
| GROSS PROFIT                           |       | 50.8                                      | %          | 47.3                                              | %          | 49.0 | % | 45.5 | % |
|                                   |       |                                      |       |                                              |       |   |   |   |   |
| OPERATING  EXPENSES:                   |       |                                      |       |                                              |       |   |   |   |   |
| Research and development               |       | 5.5                                       | %          | 6.0                                               | %          | 5.6 | % | 6.2 | % |
| Sales and marketing                    |       | 14.6                                      | %          | 14.4                                              | %          | 14.7 | % | 14.0 | % |
| General and administrative             |       | 13.9                                      | %          | 11.1                                              | %          | 14.1 | % | 11.7 | % |
|                                   |       |                                      |       |                                              |       |   |   |   |   |
| Total operating expenses               |       | 34.0                                      | %          | 31.5                                              | %          | 34.4 | % | 31.9 | % |
|                                   |       |                                      |       |                                              |       |   |   |   |   |
| INCOME FROM  OPERATIONS                |       | 16.8                                      | %          | 15.8                                              | %          | 14.6 | % | 13.6 | % |
|                                   |       |                                      |       |                                              |       |   |   |   |   |
| OTHER INCOME  (EXPENSE):               |       |                                      |       |                                              |       |   |   |   |   |
| Interest income                        |       | 0.6                                       | %          | 0.2                                               | %          | 0.6 | % | 0.1 | % |
| Interest expense                       |       | 0.0                                       | %          | -0.1                                              | %          | 0.0 | % | -0.1 | % |
| Other income (expense)—net        |       | 0.0                                       | %          | -0.1                                              | %          | 0.0 | % | -0.1 | % |
|                                   |       |                                      |       |                                              |       |   |   |   |   |
| Total other income (expense) —net |       | 0.6                                       | %          | 0.0                                               | %          | 0.6 | % | -0.1 | % |
|                                   |       |                                      |       |                                              |       |   |   |   |   |
| INCOME BEFORE  INCOME TAXES            |       | 17.4                                      | %          | 15.8                                              | %          | 15.2 | % | 13.5 | % |
|                                   |       |                                      |       |                                              |       |   |   |   |   |
| INCOME TAX  PROVISION                  |       | 7.2                                       | %          | 0.7                                               | %          | 6.3 | % | 0.4 | % |
|                                   |       |                                      |       |                                              |       |   |   |   |   |
| NET INCOME                             |       | 10.2                                      | %          | 15.1                                              | %          | 8.9 | % | 13.1 | % |

 

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**Three months and six months ended June 30, 2007and 2006**

***Service revenue***

|                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                       | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| **$ in thousands**     | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                             |       |                             |       |                           |       |   |   |   |   |
| Service revenue                  |       | $                                | 16,806     |                           | $          | 14,038 |   | $ | 31,321 |   | $ | 25,666 |   |
| *As a  percent of total revenue* |       | 90.5                             | %          | 90.4                           | %          | 90.5 | % | 89.8 | % |
|                                  |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

Service revenue for thethree months ended June 30, 2007 increased $2.8 million, or 19.7%, compared tothe corresponding prior year period. This increase was primarily due to a $2.0million increase in service revenue generated from net new customers in thethree months ended June 30, 2007, compared to the 2006 period, and an increasein service revenue derived from existing customers of $0.8 million. We definerevenue derived from net new customers to mean revenue derived during theperiod from customers who had not used our services during the 13 monthsimmediately preceding the end of that period, net of revenue derived during theperiod from customers who had been billed for services in the prior period andwere billed for less than 10% of that prior period amount in the period beinganalyzed. The increase in service revenue from new customers was largely due tocustomers that started using our services in 2006 and therefore generated yearover year increases in revenue in 2007 as they further integrated theirscreening operations with us, and the addition of new customers for the threemonths ended June 30, 2007, from whom we had not generated revenue during thethree months ended June 30, 2006. As of June 30, 2007, we had 1,723 customers,compared to 1,297 customers as of June 30, 2006. The increase in servicerevenue from existing customers was largely due to the sale of additional products and services to existing customers,further rollout of our screening services to other divisions by enterprisecustomers, and overall growth in hiring. Recently, there has been a slowdown inthe growth of screening services ordered by existing customers. This slowdownin growth is expected to reduce our service revenue growth rate in the thirdquarter as compared to the second quarter of this year.

Service revenue for thesix months ended June 30, 2007 increased $5.7 million, or 22.0%, compared tothe corresponding prior year period. For the six months ended June 30, 2007,service revenue generated from net new customers and existing customersincreased $3.6 million and $2.1 million, respectively, compared to thecorresponding 2006 period. The increase in service revenue from new customerswas largely due to customers that started using our services in 2006 andtherefore generated year over year increases in revenue in 2007 as they furtherintegrated their screening operations with us, and the addition of newcustomers for the first six months of 2007, from whom we had not generatedrevenue during the six months ended June 30, 2006. As of June 30, 2007 we had1,723 customers, compared to 1,297 customers as of June 30, 2006. The increasein service revenue from existing customers was largely due to the sale of additional products andservices to existing customers, further rollout of our screening services toother divisions by enterprise customers, and overall growth in hiring.

***Reimbursed feerevenue***
|                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| **$ in thousands**    | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                            |       |                             |       |                           |       |   |   |   |   |
| Reimbursed fee  revenue         |       | $                                | 1,770      |                           | $          | 1,497 |   | $ | 3,275 |   | $ | 2,916 |   |
| *As a percent of total revenue* |       | 9.5                              | %          | 9.6                            | %          | 9.5 | % | 10.2 | % |
|                                 |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

Reimbursed fee revenuefor the three months ended June 30, 2007 increased $0.3 million, or 18.2%,compared to the corresponding prior year period.  This increase was a result of an increase inthe number of screening transactions, which grew approximately 21.2% in thethree months ended June 30, 2007 compared to the three months ended June 30,2006.

Reimbursedfee revenue for the six months ended June 30, 2007 increased $0.4 million, or12.3%, respectively, compared to the corresponding prior year period.  In the first half of 2007, the number ofscreening transactions grew approximately 20.5% compared to the first half of2006. Reimbursed fee revenue as a percent of total revenue decreased 0.7percentage points for the six months ended June 30, 2007 compared to six monthsended June 30, 2006 because a higher percentage of the services sold did nothave associated reimbursed costs.

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***Cost of revenue***
|                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                         | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| **$ in thousands**       | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                               |       |                             |       |                           |       |   |   |   |   |
| Cost of revenue                    |       | $                                | 7,364      |                           | $          | 6,688 |   | $ | 14,380 |   | $ | 12,668 |   |
| *As a  percent of service revenue* |       | 43.8                             | %          | 47.6                           | %          | 45.9 | % | 49.4 | % |
|                               |       |                             |       |                           |       |   |   |   |   |
| Gross profit                       |       | $                                | 9,442      |                           | $          | 7,350 |   | $ | 16,941 |   | $ | 12,998 |   |
| *As a percent of service revenue*  |       | 56.2                             | %          | 52.4                           | %          | 54.1 | % | 50.6 | % |

 

Cost of revenue for thethree months ended June 30, 2007 increased $0.7 million, or 10.1%, compared tothe three months ended June 30, 2006. The higher volume of screening transactions from both new and existingcustomers resulted in increases in vendor costs of $0.3 million in salaries andwages for screening support functions and $0.4 million in administrative andfacility related costs. Overall, cost of service revenue as a percent ofservice revenue declined 3.8 percentage points for the three months ended June30, 2007 compared to the corresponding prior year period. This decline waslargely due to improved fixed cost leverage with respect to our facilities andoverhead costs, as well as the implementation of certain automation projects.

Cost of revenue in thefirst half of 2007 increased $1.7 million, or 13.5%, compared to thecorresponding 2006 period.  A highervolume of screening transactions from both new and existing customers resultedin increases in vendor costs of $0.3 million for criminal records searches,$0.7 million in salaries and wages for screening support functions and $0.7million in administrative and facility related costs. As a result of improvedleverage with our facilities and overhead costs and a benefit from automationprojects, cost of service revenue as a percent of service revenue declined 3.5percentage points for the six months ended June 30, 2007 compared to thecorresponding prior year period. This decline was largely due to improved fixedcost leverage with respect to our facilities and overhead costs, as well as theimplementation of certain automation projects.

***Research anddevelopment expense***
|                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| **$ in thousands**      | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                              |       |                             |       |                           |       |   |   |   |   |
| Research and  development expense |       | $                                | 1,023      |                           | $          | 928 |   | $ | 1,932 |   | $ | 1,789 |   |
| *As a percent of service revenue* |       | 6.1                              | %          | 6.6                            | %          | 6.2 | % | 7.0 | % |
|                                   |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

Research and developmentexpense for the three months ended June 30, 2007 increased $0.1 million, or10.2%, compared to the three months ended June 30, 2006.  The increase was the result of highersalaries, bonuses and related benefits for existing employees, which waspartially offset by $0.1 million of development costs capitalized in the 2007period. Research and development expense as a percent of service revenuedeclined by 0.5 percentage points for the three months ended June 30, 2007compared to the corresponding prior year period. This decrease as a percentageof service revenue primarily resulted from spreading our research and developmentexpense over an expanded revenue base, as research and development expenseincreased at a lower rate than our service revenue.

Research and developmentexpense for the six months ended June 30, 2007 increased $0.1 million, or 8.0%,compared to the six months ended June 30, 2006. The increase was due to higher salaries, bonuses and related benefitsfor existing employees, partially offset by the capitalization of certaindevelopment costs of $0.2 million in the first half of 2007. Research and developmentexpense as a percent of service revenue declined by 0.8 percentage points forthe first half of 2007 compared to the corresponding 2006 period. This decreaseas a percentage of service revenue primarily resulted from spreading ourresearch and development expense over an expanded revenue base, as research anddevelopment expense increased at a lower rate than our service revenue.

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***Sales andmarketing expense***
|                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| **$ in thousands**      | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                              |       |                             |       |                           |       |   |   |   |   |
| Sales and  marketing expense      |       | $                                | 2,706      |                           | $          | 2,238 |   | $ | 5,085 |   | $ | 3,994 |   |
| *As a percent of service revenue* |       | 16.1                             | %          | 15.9                           | %          | 16.2 | % | 15.6 | % |
|                                   |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

Sales and marketingexpense for the three months ended June 30, 2007 increased $0.5 million, or20.9%, compared to the corresponding prior year period.  Approximately $0.3 million of the increasewas due to higher salaries, bonuses and related benefits resulting from 12additional full-time equivalent employees during the three months ended June30, 2007 compared to the 2006 period. The remaining increase in sales andmarketing expense was attributable to higher travel and marketing expenses andfacility related costs. We anticipate that sales and marketing expense willcontinue to increase as a percentage of service revenue through the end of 2007as we plan to further expand our sales and marketing department.

Sales and marketingexpense for the six months ended June 30, 2007 increased $1.1 million, or27.3%, compared to the corresponding prior year period.  The increase was primarily due to highersalaries, bonuses and related benefits of $0.7 million resulting from 12additional full-time equivalent employees during the first half of 2007 comparedto the corresponding 2006 period. The remaining increase in sales and marketingexpense was attributable to higher travel and marketing expenses and facilityrelated costs. We anticipate that sales and marketing expense will continue toincrease as a percentage of service revenue through the end of 2007 as we planto further expand our sales and marketing department.

***General andadministrative expense***
|                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                         | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| **$ in thousands**       | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                               |       |                             |       |                           |       |   |   |   |   |
| General and  adminstrative expense |       | $                                | 2,586      |                           | $          | 1,727 |   | $ | 4,873 |   | $ | 3,333 |   |
| *As a percent of service revenue*  |       | 15.4                             | %          | 12.3                           | %          | 15.6 | % | 13.0 | % |
|                                    |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

General andadministrative expense for the three months ended June 30, 2007 increased $0.9million, or 49.7%, compared to the three months ended June 30, 2006.  This was due to a $­0.4 million increase insalaries, bonuses and related benefits for existing employees and sevenadditional full-time equivalent employees during the three months ended June30, 2007 compared to the 2006 period. Other increases in general andadministrative expense included $0.1 million, $0.2 million and $0.1 million,respectively, of facility related costs, legal expense, and consulting expense,with the remainder in administrative costs. As a percent of service revenue,general and administrative expense increased 3.1 percentage points for thethree months ended June 30, 2007, compared to the corresponding prior yearperiod.

General andadministrative expense for the six months ended June 30, 2007 increased $1.5million, or 46.2%, compared to the six months ended June 30, 2006.  This was due to a $0.6 million increase insalaries, bonuses and related benefits for existing employees and sevenadditional full-time equivalent employees during the six months ended June 30,2007 compared to the 2006 period. Other increases in general and administrativeexpense compared to the 2006 period were $0.3 million of facility relatedcosts, $0.2 million in legal expense, $0.2 million in consulting expense, withthe remainder in administrative costs. We anticipate that general andadministrative expense will continue to increase through the end of 2007 andthereafter as a result of the additional costs and compliance requirementsrelated to operating as a public company. General and administrative expense asa percent of service revenue increased 2.6 percentage points for the six monthsended June 30, 2007, compared to the corresponding prior year period.

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***Income Taxes***

The effective tax rate for the three and six months endedJune 30, 2007 was approximately 41 percent. The effective tax rate for the three and six months ended June 30, 2006was under 5 percent.  Prior to 2006, wehad established a full valuation allowance against our deferred tax assets, aswe had not concluded that it was more likely than not that we would be able torealize substantially all of our net deferred tax assets. In the third quarterof 2006, we concluded that it was more likely than not that we would be able torealize substantially all of our net deferred taxes as a result of beingprofitable in 2006 and expecting to remain profitable in 2007. As a result, allof the valuation allowance applied to net deferred tax assets was reversedduring that quarter.

**Liquidity and Capital Resources**

***Operating Activities**** *Our principal uses of cash inoperating activities are for operating expenses and working capital. Cash flowsfrom operations 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.

For the six months endedJune 30, 2007, cash generated by operating activities of $3.7 million resultedprimarily from net income, including adjustments for depreciation andamortization and non-cash deferred taxes, partially offset by an increase inoperating assets and liabilities primarily as a result of the growth inrevenues.  Cash provided by operatingactivities of $4.0 million for the first half of 2006 was primarilyattributable to net income.

***Investing Activities*** Net cashused in investing activities for the six months ended June 30, 2007 was $4.6million compared to $0.5 million for the six months ended June 30, 2006. Theincrease in cash used in investing activities was comprised of net short-terminvestment securities purchases of $3.7 million using excess cash balances, anincrease in capital expenditures of $0.2 million and the capitalization of $0.2million in software costs.

***Financing Activities*** Net cashused in financing activities for the six months ended June 30, 2007 of $1.0million was primarily related to costs incurred in connection with thepreparation for the Company’s initial public offering.  The use of cash in the six months ended June30, 2006 of $1.0 million was primarily for repayments on notes payable.

On August 13, 2007, theCompany completed the initial public offering of its common stock. Theestimated net proceeds to the Company were approximately $39.7 million, net ofunderwriting discounts, commissions, and other offering costs. The net proceedsfrom the offering are currently held predominantly in various interest-bearingmoney market accounts and marketable securities.

We currently believe thatcash flows provided by operating activities, existing credit facilities andpublic offering proceeds will be sufficient to fund our working capitalrequirements and planned investments for at least the next twelve months.  We currently have no material debt.  The Company plans to use the net proceedsprimarily for working capital and other general corporate purposes, includingthe expansion of our sales and marketing activities, development of new serviceofferings and expansion of our international operations. In addition, we mayuse a portion of the net proceeds for acquisitions of, or investments in,businesses, products or technologies that enhance or add new services oradditional functionality, further solidify our market position or allow us tooffer complementary products, services or technologies. In the event anacquisition plan is adopted which requires funds exceeding the availabilitydescribed above, an alternate source of funds to accomplish the acquisitionwould have to be developed.  Followingthe Company’s reincorporation into Delaware and our initial public offering,which was completed on August 13, 2007, the Company had 100,000,000 shares ofcommon stock authorized, of which 11,227,953 shares were outstanding, and10,000,000 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.

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**Critical Accounting Policies and Estimates**

The foregoing discussion andanalysis of the Company’s financial condition and results of operations arebased upon the consolidated financial statements of the Company, which havebeen prepared in accordance with accounting principles generally accepted inthe United States of America.  Thepreparation of our financial statements requires us to make estimates andassumptions that affect the reported amounts of assets, liabilities, revenues,costs and expenses, as well as the disclosure of contingent assets andliabilities and other related disclosures. We base our estimates on historicalexperience and on various other assumptions that we believe to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about carrying values of our assets and liabilities that are notreadily apparent from other sources. In many instances, we could havereasonably used different accounting estimates. Actual results could differfrom those estimates. We include any revisions to our estimates in our resultsfor the period in which the actual amounts become known.

We believe the critical accounting policies describedbelow affect the more significant judgments and estimates used in thepreparation of our consolidated financial statements. Accordingly, thefollowing are the policies that we believe are the most critical to aid infully understanding and evaluating our historical consolidated financialcondition and results of operations:

***Allowance forDoubtful Accounts.*** We maintain an allowance for doubtful accounts for estimated lossesresulting from the inability of certain of our customers to pay us. Thisprovision is based on our historical experience and for specific customersthat, in our opinion, are likely to default on our receivables from them. Inorder to identify these customers, we perform ongoing reviews of all customersthat have breached their payment terms, as well as those that have filed forbankruptcy or for whom information has become available indicating asignificant risk of non-recoverability. We continue to monitor and evaluate ourcustomers over time. Historically, the allowance for doubtful accounts has beensufficient to cover our uncollectible receivables. To the extent that ourfuture collections differ from our assumptions based on historical experience,the amount of our bad debt and allowance recorded may be different. If ourhistorical collection experience changes unexpectedly or if one or more of ourlargest customers fails to pay the amounts owed to us, our allowance fordoubtful accounts would likely be inadequate.

***Accounting for IncomeTaxes.***  We recordincome tax expense in accordance with Statement of Financial AccountandStandard (“SFAS”) No. 109, *Accounting for IncomeTaxes* (“SFAS 109”), which requires that we recognize deferredtax assets and liabilities for temporary differences in the bases of assets andliabilities for tax and financial reporting purposes. We record a valuationallowance related to deferred tax assets when it is more likely than not thatsome portion or all of the deferred tax asset will not be realized. We eliminatedour valuation allowance in 2006 because we were profitable in 2006 and expectto be profitable in future years. The preparation of financial projectionsinvolves significant subjectivity due to the inherent uncertainty involved inestimating future performance. If we fail to perform as projected, we may needto record a valuation allowance in the future.

***Accounting forStock-Based Compensation.***  Effective January 1, 2006, we adoptedSFAS No. 123 (revised 2004), *Share-Based Payment*(“SFAS123R”), which requires that all stock-based compensation to employees,including grants of employee stock options, be expensed in our financialstatements based on their respective grant date fair values. UnderSFAS 123R, we estimate the fair value of each stock-based paymentaward using the Black-Scholes option pricing model. The determination ofthe fair value of stock-based payment awards using the Black-Scholesmodel is affected by our stock price and a number of assumptions, includingexpected volatility, expected life, risk-free interest rate and expecteddividends. We do not have a history of market prices of our common stock as wewere not a public company until our recent initial public offering, and assuch, we estimate volatility in accordance with Staff Accounting BulletinNo. 107 (“SAB 107”) using historical volatilities of other publicly tradedcompanies in our industry. The expected life of the awards is based on thesimplified method as defined in SAB No. 107. The risk-free interest rateassumption is based on observed interest rates appropriate for the terms of ourawards. The dividend yield assumption is based on our history and expectationof not paying any dividends. Forfeitures are estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ fromthose estimates. We recognized stock-based compensation expense in ourconsolidated financial statements based on awards that are ultimately expectedto vest. A summary of significant assumptions used in determining the fairvalue of the options is as follows:

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|                          | ** ** | **Six Months  Ended  June 30, 2007** | ** ** | **Six Months  Ended  June 30, 2006** | ** ** |
|--------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| Expected life (years)    |       | 6.25                                                |       | 6.25                                                |       |
| Risk-free  interest rate |       | 4.69                                                | %          | 4.85                                                | %          |
| Volatility               |       | 41.5                                                | %          | 41.5                                                | %          |
| Dividend yield           |       | 0                                                   | %          | 0                                                   | %          |
| Forfeiture rate          |       | 9.25                                                | %          | 9.25                                                | %          |

 

If factors change and we employ different assumptions,stock-based compensation expense may differ significantly from what wehave recorded in the past. If there are any modifications or cancellations ofthe underlying unvested securities, we may be required to accelerate, increaseor cancel any remaining unearned stock-based compensation expense. Futurestock-based compensation expense and unearned stock-basedcompensation will increase to the extent that we grant additional equity awardsto employees or we assume unvested equity awards in connection withacquisitions.

**RecentAccounting Pronouncements**

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109* (“FIN 48”), effective for fiscal years beginning after December 15, 2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with SFAS 109 by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and transition. The Company adopted FIN 48 as of January 1, 2007. The impact of the Company’s reassessment of its tax positions in accordance with FIN 48 did not have a material effect on its consolidated financial position, results of operations or cash flows.

In September 2006, theFASB issued SFAS No. 157, *Fair ValueMeasurements*(“SFAS 157”), which defines fair value, establishes aframework for measuring fair value and expands disclosures about fair valuemeasurements. SFAS 157 applies to other accounting**pronouncements that require or permit fair valuemeasurements. The new guidance is effective for**financial statements issued for fiscal years beginning afterNovember 15, 2007, and for interim periods**withinthose fiscal years. The Company is currently evaluating the impact, if any,that SFAS 157 will have on its consolidated financial position, results ofoperations and cash flows.

In February 2007, theFASB issued SFAS No. 159, *The Fair ValueOption for Financial Assets and Financial Liabilities* - *Including an amendment of FASB Statement No. 115* (“SFAS 159”).SFAS 159 permits entities to choose, at specified election dates, to measureeligible items at fair value (the “Fair Value Option”). A business entity shallreport unrealized gains and losses on items for which the Fair Value Option hasbeen elected in earnings at each subsequent reporting period. SFAS 159 iseffective for years beginning after November 15, 2007. The Company is currentlyevaluating the effect, if any, that the adoption of SFAS 159 will have on itsconsolidated financial position, results of operations and cash flows.

**Item 3.        Quantitativeand Qualitative Disclosures about Market Risk**

There are nomaterial changes to the disclosure set forth in the “Quantitative and Qualitative Disclosures about Market Risk”section of Management’s Discussion andAnalysis of Financial Condition and Results of Operations** **containedin the Company’s Form S-1 (File No. 333-140613).

**Item 4T.     Controls and Procedures**

The Company’s ChiefExecutive Officer and Chief Financial Officer with the participation of theCompany’s management, carried out an evaluation of the effectiveness of theCompany’s disclosure controls and procedures (as defined in Exchange Act Rule13a-15(e)). Based upon that evaluation, the Chief Executive Officer andthe Chief Financial Officer concluded that, as of the end of the period coveredby this report, the Company’s disclosure

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controls and procedures are effective at the “reasonableassurance” level in identifying material information relating to the Company(including its consolidated subsidiaries) required to be included in thisreport.

Disclosure controls andprocedures, no matter how well designed and implemented, can provide onlyreasonable assurance of achieving an entity’s disclosure objectives. Thelikelihood of achieving such objectives is affected by limitations inherent indisclosure controls and procedures. These include the fact that human judgmentin decision-making can be faulty and that breakdowns in internal control canoccur because of human failures such as simple errors or mistakes orintentional circumvention of the established process.

There were no changes inthe Company’s internal controls over financial reporting, identified by theChief Executive Officer or the Chief Financial Officer that occurred during theperiod covered by this report that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.

The Company is currentlynot an accelerated filer under applicable rules and regulations of theSecurities and Exchange Commission and, as such, has not been required tocomply with all of the regulations recently adopted by the Commission,particularly the requirement that the Company include in its Annual Report onForm 10-K a report of management and accompanying auditor’s report on theCompany’s internal control over financial reporting (“404 reporting”).  Compliance by the Company with the 404reporting rules and regulations will be required in its Annual Report on Form10-K for the fiscal year ending December 31, 2008, unless the rules andregulations governing 404 reporting are revised.

**PART II.  OTHER INFORMATION**

**Item 1.        Legal Proceedings**

TheCompany is currently involved in certain legal matters.  While management presently believes that theultimate outcome of these proceedings, individually and in the aggregate, willnot materially harm the Company’s financial position, cash flows, or overalltrends in results of operations, litigation is subject to inherentuncertainties, and unfavorable rulings could occur. An unfavorable ruling couldinclude money damages or, in cases for which injunctive relief is sought, aninjunction prohibiting us from selling one or more services. Were anunfavorable ruling to occur, our business or results of operations could bematerially harmed.

**Item 1A.     RiskFactors**

Our operations and financial results are subject tovarious risks and uncertainties, including those described below, that couldadversely affect our business, financial condition, results of operations, cashflows, and trading price of our common stock. Please refer also to ourregistration statement on Form S-1 (File No. 333-140613) for additionalinformation concerning these and other uncertainties that could negativelyimpact the Company.

**Risks Related to Our Business**

***We are subject to significant governmental regulation, and afailure to correctly identify, interpret, comply with and reconcile the lawsand regulations to which we are subject could result in substantial liability.***

Because we are considered to be a consumer reportingagency and we deal primarily in searching and reporting public and non-publicconsumer information and records, and performing third-partyadministrative services for employment-related drug screening and otheroccupational testing, we are subject or vulnerable to extensive and oftencomplex governmental laws and regulations, such as the Fair Credit ReportingAct, or FCRA, Drivers’ Privacy Protection Act, state consumer reporting agencylaws, state private investigator licensing regulations, Department ofTransportation regulations and various other foreign, federal, state and locallaws and regulations. Among other things, such laws restrict access to, use anddisclosure of certain types of personal information and regulate the

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storageand disposal of such information. Identifying, interpreting and complying withforeign laws and regulations is particularly difficult due to the broad rangeof foreign laws and regulations, as well as uncertainties with respect to theapplicability and interpretation of such laws and regulations. For example,with respect to our services provided in the European Union and its membercountries, although we have qualified for a safe harbor certification availablefor U.S. companies for the transmission of the personal information that wecollect under the jurisdiction of the European Union, uncertainty remains as tothe other laws and regulations of the specific member countries which may alsoapply to our operations in those countries. Failure to comply with thesedomestic and foreign laws and regulations, to the extent applicable, may harmour reputation and result in the imposition of civil and criminal penalties andfines, restrictions on our operations, and breach of contract orindemnification claims by our customers and data suppliers.

In addition to the challenges of identifying,interpreting and complying with such laws and regulations, and changes to suchlaws and regulations over time, we face the challenge of reconciling the manypotential conflicts between such laws and regulations among the variousdomestic and international jurisdictions that may be involved in the provisionof our services. These challenges may require us to incur additional compliancecosts. A failure to correctly identify, interpret, comply with and reconcilethe laws and regulations to which we are subject could result in substantialliability and could have a material adverse effect on us. The expansion of ourbusiness into areas other than employment screening may require compliance withadditional laws and regulations.

***Evolving or increased regulations, particularly thoserelated to the use of personal information, may lead to additional expense,restrictions and loss of revenue, which could have a material adverse effect onour business.***

Changes to existing laws and regulations relating toour business, interpretations of those laws and regulations or theirapplicability to us, or the adoption of applicable new laws and regulationscould result in additional regulatory compliance requirements or our incurringincreasing or substantial regulatory compliance expense, litigation expense orloss of revenue. For example, certain information and services we provide aresubject to regulation by various federal, state and local laws and regulationsin the United States designed to protect the privacy of the public and toprevent the misuse of personal information in the marketplace. Many consumeradvocates, privacy advocates, and government regulators have becomeincreasingly concerned with the use of personal information, particularlysocial security numbers, department of motor vehicle data and dates of birth,which are extensively used in our search protocols. Since 2001, more than 30states have enacted new laws to protect personal information or to giveconsumers more information about how their personal information is used, andlobbying efforts are underway for further restrictions on the dissemination orcommercial use of personal information by the public and private sectors. Inparticular, following publicity surrounding the loss by various high profilepublic companies of extensive archives of sensitive personal information, andincidents of fraudulent data access through consumer reporting agencies, anumber of laws have been enacted or proposed at state and federal levels.Increased regulation in the area of data privacy, and laws and regulationsapplying to the solicitation, collection, processing or use of personal orconsumer information, could have a material adverse effect on our ability tocollect or process information or our costs related to collecting and providinginformation. Any such restriction or additional cost could limit our serviceofferings, reduce our profitability or otherwise materially and adverselyaffect our ability to conduct our business, or to do so economically.

***We could face liability based on the nature of our servicesand the information we report, which may not be covered or fully covered byinsurance.***

We face potential liability from individuals, classesof individuals, customers or regulatory bodies for claims based on the nature,content or accuracy of our services and the information used and reported byus. This potential liability includes claims of non-compliance with laws andregulations governing our services and claims of defamation, invasion ofprivacy, negligence, copyright, patent or trademark infringement. In some casessuch liability may be strict liability. The potential for us to be named inlawsuits may increase depending in part on our customers’ compliance with theFCRA, other state consumer reporting agency regulations and applicableemployment laws in their procurement and use of our screening reports, whichactions may be outside of our control.

From time to time, we have been subject to lawsuits bypotential employees of our customers, alleging that we provided to ourcustomers inaccurate or improper information that negatively impacted thecustomers’ hiring

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decisions.Although the resolutions of these lawsuits have not had a material adverseeffect on us to date, such claims could divert the attention of our management,could subject us to equitable remedies relating to the operation of ourbusiness and provision of services and result in significant legal expenses,all of which could have a material adverse effect on our business, financialcondition and results of operations. Insurance may not be adequate to cover usfor all risks to which we are exposed or may not be available to cover theseclaims at all. For example, punitive damages, which generally are not coveredby insurance, is a remedy available under the FCRA to consumers for the failureto comply with the FCRA. Any imposition of liability, particularly liabilitythat is not covered by insurance or is in excess of our insurance coverage,could have a material adverse effect on our business, financial condition orresults of operations.

***We could face liability based on information that we fail toreport in our background screening reports, which may not be covered or fullycovered by insurance.***

We may face potential liability from our customers,and possibly damaged third parties, in the event we fail to report information,particularly criminal records or other potentially negative information. Forexample, should we fail to identify and report an available and reportablecriminal felony record which our customer hired us to report, or should we failto correctly report such information to our customer, then we may facepotential liability in the event that the employer hires such applicant, laterdiscovers such record, terminates such employee and is in turn sued by suchemployee. We may also face liability in the event the employer hires suchapplicant and that employee then causes personal or monetary injury or damageto the employer, its other employees or other related third parties. Theadverse publicity from any such event, as well as the liability to which we maybe subject, could have a material adverse effect on our business and financialresults. In addition, an imposition of liability that is not covered byinsurance or that is in excess of our insurance coverage, could have a materialadverse effect on our business, financial condition or results of operations.

***We may be required to indemnify our customers or datasuppliers, which could have a material adverse effect on our financialcondition and operating results to the extent such claims are not covered byinsurance.***

Some of our customer and supplier contracts containindemnification provisions that require us to indemnify our customers andsuppliers against certain claims, including claims for improper use ofinformation, non-compliance with laws and regulations applicable to ourservices and intellectual property infringement. To the extent these claims aresuccessful and are not covered by or exceed our insurance coverage, theseobligations could have a material adverse impact on our cash flow, results ofoperation and financial condition.

***Our business, financial condition and results of operationscould be materially adversely affected by a downturn in the general economy.***

The substantial majority of our revenues are derivedfrom pre-employment screening services. A general economic downturn couldresult in a reduced demand for our services, as our revenues are dependent upongeneral economic and hiring conditions and upon conditions in the industriesserved by us. To the extent that the economy in general or labor marketconditions in particular deteriorate, our existing and potential customers mayslow or defer hiring new or replacement employees, and may be reluctant toincrease expenditures on those employees they do screen. This could interferewith our growth strategy of increasing the number of background screensperformed by, and average revenue per order of, our customer base, and couldhave a material adverse effect on our business, financial condition and resultsof operations.

***If we are unable to successfully manage our relationshipswith third-party providers of complementary products and services,including human resource outsourcing providers and recruiting softwareapplication providers, we may lose referral sources or may no longer be able tointegrate with their systems, either of which could have a material adverseeffect on our business.***

We have arrangements with human resource outsourcing,or HRO, providers and providers of recruiting software applications, whichprovide us a source of customer referrals and may allow us to integrate ourservices with these providers and our mutual customers. If our agreements withsuch providers are terminated, we may lose these referral sources, our salescycle for certain new customers could increase and certain of our screeningservices may become less convenient for our customers. In addition, if thesearrangements are terminated as a result of

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contractrenegotiation or otherwise, we may lose the ability to integrate with thesoftware applications of these companies. Our inability to integrate couldjeopardize our relationship with existing customers or put us at a competitivedisadvantage in obtaining new customers that require integration with thesoftware applications of these companies. Some of these providers have begun ormay begin, by acquisition or other affiliation, providing screening servicesthemselves, and may elect to direct all or substantially all of their customers’business to themselves or their affiliated companies. In addition, should aprovider update its products without providing sufficient notice to us, thiscould result in errors, delays and interruptions in providing services to ourintegrated customers. A termination of our arrangements with these third-partyproviders, or their refusal to refer customers to us, could have a materialadverse effect on our business, financial condition and results of operations.

***Security breaches and improper use of information maynegatively impact our business and harm our reputation.***

Our solutions involve the collection and transmissionof confidential information of customers and their existing and potentialemployees. A security breach in our facilities, computer networks, or databasescould expose us to a risk of loss of, or unauthorized access to and use of,this information, which could harm our business and reputation and result in aloss of customers or the imposition of fines or other penalties by governmentalagencies and claims by our customers and their applicants and employees. Despitesecurity measures we maintain, our systems may be vulnerable to physicalbreak-ins, computer viruses, attacks by hackers, employee malfeasance andsimilar intrusions, and our third-party contractors who handleinformation also may experience security breaches involving the storage andtransmission of proprietary and sensitive personal information. If unauthorizedparties gain access to our services or our networks or databases, or ifauthorized parties utilize our services for impermissible purposes, they may beable to steal, publish, delete or modify our confidential and sensitive third-partypersonal information. Any inability to protect the security and privacy of ourdata and electronic transactions, or any misuse of our information services byour customers, employees, vendors or hackers, could cause harm to our businessand reputation and result in significant liability. Techniques used to obtainunauthorized access or to sabotage systems change frequently and generally arenot discovered until they have been launched against a target. As a result, wemay be unable to anticipate these techniques or to implement adequatepreventative measures.

Anactual or perceived breach of our security could have one or more of thefollowing material and adverse effects:

·                  deter customers from usingour services and harm our reputation;

·                  expose us to liability;

·                  increase operatingexpenses to correct problems caused by the breach;

·                  deter data suppliers fromsupplying information to us;

·                  affect our ability to meetcustomers’ expectations; or

·                  cause inquiries from orsanctions and penalties by governmental authorities, such as the Federal TradeCommission, which has imposed significant penalties on companies that fail toadequately protect personal data, and states’ attorneys general, who haveauthority to impose fines or penalties with respect to breaches under statelaws.

***We may be subject to and in violation of state privateinvestigator licensing laws and regulations, which could adversely affect ourability to do business in certain states and subject us to liability.***

The laws and regulations relating to privateinvestigator licensing requirements vary among the states and are subject todiffering interpretations. Failure to correctly interpret and comply with theselaws and regulations may result in the imposition of penalties or restrictionson our ability to continue our operations in certain states if it is determinedthat they are applicable to us. In the past, we received cease and desistnotices from three states, alleging that we were in violation of theirrespective private investigator licensing laws and regulations. We have alsoreceived inquiries from three other states. We are now licensed as a privateinvestigator in the state of California; we are not currently licensed as aprivate investigator in any other state. The inquiries from two of the stateshave been resolved without the need for any further action. We have respondedto these notices and inquiries and are currently in the process of applying forand obtaining private investigator licenses in the states which advised us toobtain such a license. We cannot assure you that we will be granted suchlicenses or that we will not receive additional inquiries from other stateagencies. If we are required to cease or limit our operations or penalties orfines are

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imposedupon us in one or more states, it could have a material adverse effect on ourbusiness, financial condition and results of operations.

***We are subject to significant competition, and if we fail tocompete successfully, our sales could decline and our business, financialcondition and results of operations could be adversely affected.***

The industry in which we operate is and is expected toremain highly competitive. We compete on the basis of a number of factors,including: the technology-enabled, ease-of-use, level offunctionality and end-to-end efficiency of our solution; our ability tointegrate with customer systems and major software applications; the breadthand geographical reach of our service offerings; the speed of our screeningresults; pricing and return on investment for our customers; and our successfultrack record and reference base with similarly situated companies. We competewith a variety of companies that provide a broad range of screening services,and some of these competitors are larger than we are and have more resourcesthan we do, or are better financed than we are, have a greater global presencethan we do, or provide more diversified services than we do. As a publiccompany, our competitors have access to information about us and our business,while we may not have access to similar information about them. We compete witha diverse group of screening companies, ranging from large public companiessuch as ChoicePoint, Inc. and First Advantage Corp., or divisions of such largepublic companies, to many smaller privately-held regional companies. Due inpart to their size and resources, certain competitors may be able to allocategreater resources than we can, and may be in a better position to anticipateand respond to existing and changing customer preferences and requirements,emerging technologies and market trends. Some competitors also sell their datato us and may refuse to provide services to us or may charge us higher fees toreduce our competitive position. It is also possible that new competitors oralliances or consolidation among competitors may emerge and significantlyincrease competition. In addition, we face difficulties in competing forcustomers who already have long-standing relationships with other screeningservice providers, especially if the solutions provided by such competitors arealready integrated into the customer’s technology platform or hiring processes,which often create a barrier to switching providers and increase the employer’sswitching costs. If we fail to successfully compete, our business, financialposition and results of operations could be materially and adversely affected.

***Our contracts with our customers generally do not requirethat they use us exclusively and do not guarantee that we will receive anyrevenues from them.***

We typically enter into multi-year contractswith our customers. These contracts generally do not require our customers topurchase any minimum amounts of services from us, and our customers generallyare not contractually bound to use our services exclusively. Our customers cangenerally stop doing business with us for any reason at any time without noticeor penalty. As such, we cannot assure you that new customers will commenceordering our services or that existing customers will continue to order ourservices, which could have a material adverse effect on our business, financialposition and results of operations.

***If we fail to successfully manage our growth, the additionaldemands and strain on us could have a material adverse effect on our business,financial condition and results of operations.***

Growing our existing business or executing ourbusiness strategy may place significant demands on and strain our personnel andorganizational structure, including our management, staff and informationsystems. To manage our growth successfully, we must maintain appropriatestaffing levels and subject matter experts, and update our operating, financialand other systems, procedures and controls accordingly. If we fail to manageour growth effectively, our business, financial condition and results ofoperations could be materially adversely affected.

***We may expand through acquisitions of,investments in, or strategic business relationships with, other organizations,all of which may divert our management’s attention, result in additionaldilution to our stockholders, consume resources that are necessary to sustainour business, and may not be successful.***

One of our business strategies is to selectivelypursue acquisitions of, investments in or strategic business relationshipswith, other companies that would complement our business and services. Anacquisition, investment or business relationship may result in unforeseenoperating difficulties and expenditures. In particular, we may encounterdifficulties assimilating or integrating the organizations, technologies,products, personnel or operations of the acquired or affiliated organizations,particularly if the key personnel of such organizations choose not to work

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forus. Additionally, we may have difficulty maintaining uniform standards,controls, procedures and policies across multiple organizations and locations.Acquisitions, investments or business relationships may also disrupt ourongoing business, divert our resources and require significant managementattention that would otherwise be available for the ongoing development of ourbusiness. We cannot assure you that the anticipated benefits of any acquisition,investment or business relationship would be realized or that we would not beexposed to unknown liabilities. For example, in the event we acquire anorganization in part for its customer base, we may have difficulty retainingits customers and experience lower rates of renewal from those customers thanwe experience with our existing customers.

Inconnection with these transactions we may also:

·                  issue additional equitysecurities that would dilute our existing stockholders’ ownership;

·                  use cash that we may needin the future to operate our business;

·                  incur debt on termsunfavorable to us or that we are unable to repay; and

·                  incur large accountingcharges or substantial tax or other liabilities.

***Our international screening business, aswell as maintaining our technology development operations outside the UnitedStates, subjects us to a broad range of laws and regulations that may bedifficult to manage and could expose us to numerous risks that, individually ortogether, could materially and adversely affect our business.***

In 2006, we performed screening services inapproximately 200 countries and territories worldwide, primarily for U.S.-based,multinational organizations, as well as for a small number of companiesheadquartered outside of the United States. We expect to continue to providescreening services in a large number of countries worldwide and we intend toexpand our international operations. Privacy and other laws and regulationsgoverning our operations in these jurisdictions may not be fully developed, mayvary significantly, are subject to change from time to time, and may sometimesconflict or be subject to multiple interpretations. Identifying, interpretingand complying with these laws and regulations is difficult, and we cannot becertain we have done so or will correctly do so. We currently do not havecompliance personnel in any jurisdiction outside the United States. As aresult, we rely on our existing knowledge or experience in interpreting orapplying local laws and regulations, which generally is limited, or on ourcustomers’ or local vendors’ knowledge of such laws and regulations.

In addition, a majority of our technology developmentteam is currently located in the development center of our wholly-ownedsubsidiary, HireRight Estonia AS, in Tallinn, Estonia. As a result, we mayface difficulties in staffing our technology development operations in Estonia,as well as managing and integrating this team with our operations in the UnitedStates.

Ourinternational operations may subject us to additional risks and challenges,particularly with respect to:

·                  obtaining qualified,reliable data sources and vendors that cover international markets onreasonable terms, if at all;

·                  complying with localprivacy laws and restrictions, as well as local license requirements;

·                  protecting data andintellectual property outside the United States;

·                  enforcing contracts underforeign legal systems, as well as defending claims brought in jurisdictionsoutside the United States;

·                  managing and staffing internationaloperations;

·                  assimilating to languageand cultural differences and doing business with foreign agencies andgovernments;

·                  currency fluctuations thatcould impact our margins on international services or could increase the costof labor at our Estonian subsidiary; and

·                  political and economicinstability and international conflicts.

Operating and expanding our business internationallycould require us to incur additional compliance costs, which may besignificant, or could subject us to substantial liability, including civil andcriminal penalties and fines, restrictions on our operations, and breach ofcontract or indemnification claims by our customers and data suppliers,

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forfailure to adequately comply in any or all of these jurisdictions. Any suchcost or liability could have a material adverse effect on our business,financial condition and results of operations.

***System failures, including failures due to natural disastersor other catastrophic events, could delay and disrupt our services, cause harmto our business and reputation and result in a loss of customers.***

We depend heavily upon computer systems to providereliable, uninterrupted service to our customers. We have experienced briefsystem interruptions in the past, generally relating to specific customers orgroups of customers, and we believe that interruptions will continue to occurfrom time to time in the future. Our systems and operations are vulnerable todamage or interruption from a number of sources, including a natural disasteror other catastrophic event such as earthquake, fire, flood, terrorist attack,power loss and telecommunications failure, as well as computer viruses,physical and electronic break-ins, software issues, technology glitches, andother similar events, which can temporarily or permanently interrupt servicesto customers. Although we maintain an out-of-state redundant data center fordisaster recovery, any substantial disruption of this sort could causeinterruptions or delays in our business and loss of data or render us unable toaccept and fulfill customer orders or operate our websites in a timely manner,or at all. These interruptions may also interfere with the ability of ourvendors to provide us information and our employees’ ability to perform theirresponsibilities. In addition, a majority of the verification, documentmanagement and data entry functions for our services are conducted by ouroutsourced vendor in Mumbai, India. Mumbai recently experienced naturaldisasters and, as a result, our outsourced vendor experienced systeminterruptions. Any disruption in the ability of our Mumbai outsourced vendor toperform such functions may result in service interruptions and delays for ourcustomers. Any interruptions or delays caused by such catastrophic events orsystem failures could harm our brand and reputation, divert our employees’attention, reduce our revenue, subject us to liability, cause us to incurincreased expenses, cause us to breach service level contract obligations, orcause us to issue credits or lose customers, any of which could adverselyaffect our business, financial condition and results of operations.

***If we are unable to protect our proprietarytechnology and other intellectual property rights, it may reduce our ability tocompete for business and we may experience reduced revenue and incur costlylitigation to protect our rights.***

Our intellectual property rights are important to ourbusiness, and our success is dependent, in part, on protecting our proprietarytechnology and our brand, marks and domain names. In particular, the processesand software technology solutions we have created to manage screening programs,to deliver pre-integrated solutions with the companies with which we havestrategic alliances, to gather information from our users, to deliver ourscreening services, to interact, aggregate and contextualize the information weobtain from many data sources and suppliers, including the use of algorithmsand other analytical tools, are critical to the speed and accuracy of theresults we provide in screening reports and the success of our business. Werely on a combination of patent, copyright, trademark and trade secret laws, aswell as licensing agreements, third-party nondisclosure agreements andother contractual provisions and technical measures, to protect ourintellectual property rights. These protections may not be adequate to preventour competitors from copying our solutions or otherwise infringing on ourintellectual property rights. Existing copyright laws afford only limitedprotection for our intellectual property rights and may not protect such rightsin the event competitors independently develop solutions similar or superior toours. In addition, the laws of some countries in which we offer our solutions maynot protect our solutions and intellectual property rights to the same extentas do the laws of the United States.

To protect our proprietary methods, we have three U.S.patent applications pending. We cannot assure you that the U.S. Patent andTrademark Office will grant these patents, or that the patents granted willgive us the protection that we seek. To protect our brand name, we currentlyown registered trademarks in the U.S. and over 30 other countries. To protectour trade secrets and other proprietary information, we require employees,consultants, advisors and collaborators to enter into non-disclosureagreements. These agreements may not provide meaningful protection for ourtrade secrets, know-how or other proprietary information in the event of anyunauthorized use, misappropriation or disclosure of such trade secrets,know-how or other proprietary information.

We will not be able to protect our intellectualproperty if we do not detect unauthorized use of our intellectual property. Ifwe discover that a third party is infringing upon our intellectual propertyrights, we may need to undertake costly and time-consuming litigation toenforce our intellectual property rights. We cannot be sure we will

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prevailin any litigation filed to protect our intellectual property, and even if weare successful in protecting our intellectual property rights, we may incursignificant legal costs and management’s attention may be diverted from theongoing development of our business, which could adversely affect our business.If we are unable to protect our intellectual property, our competitors coulduse our intellectual property to market services similar to ours or ourintellectual property could be harmed or lose its value, either of which coulddecrease demand for our solutions.

***If a third party asserts that we are infringing itsintellectual property, whether successful or not, it could subject us to costlyand time-consuming litigation or expensive licenses, and our business may beharmed.***

The software and Internet services industries arecharacterized by the existence of a large number of patents, trademarks andcopyrights and by frequent litigation based on allegations of infringement orother violations of intellectual property rights. Third parties may assertpatent and other intellectual property infringement claims against us in theform of lawsuits, letters or other forms of communication. If a third partysuccessfully asserts a claim that we are infringing their proprietary rights,then royalty or licensing agreements might not be available on terms we findacceptable or at all. As currently pending patent applications are not publiclyavailable, we cannot anticipate all such claims or know with certainty whetherour technology infringes the intellectual property rights of third parties.These claims, whether or not successful, could require significant managementtime and attention; result in costly and time-consuming litigation and thepayment of substantial damages; require us to expend additional developmentresources to redesign our solutions to avoid infringement or discontinue thesale of our solutions; create negative publicity that adversely affects ourreputation and brand and the demand for our solutions; or require us toindemnify our customers. Even if we have not infringed any third parties’intellectual property rights, we cannot be sure our legal defenses will besuccessful, and even if we are successful in defending against such claims, ourlegal defense could require significant financial resources and management’stime, which could adversely affect our business.

***We rely on key personnel and may need additional personnelfor the success and growth of our business.***

Our business is largely dependent on the personalefforts and abilities of key personnel including Eric Boden, our Chairman,President and Chief Executive Officer, and our senior management team. Althoughwe have employment contracts with some of our officers, they can terminatetheir employment relationship with us at any time. We currently do not maintainkey person insurance on any officer or employee. Our performance also dependson our ability to identify, attract, retain and motivate highly skilleddevelopment and marketing personnel. Competition for such personnel is intense,and we cannot assure you that we will be successful in attracting and retainingsuch personnel. The loss of any key employee or our inability to attract orretain other qualified employees could harm our business and resultsof operations.

***We acquire information from a variety ofsources to conduct our business, and if some of these sources are not availableto us in the future, or if the fees charged by such sources significantlyincrease, our business may be materially and adversely affected and our profitmargins may decline.***

We rely extensively upon information derived from awide variety of sources. We obtain information from public filings, informationcompanies and governmental authorities, and we rely on a large number of courtvendors for completing local courthouse searches. We generally do not havelong-term agreements with our data suppliers. Some data suppliers, as well assome service suppliers, such as the drug testing laboratories we use, are alsoowned, or may in the future be acquired, by our competitors, which may make usvulnerable to unpredictable price increases or delays and refusals to renewagreements. Because our contracts with our customers often contain restrictionson the amounts or types of costs that may be passed through to our customers,we may not be able to recover any or all of the costs of any increases in feesby our data and service suppliers. If our suppliers are no longer able or areunwilling to provide us with certain data or services, we may need to findalternative sources with comparable breadth and accuracy, which may not beavailable on acceptable terms, or at all. If we are unable to identify andcontract with suitable alternative data and service suppliers and integratethem into our service offerings, we could experience service disruptions,increased costs and reduced quality of our services, which could have amaterial adverse effect on our business, financial position, and results ofoperations.

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***To the extent the availability of free or relativelyinexpensive information increases, the demand for our services may decrease,which could have a material adverse effect on our business.***

Public sources of free or relatively inexpensiveinformation have become increasingly available, particularly through the Internet,and we expect this trend to continue. Governmental agencies in particular haveincreased the amount of information to which they provide free public access.Public sources of free or relatively inexpensive information may reduce demandfor our services. To the extent that customers choose not to obtain servicesfrom us and instead rely on information obtained at little or no cost fromthese public sources, our revenues could decrease which may have an adverseeffect on our business, financial condition and results of operations.

***Our quarterly results of operations may fluctuate in thefuture, which may cause us to fail to meet or exceed the expectations ofinvestors or securities analysts and cause our stock price to decline.***

Our quarterly revenue and results of operations mayfluctuate as a result of a variety of factors, many of which are outside of ourcontrol. If our quarterly revenue or results of operations fall below theexpectations of investors or securities analysts, the price of our common stockcould decline substantially. Fluctuations in our results of operations may bedue to a number of factors, including, but not limited to, those listed belowand identified throughout this “Risk Factors” section and in our RegistrationStatement on Form S-1:

·                  our ability to retain andincrease sales to existing customers and attract new customers;

·                  seasonality of ourbusiness cycle, reflecting the historically higher demand for screeningservices in the second and third quarters of each year;

·                  the timing and success ofnew service offerings, product introductions or upgrades by us or ourcompetitors;

·                  changes in our pricingpolicies or those of our competitors;

·                  competition, includingentry into the market by new competitors and new service or product offeringsby competitors;

·                  the amount and timing ofexpenditures related to expanding our operations, research and development, orintroducing new services or products;

·                  changes in the paymentterms for our services; and

·                  the purchasing andbudgeting cycles of our customers.

Due to the foregoing factors and the other risksdiscussed in our Registration Statement on Form S-1, you should not rely onquarter-to-quarter comparisons of our results of operations as an indication ofour future performance.

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

During the quarterended June 30, 2007 and prior to the closing of our initial public offering, wegranted options to purchase 42,937 shares of common stock to employees of theCompany under our 2000 Stock Option/Stock Issuance Plan.

During the quarterended June 30, 2007 and prior to the closing of our initial public offering,employees exercised options for 23,856 shares of common stock.

On August 13, 2007the Company issued 76,417 shares of common stock for proceeds of approximately$243,000, pursuant to the net exercise of a warrant previously issued and soldto Hewitt Associates LLC.

The sale of theabove securities was deemed to be exempt from registration under the SecuritiesAct of 1933, as amended (the “Act”), in reliance upon Section 4(2) of the Actor Rule 701 promulgated under Section 3(b) of the Act.

Completion of the Company’sinitial public offering:

On August 13,2007, the Company completed the initial public offering of its common stock.The managing underwriters in the offering were Credit Suisse Securities (USA)LLC, Robert W. Baird & Co. Incorporated, CIBC World Markets Corp., PiperJaffray & Co. and William Blair & Company, L.L.C.. The shares of thecommon stock

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sold in the offering wereregistered under the Act on a Registration Statement on Form S-1 (No.333-140613). The Securities and Exchange Commission declared the RegistrationStatement effective on August 7, 2007.

The offeringcommenced on August 8, 2007 and terminated on August 13, 2007 after all of the4,375,000 shares of common stock registered under the Registration Statementwere sold, including 2,954,115 shares offered by the Company and 1,420,885shares offered by selling stockholders. The initial public offering price was$15.00 per share for an aggregate initial public offering of $65.6 million.

We paid a total of$4.6 million in underwriting discounts and commissions. In addition, thefollowing table sets forth the estimated costs and expenses, other than underwritingdiscounts and commissions, incurred in connection with the offering. None ofthe amounts shown was paid directly or indirectly to any director, officer,general partner of the Company or their associates, persons owning 10 percentor more of any class of equity securities of the Company or an affiliate of theCompany.

| SEC registration fee               |   | $       | 9,229     |   |
|------------------------------------|--------|---------|-----------|--------|
| NASD filing fee                    |   | 9,125   |      |
| NASDAQ Global Market  listing fee  |   | 100,000 |      |
| Blue sky fees and  expenses        |   | 10,000  |      |
| Printing and engraving  expenses   |   | 60,000  |      |
| Legal fees and expenses            |   | 500,000 |      |
| Accounting fees and  expenses      |   | 750,000 |      |
| Transfer Agent and  Registrar fees |   | 10,000  |      |
| Miscellaneous                      |   | 20,646  |      |
|                               |   |    |      |
| Total                              |   | $       | 1,469,000 |   |

 

After deducting theunderwriting discounts and commissions and the offering expenses, the estimatednet proceeds to the Company from the offering were approximately $39.7 million.The net proceeds were predominately held in various interest-bearing moneymarket accounts and marketable securities at August 31, 2007.

**Item 3.        Defaults Upon Senior Securities**

Not applicable

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

During July 2007, priorto the Company’s initial public offering, our stockholders holding a majorityof shares outstanding adopted resolutions by written consent authorizing theapproval of the Company’s reincorporation in Delaware and in connectiontherewith effected a 1-for-4.5 reverse stock split of the Company’s outstandingcapital stock and approved the adoption of our amended and restated certificateof incorporation and our amended and restated bylaws. In addition, ourstockholders approved the adoption of the HireRight, Inc. 2007 Long-TermIncentive Plan and the HireRight, Inc. Employee Stock Purchase Plan.  Stockholders holding 7,657,640 shares (on anas-if converted into common stock basis), or approximately 93 percent of theshares outstanding at that time, consented to all of the foregoing.

**Item 5.        Other Information**

Not applicable

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**Item 6.        Exhibits**
| Exhibit               | ** ** | **Description**                                                                                                                                                                                                                                                                                   |
|-----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  |       |                                                                                                                                                                                                                                                                                              |
| 3.1    |       | Certificate of Incorporation of HireRight, Inc. (1)                                                                                                                                                                                                                                               |
| 3.2    |       | Bylaws of HireRight, Inc. (1)                                                                                                                                                                                                                                                                     |
| 10.1+                 |       | Employment Agreement dated June 2007 by and between  HireRight, Inc. and Eric J. Boden (1)                                                                                                                                                                                                        |
| 10.2+                 |       | HireRight, Inc. 2007 Long-Term Incentive  Plan(1)                                                                                                                                                                                                                                            |
| 10.3+                 |       | HireRight, Inc. Employee Stock Purchase Plan(1)                                                                                                                                                                                                                                              |
| 10.4+                 |       | Deferred Compensation Plan for Directors of  HireRight, Inc. (1)                                                                                                                                                                                                                                  |
| 10.5                  |       | Form of Indemnification Agreement for directors and  executive officers(1)                                                                                                                                                                                                                        |
| 10.6+                 |       | Form of Stock Option Agreement for directors for use  with the 2007 Long-Term Incentive Plan(1)                                                                                                                                                                                                   |
| 10.7+                 |       | Form of Stock Option Agreement for certain officers  (with change-in-control double trigger) for use with the 2007  Long-Term Incentive Plan(1)                                                                                                                                                   |
| 10.8+                 |       | Change in Control Agreement by and between  HireRight, Inc. and Jeffrey A. Wahba(1)                                                                                                                                                                                                          |
| 10.9+                 |       | Form of Change in Control Agreement by and between  HireRight, Inc. and each of the following officers: Lisa A. Gallagher,  Stefano Malnati, Alexander F. Munro, David M. Nachman,  Barbara M. Nieto, Robert J. Pickell, Glen E. Schrank and  Trygve M. Thoresen(1) |
| 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.                                                                                                                 |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------|
|   | +   | Indicates management contract or compensatory plan.                                                                                                 |
|   | (1) | Filed as an exhibit to the Registrant’s Registration  Statement on Form S-1 Registration No. 333-140613 and incorporated herein by  reference. |

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, the registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.
|          | HIRERIGHT, INC.                       |
|----------|---------------------------------------|
|     |                                  |
|     |                                  |
| Date:    | September 13, 2007                    |   | /s/ Eric J. Boden |
|     | Eric J. Boden                         |
|     | President and Chief Executive Officer |
| * * | *(duly authorized officer)*           |
|     |                                  |
|     |                                  |
| Date:    | September 13, 2007                    |   | /s/ Jeffrey A. Wahba |
|     | Jeffrey A. Wahba                      |
|     | Chief Financial Officer               |
| * * | *(principal financial officer)*       |

 

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