UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

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

INTERSECTIONS INC.

(Exact name of registrant as specified in the charter)

DELAWARE		54-1956515
(State or other jurisdiction of incorporation or		(I.R.S. Employer
organization)		Identification Number)
14901 Bogle Drive, Chantilly, Virginia		20151
(Address of principal executive office)		(Zip Code)

(703) 488-6100
(Registrant’s telephone number including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ       No o

Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer o      Accelerated filer þ      Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

Yes o      No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:

As of November 1, 2007, there were 18,149,515 shares of common stock, $0.01 par value, issued and 17,133,093 shares outstanding, with 1,016,422 shares of treasury stock.

 

 

Form 10-Q

September 30, 2007

Table of Contents

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			3
Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2007 and 2006 (unaudited)			3
Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006 (unaudited)			4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006 (unaudited)			5
Notes to Condensed Consolidated Financial Statements (unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3. Quantitative and Qualitative Disclosure About Market Risk			33
Item 4. Controls and Procedures			34
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			34
Item 6. Exhibits			34

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

INTERSECTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)

(unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Revenue		$	71,403			$	55,261			$	194,708			$	146,318
Operating expenses:
Marketing			9,390				6,473				25,325				18,454
Commissions			13,992				7,389				35,830				18,007
Cost of revenue			27,074				19,967				75,070				54,217
General and administrative			14,968				13,815				44,268				34,560
Depreciation and amortization			3,132				2,895				9,005				7,298
Total operating expenses			68,556				50,539				189,498				132,536
Income from operations			2,847				4,722				5,210				13,782
Interest income			171				248				667				1,384
Interest expense			(304	)			(355	)			(968	)			(519	)
Other (expense) income, net			(18	)			3				(23	)			324
Income before income taxes and minority interest			2,696				4,618				4,886				14,971
Income tax expense			(1,269	)			(1,850	)			(2,196	)			(5,936	)
Income before minority interest			1,427				2,768				2,690				9,035
Minority interest in net loss (income) of Screening International, LLC			297				(132	)			853				(238	)
Net income		$	1,724			$	2,636			$	3,543			$	8,797
Net income per share – basic		$	0.10			$	0.16			$	0.21			$	0.53
Net income per share – diluted		$	0.10			$	0.15			$	0.20			$	0.50
Weighted average common shares outstanding — basic			17,156				16,788				17,086				16,746
Weighted average common shares outstanding — diluted			17,560				17,855				17,492				17,542

See Notes to Condensed Consolidated Financial Statements

INTERSECTIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
(unaudited)

		September 30,				December 31,
		2007				2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	13,533			$	15,580
Short-term investments			—				10,453
Accounts receivable, net of allowance for doubtful accounts $58 (2007) and $38 (2006)			26,874				22,369
Prepaid expenses and other current assets			6,688				5,241
Income tax receivable			818				2,113
Note receivable			—				750
Deferred subscription solicitation costs			21,782				11,786
Total current assets			69,695				68,292
PROPERTY AND EQUIPMENT—net			19,735				21,699
GOODWILL			67,961				66,663
INTANGIBLE ASSETS—net			11,755				12,388
OTHER ASSETS			17,011				10,425
TOTAL ASSETS		$	186,157			$	179,467
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Note payable—current portion		$	3,345			$	3,333
Note payable—Control Risks Group Ltd.			450				—
Capital leases—current portion			1,104				1,176
Accounts payable			8,342				5,193
Accrued expenses and other current liabilities			18,433				15,690
Accrued payroll and employee benefits			4,600				7,073
Commissions payable			2,066				1,194
Deferred revenue			2,745				5,292
Deferred tax liability — current portion			2,385				2,483
Total current liabilities			43,470				41,434
NOTE PAYABLE — less current portion			9,183				11,667
OBLIGATIONS UNDER CAPITAL LEASES—less current portion			814				1,637
OTHER LONG-TERM LIABILITIES			2,836				551
DEFERRED TAX LIABILITY— less current portion			8,127				8,152
TOTAL LIABILITIES		$	64,430			$	63,441
MINORITY INTEREST			10,642				11,450
STOCKHOLDERS’ EQUITY:
Common stock at $.01 par value; shares authorized, 50,000; shares issued, 18,150 shares (2007) and 17,836 shares (2006); shares outstanding, 17,133 (2007) and 16,871 (2006)			181				178
Additional paid-in capital			98,796				95,462
Treasury stock, 1,016 shares at cost			(9,071	)			(8,600	)
Retained earnings			21,035				17,447
Accumulated other comprehensive income			144				89
Total stockholders’ equity			111,085				104,576
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	186,157			$	179,467

See Notes to Condensed Consolidated Financial Statements

INTERSECTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

		Nine Months Ended
		September 30,
		2007				2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	3,543			$	8,797
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization			9,092				7,370
Amortization of gain from sale leaseback			(72	)			(72	)
Loss on disposal of fixed assets			60				54
Amortization of debt issuance costs			57				16
Deferred tax			(26	)			2,275
Provision for doubtful accounts			19				104
Stock based compensation			2,026				919
Amortization of deferred subscription solicitation costs			24,125				15,458
Minority interest			(853	)			238
Foreign currency transaction losses, net			29				—
Changes in assets and liabilities:
Accounts receivable			(4,523	)			(4,836	)
Prepaid expenses and other current assets			(1,505	)			(608	)
Income tax receivable			1,296				—
Deferred subscription solicitation costs			(34,122	)			(14,141	)
Other assets			(6,585	)			(3,570	)
Accounts payable			2,605				(1,910	)
Accrued expenses and other current liabilities			2,228				3,882
Accrued payroll and employee benefits			(2,473	)			1,162
Commissions payable			872				(1,091	)
Current tax payable			—				(168	)
Deferred revenue			(2,546	)			3,245
Other long-term liabilities			2,273				462
Net cash (used in) provided by operating activities			(4,480	)			17,586
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Sale of short term investments			10,453				27,673
Cash paid in the acquisition of Intersections Insurance Services Inc.			(5	)			(50,609	)
Cash received in the acquisition of Screening International, LLC			—				1,710
Cash paid in the acquisition of Hide N’ Seek, LLC			(936	)			—
Acquisition of property and equipment			(4,325	)			(6,113	)
Net cash provided by (used in) investing activities			5,187				(27,339	)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES:
Cash proceeds from stock options exercised			940				220
Tax benefit of stock options exercised			372				—
Proceeds from debt issuance			450				15,000
Debt issuance costs			—				(243	)
Repurchase of treasury stock			(471	)			—
Repayments on note payable			(2,546	)			—
Note receivable			(750	)			—
Capital lease payments			(820	)			(1,062	)
Net cash (used in) provided by financing activities			(2,825	)			13,915
EFFECT OF EXCHANGE RATE ON CASH			71				33
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS			(2,047	)			4,195
CASH AND CASH EQUIVALENTS—Beginning of period			15,580				17,555
CASH AND CASH EQUIVALENTS—End of period		$	13,533			$	21,750
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest		$	853			$	203
Cash paid for taxes		$	1,575			$	3,892
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
Equipment accrued but not paid		$	531			$	448

See Notes to Condensed Consolidated Financial Statements

INTERSECTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Organization and Business

We offer consumers a variety of consumer protection services and other consumer products and services primarily on a subscription basis. Our services help consumers protect themselves against identity theft or fraud and understand and monitor their credit profiles and other personal information. Through our acquisition of Intersections Insurance Services Inc. (“IISI”), formerly known as Chartered Marketing Services, Inc., in July of 2006, we expanded our portfolio of services to include consumer discounts on healthcare, home and auto related expenses, access to professional financial and legal information, and life, accidental death and disability insurance products. Our consumer services are offered through relationships with clients, including many of the largest financial institutions in the United States and Canada, and clients in other industries. In addition, we also offer our services directly to consumers.

Through our majority owned subsidiary Screening International, LLC (“SI”), we provide personnel and vendor background screening services to businesses worldwide. SI was formed in May 2006, with Control Risks Group, Ltd., (“CRG”), a company based in the UK. SI has offices in Winchester, Virginia, London, in the UK, and Singapore. SI’s clients include leading United States, UK and global companies in such areas as manufacturing, healthcare, telecommunications and financial services. SI provides a variety of risk management tools for the purpose of personnel and vendor background screening, including criminal background checks, driving records, employment verification and reference checks, drug testing and credit history checks.

We have three reportable segments. Our Consumer Products and Services segment includes our consumer protection and other consumer products and services. This segment also includes the data security breach services we provide to assist organizations in responding to compromises of sensitive personal information. We help these clients notify the affected individuals, and we provide the affected individuals with identity theft recovery and credit monitoring services offered by our clients at no charge to the affected individual. Our Background Screening segment includes the personnel and vendor background screening services provided by SI. Our Other segment includes the newly acquired Captira Analytical, LLC (“Captira”), which provides software and automated service solutions for the bail bonds industry.

We acquired American Background Services, Inc. (“ABI”), in November 2004. In May 2006, we created SI with CRG by combining ABI with CRG’s background screening division. We own 55% of SI, and have the right to designate a majority of the five-member board of directors. CRG owns 45% of SI. We and CRG have agreed to cooperate to meet any future financing needs of SI, including guaranteeing third party loans and making additional capital contributions on a pro rata basis, if necessary, subject to certain capital call and minority protection provisions.

2. Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The accompanying unaudited consolidated financial statements have been prepared by us in accordance with accounting principles generally accepted in the United States of America. Our financial results include ABI for the period January 1, 2006 through May 30, 2006, and SI, which combined ABI with CRG’s background screening business, for the period May 31, 2006 through September 30, 2007. We own 55% of SI. Our financial results also include IISI, which we acquired on July 3, 2006, and Captira, of which we acquired from Hide N’Seek on August 7, 2007. In the opinion of management, all adjustments consisting of only normal recurring adjustments necessary for a fair presentation of the financial position of the Company, the results of its operations and cash flows have been made. All significant intercompany transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

We consider all highly liquid investments, including those with an original maturity of three months or less, to be cash equivalents. Cash and cash equivalents consist primarily of interest-bearing accounts.

Short-Term Investments

Our investments consist of short-term U.S. Treasury securities with original maturities greater than 90 days but no greater than nine months. These investments are categorized as held to maturity and are carried at amortized cost because we have both the intent and the ability to hold these investments until they mature. Discounts are accreted into earnings over the life of the investment. Interest income is recognized when earned.

Foreign Currency Translation

We account for foreign currency translation and transaction gains and losses in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 52, Foreign Currency Translation. We translate the asset and liabilities of our foreign subsidiary at the exchange rates in effect at the end of the period and the results of operations at the average rate throughout the period. The translation adjustments are recorded directly as a separate component of shareholders equity, while transaction gains and losses are included in net income.

Accounts Receivable

Accounts receivable represents trade receivables as well as in-process credit card billings. We provide an allowance for doubtful accounts on trade receivables based upon factors related to historical trends, a specific review of outstanding invoices and other information. We also record a provision for estimated sales refunds and allowances related to sales in the same period that the related revenues are recorded. These estimates are based on historical refunds and other known factors.

We record as goodwill the excess of purchase price over the fair value of the identifiable net assets acquired. The determination of fair value of the identifiable net assets acquired was determined based upon a third party valuation and evaluation of other information.

SFAS No. 142, Goodwill and Other Intangible Assets, prescribes a two-step process for impairment testing of goodwill and intangibles with indefinite lives, which is performed annually, as well as when an event triggering impairment may have occurred. The first step tests for impairment, while the second step, if necessary, measures the impairment. We elected to perform our annual analysis during the fourth quarter of each fiscal year as of October 31 and no indicators of impairment have been identified.

Intangible assets subject to amortization include trademarks, customer marketing and technology related asses. Such intangible assets are amortized on a straight-line or accelerated basis over their estimated useful lives, which are generally three to ten years.

Beginning in the nine months ended September 30, 2007, we modified our amortization method for customer related intangible assets prospectively in accordance with SFAS No. 154, Accounting Changes and Error Corrections.

The goodwill and intangibles balances as of September 30, 2007 pertain to the acquisitions of American Background on November 12, 2004, Screening International on May 31, 2006, Chartered Marketing Services on July 3, 2006 and Captira on August 7, 2007.

Revenue Recognition

We recognize revenue on 1) identity theft, credit management and background services and 2) accidental death insurance and other membership products.

Our products and services are offered to consumers primarily on a monthly subscription basis. Subscription fees are generally billed directly to the subscriber’s credit card, mortgage bill or demand deposit accounts. The prices to subscribers of various configurations of our products and services range generally from $4.99 to $25.00 per month. As a means of allowing customers to become familiar with our services, we sometimes offer free trial or guaranteed refund periods. No revenues are recognized until applicable trial periods are completed.

Identity Theft, Credit Management and Background Services

We recognize revenue from our services in accordance with Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements as amended by SAB No. 104, Revenue Recognition. Consistent with the requirements of SAB No.’s 101 and 104, revenue is recognized when: a) persuasive evidence of arrangement exists as we maintain signed contracts with all of our large financial institution customers and paper and electronic confirmations with individual purchases, b) delivery has occurred once the product is transmitted over the internet, c) the seller’s price to the buyer is fixed as sales are generally based on contract or list prices and payments from large financial institutions are collected within 30 days with no significant write-offs, and d) collectibility is reasonably assured as individual customers pay by credit card which has limited our risk of non-collection. Revenue for monthly subscriptions is recognized in the month the subscription fee is earned. For subscriptions with refund provisions whereby only the prorated subscription fee is refunded upon cancellation by the subscriber, deferred subscription fees are recorded when billed and amortized as subscription fee revenue on a straight-line basis over the subscription period, generally one year. We generate revenue from one-time credit reports and background screenings which are recognized when the report is provided to the customer electronically, which is generally at the time of completion.

Revenue for annual subscription fees must be deferred if the subscriber has the right to cancel the service. Annual subscriptions include subscribers with full refund provisions at any time during the subscription period and pro-rata refund provisions. Revenue related to annual subscription with full refund provisions is recognized on the expiration of these refund provisions. Revenue related to annual subscribers with pro-rata provisions is recognized based on a pro rata share of revenue earned. An allowance for discretionary subscription refunds is established based on our actual cancellation experience.

We also provide services for which certain financial institution clients are the primary obligors directly to their customers. Revenue from these arrangements is recognized when earned, which is at the time we provide the service, generally on a monthly basis. In addition, we generate revenue from the sale of one-time credit reports and background screens, which is generally at the time of completion.

The amount of revenue recorded by us is determined in accordance with Financial Accounting Standards Board’s (“FASB”) Emerging Issues Task Force (“EITF”) 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, which addresses whether a company should report revenue based on the gross amount billed to a customer or the net amount retained by us (amount billed less commissions or fees paid). We generally record revenue on a gross basis in the amount that we bill the subscriber when our arrangements with financial institution clients provide for us to serve as the primary obligor in the transaction, we have latitude in establishing price and we bear the credit risk for the amount billed to the subscriber. We generally record revenue in the amount that we bill our financial institution clients, and not the amount billed to their customers, when our financial institution client is the primary obligor, establishes price to the customer and bears the credit risk.

Accidental Death Insurance and other Membership Products

We recognize revenue from our services in accordance with SAB No. 101, as amended by SAB No. 104. Consistent with the requirements of SAB No.’s 101 and 104 revenue is recognized when: a) persuasive evidence of arrangement exists as we maintain paper and electronic confirmations with individual purchases, b) delivery has occurred at the completion of a product trial period, c) the seller’s price to the buyer is fixed as the price of the product is agreed to by the customer as a condition of the sales transaction which established the sales arrangement, and d) collectibility is reasonably assured as evidenced by our collection of revenue through the monthly mortgage payments of our customers or through checking account debits to our customers’ accounts. Revenues from insurance contracts are recognized when earned. Marketing of our insurance products generally involves a trial period during which time the product is made available at no cost to the customer. No revenues are recognized until applicable trial periods are completed.

The amount of revenue recorded by us is determined in accordance with FASB’s EITF 99-19, which addresses whether a company should report revenue based on the gross amount billed to a customer or the net amount retained by us (amount billed less commissions or fees paid). For insurance products we generally record revenue on a net basis as we perform as an agent or broker for the insurance products without assuming the risks of ownership of the insurance products. For membership products, we generally record revenue on a gross basis as we serve as the primary obligor in the transactions, have latitude in establishing price and bear credit risk for the amount billed to the subscriber.

We participate in agency relationships with insurance carriers that underwrite insurance products offered by us. Accordingly, insurance premiums collected from customers and remitted to insurance carriers are excluded from our revenues and operating expenses. Insurance premiums collected but not remitted to insurance carriers as of September 30, 2007 and December 31, 2006 totaled $2.1 million and $1.8 million, respectively, and is included in accrued expenses and other current liabilities in our consolidated financial statements.

Deferred Subscription Solicitation and Commission Costs

Deferred subscription solicitation and commission costs include direct-response marketing costs and deferred commissions.

We expense advertising costs as incurred except for direct-response marketing costs. Direct-response marketing costs include telemarketing, web-based marketing and direct mail costs related directly to subscription solicitation. In accordance with American Institute of Certified Public Accountants Statement of Position (“SOP”) 93-7, Reporting on Advertising Costs, direct-response advertising costs are deferred and charged to operations on a cost pool basis as the corresponding revenues from subscription fees are recognized, but not for more than one year.

The recoverability of the amounts capitalized as deferred subscription solicitation and commission costs are evaluated at each balance sheet date, in accordance with SOP 93-7, by comparing the carrying amounts of such assets on a cost pool basis to the probable remaining future benefit expected to result directly from such advertising. Probable remaining future benefit is estimated based upon historical customer patterns, and represents net revenues less costs to earn those revenues.

Deferred subscription solicitation costs included in the accompanying balance sheet as of September 30, 2007 and December 31, 2006, were $21.8 million and $11.8 million, respectively. Amortization of deferred subscription solicitation and commission costs, which are included in either marketing or commissions expense in our consolidated statement of operations, for the three month periods ended September 30, 2007 and 2006 was $9.4 million and $5.0 million, respectively. Amortization of deferred subscription solicitation and commission costs for the nine month periods ended September 30, 2007 and 2006 were $24.1 million and $15.5 million, respectively. Subscription solicitation costs expensed as incurred related to marketing costs, which are included in marketing expenses in our consolidated statement of operations, as they did not meet the criteria for deferral in accordance with SOP 93-7, for the three months ended September 30, 2007 and 2006 were $215 thousand and $1.4 million, respectively. Subscription solicitation costs expensed as incurred related to marketing costs in the nine months ended September 30, 2007 and 2006 were $1.9 million and $4.8 million, respectively.

In accordance with SAB No. 101, as amended by SAB No. 104, commissions that relate to annual subscriptions with full refund provisions and monthly subscriptions are expensed when incurred, unless we are entitled to a refund of the commissions. If annual subscriptions are cancelled prior to their initial terms, we are generally entitled to a full refund of the previously paid commission for those annual subscriptions with a full refund provision and a pro-rata refund, equal to the unused portion of the subscription, for those annual subscriptions with a pro-rata refund provision. Commissions that relate to annual subscriptions with full commission refund provisions are deferred until the earlier of expiration of the refund privileges or cancellation. Once the refund privileges have expired, the commission costs are recognized ratably in the same pattern that the related revenue is recognized. Commissions that relate to annual subscriptions with pro-rata refund provisions are deferred and charged to operations as the corresponding revenue is recognized. If a subscription is cancelled, upon receipt of the refunded commission from our client, we record a reduction to the deferred commission.

We have prepaid commission agreements with some of our clients. Under these agreements, we pay a commission on new subscribers in lieu of ongoing commission payments. We amortize these prepaid commissions over a period of time not to exceed three years. The prepaid commissions are shown in prepaid expenses and other current assets on our consolidated balance sheet. Amortization is included in commissions expense on our consolidated statement of operations.

Software Development Costs

We develop software for internal use and capitalize software development costs incurred during the application development stage in accordance with SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, and EITF 00-2, Accounting for Web Site Development Cost. Costs incurred prior to and after the application development stage are charged to expense. When the software is ready for its intended use, capitalization ceases and such costs are amortized on a straight-line basis over the estimated useful life, which is generally three to five years.

In accordance with SOP 98-1, the Company regularly reviews its capitalized software projects for impairment in accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We did not have any impairments in the three or nine months ended September 30, 2007.

Stock-Based Compensation

We currently have three equity incentive plans, the 1999 and 2004 Stock Option Plans and the 2006 Stock Incentive Plan which provide us with the opportunity to compensate selected employees with stock options, restricted stock and restricted stock units. A stock option entitles the recipient to purchase shares of common stock from us at the specified exercise price. Restricted stock and restricted stock units (“RSUs”) entitle the recipient to obtain stock or stock units, which vest over a set period of time. RSUs are granted at no cost to the employee. Employees do not need to pay an exercise price to obtain the underlying common stock. All grants or awards made under the Plans are governed by written agreements between us and the participants.

On January 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised 2004), Share-Based Payment. The Company uses the Black-Scholes option-pricing model to value all options and the straight-line method to amortize this fair value as compensation cost over the requisite service period. Total share-based compensation expense included in general and administrative expenses on our consolidated statements of operations for the three months ended September 30, 2007 and 2006 was $737 thousand and $654 thousand, respectively. Total share-based compensation expense included in general and administrative expenses on our consolidated statements of operations for the nine months ended September 30, 2007 and 2006 was $2.0 million and $919 thousand, respectively.

The following weighted-average assumptions were used for option grants during the nine months ended September 30, 2007 and 2006:

Expected Dividend Yield. The Black-Scholes valuation model requires an expected dividend yield as an input. We have not issued dividends in the past nor do we expect to issue dividends in the future. As such, the dividend yield used in our valuations for the nine months ended September 30, 2007 and 2006 was zero.

Expected Volatility. The expected volatility of the options granted was estimated based upon the average volatility of comparable public companies, as described in the SAB No. 107, Share-Based Payment. Due to the fact that we have only been a public company for approximately three years, we believe that there is not a substantive share price history to calculate accurate volatility and have elected to use the average volatility of companies similar to us in size or industry. At the point when we have enough public history, we will reconsider the utilization of our own stock price volatility.

Risk-free Interest Rate. The yield on actively traded non-inflation indexed U.S. Treasury notes was used to extrapolate an average risk-free interest rate based on the expected term of the underlying grants.

Expected Term. The expected term of options granted during the nine months ended September 30, 2007 and 2006 was determined under the simplified calculation provided in SAB No. 107 ((vesting term + original contractual term)/2). For the majority of grants valued during the nine months ended September 30, 2007 and 2006, the options had graded vesting over 4 years (25% of the options in each grant vest annually) with a contractual term of 10 years.

The fair value of each option granted has been estimated as of the date of grant using the Black-Scholes option pricing model with the following assumptions:

		Nine Months Ended				Nine Months Ended
		September 30, 2007				September 30, 2006
Expected dividend yield			0	%			0	%
Expected volatility			38	%			44	%
Risk free interest rate			4.46	%			4.80 – 5.12	%
Expected life of options		6.25 years				5.75 – 6.25 years

Income Taxes

We account for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes, which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realized.

We believe that our tax positions comply with applicable tax law. As a matter of course, we may be audited by various taxing authorities and these audits may result in proposed assessments where the ultimate resolution may result in us owing additional taxes. On January 1, 2007, we adopted FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, Accounting for Income Taxes, as further amended by FIN No. 48-1, Definition of Settlement in FASB Interpretation No. 48. This interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN No. 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Upon adoption of FIN No. 48, and as further described in Note 9, we adjusted retained earnings by $45 thousand.

Net Income Per Common Share

Basic and diluted income per share are determined in accordance with the provisions of SFAS No. 128, Earnings Per Share. Basic income per common share is computed using the weighted average number of shares of common stock outstanding for the period. Diluted income per share is computed using the weighted average number of shares of common stock, adjusted for the dilutive effect of potential common stock. Potential common stock, computed using the treasury stock method or the if-converted method, includes convertible debt, preferred stock, options and warrants.

For the three and nine months ended September 30, 2007, options to purchase 3.0 million shares of common stock have been excluded from the computation of diluted earnings per share as their effect would not be dilutive. These shares could dilute earnings per share in the future. For the three and nine months ended September 30, 2006, options to purchase 3.1 million shares of common stock have been excluded from the computation of diluted earnings per share as their effect would not be dilutive.

A reconciliation of basic income per common share to diluted income per common share is as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
		(in thousands, except per								(in thousands, except per
		share data)								share data)
Net income available to common shareholders — basic and diluted		$	1,724			$	2,636			$	3,543			$	8,797
Weighted average common shares outstanding—basic			17,156				16,788				17,086				16,746
Dilutive effect of common stock equivalents			404				1,067				406				796
Weighted average common shares outstanding—diluted			17,560				17,855				17,492				17,542
Income per common share:
Basic		$	0.10			$	0.16			$	0.21			$	0.53
Diluted		$	0.10			$	0.15			$	0.20			$	0.50

Segment Reporting

We have adopted SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, which defines how operating segments are determined and requires disclosures about products, services, major customers and geographic areas. We have three reportable segments. Our Consumer Products and Services segment includes our consumer protection and other consumer products and services provided by Intersections and Intersections Insurance Services. Our Background Screening segment includes the personnel and vendor background screening services provided by SI. Our Other segment includes software solutions for the bail bonds industry provided by Captira.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are in the process of evaluating the impact, if any, that SFAS No.157 will have on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115. SFAS No. 159 permits an entity, at specified election dates, to choose to measure certain financial instruments and other items at fair value. The objective of SFAS No. 159 is to provide entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently, without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for accounting periods beginning after November 15, 2007. We are in the process of evaluating the impact, if any, that SFAS No. 159 will have on our consolidated financial statements.

In June 2007, EITF 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities, was issued and is effective for fiscal years beginning January 1, 2008. EITF 07-3 requires that non-refundable advance payments for future research and development activities should be deferred and capitalized. We are in the process of evaluating the impact, if any, that EITF 07-3 will have on our consolidated financial statements.

Reclassifications

Certain financial statement items from prior periods have been reclassified for consistency with our current presentation.

3. Business Acquisitions

Captira Analytical

On August 7, 2007, our wholly owned subsidiary, Captira Analytical LLC, acquired substantially all of the assets of Hide N’ Seek, LLC (“Seller”), an Idaho limited liability company, for $3.1 million, which included approximately $105 thousand in acquisition costs.  Additional consideration up to approximately $2.5 million in cash is due if the Company achieves certain cash flow milestones in the future.

The purchase price consists of the following:

Cash paid		$	833
Assumption of operating liabilities			637
Forgiveness of loans and accrued interest from Intersections			1,567
Transaction costs			105
		$	3,142

This transaction was accounted for as a business combination in accordance with the provisions of SFAS No. 141, Business Combinations.

The estimated determination of the purchase price allocation was based on the fair values of the acquired assets and liabilities assumed including acquired intangible assets. The estimated determination was made by management through various means, including obtaining a third party valuation of identifiable intangible assets acquired and an evaluation of the fair value of other assets and liabilities acquired.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

Current assets						$	13
Property, plant and equipment							282
Intangible assets:
Marketing related for trade name (estimated useful life of 4 years)		$	407
Existing developed technology assets (estimated useful life of 4 years)			1,297
Total intangible assets							1,704
Goodwill							1,143
Net assets acquired						$	3,142

The $1.1 million of goodwill was assigned to the Other segment. The total amount is expected to be deductible for income tax purposes. Captira will provide software and automated service solutions for the bail bonds industry, including office automation, bond inventory and client tracking, and public records and reports for the purpose of evaluating bond applications.

The pro forma impact of Captira or Hide N’Seek on the Company’s historical operating results is not material.

Intersections Insurance Services

On July 3, 2006, we acquired all of the outstanding shares of IISI, formerly Chartered Marketing Services, Inc., for $54.3 million in cash, which included $364 thousand in acquisition costs. $15 million of the purchase price was financed through borrowings on a new term loan with the balance financed through cash on hand and short term investments. Of the total cash consideration, approximately $5.5 million was distributed to an escrow account to be used for indemnification claims as set forth in the escrow agreement. In the nine months ended September 30, 2007, we filed a claim notice for $4.2 million related to various federal and state tax matters pursuant to the escrow agreement. All funds remaining in the account after resolution of any claims will be distributed to the former IISI shareholders in accordance with the acquisition agreement on September 16, 2008. In order to fund the purchase of IISI, we sold $27.8 million of short-term investments. There was no gain or loss recognized on the sale of these investments. The results of IISI’s operations have been included in the consolidated financial statements since the date of acquisition. IISI is a marketer of various insurance products and services. As a result of the acquisition, we have diversified our client and product portfolios. In addition, IISI provides us access to new market segments, particularly with large mortgage servicers.

The final determination of the purchase price allocation was based on the fair values of the acquired assets and liabilities assumed including acquired intangible assets. The determination was made by management through various means, including obtaining a third party valuation of identifiable intangible assets acquired and an evaluation of the fair value of other assets and liabilities acquired.

The following table summarizes the final fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

Current assets						$	11,047
Property, plant and equipment							1,368
Other assets							135
Intangible assets:
Registered trademarks (estimated useful life of 3 years)		$	1,886
Existing subscriber base and client relationships (estimated useful life of 10 years)			7,641
Carrier and network provider agreements (estimated useful life of 5 years)			731
Existing developed technology assets (estimated useful life of 5 years)			1,499
Total intangible assets							11,757
Goodwill							43,235
Total assets							67,542
Deferred tax and current liabilities							(8,073	)
Deferred tax and long term liabilities							(5,192	)
Total liabilities							(13,265	)
Net assets acquired						$	54,277

The $43.2 million of goodwill was assigned to the Consumer Products and Services segment. Of that total amount, approximately $27.1 million is expected to be deductible for income tax purposes.

In connection with the IISI acquisition, we commenced integration activities which have resulted in involuntary terminations. The liability for involuntary termination benefits covers approximately 15 employees, primarily in general and administrative functions. In 2006, we recorded $2.6 million of severance and severance-related costs in the above allocation of the cost of the acquisition in accordance with EITF No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination. We expect to pay the severance and severance-related costs of $1.8 million during 2007 and the remaining balance of $234 thousand during 2008.

The following table summarizes the obligations recognized in connection with the IISI acquisition and the activity to date (in thousands):

		September 30, 2007
										Other
		Beginning								Increases				Ending
		Balance				Payments				(Decreases)				Balance
Severance costs and contract termination costs		$	2,016			$	(1,679	)		$	248			$	585

At January 1, 2007, we recorded a liability of $1.8 million, related to state income tax matters, net of federal benefit, relating to the acquisition of IISI, offset by an escrow receivable of $1.8 million. The escrow receivable and liability were recorded as a long-term asset and other long-term liability, respectively, in the accompanying consolidated balance sheet. The amount includes the estimated state tax, penalties and cumulative interest related to this matter. Total interest expense on the liability for the three and months ended September 30, 2007 was $33 thousand and $80 thousand, increasing the total liability and escrow receivable balance to approximately $1.9 million.

The following table summarizes unaudited pro forma financial information assuming the IISI acquisition had occurred on January 1, 2006. This unaudited pro forma financial information does not necessarily represent what would have occurred if the transaction had taken place on the dates presented and should not be taken as representative of our future consolidated results of operations or financial position:

		Three Months Ended				Nine Months Ended
		September 30, 2006				September 30, 2006
		(In thousands, except share data)
		(Unaudited)				(Unaudited)
Revenue		$	55,261			$	167,664
Net Income		$	2,636			$	8,997
Basic earning per share		$	0.16			$	0.54
Diluted earnings per share		$	0.15			$	0.51

Screening International, LLC

As described in Note 1, we created SI for the purpose of combining our wholly-owned subsidiary ABI and CRG’s U.K. background screening business, Control Risks Screening Limited (“CRS”). SI provides global pre-employment background screening services. As a result of the transaction, we have expanded our background screening business worldwide.

We initially contributed all of the outstanding shares of our wholly-owned subsidiary, ABI, to SI, in exchange for a 55% ownership interest in SI. The background screening operations and assets of CRG were transferred to its wholly-owned subsidiary, CRS, and at closing CRG, initially contributed all of the outstanding shares of CRS to SI, in exchange for a 45% ownership interest. In addition, we and CRG have agreed to cooperate to meet any future financing needs of SI, including seeking third party financing, guaranteeing third party loans and making additional capital contributions on a pro rata basis, if necessary, subject to certain capital call and minority protection provisions.

In the three months ended September 30, 2007 we and CRG loaned SI a total of $1.6 million as part of its ownership commitment. The note is an on demand loan, with interest at 8% per annum.

The final determination of the purchase price allocation was based on the fair values of the acquired assets and liabilities assumed including acquired intangible assets. The determination was made by management through various means, including obtaining a third party valuation of identifiable intangible assets acquired and an evaluation of the fair value of other assets and liabilities acquired. The purchase price of the acquisition was $11.8 million, which included $529 thousand in acquisition costs.

The final allocation of purchase price, including acquisition costs is as follows (in thousands):

Current assets		$	4,126
Property and equipment			378
Goodwill			6,842
Intangible assets			663
Deferred tax liability			(199	)
Total consideration		$	11,810

In accordance with SFAS No. 141, we recorded goodwill in the amount of $6.8 million for the excess of the purchase price, including estimated acquisition costs, over the net assets acquired. Intangible assets were recorded at a value of $302 thousand for customer related intangible assets and $361 thousand for marketing related intangible assets. Customer intangible assets will be amortized over a period of seven years and marketing intangible assets will be amortized over a period of ten years.

The $6.8 million of goodwill was assigned to the Background Screening segment. The goodwill is not deductible for tax purposes.

4. Deferred Subscription Solicitation and Commission Costs

Deferred subscription solicitation costs included in the accompanying balance sheet as of September 30, 2007 and December 31, 2006, were $21.8 million and $11.8 million, respectively. Amortization of deferred subscription solicitation and commission costs, which are included in either marketing or commissions expenses on our consolidated statement of operations, for the three months ended September 30, 2007 and 2006 was $9.4 million and $5.0 million, respectively. Amortization of deferred subscription solicitation and commission costs for the nine months ended September 30, 2007 and 2006 was $24.1 million and $15.5 million, respectively. Subscription solicitation costs expensed as incurred related to marketing costs as they did not meet the criteria for deferral in accordance with SOP 93-7, which are included in marketing expenses on our consolidated statement of operations, for the three months ended September 30, 2007 and 2006 were $215 thousand and $1.4 million, respectively. Subscription solicitation costs expensed as incurred related to marketing for the nine months ended September 30, 2007 and 2006 were $1.9 million and $4.8 million, respectively.

5. Goodwill and Intangible Assets

Changes in the carrying amount of goodwill for the nine months ended September 30, 2007, by reportable segment are as follows (in thousands):

		Consumer Products				Background
		and Services				Screening				Other				Total
Balance, December 31, 2006		$	43,080			$	23,583			$	—			$	66,663
Acquired during the year			—				—				1,143				1,143
Adjustments			155				—				—				155
Balance, September 30, 2007		$	43,235			$	23,583			$	1,143			$	67,961

Goodwill was increased by $155 thousand, net of tax, in the nine months ended September 30, 2007 due to additional severance expense for integration activities related to the IISI acquisition.

Intangibles consisted of the following (in thousands):

		September 30, 2007												December 31, 2006
		Gross								Net				Gross								Net
		Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
		Amount				Amortization				Amount				Amount				Amortization				Amount
Amortizable intangible assets:
Customer related		$	9,652			$	(2,503	)		$	7,149			$	9,652			$	(1,133	)		$	8,519
Marketing related			3,385				(1,146	)			2,239				2,978				(458	)			2,520
Technology related			2,796				(429	)			2,367				1,499				(150	)			1,349
Total amortizable intangible assets		$	15,833			$	(4,078	)		$	11,755			$	14,129			$	(1,741	)		$	12,388

Intangible assets are amortized over a period of three to ten years. For the three and nine months ended September 30, 2007, we had an aggregate amortization expense of $913 thousand and $2.3 million, respectively, which was included in depreciation and amortization expense on the consolidated statements of operations. For the three and nine months ended September 30, 2006, we had an aggregate amortization expense of $696 thousand and $878 thousand, respectively. We estimate that we will have the following amortization expense for the future periods indicated below (in thousands).

For the remaining three months ending December 31, 2007		$	946
For the years ending December 31,
2008			3,284
2009			2,506
2010			1,661
2011			1,156
2012			606
Thereafter			1,596
		$	11,755

6. Other Assets.

The components of our other assets are as follows:

		September 30, 2007				December 31, 2006
		(In thousands)
Prepaid royalty payments		$	11,913			$	9,705
Prepaid contracts			764				512
Escrow receivable			1,931				—
Other			2,403				208
		$	17,011			$	10,425

In February and March 2005, respectively, we entered into agreements with two providers under which we receive data and other information for use in the new consumer services that we introduced in the first quarter of 2006. Under these arrangements, we pay non-refundable royalties based on usage of the data or analytics, and make certain minimum royalty payments in exchange for defined limited exclusivity rights. Prepaid royalties will be applied against future royalties incurred and the minimum royalty payments.

7. Accrued Expenses and Other Current Liabilities.

The components of our accrued expenses and other liabilities are as follows:

		September 30, 2007				December 31, 2006
		(In thousands)
Accrued marketing		$	2,936			$	1,008
Accrued cost of sales, including credit bureau costs			6,989				6,192
Accrued general and administrative expense and professional fees			3,812				3,348
Transition costs			585				2,016
Insurance premiums			2,078				1,830
Other			2,033				1,296
		$	18,433			$	15,690

8. Accrued Payroll and Employee Benefits.

The components of our accrued payroll and employee benefits are as follows:

		September 30, 2007				December 31,2006
		(In thousands)
Accrued payroll		$	3,215			$	4,724
Accrued severance			—				1,142
Accrued benefits			1,338				1,173
Other			47				34
		$	4,600			$	7,073

9. Income Taxes

In June 2006, the FASB issued FIN No 48, Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. The interpretation prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

In connection with our adoption of FIN No. 48, as further amended by FIN No. 48-1, Definition of Settlement in FASB Interpretation No. 48, as of January 1, 2007, we recorded a net increase to retained earnings of $45 thousand. The increase to retained earnings includes the effect of previously unrecognized tax benefits related to research and development tax credits. As of September 30, 2007, we had total unrecognized tax benefits of $719 thousand related to various federal and state tax matters. If recognized, an income tax benefit of $268 thousand would be recorded as a component of income taxes and reduce the effective tax rate.

As of September 30, 2007, we were subject to examination in the U.S. federal tax jurisdiction for the 2000-2006 tax years and in various state jurisdictions for the 1999-2006 tax years.

We have elected to include income tax penalties related to uncertain tax positions as part of our income tax expense in the consolidated financial statements, the accrual for estimated penalties as of adoption of $45 thousand is included as a component of other long-term liabilities. No additional penalties were accrued in the three or nine months ended September 30, 2007.

We have elected to include interest expense related to uncertain tax positions as part of interest expense in the consolidated financial statements. The accrual for estimated interest expense is included as a component of other long-term liabilities.

During the three and nine months ended September 30, 2007, there were no changes in our uncertain tax positions. We do not expect that the amounts of unrecognized tax benefits will change significantly within the next 12 months.

Our effective tax rate for the three months ended September 30, 2007 and September 30, 2006 was 47.1% and 40.1%, respectively. Our effective tax rate for the nine months ended September 30, 2007, and 2006 was 44.9% and 39.7%, respectively. The increase is primarily a result of losses outside of the United States, which are subject to tax at rates different than the statutory income tax rate.

10. Leases

In October 2005, we entered into an Equipment Lease Agreement with a financial institution. The facility can be drawn upon for the purchase of qualifying assets. The term and interest rate for this facility were set at the time we drew upon this facility. In December 2005, we drew down $1.2 million based on assets purchased during 2005 with a term of three years and an interest rate of 5.86%. Accordingly, we recorded the lease liability at the fair market value of the underlying assets, which was $1.0 million, resulting in the recognition of a deferred gain which will be amortized in proportion to the amortization of the leased assets. As of September 30, 2007, the balance of the lease liability and deferred gain was $462 thousand and $62 thousand, respectively.

11. Notes Payable

On July 3, 2006 we negotiated bank financing in the amount of $40 million. Under terms of the financing agreements, we were granted a $25 million line of credit and a term loan of $15 million with interest. The term loan is payable in monthly installments of $278 thousand, plus interest. Substantially all our assets are pledged as collateral to these loans. As of September 30, 2007, the outstanding interest rate was 6.67% and principal balance under the credit agreement was $12.5 million.

In addition, SI has an outstanding demand loan of $450 thousand with CRG at an average rate of 8.0%. Other notes outstanding of $28 thousand will be due in 2009.

Aggregate maturities during the subsequent years are as follows (in thousands):

For the remainder of 2007		$	837
As of December 31,
2008			3,345
2009			3,346
2010			3,333
2011			1,667
			12,528
Demand loan			450
		$	12,978

The credit agreement contains certain customary covenants, including among other things covenants that limit or restrict the incurrence of liens; the making of investments; the incurrence of certain indebtedness; mergers, dissolutions, liquidation, or consolidations; acquisitions (other than certain permitted acquisitions); sales of substantially all of our or any co-borrowers’ assets; the declaration of certain dividends or distributions; transactions with affiliates (other than co-borrowers under the credit agreement) other than on fair and reasonable terms; and the creation or acquisition of any direct or indirect subsidiary of the company that is not a domestic subsidiary unless such subsidiary becomes a guarantor. We are also required to maintain compliance with certain financial covenants which include our tangible net worth, consolidated leverage ratios, consolidated fixed charge coverage ratios as well as customary covenants, representations and warranties, funding conditions and events of default. We are currently in compliance with all such covenants.

12. Stock Based Compensation

On August 24, 1999, the Board of Directors and stockholders approved the 1999 Stock Option Plan (the “1999 Plan”). The number of shares of common stock that may be issued under the 1999 Plan may not exceed 4,162,004 shares pursuant to an amendment to the plan executed in November 2001. As of September 30, 2007, we have 1,490,500 shares remaining to issue. We do not intend to issue further options under the 1999 Plan. Individual awards under the 1999 Plan may take the form of incentive stock options and nonqualified stock options.

On March 12, 2004 and May 5, 2004, the Board of Directors and stockholders, respectively, approved the 2004 Stock Option Plan (the “2004 Plan”) which became effective immediately prior to the consummation of the initial public offering. The 2004 Plan provides for the authorization to issue 2,775,000 shares of common stock. As of September 30, 2007, we have 598,504 shares remaining to issue. Individual awards under the 2004 Plan may take the form of incentive stock options and nonqualified stock options. Option awards are generally granted with an exercise price equal to the market price of our stock at the date of grant; those option awards generally vest over four years of continuous service and have ten year contractual terms.

On March 8, 2006 and May 24, 2006, the Board of Directors and stockholders, respectively, approved the 2006 Stock Incentive Plan (the “2006 Plan”). The 2006 Plan provides for the authorization to issue 2,500,000 shares of common stock. As of September 30, 2007, we have 1,777,000 shares remaining to issue. Individual awards under the 2006 Plan may take the form of incentive stock options, nonqualified stock options, restricted stock awards and/or restricted stock units. To date, only restricted stock units have been granted under the 2006 Plan. These awards generally vest over three and four years of continuous service.

The compensation committee administers the Plans, selects the individuals who will receive awards and establishes the terms and conditions of those awards. Shares of common stock subject to awards that have expired, terminated, or been canceled or forfeited are available for issuance or use in connection with future awards.

The 1999 Plan will remain in effect until August 24, 2009, the 2004 Plan will remain in effect until May 5, 2014 and the 2006 Plan will remain in effect until May 24, 2016, unless terminated by the Board of Directors.

Stock Options

The following table summarizes the Company’s stock option activity:

						Weighted				Weighted-Average				Aggregate
						Average				Remaining				Intrinsic
		Number of				Exercise				Contractual				Value
		Shares				Price				Life				(In thousands)
Outstanding at December 31, 2006			3,944,566			$	13.10
Granted			623,000				9.90
Canceled			(659,141	)			17.03
Exercised			(226,229	)			5.78
Outstanding at September 30, 2007			3,682,196			$	12.30				5.68			$	4,018
Exercisable at September 30, 2007			2,867,110			$	12.93				4.34			$	3,820

The weighted average grant date fair value of options granted during the nine months ended September 30, 2007 and 2006 was $6.39 and $5.51, respectively.

For options exercised, intrinsic value is calculated as the difference between the market price on the date of exercise and the exercise price. The total intrinsic value of options exercised during the nine months ended September 30, 2007 and 2006 was $963 thousand and $998 thousand, respectively.

Total stock based compensation recognized for stock options, which was included in general and administrative expense on our consolidated statement of operations, for the three months ended September 30, 2007 and 2006 was $256 thousand and $81 thousand, respectively. Total stock based compensation recognized for stock options for the nine months ended September 30, 2007 and 2006 was $658 thousand and $116 thousand, respectively.

As of September 30, 2007, there was $3.1 million of total unrecognized compensation cost related to nonvested stock option arrangements granted under the Plans. That cost is expected to be recognized over a weighted-average period of 3.2 years.

Restricted Stock Units

The following table summarizes our restricted stock unit activity:

						Weighted-Average				Aggregate
						Remaining				Fair
		Number of				Contractual				Value
		RSUs				Life				(In thousands)
Outstanding at December 31, 2006			459,000				2.2			$	4,333
Granted			336,000				3.4				3,326
Canceled			(34,228	)			—				(323	)
Vested			(93,760	)			—				(884	)
Forfeited			(77,000	)			—				(726	)
Outstanding at September 30, 2007			590,012				2.6			$	5,726

As of September 30, 2007 there was $4.3 million of total unrecognized compensation cost related to unvested restricted stock units granted under the Plans. That cost is expected to be recognized over a weighted-average period of 2.6 years.

Total stock based compensation recognized for restricted stock units, which was included in general and administrative expense on our consolidated statement of operations, for the three months ended September 30, 2007 and 2006 was $481 thousand and $573, respectively. Total stock based compensation recognized for restricted stock units for the nine months ended September 30, 2007 and 2006 was $1.4 million and $803 thousand, respectively.

13. Segment Reporting

We operate in three primary business segments: Consumer Products and Services, Background Screening, and Other. These segments are organized based on the differences in the products and services. Products and services provided by the Consumer Products and Services segment include daily, monthly or quarterly monitoring of subscribers’ credit files at one or all three major credit reporting agencies (Equifax, Experian and TransUnion), credit reports from one or all three major credit reporting agencies, credit score analysis tools, credit education, an identity theft recovery unit, security breach services, identity theft cost coverage and, through IISI, consumer discounts on healthcare, home and auto related expenses, access to professional and legal information, and life, accidental death and disability insurance products.

The Background Screening segment includes products and services related to pre-employment background screening, including criminal background checks, driving records, employment verification and reference checks, drug testing and credit history checks.

The Other segment consists of newly acquired Captira, which provides software and automated service solutions for the bail bonds industry. The operating impact of the Other segment is not material.

The following table sets forth segment information for the three and nine months ended September 30, 2007 and 2006:

		Consumer Products				Background
		and Services				Screening				Other				Consolidated
		(In thousands)
Three Months Ended September 30, 2007
Revenue		$	63,678			$	7,714			$	11			$	71,403
Depreciation and amortization			2,696				356				80				3,132
Income (loss) before income taxes		$	4,278			$	(1,185	)		$	(397	)		$	2,696
Three Months Ended September 30, 2006
Revenue		$	47,758			$	7,503				—			$	55,261
Depreciation and amortization			2,600				295				—				2,895
Income before income taxes		$	3,945			$	673				—			$	4,618
Nine Months Ended September 30, 2007
Revenue		$	172,506			$	22,191			$	11			$	194,708
Depreciation and amortization			7,902				1,023				80				9,005
Income (loss) before income taxes		$	8,418			$	(3,135	)		$	(397	)		$	4,886
Nine Months Ended September 30, 2006
Revenue		$	129,038			$	17,280				—			$	146,318
Depreciation and amortization			6,628				670				—				7,298
Income before income taxes		$	13,215			$	1,756				—			$	14,971
As of September 30, 2007
Property, plant and equipment, net		$	17,136			$	2,326			$	273			$	19,735
Identifiable assets		$	172,680			$	13,381			$	96			$	186,157
As of December 31, 2006
Property, plant and equipment, net		$	19,697			$	2,002				—			$	21,699
Identifiable assets		$	144,170			$	35,297				—			$	179,467

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

Overview

We have three reportable segments. Our Consumer Products and Services segment includes our consumer protection and other consumer products and services. Our Background Screening segment includes the personnel and vendor background screening services provided by Screening International. Our Other segment includes software solutions for the bail bonds industry provided by Captira Analytical, LLC.

Consumer Products and Services

We offer consumers a variety of consumer protection services and other consumer products and services primarily on a subscription basis. Our services help consumers protect themselves against identity theft or fraud and understand and monitor their credit profiles and other personal information. Through our acquisition of Intersections Insurance Services, formerly known as Chartered Marketing Services, Inc., in July of 2006, we expanded our portfolio of services to include consumer discounts on healthcare, home, and auto related expenses, access to professional financial and legal information, and life, accidental death and disability insurance products. Our consumer services are offered through relationships with clients, including many of the largest financial institutions in the United States and Canada, and clients in other industries. We also offer our services directly to consumers.

Our products and services are marketed to customers of our clients, and often are branded and tailored to meet our clients’ specifications. Our clients are principally credit card or mortgage issuing financial institutions, including many of the largest financial institutions in the United States and Canada. With certain of our financial institution clients, we have broadened our marketing efforts to access demand deposit accounts and selling at the point of personal contact in branches. Our financial institution clients currently account for the majority of our existing subscriber base. We also are continuing to augment our client base through relationships with insurance companies, mortgage companies, brokerage companies, associations, travel companies, retail companies, web and technology companies and other service providers with significant market presence and brand loyalty.

We also offer data security breach services to organizations responding to compromises of sensitive personal information. We help these clients notify the affected individuals and we provide the affected individuals with identity theft recovery and credit monitoring services offered by our clients at no charge to the affected individuals.

With our clients, our services are marketed to potential subscribers through a variety of marketing channels, including direct mail, outbound telemarketing, inbound telemarketing, inbound customer service and account activation calls, email, mass media and the internet. Our marketing arrangements with our clients sometimes call for us to fund and manage marketing activity. The mix between our company-funded and client-funded marketing programs varies from year to year based upon our and our clients’ strategies. We have substantially increased our own investment in marketing with one or more clients over the past nine months and anticipate this continuing over the next 12 months.

Our client arrangements are distinguished from one another by the allocation between us and the client of the economic risk and reward of the marketing campaigns. The general characteristics of each arrangement are described below, although the arrangements with particular clients may contain unique characteristics:

	•		Direct marketing arrangements: Under direct marketing arrangements, we bear most of the new subscriber marketing costs and pay our client a commission for revenue derived from subscribers. These arrangements generally result in negative cash flow over the first several months after a program is launched due to the upfront nature of the marketing investments. In some arrangements we pay the client a service fee for access to the client’s customers or billing of the subscribers by the client.
	•		Indirect marketing arrangements: Under indirect marketing arrangements, our client bears the marketing expense and pays us a service fee or percentage of the revenue. Because the subscriber acquisition cost is borne by our client under these arrangements, our revenue per subscriber is typically lower than that under direct marketing arrangements. Indirect marketing arrangements generally provide positive cash flow earlier than direct arrangements and the ability to obtain subscribers and utilize marketing channels that the clients otherwise may not make available.
	•		Shared marketing arrangements: Under shared marketing arrangements, marketing expenses are shared by us and the client in various proportions, and we may pay a commission to or receive a service fee from the client. Revenue generally is split in proportion to the investment made by our client and us.

The classification of a client relationship as direct, indirect or shared is based on whether we or the client pay the marketing expenses. Our accounting policies for revenue recognition, however, are not based on the classification of a client arrangement as direct, indirect or shared. We look to the specific client arrangement to determine the appropriate revenue recognition policy, as discussed in detail in Note 2 to our consolidated financial statements.

Our typical contracts for direct marketing arrangements, and some indirect and shared marketing arrangements, provide that after termination of the contract we may continue to provide our services to existing subscribers, for periods ranging from two years to no specific termination period, under the economic arrangements that existed at the time of termination. Under certain of our agreements, however, including most indirect marketing arrangements and some shared marketing arrangements, the clients may require us to cease providing services under existing subscriptions. Clients under some contracts may also require us to cease providing services to their customers under existing subscriptions if the contract is terminated for material breach by us. We look to the specific client arrangement to determine the appropriate revenue recognition policy.

In 2006 we began expanding our efforts to market our consumer products and services directly to consumers. We conduct our consumer direct marketing primarily through the internet. We also may market through other channels, including direct mail, outbound telemarketing, inbound telemarketing, email and mass media. We are in the process of making a significant investment in marketing direct to consumers in 2007.

The following table details other selected subscriber and financial data.

Other Data (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Subscribers at beginning of period			4,850				3,744				4,626				3,660
New subscribers — indirect			578				707				1,659				1,875
New subscribers — direct (1)			472				503				1,331				892
Cancelled subscribers within first 90 days of subscription			(258	)			(226	)			(768	)			(683	)
Cancelled subscribers after first 90 days of subscription			(691	)			(400	)			(1,897	)			(1,416	)
Subscribers at end of period			4,951				4,328				4,951				4,328
Total revenue		$	71,403			$	55,261			$	194,708			$	146,318
Revenue from transactional sales			(8,673	)			(9,600	)			(27,229	)			(22,379	)
Revenue from lost/stolen credit card registry			(7	)			(20	)			(37	)			(60	)
Subscription revenue		$	62,723			$	45,641			$	167,442			$	123,879
Marketing and commissions		$	23,382			$	13,862			$	61,155			$	36,461
Commissions paid on transactional sales			(2	)			(6	)			(11	)			(25	)
Commissions paid on lost/stolen credit card registry			(10	)			(9	)			(25	)			(22	)
Marketing and commissions associated with subscription revenue		$	23,370			$	13,847			$	61,119			$	36,414

Background Screening

Through our majority owned subsidiary Screening International, LLC, we provide personnel and vendor background screening services to businesses worldwide. Screening International was formed in May 2006, by combining our subsidiary American Background Services, Inc., with the background screening division of Control Risks Group, Ltd., a company based in the UK.

Other

Our Other segment includes the newly acquired Captira Analytical, LLC (“Captira”), which provides software and automated service solutions for the bail bonds industry, including office automation, bond inventory and client tracking, and public records and reports for the purpose of evaluating bond applications. On August 7, 2007, our wholly owned subsidiary, Captira Analytical LLC, acquired substantially all of the assets of Hide N’ Seek, LLC (“Seller”), an Idaho limited liability company, for $3.1 million, which included approximately $105 thousand in acquisition costs. Additional consideration up to approximately $2.5 million in cash is due if the Company achieves certain cash flow milestones in the future.

The pro forma impact of Captira or Hide N’Seek on the Company’s historical operating results is not material.

Critical Accounting Policies

In preparing our consolidated financial statements, we make estimates and assumptions that can have a significant impact on our financial position and results of operations. The application of our critical accounting policies requires an evaluation of a number of complex criteria and significant accounting judgments by us. In applying those policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions. We have identified the following policies as critical to our business operations and the understanding of our results of operations. For additional information, see Note 2 to our consolidated financial statements.

Revenue Recognition

We recognize revenue on 1) identity theft, credit management and background services and 2) accidental death insurance and other membership products.

Our products and services are offered to consumers primarily on a monthly subscription basis. Subscription fees are generally billed directly to the subscriber’s credit card, mortgage bill or demand deposit accounts. The prices to subscribers of various configurations of our products and services range generally from $4.99 to $25.00 per month. As a means of allowing customers to become familiar with our services, we sometimes offer free trial or guaranteed refund periods.

Identity Theft, Credit Management and Background Services

We recognize revenue from our services in accordance with Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements as amended by SAB No. 104, Revenue Recognition. Consistent with the requirements of SAB No.’s 101 and 104, revenue is recognized when: a) persuasive evidence of arrangement exists as we maintain signed contracts with all of our large financial institution customers and paper and electronic confirmations with individual purchases, b) delivery has occurred once the product is transmitted over the internet, c) the seller’s price to the buyer is fixed as sales are generally based on contract or list prices and payments from large financial institutions are collected within 30 days with no significant write-offs, and d) collectibility is reasonably assured as individual customers pay by credit card which has limited our risk of non-collection. Revenue for monthly subscriptions is recognized in the month the subscription fee is earned. For subscriptions with refund provisions whereby only the prorated subscription fee is refunded upon cancellation by the subscriber, deferred subscription fees are recorded when billed and amortized as subscription fee revenue on a straight-line basis over the subscription period, generally one year. We generate revenue from one-time credit reports and background screenings which are recognized when the report is provided to the customer electronically, which is generally at the time of completion.

Revenue for annual subscription fees must be deferred if the subscriber has the right to cancel the service. Annual subscriptions include subscribers with full refund provisions at any time during the subscription period and pro-rata refund provisions. Revenue related to annual subscription with full refund provisions is recognized on the expiration of these refund provisions. Revenue related to annual subscribers with pro-rata provisions is recognized based on a pro rata share of revenue earned. An allowance for discretionary subscription refunds is established based on our actual cancellation experience.

We also provide services for which certain financial institution clients are the primary obligors directly to their customers. Revenue from these arrangements is recognized when earned, which is at the time we provide the service, generally on a monthly basis. In addition, we generate revenue from the sale of one-time credit reports and background screens, which is generally at the time of completion.

The amount of revenue recorded by us is determined in accordance with Financial Accounting Standards Board’s (“FASB”) Emerging Issues Task Force (“EITF”) 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, which addresses whether a company should report revenue based on the gross amount billed to a customer or the net amount retained by us (amount billed less commissions or fees paid). We generally record revenue on a gross basis in the amount that we bill the subscriber when our arrangements with financial institution clients provide for us to serve as the primary obligor in the transaction, we have latitude in establishing price and we bear the credit risk for the amount billed to the subscriber. We generally record revenue in the amount that we bill our financial institution clients, and not the amount billed to their customers, when our financial institution client is the primary obligor, establishes price to the customer and bears the credit risk.

Accidental Death Insurance and other Membership Products

We recognize revenue from our services in accordance with SAB No. 101, as amended by SAB No. 104. Consistent with the requirements of SAB No.’s 101 and 104, revenue is recognized when: a) persuasive evidence of arrangement exists as we maintain paper and electronic confirmations with individual purchases, b) delivery has occurred at the completion of a product trial period, c) the seller’s price to the buyer is fixed as the price of the product is agreed to by the customer as a condition of the sales transaction which established the sales arrangement, and d) collectibility is reasonably assured as evidenced by our collection of revenue through the monthly mortgage payments of our customers or through checking account debits to our customers’ accounts. Revenues from insurance contracts are recognized when earned. Marketing of our insurance products generally involves a trial period during which time the product is made available at no cost to the customer. No revenues are recognized until applicable trial periods are completed.

The amount of revenue recorded by us is determined in accordance with FASB’s EITF 99-19, which addresses whether a company should report revenue based on the gross amount billed to a customer or the net amount retained by us (amount billed less commissions or fees paid). For insurance products we generally record revenue on a net basis as we perform as an agent or broker for the insurance products without assuming the risks of ownership of the insurance products. For membership products, we generally record revenue on a gross basis as we serve as the primary obligor in the transactions, have latitude in establishing price and bear credit risk for the amount billed to the subscriber.

We participate in agency relationships with insurance carriers that underwrite insurance products offered by us. Accordingly, insurance premiums collected from customers and remitted to insurance carriers are excluded from our revenues and operating expenses. Insurance premiums collected but not remitted to insurance carriers as of September 30, 2007 and December 31, 2006 totaled $2.1 million and $1.8 million, respectively, and is included in accrued expenses and other current liabilities in our consolidated financial statements.

Deferred Subscription Solicitation and Commission Costs

Deferred subscription solicitation and commission costs include direct-response marketing costs and deferred commissions.

Our deferred subscription solicitation costs consist of subscription acquisition costs, including telemarketing, web-based marketing expenses and direct mail such as printing and postage. Telemarketing, web-based marketing and direct mail expenses are direct response advertising costs, which are accounted for in accordance with American Institute of Certified Public Accountants Statement of Position (“SOP”) 93-7, Reporting on Advertising Costs. The recoverability of amounts capitalized as deferred subscription solicitation costs are evaluated at each balance sheet date, in accordance with SOP 93-7, by comparing the carrying amounts of such assets on a cost pool basis to the probable remaining future benefit expected to result directly from such advertising costs. Probable remaining future benefit is estimated based upon historical subscriber patterns, and represents net revenues less costs to earn those revenues. In estimating probable future benefit (on a per subscriber basis) we deduct our contractual cost to service that subscriber from the known sales price. We then apply the future benefit (on a per subscriber basis) to the number of subscribers expected to be retained in the future to arrive at the total probable future benefit. In estimating the number of subscribers we will retain (i.e., factoring in expected cancellations), we utilize historical subscriber patterns maintained by us that show attrition rates by client, product and marketing channel. The total probable future benefit is then compared to the costs of a given marketing campaign (i.e., cost pools), and if the probable future benefit exceeds the cost pool, the amount is considered to be recoverable. If direct response advertising costs were to exceed the estimated probable remaining future benefit, an adjustment would be made to the deferred subscription costs to the extent of any shortfall.

We amortize deferred subscription solicitation costs on a cost pool basis over the period during which the future benefits are expected to be received, but no more than 12 months.

In accordance with SAB No. 101, as amended by SAB No. 104, commissions that relate to annual subscriptions with full refund provisions and monthly subscriptions are expensed in the month incurred, unless we are entitled to a refund of the commissions. If annual subscriptions are cancelled prior to their initial terms, we are generally entitled to a full refund of the previously paid commission for those annual subscriptions with a full refund provision and a pro-rata refund, equal to the unused portion of their subscription, for those annual subscriptions with a pro-rata refund provision. Commissions that relate to annual subscriptions with full commission refund provisions are deferred until the earlier of expiration of the refund privileges or cancellation. Once the refund privileges have expired, the commission costs are recognized ratably in the same pattern that the related revenue is recognized. Commissions that relate to annual subscriptions with pro-rata refund provisions are deferred and charged to operations as the corresponding revenue is recognized. If a subscription is cancelled, upon receipt of the refunded commission from our client, we record a reduction to the deferred commission.

We have prepaid commission agreements with some of our clients. Under these agreements, we pay a commission on new subscribers in lieu of ongoing commission payments. We amortize these prepaid commissions over a period of time not to exceed three years. The prepaid commissions are shown in prepaid expenses and other current assets on our consolidated balance sheet. Amortization is included in commissions expense on our consolidated statement of operations.

Software Development Costs

We develop software for internal use and capitalize software development costs incurred during the application development stage in accordance with SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, and EITF 00-2, Accounting for Web Site Development Cost. Costs incurred prior to and after the application development stage are charged to expense. When the software is ready for its intended use, capitalization ceases and such costs are amortized on a straight-line basis over the estimated useful life, which is generally three to five years.

In accordance with SOP 98-1, the Company regularly reviews its capitalized software projects for impairment in accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We did not have any impairments in the three or nine months ended September 30, 2007.

Goodwill and Other Intangible Assets

We record as goodwill the excess of purchase price over the fair value of the identifiable net assets acquired. The determination of fair value of the identifiable net assets acquired was determined based upon a third party valuation and evaluation of other information.

SFAS No. 142, Goodwill and Other Intangible Assets, prescribes a two-step process for impairment testing of goodwill and intangibles with indefinite lives, which is performed annually, as well as when an event triggering impairment may have occurred. The first step tests for impairment, while the second step, if necessary, measures the impairment. We elected to perform our annual analysis during the fourth quarter of each fiscal year as of October 31 and no indicators of impairment have been identified.

Intangible assets subject to amortization include trademarks, customer, marketing and technology related asses. Such intangible assets, excluding customer related, are amortized on a straight-line basis over their estimated useful lives, which are generally three to ten years. Beginning in the nine months ended September 30, 2007 we modified our amortization method for customer related intangible assets prospectively in accordance with SFAS No. 154, Accounting Changes and Error Corrections. Customer related intangible assets are amortized on either a straight-line or accelerated basis, dependant upon the underlying.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are in the process of evaluating the impact, if any, that SFAS No.157 will have on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159 The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115. SFAS No. 159 permits an entity, at specified election dates, to choose to measure certain financial instruments and other items at fair value. The objective of SFAS No. 159 is to provide entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently, without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for accounting periods beginning after November 15, 2007. We are in the process of evaluating the impact, if any, that SFAS No. 159 will have on our consolidated financial statements.

In June 2007, EITF 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities, was issued and is effective for the fiscal years beginning January 1, 2008. EITF 07-3 requires that non-refundable advance payments for future research and development activities should be deferred and capitalized. We are in the process of evaluating the impact, if any, that EITF 07-3 will have on our consolidated financial statements.

Results of Operations

We have three reportable segments. Our Consumer Products and Services segment includes our consumer protection and other consumer products and services. Our Background Screening segment includes the personnel and vendor background screening services provided by Screening International. Our Other segment includes software solutions for the bail bonds industry provided by Captira Analytical, LLC.

Three Months Ended September 30, 2007 vs. Three Months Ended September 30, 2006 (in thousands):

The consolidated results of operations are as follows:

		Consumer
		Products				Background
		and Services				Screening				Other				Consolidated
Three Months Ended September 30, 2007
Revenue		$	63,678			$	7,714			$	11			$	71,403
Operating expenses:
Marketing			9,390				—				—				9,390
Commissions			13,992				—				—				13,992
Cost of revenue			22,366				4,662				46				27,074
General and administrative			10,804				3,882				282				14,968
Depreciation and amortization			2,696				356				80				3,132
Total operating expenses			59,248				8,900				408				68,556
Operating income (loss)		$	4,430			$	(1,186	)		$	(397	)		$	2,847
Three Months Ended September 30, 2006
Revenue		$	47,758			$	7,503			$	—			$	55,261
Operating expenses:
Marketing			6,473				—				—				6,473
Commissions			7,389				—				—				7,389
Cost of revenue			15,940				4,027				—				19,967
General and administrative			11,299				2,516				—				13,815
Depreciation and amortization			2,600				295				—				2,895
Total operating expenses			43,701				6,838				—				50,539
Operating income		$	4,057			$	665			$	—			$	4,722

Consumer Products and Services Segment

		Three Months Ended September 30,
		2007				2006				Difference				%
Revenue		$	63,678			$	47,758			$	15,920				33.3	%
Operating expenses:
Marketing			9,390				6,473				2,917				45.1	%
Commissions			13,992				7,389				6,603				89.4	%
Cost of revenue			22,366				15,940				6,426				40.3	%
General and administrative			10,804				11,299				(495	)			(4.4	)%
Depreciation and amortization			2,696				2,600				96				3.7	%
Total operating expenses			59,248				43,701				15,547				35.6	%
Operating income		$	4,430			$	4,057			$	373				9.2	%

Revenue. The increase in Consumer Products and Services is primarily the result of an increase in our subscriber base to 5.0 million subscribers for the three months ended September 30, 2007 from 4.3 million for the three months ended September 30, 2006, an increase of 14.4%. The growth in our subscriber base has been accomplished primarily through direct marketing efforts with a new client arrangement in 2007 and additional subscribers through continued indirect marketing efforts. Revenue from direct marketing arrangements, in which we recognize the gross amount billed to the customer, has increased 10.5% to 70.2% for the three months ended September 30, 2007 from 59.7% in the three months ended September 30, 2006.

The table below shows the percentage of subscribers generated from indirect marketing arrangements.

		Three Months Ended
		September 30,
		2007				2006
Percentage of subscribers from indirect marketing arrangements to total subscribers			63.1	%			69.1	%
Percentage of new subscribers acquired from indirect marketing arrangements to total new subscribers acquired			55.1	%			58.4	%
Percentage of revenue from indirect marketing arrangements to total subscription revenue			29.8	%			40.3	%

Marketing Expenses. Marketing expenses consist of subscriber acquisition costs, including telemarketing, web-based marketing and direct mail expenses such as printing and postage. The increase in marketing is primarily a result of an increased investment in marketing for direct marketing agreements. Amortization of deferred subscription solicitation costs related to marketing for the three months ended September 30, 2007 and 2006 were $9.2 million and $5.1 million, respectively. Subscription solicitation costs related to marketing costs expensed as incurred for the three months ended September 30, 2007 and 2006 were $215 thousand and $1.4 million, respectively.

As a percentage of revenue, marketing expenses increased to 14.7% for the three months ended September 30, 2007 from 13.6% for the three months ended September 30, 2006 primarily as the result of an increased investment in marketing for direct marketing arrangements.

Commission Expenses. Commission expenses consist of commissions paid to clients. The increase is related to revenue and subscribers from our direct subscription business and a new client arrangement in 2007.

As a percentage of revenue, commission expenses increased to 22.0% for three months ended September 30, 2007 from 15.5% for three months ended September 30, 2006 primarily due to increased proportion of revenue from direct marketing arrangements.

Cost of Revenue. Cost of revenue consists of the costs of operating our customer service and information processing centers, data costs and billing costs for subscribers and one-time transactional sales. The increase in Consumer Products and Services is primarily the result of $6.6 million in increased data costs, higher cost of revenue for initial fulfillment and customer service costs for new subscribers, which are incurred prior to the commencement of related revenue due to the trial periods, as well as a 14.4% growth in our customer base.

As a percentage of revenue, cost of revenue was 35.1% for the three months ended September 30, 2007 compared to 33.4% for the three months ended September 30, 2006.

General and Administrative Expenses. General and administrative expenses consist of personnel and facilities expenses associated with our executive, sales, marketing, information technology, finance, and program and account management functions. The decrease in Consumer Products and Services costs includes a $902 thousand decrease in consulting and professional fees, partially offset by increased payroll expenses.

Total share based compensation expense for the three months ended September 30, 2007 and 2006 was $737 thousand and $654 thousand, respectively.

As a percentage of revenue, general and administrative expenses decreased to 17.0% for the three months ended September 30, 2007 from 23.7% for the three months ended September 30, 2006.

Depreciation and Amortization. Depreciation and amortization expenses consist primarily of depreciation expenses related to our fixed assets and capitalized software, and the amortization of our intangible assets. This increase is primarily attributable to the increase in intangible assets as the result of the modification to the amortization method for customer related intangibles in 2007.

As a percentage of revenue, depreciation and amortization expenses decreased to 4.2% for the three months ended September 30, 2007 from 5.4% for the three months ended September 30, 2006.

Operating Income. Operating income in the three months ended September 30, 2007 for the Consumer Products and Services segment was $4.4 million. This compares with $4.0 million in the three months ended September 30, 2006. Operating income in the three months ended September 30, 2007 includes a net impact of $1.1 million in settlement payments from ongoing partner relationships in the normal course of business. Included in this amount is approximately a $1.5 million settlement with an ongoing marketing partner. The $1.5 million settlement related to prior periods and was calculated utilizing additional information received from the marketing partner in the three months ended September 30, 2007.

Background Screening Segment

		Three Months Ended September 30,
		2007				2006				Difference				%
Revenue		$	7,714			$	7,503			$	211				2.8	%
Operating expenses:
Cost of revenue			4,662				4,027				635				15.8	%
General and administrative			3,882				2,516				1,366				54.3	%
Depreciation and amortization			356				295				61				20.7	%
Total operating expenses			8,900				6,838				2,062				30.2	%
Operating (loss) income		$	(1,186	)		$	665			$	(1,851	)			(278.3	)%

Revenue. The increase is attributable to increased revenue in the UK operations of $249 thousand.

Cost of Revenue. Cost of revenue consists of the costs to fulfill background screens and is composed of direct labor costs, consultant costs, database fees and access fees. This increase is primarily the result of increased labor costs in the UK.

As a percentage of revenue, cost of revenue was 60.4% for the three months ended September 30, 2007 compared to 53.7% for the three months ended September 30, 2006.

General and Administrative Expenses. General and administrative expenses consist of personnel and facilities expenses associated with our sales, marketing, information technology, finance, and account management functions. The increase in Background Screening is primarily a result of continued investment in both the domestic, UK and Singapore operations.

As a percentage of revenue, general and administrative expenses increased to 50.3% for the three months ended September 30, 2007 from 33.5% for the three months ended June 30, 2006.

Depreciation and Amortization. Depreciation and amortization expenses consist primarily of depreciation expenses related to our fixed assets and capitalized software, and the amortization of our intangible assets.

As a percentage of revenue, depreciation and amortization expenses increased to 4.6% for the three months ended September 30, 2007 from 3.9% for the three months ended September 30, 2006.

Other Segment

			Three Months Ended September 30,
		2007				2006
Revenue		$	11			$	—
Operating expenses:
Cost of revenue			46				—
General and administrative			282				—
Depreciation and amortization			80				—
Total operating expenses			408				—
Operating loss		$	(397	)		$	—

     On August 7, 2007, our wholly owned subsidiary, Captira Analytical LLC, acquired substantially all of the assets of Hide N’ Seek, LLC (“Seller”), an Idaho limited liability company, for $3.1 million, which included approximately $105 thousand in acquisition costs. The purchase price consists of approximately $833 thousand in cash and the right to earn an additional amount of approximately $2.5 million in cash if the company achieves certain cash flow milestones in the future. In addition, Captira agreed to assume approximately $637 thousand in operating liabilities of the Seller and we agreed to cancel and forgive $1.5 million in loans from Intersections to the Seller and $67 thousand of accrued interest.

Captira is an early stage business and costs represent implementation efforts for this business.

Our consolidated effective tax rate for the three months ended September 30, 2007 was 47.1% as compared to 40.1% for the three months ended September 30, 2006. The increase is primarily a result of losses outside of the United States, which are subject to tax at rates different than the statutory income tax rate.

Nine Months Ended September 30, 2007 vs. Nine Months Ended September 30, 2006 (in thousands):

The consolidated results of operations are as follows:

		Consumer
		Products				Background
		and Services				Screening				Other				Consolidated
Nine Months Ended September 30, 2007
Revenue		$	172,506			$	22,191			$	11			$	194,708
Operating expenses:
Marketing			25,325				—				—				25,325
Commissions			35,830				—				—				35,830
Cost of revenue			61,755				13,269				46				75,070
General and administrative			32,966				11,020				282				44,268
Depreciation and amortization			7,902				1,023				80				9,005
Total operating expenses			163,778				25,312				408				189,498
Operating income (loss)		$	8,728			$	(3,121	)		$	(397	)		$	5,210
Nine Months Ended September 30, 2006
Revenue		$	129,038			$	17,280			$	—			$	146,318
Operating expenses:
Marketing			18,454				—				—				18,454
Commissions			18,007				—				—				18,007
Cost of revenue			45,383				8,834				—				54,217
General and administrative			28,543				6,017				—				34,560
Depreciation and amortization			6,628				670				—				7,298
Total operating expenses			117,015				15,521				—				132,536
Operating income		$	12,023			$	1,759			$	—			$	13,782