UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

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 March 31, 2005
		OR

o

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

     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 an accelerated filer (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:

17,041,647 shares of common stock, $0.01 par value, outstanding as of April 30, 2005.

Form 10-Q
March 31, 2005

Table of Contents

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

INTERSECTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

See Notes to Condensed Consolidated Financial Statements

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INTERSECTIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

See Notes to Condensed Consolidated Financial Statements

4

INTERSECTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

5

INTERSECTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See Notes to Condensed Consolidated Financial Statements

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

1. Organization and Business

Intersections Inc. (the “Company”), incorporated in the State of Delaware, is a financial information services company that provides identity theft protection and credit management services to consumers and primarily sells monthly subscriptions which provide for a consumer credit monitoring service. The Company and its financial institution clients market subscription programs to consumers throughout the United States using direct marketing techniques, mainly through inbound and outbound telemarketing and direct mail conducted primarily through endorsed co-marketing relationships with credit card issuers, as well as media advertising.

The Company’s Registration Statement for the sale of its common stock in an initial public offering was declared effective by the Securities and Exchange Commission on April 29, 2004. The Company offered and sold 3,000,000 primary shares of its common stock at an initial price of $17.00 per share, and certain selling stockholders offered and sold an additional 4,187,500 shares. The offering was completed with all shares of common stock having been sold on May 5, 2004. The net proceeds to the Company from the initial public offering, after deducting underwriting discounts and commissions payable by the Company, was $47.4 million. Proceeds to the Company are being and have been used for general corporate purposes. The completion of this stock offering resulted in the conversion of the Senior Secured Convertible Note and all outstanding preferred stock into 8,988,894 shares of common stock.

On November 12, 2004, the Company completed the acquisition of American Background Information Services, Inc. (“ABI”), a Virginia corporation. ABI provides businesses a variety of personnel risk management tools for the purpose of pre-employment background screening, including criminal background checks, driving records, employment verification and reference checks, drug testing and credit history checks.

2. Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America. 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. Certain information and footnote disclosures included in complete financial statements have been either condensed or omitted. For further information, refer to our Annual Report on Form 10-K for the year ended December 31, 2004 filed on March 30, 2005. Financial results for the period may not be reflective of results anticipated for the entire year.

On May 5, 2004, the Company effected a 554.9338-for-one stock split of its common stock. All share and per share amounts included in the accompanying financial statements have been restated to reflect the stock split.

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.

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Revenue Recognition

We receive revenue from existing recurring subscriptions, the sale of new subscriptions and one-time transaction sales including personnel screening. Subscription fees recognized as revenue by us are generally billed to the subscriber’s credit card on a monthly basis directly by our client or through our credit card processor. A percentage of our revenue is received by some of our clients as a commission.

The point in time that the Company records revenue is determined in accordance with Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”). Revenue for monthly subscriptions is recognized in the month the subscription fee is earned. For contracts with refund provisions whereby only the prorated subscription fee is returned upon cancellation by the subscriber, deferred subscription fees are recorded when billed and amortized as revenue on a straight-line basis over the subscription period, generally one year. As of March 31, 2005 and December 31, 2004, the accompanying consolidated balance sheets include deferred revenue of $3,524,523 and $3,538,786, respectively, from such programs. Revenue for annual subscription fees must be deferred if the subscriber has the right to cancel the service and receive a full refund at any time during the subscription period. The Company recognizes a pro rata share of revenue earned upon expiration of the full refund period. As of March 31, 2005 and December 31, 2004, deferred revenue includes $148,336 and $152,324, respectively, for such deferred subscription fees. An allowance for refunds on monthly subscriptions is established based on the Company’s historical experience.

The Company also provides membership services to customers of certain financial institution clients that pay the Company to provide such services directly to their customers. Revenue from these arrangements is recognized when earned which is at the time that the Company provides the services to the financial institution client, generally on a monthly basis.

The amount of revenue recorded by the Company is determined in accordance with the FASB’s 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 the company (amount billed less commissions or fees paid). The Company generally records revenue on a gross basis in the amount that is billed to the subscriber when its arrangements with financial institution clients provide for the Company to serve as the primary obligor in the transaction, the Company has latitude in establishing price, the Company bears the risk of physical loss of inventory, and the Company bears credit risk for the amount billed to the subscriber. The Company generally records revenue in the amount billed to its financial institution clients, and not the amount billed to the customer, when the Company’s financial institution client is the primary obligor, establishes price to the customer and bears the credit risk.

The Company also generates revenue from one-time transactions including credit reports and background screens which are recognized when the report is provided to the customer electronically, which is at the time of completion.

Deferred Subscription Solicitation Costs

The Company generally defers subscription solicitation costs, which primarily consist of direct-response marketing costs. Direct-response marketing costs include telemarketing 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 more than one year.

The recoverability of the 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. Probable remaining future benefit is estimated based upon historical customer patterns, and represents net revenues less costs to earn those revenues.

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Deferred subscription solicitation costs as of March 31, 2005 and December 31, 2004 were $9,536,317 and $9,185,196, respectively. Amortization of deferred subscription solicitation costs for the period ended March 31, 2005 and 2004 were $5,389,922 and $5,436,236, respectively. Subscription solicitation costs expensed as incurred in the period ended March 31, 2005 and 2004 were $54,402 and $116,123, respectively.

Stock-Based Compensation

The Company has elected to continue to follow the recognition and measurement principals of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations for its stock-based employee compensation plan. Accordingly, the Company measured compensation expense using the intrinsic value method which yielded no compensation cost for the three months ended March 31, 2005 and 2004, as all options were granted at or above the estimated fair market value of the underlying common stock on the date of grant.

Had compensation expense been determined consistent with the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — An Amendment of SFAS 123”, the Company’s net income would have been as follows:

For SFAS No. 123 purposes, 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:

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3. Earnings Per Share

Basic and diluted income per share amounts are determined in accordance with the provisions of SFAS No. 128, “Earnings Per Share”. Basic income per share is computed using the weighted average number of shares of common stock outstanding during the year. 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 options, warrants, convertible debt and preferred stock. For the quarters ended March 31, 2005 and 2004, options to purchase 1,543,083 and 368,338 shares of common stock, respectively, have been excluded from the computation of diluted earnings per share as their effect would be anti-dilutive. These shares could dilute earnings per share in the future.

In April 2004, the Company completed an initial public offering of its common stock that resulted in the conversion of the senior secured convertible note and all outstanding preferred stock into 8,988,894 shares of common stock. The following table depicts income per share on an actual basis for the three months ended March 31, 2005 and 2004, and on a pro forma basis for March 31, 2004 giving effect to the conversion as if the conversion occurred on January 1, 2004.

4. Segment Reporting

The Company operates in two primary business segments: Identity Theft and Credit Management Services and Personnel Screening. These segments are organized based on the differences in the products and services. The accounting policies of the segments are the same as those described in the Critical Accounting Policies (see Management’s Discussion and Analysis of Financial Condition and Results of Operations).

Products and services provided by the Identity Theft and Credit Management 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 and identity theft cost coverage.

The Personnel 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.

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The following table sets forth segment information for the three months ended March 31, 2005 and 2004. Prior to the acquisition of ABI on November 12, 2004, the Company provided only services related to the Identity Theft and Credit Management Services segment.

5. Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”, or SFAS No. 123R. SFAS No. 123R replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and subsequently issued stock option related guidance. This statement was further amended on April 14, 2005 to extend the date for compliance to the beginning of our next fiscal year. This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. Entities will be required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification.

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We are required to apply SFAS No. 123R, as amended, to all awards granted, modified or settled as of the beginning of our next fiscal year. We are also required to use either the modified-prospective method or modified-retrospective method. Under the modified-prospective method, we must recognize compensation cost for all awards subsequent to adopting the standard and for the unvested portion of previously granted awards outstanding upon adoption. Under the modified-retrospective method, we must restate our previously issued financial statements to recognize the amounts we previously calculated and reported on a pro forma basis, as if the prior standard had been adopted. Under both methods, we are permitted to use either the straight line or an accelerated method to amortize the cost as an expense for awards with graded vesting. The standard permits and encourages early adoption.

We have commenced our analysis of the impact of SFAS No. 123R, but have not yet decided: (1) whether we elect to early adopt, (2) if we elect to early adopt, what date we would do so, (3) whether we will use the modified-prospective or modified-retrospective method, and (4) whether we will elect to use straight line or an accelerated method. Accordingly, we have not determined the impact that the adoption of SFAS No. 123R will have on our financial position or results of operations.

6. Subsequent Event

On April 25, 2005, we announced that our Board of Directors had authorized a share repurchase program under which we can repurchase up to $20 million of our outstanding shares of common stock from time to time, depending on market conditions, share price and other factors. The repurchases may be made on the open market, in block trades, through privately negotiated transactions or otherwise, and the program may be suspended or discontinued at any time. Subsequent to April 25, 2005, we repurchased 739,822 shares of our common stock at an aggregate investment of approximately $6.6 million, or $8.84 per share on a weighted average basis.

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

Overview

We provide identity theft protection and credit management services on a subscription basis to our subscribers. Our services are principally marketed to customers of our clients and branded and tailored to meet our clients’ specifications. Our clients are principally credit and charge card issuing financial institutions. Our subscribers purchase our services either through arrangements with our clients or directly from us. We also provide pre-employment background screening including criminal background checks, driving records, employment verification and reference checks, drug testing and credit history checks to businesses.

Our identity theft protection and credit management services include daily, monthly or quarterly monitoring of our subscribers’ credit files at one or all three of the major credit reporting agencies, Equifax, Experian and TransUnion. We deliver our services online or by mail to our subscribers in a user-friendly format. We also offer credit score analysis tools, credit education, an identity theft resource unit, security breach services and identity theft cost coverage.

We also provide personnel risk management tools for the purpose of pre-employment background screening, including criminal background checks, driving records, employment verification and reference checks, drug testing and credit history checks. These services are provided to a variety of businesses ranging from small businesses to Fortune 500 companies in a variety of industries such as manufacturing, healthcare, telecommunications and retail.

The following table details other selected subscriber and financial data.

Other Data:

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(2) We exclude from subscribers those customers of our clients who are receiving, on a subscription basis, a small subset of our service which is purchased by the client on behalf of the customer and offered to a large customer base.

Recent Developments

On April 25, 2005, we announced that our Board of Directors had authorized a share repurchase program under which we can repurchase up to $20 million of our outstanding shares of common stock from time to time, depending on market conditions, share price and other factors. The repurchases may be made on the open market, in block trades, through privately negotiated transactions or otherwise, and the program may be suspended or discontinued at any time. Subsequent to April 25, 2005, we repurchased 739,822 shares of our common stock at an aggregate investment or approximately $6.6 million, or $8.84 per share on a weighted average basis.

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.

Revenue Recognition

We receive revenue from existing recurring subscriptions, the sale of new subscriptions and one-time transaction sales including personnel screening. Subscription fees recognized as revenue by us are generally billed to the subscriber’s credit card on a monthly basis directly by our client or through our credit card processor. The prices to subscribers of various configurations of our services range from $4.99 to $12.99 per month. A percentage of our revenue is received by some of our clients as a commission.

The point in time at which we recognize revenue from our services is determined in accordance with Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements”. 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. Revenue for annual subscription fees must be deferred if the subscriber has the right to cancel the service and receive a full refund at any time during the subscription period. We recognize a pro rata portion of revenue earned upon expiration of the full refund period. An allowance for monthly 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 also generate revenue from one-time transactions including credit reports and background screens which are recognized when the report is provided to the customer electronically, which is at the time of completion.

The amount of revenue recorded by us is determined in accordance with FASB’s 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 the company (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 risk of physical loss of inventory and 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.

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Deferred Subscription Solicitation Costs

Our deferred subscription solicitation costs consist of subscription acquisition costs, including telemarketing and direct mail expenses such as printing and postage, and commissions paid to clients. Telemarketing 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” (“SOP 93-7”). 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 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. The period of time in which we amortize these costs reflects historical subscriber patterns, but has historically not exceeded 12 months. We amortize these costs on an accelerated basis, in conjunction with our historical attrition patterns.

In accordance with SAB No. 101, “Revenue Recognition in Financial Statements,” 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.

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 Costs”. 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 years.

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In accordance with SOP 98-1, the Company regularly reviews its capitalized software projects for impairment in accordance with the provisions of FAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. As such, in the first quarter of 2005, we re-assessed the development effort related to our small business product in an effort to launch the product sooner and with less additional investment. Consequently, we decided to adopt an alternative approach resulting in the recognition of an impairment loss of approximately $1.4 million related to software development costs. In addition, we agreed with a client to change certain processes that required new software resulting in an additional impairment loss of approximately $150,000.

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 and attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. While the projection of future taxable income is always dependent on certain estimates and assumptions, we anticipate generating taxable income sufficient to realize the net deferred tax asset during the year ending December 31, 2005.

Goodwill and Other Intangibles

We review the carrying value of our goodwill and other intangible assets and assess the remaining estimated useful lives of our intangible assets in accordance with Financial Accounting Standards Board (“FASB”) Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). We review the carrying value of our goodwill and intangible assets for impairment by comparing such amounts to their fair values. We are required to perform this comparison at least annually or more frequently if circumstances indicate possible impairment. The Company will perform the impairment test as of October 31^st of each year. When determining fair value, we utilize various assumptions. A change in these underlying assumptions would cause a change in the results of the tests and, as such, could cause fair value to be less than the carrying amounts. In such an event, we would then be required to record a corresponding charge which would negatively impact earnings. The goodwill and intangible balances at March 31, 2005 pertain to the acquisition of ABI on November 12, 2004 and represent a preliminary allocation of the purchase price and are subject to final determination.

Three Months Ended March 31, 2005 vs. Three Months Ended March 31, 2004

Revenue. Revenue increased 1.1% to $38.6 million for the quarter ended March 31, 2005 from $38.2 million for the quarter ended March 31, 2004. Revenue was reduced for the quarter ended March 31, 2005 by approximately 19% due to our new marketing and services agreement with Capital One Services, Inc. (“Capital One”) that became effective on September 1, 2004, of which a portion of the terms became effective January 1, 2005. Prior to the new agreement, revenue was recognized on a gross basis in the amount billed to the subscriber because we served as the primary obligor in the transaction, had latitude in establishing price and bore the physical loss of inventory and credit risk for the amount billed to the subscriber. Under the new agreement, the client serves as the primary obligor, has latitude in establishing price and bears the credit risk for the amount billed to the subscriber. As a result, pursuant to the new agreement, we record revenue based on the amount billed to the client not the amount billed to the subscriber. These revised terms and the corresponding change in revenue recognition for this new agreement will impact our expenses as a percentage of revenue. Marketing and commission expenses will decrease as a percentage of revenue while cost of revenue, general and administrative expenses and depreciation and amortization expense will increase as a percentage of revenue.

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The decrease in revenue attributable to Capital One was partially offset as our subscription base increased to 2.98 million subscribers for the quarter ended March 31, 2005 from 2.44 million for the quarter ended March 31, 2004, an increase of 22.3%, in addition, we recognized $2.9 million in revenue associated with ABI. The growth in our subscriber base has been accomplished primarily through continued marketing efforts with existing clients. As shown in the table below, an increasing percentage of our subscribers and revenue is generated from indirect marketing arrangements.

Marketing and Commission Expenses. Marketing and commission expenses consist of subscriber acquisition costs, including telemarketing and direct mail expenses such as printing and postage, as well as commissions paid to clients. Marketing and commission expenses decreased 37.1% to $11.7 million for the quarter ended March 31, 2005 from $18.6 million for the quarter ended March 31, 2004. Marketing expenses related to subscriber acquisition costs remained flat at $4.8 million for both the quarter ended March 31, 2005 and the quarter ended March 31, 2004. Commission expenses decreased 49.9%, to $6.9 million for the quarter ended March 31, 2005 from $13.8 million for the quarter ended March 31, 2004. The decrease in commission expense is primarily the result of the revised terms in the amendment to the marketing and services agreement with Capital One described in the Revenue section above. As a percentage of revenue, marketing and commission expenses decreased to 30.3% for the quarter ended March 31, 2005 from 48.7% for the quarter ended March 31, 2004. In addition to the revised terms in the amendment to the marketing and services agreement with Capital One, the decrease in marketing and commission as a percentage of revenue is also due to our changing mix of increasing indirect subscribers and associated revenue where we do not pay any marketing and commission costs.

Cost of Revenue. Cost of revenue consists of the costs of operating our customer service and information processing centers, data costs, costs to provide background investigations and billing costs for subscribers and one-time transactional sales. Cost of revenue increased 41.4% to $13.1 million for quarter ended March 31, 2005 from $9.3 million for the quarter ended March 31, 2004. Costs associated with providing background investigations accounted for approximately $ 1.4 million, or 36.9%, of the increase. We did not begin providing background investigations until the fourth quarter of 2004 as a result of the acquisition of ABI. Data costs accounted for approximately $1.7 million, or 43.2%, of the increase and costs associated with operating our customer service and information processing centers accounted for approximately $650,000, or 17.0%, of the increase primarily due to an increase in our subscriber base. As a percentage of revenue, cost of revenue was 34.0% for the quarter ended March 31, 2005 compared to 24.3% for the quarter ended March 31, 2004. The increase is primarily a result of the revised terms in the amendment to the marketing and services agreement with Capital One described in the Revenue section above and the increasing percentage of indirect marketing arrangements.

General and Administrative Expenses. General and administrative expenses consist of personnel and facilities expenses associated with our executive, sales, marketing, information technology, finance, program and account management functions. General and administrative expenses increased 45.3% to $8.0 million for quarter ended March 31, 2005 from $5.5 million for the quarter ended March 31, 2004. Approximately $1.4 million, or 54.5%, of the increase is related to general and administrative expenses of ABI. Approximately $700,000, or 28.1%, of the increase is attributable to payroll and consulting costs. The remaining approximately $400,000, or 17.4%, is related to various overhead expenses as a result of our growth and being a public company. As a percentage of revenue, general and administrative expenses increased to 20.7% for the quarter ended March 31, 2005 from 14.4% for the quarter ended March 31, 2004. The increase is primarily the result of the revised terms in the amendment to the marketing and services agreement with Capital One described in the Revenue section above, the increasing percentage of indirect marketing arrangements and the increased costs associated with being a public company including directors’ and officers’ insurance, investor relations programs and increased professional fees primarily related to meeting the compliance requirements of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002. As of March 31, 2005, we have incurred approximately $300,000 in expenses related to meeting compliance requirements of the Sarbanes-Oxley Act of 2002, including Section 404, and expect to incur additional expenses for the remainder of the year in the range of $250,000 to $400,000.

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Depreciation and Amortization. Depreciation and amortization expenses consist primarily of depreciation expenses related to our fixed assets and capitalized software and the amortization of intangible assets. Depreciation and amortization increased 65.8% to approximately $1.5 million for the quarter ended March 31, 2005 from $880,000 for the quarter ended March 31, 2004 primarily as a result of over $10 million in capital expenditures since the first quarter of 2004 as we continue to expand our infrastructure to meet our growth and as a result of the acquisition of ABI. As a percentage of revenue, depreciation and amortization expenses increased to 3.8% for the quarter ended March 31, 2005 from $2.3% for the quarter ended March 31, 2004.

Impairment of Software Development Costs. During the quarter ended March 31, 2005, we re-assessed the development effort related to our small business product in an effort to launch the product sooner and with less additional investment. Consequently, we decided to adopt an alternative approach resulting in the recognition of an impairment loss of approximately $1.4 million related to software development costs. In addition, we agreed with a client to change certain processes that required new software resulting in an additional impairment loss of approximately $150,000.

Operating Income. Operating income decreased 28.8% to $2.8 million for the quarter ended March 31, 2005 from $3.9 million for the quarter ended March 31, 2004. Excluding the impairment of software development costs of approximately $1.5 million, operating income would have increased approximately $380,000, or 9.8%, from the quarter ended March 31, 2004. As a percentage of revenue, operating income was 7.2% for the quarter ended March 31, 2005 compared to 10.3% for the quarter ended March 31, 2004. Excluding the impairment of software development costs of approximately $1.5 million, operating income, as a percentage of revenue, would have been 11.2% for the quarter ended March 31, 2005. Operating income during the quarter ended March 31, 2005 was negatively impacted as a result of the revised terms in the amendment to the marketing and services agreement with Capital One, of which a portion of the terms became effective January 1, 2005. In addition, the increase in indirect marketing arrangements and the changes in client and product mix within these arrangements also negatively impacted operating income.

Provision for Income Taxes. Our effective tax rate for the quarter ended March 31, 2005 was 40.4%. This is higher than our effective tax rate for the quarter ended March 31, 2004 of 38.9% due primarily to the amortization of intangible assets of $90,000 associated with the acquisition of ABI, which are not tax deductible. Excluding the amortization of intangible assets, our effective tax rate would have been 39.2%.

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Liquidity and Capital Resources

The Company’s Registration Statement for the sale of its common stock in an initial public offering was declared effective by the Securities and Exchange Commission on April 29, 2004. The Company offered and sold 3,000,000 primary shares of its common stock at an initial price of $17.00 per share, and certain selling stockholders offered and sold an additional 4,187,500 shares. The offering was completed with all shares of common stock having been sold on May 5, 2004. The net proceeds to the Company from the initial public offering, after deducting underwriting discounts and commissions and expenses payable by the Company, was $44.9 million. The completion of this stock offering resulted in the conversion of the Senior Secured Convertible Note and all outstanding preferred stock into 8,988,894 shares of common stock. Approximately $20.2 million of the proceeds was utilized by us in connection with the acquisition in November 2004 of American Background Services Inc., including approximately $1.4 million to retire American Background’s outstanding bank debt. The balance has been retained by us for general corporate purposes.

At March 31, 2005, our cash and cash equivalents balance was $7.6 million compared to $12.0 million as of December 31, 2004. Our cash and cash equivalents are highly liquid investments and consist primarily of short-term U.S. Treasury securities with a maturity of less than 90 days. Our investment balance at March 31, 2005 was $39.6 million compared to $40.2 million at March 31, 2005. Our investments consist of short-term U.S. Treasury securities with a maturity greater than 90 days but no greater than six months.

Our accounts receivable balance as of March 31, 2005 was $11.3 million, including approximately $1.6 million related to ABI, compared to $10.0 million as of December 31, 2004. Our accounts receivable balance consists of both credit card transactions that have been approved but not yet deposited to our account, several large balances with some of the top financial institutions and accounts receivable associated with background screening clients. The likelihood of non-payment has historically been remote with respect to clients billed under indirect marketing arrangements, however, we do provide for an allowance for doubtful accounts with respect to background screening clients and for a refund allowance against transactions that may be refunded in subsequent months. This allowance is based on historical results.

Our liquidity is impacted by our ability to generate cash from operations and working capital management. Working capital decreased to $52.8 million as of March 31, 2005 compared to $56.0 million as of December 31, 2004. The decrease in working capital is primarily the result of a $5.5 million payment during the quarter ended March 31, 2005 associated with prepaid royalty payments in connection with certain exclusive rights under two agreements which provide for the receipt of data and other information to be used primarily in our identity theft prevention product under development and changes in assets and liabilities.

Net cash used in operations was $3.0 million for the quarter ended March 31, 2005 compared to net cash provided by operations of $4.4 million for the quarter ended March 31, 2004. The $7.4 million decrease in net cash provided by operations was impacted by the payment of $5.5 million associated with prepaid royalty payments in connection with certain exclusive rights under two agreements which provide for the receipt of data and other information to be used primarily in our identity theft prevention product under development and changes in assets and liabilities.

Net cash used in investing activities, which is primarily related to the acquisition of property and equipment, was $2.1 million for both the quarter ended March 31, 2005 and the quarter ended March 31, 2004.

Net cash provided by financing activities was $620,000 for the quarter ended March 31, 2004 compared to net cash used in financing activities of $300,000 for the quarter ended March 31, 2003. The increase in net cash provided by financing activities is related to cash generated from the exercise of stock options.

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Our short-term capital needs consist primarily of day-to-day operating expenses, capital expenditures of approximately $10 million and contractual obligations with respect to facility leases, capital equipment leases and software licenses. We expect future cash flow to be generated by operations and our existing cash balances will provide sufficient resources to meet our short-term obligations. Long-term capital requirements will consist of capital expenditures required to sustain our growth and contractual obligations with respect to facility leases, capital equipment leases, software licenses and service agreements. We anticipate that continued cash generated from operations as well as existing cash balances will provide sufficient resources to meet our long-term obligations.

We expect to incur significant marketing and commission expenses in the future as we continue our marketing efforts with existing clients and potential new clients. We expect to generate net income and positive cash flow for at least the next 12 months. We expect our general and administrative expenses will increase in the future as we expand our personnel and infrastructure to meet our growth and as we incur additional costs related to being a public company, including directors’ and officers’ insurance, investor relations programs and increased professional fees primarily related to meeting the compliance requirements of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002. Based on current plans, we believe that our existing cash and cash equivalents and investments combined with expected positive cash flow will be sufficient to fund our operations for at least the next 12 months.

Forward Looking Statements

Certain written and oral statements made by or on our behalf may constitute “forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995. Words or phrases such as “should result,” “are expected to,” “we anticipate,” “we estimate,” “we project,” or similar expressions are intended to identify forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in any forward-looking statements. These risks and uncertainties include, but are not limited to, those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2004 filed on March 30, 2005, and the following important factors: demand for our services, product development, maintaining acceptable margins, maintaining secure systems, ability to control costs, the impact of federal, state and local regulatory requirements on our business, specifically the consumer credit market, the impact of competition, ability to continue our long-term business strategy including growth through acquisition, ability to attract and retain qualified personnel and the uncertainty of economic conditions in general. Readers are cautioned not to place undue reliance on forward-looking statements, since the statements speak only as of the date that they are made, and we undertake no obligation to publicly update these statements based on events that may occur after the date of this report.

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Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures. We carried out an evaluation as of the end of the period covered by this report, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operations of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-14 and 15d-14. Based upon that evaluation, the chief executive officer and chief financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be included in our periodic SEC filings.

Changes in control over financial reporting. There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

On May 5, 2004, we closed the sale of 7,187,500 shares of our common stock, at a price of $17.00 per share in a firm commitment underwritten initial public offering, of which 3,000,000 of the shares were sold by us and the remaining 4,187,500 shares were sold by selling stockholders. The offering was effected pursuant to a Registration Statement on Form S-1 (File No. 333-111194), which the Securities and Exchange Commission declared effective on April 29, 2004.

Of the $51.0 million in gross proceeds raised by us in the offering:

     1. approximately $3.57 million was paid to the underwriters in connection with underwriting discounts and commissions;

     2. approximately $2.5 million was paid or accrued by us in connection with offering fees and expenses; and

     3. approximately $20.2 million was paid or accrued by us in connection with our acquisition in November 2004 of American Background Services, Inc., including approximately $1.4 million to retire American background’s outstanding bank debt; and

     4. the balance has been retained by us for general corporate purposes and is invested in short-term, interest-bearing, U.S. Treasury securities.

Item 6. Exhibits and Reports on Form 8-K

31.1	Certification of Michael R. Stanfield, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Debra R. Hoopes, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Michael R. Stanfield, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Debra R. Hoopes, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: May 16, 2005

	INTERSECTIONS INC.
	By:	/s/  Debra R. Hoopes
		Debra R. Hoopes
		Chief Financial Officer (principal financial and accounting officer)

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