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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

x		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2002

OR

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                              to                              

Commission file number 0-26149

US SEARCH.COM INC.

5401 Beethoven Street, Los Angeles, CA 90066
(Address of principal executive offices, including zip code)

(310) 302-6300
(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) Yes x No o and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

     There were 96,992,327 shares of outstanding Common Stock of the registrant as of November 1, 2002.

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US SEARCH.COM INC.

Form 10-Q for the quarterly period ended September 30, 2002

INDEX

Part I.		FINANCIAL INFORMATION
		Item 1.		Financial Statements
				Consolidated Statements of Operations for the three and nine month periods ended September 30, 2002 and 2001
				Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001
				Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2002 and 2001
				Notes to Consolidated Financial Statements
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
		Item 3.		Quantitative and Qualitative Disclosures about Market Risk
		Item 4.		Controls and Procedures
Part II.		OTHER INFORMATION
		Item 1.		Legal Proceedings
		Item 2.		Changes in Securities and Use of Proceeds
		Item 3.		Defaults Upon Senior Securities
		Item 4.		Submission of Matters to a Vote of Security Holders
		Item 5		Other Information
		Item 6.		Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
INDEX TO EXHIBITS

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PART I. FINANCIAL INFORMATION

     Item 1. Financial Statements

US SEARCH.com Inc.

The accompanying notes are an integral part of these statements.

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US SEARCH.com Inc.

The accompanying notes are an integral part of these statements.

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US SEARCH.com Inc.

The accompanying notes are an integral part of these statements.

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US SEARCH.COM INC.

1. Organization and Business:

     US SEARCH.com Inc. (the “Company”) provides individual reference services and background information about individuals. The Company was formed as a California S Corporation in 1994, and reincorporated as a Delaware corporation in April 1999. On December 28, 2001 the Company acquired all of the outstanding stock of Professional Resource Screening, Inc. (“PRSI”), which provides pre-employment screening services primarily to large corporations, including Fortune 1000 companies in the United States.

2. Summary of Significant Accounting Policies:

Basis of Presentation

     These unaudited financial statements and accompanying notes prepared in accordance with instructions to Form 10-Q have been condensed and, therefore, do not contain certain information included in the Company’s annual financial statements and accompanying notes. Therefore, you should read these unaudited condensed financial statements in conjunction with the Company’s annual financial statements included in the annual report on Form 10-K.

     The unaudited condensed financial statements reflect, in the opinion of management, all adjustments which are of a normal recurring nature, necessary to present fairly the financial position of the Company as of September 30, 2002, and the results of its operations for the three and nine month periods ended September 30, 2002 and 2001. Interim results are not necessarily indicative of results to be expected for a full fiscal year.

     Principles of Consolidation. The financial statements include the accounts of US SEARCH.com Inc. and its wholly owned subsidiary. All material inter-company accounts and transactions have been eliminated in consolidation.

Net Loss Per Share

     Basic net loss per common share is computed using the weighted average number of shares of common stock outstanding and diluted net loss per common share is computed using the weighted average number of shares of common stock and common equivalent shares outstanding. Common equivalent shares related to convertible preferred stock, convertible notes payable, stock options and warrants are excluded from the computation when their effect is anti-dilutive. As of September 30, 2002, stock options representing 19,757,470 shares of common stock and warrants representing 10,407,019 shares of common stock have been excluded from the calculation of diluted earnings per share because their inclusion would be anti-dilutive. As of September 30, 2001, stock options representing 13,237,561 shares of common stock and warrants representing 1,750,000 shares of common stock and 8,750 shares of preferred stock, have been excluded from the calculation of diluted earnings per share because their inclusion would be anti-dilutive. Also excluded at September 30, 2001 are 42,107,303 common shares that were issuable on conversion of Series A-1 convertible preferred stock.

Management’s Plans

     Since inception, the Company has experienced negative cash flows from operations. The Company had a working capital deficit of $1,625,000 and an accumulated deficit of $95,799,000 as of September 30, 2002. Based on our current operating plans, management believes existing cash resources and cash forecasted by management to be generated by operations and potentially available from a renegotiated bank financing arrangement will be sufficient to meet working capital and capital requirements through at least the next twelve months. Management’s plans to attain profitability and generate additional cash flows include, increasing revenues from enterprise and consumer services, focusing on cost reductions and operational efficiencies to be derived from further deployment of US SEARCH’s technologies, and the launch of additional products. There is no assurance that management will be

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successful with these plans. However, if events and circumstances occur such that US SEARCH does not meet its current operating plan as expected, and US SEARCH is unable to raise additional financing, US SEARCH may be required to reduce certain discretionary spending, which could have a material adverse effect on US SEARCH’s ability to achieve its’ intended business objectives.

Reclassifications

     Certain reclassifications have been made to the 2001 financial statements to conform to the 2002 presentation.

3. Notes Payable:

     In December 2001, the Company issued a $3,500,000 promissory note to Pequot Private Equity Fund II, L.P. (“Pequot”). The promissory note bore interest at a rate of eight percent (8%) per annum and, if not previously converted into common stock, was due and payable on December 20, 2002. This note and accrued interest automatically converted into 6,922,399 shares of common stock at the conversion price of $0.5292 on July 18, 2002.

     In January 2002, the Company issued 8% Convertible Promissory Notes due January 17, 2003 in the aggregate principal amount of $4,600,000 and four year warrants to purchase up to an aggregate of 1,782,176 shares of common stock at an initial exercise price of $1.044 per share. These notes and accrued interest automatically converted into 9,143,182 shares of common stock at the conversion price of $0.5292 on July 18, 2002.

     In March 2002, the Company issued 8% Convertible Promissory Notes due December 20, 2002 in the aggregate principal amount of $6,075,000 ($5,700,000 in proceeds net of issuance costs) and five year warrants to purchase up to an aggregate of 2,144,118 shares of our common stock at an initial exercise price of $1.044 per share. The Company also issued warrants to purchase 714,706 shares of common stock at an exercise price of $0.85 per share to the principals of the offering placement agent. These notes and accrued interest automatically converted into 11,798,470 shares of common stock on July 18, 2002.

     In accordance with Accounting Principles Board Opinion No. 14 “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants”, the relative fair value of the warrants issued in conjunction with the December, January and March notes (the “Notes”) totaled $452,000 and $730,000 and, $892,000, respectively. Warrants issued to the placement agent had a fair value of $315,000. Such amounts were being recorded as interest expense over the terms of the notes. On conversion of the notes, on July 18 2002, the remaining unamortized discount relating to these warrants and issuance costs of $1.9 million was recorded as interest expense.

     In July 2002, upon the conversion of the 8% Convertible Promissory Notes with an aggregate principal amount of $14,226,000, the Company recorded as additional interest expense a non-cash charge of $11,749,000 for a beneficial conversion feature (BCF) relating to the Notes. The BCF was computed based on the difference between the effective conversion price per share and the fair value of the common stock on the commitment date, multiplied by the number of shares into which the promissory notes were convertible, limited to the amount of proceeds allocated to the notes at the commitment date.

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     During July 2002, the Company entered into an agreement to settle a note payable for $525,000. The settlement agreement resulted in a gain of $61,000 which was recorded in the accompanying statement of operations during the three months ended September 30, 2002. As of September 30, 2002, the Company has repaid $300,000 of the amount due, and is obligated to repay the remaining $225,000 in monthly installments of $75,000 through December 2002.

4. Bank Debt

     On August 7, 2002, the Company entered into an agreement with Comerica Bank to amend its loan and security agreement (“Amendment Number Two”). The Comerica facility was amended to reduce the revolving credit line to $1,000,000 from $3,000,000. Amounts under the borrowing base line may be advanced based on up to 80% of eligible receivables as defined in the agreement. Borrowings under the revolving credit line are due and payable on March 26, 2003. Total borrowings under the revolving credit facility totaled $1,000,000 at September 30, 2002.

     Significant financial covenants with which the Company must comply include operating performance requirements, minimum EBITDA requirements and a debt/tangible net worth ratio. Additionally, in accordance with the terms of Amendment Number Two, the amount of unrestricted cash the Company must maintain on deposit with the bank was reduced from $1,250,000 to $250,000. As of September 30, 2002, the Company must also maintain deposits of approximately $800,000 with the bank as collateral for credit card processing and a standby letter of credit. Effective April 2002, the Company placed a $750,000 deposit with the bank to collateralize an outstanding standby letter of credit. The letter of credit and the required deposit is reduced by $83,333 per month and matures on November 30, 2002. The amount of the letter of credit and the collateral deposit at October 1, 2002 was $166,000. The Company was in compliance with or had received a bank waiver of covenants at September 30, 2002.

     In connection with a previous amendment to the loan and security agreement, the Company agreed to issue the bank a warrant to purchase 55,487 shares of the Company’s common stock at an exercise price of $0.85 per share. The warrant expires on March 14, 2007. As a result of the issuance of the warrant, the Company recorded a non-cash charge of $24,000, which is included in debt issuance costs for the period ended September 30, 2002.

5. Capital Stock

     During the nine months ended September 30, 2002, the Company issued to certain vendors a warrant, which matures March 5, 2007, to purchase 75,000 shares at an exercise price of $1.20 per share; and a warrant, which matures on January 3, 2005, to purchase 137,143 shares at an exercise price of $0.01 per share.

     As of close of business on July 18, 2002, Pequot Private Equity Fund II, L.P., the holder of all 203,113 shares of Series A-1 Convertible Preferred Stock outstanding on that date, elected to convert all of its Series of A-1 Convertible Preferred Stock into Common Stock. The conversion price of the Series of A-1 Convertible Preferred Stock was $0.48237 per share, which resulted in the issuance of an aggregate of 42,107,303 shares of Common Stock upon conversion of the Series of A-1 Convertible Preferred Stock.

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6. Commitments And Contingencies

Strategic Alliance Commitments

     The Company has several cancelable and non-cancelable distribution and marketing agreements with various Internet companies. The terms of these agreements provide for varying levels of exclusivity and minimum and maximum fees payable based on the number of banners, buttons and text links displayed on affiliate web sites. At September 30, 2002, the minimum non-cancelable payments due under these agreements are approximately $825,000 for the remainder of 2002, approximately $3,300,000 for 2003, and approximately $550,000 for 2004.

     The Company has entered into an agreement with a supplier of online public records data. At September 30, 2002, the non-cancelable payments under this agreement are $207,000 due in 2002 and $690,000 due in 2003.

Legal Proceedings

     On April 3, 2000, a two count trade name and service mark complaint was filed against US SEARCH in the United States District Court for the Eastern District of Virginia, styled U.S. Search, LLC v USSearch.com Inc. Civil Action No. 00-554-A. On January 26, 2001, our motion for summary judgment was granted and the court ordered that both counts of plaintiff’s complaint be dismissed with prejudice. The Plaintiff has appealed the judgment to the U.S. Court of Appeals, Fourth Circuit. The hearing on appeal was held June 6, 2002. On August 16, 2002, the Court of Appeals affirmed the grant of summary judgment in favor of the Company.

     In May 2001, ChoicePoint, Inc., the successor entity to DBT Online, Inc., filed a complaint against us in Palm Beach County, Florida alleging breach of contract, fraudulent misrepresentation, unjust enrichment, quantum meruit and breach of the implied covenant of good faith and fair dealing. The Complaint sought approximately $1.5 million in damages, as well as interest and attorneys’ fees. We removed this action to the United States District Court for the Southern District of Florida. The United States District Court for the Southern District of Florida ordered the matter to arbitration. An arbitration hearing was held in April 2002 and in June 2002 the arbitration awarded us a credit of $297,671 to be deducted from invoices of $1,418,731. ChoicePoint has filed a Motion to Confirm the Arbitration Award and we have filed a Motion to Modify and correct the Arbitration Award to provide additional credits. We are awaiting the District Court’s ruling on these motions. While awaiting a ruling on the motions, we paid $100,000 of the Award during the three months ended September 30, 2002. We have approximately $979,000 accrued for this liability at September 30, 2002. The costs related to this litigation to date have been less than $100,000. As of November 1, 2002 the Company had paid a total of $300,000 towards the settlement amount, resulting in an accrued liability of approximately $779,000.

     On June 25, 2002, a complaint seeking $434,000 in damages was filed against Professional Resource Screening, Inc. in Superior Court of California, County of Contra Costa, styled Wood Warren & Co. v. Professional Resource Screening, Inc., No.C02-01816, alleging breach of an oral agreement relating to investment banking services, negligent misrepresentation, promissory estoppel, equitable estoppel and quantum meruit. Although it is too early to predict the outcome of this litigation, the Company believes it has meritorious defenses to plaintiff’s claims.

     The Company may from time to time become a party to various legal proceedings arising in the ordinary course of business.

7. Unaudited Pro Forma Results of Operations for the Nine and Three Months Ended September 30, 2001

     Unaudited pro forma consolidated results of operations are presented in the table below for the nine and three months ended September 30, 2001. The proforma results of operations reflect the acquisition of Professional Resource Screening, Inc., which are not reflected in the September 30, 2001 historical results, as if the acquisition was consummated as of January 1, 2001. Historical results for the nine and three months ended September 30, 2002, which include the results of Professional Resource Screening, Inc. for the entire period, are presented for comparability.

		Nine Months				Nine Months				Three Months				Three Months
		Ended				Ended				Ended				Ended
		September 30, 2002				September 30, 2001				September 30, 2002				September 30, 2001
(in thousands)		Historical				Pro Forma				Historical				Pro Forma
Net revenue		$	22,616			$	20,859			$	8,427			$	6,300
Net loss			(21,281	)			(8,686	)			(14,572	)			(3,089	)
Net loss attributable to common stockholders			(21,281	)			(21,664	)			(14,572	)			(3,089	)
Net loss per share attributable to common stockholders		$	(0.46	)		$	(0.81	)		$	(0.18	)		$	(0.12	)

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     These unaudited pro forma results have been prepared for comparative purposes only and include material adjustments, such as amortization of identifiable intangible assets and interest on installment obligations. The results do not purport to be indicative of the results of operations which actually would have resulted had the combination been in effect on January 1, 2001, or of future results of operations of the consolidated company.

8. Related Party Transactions

     In accordance with the Agreement and Plan of Merger, dated as of December 28, 2001, by and among the Company, Professional Resource Screening, Inc. (“PRSI”), Irwin R. Pearlstein, Cheryl Pearlstein-Enos and David Pearlstein (the “Merger Agreement”), on December 28, 2001, the Company issued 8,148,148 shares of common stock to the former shareholders of PRSI. Pursuant to the Merger Agreement on January 31, 2002 the Company issued an additional 651,852 shares of common stock to the former shareholders of PRSI.

     In connection with the acquisition of PRSI, the company recorded acquisition obligations of $2,556,000, representing the present value of future installment obligations to be made to the selling shareholders. The installment obligation of $3,000,000 bears no interest, and was discounted by $444,000. During the nine month period ended September 30, 2002, the company made installment payments of $750,000 to the former shareholders of PRSI.

     Lawrence D. Lenihan, Jr., a member of the Board of Directors of the Company, is Managing Director of Pequot Capital Management, the general partner of Pequot Private Equity Fund II, L.P. (“Pequot”) which beneficially holds 54.16% of our outstanding common stock.

     As of the close of business on July 18, 2002, Pequot, the holder of the 203,113 shares of Series A-1 Convertible Preferred Stock, elected to convert all of its Series A-1 Convertible Preferred Stock into Common Stock. The conversion price of the Series A-1 Convertible Preferred Stock was $0.48237 per share, which resulted in the issuance of an aggregate of 42,107,303 shares of Common Stock upon conversion of the Series A-1 Convertible Preferred Stock.

     On December 20, 2001, the Company sold to Pequot for $3,500,000 an 8% Convertible Promissory Note due December 20, 2002 in the principal amount of $3.5 million (the “December Note”) and a four year warrant to purchase up to an aggregate of 1,117,497 shares of Common Stock at an initial exercise price of $1.044 per share (the “December Warrant”). On July 18, 2002, the December Note automatically converted into Common Stock pursuant to the terms of the December Notes. The conversion price of the notes was $0.5292 per share, which resulted in the issuance of an aggregate 6,922,399 shares of Common Stock upon conversion of the December Note and accrued interest.

     Alan C. Mendelson, a director of the Company, is a partner at Latham & Watkins, a law firm which provides legal services to the Company. The Company incurred legal fees of $49,000 and $273,000 to Latham & Watkins during the three and nine months ended September 30, 2002, respectively. The Company incurred legal fees of $82,000 and $176,000 to Latham & Watkins during the three and nine months ended September 30, 2001, respectively.

     Harry B. Chandler, a director of the Company, is the Executive Vice President of Overture, Inc. (formerly Goto.com), an internet search provider which provides advertising services to the Company. During the three and nine month periods ended September 30, 2002, the Company incurred $81,000 and $227,000, respectively, for fees to Overture.

9. Goodwill

     In connection with the Merger Agreement (Note 8), and as more fully described in Note 10 of Notes to the Financial Statements for the year ended December 31, 2001, the purchase price of $14,353,000 was reduced by the contingent purchase consideration pending the outcome of a revenue contingency. The Merger Agreement provides that in the event that net revenues for PRSI for 2002 are less than $9,000,000, the selling shareholders will be required to return $500,000 plus any shortfall in revenues below $9,000,000 in cash or company stock. In accordance with SFAS 142, at December 28, 2001, the Company did not record $4,500,000 of the purchase price representing that portion of the purchase price deemed contingent. At December 31, 2001, Management estimated that achieving a revenue threshold above $5,000,000 could not be assured beyond a reasonable doubt, as specified in SFAS 142.

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     During the three months ended September 30, 2002, revenues for PRSI exceeded the previously estimated $5,000,000 threshold by $1,720,000, and the Company recorded additional goodwill of $1,720,000 to recognize additional purchase price to the extent that revenue contingencies were resolved. Additional purchase consideration will be recorded in the three months ending December 31, 2002 as revenue contingencies are resolved.

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

Forward-Looking Statements

     THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE PURSUANT TO THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON OUR CURRENT EXPECTATIONS, ESTIMATES AND PROJECTIONS ABOUT THE COMPANY’S BUSINESS, MANAGEMENT’S BELIEFS AND ASSUMPTIONS MADE BY MANAGEMENT. WORDS SUCH AS “ANTICIPATES,” “EXPECTS,” “INTENDS,” “PLANS,” “BELIEVES,” “SEEKS,” “ESTIMATES,” “LIKELY”, VARIATIONS OF SUCH WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT TO PREDICT; THEREFORE, ACTUAL RESULTS AND OUTCOMES MAY DIFFER MATERIALLY FROM WHAT IS EXPRESSED OR FORECASTED IN ANY SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE THOSE SET FORTH BELOW UNDER “FACTORS AFFECTING OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION” AND OUR OTHER PUBLIC FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. WE UNDERTAKE NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.

Overview

     US SEARCH provides a full range of location and verification services to enterprises, consumers and small and medium sized business clients including identity verification, individual location, criminal record checks, employment and education verifications, professional reference checks, credit and motor vehicle record checks, drug screening, and pre-employment screening services. We are able to deliver location verification and screening services through our proprietary web-based applications and our patent pending US SEARCH DARWIN technology. Our services can be accessed through our Web sites, USSEARCH.com, ussearch.com/business or prsinet.com, or by calling our toll free telephone numbers, 1-800-USSEARCH for consumers, 1-877-327-2410 for small and medium businesses or 1-800-232-0247 for large businesses.

     Our consumer and small and medium enterprise products provide direct (Internet and telephone) individual locator, and other public record searches to consumers and these services and pre-employment screening

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services to small and medium-sized businesses. Our enterprise product provides employment screening and risk mitigation services to large enterprises and organizations.

     Due to the high level of automation, certain of our services can be conducted instantly online. We also offer assisted searches and screening services, both online and through our toll free telephone number.

	•		Enterprise services. We provide large businesses, government agencies and other large employers with a variety of employment screening, background check and risk mitigation products and services via an online, Web-based system that enables instant ordering and prompt delivery of results. Customers can customize their search and decision parameters online using a “drag-and-drop” browser interface. Our employment screening products include social security number traces, federal and state felony and misdemeanor record searches, employment and education verification, and credit histories. We also provide character reference checks and drug screening via third party providers. We also offer a Management Services program that provides customers with an outsourced solution to background investigations, which includes analysis of developed investigation data, management of FCRA communications, legal compliance, and direct applicant contact.
	•		Consumer-focused services. We provide consumer clients and small and medium sized businesses with a single, comprehensive access point to a broad range of information to assist them in locating individuals or to learn more information about people in their lives or with whom they do business. Our consumer clients can obtain public information including addresses, aliases, phone numbers, property ownership, court records, professional license verification, corporate affiliations and death record information. We also offer nanny and contractor background check services for consumers and employment screening for small businesses.

     Prices for our non-instant consumer and small and medium business services have ranged from approximately $20 to $395 per search. Prices for “Instant Searches” range from approximately $10 to $15 per search. Prices for our large business services range from $3 to $495. The prices for our services vary based on the nature and amount of information and whether or not the search is assisted by a search specialist.

     Revenue for our services is recognized when the results are delivered to the client. The terms of sale do not provide for refunds after our services have been delivered, however, in instances where the clients indicate that the initial search result was unsuccessful, we may perform another search or provide a refund at our discretion. In addition, where clients desire additional information they can request to broaden the scope of their “Instant Searches” and we apply up to a portion of the cost of the client’s “Instant Searches” towards the cost of the more comprehensive search.

     Our cost of services consists primarily of payroll and benefits, data acquisition costs, and local and long distance telephone charges associated with providing our services, and payment processing costs. Our cost of services is likely to increase with increasing revenue levels. The Company has entered into an agreement with a supplier of online public record data. At September 30, 2002, the non-cancelable payments under this agreement are $207,000 in 2002 and $690,000 in 2003.

     Our operating expenses consist primarily of selling, marketing, general and administrative expenses and information technology costs. We expect our operating expenses to increase as we attempt to expand our corporate sales force and our product lines.

     Selling and marketing expenses constitutes a significant portion of our operating expenses. Internet advertising expenses are the most significant selling and marketing expense. The Company has several cancelable and non-cancelable distribution and marketing agreements with various Internet companies. The terms of these agreements provide for varying levels of exclusivity and minimum and maximum fees payable based on the number of banners, buttons and text links displayed on affiliate web sites. At September 30, 2002, the minimum non-cancelable payments due under these agreements are approximately $825,000 for 2002, and $3,300,000 for 2003, and $550,000 for 2004.

     We expect our selling and marketing expenses to increase as we attempt to expand our products and our market reach in both the consumer and enterprise services groups.

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     Information technology expenses consist primarily of the compensation and benefits for employees and consultants involved in development, network administration, planning and maintenance of our infrastructure. Certain costs associated with the development of software for internal use are capitalized. Information technology costs are expected to increase with the continuing development of proprietary technology.

Results of Operations

Comparison of the Three Months Ended September 30, 2002 to the Three Months Ended September 30, 2001

     Net Revenues. Our net revenues increased from approximately $4.5 million for the three months ended September 30, 2001 to approximately $8.4 million for the three months ended September 30, 2002, representing a 86.6% increase. Approximately $2.5 million of the increase is attributable to our acquisition of PRSI in December 2001 and the Company’s entrance into the enterprise services sector. The remaining $1.4 million increase was due to growth in the Company’s consumer business. Through a combination of establishing new channel partnerships, strengthening existing channel partnership relationships, and implementing enhanced search technology, the Company was able to increase internet traffic to its website and improve customer conversion rates for the consumer business.

     Gross Profit. Gross profit increased from approximately $3.5 million for the three months ended September 30, 2001, to approximately $5.9 million for the three months ended September 30, 2002, representing a 70.1% increase. Gross profit as a percentage of net revenues was approximately 70.2% and 77.0% for the three month periods ended September 30, 2002 and 2001, respectively. The decrease in gross margin reflects the change in product mix as a result of the Company’s December 2001 acquisition of PRSI, which has a lower gross margin than the consumer business, offset by cost reductions in the Company’s consumer business. Increased automation in our consumer business, which resulted in a reduction in direct labor expense for the consumer business, also contributed to an increase in gross profit.

     Selling and Marketing Expenses. Selling and marketing expenses increased by $500,000 to $3.0 million for the three month period ended September 30, 2002 as compared to $2.5 million for the 2001 period. The change is the net result of an increase of $440,000 due to the December 2001 acquisition of PRSI and $450,000 due to increased advertising costs and the addition of new Internet advertising providers. These increases are partially offset by reductions in other costs, consisting primarily of a $340,000 reduction in selling and marketing labor costs. Although costs increased, selling and marketing expenses were 35.3% of sales for the three months ended September 30, 2002 compared to 54.4% of sales for the three months ended September 30, 2001. The decrease in the ratio of selling and marketing expenses to sales is a result of the Company’s efforts to reduce customer acquisition costs and to implement more efficient means of marketing by taking steps such as developing better channel partnerships.

     Information Technology Expenditures. Information technology expenditures decreased by $350,000 for the three-month period ended September 30, 2002 as compared to the 2001 period. The change is the net result of a $105,000 increase due to the December 2001 acquisition of PRSI, primarily offset by a $245,000 reduction in payroll costs due to a reduction in headcount, and a $100,000 decrease in consulting costs due to implementation of certain of the Company’s internally developed software.

     General and Administrative Expenses. General and administrative expenses for the three months ended September 30, 2002 increased by $166,000 compared to the same period in 2001. The change is primarily the result of a $479,000 increase due to the December 2001 acquisition of PRSI, a $186,000 increase in depreciation expense as a result of the initial implementation of certain of the Company’s internally developed software, partially offset by a $135,000 reduction in legal fees. Additionally, there was a net $407, 000 reduction in credit card dispute chargebacks and related chargeback fees. To achieve the reduction in chargebacks, the Company introduced several new credit card authentication procedures to verify credit card transactions.

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     Interest Expense, Net. Interest expense, net of interest income, was $13,882,000 for the three months ended September 30, 2002 as compared to $96,000 for the same period in 2001. In July 2002, upon the conversion of the 8% Convertible Promissory Notes with an aggregate principal amount of $14,226,000, the Company recorded as additional interest expense a non-cash charge of $11,749,000 for a beneficial conversion feature relating to the Notes. Included in interest expense for 2002 are non-cash interest charges of $1,932,000 related to the amortization of discounts and issuance costs on the Company’s convertible notes payable. During July 2002 the Company wrote off all remaining discounts on the convertible notes upon conversion of the notes. Interest expense also includes $126,000 related to the amortization of debt issuance costs incurred in conjunction with the Company’s bank credit facility.

     Other Income (Expense), Net. Other expense, net of other income, was $140,000 for the three months ended September 30, 2002 as compared to $3,000 for the same period in 2001. In July 2002, upon the conversion of the 8% Convertible Promissory Notes with an aggregate principal amount of $14,226,000, the Company wrote off approximately $140,000 of financing costs.

Comparison of the Nine Months Ended September 30, 2002 to the Nine Months Ended September 30, 2001

     Net Revenues. Our net revenues increased from approximately $14.5 million for the nine months ended September 30, 2001 to approximately $22.6 million for the nine months ended September 30, 2002, representing a 56.4% increase. Approximately $6.7 million of the increase is attributable to our acquisition of PRSI in December 2001 and the Company’s entrance into the enterprise services sector. The remaining $1.4 million increase is due to an increase in the Company’s consumer services business. Through a combination of establishing new channel partnerships, strengthening existing channel partnership relationships, and implementing enhanced search technology, the Company was able to increase internet traffic to it’s website and improve customer conversion rates for the consumer business.

     Gross Profit. Gross profit increased from approximately $10.9 million for the nine months ended September 30, 2001, to approximately $15.9 million for the nine months ended September 30, 2002, representing a 45.3% increase.

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Gross profit as a percentage of net revenues was approximately 70.3% and 75.7% for the nine month periods ended September 30, 2002 and 2001, respectively. The decrease in gross margin reflects the change in product mix as a result of the Company’s December 2001 acquisition of PRSI, which has a lower gross margin than the consumer business, offset by cost reductions in the Company’s consumer business. Increased automation in our consumer business resulting in a reduction of direct labor expense also contributed to the increase in gross profit.

     Selling and Marketing Expenses. Selling and marketing expenses increased by $1.2 million to $8.9 million for the nine month period ended September 30, 2002 as compared to $7.7 million for the 2001 period. The change is the net result of an increase of $1,455,000 due to the December 2001 acquisition of PRSI, and $1,256,000 due to increased advertising costs and the addition of new Internet advertising providers, partially offset by a $1,036,000 reduction in selling and marketing labor costs. There was also a net reduction of approximately $491,000 in other discretionary selling and marketing costs, consisting of miscellaneous costs such as consulting fees, travel and entertainment costs, and public relations fees. Although costs increased, selling and marketing expenses were 39.3% of sales for the nine months ended September 30, 2002 compared to 53.3% of sales for the nine months ended September 30, 2001. The decrease in the ratio of selling and marketing expenses to sales is a result of the Company’s efforts to reduce customer acquisition costs and to implement more efficient means of marketing by taking steps such as developing better channel partnerships.

     Information Technology Expenditures. Information technology expenditures decreased by $784,000 for the nine-month period ended September 30, 2002 as compared to the 2001 period, due primarily to a $893,000 reduction in payroll costs due to reduction in headcount, a $288,000 net reduction in consulting fees due to implementation of certain of the Company’s internally developed software, and a $175,000 increase in software maintenance fees. Additionally, during the three-month period ended September 30, 2002, the Company reversed accruals of approximately $129,000 as it determined that activities related to those accruals were settled for less than the amounts originally estimated. These net cost reductions were partially offset by the $409,000 of increased costs resulting from the December 2001 acquisition of PRSI.

     General and Administrative Expenses. General and administrative expenses for the nine months ended September 30, 2002 increased by $2,324,000 compared to the same period in 2001. The change is primarily the result of a $1,829,000 increase due to the December 2001 acquisition of PRSI and a $644,000 increase in depreciation expense as a result of initial implementation of certain of the Company’s internally developed software. Additionally, there was a net $346,000 reduction in credit card dispute chargebacks and related chargeback fees. To achieve the reduction in chargebacks, the Company introduced several new credit card authentication procedures to verify credit card transactions. There was also a net increase of approximately $197,000 in other miscellaneous costs.

     Interest Expense, Net. Interest expense, net of interest income, was $15,956,000 for the nine months ended September 30, 2002 as compared to $897,000 for the same period in 2001. In July 2002, upon the conversion of the 8% Convertible Promissory Notes with an aggregate principal amount of $14,226,000, the Company recorded as additional interest expense a non-cash charge of $11,749,000 for a beneficial conversion feature relating to the Notes. Included in interest expense for 2002 are non-cash interest charges of $3,430,000 related to the amortization of discounts and issuance costs on the Company’s convertible and vendor notes payable. During July 2002 the Company wrote off all remaining discounts on the convertible notes upon conversion of the notes. Interest expense also includes $528,000 related to the amortization of debt issuance costs incurred in conjunction with the Company’s bank credit facility.

     Other Income (Expense), Net. Other expense, net of other income, was $134,000 for the nine months ended September 30, 2002 as compared to $26,000 for the same period in 2001. In July 2002, upon the conversion of the 8% Convertible Promissory Notes with an aggregate principal amount of $14,226,000, the Company wrote off approximately $140,000 of financing costs.

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Liquidity and Capital Resources

     As of September 30, 2002, cash and cash equivalents has decreased to $3.5 million (including $1.1 million of restricted cash pledged as collateral in connection with the Company’s credit facility) from $3.9 million (including $750,000 of restricted cash) at December 31, 2001.

     Cash used in operations was $7.0 million for each of the nine-month periods ended September 30, 2002 and 2001. The cash used in operations during the 2002 period is the result of continued operating losses and the growth in accounts receivable due to the Company’s entrance into the enterprise services sector.

     Cash used in investing activities decreased to $1.9 million for the nine months ended September 30, 2002 as compared to $3.6 million for the nine months ended on September 30, 2001. This is attributable to reduced investment in software development because of the completion and implementation of certain projects, reduced computer equipment purchases and license fees.

     Cash provided by financing activities was approximately $8.2 million for the nine months ended September 30, 2002 as compared to $10.4 million for the nine months ended September 30, 2001. The cash provided in the 2002 period is primarily attributable to $10.2 million in net cash proceeds from issuance of our January and March 2002 convertible notes payable, partially offset by $697,000 of payments made in conjunction with our December 2001 acquisition of PRSI, the repayment of $1.1 million in obligations to financial institutions and other unrelated third parties, and the increase in restricted cash of $305,000 in accordance with our amended credit facility.

     On August 7, 2002, the Company entered into an agreement with Comerica Bank to amend its loan and security agreement (“Amendment Number Two”). The Comerica facility was amended to reduce the revolving credit line to $1,000,000 from $3,000,000. Amounts under the borrowing base line may be advanced based on up to 80% of eligible receivables as defined in the agreement. Borrowings under the revolving credit line are due and payable on March 26, 2003. Total borrowings under the revolving credit facility totaled $1,000,000 at September 30, 2002. Pursuant to the terms of Amendment Number Two, all further credit advances under the revolving credit line are subject to credit approval by the bank.

     Significant financial covenants with which the Company must comply include operating performance requirements, minimum EBITDA requirements and a debt/tangible net worth ratio. In accordance with the terms of Amendment Number Two, the amount of unrestricted cash the Company must maintain on deposit with the bank was reduced from $1,250,000 to $250,000. As of September 30, 2002, the Company must also maintain deposits of $800,000 with the bank as collateral for credit card processing and a standby letter of credit. Effective April 2002, the Company placed a $750,000 deposit with the bank to collateralize an outstanding standby letter of credit. The letter of credit and the required deposit is reduced by $83,333 per month and matures on November 30, 2002. The amount of the letter of credit and the collateral deposit at October 1, 2002 was $166,000.

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     In December 2001, we issued 8% Convertible Promissory Notes due December 20, 2002 in the aggregate principal amount of $3.5 million. In January 2002, we issued 8% Convertible Promissory Notes due January 17, 2003 in the aggregate principal amount of $4.6 million. In March 2002, we issued 8% Convertible Promissory Notes due December 20, 2002 in the aggregate principal amount of $6.1 million with net proceeds of $5.7 million. At the 2002 Annual Meeting of Stockholders, held on July 18, 2002, the Company’s stockholders approved the issuance of the shares of common stock underlying the notes and, consequently, these notes and accrued interest automatically converted into common stock on July 18, 2002. These notes, with an aggregate principal amount of $14.2 million and accrued interest, converted into 27,864,051 shares of common stock.

     As of close of business on July 18, 2002, Pequot Private Equity Fund II, L.P., the holder of all 203,113 shares of Series A-1 Convertible Preferred Stock, elected to convert all of its Series of A-1 Convertible Preferred Stock into Common Stock. The conversion price of the Series A-1 Convertible Preferred Stock was $0.48237 per share, which resulted in the issuance of an aggregate of 42,107,303 shares of common stock upon conversion of the Series of A-1 Convertible Preferred Stock.

     Since inception, we have experienced negative cash flows from operations. We had a working capital deficit of $1.6 million and an accumulated deficit of $95.8 million as of September 30, 2002. Based on our current operating plans, management believes existing cash resources and cash forecasted by management to be generated by operations and potentially available from a renegotiated bank financing arrangement will be sufficient to meet working capital and capital requirements through at least the next twelve months. Management’s plans to attain profitability and generate additional cash flows include, increasing revenues from enterprise and consumer services, focusing on cost reductions and operational efficiencies to be derived from further deployment of our technologies, and the launch of additional products. There is no assurance that management will be successful with these plans. If we are unable to meet our current operating plan and are unable to raise additional financing, we may be required to reduce certain discretionary spending, which could have a material adverse effect on our ability to achieve our intended business objectives.

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Contractual Obligations and Commercial Commitments.

     The following table summarizes all significant contractual payment obligations as of September 30, 2002, by payment due date:

Risk Factors affecting our Business, Operating Results and Financial Condition

     The following is a discussion of certain risks, uncertainties and other factors that currently impact or may impact our business, operating results and/or financial condition. Anyone evaluating us and making an investment decision with respect to our Common Stock or other securities is cautioned to carefully consider these factors, along with similar factors and cautionary statements contained in our filings with the Securities and Exchange Commission.

     The number of freely tradable shares of our common stock has increased substantially as a result of registration rights agreements we entered into with some of our stockholders. This could adversely impact the trading price of our common stock.

     Our current stockholders hold a substantial number of shares, which they will be able to sell in the public market immediately. As of May 28, 2002 we had 27,343,222 shares issued and outstanding, of which 18,408,080 were restricted. We registered for resale 49,027,948 shares, including 11,800,000 of the restricted shares currently outstanding. In addition to the shares discussed above, Pequot Private Equity Fund II, L.P. elected to convert its Series A-1 Convertible Preferred Stock into 42,107,303 shares of our Common Stock.

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     The following chart summarizes the number of shares of our Common Stock that are available for resale as of November 1, 2002 as compared to May 28, 2002.

Our stock price may be volatile, and you may lose all or part of your investment

     The market price of our Common Stock has fluctuated significantly. Since going public in June 1999, the closing price of our Common Stock on NASDAQ has ranged from a high of $17.375 to a low of $0.1888. During the last twelve months, the closing price of our Common Stock has ranged from a high of $1.84 to a low of $0.19. On October 30, 2002, the closing price of our Common Stock was $0.34. The market price of our Common Stock could continue to be subject to significant fluctuations as a result of numerous factors, many of which are beyond our control. Among the factors that could affect our stock price are:

	•		quarterly variations in our operating results;
	•		changes in revenue or earnings estimates or publication of research reports by analysts;
	•		speculation in the press or investment community about our business;
	•		fluctuations in stock market prices and volumes, particularly of similar companies;

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	•		changes in market valuations of similar companies;
	•		strategic actions by us or our competitors such as acquisitions or restructurings;
	•		regulatory developments;
	•		additions or departures of key personnel;
	•		general market conditions, including the effect of market conditions on our customers and suppliers; and
	•		domestic and international economic factors unrelated to our performance.

     The stock markets in general, and the markets for technology stocks in particular, have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. We have experienced previous fluctuations in our common stock in the past and the price of our stock remains volatile.

If trading price per share of our common stock remains low, we may be delisted from The NASDAQ National Market.

     The trading price of our Common Stock has fallen below $1.00 per share, and, therefore, it may be delisted from the NASDAQ National Market. If our Common Stock is delisted from the NASDAQ National Market, you may be unable to dispose of your shares. In February 2001 and September 2002 we received notices from the NASDAQ Stock Market that we were not in compliance with the $1.00 minimum bid requirement for continued listing on the NASDAQ National Market and that our common stock was subject to delisting from the NASDAQ National Market. In March 2001 we participated in a hearing before the NASDAQ Listing Qualifications Panel to appeal the earlier decision to delist out common stock. In June 2001 we received a notification from NASDAQ that the NASDAQ Listing Qualifications Panel had determined that we regained compliance with the requirements for continued listing on the NASDAQ National Market and, accordingly, determined to continue to list our common stock on the NASDAQ National Market. On October 24, 2002 we participated in another hearing before the NASDAQ Listing Qualification Panel to appeal the September 2002 decision to delist our common stock. We are awaiting the Panel’s decision.

     We are in compliance with all continued listing requirements except NASDAQ’s minimum bid price requirement. At the October 2002 hearing, we requested an extension of time to achieve compliance with the minimum bid price requirement and we informed the Hearing Panel, among other things, that our Board of Directors had approved a reverse stock split, if necessary, to achieve compliance.

     If we are unable to maintain compliance with the requirements for continued listing on the NASDAQ National Market, including the $1.00 minimum bid requirement and the net tangible assets maintenance requirement; we may be subject to delisting from the NASDAQ National Market. On October 30, 2002, the closing price for our common stock was $0.34 per share. If we are delisted from the NASDAQ National Market System, trading in our common stock could occur, if at all, in the NASDAQ Small Cap Market or in the over-the-counter market in so-called “pink sheets” or, if then available, the OTC Bulletin Board. As a result, the holders of our common stock would find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, our common stock.

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     If our common stock is delisted from trading on The NASDAQ Stock Market and the trading price is less than $5.00 per share, trading in our common stock would also be subject to the requirements of Rule 15g-9 promulgated under the Securities Exchange Act of 1934. Under such rule, broker/dealers who recommend these low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser’s written consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional disclosure in connection with any trades involving a stock defined as a penny stock (generally any equity security not traded on an exchange or quoted on The NASDAQ Stock Market that has a market price of less than $5.00 per share, subject to certain exceptions), including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated with the penny stock market. These requirements would likely severely limit the market liquidity of our common stock and the ability of our shareholders to dispose of their shares, particularly in a declining market.

We have incurred significant net losses and we may never achieve profitability

     We incurred significant net losses of approximately $26.4 million in 1999, $29.4 million in 2000, $11.9 million in 2001 and $21.3 million in the first nine months of 2002. As of September 30, 2002, we had an accumulated deficit of approximately $95.8 million. If our revenue does not grow as expected or capital and operating expenditures exceed our plans, our business, operating results and financial condition will be materially adversely affected. We cannot be certain if or when we will be profitable or if or when we will generate positive operating cash flow.

Our acquisition of Professional Resource Screening, Inc., and future acquisitions, could have a material adverse effect on our business, results of operations or financial condition.

     In December 2001, we acquired Professional Resource Screening, Inc. The acquisition will present numerous challenges to us, including the integration of the operations and personnel of Professional Resource Screening. We will also be subject to special risks such as possible unanticipated liabilities and costs, diversion of management attention and loss of personnel. In addition, we may not achieve the revenue levels, increased earnings, profitability, efficiencies or synergies that we believe justified the acquisition. In addition, while we have no current plan to acquire any specific business or businesses, we may, from time to time, pursue other acquisitions of businesses that complement or expand our existing business. There can be no assurance that the anticipated economic, operational and other benefits of any future acquisition will be achieved. In addition, acquisitions may involve the expenditure of significant funds and involve a number of risks, including diversion of management attention, unanticipated problems, liabilities or contingencies and risks of entering markets in which we have limited or no direct expertise. We cannot assure you that Professional Resource Screening or any businesses we acquire in the future will generate sufficient revenue to offset the associated costs or other adverse effects or that we will be able to successfully integrate or manage Professional Resource Screening. The occurrence of some or all of these events could have a material adverse effect on our business, results of operations or financial condition.

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We face competition from many sources. We may be unable to successfully compete with other companies in our industry.

     We operate in a number of geographic and service markets which are fragmented and highly competitive. Currently, our competition falls into three categories:

	•		free individual locator and information services, including services offered by Internet search engines, telephone companies and other third parties who publish free printed or electronic directories such as Yahoo, Inc. and Infospace, Inc.;
	•		fee-based Internet search services offering comparable services, such as KnowX.com;
	•		local, regional and national private investigation firms, such as Kroll-O’Gara Company, Pinkerton, the Proudfoot Reports division of ASI Solutions, Inc., and a significant number of companies operating on either a national scale or a local or regional basis; and the employment screening market, where our competitors include Avert, Inc., ChoicePoint, Inc., Hire Check, Inc. and General Information Services, Inc.

     There are no significant barriers that would prevent new companies from entering the market in which we operate. In addition, some of our current suppliers and companies with which we have advertising agreements may compete with us in the future, which may make it more difficult to advertise our services effectively on their Web sites.

     Many of our competitors have greater financial and marketing resources than we do and may have significant competitive advantages through other lines of business, their existing client base and other business relationships. These competitors and other potential competitors may undertake more extensive marketing campaigns, adopt more aggressive pricing policies and devote more resources to developing information search services, background checks for individual or corporate clients and internet trust services than we are willing or able to accomplish. In addition, our competitors or potential competitors may develop services that are superior to ours, develop services less expensive than ours or that achieve greater market acceptance than our services. We may not be able to successfully compete against our current or future competitors with respect to any of these factors. As a response to changes in the competitive environment, we may make pricing, service or marketing decisions such as reducing our prices or increasing our advertising, all of which may affect our operating results. If we are unsuccessful in responding to our competitors, our business, financial condition and results of operations will be materially adversely affected.

We are dependent on a limited number of third party database and other information suppliers. If we are unable to manage successfully our relationships with these suppliers, the quality and availability of our services may be harmed.

     We do not independently maintain most of the databases from which we gather information. We obtain the data used in our services from a limited number of third party suppliers. If our current suppliers raise their prices, or are no longer able, due to government regulations or contractual arrangements, or are unwilling to provide us with certain data, we may need to find alternative sources of information. If we are unable to identify and contract with suitable alternative data suppliers and integrate these data sources into our service offerings, we could experience service disruptions, increased costs and reduced quality of our services. Additionally, if one or more of our suppliers terminates our existing agreements, we cannot assure you that we will be able to obtain new agreements with third party suppliers on terms favorable to us, if at all. If one or more of these events were to occur, our business, financial condition and results of operations could be materially adversely affected by increased costs, reduced revenue and lower profit margins.

We may incur liability based on consumer complaints

     A substantial amount of our business involves sales of services to individual consumers. We have received customer complaints concerning the quality of our services, including complaints about the currency and/or

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completeness of the data returned to customers. In addition, our customers have lodged similar complaints with consumer agencies, such as the Better Business Bureau and state attorney general consumer divisions. These consumer agencies, in turn, send us an inquiry regarding the consumer complaint. We could in the future experience similar complaints from consumers or inquiries from governmental and consumer agencies based on consumer complaints. If we are unable to resolve existing and future complaints and inquiries, we could be subject to governmental regulatory action as well as civil liability, which may have a material adverse effect on our business, financial condition and results of operations.

Our business and financial performance may suffer if we are unsuccessful in expanding our services, especially those related to employment screening and risk mitigation services, to corporate and professional clients.

     We have historically derived a substantial portion of our revenues from a small number of service offerings, particularly our individual locator, individual profile reports and “Instant Searches” services. If we are unable to continue to offer these services, or if our costs of providing these services increase such that we can no longer offer these services at competitive prices, our business, financial condition, and results of operations may be materially adversely affected.

     We intend to expand the number of services available through our Web site and develop and promote service offerings to address the needs of corporate and professional clients. We have limited experience in providing risk mitigation services to corporate and professional clients. Attracting these clients will require us to hire new sales and marketing personnel or acquire companies already providing these services. We will also be required to spend money to develop and promote these new services. We may be unsuccessful in our efforts to provide these new services in a timely and cost-effective manner and these services may never become profitable. If individual or corporate clients are unwilling to pay for these services or if the market for these services fails to develop or continues to develop more slowly than anticipated, our business financial condition and results of operation will be materially adversely affected.

We have substantial fixed costs which may not be offset by our revenues

     A substantial portion of our operating expenses is related to management personnel, administrative support and our advertising agreements. Many of these agreements have non-cancelable fixed terms and minimum payment obligations. As a result, a substantial portion of our expenses in any given period is fixed costs. If we are unable to generate sufficient revenues to offset our operating costs or if we are unable to lower our advertising costs to respond to lower than expected revenues, our results of operations would be materially adversely affected. Our minimum non-cancelable payments under certain distribution and marketing agreements with various Internet companies are $4.7 million as of September 30, 2002.

We depend on our marketing agreements with Internet companies

     An important element of our current business strategy is to maintain relationships with a number of Internet search engines and popular Web sites for advertising and to direct and attract traffic to our Web site. The most significant of these agreements are with Yahoo!, Inc. and InfoSpace, Inc. We entered into a new agreement with Yahoo! in September 2002, which expires on February 29, 2004 and our agreement with InfoSpace expires on September 30, 2003. These advertising agreements constitute a significant portion of our operating expenses. If the costs associated with these advertising agreements increases, we may not be able to maintain our existing marketing relationships or enter into future marketing relationships with other Internet companies. Any termination of existing agreements or failure to enter into new agreements with Internet companies on terms favorable to us could have a material adverse effect on our business, financial condition and results of operations.

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Our access to key Internet advertising depends on marketing agreements between other Internet companies that are beyond our control

     Advertising arrangements with one Internet company may provide us access to another company’s Web site. For example, our arrangement with InfoSpace provides us with advertising within the white page directories of the AOL and MSN Web sites, independent of any agreements with AOL or MSN. Our advertising on these Web sites depends on the continued relationship InfoSpace has with companies such as AOL and MSN. If this relationship is terminated for any reason and if we are either unable to enter into an agreement with these companies or unable to enter into an agreement with another company that has an agreement providing access to AOL and/or MSN white pages directories, our advertising will no longer appear on their Web sites. This could significantly reduce our advertising reach and, consequently, lower the number of potential clients visiting our Web site, which could in turn materially adversely affect our business, financial condition and results of operations.

Service interruptions may have a negative impact on our revenues and may damage our reputation and decrease our ability to attract clients

     We depend on the satisfactory performance, reliability and availability of our Web site and telecommunications infrastructure to attract clients and generate sales. We cannot assure you that we will be able to protect our operations from a system outage or data loss by events beyond our control. Events that could cause system interruptions include:

	•		fire;
	•		earthquake;
	•		terrorist attacks;
	•		natural disasters;
	•		computer viruses;
	•		unauthorized entry;
	•		telecommunications failure; and
	•		power loss and California rolling blackouts.

     We have experienced unanticipated system interruptions in the past and, although we have upgraded our infrastructure, these interruptions may occur again in the future. During the past twelve months our system interruptions have been limited to less than two hours and have included a denial of service attack, after which we installed a Network Intrusion Detection System, and a power management module outage at Exodus, our co-location facility. Substantially all of our computer and communications hardware is currently located at facilities in Southern California, which is an area susceptible to earthquakes. We do not carry business interruption insurance sufficient to compensate fully for all losses, and in some cases, any losses from any or all these types of events. The occurrence of any of these events may have a material adverse effect on our business, financial condition and results of operations.

We may be subject to federal and state laws relating to the Internet and the use of personal information and privacy rights

     Many privacy and consumer advocates and federal regulators have become increasingly concerned with the use of personal information, particularly “credit header” information. For certain qualified business customers, we use the social security numbers of individuals to search various databases, including those of consumer credit reporting agencies. For example, we search the “credit header” information contained in various consumer credit reporting agencies’ databases to find, among other items, date of birth, current and previous addresses, social security numbers used by an individual or possible other names (such as married

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names, etc.). We also search these databases to determine if a customer’s social security number is being used by any other party. Attempts have been made and can be expected to continue to be made by various federal regulators and organized groups to adopt new or additional federal and state legislation to regulate the use of personal information. Our results of operations could suffer materially if federal or state laws or regulations are amended or enacted in the future, or cases decided relating to the access and use of personal information, or privacy and civil rights, in general, or with respect to the Internet or commercial online services covering issues such as property rights, distribution, taxation, access charges and other fees, and quality of products and services. Cost increases relating to this government regulation could result in these increased costs being passed along to Internet end users and could dampen the growth in use of the Internet as a communications and commercial medium, which could have a material adverse effect on our business and results of operations.

We depend on our key management personnel for our future success

     Our success depends to a significant degree upon the continued contributions of our executive management team and its ability to effectively manage the anticipated growth of our operations and personnel. The loss of Brent Cohen, our CEO, David Wachtel, our CTO, or other members of our management team and the inability to hire additional senior management, if necessary, could have a material adverse effect on our business and results of operations. In addition, increased costs of new personnel, including members of executive management, could have a material adverse effect on our business and operating results.

The Internet may fail to support the growth of electronic commerce

     The rapid rise in the number of Internet users and the growth of electronic commerce and applications for the Internet have placed increasing strains on the Internet’s communications and transmissions infrastructure. This could lead to significant deterioration in transmission speeds and the reliability of the Internet as a commercial medium and, consequently, could reduce the use of the Internet by businesses and individuals. The Internet may not be able to support the demands placed upon it by this continued growth. Any failure of the Internet to support growth due to inadequate infrastructure or for any other reason would seriously limit its development as a viable source of commercial and interactive content and services. This could materially adversely affect the acceptance of our services and our business.

Our success depends on our ability to protect and enforce our trademarks and other proprietary rights

     We rely on a combination of patent, trademark, service mark, copyright and trade secret laws, restrictions on disclosure and transferring title and other methods to protect our proprietary rights. We also generally enter into confidentiality agreements with our employees, business partners and/or others to protect our proprietary rights. It may be possible for a third party to copy or otherwise obtain and use our proprietary information without authorization or to develop similar technology independently.

     Our registered trademarks include: “1-800 U.S. SEARCH”, our logo, “The Public Record Portal”, “Trust Identity,” “Fraud Identity,” and “Reuniting America Two People at a Time”. In addition, we have applied for a patent on our US SEARCH DARWIN™ technology and for registered trademark status for “US SEARCH.com”, and “VeroTrust” service marks in the United States and intend to pursue registration internationally through applications. Effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country in which our products and services are made available, online or otherwise. Also, policing unauthorized use of our patent, trademark, service mark or other proprietary rights might be difficult and expensive and we may be unable to protect our brand, patents, and trademarks from third party challenges. Our brand may suffer and our business and results of operations could be materially and adversely affected if we are unable to effectively protect or enforce our patent, trademark, service marks or other proprietary rights.

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We may be unable to prevent third parties from developing Web sites and acquiring domain names similar to ours

     We have registered several domain names, including 1800USSEARCH.com, ussearch.com, verotrust.com and prsinet.com. Competitors may obtain a corporate name and domain name similar to ours which may cause confusion on the part of potential clients. We may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights and we may be required to file law suits to protect our interests. This would be costly and time consuming and our business could suffer.

We face significant security risks related to our electronic transmission of confidential information

     We rely on encryption and other technologies to provide system security to effect secure transmission of confidential information, such as credit card numbers. We license these technologies from third parties. We cannot assure you that our use of applications designed for data security, or that of our third-party contractors will effectively counter evolving security risks. A security or privacy breach could:

	•		expose us to additional liability;
	•		increase our expenses relating to resolution of these breaches; and
	•		deter customers from using our services.

     Any inability to protect the security and privacy of our electronic transactions could have a material adverse effect on our profitability.

We face risks related to chargebacks processed from our merchant bank

     Like many other service providers who accept credit card information without a signature over the telephone or Internet, we have issued credits as a result of orders placed with fraudulent credit card information. We may suffer losses or damage to our reputation as a result of fraudulent use of credit card information in the future. Moreover, because we offer services over the Internet and accept credit card information without a signature, a certain percentage of our transactions are automatically charged back by the credit card companies pursuant to their policies if the customer disputes the validity of the charge. Our chargeback rate has periodically exceeded the permissible rates in our merchant card agreements, and we have been subject to significant fines.

     Under the terms of our Merchant Card Agreement with Visa, chargebacks as a percentage of interchange transactions must not exceed 2.5% and the ratio of customer dispute chargebacks to interchange transactions must not exceed 1%. Although our chargeback rate has periodically exceeded the permissible rates, in our merchant card agreements, during July, August, and September 2002, the company was in compliance with the rates.

     Loss of credit card processing rights could materially adversely affect our business and results of operations. In addition, pursuant to the terms of our bank credit facility, we agreed to reduce our chargeback rate to bring it within the permissible rates in our merchant card agreements. To accomplish this we have introduced several fraud prevention features, most notably CVV2 checks and we only accept VISA transactions which pass these checks. CVV2 is a new authentication procedure established by credit card companies which requires a cardholder to enter the CVV2 number (the last 3 digits after the credit card number in the signature area of the card) at transaction time to verify that the card is on hand.

We could face liability based on the nature of our services and the content of the materials that we provide which may not be covered by insurance

     We may face potential liability from individuals, government agencies or businesses for defamation, invasion of privacy, negligence, copyright, patent or trademark infringement and other claims based on the nature and content of the materials that appear on our Web site or in our search reports. We also face potential

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liability to clients and/or the subjects of individual search reports prepared by us for inaccurate information or misuse of the information. Although we carry a limited amount of general liability and errors and omissions insurance, our insurance may not cover claims of these types or may not be adequate to indemnify us for all liability that may be imposed. In addition, this insurance may not remain available to us on acceptable terms. Additionally, we do not currently maintain liability insurance to cover claims by the subjects of reports. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of our insurance coverage, could have a material adverse effect on our reputation and our business and results of operations.

Our certificate of incorporation, bylaws and Delaware law contain provisions that could discourage a third party from acquiring us and consequently decrease the market value of our common stock

     Our certificate of incorporation grants our board of directors the authority to issue up to 1,000,000 shares of preferred stock, and to determine the price, rights, preferences, privileges and restrictions, including voting rights of these shares without any further vote or action by the stockholders. Previously, we have issued preferred stock with voting, liquidation, dividend and other rights superior to those of the common stock. Although all preferred stock previously issued has been converted to common stock, we may issue additional preferred stock in the future and the rights of the holders of common stock will be subject to, and maybe adversely affected by, the rights of any preferred stock that may be issued in the future. The issuance of preferred stock could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock which could decrease the market value of our stock. Further, provisions in our certificate of incorporation and bylaws and Delaware law could have the effect of delaying or preventing a third party from acquiring us, even if a change in control would be in the best interest of our stockholders. These provisions include the inability of stockholders to act by written consent without a meeting and procedures required for director nomination and stockholder proposal.

Pequot Private Equity Fund II, L.P. (“Pequot”) currently beneficially holds approximately 54.16% of our common stock and will be able to exercise voting control over issues presented to our stockholders for approval.

     We have entered into a Stockholders Agreement with Pequot and Kushner-Locke. The Stockholders Agreement provides, among other things, that Pequot and Kushner-Locke will vote the shares of capital stock held by them in favor of (i) one member of the Board of Directors being nominated by Kushner- Locke, (ii) one member, if Pequot Private Equity Fund II, L.P. owns between 10-35% of the shares of common stock issued upon conversion of the Series A-1 Convertible Preferred Stock, or two members, if Pequot Private Equity Fund II, L.P. owns at least 35% of the shares of common stock issued upon conversion of the Series A-1 Convertible Preferred Stock, of the Board of Directors being nominated by Pequot Private Equity Fund II, L.P., (iii) our Chief Executive Officer as a member of our Board of Directors, and (iv) three independent members of the Board of Directors, each of which shall be nominated for election by the consent of the Board Members nominated by Pequot and a majority of all other members of the Board of Directors other than Board Member nominated by Kushner-Locke.

     Pequot will be able to exercise voting control over issues presented to our stockholders for approval. Further, by virtue of the Stockholders Agreement and their combined voting control Pequot possesses certain voting and approval rights which could prevent us from taking certain major corporate actions such as the issuance of additional securities, the payment of dividends, or the merger of us with or into another entity or sale of substantially all of our assets.

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Our directors, executive officers and existing stockholders and their affiliates will continue to have substantial control over our company, and their interests may differ from and conflict with yours

     Our executive officers, directors and principal stockholders beneficially own, in total, 69.25% of our outstanding common stock. As a result, these stockholders may have interests that are different from and may conflict with yours, and will be able to influence matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This could have the effect of delaying or preventing a change of control of our company or otherwise cause us to take action that may not be in the best interests of all stockholders, either of which in turn could reduce the market price per share of our common stock or prevent you from receiving a premium in such transaction. This concentration of stock ownership may adversely affect the trading price of our common stock due to investors’ perception that conflicts of interest may exist or arise.

Your ownership interest may be materially diluted upon exercise of options and warrants

     As of September 30, 2002, we had granted options and warrants to purchase an aggregate of approximately 30,164,489 shares of common stock at exercise prices ranging from $0.01 per share to $11.13 per share. To the extent that the stock options and warrants are exercised, material dilution of the ownership interest of our stockholders will occur. We also expect that in the ordinary course of our business we will issue additional warrants and grant additional stock options including, but not limited to, options granted pursuant to our stock option plans.

Item 3. Quantitative and qualitative disclosures about market risk

     We considered the provision of Financial Reporting Release No. 48 “Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent In Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments.” We had no holdings of derivative financial instruments at September 30, 2002 and our total liabilities as of September 30, 2002 consist primarily of notes payable and accounts payable that have fixed interest rates and were not subject to any significant market risk.

Item 4. Controls and Procedures

     The Company maintains “disclosure controls and procedures” as such term is defined under Rule 13a-14(c) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in the Company’s reports required to be filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, the Company’s management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and the Company’s management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

     Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

     There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

     On April 3, 2000 a two count trade name and service mark complaint was filed against the Company in the United States District Court for the Eastern District of Virginia, styled U.S. Search, LLC v USSearch.com Inc. Civil Action No. 00-554-A. On January 26, 2001, our motion for summary judgment was granted and the court ordered that both counts of plaintiff’s complaint be dismissed with prejudice. Plaintiff has appealed this matter to the U.S. Court of Appeals, Fourth Circuit. The hearing on appeal was held on June 6, 2002. On August 16, 2002, the Court of Appeals affirmed the grant of summary judgment in the Company’s favor.

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     In May 2001, ChoicePoint, Inc., the successor entity to DBT Online, Inc., filed a complaint against us in Palm Beach County, Florida alleging breach of contract, fraudulent misrepresentation, unjust enrichment, quantum meruit and breach of the implied covenant of good faith and fair dealing. ChoicePoint sought approximately $1.5 million in damages, as well as interest and attorneys’ fees. US SEARCH removed this action to the United States District Court for the Southern District of Florida. The United States District Court for the Southern District of Florida ordered the matter to arbitration. In June 2002 the arbitrator awarded us a credit of $297,671 to be deducted from invoices of $1,418,731. ChoicePoint has filed a motion to confirm the Arbitration Award and we have filed a motion to modify and correct the Arbitration award to provide additional credits. We are awaiting rulings on these motions. In the third quarter of 2002, we had paid ChoicePoint $100,000 of the award. At September 30, 2002, the Company had approximately $979,000 accrued for this liability. The costs related to this litigation, including the fees and costs of our attorneys and other litigation support professionals, have been less than $100,000. As of November 1, 2002, the Company had paid a total of $300,000 of the award, leaving approximately $779,000 accrued for this liability.

     On June 25, 2002, a complaint seeking $434,000 in damages was filed against Professional Resource Screening, Inc. in Superior Court of California, county of Contra Costa, styled Wood Warren & Co. v. Professional Resource Screening, Inc., No. C02-01816, alleging breach of an oral agreement relating to investment banking services, negligent misrepresentation, promissory estoppel, equitable estoppel and quantum meruit. Although it is too early to predict the outcome, the Company believes it has meritorious defenses to plaintiff claims.

     We may from time to time become a party to various legal proceedings arising in the ordinary course of business.

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Item 2. Changes in Securities and Use of Proceeds.

On July 18, 2002 we issued to the holders of our 8% Convertible Promissory Notes an aggregate of 27,864,051 shares of common stock upon conversion in full of our then outstanding 8% Convertible Promissory Notes (the “Note Conversion Shares”). The issuance of the Note Conversion Shares was exempt from the registration requirements of the Act pursuant to Sections 3(a)(9) and 4(2) thereof and Rule 506 of Regulation D promulgated thereunder.

On July 18, 2002 we issued to Pequot Private Equity Fund II, L.P. (“Pequot”) 42,107,303 shares of common stock upon conversion in full of all shares of Series A-1 Convertible Preferred Stock then held by Pequot (the “Series A-1 Conversion Shares”). The issuance of the Series A-1 Conversion Shares was exempt from the registration requirements of the Act pursuant to Sections 3(a)(9) and 4(2) thereof and Rule 506 of Regulation D promulgated thereunder.

Item 3. Defaults upon Senior Securities

     None

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

The Company held its annual stockholders’ meeting on July 18, 2002. The following matters were voted on at the meeting:

1.

To approve an amendment to the Company’s Certificate of Incorporation to increase the number of authorized shares of Common Stock from 150,000,000 to 300,000,000.

2.

To ratify the issuance of the Company’s 8% Convertible Promissory Notes and to approve the issuance of Common Stock upon conversion thereof.

3.

To elect three Common Stock directors to hold office until the 2005 Annual Meeting of Shareholders. Brent Cohen Peter Locke Alan Mendelson

4.

To approve an amendment to the Company’s Amended and Restated 1998 Stock Incentive Plan to increase the aggregate number of shares of Common Stock authorized for issuance under such plan by 10,000,000 shares

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Item 5. Other Information

     None

Item 6. Exhibits and Reports on Form 8-K

     (a)  Exhibits: Exhibit 10.2. Amendment No. 5 to the Advertising and Promotion Agreement dated September 11, 2002.

     (b)  Reports on Form 8-K:

     During the quarter ended September 30, 2002, we filed current reports on Form 8-K on the following dates:

	•		July 23, 2002 (Item 5. Other Events);
	•		August 7, 2002 (Item 5. Other Events);
	•		August 14, 2002 (Item 9. Regulation FD Disclosure).

SIGNATURES

     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.

				US SEARCH.COM INC. (Registrant)
Date: November 14, 2002		By:		/s/ BRENT N. COHEN
				Brent N. Cohen President and Chief Executive Officer
		By:		/s/ JEFFREY R. WATTS
				Jeffrey R. Watts Chief Financial Officer

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Section 302 Certification:

Chief Executive Officer

     I, Brent N. Cohen, President and Chief Executive Officer of US SEARCH.com Inc., certify that:

	1. I have reviewed this quarterly report on Form 10-Q of US SEARCH.com Inc.;

	2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

	3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

	4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

	a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

	5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

	a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

	6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

				/s/ BRENT N. COHEN
				Brent N. Cohen President and Chief Executive Officer
Date: November 14, 2002

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Chief Financial Officer

     I, Jeffrey R. Watts, Chief Financial Officer, certify that:

	1. I have reviewed this quarterly report on Form 10-Q of US SEARCH.com Inc.;

	2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

	3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

	4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

	a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

	5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

	a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

	6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

				/s/ JEFFREY R. WATTS
				Jeffrey R. Watts Chief Financial Officer
Date: November 14, 2002