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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Digital Insight Corporation
(Exact name of registrant as specified in its charter)

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.         Yes     x                    No     o

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

Common Stock, $0.001 par value
32,162,161 shares outstanding as of July 31, 2002

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DIGITAL INSIGHT CORPORATION
FORM 10-Q

INDEX

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PART I – FINANCIAL INFORMATION

ITEM 1.    Consolidated Financial Statements

DIGITAL INSIGHT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share information)

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

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DIGITAL INSIGHT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)

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

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DIGITAL INSIGHT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)

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

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DIGITAL INSIGHT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.       The Company and Summary of its Significant Accounting Policies

             The Company

          Digital Insight Corporation (the “Company”), which incorporated in March 1997 in Delaware, provides Internet banking services to credit unions, banks and savings and loans.  Its Internet banking services include Internet banking and bill payment services for individual customers, business banking for commercial customers, a target marketing program to increase financial services to end users, and customized web site design and implementation and other related services.  In addition, the Company, through its acquisition of Anytime Access, Inc. (“ATA”), is a provider of services that allow credit unions and banks to outsource their consumer loan origination and processing functions.  Substantially all of the Company’s revenues are derived from these services.

          On January 28, 2002, the Company completed the acquisition of Virtual Financial Services, Inc. (“ViFi”), pursuant to an Agreement and Plan of Merger, dated as of January 3, 2002.  This acquisition was accounted for under the purchase method of accounting and the results of operations of ViFi have been included in the Company’s financial results since the date of acquisition.

          The accompanying consolidated financial statements for the three months and six months ended June 30, 2002 and 2001 have been prepared in accordance with generally accepted accounting principles (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Certain information and footnote disclosures normally included in financial statements in accordance with GAAP have been omitted or condensed in accordance with quarterly reporting requirements of the Securities and Exchange Commission (the “SEC”).  Independent accountants have not audited these consolidated financial statements. The consolidated financial statements, however, include all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary for a fair statement of the consolidated financial condition, results of operations and cash flows for such periods.  However, these results are not necessarily indicative of results for any other interim period or for the full year.  The accompanying consolidated balance sheet as of December 31, 2001 has been derived from the audited consolidated financial statements, but does not include all disclosures required by GAAP.

          Management believes that the disclosures included in the accompanying interim consolidated financial statements and footnotes are adequate to make the information not misleading, but should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2001.

          Long-lived assets (excluding goodwill)

          The Company assesses potential impairments to its long-lived assets, excluding goodwill, periodically in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 121, “Accounting For the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of” as amended by SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets.”  An impairment review is performed whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  Factors considered by the Company include, but are not limited to: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use of the acquired assets or the strategy for the Company’s overall business; significant negative industry or economic trends; a significant decline in the Company’s stock price for a sustained period of time; and the Company’s market capitalization relative to net book value.  When the Company determines that the carrying value of a long-lived asset (excluding goodwill) may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition.  If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, the Company recognizes an impairment loss.  The impairment loss is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset, determined either based on the market value if available, or discounted cash flows, if not.

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          New accounting standards

          As of January 1, 2002, the Company adopted SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.”  SFAS No. 141 established new standards for accounting and reporting requirements for business combinations initiated after June 30, 2001 and prohibits the use of the pooling-of-interest method for combinations initiated after June 30, 2001.  SFAS No. 142 changed the accounting for goodwill from an amortization method to an impairment only approach.  Under SFAS No. 142, goodwill will be tested at the reporting unit level annually and whenever events or circumstances occur indicating that goodwill might be impaired.  Amortization of goodwill, including goodwill from past business combinations, will cease.  As discussed further in Note 2, the Company recorded an impairment charge of approximately $29.0 million as a cumulative effect of change in accounting principle from the adoption of SFAS No. 142 in the first quarter of 2002.

          In August 2001, the FASB issued SFAS No. 143, “Accounting for Obligations Associated with the Retirement of Long-lived Assets,” which establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost.  It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets.  SFAS No. 143 is effective for fiscal years beginning after June 15, 2002, with early adoption permitted.  The Company expects to adopt SFAS No. 143 effective January 1, 2003 and does not expect that the adoption of this new standard will have a significant impact on its results of operations or financial position.

          In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets,” which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of.  This Statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of.”  This Statement also supersedes the accounting and reporting provisions of APB Opinion No. 30 (“APB 30”), “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for Segments of a Business to Be Disposed Of.”  This Statement also amends ARB No. 51, “Consolidated Financial Statements,” to eliminate the exception to consolidation for a temporarily controlled subsidiary.  The Company adopted SFAS No. 144 on January 1, 2002 and the adoption of this new standard did not have a significant impact on its results of operations or financial position.

          In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”  SFAS No. 146 supersedes the existing guidance related to accounting and reporting of costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue (“EITF”) No. 94-3, “Liability Recognition For Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).”  Under SFAS No. 146, a liability for a cost associated with an exit or a disposal activity will be recognized and measured initially at its fair value in the period in which the liability is incurred.  The provisions of SFAS No. 146 will be effective for exit or disposal activities initiated after December 31, 2002 with earlier adoption encouraged.  The Company anticipates adopting this standard on future exit or disposal activities and there would be no impact on the Company’s restructuring plans already initiated.

          Reclassifications

          Certain reclassifications have been made to the consolidated financial statements as of December 31, 2001 and for the three and six months ended June 30, 2001 in order to conform to the 2002 presentation.

2.       Goodwill, Intangible Assets, and Change in Accounting Principle

          The change in the balance of goodwill during the six months ended June 30, 2002 is set forth below: 

          Upon the adoption of SFAS No. 142, the Company evaluated the goodwill related to its prior acquisitions, 1View Network Corporation (“1View”) and ATA, using the fair value approach prescribed by SFAS No. 142.  The

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Company determined that there was no impairment related to the 1View goodwill based on the enterprise level analysis performed.  1View is included at the enterprise level in the “Internet banking” reporting unit as there are no separately identifiable cash flows.

          Based on the analysis of the ATA goodwill at the “lending” reporting unit, the Company determined that an impairment write-down was necessary.  The amount of the impairment was estimated based on a valuation process that combined estimating the present value of the future cash flows of ATA with obtaining the market value to revenue multiples of comparable publicly traded companies and applying these multiples to the projected and historical revenue of ATA.  This valuation process yielded a goodwill carrying value of $32.1 million which required the impairment write-down of $29.0 million.  This amount has been recorded in the consolidated statement of operations for the six months ended June 30, 2002 as a cumulative effect of change in accounting principle.

          As of December 31, 2001 and June 30, 2002, all other intangible assets were subject to amortization.  A summary of the other intangible assets as of December 31, 2001 and June 30, 2002 is set forth below:

          During the six months ended June 30, 2002, $6.8 million was added to the customer relationships intangible asset as part of the purchase of ViFi and amortization expense incurred related to all intangible assets was $1.5 million and $2.9 million for the three months and six months ended June 30, 2002, respectively.   Estimated intangible asset amortization expense remaining for the year ending December 31, 2002 and for the next four years ending December 31 is as follows (amounts in thousands):

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          The following tables adjust net loss and net loss per share for the impact of the implementation of SFAS No. 142 as follows: 

3.       Revolving Line of Credit and Equipment Leasing Line of Credit

          In May 2001, the Company renewed its $10 million secured revolving credit commitment (the “Revolver”) from a bank, which has been extended to September 1, 2002. Interest on the outstanding borrowings is payable monthly. The interest rate on the Revolver is equal to the bank’s prime rate which was 4.75% at June 30, 2002.  The Revolver is collateralized by all of the Company’s assets.  The Company had no outstanding advances on the Revolver as of December 31, 2001 and June 30, 2002.

          In August 2000, the Company obtained a $10 million equipment leasing line of credit evidenced by a multiple disbursement note from a bank (the “Note”), collateralized by the participating equipment and a $10 million certificate of deposit.  The terms of the Note were revised in August 2001 to allow principal to be borrowed from time to time prior to October 31, 2001.  Interest will accrue at either (i) the bank’s prime rate less 1% or (ii) 1.5% above the rate stated on the certificate of deposit pledged as collateral for the Note.  As of June 30, 2002, the interest rate on the Note was 3.15% per annum.  Under the revised terms, interest and principal will be paid in 34 monthly installments, commencing November 30, 2001.  As of June 30, 2002, the Company had $7.6 million in borrowings outstanding under the Note, $4.1 million of which was classified as long-term debt.  As a result of the classification of this Note, $4.1 million of the certificate of deposit has been classified as a long-term investment and the remaining portion is included in short-term investments.

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4.          Restructuring and Asset Impairment Charges

             In February 2001, the Company strategically restructured its business to reduce operating expenses.  The process included a review of potentially redundant functions and facilities.  The majority of these redundancies resulted from the three acquisitions completed in 2000.  As a result of this process, 58 employee positions were eliminated and the Company’s facility in San Francisco, California was closed.  During the six months ended June 30, 2001, the Company recorded a restructuring charge of approximately $1,629,000 for severance payments and related benefits for employees whose positions were eliminated, approximately $940,000 in deferred stock-based compensation expense for the acceleration of stock options and approximately $707,000 for exit costs as a result of the closure of the San Francisco facility and related lease termination.

             In March 2002, the Company initiated an additional restructuring to further optimize its cost structure.  The Company plans to restructure its operations by geographically consolidating certain business functions including customer service, web services, and software development.  The consolidation of these operations will eliminate unnecessary costs that are incurred by operating these functions in multiple locations.  As a result of this restructuring process, approximately 75 employees will be terminated and the Company plans to reduce space utilized at three facilities during 2002.  For the six months ended June 30, 2002, the Company recorded a charge of $850,000 related to estimated severance payments for employee terminations.  The Company also recorded a charge of $1,230,000 related to the facilities closures which represents the difference between estimated sublease income and the rental commitments of the Company plus the estimated cost to sublease the facilities.   A summary of the restructuring accrual is as follows:

             During the six months ended June 30, 2002, the Company recorded an asset impairment charge of $2.9 million to reduce the carrying value of long-lived assets consisting primarily of purchased computer software and equipment that were abandoned or removed from operations during the first quarter of 2002.  The impaired assets were written-down to their estimated fair value less costs to sell.

5.          Reportable Segments and Major Customers

             The Company manages its business through two reportable segments: the Internet banking division and the lending division.  Management does not allocate deferred stock-based compensation to the reportable segments when evaluating the performance of the Internet banking and lending divisions.  As a result, deferred stock-based compensation is included with unallocated expenses in the tables that follow.  The results of operations for these reportable segments were as follows for the three months and six months ended June 30, 2002 and 2001:

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             For the three months and six months ended June 30, 2002 and 2001 no customer comprised more than 10% of revenues.

6.          Acquisition of ViFi

             On January 28, 2002, the Company completed the acquisition of ViFi pursuant to an Agreement and Plan of Merger, dated as of January 3, 2002.  ViFi was a privately-owned company based in Indianapolis, Indiana that provided retail and commercial Internet banking, electronic bill payment, cash management services, credit and debit card processing, online brokerage, document management, web site design, target marketing and aggregation services via PC-based or wireless access.  As a result of the merger, all the outstanding shares of ViFi were converted into an aggregate of $3,750,000 in cash, $3,750,000 in promissory notes, and 1,901,907 shares of the Company’s common stock with an estimated fair value of approximately $41.1 million.  The fair value of the common stock issued was based on the average trading price of the Company’s common stock for four days before, four days after, and including the public announcement date.  In addition, the Company assumed options to purchase an aggregate of 111,978 shares of its common stock with an estimated fair value of $876,000 determined using the Black-Scholes option pricing model.  All assumed options were fully vested and, as such, no allocation to deferred

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stock-based compensation was required.  The Company did not acquire certain of the ViFi fixed assets and the credit card processing product line which remained with the selling shareholder of ViFi.

             The acquisition has been accounted for using the purchase method of accounting. The purchase price was allocated to the estimated fair value of the assets acquired and liabilities assumed. The estimated fair value of the tangible assets acquired and liabilities assumed approximated the historical cost basis and the purchase price allocation provided a goodwill balance of $50.6 million and identifiable intangible assets comprised of customer relationships of $6.8 million.  In accordance with SFAS No. 142, goodwill will not be amortized but rather will be periodically evaluated for impairment on at least an annual basis. The customer relationships identifiable intangible asset will be amortized on a straight-line basis over an estimated useful life of six years.

             In accordance with the purchase method of accounting, the results of ViFi have been included since the acquisition date, January 28, 2002.  If the operating results of ViFi had been included since the beginning of the period for the three months and six months ended June 30, 2002 and 2001, the pro forma results of the Company would be as follows:

7.       Contingencies

          See Item 1 in “Part II – Other Information” for a description of legal proceedings.

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

          The following discussion should be read in conjunction with the accompanying Consolidated Financial Statements and Notes thereto.  This Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and information that are based on management’s beliefs, as well as on assumptions made by, and upon information currently available to, management.  When used in this Form 10-Q, the words “expect”, “anticipate”, “intend”, “plan”, “believe”, “seek”, and “estimate” or similar expressions are intended to identify such forward looking statements.  However, this Form 10-Q also contains other forward-looking statements.  Forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions, including anticipated financial performance, business prospects, anticipated capital expenditures, and other similar matters which reflect management’s best judgment based on factors currently known.  Actual results and experience could differ materially from the anticipated results or other expectations expressed in our forward looking statements as a result of a number of factors, including but not limited to those discussed in the MD&A and under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2001.

          As of June 30, 2002, we had contracts with 1,609 financial institutions, 1,393 of which had contracted for Internet banking services, 531 of which had contracted for cash management services and 158 of which had contracted for on-line lending services. There were approximately 3.2 million active Internet banking end users at the end of the quarter, up 63% from a year earlier and 4% from the prior quarter.  We had a total of 1,253 Internet banking clients with live sites at June 30, 2002, which represented approximately 31.2 million potential end users and an overall penetration rate of 10.4%.  The total number of potential end users of the 1,393 contracted Internet banking institutions was approximately 33.1 million.

          On January 28, 2002, we completed the acquisition of Virtual Financial Services, Inc. (“ViFi”), pursuant to an Agreement and Plan of Merger, dated as of January 3, 2002.  ViFi was a privately-owned company based in Indianapolis, Indiana that provided retail and commercial Internet banking, electronic bill payment, cash management services, credit and debit card processing, online brokerage, document management, web site design, target marketing and aggregation services via PC-based or wireless access.  As a result of the merger, all the outstanding shares of ViFi were converted into an aggregate of $3,750,000 in cash, $3,750,000 in promissory notes, and 1,901,907 shares of the Company’s common stock.  In addition, we assumed options to acquire ViFi stock that, as a result of the merger, converted into options to purchase an aggregate of 111,978 shares of our common stock.  Our results of operations include the operations of ViFi subsequent to the acquisition date.

          We manage our business through two reportable segments: the Internet banking division and the lending division.  Management does not allocate deferred stock-based compensation to the reportable segments when evaluating the performance of the Internet banking and lending divisions.  As a result, deferred stock-based compensation is included with unallocated expenses in the tables that follow.  The results of operations for these reportable segments were as follows for the three months and six months ended June 30, 2002 and 2001:

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