SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(MARK ONE)

For the quarterly period ended June 30, 2004

OR

For the transition period from            to

Commission file number: 000-21319

LIGHTBRIDGE, INC.

30 Corporate Drive
Burlington, Massachusetts 01803
(Address of Principal Executive Offices) (Zip Code)

(781) 359-4000
(Registrant’s Telephone Number, Including Area Code)

Former Address:
67 South Bedford Street
Burlington, Massachusetts 01803
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)

     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. x Yes o No

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). x Yes o No

     As of August 2, 2004, there were 26,446,013 shares of the registrant’s common stock, $.01 par value, outstanding.

LIGHTBRIDGE, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2004

TABLE OF CONTENTS

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PART I. FINANCIAL INFORMATION

LIGHTBRIDGE, INC. AND SUBSIDIARIES

See notes to unaudited condensed consolidated financial statements.

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LIGHTBRIDGE, INC. AND SUBSIDIARIES

See notes to unaudited condensed consolidated financial statements.

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LIGHTBRIDGE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)

See notes to unaudited condensed consolidated financial statements.

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LIGHTBRIDGE, INC. AND SUBSIDIARIES

See notes to unaudited condensed consolidated financial statements.

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LIGHTBRIDGE, INC. AND SUBSIDIARIES

1. BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements include the accounts of Lightbridge, Inc. and its subsidiaries (collectively, “Lightbridge” or the “Company”). Lightbridge believes that the unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of Lightbridge’s financial position, results of operations and cash flows at the dates and for the periods indicated. Although certain information and disclosures normally included in Lightbridge’s annual financial statements have been omitted, Lightbridge believes that the disclosures provided are adequate to make the information presented not misleading. Results of interim periods may not be indicative of results for the full year or any future periods. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in Lightbridge’s Annual Report on Form 10-K for the year ended December 31, 2003.

2. BUSINESS AND ACQUISITION ACTIVITY

     On March 31, 2004, the Company acquired all of the outstanding stock of Authorize.Net Corporation (“Authorize.Net”) for $82 million in cash from InfoSpace, Inc. In addition, the Company expects to incur approximately $2.1 million in acquisition related costs. The total purchase price for the acquisition was $84.1 million, after giving effect to a working capital adjustment. The purchase price paid by the Company in the Authorize.Net acquisition was reduced by $430,000 based on the final determination of working capital required at closing as set forth in the stock sale agreement. Authorize.Net provides credit card and electronic check payment solutions to companies that process orders for goods and services over the Internet. Authorize.Net connects small and medium sized businesses to large credit card processors and banking organizations, allowing those businesses to accept electronic payments. Through the acquisition of Authorize.Net, the Company expanded its customer transaction business to include online payment processing, while reaching a new customer base of small to medium-sized merchants. The results of operations of Authorize.Net were not included in the condensed consolidated statements of operations for the first quarter of 2004 or the first six months of 2003 since the purchase was effective at the close of business on March 31, 2004. The operations of Authorize.Net were included in the second quarter results for 2004.

     The aggregate purchase price for the Authorize.Net acquisition has been allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values at the date of acquisition as follows (in thousands):

     The tangible assets acquired and liabilities assumed were recorded at their fair values, which approximated their carrying amounts at the acquisition date. The values of the identifiable intangible assets were determined by an independent appraiser using established valuation techniques accepted in the technology and software industries. The appraisal of the intangible assets involved calculations which were based in part on management’s judgments and assumptions. These judgments and assumptions included estimates of growth rates, changes to pricing and margins, estimates of the life of the reseller network and merchant customer base, and an assessment of the value of the existing technology. The amortization periods for intangible assets are as follows. The reseller network value of $9.3 million and the processor relationships of $300,000 will be amortized over twelve years. The merchant customer base

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value of $7.0 million and the existing technology value of $3.1 million will be amortized over five years. The intangible value of the trademarks of $3.6 million is not amortized. Excluding trademarks, the weighted average amortization term of the intangible assets is 8.4 years.

     In connection with the Authorize.Net acquisition, the Company recorded a $679,000 charge during the first quarter of 2004 for two in-process research and development (“IPR&D”) projects. The Authorize.Net technology includes payment gateway solutions that enable merchants to authorize, settle and manage electronic transactions via the Internet, at retail locations and on wireless devices. The research projects in process at the date of acquisition related to the development of the Card Present Solution (“CPS”) and the Fraud Tool (“FT”). Development on the FT project and the CPS project was started at the end of 2003 and the beginning of 2004, respectively. The complexity of the CPS technology lies in its fast, flexible and redundant characteristics. The complexity of the FT technology lies in its responsiveness to changing fraud dynamics and efficiency.

     The value of the projects was determined by an independent appraiser using the income method. The discounted cash flow method was utilized to estimate the present value of the expected income that could be generated through revenues from the projects over their estimated useful lives through 2009. The percentage of completion for the projects was determined based on the amount of research and development expenses incurred through the date of acquisition as a percentage of estimated total research and development expenses to bring the projects to technological feasibility. At the acquisition date, the Company estimated that the CPS and the FT projects were approximately 15% and 80% complete, respectively, with fair values of approximately $638,000 and $41,000, respectively. The discount rate used for the fair value calculation was 30% for the CPS project and 22% for the FT project. At the date of acquisition, development of the technology involved risks to the Company including the remaining development effort required to achieve technological feasibility and uncertainty with respect to the market for the technology.

     Lightbridge completed the development of the FT in May 2004 having spent approximately $129,000 on the project after the acquisition. Total cost to complete the CPS project after acquisition is estimated to be approximately $650,000. The CPS project is expected to be completed by March 2005. If the development of the technology is not completed on schedule, the potential consequences to the Company may be increased development costs and increased competition from other companies that have competitive products in the market.

     The purchase price in excess of the net assets acquired and the identifiable intangible assets acquired was allocated to goodwill. The entire amount of the goodwill is expected to be deductible for tax purposes.

     In accordance with Statement of Financial Accounting Standard No. 142 (SFAS 142), the Company is required to analyze the carrying value of goodwill and other intangible assets against the estimated fair value of those assets for possible impairment on an annual basis. If impairment has occurred, the Company will record a charge in the amount by which the carrying value of the assets exceeds their estimated fair value. Estimated fair value will generally be determined based on discounted cash flows.

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Pro forma financial information

     The following table presents the unaudited pro forma financial information of the Company including Authorize.Net for the three months ended June 30, 2003 and for the six months ended June 30, 2004 and 2003, as if the acquisition had occurred on January 1, 2003, after giving effect to certain purchase accounting adjustments. The pro forma adjustments include elimination of revenue associated with pre-acquisition deferred revenue of Authorize.Net, amortization of intangible assets, elimination of interest income associated with the cash purchase price of the acquisition and related income tax effects.

     The pro-forma net income for the six months ended June 30, 2004 excludes the expense of IPR&D of $679,000 related to the Authorize.Net acquisition due to its non-recurring nature. These results are presented for illustrative purposes only and are not necessarily indicative of the actual operating results or financial position that would have occurred if the transaction had been consummated on January 1, 2003.

3. COMMITMENTS AND CONTINGENCIES

     At June 30, 2004, the Company was holding funds in the amount of $5.1 million on behalf of merchants utilizing Authorize.Net’s eCheck services. The funds are included in cash and cash equivalents and funds due to merchants on the Company’s condensed consolidated balance sheet. Authorize.Net typically holds eCheck funds for approximately seven business days; the actual number of days depends on the contractual terms with each merchant. In addition, at June 30, 2004, the Company held funds in the amount of $907,000 for and on behalf of merchants processing credit card and ACH transactions using the Integrated Payment Solution (IPS) product. The funds are included in cash and cash equivalents and funds due to merchants on the Company’s condensed consolidated balance sheet. Credit card funds are typically held for approximately two business days; ACH funds are held for approximately four business days, according to the specifications of the IPS product and the contract between Authorize.Net and the financial institution through which the transactions are processed.

     In addition, the Company currently has $600,000 on deposit with a financial institution. The deposit is held to cover any deficit account balance that could occur if the amount of transactions returned or charged back exceeds the balance on deposit with the financial institution. To date, the deposit has not been applied to offset any deficit balance, and management believes that the likelihood of incurring a deficit balance with the financial institution due to the amount of transactions returned or charged back is remote. The deposit will be held continuously for as long as Authorize.Net utilizes the ACH processing services of the financial institution, and the amount of the deposit may increase as processing volume increases.

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     The Company’s primary contractual obligations and commercial commitments are under its operating leases and a letter of credit. The Company maintains an annually renewable letter of credit in the amount of $1.0 million which extends through January 2005, as required for security under the lease for its headquarters. The Company’s future minimum payments due under operating leases are as follows as of June 30, 2004:

     On February 10, 2004, the Company entered into a lease agreement with the Region of Queens Municipality to lease 32,144 square feet of space in Liverpool, Nova Scotia, Canada. The lease expires on April 30, 2009, with an option to renew at the end of the current lease term. The lease also gives the Company the right to terminate upon the third anniversary thereof.

     On July 21, 2004, the Company entered into a lease agreement for 14,148 square feet of office space in Bellevue, Washington. The lease is expected to commence in September 2004 and will expire in September 2009. The future minimum payments due under this lease agreement are as follows: Total, $874,000; $14,000 in the remainder of 2004; $168,000 in 2005; $175,000 in 2006, $182,000 in 2007; and $335,000 after 2007.

4. STOCK-BASED COMPENSATION

     The Company applies the intrinsic value based method of accounting for stock options granted to employees. The Company accounts for stock options and awards to non-employees using the fair value method.

     Under the intrinsic value method, compensation associated with stock awards to employees is determined as the difference, if any, between the current fair value of the underlying common stock on the date compensation is measured and the price an employee must pay to exercise the award. The measurement date for employee awards is generally the date of grant. Under the fair value method, compensation associated with stock awards to non-employees is determined based on the estimated fair value of the award itself, measured using either current market data or an established option pricing model. The measurement date for non-employee awards is generally the date of grant.

     Had the Company used the fair value method to measure such compensation expense associated with grants of stock options to employees, reported net income (loss) and basic and diluted income (loss) per share would have been as follows:

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     The fair value of options on their grant date was measured using the Black-Scholes Option Pricing Model. Key assumptions used to apply this pricing model for the three and six-month periods ended June 30, 2004 and 2003 are as follows:

     It should be noted that the option-pricing model used was designed to value readily tradable stock options with relatively short lives. The options granted to employees are not tradable and have contractual lives of up to ten years.

5. COMPREHENSIVE INCOME

     The Company currently has currency translation and net income (loss) as items of comprehensive income.

6. DISCLOSURES ABOUT SEGMENT OF AN ENTERPRISE AND RELATED INFORMATION

     Based upon the way management and the Board of Directors monitor the Company’s operations, the Company operates in five distinct segments: the transaction business, the software license business, the consulting and service business, the hardware business and the payment processing business. Within these five segments, performance is measured based on gross profit realized from each segment. Information about revenues, cost of revenues and gross profit of each segment is shown separately on the statement of operations. Information about costs and expenses, other than costs of revenues, is not reported by segment. There are no transactions between segments. A majority of the Company’s revenues historically have been derived from clients located in the United States.

7. REVENUE RECOGNITION

     The Company generates revenue from the processing of qualification and activation transactions; granting of software licenses; services (including maintenance, installation and training); development and consulting contracts; hardware sold in conjunction with certain software licenses; and performing payment processing services. We also offer on-demand voice conferencing services through our GroupTalk offering. Revenues from processing of qualification and activation transactions for communications providers are recognized in the period in which services are performed. Revenues from our GroupTalk offering are recognized as conference services are utilized.

     The Company’s software license agreements have typically provided for an initial license fee and annual maintenance fees based on a defined number of subscribers, as well as additional license and maintenance fees for net subscriber additions in certain circumstances. Revenue from software license sales is recognized when persuasive evidence of an arrangement exists, delivery of the product has been made, and a fixed fee and collectibility have been determined. To the extent that obligations exist for other services, the Company allocates revenue between the license and the services based upon their relative fair value or by the residual method.

     Revenues from consulting and services contracts are generally recognized as the services are performed. Revenues from software maintenance contracts are recognized ratably over the term of the maintenance agreement and are reported as consulting and services revenues. Revenue from hardware sales is recognized upon shipment, unless testing, integration or implementation services are required, in which case hardware revenue is recognized upon commissioning and acceptance of the product. Revenue from hardware sold in conjunction with software licenses is deferred until the related license revenue is recognized.

     Revenues for payment processing are derived from the Company’s credit card processing and eCheck processing services (collectively “payment processing services”), gateway fees and set-up fees. Payment processing services revenue is based on a fee per transaction or on a percentage of the completed transaction, and is recognized in the period in which the transaction occurs. Gateway fees are monthly subscription fees charged to merchant customers for the use of the payment gateway. Gateway fees are recognized in the period in which the service is provided. Set-up fees represent one-time charges for initiating the Company’s payment processing services. Although these fees are generally paid to the Company at the commencement of the agreement, they are recognized ratably over the estimated average life of the merchant relationship, which is determined through a series of analyses of active and deactivated merchants. Commissions paid to outside sales partners are recorded in sales and marketing expense in the Company’s statements of operations.

8. EARNINGS PER SHARE (EPS)

     Basic EPS is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock using the treasury stock method.

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     A reconciliation of the shares used to compute basic income per share to those used for diluted income per share is as follows:

     Stock options for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on EPS and, accordingly, are excluded from the diluted computations for the three and six months ended June 30, 2004 and 2003. Had such shares been included, shares for the diluted computation would have increased by approximately 3,996,000 and 2,334,000 for the three months ended June 30, 2004 and 2003, respectively, and approximately 3,244,000 and 2,565,000 for the six months ended June 30, 2004, and 2003, respectively.

     In addition, all other stock options and warrants convertible into common stock have been excluded from the diluted EPS computations for the three months ended June 30, 2003 and for the six months ended June 30, 2004 and 2003, as they are anti-dilutive due to the net loss recorded by the Company in those periods. Had such shares been included, the number of shares for the diluted computation would have increased by approximately 367,000 shares for the three months ended June 30, 2003, and 124,000 and 300,000 for the six months ended June 30, 2004 and 2003, respectively.

9. REPURCHASE OF SHARES

     On October 4, 2001, Lightbridge announced that its Board of Directors had authorized the repurchase of up to 2 million shares of the Company’s common stock at an aggregate cost of up to $20 million. The shares may be purchased from time to time depending on market conditions. On April 23, 2003, the Board approved an expansion of the plan to authorize Lightbridge to purchase up to 4 million shares of the Company’s common stock at an aggregate cost of up to $40 million through September 26, 2005. As of June 30, 2004, the Company had purchased approximately 2.5 million shares at a total cost of approximately $17.9 million since the inception of its repurchase program.

     The following summarizes the purchases during the second quarter of 2004:

10. RESTRUCTURING RESERVES

     In June 2002, the Company announced that it was reducing its workforce by seven percent and consolidating its Waltham, Massachusetts call center operations into its Lynn, Massachusetts and Broomfield, Colorado facilities by the end of 2002. The Company recorded a restructuring charge of approximately $3.6 million, consisting of $1.6 million for workforce reductions, $1.3 million for facilities reductions including lease obligations, utilities and security costs on unused space and $0.7 million for capital equipment write-offs associated with these measures. The restructuring plan resulted in the termination of 65 personnel as follows: 25 in product and service delivery, 22 in development, 11 in sales and marketing and seven in general and administrative.

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The capital equipment write-offs and a majority of severance costs related to this restructuring were incurred by the end of 2002, and the Company anticipates that all other costs relating to this restructuring, consisting principally of lease obligations on unused space, will be paid by the end of 2004.

     The following summarizes the changes to the June 2002 restructuring reserves for the six months ended June 30, 2004:

     In March 2003, the Company announced that it would be streamlining its existing Broomfield, Colorado call center operations into its Lynn, Massachusetts facility and a smaller facility in Broomfield, Colorado by the end of May 2003. In the quarter ended March 31, 2003, the Company recorded a restructuring charge of approximately $0.1 million for workforce reductions. In the quarter ended June 30, 2003, the Company recorded an additional restructuring charge associated with this action of approximately $1.0 million, consisting of approximately $0.6 million in future lease obligations for unused facilities and approximately $0.4 million for capital equipment write-offs. The capital equipment write-offs and a majority of severance costs related to this restructuring were incurred by the end of 2003, and the Company anticipates that all other costs relating to this restructuring, consisting principally of lease obligations on unused space, will be paid by the end of 2004.

     The following summarizes the changes to the March 2003 restructuring reserves for the six months ended June 30, 2004:

     In June 2003, the Company announced that it would be closing its Irvine, California facility and transferring certain employment positions to its Broomfield, Colorado facility and reducing its headcount by an estimated 70 employees as follows: 16 in product and service delivery, 30 in development, 13 in sales and marketing and 11 in general and administrative. In the quarter ended June 30, 2003, the Company recorded a restructuring charge of approximately $0.7 million, consisting mainly of workforce reduction costs. In the quarter ended September 30, 2003, the Company recorded an additional restructuring charge associated with this action of approximately $3.3 million, consisting of $1.1 million for workforce reduction, $1.7 million in future lease obligations for unused facilities and $0.5 million for capital equipment write-offs. In the quarter ended December 31, 2003, the Company recorded an additional restructuring charge of $0.1 million related to future lease obligations and employee severance benefits. The capital equipment write-offs and a majority of severance costs related to this restructuring were incurred by the end of 2003, and the Company anticipates that all other costs related to this restructuring, consisting principally of lease obligations on unused space, will be paid by the end of 2005.

     The following summarizes the changes to the June 2003 restructuring reserves for the six months ended June 30, 2004:

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     In January 2004, the Company announced a limited reorganization of its internal business operations. This action, a continuation of the Company’s emphasis on expense management, resulted in the termination of ten individuals in the Company’s corporate office in Burlington, Massachusetts. The Company recorded a restructuring charge of approximately $0.5 million relating to employee severance and termination benefits.

     The following summarizes the changes to the January 2004 restructuring reserves for the six months ended June 30, 2004:

11. PROVISION FOR (BENEFIT FROM) INCOME TAXES

     The income tax provision for the six months ended June 30, 2004 reflects a net benefit of $0.1 million which consists of an income tax provision at an annual effective tax rate of (5.0)%, plus a $0.3 million tax benefit related to the recognition of prior year research and development tax credits less a $0.2 million provision to establish a tax valuation allowance against certain deferred tax assets. If the Company generates future taxable income against which these tax attributes may be applied, some portion or all of the valuation allowance previously established will be reversed and result in an income tax benefit in the current period. The (5.0)% rate differs from the statutory rate of 34.0% due to the level of estimated pre-tax profit. The income tax provision for the six months ended June 30, 2003 reflects a net benefit of $0.4 million which consists of an income tax benefit at an annual effective tax rate of 20.0%, as well as a $0.3 million tax benefit related to the recognition of prior year’s research and development tax credits. The 20.0% rate differs from the statutory rate of 34.0% due to the level of estimated pre-tax profit.

12. RECENT ACCOUNTING PRONOUNCEMENTS

     In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements” (FIN 46). FIN 46 establishes accounting guidance for consolidation of variable interest entities (VIEs) that function to support the activities of the primary beneficiary. FIN 46 applies to any business enterprise, both public and private, that has a controlling interest, contractual relationship or other business relationship with a VIE.

     In December 2003, the FASB published a revision to FIN 46 to clarify some of the provisions and to exempt certain entities from its requirements. Under the new guidance, special effective date provisions apply to enterprises that have fully or partially applied FIN 46 prior to issuance of the revised interpretation. Otherwise, application of Interpretation 46R (FIN 46R) is required in financial statements of public entities that have interests in structures that are commonly referred to as special-purpose entities (SPEs) for periods ending after December 15, 2003. Application by public entities, other than business issuers, for all other types of VIEs other than SPEs, is required in financial statements for periods ending after March 15, 2004. The Company does not have any investments in or contractual relationships or other business relationships with any VIE and therefore the adoption of FIN 46R did not have any impact on the Company’s consolidated financial position, results of operations or cash flows.

13. SUBSEQUENT EVENTS

     On August 2, 2004, the Company announced that Pamela D.A. Reeve had resigned as President and Chief Executive Officer and as a member of the Company’s Board of Directors. Robert E. Donahue, a member of the Board of Directors, was named to serve as the Company’s interim President and Chief Executive Officer. In conjunction with Ms. Reeve’s resignation, the Company entered into a Separation Agreement and Release which includes payments to Ms. Reeve equivalent to two years’ base salary and certain other benefits. These expenses will be recorded by the Company in its condensed consolidated statements of operations for the three months ending September 30, 2004.

     On August 6, 2004, the Company entered into an Asset Purchase Agreement with Subex Systems Limited – NJ (“Subex”) to transfer certain assets related to the Company’s Fraud Centurion product suite for up to $3.0 million. The closing of the transaction is expected to occur within the next three months and is subject to certain closing conditions specified in the Asset Purchase Agreement.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

     This Quarterly Report on Form 10-Q contains “Forward-Looking Statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects” and similar expressions are intended to identify forward-looking statements. The forward-looking statements involve known and unknown risks, uncertainties and other factors, including the factors set forth below under the heading “Risk Factors” that may cause the actual results, performance and achievements of Lightbridge to differ materially from those indicated by the forward-looking statements. Lightbridge undertakes no obligation to update any forward-looking statements it makes.

     ALIAS, AUTHORIZE.NET, FRAUDBUSTER, FRAUD CENTURION, FRAUD SENTINEL, GROUPTALK, LIGHTBRIDGE, the Lightbridge logo, PHONEPRINT and PROFILE are registered trademarks of Lightbridge, and @RISK, CAS, CUSTOMER ACQUISITION SYSTEM, INSIGHT, LIGHTBRIDGE TELESERVICES, PHONEFUEL, POPS, PREPAY, PREPAY IN, RETAIL MANAGEMENT SYSTEM, RMS and TALKGROUP are trademarks of Lightbridge. All other trademarks or trade names appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.

Critical Accounting Policies and Estimates

     We have identified and discussed certain critical accounting policies and estimates in our Annual Report on Form 10-K for the year ended December 31, 2003. We did not modify our critical accounting policies during the quarter ended June 30, 2004. Those policies and estimates have been applied in the preparation of our financial statements included in this Quarterly Report on Form 10-Q. In applying our critical accounting policies, we decreased the annual estimated effective tax rate to (5)% in the quarter ended June 30, 2004.

Overview

     We develop, market and support a suite of products and services for communications providers and online businesses that support the customer lifecycle, including customer qualification and acquisition, risk management, prepaid billing, mobile data management, voice conferencing, authentication services and payment processing services. We also offer on-demand voice conferencing services. Our software-based solutions are delivered primarily on an outsourced or service bureau basis. These outsourced or service bureau solutions together with our TeleServices offerings comprise our transaction business. We also derive revenues from software licensing, consulting and maintenance services, hardware sales and payment processing services. While our solutions historically have been delivered primarily to wireless carriers, we also provide solutions to online businesses and other non-carrier clients.

     The results of operations for Authorize.Net are being included for the first time in the three-month period ended June 30, 2004 on our statements of operations.

     In June 2002, we announced that we were reducing our workforce by seven percent and consolidating our Waltham, Massachusetts call center operations into our Lynn, Massachusetts and Broomfield, Colorado facilities by the end of 2002. In March 2003, we announced that we would be streamlining our Broomfield, Colorado call center operations into our Lynn, Massachusetts facility and a smaller facility in Broomfield, Colorado by the end of May 2003. In June 2003, we announced we would be closing our Irvine, California facility and transferring certain employment positions to our Broomfield, Colorado facility and reducing our headcount by an estimated 70 employees.

     In December 2003, we entered into an agreement to lease approximately 80,000 square feet in a single building in Burlington, Massachusetts for our new principal administrative, sales, consulting, marketing and product development facility. In February 2004, we announced the planned expansion of our call center operations to Liverpool, Nova Scotia, Canada. Our Nova Scotia facility became operational on April 15, 2004 and we commenced occupancy of our new Burlington facility in June 2004.

     In January 2004, we announced a limited reorganization of our internal business operations. This action, a continuation of our emphasis on expense management, resulted in the termination of ten individuals in our corporate office in Burlington, Massachusetts. We recorded a restructuring charge of approximately $0.5 million relating to severance and termination benefits.

     On March 31, 2004, we acquired all of the outstanding stock of Authorize.Net from InfoSpace Inc., for $82 million in cash and expect to incur approximately $2.1 million in acquisition related transaction costs. The purchase price paid by us was subject to adjustment based on the final determination of working capital required at closing as set forth in the stock sale agreement. Authorize.Net is a provider of payment solutions for online customer transactions. The Authorize.Net payment gateway provides credit card and electronic check solutions to companies that process orders for goods and services over the Internet. Authorize.Net connects small and medium sized businesses to large credit card processors and banking organizations, allowing those businesses to accept electronic payments.

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     Our transaction revenues are derived primarily from the processing of applications for qualification of subscribers for telecommunications services and the activation of service for those subscribers. Over time, we have expanded our offerings from credit evaluation services to include screening for subscriber fraud, evaluating carriers’ existing accounts, interfacing with carrier and third-party systems and providing call center services. We also offer transaction services to screen and authenticate the identity of users engaged in online transactions. We also offer on-demand voice conferencing services through our GroupTalk offering. Our transaction-based solutions provide multiple, remote, systems access for workflow management, along with centrally managed client-specified business policies, and links to client and third-party systems. Transaction services are provided through contracts with carriers and others, which specify the services to be utilized and the markets to be served. Our clients are charged for these services on a per transaction basis or, in the case of GroupTalk, on a per-minute basis. Pricing varies depending primarily on the volume and type of transactions, the number and type of other products and services selected for integration with the services and the term of the contract under which services are provided. The volume of transactions processed varies depending on seasonal and retail trends, the success of the carriers and others utilizing our services in attracting subscribers and the markets served by our clients. Transaction revenues are recognized in the period in which the services are performed.

     Our software licensing revenues consist of revenues attributable to the licensing of our CAS Application Modules, Prepaid Billing and Mobile Data Management software. Our CAS modules are designed to assist customers in interfacing with our transaction processing systems as well as to perform other point-of-sale and channel functionality. In the quarter ended March 31, 2004, we determined that we would no longer actively market or sell our Retail Management System (RMS) product. On August 6, 2004, we entered into an Asset Purchase Agreement with Subex Systems Limited – NJ (“Subex”) to transfer certain assets related to our Fraud Centurion product suite for up to $3.0 million. The closing of the transaction is expected to occur within the next three months and is subject to certain closing conditions specified in the Asset Purchase Agreement. The Fraud Centurion product suite is designed to assist carriers in monitoring subscriber accounts to identify activity that may indicate fraud. The Prepaid Billing system allows carriers to market and manage prepaid wireless services to customers. The Mobile Data Management solutions provide wireless carriers a platform for the development and management of data content and applications. Our software products are licensed as packaged software products and each product generally requires incidental customization or integration with other products and systems to varying degrees. Software licensing revenues are recognized when persuasive evidence of an arrangement exists, delivery of the product has been made, and a fixed fee and collectibility have been determined.

     Our consulting and services revenues historically have been derived principally from providing solution development and deployment services and business advisory consulting in the areas of customer acquisition and retention, authentication, prepay billing and risk management. The majority of consulting and services engagements are performed on a time and materials basis and revenues from these engagements are generally recognized as the services are performed. When we perform work under a fixed fee arrangement, revenues are generally recognized as services are performed. Revenues from software maintenance contracts are recognized ratably over the term of the maintenance agreement and are reported as consulting and services revenues.

     Our hardware revenues historically have been derived in connection with sales of our PrePay and PhonePrint products. Revenue from hardware is recognized upon shipment, unless testing, integration or other services are required, in which case it is recognized upon commissioning and acceptance of the product. Revenue from hardware sold in conjunction with software is deferred until the software revenue is recognized.

     Revenues for payment processing are derived from our credit card processing and eCheck processing services (collectively “payment processing services”), gateway fees and set-up fees. Payment processing services revenue is based on a fee per transaction or on a percentage of the completed transaction, and is recognized in the period in which the transaction occurs. Gateway fees are monthly subscription fees charged to our merchant customers for the use of our payment gateway. Gateway fees are recognized in the period in which the service is provided. Set-up fees represent one-time charges for initiating our payment processing services. Although these fees are generally paid to us at the commencement of the agreement, they are recognized ratably over the estimated average life of the merchant relationship which is determined through a series of analyses of active and deactivated merchants. Commissions paid to outside sales partners are recorded in sales and marketing expense in our statements of operations.

     In the quarter ended June 30, 2004, two clients accounted for 24% and 15% of our total revenues. In the quarter ended June 30, 2003, four clients accounted for 24%, 20%, 18% and 12% of our total revenues. In the six months ended June 30, 2004, three clients accounted for 24%, 17% and 10% of our total revenues. In the six months ended June 30, 2003, four clients accounted for 26%, 21%, 17% and 12% of our total revenues. We entered into a recent amendment to our services agreement with AT&T Wireless Services, Inc. (“AT&T”), one of our major clients, extending the term of the agreement through April 1, 2009, subject to earlier termination of the services agreement upon twelve months’ notice and designated services upon notice. A loss of one or more of these major clients, a bankruptcy or period of financial difficulty of one or more of these clients, a decrease in orders by one or more of these clients or a change in the combination of products and services obtained from us by one or more of these clients would adversely affect our revenues, margins and net income.

     We are currently reviewing our cost structure in order to better align our costs with anticipated future revenues. We anticipate that this review may result in reduced operating expenses in future periods.

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Results Of Operations

     The following table sets forth, for the periods indicated, certain financial data as a percentage of total revenues:

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Quarter Ended June 30, 2004 Compared with Quarter Ended June 30, 2003.

     Revenues. Revenues and certain revenue comparisons for the three months ended June 30, 2004 and 2003 were as follows:

(Dollars in thousands)

     The slight increase in transaction revenues of $100,000 was due to increased client subscriber applications and an increase in the services provided by our TeleServices call centers. These favorable changes were partially offset by lower transaction fees charged to certain clients as a result of competitive pricing pressures and an unfavorable change in the mix of services provided.

     Our transaction revenues will continue to reflect the industry’s rate of growth of new subscribers as well as the rate of switching among carriers by subscribers (subscriber churn). While we saw growth in the number of applications processed in the quarter ended June 30, 2004 as compared to the quarter ended June 30, 2003, we believe that transaction revenues in the remainder of 2004 may be impacted by changes in the demand for our TeleServices business, changes in the combination of services purchased by clients, and competitive pricing pressures.

     The decrease in software licensing revenues of $2.0 million resulted from fewer and lower total value software license transactions and reduced growth fees from existing clients. We expect the level of capital spending by carriers to continue to affect the sales of our software products during the remainder of 2004. Our PrePay clients’ growth rates for net new PrePay subscribers continue to impact the level of our growth fee license revenue.

     The decrease in consulting and services revenues of $0.3 million for the quarter ended June 30, 2004 was principally due to a decrease in maintenance and support fees associated with our PhonePrint and RMS products which we no longer actively market and sell. We expect that the level of software sales will continue to affect consulting and services revenues during the remainder of 2004. Upon closing of the Fraud Centurion transaction with Subex, we expect that maintenance and support fees associated with our Fraud Centurion products will end or decline significantly and, accordingly, negatively affect consulting and services revenues.

     There was a decrease in hardware revenues of $0.6 million for the quarter ended June 30, 2004. Hardware revenues are a function of the number of PrePay software license sales and the number of subscribers each new system sold will support.

     Payment processing revenues were included in the second quarter results for the first time during the quarter ended June 30, 2004, due to the acquisition of Authorize.Net, and we expect these revenues to increase through the remainder of 2004.

     Cost of Revenues and Gross Profit. Cost of revenues consists primarily of personnel costs, costs of resold third party hardware, software and services, costs of maintaining systems and networks used in processing qualification and activation transactions (including depreciation and amortization of systems and networks) and amortization of capitalized software and acquired technology. Cost of revenues for payment processing consists of expenses associated with the delivery, maintenance and support of Authorize.Net’s products and services, including personnel costs, communication costs, such as high-bandwith Internet access, server equipment depreciation, transactional processing fees, as well as customer care costs. In the future, cost of revenues may vary as a percentage of total revenues as a result of a number of factors, including changes in the volume of transactions processed, changes in the mix of transaction revenues between those from automated transaction processing and those from processing transactions through our TeleServices call centers, changes in pricing to certain clients and changes in the mix of total revenues among transaction revenues, software licensing and maintenance revenues, consulting services revenues and payment processing revenues. Generally, cost of revenue from automated transaction processing tends to be lower than costs of revenue from processing transactions through our TeleServices call centers.

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     Cost of revenues, gross profit and certain comparisons for the three months ended June 30, 2004 and 2003 were as follows:

(Dollars in thousands)

     Transaction cost of revenues increased by $1.3 million in the second quarter of 2004 from the second quarter of 2003. This increase, which is associated with our call center operations, reflects staffing and training costs due to increased call center volume as well as the opening of our Liverpool, Nova Scotia call center.

     Software licensing cost of revenues decreased by $0.5 million in the second quarter of 2004 from the second quarter of 2003. This decrease was primarily attributable to the type of software products licensed during the quarter ended June 30, 2004. The second quarter 2004 software licensing cost of revenue is more reflective of average historical and expected future software cost of sales than the cost in the second quarter of 2003.

     Consulting and services cost of revenues decreased slightly by $0.2 million in the quarter ended June 30, 2004 from the quarter ended June 30, 2003, driven by reduced use of contract labor.

     Hardware cost of revenues decreased by $0.6 million in the quarter ended June 30, 2004 from 3.2% in the quarter ended June 30, 2003. This decrease was attributable to the decrease in hardware revenues.

     Payment processing cost of revenues were included in the second quarter results for the first time during 2004.

     We expect that fluctuations in gross profit may occur primarily because of a change in the mix of revenue generated from our five revenue components, particularly revenues from software licensing, consulting services and payment processing, and also because of competitive pricing pressures.

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     Operating Expenses. Operating expenses and certain operating expense comparisons for the three months ended June 30, 2004 and 2003 were as follows:

(Dollars in thousands)

     Development. Development expenses include software development costs, consisting primarily of personnel and outside technical service costs related to developing new products and services, enhancing existing products and services, and implementing and maintaining new and existing products and services. The decrease in the development expenses for the three months ended June 30, 2004 was primarily due to cost savings associated with the June 2003 and January 2004 restructurings. These savings were partially offset by the addition of Authorize.Net. Development expenses as a percentage of total revenues decreased for the three months ended June 30, 2004 as a result of lower expense levels and increased revenues. We expect development expenses to continue to be greater, in comparison to prior year levels, in the remaining periods in 2004 primarily due to the inclusion of Authorize.Net’s development expenses in our 2004 results.

     Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions and travel expenses of direct sales and marketing personnel, as well as costs associated with advertising, trade shows and conferences. Additionally for Authorize.Net, sales and marketing expenses consist of the costs mentioned above as well as commissions paid to outside sales partners. The increase for the three months ended June 30, 2004 was due to the addition of Authorize.Net and the related sales partner commissions included in sales and marketing expense. We expect sales and marketing expenses to continue to be greater, in comparison to prior year levels, in the remaining periods in 2004 primarily due to the inclusion of Authorize.Net’s sales and marketing expenses in our 2004 results.

     General and Administrative. General and administrative expenses consist principally of salaries of executive, finance, human resources and administrative personnel and fees for certain outside professional services. The increase in general and administrative costs for the three months ended June 30, 2004 was primarily due to expenses incurred as a result of increased regulatory and compliance requirements and the inclusion of the Authorize.Net expenditures. Excluding expenditures related to the Authorize.Net business, general and administrative expenses decreased slightly in the quarter end June 30, 2004 in comparison with the same quarter of 2003. We expect general and administrative expenses to continue to be greater, in comparison to prior year levels, in the remaining periods in 2004 primarily due to the inclusion of Authorize.Net’s general and administrative expenses in our 2004 results as well as the impact of separation costs related to Ms. Reeve’s resignation as discussed in Note 13. Subsequent Events, of our condensed consolidated statements of operation.

     Other Income, Net. Other income, net primarily consists of interest income earned on our cash and short-term investment balances as well as other non-operating gains and losses. Other income, net decreased to $0.4 million in the quarter ended June 30, 2004 from $0.5 million in the quarter ended June 30, 2003. This decrease was primarily due to a decline in our cash and short-term investments balance as a result of the payment of the purchase price for the acquisition of Authorize.Net. This decrease was partially offset by a $250,000 recovery of a note receivable that had been deemed uncollectible and written off in a prior period.

     Provision For (Benefit From) Income Taxes. We estimate our interim income tax expense (benefit) based on the Company’s projected annual effective tax rate. Our projected annual effective tax rate differs from the federal statutory rate primarily due to the impact of state taxes, changes in valuation allowances for certain deferred tax assets and benefit from federal and state tax credits. The annual effective tax rate for 2004 will be largely dependent on our performance and could fluctuate significantly with slight changes in the absolute dollar value of our 2004 pre-tax income (loss).

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Six Months Ended June 30, 2004 Compared With Six Months Ended June 30, 2003.

     Revenues. Revenues and certain revenue comparisons for the six months ended June 30, 2004 and 2003 were as follows:

     The increase in transaction revenues of $0.9 million was due to increased client subscriber applications and an increase in the services provided by our TeleServices call centers. These factors were partially offset by lower transaction fees charged to certain clients as a result of competitive pricing pressures and an unfavorable change in the mix of services provided.

     Software licensing revenues decreased by $1.1 million in the six months ended June 30, 2004 as compared to the six months ended June 30, 2003 reflecting reduced growth fees resulting from lower PrePay subscriber growth among clients utilizing our PrePay software. This reduction was offset in part by a slight increase in the revenues associated with initial software license sales.

     The decrease in consulting and services revenues of $1.0 million for the six months ended June 30, 2004 was principally due to a decline in maintenance fees for the PrePay product, resulting from certain maintenance pricing modifications to our agreement with Ericsson AB.

     There was a slight decrease in hardware revenues of $0.3 million for the six months ended June 30, 2004.

     Payment processing revenues were included in the second quarter results for the first time during the quarter ended June 30, 2004, due to the acquisition of Authorize.Net.

     Cost of Revenues and Gross Profit.

     Cost of revenues, gross profit and certain comparisons for the six months ended June 30, 2004 and 2003 were as follows:

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     Transaction cost of revenues increased by $2.3 million in the first six months of 2004 from the first six months of 2003. Spending for our TeleServices call centers increased as a result of increased staffing and training costs related to increased call center volume. Increased client subscriber applications resulted in slightly higher resold services expenses, which are the fees paid to third party service providers whose services we resell in conjunction with the processing of some credit applications. These increases were partially offset by reduced costs of maintaining systems and networks used in processing qualification and activation.

     Software licensing cost of revenues was unchanged for the six months ended June 30, 2004 in comparison with the same period in 2003.

     Consulting and services cost of revenues decreased by $0.9 million in the six months ended June 30, 2004. This decrease was attributable to a reduction in headcount associated with the June 2003 and January 2004 restructurings and a reduced use of contract labor.

     Hardware cost of revenues decreased by $0.3 million in the six months ended June 30, 2004 from 2.6% in the six months ended June 30, 2003. This decrease was attributable to the decrease in hardware revenues.

     Payment processing costs of revenues were included in the second quarter results for the first time during 2004.

     Operating Expenses. Operating expenses and certain operating expense comparisons for the six months ended June 30, 2004 and 2003 were as follows:

     Development. The decrease in development expenses for the six months ended June 30, 2004 was primarily due to cost savings associated with the June 2003 and January 2004 restructurings. These savings were partially offset by the addition of Authorize.Net, the expenses from which are included beginning in the three months ended June 30, 2004. Development expenses as a percentage of total revenues decreased for the six months ended June 30, 2004 as a result of lower expense levels and increased revenue.

     Sales and Marketing. The increase in sales and marketing expenses for the six months ended June 30, 2004 was due to the addition of Authorize.Net and the related sales partner commissions included in sales and marketing expense. Sales and marketing expenses without the addition of Authorize.Net decreased slightly from the six months ending June 30, 2003 due to a decrease in marketing program spending.

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     General and Administrative. The increase in general and administrative costs for the six months ended June 30, 2004 was primarily due to expenses incurred as a result of increased regulatory and compliance requirements and the inclusion of the Authorize.Net expenditures.

     Purchased In-Process Research and Development (“IPR&D”). In connection with the Authorize.Net acquisition, we recorded a $0.7 million charge during the first quarter of 2004 for two IPR&D projects. The Authorize.Net technology includes payment gateway solutions that enable merchants to authorize, settle and manage electronic transactions via the Internet, at retail locations and on wireless devices. The research projects in process at the date of acquisition related to the development of the Card Present Solution (“CPS”) and the Fraud Tool (“FT”). Development on the FT project and the CPS project was started at the end of 2003 and the beginning of 2004, respectively. The complexity of the CPS technology lies in its fast, flexible and redundant characteristics. The complexity of the FT technology lies in its responsiveness to changing fraud dynamics and efficiency.

     The value of the projects was determined by an independent appraiser using the income method. The discounted cash flow method was utilized to estimate the present value of the expected income that could be generated through revenues from the projects over their estimated useful lives through 2009. The percentage of completion for the projects was determined based on the amount of research and development expenses incurred through the date of acquisition as a percentage of estimated total research and development expenses to bring the projects to technological feasibility. At the acquisition date, we estimated that the CPS and the FT projects were approximately 15% and 80% complete, respectively, with fair values of approximately $638,000 and $41,000, respectively. The discount rate used for the fair value calculation was 30% for the CPS project and 22% for the FT project. At the date of acquisition, development of the technology involved risks to us including the remaining development effort required to achieve technological feasibility and uncertainty with respect to the market for the technology.

     We completed the development of the FT in May 2004 having spent approximately $129,000 on the project after the acquisition. Total cost to complete the CPS project after acquisition is estimated to be approximately $650,000. The CPS project is expected to be completed by March 2005. If the development of the technology is not completed on schedule, the potential consequences to us may be increased development costs and increased competition from other companies that have competitive products in the market.

     Other Income, Net. Other income, net decreased to $0.8 million in the six months ended June 30, 2004 from $1.0 million in the six months ended June 30, 2003. This decrease was primarily due to a decline in our cash and short-term investments balance as a result of the payment of the purchase price for the acquisition of Authorize.Net. This decrease was partially offset by a $250,000 recovery of a note receivable that had been deemed uncollectible and written off in a prior period.

     Provision For (Benefit From) Income Taxes. Our projected annual effective tax rate of (5)% differs from the federal statutory rate primarily due to the impact of state taxes, changes in valuation allowances for certain deferred tax assets and benefit from federal and state tax credits.

Restructuring

     In June 2002, we announced that we were reducing our workforce by seven percent and consolidating our Waltham, Massachusetts call center operations into our Lynn, Massachusetts and Broomfield, Colorado facilities by the end of 2002. We recorded a restructuring charge of approximately $3.6 million, consisting of $1.6 million for workforce reductions, $1.3 million for facilities reductions including lease obligations, utilities and security costs on unused space and $0.7 million for capital equipment write-offs associated with these measures. The restructuring plan resulted in the termination of 65 personnel as follows: 25 in product and service delivery, 22 in development, 11 in sales and marketing and seven in general and administrative. The capital equipment write-offs and a majority of severance costs related to this restructuring were incurred by the end of 2002, and we anticipate that all other costs relating to this restructuring, consisting principally of lease obligations on unused space, will be paid by the end of 2004.

     The following summarizes the changes to the June 2002 restructuring reserves for the six months ended June 30, 2004:

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     In March 2003, we announced that we would be streamlining our existing Broomfield, Colorado call center operations into our Lynn, Massachusetts facility and a smaller facility in Broomfield, Colorado by the end of May 2003. In the quarter ended March 31, 2003, we recorded a restructuring charge of approximately $0.1 million for workforce reductions. In the quarter ended June 30, 2003, we recorded an additional restructuring charge associated with this action of approximately $1.0 million, consisting of approximately $0.6 million in future lease obligations for unused facilities and approximately $0.4 million for capital equipment write-offs. The capital equipment write-offs and a majority of severance costs related to this restructuring were incurred by the end of 2003, and we anticipate that all other costs relating to this restructuring, consisting principally of lease obligations on unused space, will be paid by the end of 2004.

     The following summarizes the changes to the March 2003 restructuring reserves for the six months ended June 30, 2004:

     In June 2003, we announced that we would be closing our Irvine, California facility and transferring certain employment positions to our Broomfield, Colorado facility and reducing our headcount by an estimated 70 employees as follows: 16 in product and service delivery, 30 in development, 13 in sales and marketing and 11 in general and administrative. In the quarter ended June 30, 2003, we recorded a restructuring charge of approximately $0.7 million, consisting mainly of workforce reduction costs. In the quarter ended September 30, 2003, we recorded an additional restructuring charge associated with this action of approximately $3.3 million, consisting of $1.1 million for workforce reduction, $1.7 million in future lease obligations for unused facilities and $0.5 million for capital equipment write-offs. In the quarter ended December 31, 2003, we recorded an additional restructuring charge of $0.1 million related to future lease obligations and employee severance benefits. The capital equipment write-offs and a majority of severance costs related to this restructuring were incurred by the end of 2003, and we anticipate that all other costs related to this restructuring, consisting principally of lease obligations on unused space, will be paid by the end of 2005.

     The following summarizes the changes to the June 2003 restructuring reserves for the six months ended June 30, 2004: