SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(MARK ONE)

For the quarterly period ended September 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:
(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 November 5, 2004, there were 26,503,459 shares of the registrant’s common stock, $.01 par value, outstanding.

LIGHTBRIDGE, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 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 Corp. (“Authorize.Net”) from InfoSpace, Inc. for $82 million in cash. In addition, the Company incurred approximately $2.0 million in acquisition related costs. The total purchase price for the acquisition was $83.6 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 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, at retail locations and on wireless devices. 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 nine 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 and third 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 reseller network value of $9.3 million and the processor relationships value of $300,000 will be amortized over twelve years. The merchant customer base value of $7.0 million and the existing technology value of $3.1 million will be amortized over five years. The 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.

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     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 include 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.

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 September 30, 2003 and for the nine months ended September 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 loss for the nine months ended September 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.

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3. COMMITMENTS AND CONTINGENCIES

     At September 30, 2004, the Company was holding funds in the amount of $6.3 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 September 30, 2004, the Company held funds in the amount of $882,000 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 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.

     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.

     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.

     As of August 10, 2004, the Company entered into a lease agreement for 14,148 square feet of office space in Bellevue, Washington. The lease commenced in September 2004 and will expire in September 2009.

     The Company’s future minimum payments due under operating leases are as follows as of September 30, 2004:

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 the date at which the services are provided or the date of grant.

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

     Due to the cancellation of a significant amount of unvested stock options held by employees whose employment was terminated in the quarter ended September 30, 2004, the pro forma adjustment for that period’s stock based compensation resulted in a net benefit.

     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 nine-month periods ended September 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 SEGMENTS 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 services 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. On March 31, 2004, the Company created the payment processing business segment through the acquisition of Authorize.Net. The total assets of this segment as of September 30, 2004 were $98.6 million.

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. The Company also offers on-demand voice conferencing services through its GroupTalk offering. Revenues from processing of qualification and activation transactions for communications providers are recognized in the period in which services are performed.

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Revenues from our GroupTalk offering are recognized as conference services are utilized. To date, the Company has not recognized any transaction revenues from its GroupTalk offering. If substantial doubt exists regarding collection of fees for the Company’s products or services at the time of delivery or performance, the Company defers recognition of the associated revenue until the fees are collected.

     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 agreements 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. 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 and the aforementioned other criteria for hardware revenue recognition are met.

     Revenues from 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. 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 nine months ended September 30, 2004 and 2003. Had such shares been included, shares for the diluted computation would have increased by approximately 4,939,000 and 1,874,000 for the three months ended September 30, 2004 and 2003, respectively, and approximately 3,363,000 and 2,243,000 for the nine months ended September 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 September 30, 2004 and 2003 and for the nine months ended September 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 48,000 and 374,000 shares for the three months ended September 30, 2004 and 2003, respectively, and 106,000 and 539,000 for the nine months ended September 30, 2004 and 2003, respectively.

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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 September 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. There were no repurchases during the third quarter of 2004. The maximum number of shares that could yet be purchased under the plan was 1,452,862 at September 30, 2004.

10. RESTRUCTURING RESERVES

     In September 2004, the Company announced a restructuring of its business in order to lower overall expenses to better align them with future revenue expectations. This action, a continuation of the Company’s emphasis on expense management, resulted in the termination of 64 employees and 2 contractors, in the Company’s corporate offices in Burlington, Massachusetts and its Broomfield, Colorado location as follows: 12 in product and service delivery, 16 in engineering and development, 25 in sales and marketing and 13 in general and administrative. The Company recorded a restructuring charge of approximately $2.1 million relating to employee severance and termination benefits during the three months ended September 30, 2004.

     The following summarizes the changes to the September 2004 restructuring reserve since it was accrued:

     In January 2004, the Company announced a reorganization of its internal business operations. This action 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 during the three months ended March 31, 2004.

     The following summarizes the changes to the January 2004 restructuring reserves for the nine months ended September 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 2006.

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     The following summarizes the changes to the June 2003 restructuring reserves for the nine months ended September 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 all of the 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 nine months ended September 30, 2004:

     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. 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 2005.

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

11. PROVISION FOR (BENEFIT FROM) INCOME TAXES

     The Company provides for income taxes on an interim basis based on the full year projected effective tax rate. The income tax provision for the nine months ended September 30, 2004 reflects a current state income tax expense, full valuation on net operating loss carryforwards and a provision for a net increase in the valuation allowance of certain deferred tax assets, which the Company believes that it is more likely than not, will not be used. If the Company generates future taxable income against which these tax attributes may be applied, some portion of the valuation allowance previously established will be reversed and result in an income tax benefit in the current period.

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     The income tax provision for the nine months ended September 30, 2003 reflects a net benefit based on the Company’s projected annual effective tax rate plus a benefit related to the recognition of prior year research and development tax credits.

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. ASSETS AND LIABILITIES HELD FOR SALE

     On October 1, 2004, the Company closed the sale of its Fraud Centurion products pursuant to an agreement with India-based Subex Systems, Limited – NJ (“Subex”). The Company received net cash proceeds of $2.2 million as a result of the sale. The Company expects to record a gain of approximately $2.4 million in the fourth quarter of 2004 due to this transaction.

     As part of this transaction, the Company sold equipment with a net book value of approximately $250,000 to Subex. In addition, the Company assigned certain maintenance contracts to Subex. The deferred revenue related to these contracts as of September 30, 2004 totaled $407,000. These amounts are classified as assets (and liabilities) held for sale in the accompanying September 30, 2004 balance sheet.

14. WORLDCOM, INC. SETTLEMENT

     During the quarter ended September 30, 2004, the Company received a settlement payment of approximately $538,000 as a result of the WorldCom, Inc. bankruptcy proceedings for services provided to WorldCom in 2002. As part of the bankruptcy settlement, the Company also realized a one-time benefit of approximately $1.2 million related to the release from liability of amounts owed to WorldCom, Inc. and amounts that had been reserved for potential claims against the Company as part of the WorldCom, Inc. bankruptcy proceedings.

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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.

     AUTHORIZE.NET, ECHECK.NET, FRAUD CENTURION, LIGHTBRIDGE, the Lightbridge logo and PHONEPRINT are registered trademarks, and AUTHORIZE.NET – WHERE THE WORLD TRANSACTS, CAS, CUSTOMER ACQUISITION SYSTEM, GROUPTALK, LIGHTBRIDGE TELESERVICES, PREPAY, PREPAY IN, RETAIL MANAGEMENT SYSTEM and RMS are trademarks of Lightbridge or Authorize.Net. 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 September 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.

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 were included for the first time in the three-month period ended June 30, 2004 in 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 in April 2004 and we commenced occupancy of our new Burlington facility in June 2004.

     In January 2004, we announced a reorganization of our internal business operations. This action 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 incurred approximately $2.0 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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     In September 2004, we announced a restructuring of our business in order to lower overall expenses to better align them with future revenue expectations. This action, a continuation of our emphasis on expense management, resulted in the termination of 64 employees and 2 contractors, in our corporate offices in Burlington, Massachusetts and Broomfield, Colorado location as follows: 12 in product and service delivery, 16 in engineering and development, 25 in sales and marketing and 13 in general and administrative. We recorded a restructuring charge of approximately $2.1 million relating to employee severance and termination benefits.

     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. We do not expect to recognize any transaction revenues from our GroupTalk offering in 2004. 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 and Prepaid Billing 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. The Prepaid Billing system allows carriers to market and manage prepaid wireless services to customers. 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 products. The closing of the transaction occurred on October 1, 2004. We received net cash proceeds of $2.2 million as a result of the sale. The Fraud Centurion products is designed to assist carriers in monitoring subscriber accounts to identify activity that may indicate fraud. The Mobile Data Management solutions, which we no longer actively market or sell, 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 from 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.

     If substantial doubt exists regarding collection of fees for our products or services at the time of delivery or performance, we defer recognition of the associated revenue until the fees are collected.

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     Our allowance for doubtful accounts is evaluated on a quarterly basis and the amount is determined based on detailed reserves for specific clients’ invoices and a general reserve based on historical amounts written-off.

     In the quarter ended September 30, 2004, three clients accounted for 18%, 15% and 10% of our total revenues. In the quarter ended September 30, 2003, four clients accounted for 30%, 23%, 13% and 10% of our total revenues. In the nine months ended September 30, 2004, three clients accounted for 22%, 17% and 10% of our total revenues. In the nine months ended September 30, 2003, four clients accounted for 27%, 21%, 14% 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. In February 2004, Cingular Wireless LLC (“Cingular”) announced an agreement to acquire AT&T. In October 2004, Cingular announced that it had completed its merger with AT&T. Cingular Wireless is not presently a client of Lightbridge. We are unable to predict the effect of the acquisition on our relationship with AT&T including, without limitation, the timing or extent of any reductions in applications processed or other services provided under our contract with AT&T. A loss of one or more of these major clients, a bankruptcy or period of financial difficulty of one or more of our clients, a decrease in orders by one or more of our major clients or a change in the combination of products and services obtained from us by one or more of our major clients would adversely affect our revenues, margins and net income.

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

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

(Dollars in thousands)

     The decrease in transaction revenues of $583,000 was a result of lower transaction fees charged to certain clients due to competitive pricing pressures and a less favorable mix of services provided on individual transactions. These unfavorable changes were partially offset by increased client subscriber application volumes and the full third quarter impact in 2004 of a large client for that we began providing transaction services during the third quarter of 2003. In addition, transaction revenues for the quarter ended September 30, 2004 included a settlement payment of approximately $538,000 as a result of the WorldCom, Inc. bankruptcy proceedings, for services provided to WorldCom, Inc. in 2002. We did not recognize revenue at the time the services were performed due to concerns regarding the collectibility of our fees.

     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 September 30, 2004 as compared to the quarter ended September 30, 2003, we believe that transaction revenues in the remainder of 2004 will continue to be impacted by changes in the demand for our transaction offerings, changes in the combination of services purchased by clients, and competitive pricing pressures. We expect transaction revenues in the fourth quarter of 2004 to be higher than in the third quarter.

     The decrease in software licensing revenues of $594,000 resulted from the absence of new software license transactions in the third quarter of 2004, despite increased user growth license fees for existing customers. The lack of new license fees was partly the result of our decision to discontinue actively marketing our RMS software product. 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 software clients’ growth rates for net new subscribers continue to impact the level of our growth fee license revenue. We expect software licensing revenues in the fourth quarter of 2004 to be lower than in the third quarter of 2004. We are developing plans that are intended to bring the expenses associated with our software business to breakeven or better 2005.

     The decrease in consulting and services revenues of $3.2 million for the quarter ended September 30, 2004 was principally due to a decrease in maintenance and support fees associated with our RMS product, which we no longer actively market and sell, decreased consulting services revenue from one significant transactions client, and the absence of new software licenses in the quarter. Additionally, pricing pressures have resulted in reduced rates for maintenance related to our PrePay software product suite in 2004. We expect that the level of software sales will continue to affect consulting and services revenues during the remainder of 2004. Due to the sale of our Fraud Centurion products to Subex on October 1, 2004, we expect that maintenance and support fees associated with our Fraud Centurion products will end or decline significantly during the remainder of 2004 and thereafter, and, accordingly, negatively affect consulting and services revenues in future periods. Maintenance revenues from the Fraud Centurion products were approximately $750,000 during the quarter ended September 30, 2004. Overall, we expect consulting and services revenues in the fourth quarter 2004 to be lower than in the third quarter of 2004.

     There was an increase in hardware revenues of $235,000 for the quarter ended September 30, 2004 compared to the same quarter last year. Hardware revenues are largely 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 third quarter results this year due to the acquisition of Authorize.Net on March 31, 2004. Authorize.Net’s revenues for the quarter ended September 30, 2004 increased by approximately 26% versus the same period last year, as reported by Authorize.Net’s former owner, InfoSpace, Inc., due to an increase in the number of merchant customers and increased transaction volumes. We expect these revenues to continue to increase through the remainder of 2004.

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     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.

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

(Dollars in thousands)

     Transaction cost of revenues increased by $105,000 in the third quarter of 2004 from the third quarter of 2003. This increase, which is associated with our call center operations, reflects staffing and training costs due to increased call center transaction volume as well as the expansion of our Liverpool, Nova Scotia call center opened in the second quarter of 2004. Generally, cost of revenue from automated transaction processing tends to be lower than costs of revenue from processing transactions through our TeleServices call centers. Included in transaction cost of revenues for the third quarter of 2004 was a one-time benefit realized by us as part of the settlement of the WorldCom, Inc. bankruptcy of approximately $200,000 related to the release from liability for certain telecommunications costs which we received from WorldCom, Inc..

     Software licensing cost of revenues decreased by $180,000 in the third quarter of 2004 from the third quarter of 2003. This decrease was primarily attributable to the type of software products provided during the quarter ended September 30, 2004. The third quarter 2004 software licensing cost of revenue is more reflective of average historical and expected future software cost of revenues than the cost in the third quarter of 2003.

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     Consulting and services cost of revenues decreased by $867,000 in the quarter ended September 30, 2004 from the quarter ended September 30, 2003, driven by the reduced consulting and services revenues and reduced use of contract labor primarily for consulting and services related to our RMS product.

     Hardware cost of revenues increased by $348,000 in the quarter ended September 30, 2004 from the quarter ended September 30, 2003. This increase was attributable to the increase in hardware revenues during the quarter ended September 30, 2004. Hardware sales are usually a component of software licensing or service arrangements. The gross margins earned can vary significantly as a percentage of hardware revenues based on discounts given on individual transactions.

     Due to the acquisition of Authorize.Net on March 31, 2004, this was the first time payment processing cost of revenues were included in the third quarter results for 2004.

     We expect that fluctuations in gross profit may occur in future periods 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.

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

(Dollars in thousands)

     Engineering and Development. Engineering and 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 increase in the engineering and development expenses for the three months ended September 30, 2004 was primarily due to the inclusion of Authorize.Net in this year’s results. Authorize.Net represented approximately $1.2 million of our engineering and development costs during the third quarter of 2004. These cost increases were partially offset by cost savings associated with the January 2004 restructuring and our decision to cease new development and enhancement of our RMS software product. Engineering and development expenses as a percentage of total revenues decreased slightly for the three months ended September 30, 2004 as a result of increased revenues. We expect engineering and development expenses to continue to be greater, in comparison to prior year levels, in the fourth quarter of 2004 primarily due to the inclusion of Authorize.Net’s engineering and 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 September 30, 2004, in absolute dollars and as a percentage of total revenues, was due to the acquisition of Authorize.Net in 2004 and the related sales partner commissions included in sales and marketing expense. Authorize.Net represented approximately $3.5 million of our sales and marketing expenses in the third quarter of 2004. This increase was partially offset by reductions in marketing costs for the other portions of our business as a result of reduced marketing headcount and program spending as compared to the same period last year. We expect sales and marketing expenses to continue to be greater, in comparison to prior year levels, in the remainder of 2004 primarily due to the inclusion of Authorize.Net’s sales and marketing expenses in our results this year.

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     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 September 30, 2004, in absolute dollars and as a percentage of revenue, was primarily due to increased professional service fees related to regulatory compliance requirements and the inclusion of Authorize.Net’s expenditures in the current year. Authorize.Net represented approximately $643,000 of general and administrative expenses during the quarter ended September 30, 2004.

     In addition during the third quarter of 2004, we incurred approximately $920,000 in separation costs associated with the resignation of our former President and Chief Executive Officer in August 2004. This increase was offset by a one-time benefit of approximately $1.0 million related to the release from liability of amounts that had been reserved for potential claims against us related to the WorldCom, Inc. bankruptcy proceedings. We expect general and administrative expenses to continue to be greater, in comparison to prior year levels, in the fourth quarter of 2004 primarily due to the inclusion of Authorize.Net’s general and administrative expenses in our 2004 results and increased regulatory compliance costs.

     Restructuring. In September 2004, we announced a restructuring of our business in order to lower overall expenses to better align them with future revenue expectations. This action, a continuation of our emphasis on expense management, resulted in the termination of 64 employees and 2 contractors, in our corporate offices in Burlington, Massachusetts and our Broomfield, Colorado location as follows: 12 in product and service delivery, 16 in engineering and development, 25 in sales and marketing and 13 in general and administrative. We recorded a restructuring charge of approximately $2.1 million relating to employee severance and termination benefits during the three months ended September 30, 2004.

     The following summarizes the changes to the September 2004 restructuring reserve since it was accrued:

     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 $193,000 in the quarter ended September 30, 2004 from $377,000 in the quarter ended September 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.

     Provision For (Benefit From) Income Taxes. We estimate our interim income tax expense (benefit) based on our 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 net income (loss).

Nine Months Ended September 30, 2004 Compared with Nine Months Ended September 30, 2003.

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

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     The increase in transaction revenues of $300,000 was due to increased volume of client subscriber applications, 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. In addition, transaction revenues for the quarter ended September 30, 2004 included approximately $538,000 related to a settlement received, as a result of the WorldCom, Inc. bankruptcy proceedings, for services provided to Worldcom, Inc. in 2002. We did not recognize revenue at the time the services were performed due to concerns regarding the collectibility of our fees.

     The decline in software licensing revenues of $1.7 million in the nine months ended September 30, 2004 was due to lower new software license revenues related to our RMS product and reduced subscriber growth license fees from clients utilizing our PrePay software. These decreases were partially offset by increased new software license revenues related to our PrePay software suite.

     The decrease in consulting and services revenues of $4.2 million for the nine months ended September 30, 2004 was principally due to a decline in consulting and maintenance revenues related to our decision to no longer actively market or develop our RMS product. Additonally, the decrease is related to a decline in maintenance revenues related to our PrePay software product suite as a result of pricing pressures and a decrease in consulting revenue from a significant transactions client. These decreases were partially offset by increased consulting revenues related to our PrePay software suite as a result of an increase in the volume of initial licenses sold.

     There was a slight decrease in hardware revenues of $103,000 for the nine months ended September 30, 2004. Hardware revenues are largely 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 our results beginning in 2004 as a result of the acquisition of Authorize.Net on March 31, 2004. Authorize.Net’s revenues for the period from April 1, 2004 to September 30, 2004 have increased 24% compared to the same period in 2003, as reported by Authorize.Net’s former owner, InfoSpace, Inc. The increased revenues are the result of an increase in the number of merchant customers and increased volume of transactions processed.

     Cost of Revenues and Gross Profit.

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

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     Transaction cost of revenues increased by $2.4 million in the first nine months of 2004 from the first nine 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. Additionally, the opening of our Liverpool, Nova Scotia call center during 2004 has resulted in increased costs as transaction volume was transferred from our previously existing call centers to this new site. 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 transactions.

     Software licensing cost of revenues decreased slightly by $181,000 for the nine months ended September 30, 2004 in comparison with the same period in 2003. This decrease was primarily attributable to the mix of software products licensed during 2004 as compared to the prior year.

     Consulting and services cost of revenues decreased by $1.7 million in the nine months ended September 30, 2004. This decrease was attributable to a reduction in headcount associated with the June 2003, January 2004 and September 2004 restructurings and a reduced use of contract labor.

     Hardware cost of revenues increased by $77,000 in the nine months ended September 30, 2004 in comparison with the same period in 2003. Hardware sales are usually a component of software licensing or service arrangements. The gross margins earned can vary significantly based on discounts given on individual transactions.

     Payment processing costs of revenues were included in our results beginning in the second quarter of 2004 due to the acquisition of Authorize.Net on March 31, 2004.

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

     Engineering and Development. The increase in engineering and development expenses for the nine months ended September 30, 2004 was primarily due to the addition of Authorize.Net, the expenses from which are included in our results beginning on April 1, 2004. Authroize.Net represented $2.1 million of engineering and development expenses in the current year’s results. This increase was partially offset by cost savings associated with the June 2003 and January 2004 restructurings and our decision to cease new development and enhancement of our RMS software product. Engineering and development expenses as a percentage of total revenues decreased for the nine months ended September 30, 2004 as a result of increased revenues.

     Sales and Marketing. The increase in sales and marketing expenses for the nine months ended September 30, 2004, in absolute dollars and as a percentage of revenue, was due to the addition of Authorize.Net and the related sales partner commissions included in sales and marketing expense. Authorize.Net represented $6.7 million of sales and marketing expenses in the current year’s results. This increase was partially offset by reductions in marketing costs for the other portions of our business as a result of reduced marketing headcount and program spending as compared to the same period last year.

     General and Administrative. The increase in general and administrative costs for the nine months ended September 30, 2004, in absolute dollars and as a percentage of revenue, was primarily due to expenses incurred as a result of increased regulatory and compliance requirements and the inclusion of the Authorize.Net expenditures beginning on April 1, 2004. Authorize.Net represented approximately $1.1 million of general and administrative in the current year’s results. In addition, during 2004, we incurred approximately $920,000 in separation costs associated with the resignation our former President and Chief Executive Officer in August 2004. This increase was offset by a one-time benefit in 2004 of approximately $1.0 million related to the release from liability of amounts that had been reserved for potential claims against us related to the WorldCom, Inc. bankruptcy proceedings.

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     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 include increased development costs and increased competition from other companies that have competitive products in the market.

     Other Income, Net. Other income, net decreased to $973,000 in the nine months ended September 30, 2004 from $1.4 million in the nine months ended September 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. The income tax provision for the nine months ended September 30, 2004 reflects a current state income tax expense and an increase in the valuation allowance against certain deferred tax credits, which we believe is more likely than not, will not be used.

Restructurings

     In September 2004, we announced a restructuring of our business in order to lower overall expenses to better align them with future revenue expectations. This action, a continuation of our emphasis on expense management, resulted in the termination of 64 employees and 2 contractors, in our corporate offices in Burlington, Massachusetts and our Broomfield, Colorado location as follows: 12 in product and service delivery, 16 in engineering and development, 25 in sales and marketing and 13 in general and administrative. We recorded a restructuring charge of approximately $2.1 million relating to employee severance and termination benefits during the three months ended September 30, 2004.

     The following summarizes the changes to the September 2004 restructuring reserve since it was accrued:

     In January 2004, we announced a 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 employee severance and termination benefits during the three months ended March 31, 2004.

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     The following summarizes the changes to the January 2004 restructuring reserves for the nine months ended September 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 2006.

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

     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 all of the 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 nine months ended September 30, 2004: