SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(MARK ONE)

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

For the quarterly period ended June 30, 2006

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

For the transition period from            to

LIGHTBRIDGE, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		04-3065140
(State or Other Jurisdiction of		(I.R.S. Employer Identification No.)
Incorporation or Organization)

30 Corporate Drive
Burlington, Massachusetts 01803
(Address of Principal Executive Offices) (Zip Code)
(781) 359-4000
(Registrant’s Telephone Number, Including Area Code)

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

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer þ

Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

     As of July 24, 2006, there were 27,303,475 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, 2006
TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS			3
Balance Sheets as of June 30, 2006 and December 31, 2005			3
Statements of Operations for the three and six months ended June 30, 2006 and 2005			4
Statements of Cash Flows for the six months ended June 30, 2006 and 2005 (as restated)			6
Notes to Unaudited Condensed Consolidated Financial Statements			7
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			17
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			27
Item 4. CONTROLS AND PROCEDURES			28
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS			28
Item 1A. RISK FACTORS			28
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			35
Item 6. EXHIBITS			36
SIGNATURE			37
EX-31.1 Section 302 Certification of C.E.O.
EX-31.2 Section 302 Certification of C.F.O.
EX-32.1 Section 906 Certification of C.E.O. & C.F.O.

PART I. FINANCIAL INFORMATION

		June 30,				December 31,
		2006				2005
ASSETS
Current assets:
Cash and cash equivalents		$	96,310			$	83,120
Short-term investments			1,917				1,688
Accounts receivable, net			10,449				11,911
Other current assets			2,812				3,432
Total current assets			111,488				100,151
Property and equipment, net			8,763				10,804
Other assets, net			635				438
Restricted cash			2,100				2,100
Goodwill			57,628				57,628
Intangible assets, net			16,998				18,414
Total assets		$	197,612			$	189,535
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	3,805			$	3,448
Accrued compensation and benefits			3,259				5,724
Other accrued liabilities			4,732				5,203
Deferred rent			633				656
Deferred revenues			3,074				2,863
Funds due to merchants			8,455				7,112
Accrued restructuring			877				989
Total current liabilities			24,835				25,995
Deferred rent, less current portion			2,304				2,548
Deferred tax liability			3,553				3,074
Other long-term liabilities			1,246				965
Total liabilities			31,938				32,582
Commitments and contingencies (Note 7)
Stockholders’ equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; no shares issued or outstanding at June 30, 2006 and December 31, 2005			—				—
Common stock, $.01 par value; 60,000,000 shares authorized; 30,738,455 and 30,259,882 shares issued and 27,299,412 and 26,820,839 shares outstanding at June 30, 2006 and December 31, 2005, respectively			307				303
Additional paid-in capital			175,810				169,648
Accumulated other comprehensive income			179				110
Retained earnings			10,165				7,679
Less: treasury stock, at cost; 3,439,043 shares			(20,787	)			(20,787	)
Total stockholders’ equity			165,674				156,953
Total liabilities and stockholders’ equity		$	197,612			$	189,535

See notes to unaudited condensed consolidated financial statements.

LIGHTBRIDGE, INC. AND SUBSIDIARIES

		Three Months Ended
		June 30,
		2006				2005
Revenues:
Transaction services		$	24,551			$	25,147
Consulting and maintenance services			672				1,417
Total revenues			25,223				26,564
Cost of revenues:
Transaction services			10,391				11,459
Consulting and maintenance services			391				557
Total cost of revenues			10,782				12,016
Gross profit:
Transaction services			14,160				13,688
Consulting and maintenance services			281				860
Total gross profit			14,441				14,548
Operating expenses:
Engineering and development			2,946				3,554
Sales and marketing			4,939				4,444
General and administrative			5,781				4,091
Restructuring charges and related asset impairments			937				(8	)
Total operating expenses			14,603				12,081
Income (loss) from operations			(162	)			2,467
Other income, net			1,099				328
Income from continuing operations before provision for income taxes			937				2,795
Provision for income taxes			83				442
Income from continuing operations			854				2,353
Discontinued operations, net of income taxes:
Gain on sale of INS assets			—				12,689
Discontinued operations			—				170
Total discontinued operations, net of income taxes			—				12,859
Net income		$	854			$	15,212
Net income per common shares (basic):
From continuing operations		$	0.03			$	0.09
From discontinued operations			—				0.48
Net income per common share (basic)		$	0.03			$	0.57
Net income per common share (diluted):
From continuing operations		$	0.03			$	0.09
From discontinued operations			—				0.47
Net income per common share (diluted):		$	0.03			$	0.56
Basic weighted average shares			27,243				26,623
Diluted weighted average shares			28,331				27,014

See notes to unaudited condensed consolidated financial statements.

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

		Six Months Ended
		June 30,
		2006				2005
Revenues:
Transaction services		$	50,233			$	50,801
Consulting and maintenance services			1,532				2,936
Total revenues			51,765				53,737
Cost of revenues:
Transaction services			21,595				24,190
Consulting and maintenance services			924				1,322
Total cost of revenues			22,519				25,512
Gross profit:
Transaction services			28,638				26,611
Consulting and maintenance services			608				1,614
Total gross profit			29,246				28,225
Operating expenses:
Engineering and development			6,183				7,476
Sales and marketing			9,710				8,915
General and administrative			10,540				7,621
Restructuring charges and related asset impairments			2,330				376
Total operating expenses			28,763				24,388
Income from operations			483				3,837
Other income, net			2,109				590
Income from continuing operations before provision for income taxes			2,592				4,427
Provision for income taxes			574				920
Income from continuing operations			2,018				3,507
Discontinued operations, net of income taxes:
Gain on sale of INS assets			—				12,689
Discontinued operations			468				(2,084	)
Total discontinued operations, net of income taxes			468				10,605
Net income		$	2,486			$	14,112
Net income per common shares (basic):
From continuing operations		$	0.07			$	0.13
From discontinued operations			0.02				0.40
Net income per common share (basic)		$	0.09			$	0.53
Net income per common share (diluted):
From continuing operations		$	0.07			$	0.13
From discontinued operations			0.02				0.39
Net income per common share (diluted):		$	0.09			$	0.52
Basic weighted average shares			27,134				26,592
Diluted weighted average shares			28,059				26,963

See notes to unaudited condensed consolidated financial statements.

LIGHTBRIDGE, INC. AND SUBSIDIARIES

		Six Months Ended
		June 30,
		2006				2005
						(As Restated,
						See Note 2)
Cash flows from operating activities:
Net income		$	2,486			$	14,112
Income from discontinued operations			468				10,605
Income from continuing operations			2,018				3,507
Adjustments to reconcile net income to net cash provided by operating activities for continuing operations:
Depreciation and amortization			3,908				4,638
Asset impairment related to restructuring			862				—
Loss on disposal of property and equipment			—				8
Deferred income taxes			479				816
Stock compensation expense			2,766				—
Changes in assets and liabilities:
Accounts receivable			1,462				1,167
Other assets			387				(1,285	)
Accounts payable and accrued liabilities			(2,695	)			(2,033	)
Funds due to merchants			1,343				882
Deferred rent			(267	)			(902	)
Deferred revenues			211				1,260
Other liabilities			281				801
Net cash provided by operating activities of continuing operations			10,755				8,859
Cash flows from investing activities of continuing operations:
Purchases of property and equipment			(1,193	)			(1,799	)
Restricted cash			—				(1,600	)
Purchase of short-term investments			(520	)			(3,928	)
Proceeds from sales and maturities of short-term investments			291				11,222
Net cash provided by (used in) investing activities for continuing operations			(1,422	)			3,895
Cash flows from financing activities of continuing operations:
Proceeds from issuance of common stock			3,400				597
Net cash provided by financing activities of continuing operations			3,400				597
Effects of foreign exchange rate changes on cash and cash equivalents			(11	)			211
Net cash provided by (used in) operating activities of discontinued operations			468				(3,313	)
Net cash provided by investing activities of discontinued operations			—				15,017
Net cash financing activities of discontinued operations			—				—
Net increase in cash and cash equivalents			13,190				25,266
Cash and cash equivalents, beginning of period			83,120				39,036
Cash and cash equivalents, end of period		$	96,310			$	64,302

See notes to unaudited condensed consolidated financial statements.

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, 2005.

2. RESTATEMENT OF FINANCIAL STATEMENTS FOR DISCONTINUED OPERATIONS

     Subsequent to the issuance of the Company’s interim condensed consolidated financial statements for the period ended June 30, 2005, the Company concluded that it was necessary to restate the statement of cash flows for the six months ended June 30, 2005 previously filed by the Company on Form 10-Q/A, to correct the error as set forth below in reporting the gain on the sale of the Company’s INS business. The gain on the sale of the INS business of $12.7 million and the net proceeds from the sale of the INS business of $15.0 million were previously improperly presented in net cash provided by (used in) operating activities of continuing operations and net cash provided by investing activities of continuing operations, respectively.

     The following table summarizes the amounts as previously reported and as restated in the Statements of Cash Flows for the six months ended June 30, 2005. The amounts have been adjusted to reflect discontinued operations (see Note 4) (dollars in thousands):

		Six months ended
		June 30, 2005
		As
		previously				As
		reported				restated
Net cash provided by (used in) operating activities of continuing operations		$	(5,524	)		$	8,859
Net cash provided by investing activities of continuing operations		$	18,912			$	3,895
Net cash provided by (used in) operating activities of discontinued operations		$	11,070			$	(3,313	)
Net cash provided by investing activities of discontinued operations		$	—			$	15,017

3. SHARE-BASED COMPENSATION

Stock Option Plans

     Stock Incentive Plans (active) — The Company awards stock options and restricted share awards under the 2004 Stock Incentive Plan (the 2004 Plan). No further grants can be made under the 1996 Incentive and Nonqualified Stock Option Plan (the 1996 Plan) and the 1998 Non-Statutory Stock Option Plan (the 1998 Plan). Also, the Company does not plan to make any further grants under the 1997 Stock Incentive Plan and Restricted Stock Purchase Plan.

     In April and June 2004, respectively, the Board authorized and the stockholders approved the adoption of the 2004 Plan which provides for the issuance of options and other stock-based awards to purchase up to 2,500,000 shares of the Company’s common stock, plus the number of shares then remaining available for future grants under the Company’s 1996 Plan and the 1998 Plan, plus the number of shares subject to any stock option granted pursuant to the 1996 Plan or the 1998 Plan that expires, is cancelled or otherwise terminates (other than by exercise) after the effective date of the 2004 Plan. Options are granted with an exercise price of no less than the common stock’s market value at the date of grant. Options generally have a four-year graded vesting and have 10-year contractual terms. Certain option and plan awards provide for accelerated vesting based on stock price performance or if there is a change in control (as defined in the 2004 Plan). At June 30, 2006, 3,216,941 shares were available for grant under the 2004 Plan.

     Employees Stock Purchase Plan — On June 14, 1996, the Board authorized and the stockholders approved the adoption of the 1996 Employee Stock Purchase Plan (ESPP Plan). The ESPP Plan provided for the sale of up to 600,000 shares of the Company’s common stock to employees. Employees may have up to 6% of their base salary withheld through payroll deductions to purchase common stock during semi-annual offering periods. The purchase price of the stock is the lower of 85% of (i) the fair market value of the common stock on the enrollment date (the first day of the offering period), or (ii) the fair market value on the exercise date (the last day of each offering period). Offering period means approximately six-month periods commencing (a) on the first trading day on or after February 1 and terminating on the last trading day in the following July, and (b) on the first trading day on or after August 1 and terminating on the last trading day in the following January.

     During the six months ended June 30, 2006, and 2005, the Company issued approximately 20,000 and 51,000 shares, respectively, under the ESPP Plan. The ESPP Plan was terminated upon expiration of the offering period on January 31, 2006.

Stock Option Valuation and Expense Information under SFAS 123(R)

     Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R) (SFAS No. 123(R)), “Share-Based Payment,” which establishes accounting for equity instruments exchanged for employee services. Under the provisions of SFAS No. 123(R), share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant). Prior to January 1, 2006, the Company accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company also followed the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” The Company elected to adopt the modified prospective transition method as provided by SFAS No. 123(R) and, accordingly, financial statement amounts for the prior periods presented in this Form 10-Q have not been restated to reflect the fair value method of expensing share-based compensation.

     On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards” (the FSP). The FSP provides that companies may elect to use a specified “short-cut” method to calculate the historical pool of windfall tax benefits upon adoption of SFAS No. 123(R). The Company elected to use the “short-cut” method when SFAS No. 123(R) was adopted by the Company on January 1, 2006.

     Share-based compensation expense recognized in the condensed consolidated statement of operations for the three and six months ended June 30, 2006 is based on awards ultimately expected to vest, and has been reduced for estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based partially on historical experience. In the Company’s pro forma information required under SFAS No. 123 for the periods prior to January 1, 2006, the Company did not established estimates for forfeitures.

     The following table summarizes the share-based compensation expense included in operating expense captions that the Company recorded within the accompanying condensed consolidated statements of income (amounts in thousands):

		Three Months				Six Months
		Ended				Ended
		June 30, 2006				June 30, 2006
Cost of revenues		$	51			$	146
Engineering and development			106				287
Sales and marketing			27				69
General and administrative			971				2,264
Share-based compensation expense		$	1,155			$	2,766

     Except as noted below, the Company estimates the fair value of options granted using the Black-Scholes option valuation model. It estimates the volatility of the Company’s common stock at the date of grant based on its historical volatility rate, consistent with Staff Accounting Bulletin No. 107 (SAB 107). The Company’s decision to use historical volatility was based upon the limited amount of actively traded options on its common stock and its assessment that historical volatility is more representative of future stock price trends than implied volatility. Lightbridge estimates the expected term to be consistent with the simplified method identified in SAB 107 for share-based awards granted during the six months ended June 30, 2006. The simplified method calculates the expected term as the average of the vesting and contractual terms of the award. The dividend yield assumption is based on historical and expected dividend payouts. The risk-free interest rate assumption is based on observed interest rates appropriate for the term of the Company’s employee options. The Company uses historical data to estimate pre-vesting option forfeitures and records share-based compensation expense only for those awards that are expected to vest. For options granted, the Company amortizes the fair value on a straight-line basis over the vesting period of the options.

     Lightbridge used the following assumptions to estimate the fair value of share-based payment awards:

		Six Months Ended
		June 30, 2006
						Employee Stock
		Stock Options				Purchase Plan (1)
Expected term (years)			6.25				0.50
Expected volatility			60% – 62	%			38	%
Risk-free interest rate (range)			4.3 – 5.2	%			4.6	%
Expected dividend yield			0.0	%			0.0	%

     During 2004 and 2005, the Company granted stock options to certain executive officers that provide for vesting of the options upon the achievement of stock price performance. During the three months ended March 31, 2006, 125,000 of these options vested because the average closing price of the Company’s common stock reached $10.00 for over 20 consecutive days. During the three months ended June 30, 2006, 50,000 of these options vested because the average closing price of the Company’s common stock reached $12.50 for over 20 consecutive days. Additional vesting of 50,000, and 50,000 shares under such stock options could occur if the average closing price of the Company’s common stock over 20 consecutive days reaches $15.00, and $17.50, respectively. The estimated fair value of these options was calculated using a Monte Carlo simulation model that estimated (i) the probability that the performance goal will be achieved, and (ii) the length of time required to attain the target market price. The Company recognized approximately $0.1 million and $1.0 million of shared-based compensation expense related to these options during the three months ended June 30 and March 31, 2006, respectively.

Share Awards

     The value of restricted share awards is determined by their intrinsic value (as if the underlying shares were vested and issued) on the grant date. The following table summarizes the Company’s time-based non-vested share activity for the six months ended June 30, 2006:

     The following table summarizes the status of the Company’s non-vested restricted shares:

						Weighted
		Number of				Average
		Shares				Fair Value
Non-vested at December 31, 2005			—			$	—
Granted			30,000				13.17
Vested			—				—
Forfeited			—				—
Non-vested at June 30, 2006			30,000			$	13.17

Stock Option Pro Forma Information under SFAS 123

     The Company did not recognize compensation expense for employee share-based awards for the three and six months ended June 30, 2005, when the exercise price of the Company’s employee stock awards equaled the market price of the underlying stock on the date of grant. The Company had previously adopted the provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” (SFAS 123), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,” through disclosure only. The following table illustrates the effects on net income and earnings per share for the three and six months ended June 30, 2005, as if the Company had applied the fair value recognition provisions of SFAS 123 to share-based employee awards.

		Three Months				Six Months
		Ended				Ended
		June 30, 2005				June 30, 2005
Income from continuing operations as reported		$	2,353			$	3,507
Add: Stock-based compensation included in income			—				—
Deduct: Total stock-based employee compensation expense determined under fair value method			(342	)			(799	)
Pro forma income from continuing operations		$	2,011			$	2,708
Income from continuing operations per common share — basic and diluted as reported		$	0.09			$	0.13
Income from continuing operations per common share — basic pro forma		$	0.08			$	0.10
Income from continuing operations per common share — diluted pro forma		$	0.07			$	0.10
Net income as reported		$	15,212			$	14,112
Add: Stock-based compensation included in (loss) income			—				—
Deduct: Total stock-based employee compensation expense determined under fair value method			(408	)			(977	)
Pro forma net income		$	14,804			$	13,135
Net loss per common share — basic as reported		$	0.57			$	0.53
Net loss per common share — diluted as reported		$	0.56			$	0.52
Net loss per common share — basic pro forma		$	0.56			$	0.49
Net loss per common share — diluted pro forma		$	0.55			$	0.49

     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 are as follows:

		Six Months
		Ended
		June 30,
		2005
Risk-free interest rate			2.8	%
Expected life of options grants		1- 5 years
Expected volatility of underlying stock			63	%
Expected dividend payment rate, as a percentage of the stock price on the date of grant			0.0	%

     The following table presents activity under all stock option plans:

										Weighted-
						Weighted-				Average
						Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
		Shares				Price				Term				Value
		(In thousands)												(In thousands)
Outstanding at December 31, 2005			3,821			$	7.23				7.55
Granted			626				11.31
Exercised			(459	)			7.14
Forfeited or expired			(705	)			10.69
Outstanding at June 30, 2006			3,283			$	7.30				8.19			$	19,100
Options exercisable at June 30, 2006			1,553			$	7.15				7.58			$	9,500

     The following table sets forth information regarding options outstanding at June 30, 2006:

														Weighted								Weighted
														Average								Average
										Weighted				Remaining								Exercise
						Range of				Average				Contractual				Number				Price for
Number of						Exercise				Exercise				Life				Currently				Currently
Options						Prices				Price				(Years)				Exercisable				Exercisable
(In thousands)																		(In thousands)
			314			$3.75 – $3.76				$	3.76				8.10				306			$	3.76
			323			4.44 – 4.67					4.67				8.21				117				4.67
			358			4.82 – 5.60					5.42				7.90				174				5.46
			207			5.76 – 6.10					5.91				8.07				116				5.91
			400			6.11					6.11				8.52				128				6.11
			368			6.16					6.16				8.55				108				6.16
			344			6.17 – 7.70					6.82				7.91				172				6.88
			503			7.72 – 9.78					9.39				8.40				196				9.01
			346			9.81 – 13.17					12.34				8.33				130				11.66
			120			13.37 – 37.32					17.13				6.73				106				17.54
			3,283							$	7.30				8.19				1,553			$	7.15

     The weighted average grant date fair value of options granted during the six months ended June 30, 2006 was $6.97. The aggregate intrinsic value of outstanding options as of June 30, 2006 was $19.1 million. The intrinsic value of options exercised during the period was $1.5 million.

     As of June 30, 2006, there was $6.4 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company’s stock plans including non-vested restricted share awards. That cost is expected to be recognized over a weighted-average period of 2.78 years.

     The Company received $3.4 million in cash from option exercises and issuances of stock under the ESPP Plan for the six months ended June 30, 2006. The excess tax benefits of $0.5 million attributable to option exercises and issuances are reflected on a “with-and-without” method and will be recognized when the benefit is realized.

4. DISCONTINUED OPERATIONS

Intelligent Network Solutions (INS) Business

     On April 25, 2005, the Company announced that it had entered into an asset purchase agreement for the sale of its INS business, which included its PrePay IN product and related services, to VeriSign, Inc. The sale was completed on June 14, 2005 for $17.45 million in cash plus assumption of certain contractual liabilities. Of the sale price $1.745 million is being held in escrow, $1.495 million is being held by VeriSign, and $0.25 million is being held by the Company. The Company will record the amounts in escrow as a gain upon the expiration of certain representations and warranties expire after an 18-month period after closing and will be recorded as a gain, net of possible indemnity claims at that time.

     In addition, a liability has been established of $0.45 million in accordance with FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” based on the estimated cost if the Company were to purchase an insurance policy to cover up to $5 million of indemnification obligations for certain potential breaches of its intellectual property representations and warranties in the asset purchase agreement with VeriSign. Such representations and warranties extend for a period of two years and expire on June 14, 2007. The operating results and financial condition of this former INS segment have been reported as discontinued operations in the accompanying consolidated financial statements in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” as the sale was completed during the second quarter of 2005. All comparative prior period amounts have been restated in a similar manner.

     Included in the amounts reported for net income from discontinued operations for the three and six months ended June 30, 2005 is the gain on the sale of the INS business of $12.7 million (net of income tax provision of $0.1 million) and a $1.4 million settlement received by the Company from a lawsuit between Lucent Technologies, Inc. and the Company that was finalized in the second quarter of 2005.

Instant Conferencing Business

     In the first quarter of 2005, the Company made the decision to no longer actively market or sell its GroupTalk product and took actions to outsource the continuing operations of its Instant Conferencing business. On August 17, 2005, the Company and America Online, Inc. mutually agreed to terminate the master services agreement under which the Company provided our GroupTalk instant conferencing services to America Online, Inc. Lightbridge subsequently terminated all of the outsourcing agreements for its GroupTalk services and ceased operations of the Instant Conferencing business in the third quarter of 2005.

     In accordance with SFAS 144, the operating results of the former INS and Instant Conferencing segments have been included as part of the financial results from discontinued operations in the accompanying consolidated financial statements. The components of losses from operations of discontinued operations previously classified as operating activities are as follows (amounts in thousands):

		Three Months Ended June 30,
		2006				2005
Results of operations:
Total Gross Profit		$	—			$	2,841
Total Operating Expenses			—				2,671
Discontinued operations			—				170
Gain on sale of INS			—				12,689
Total discontinued operations, net of income taxes		$	—			$	12,859

		Six Months Ended June 30,
		2006				2005
Results of operations:
Total Gross Profit		$	468			$	4,457
Total Operating Expenses			—				6,541
Discontinued operations			468				(2,084	)
Gain on sale of INS			—				12,689
Total discontinued operations, net of income taxes		$	468			$	10,605

     The Company recorded net income from discontinued operations of $0 and $12.9 million for the three months ended June 30, 2006 and 2005, respectively, and the Company recorded net income from discontinued operations of $0.5 million and $10.6 million for the six months ended June 30, 2006 and 2005, respectively. The net income from discontinued operations in 2006 represents a refund received for telecommunications costs previously paid which related to the Instant Conferencing segment. The net income from discontinued operations for the three and six months ended June 30, 2005 includes a gain on sale of the INS business of $12.7 million and the operating results of the INS and Instant Conferencing segments.

5. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

     Based upon the way financial information is provided to the Company’s Chief Executive Officer for use in evaluating allocation of resources and assessing performance of the business, the Company reports its operations in two distinct operating segments, described as follows:

	•		Payment Processing Services (Payment Processing) — This segment provides a transaction processing system under the Authorize.Net® brand that allows businesses to authorize, settle and manage credit card, electronic check and other electronic payment transactions online.
	•		Telecom Decisioning Services (TDS) — This segment provides wireless subscriber qualification, risk assessment, fraud screening, consulting services and contact center services to telecommunications and other companies.

     In the Company’s Quarterly Report on Form 10-Q, as amended, for the three and six months ended June 30, 2005, the Company reported segment information for the Instant Conferencing Services (Instant Conferencing) business as a separate segment. The operating results and financial condition of the Instant Conferencing segments have been included as part of the financial results from discontinued operations in the accompanying condensed consolidated financial statements and, accordingly, the Company’s segment information has been restated. All prior period segment financial information has been restated to conform with the current presentation. See Note 4, Discontinued Operations, for additional information about these businesses.

     Within segments, performance is measured based on revenue, gross profit and operating income (loss) realized from each segment. There are no transactions between segments. The Company generally does not allocate share-based compensation, corporate or centralized marketing and general and administrative expenses to its business unit segments, because these activities are managed separately from the business units. Also, the Company does not allocate restructuring expenses and other non-recurring gains or charges to its business unit segments because the Company’s Chief Executive Officer evaluates the segment results exclusive of these items. Asset information by operating segment is not reported to or reviewed by the Company’s Chief Executive Officer, and therefore the Company has not disclosed asset information for each operating segment.

     Financial information for each reportable segment from continuing operations as restated for the three and six months ended June 30, 2006, and 2005 were as follows (amounts in thousands):

										Sub-total
Three Months Ended						Payment				Reportable				Reconciling				Consolidated
June 30, 2006		TDS				Processing				Segments				Items				Total
Revenues		$	11,306			$	13,917			$	25,223			$	—			$	25,223
Gross profit			3,452				11,040				14,492				(51	)(1)			14,441
Operating income (loss)			1,345				4,180				5,525				(5,687	)(2)			(162	)
Depreciation and amortization			701				1,094				1,795				157	(3)			1,952

										Sub-total
Three Months Ended						Payment				Reportable				Reconciling				Consolidated
June 30, 2005		TDS				Processing				Segments				Items				Total
Revenues		$	15,817			$	10,747			$	26,564			$	—			$	26,564
Gross profit			6,078				8,470				14,548				—				14,548
Operating income			3,204				2,453				5,657				(3,190	)(2)			2,467
Depreciation and amortization			983				1,039				2,022				217	(3)			2,239

										Sub-total
Six Months Ended						Payment				Reportable				Reconciling				Consolidated
June 30, 2006		TDS				Processing				Segments				Items				Total
Revenues		$	24,395			$	27,370			$	51,765			$	—			$	51,765
Gross profit			7,762				21,630				29,392				(146	)(1)			29,246
Operating income			3,540				8,169				11,709				(11,226	)(2)			483
Depreciation and amortization			1,386				2,209				3,595				313	(3)			3,908

										Sub-total
Six Months Ended						Payment				Reportable				Reconciling				Consolidated
June 30, 2005		TDS				Processing				Segments				Items				Total
Revenues		$	32,890			$	20,847			$	53,737			$	—			$	53,737
Gross profit			11,950				16,275				28,225				—				28,225
Operating income			5,679				4,550				10,229				(6,392	)(2)			3,837
Depreciation and amortization			2,132				2,086				4,218				420	(3)			4,638

		Three Months Ended June 30,
		2006				2005
Restructuring charges		$	937			$	(8	)
Litigation settlement, net			1,500				—
Unallocated corporate and centralized marketing, general and administrative expenses			2,146				3,198
Unallocated share-based compensation			1,104				—
Total		$	5,687			$	3,190

		Six Months Ended June 30,
		2006				2005
Restructuring charges		$	2,330			$	376
Litigation settlement, net			1,500				—
Unallocated corporate and centralized marketing, general and administrative expenses			4,776				6,016
Unallocated share-based compensation			2,620				—
Total		$	11,226			$	6,392

6. GOODWILL IMPAIRMENT ANALYSIS

     In accordance with Statement of Financial Accounting Standard No. 142 (SFAS 142), “Goodwill and Other Intangible Assets,” 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. On March 31, 2006, the Company performed the annual impairment test for the goodwill balance of $57.6 million related to the acquisition of Authorize.Net. The Company used the discounted cash flow and market methodologies to determine the fair value of the reporting unit related to these intangible assets. The discounted cash flow methodology is based upon converting expected cash flows to present value. A comparison of the resulting fair value of the reporting unit to its carrying amount, including goodwill, indicated that the goodwill balance was not impaired as of March 31, 2006. There have been no events since March 31, 2006 that would require us to perform an additional assessment of goodwill.

7. COMMITMENTS AND CONTINGENCIES

Merchant Funds

     At June 30, 2006, the Company was holding funds in the amount of $8.5 million due to merchants comprised of $7.5 million held for Authorize.Net’s eCheck.Net^® product, and $1.0 million held for Authorize.Net’s Integrated Payment Solution (IPS) product. The funds are included in cash and cash equivalents and funds due to merchants on the Company’s consolidated balance sheet. Authorize.Net typically holds eCheck.Net funds for approximately seven business days; the actual number of days depends on the contractual terms with each merchant. The $1.0 million held for IPS includes funds from processing both credit card and Automated Clearing House (ACH) transactions. IPS credit card funds are held for approximately two business days; IPS ACH funds are held for approximately four business days, according to the requirements of the IPS product and the contract between Authorize.Net and the financial institution through which the transactions are processed.

     In addition, the Company has $0.5 million on deposit with a financial institution to cover any deficit account balance that could occur if the amount of eCheck.Net 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.

Legal Proceedings

Litigation Settlement

     In May 2006, the Company entered into a settlement agreement with respect to certain litigation involving Net MoneyIN, Inc. Pursuant to the agreement, the Company agreed to pay Net MoneyIN, Inc. a lump sum payment of $1.75 million in exchange for a license grant, release and covenant not to sue. The cost of the settlement to the Company was $1.5 million net of $0.25 million received from another party named in the litigation. The Company recorded this cost in its general and administrative expenses.

     The Company had incurred legal expenses in 2005 and 2004 of approximately $1.1 million and $0.2 million, respectively, in connection with the defense of this lawsuit following the Company’s acquisition of Authorize.Net. The Company does not expect to incur any further litigation costs related to this lawsuit after the second quarter of 2006.

     The Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. On a quarterly basis, the Company reviews its commitments and contingencies to reflect the effect of ongoing negotiations, settlements, rulings, advice of counsel, and other information and events pertaining to a particular case.

Leases

     As of June 30, 2006, the Company’s primary contractual obligations and commercial commitments are under its operating leases and a letter of credit. The Company maintains a letter of credit in the amount of $1.6 million, as required for security under the operating lease for its corporate headquarters.

     The Company has non-cancelable operating lease agreements for office space and certain equipment. These lease agreements expire at various dates through 2011 and certain of them contain provisions for extension on substantially the same terms as are currently in effect.

     Future minimum payments under operating leases, including facilities affected by restructurings and the Company’s headquarters lease, consisted of the following at June 30, 2006 (amounts in thousands):

		Operating
		Leases
Remainder of 2006		$	1,845
2007			3,763
2008			3,164
2009			2,511
2010			2,075
Thereafter			1,686
Total minimum lease payments		$	15,044

8. RESTRICTED CASH

     As of June 30, 2006, the Company has provided $1.6 million of cash as collateral for a letter of credit, which is required for security under an operating lease for its corporate headquarters. The Company is required to maintain this letter of credit throughout the term of the lease, which expires in 2011. In addition, as described in Note 7 above, the Company has $0.5 million 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.

9. EARNINGS PER SHARE (EPS)

     Basic EPS is computed by dividing income 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.

     A reconciliation of the shares used to compute basic income per share from continuing operations to those used for diluted income per share from continuing operations is as follows (in thousands):

		Three Months Ended
		June 30,
		2006				2005
Shares for basic computation			27,243				26,623
Options and warrants (treasury stock method)			1,088				391
Shares for diluted computation			28,331				27,014
		Six Months Ended
		June 30,
		2006				2005
Shares for basic computation			27,134				26,592
Options and warrants (treasury stock method)			925				371
Shares for diluted computation			28,059				26,963

     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 both periods presented. Had such shares been included, shares for the diluted computation would have increased by approximately 345,000 and 1,945,000 for the three months ended June 30, 2006 and 2005, respectively, and approximately 373,000 and 2,459,000 for the six months ended June 30, 2006 and 2005, respectively. The EPS calculation has been restated to reflect the change in income from continuing operations due to the Company’s INS and Instant Conferencing segments now being accounted for as discontinued operations.

10. RESTRUCTURING

     The following table summarizes the activity in the restructuring accrual for the six months ended June 30, 2006 (amounts in thousands):

		Employee
		Severance				Facility Closing
		and Termination				and Related				Asset
		Benefits				Costs				Impairment				Total
Accrued restructuring balance at December 31, 2005		$	17			$	972			$	—			$	989
Restructuring accrual — January 2006			1,396				—				—				1,396
Cash payments			(1,198	)			(39	)			—				(1,237	)
Restructuring adjustments			(3	)			—				—				(3	)
Accrued restructuring balance at March 31, 2006		$	212			$	933			$	—			$	1,145
Restructuring accrual — May 2006			61				—				862				923
Impairment of assets			—				—				(862	)			(862	)
Cash payments			(184	)			(159	)			—				(343	)
Restructuring adjustments			3				11				—				14
Accrued restructuring balance at June 30, 2006		$	92			$	785			$	—			$	877

     In May 2006, the Company announced the planned closing of the Liverpool, Nova Scotia contact center. Related to this closing, the Company recorded a charge of $0.9 million during the second quarter of 2006 related to the asset impairment. The Company expects to incur a charge of approximately $0.5 million to $0.7 million during the third quarter of 2006 for employee severance and facility closing related costs. The Company expects to close the center in the third quarter of 2006.

     In January 2006, the Company announced a workforce reduction focused primarily within the TDS business, as well as reductions in general and administrative expenses. The restructuring consisted of a total workforce reduction of about 28 positions, and the Company recorded a restructuring charge of $1.4 million in the first quarter of 2006, primarily related to employee severance and termination benefits.

11. PROVISION FOR INCOME TAXES

     The Company provides for income taxes on an interim basis based on the full-year projected effective tax rate. The Company’s effective tax rate was 22% for the six months ended June 30, 2006, as compared to 21% for the six months ended June 30, 2005. The income tax provision for the six months ended June 30, 2006 of $0.6 million reflects a current provision of $0.1 million for federal, state and foreign taxes and a deferred federal and state provision of $0.5 million attributable to amortization of intangibles for tax purposes with indefinite lives. The income tax provision for the six months ended June 30, 2005 of $0.9 million reflects a current provision for state and foreign taxes of $0.1 million and a deferred federal and state provision of $0.8 million attributable to amortization of intangibles for tax purposes with indefinite lives. At June 30, 2006, the Company continues to believe a full valuation allowance is required until an appropriate level of profitability is sustained that would enable the Company to conclude that it is more likely than not that a portion of the Company’s deferred taxes would be realizable.

12. COMPREHENSIVE INCOME

     The amounts that comprise comprehensive loss for the three and six months ended June 30, 2006 and 2005 are as follows (in thousands):

		Three Months Ended June 30,
		2006				2005
Net income as reported		$	854			$	15,212
Other comprehensive income:
Unrealized loss on short-term investments			6				—
Foreign currency gain			67				15
Comprehensive income		$	927			$	15,227

		Six Months Ended June 30,
		2006				2005
Net income as reported		$	2,486			$	14,112
Other comprehensive income:
Unrealized loss on short-term investments			10				—
Foreign currency gain			59				225
Comprehensive income		$	2,555			$	14,337

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 under the heading “Risk Factors” in Part II., Item 1.A. below 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.

AIRPAY BY AUTHORIZE.NET, ALIAS, ALTALINKS, AUTHORIZE-IT, AUTHORIZE.NET, the Authorize.Net logo, AUTHORIZE.NET WHERE THE WORLD DOES BUSINESS ON THE WEB, AUTHORIZE.NET WHERE THE WORLD TRANSACTS, CAS, CUSTOMER ACQUISITION SYSTEM, ECHECK.NET, FRAUDBUSTER, FRAUD CENTURION, FRAUDSCREEN.NET, FRAUD SENTINEL, LIGHTBRIDGE, the Lightbridge logo, POCKET AUTHORIZE.NET, and PROFILE are registered trademarks of Lightbridge, and @RISK, AUTOMATED RECURRING BILLING, AUTHENTICATENOW, AUTHORIZE.NET YOUR GATEWAY TO IP TRANSACTIONS, CDS, CREDIT DECISION SYSTEM, ECHECK, EDM, ENHANCED DECISION MANAGEMENT, FRAUDBRIDGE, FRAUD DETECTION SUITE, INSIGHT, LIGHTBRIDGE TELESERVICES, POPS, POINT OF PURCHASE SYSTEM, RMS, and RETAIL MANAGEMENT SYSTEM 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.

     The following discussion and analysis of our financial conditions and results of operations has been restated to give effect to the restatement of the cash flows as described in Note 2 to the consolidated financial statements and the operations that were discontinued during 2005. See “Discontinued Operations” below and Note 4 to the consolidated financial statements for further information concerning discontinued operations.

Overview

     We develop, market and support a suite of products and services for both merchants and communication providers. Our Payment Processing segment offers a transaction processing system under the Authorize.Net^® brand that allows businesses to authorize, settle and manage credit card, electronic check and other electronic payment transactions online. Our Telecom Decisioning Services (TDS) segment provides wireless subscriber qualification, risk assessment, fraud screening, consulting services and contact center services to telecommunications and other companies.

     A majority of our revenues historically have been derived from clients located in the United States. Our revenues are derived from transaction services and consulting and maintenance services.

     Transaction services revenues related to payment processing are derived from our credit card processing and ACH processing services, and other services (collectively, “processing services”). Processing services revenue is based on a one-time set up fee, a monthly gateway fee, and a fee per transaction. The per transaction fee 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 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.

     Our transaction service revenues are derived primarily from the processing of applications for qualification of subscribers for telecommunications services, the activation of services for those subscribers and from the processing of payment transactions for merchants. Our telecommunications transactions offerings include screening for subscriber fraud, evaluating carriers’ existing accounts, interfacing with carrier and third-party systems and providing contact center services. We also offer transaction services to screen and authenticate the identity of users engaged in online transactions. 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. 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.

     We believe we may continue to experience changes in the combination of services acquired by TDS clients and that competitive pricing pressures will continue to negatively affect transaction revenues in 2006. In order to add to our business, we are seeking to expand our reach in the e-commerce and payment processing business markets and to target industry sectors in the TDS business we do not currently serve and to add new telecommunications clients. Commissions paid to outside sales partners are recorded in sales and marketing expense in our statements of operations in the month in which the related revenue is recognized.

     Our consulting revenues are derived principally from providing solution development and deployment services and business advisory consulting in the areas of customer acquisition and retention, authentication, and risk management. The majority of consulting engagements are performed on a time and materials basis and revenues from these engagements are recognized based on the number of hours worked by our consultants at an agreed upon rate per hour and are recognized in the period in which services are performed. When we perform work under a fixed fee arrangement, revenues are generally recognized on the proportional performance method of accounting based on the ratio of labor hours incurred to estimated total labor hours. In instances where the customer, at its discretion, has the right to reject the services prior to final acceptance, revenue is deferred until such acceptance occurs. Revenues from software maintenance and support contracts are recognized ratably over the term of the agreement.

Recent Developments

     In May 2006, we announced the planned closing of the Liverpool, Nova Scotia contact center. Related to this closing, we recorded a charge of $0.9 million during the second quarter of 2006 related to the asset impairment and we expect to incur a charge of approximately $0.5 million to $0.7 million during the third quarter of 2006 for employee severance and facility closing related costs. We expect the center will be closed in the third quarter of 2006.

     In May 2006, we were advised by T-Mobile USA, Inc. (T-Mobile) that T-Mobile planned to consolidate its contact center business and begin the transition of that business from us to other vendors. Commencing in the third quarter of 2006, we do not expect T-Mobile to be a significant contact center customer. In the first and second quarters of 2006, revenue from T-Mobile was approximately $2.3 and $2.1 million respectively.

     In May 2006, we entered into a settlement agreement with respect to certain litigation involving Net MoneyIN, Inc. Pursuant to the agreement, we agreed to pay Net MoneyIN, Inc. a lump sum payment of $1.75 million in exchange for a license grant, release and covenant not to sue. The cost of the settlement to us was $1.5 million net of $0.25 million received from another party named in the litigation. We recorded this cost in general and administrative expenses. We had incurred legal expenses in 2005 and 2004 of approximately $1.1 million and $0.2 million, respectively, in connection with the defense of this lawsuit and we expected to incur additional costs of approximately $1.5 million in 2006 had we not entered in to the settlement agreement. We do not expect to incur any further litigation costs related to this lawsuit after the second quarter of 2006.

     On January 13, 2006, we announced a restructuring focused primarily within the TDS business, as well as reductions in general and administrative expenses. This action reflects our continued commitment to align cost and revenue. The restructuring consisted of a total workforce reduction of about 28 positions, and we recorded a restructuring charge of approximately $1.4 million in the first quarter of 2006, primarily related to employee severance and termination benefits.

     During 2005, we evaluated strategic alternatives for the TDS business. We engaged investment bankers to investigate a range of possibilities, including a sale or other disposition of the TDS business. In December 2005, we announced that we had concluded the investigation of possible strategic alternatives, and decided to continue to operate the TDS business. Also during 2005, we sold our INS business and ceased the operation of our Instant Conferencing business. The INS business and our Instant Conferencing business are presented as discontinued operations.

Critical Accounting Policies and Estimates

     Management’s discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expense during the reporting period. On an ongoing basis, we evaluate our estimates, including those listed below. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, our actual results could differ from those estimates.

     We believe the following critical accounting policies affect our significant estimates and assumptions used in the preparation of our condensed consolidated financial statements. A full discussion of the following accounting policies is included in our 2005 Annual Report on Form 10-K filed with the Securities and Exchange Commission and we refer the reader to that discussion.

	•		Revenue Recognition
	•		Allowance for Doubtful Accounts
	•		Income Taxes and Deferred Taxes
	•		Restructuring Estimates
	•		Goodwill and Acquired Intangible Assets

     We updated our critical accounting policies during the six months ended June 30, 2006 as follows:

     Share-Based Compensation. Effective January 1, 2006, we account for employee stock-based compensation costs in accordance with Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (SFAS 123(R)). Except as noted below, we utilize the Black-Scholes option pricing model to estimate the fair value of employee stock based compensation at the date of grant, and used the Monte Carlo simulation model for the share-based performance options, which both require the input of highly subjective assumptions, including expected volatility and expected life. Further, as required under SFAS 123(R), we now estimate forfeitures for options granted that are not expected to vest. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our share-based compensation.

     Internal-use Software. Costs incurred to develop internal-use software during the application development stage are capitalized and reported at cost, subject to an impairment test as described below. Application development stage costs generally include costs associated with internal-use software configuration, coding, installation and testing. Costs of significant upgrades and enhancements that result in additional functionality are also capitalized whereas costs incurred for maintenance and minor upgrades and enhancements are expensed as incurred. We assess potential impairment of capitalized internal-use software whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted net cash flows that are expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. This analysis requires us to estimate future net cash flows associated with the assets. If these estimates change, reductions or write-offs of internal-use software costs could result.

Operating Segments

     Based upon the way financial information is provided to our chief operating decision maker, the Chief Executive Officer, for use in evaluating allocation of resources and assessing performance of the business, we now report our operations in two distinct operating segments: Payment Processing Services, and Telecom Decisioning Services (TDS).

     The Payment Processing segment offers a transaction processing system under the Authorize.Net^® brand that allows businesses to authorize, settle and manage credit card, electronic check and other electronic payment transactions online. The TDS segment provides wireless subscriber qualification, risk assessment, fraud screening, consulting services and contact center services to telecommunications and other companies. Within these two segments performance is measured based on revenue, gross profit and operating income (loss) realized from each segment. There are no transactions between segments.

     We do not allocate shared-based compensation, certain corporate or centralized marketing and general and administrative expenses to our business unit segments, because these activities are managed separately from the business units. Also, we do not allocate restructuring expenses and other non-recurring gains or charges to our business unit segments because our Chief Executive Officer evaluates the segment results exclusive of these items. Asset information by operating segment is not reported to or reviewed by our Chief Executive Officer and therefore we have not disclosed asset information for each operating segment.

     The historical operating results associated with our Retail Management System (RMS) product, which we no longer actively market or sell, are included in our TDS segment.

Results Of Operations

Quarter Ended June 30, 2006 Compared with Quarter Ended June 30, 2005.

     Revenues. Revenues and certain revenue comparisons for the quarters ended June 30, 2006 and 2005 were as follows:

		Quarter Ended				Quarter Ended
		June 30,				June 30,				$				%
		2006				2005				Difference				Difference
		(Dollars in thousands)
Transaction services:
Payment Processing (Authorize.Net)		$	13,917			$	10,747			$	3,170				29.5	%
TDS			10,634				14,400				(3,766	)			(26.2	)
Total Transaction services revenues			24,551				25,147				(596	)			(2.4	)
Consulting and maintenance services:
TDS			672				1,417				(745	)			(52.6	)
Total		$	25,223			$	26,564			$	(1,341	)			(5.0	)%

     The decrease in transaction services revenues was primarily due to a $3.8 million decline in transactions services revenues from our TDS segment offset by a $3.2 million increase in Authorize.Net’s revenue. Authorize.Net’s revenues for the quarter increased 29.5% compared to the same period in 2005. The increased revenues were primarily the result of an increase in the number of merchant customers and the volume of transactions processed. The decline in TDS transaction services revenues was primarily a result of a $3.5 million reduction in transaction fees charged to Sprint/Nextel following the merger between Sprint Spectrum L.P. (Sprint) and Nextel Operations, Inc. (Nextel), a decrease in transaction fees charged to AT&T Wireless Services, Inc. (AT&T Wireless), and an unfavorable change in the mix of services provided to our TDS clients.

     In the near term, we expect transaction services revenue from Authorize.Net to continue to increase. However, in the near term, we also expect transaction services revenue associated with our TDS segment to decline from the second quarter 2006 level as a result of continued pricing pressures and as a result of T-Mobile’s decision to consolidate its contact center business with other vendors. We expect TDS transaction services revenues to 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). We believe that transaction revenue in future periods will continue to be impacted by changes in the demand for our transaction offerings, changes in the combination of services purchased by clients, carrier consolidation, and competitive pricing pressures.

     The decrease in consulting and maintenance services revenues of $0.7 million was principally due to a decrease in consulting fees charged to AT&T of $0.3 million and a decline in consulting and maintenance revenues related to our decision to no longer actively market, sell or develop our RMS product. We believe that consulting and maintenance services revenue related to our TDS segment will continue to be impacted by pricing pressures and a reduced level of consulting activity.

          Cost of Revenues and Gross Profit. Cost of revenues consists primarily of personnel costs, 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 Authorize.Net, included in transaction services cost of revenues, 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-bandwidth 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 contact centers (which have a higher cost component), changes in pricing to certain clients and changes in the mix of total revenues among transaction services revenues, consulting and maintenance services revenues.

     Cost of revenues, gross profit and certain comparisons for the quarters ended June 30, 2006 and 2005 were as follows:

		Quarter				Quarter
		Ended				Ended
		June 30,				June 30,				$				%
		2006				2005				Difference				Difference
						(Dollars in thousands)
Cost of revenues:
Transaction services		$	10,391			$	11,459			$	(1,068	)			(9.3	)%
Consulting and maintenance services			391				557				(166	)			(29.8	)
Total cost of revenues		$	10,782			$	12,016			$	(1,234	)			(10.3	)%
Gross profit:
Transaction services $		$	14,160			$	13,688			$	472				3.4	%
Transaction services %			57.7	%			54.4	%
Consulting and maintenance services $		$	281			$	860			$	(579	)			(67.3	)%
Consulting and maintenance services %			41.8	%			60.7	%
Total gross profit $		$	14,441			$	14,548			$	(107	)			(0.7	)%
Total gross profit %			57.3	%			54.8	%