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, 2005

OR

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

For the transition period from            to

Commission file number: 000-21319

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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).þ Yes o No

     As of August 5, 2005, there were 26,722,364 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, 2005

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS			3
Balance Sheets as of June 30, 2005 and December 31, 2004			3
Statements of Operations for the three and six months ended June 30, 2005 and 2004			4
Statements of Cash Flows for the six months ended June 30, 2005 and 2004			5
Notes to Unaudited Condensed Consolidated Financial Statements			6
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			16
Item 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES			39
Item 4. CONTROLS AND PROCEDURES			40
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS			40
Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES			41
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			41
Item 6. EXHIBITS			41
SIGNATURE
EX-31.1 Section 302 Certification of CEO
EX-31.2 Section 302 Certification of CFO
EX-31.2 Section 906 Certification of CEO & CFO

PART I. FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

LIGHTBRIDGE, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)

		June 30,				December 31,
		2005				2004
ASSETS
Current assets:
Cash and cash equivalents		$	64,302			$	39,036
Short-term investments			5,295				12,589
Restricted cash			2,200				600
Accounts receivable, net			13,206				14,368
Other current assets			1,834				2,214
Current assets related to assets sold			5,313				5,490
Total current assets			92,150				74,297
Property and equipment, net			14,117				16,293
Other assets, net			154				268
Goodwill			57,628				57,628
Intangible assets, net			19,831				21,247
Non-current assets related to assets sold			300				753
Total assets		$	184,180			$	170,486
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	3,827			$	4,694
Accrued compensation and benefits			3,339				4,831
Other accrued liabilities			5,510				3,861
Deferred rent			1,816				1,592
Deferred revenues			2,825				2,331
Funds due to merchants			6,440				5,558
Reserve for restructuring			1,117				2,479
Current liabilities related to assets sold			2,562				5,354
Total current liabilities			27,436				30,700
Deferred rent, less current portion			2,350				2,709
Other long-term liabilities			950				149
Non-current liabilities related to assets sold			766				—
Total liabilities			31,502				33,558
Commitments and contingencies (Note 5)
Stockholders’ equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; no shares issued or outstanding at June 30, 2005 and December 31, 2004			—				—
Common stock, $.01 par value; 60,000,000 shares authorized; 30,091,059 and 29,951,826 shares issued and 26,652,016 and 26,512,783 shares outstanding at June 30, 2005 and December 31, 2004, respectively			301				300
Additional paid-in capital			168,267				167,465
Warrants			—				206
Foreign currency translation			41				(184	)
Retained earnings (accumulated deficit)			4,856				(10,072	)
Less: treasury stock, at cost			(20,787	)			(20,787	)
Total stockholders’ equity			152,678				136,928
Total liabilities and stockholders’ equity		$	184,180			$	170,486

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)

		Three Months Ended
		June 30,
		2005				2004
Revenues:
Transaction services		$	25,147			$	27,306
Consulting and maintenance services			1,417				2,961
Software licensing and hardware			—				1,859
Total revenues			26,564				32,126
Cost of revenues:
Transaction services			11,972				14,273
Consulting and maintenance services			557				1,092
Software licensing and hardware			—				—
Total cost of revenues			12,529				15,365
Gross profit:
Transaction services			13,175				13,033
Consulting and maintenance services			860				1,869
Software licensing and hardware			—				1,859
Total gross profit			14,035				16,761
Operating expenses:
Engineering and development			3,495				5,527
Sales and marketing			4,429				5,533
General and administrative			4,152				4,045
Restructuring costs			(8	)			4
Total operating expenses			12,068				15,109
Income from operations			1,967				1,652
Other income, net			328				143
Income from continuing operations before provision for income taxes			2,295				1,795
Provision for income taxes			34				697
Income from continuing operations			2,261				1,098
Discontinued operations, net of income taxes:
Gain on sale of INS assets			12,689				—
Discontinued operations			670				(525	)
Total discontinued operations, net of income taxes			13,359				(525	)
Net income		$	15,620			$	573
Net income (loss) per common shares (basic):
From continuing operations		$	0.09			$	0.04
From discontinued operations			0.50				(0.02	)
Net income (loss) per common share (basic)		$	0.59			$	0.02
Net income (loss) per common share (diluted):
From continuing operations		$	0.08			$	0.04
From discontinued operations			0.50				(0.02	)
Net income (loss) per common share (diluted):		$	0.58			$	0.02
Basic weighted average shares			26,623				26,639
Diluted weighted average shares			27,014				26,678

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,
		2005				2004
Revenues:
Transaction services		$	50,801			$	47,872
Consulting and maintenance services			2,936				6,194
Software licensing and hardware			—				1,868
Total revenues			53,737				55,934
Cost of revenues:
Transaction services			25,018				26,554
Consulting and maintenance services			1,322				2,190
Software licensing and hardware			—				12
Total cost of revenues			26,340				28,756
Gross profit:
Transaction services			25,783				21,318
Consulting and maintenance services			1,614				4,004
Software licensing and hardware			—				1,856
Total gross profit			27,397				27,178
Operating expenses:
Engineering and development			7,888				10,504
Sales and marketing			8,983				8,268
General and administrative			7,699				7,397
Purchased in-process research and development			—				679
Restructuring costs			851				489
Total operating expenses			25,421				27,337
Income (loss) from operations			1,976				(159	)
Other income, net			590				300
Income (loss) from continuing operations before provision for income taxes			2,566				141
Provision for (benefit from) for income taxes			104				(50	)
Income (loss) from continuing operations			2,462				191
Discontinued operations, net of income taxes:
Gain on sale of INS assets			12,689				—
Discontinued operations			(223	)			(359	)
Total discontinued operations, net of income taxes			12,466				(359	)
Net income (loss)		$	14,928			$	(168	)
Net income (loss) per common shares (basic):
From continuing operations		$	0.09			$	0.007
From discontinued operations			0.47				(0.013	)
Net income (loss) per common share (basic)		$	0.56			$	(0.006	)
Net income (loss) per common share (diluted):
From continuing operations		$	0.09			$	0.007
From discontinued operations			0.46				(0.013	)
Net income (loss) per common share (diluted):		$	0.55			$	(0.006	)
Basic weighted average shares			26,592				26,794
Diluted weighted average shares			26,963				26,918

See notes to unaudited condensed consolidated financial statements.

LIGHTBRIDGE, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)

		Six Months Ended
		June 30,
		2005				2004
Cash flows from operating activities:
Net income (loss)		$	14,928			$	(168	)
Gain from discontinued operations			12,466				(359	)
Income (loss) from continuing operations			2,462				191
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities for continuing operations:
Purchased in-process research and development			—				679
Depreciation and amortization			4,879				4,736
Deferred income taxes			—				205
Loss on disposal of property and equipment			8				12
Gain on sale of INS assets, net of taxes			(12,689	)			—
Changes in assets and liabilities:
Accounts receivable			1,162				1,884
Other assets			(1,189	)			178
Accounts payable and accrued liabilities			(2,203	)			(2,533	)
Funds due to merchants			882				(436	)
Deferred rent			(902	)			—
Deferred revenues			1,265				282
Other liabilities			801				109
Net cash provided by (used in) operating activities of continuing operations			(5,524	)			5,307
Cash flows from investing activities of continuing operations:
Purchases of property and equipment			(1,799	)			(6,881	)
Restricted cash			(1,600	)			—
Purchase of short-term investments			(3,928	)			(26,335	)
Proceeds from sales and maturities of short-term investments			11,222				83,693
Net cash proceeds from the sale of INS assets			15,017				—
Acquisition of Authorize.Net, less cash received			—				(77,510	)
Net cash provided by (used in) investing activities for continuing operations			18,912				(27,033	)
Cash flows from financing activities of continuing operations:
Proceeds from issuance of common stock			597				313
Repurchase of common stock			—				(3,832	)
Net cash provided by (used in) financing activities of continuing operations			597				(3,519	)
Effects of foreign exchange rate changes on cash and cash equivalents			211				(10	)
Net cash provided by (used in) net assets related to assets sold			11,070				(2,269	)
Net increase (decrease) in cash and cash equivalents			25,266				(27,524	)
Cash and cash equivalents, beginning of period			39,036				69,085
Cash and cash equivalents, end of period		$	64,302			$	41,561

See notes to unaudited condensed consolidated financial statements.

LIGHTBRIDGE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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, 2004.

     Certain prior year amounts in the condensed consolidated financial statements have been reclassified to conform to the current year presentation.

2. DISCONTINUED OPERATIONS

     On April 25, 2005, the Company announced that it had entered into an asset purchase agreement for the sale of its INS business, which includes its PrePay IN product and related services, to VeriSign, Inc. (“VeriSign”). The sale was completed on June 14, 2005 for $17.45 million in cash plus assumption of certain contractual liabilities. Of the $17.45 million in consideration, $1.495 million is being held in escrow by VeriSign, and $0.25 million is being held by the Company as a liability to VeriSign, until 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 $450,000 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 the INS segment have been reported as discontinued operations in the accompanying consolidated financial statements in accordance with Statement of Financial Accounting Standards (“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. The Company has recorded a gain on the sale of its INS business of $12.7 million, which has been presented as a gain on sale of discontinued operations. The Company recorded net income from discontinued operations of $0.7 million for the three months ended June 30, 2005 and recorded a net loss from discontinued operations of $0.2 million for the six months ended June 30, 2005. Income from discontinued operations included a $1.4 million settlement of a lawsuit between Lucent Technologies, Inc. and the Company received the related settlement in the second quarter of 2005.

     Summarized financial information for the discontinued operations of the INS business are as follows (amounts in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
		2005				2004				2005				2004
Results of operations:
Net revenues		$	3,355			$	2,440			$	5,285			$	5,582
Total Expenses			2,685				2,965				5,508				5,941
Net income (loss)			670				(525	)			(223	)			(359	)
Gain on sale of INS			12,689				—				12,689				—
Net income (loss) from discontinued operations		$	13,359			$	(525	)		$	12,466			$	(359	)

		June 30,2005				December 31, 2004
Financial position:
Current assets		$	5,313			$	5,490
Other assets			300				753
Total liabilities			(3,328	)			(5,354	)
Net assets related to assets sold		$	2,285			$	889

3. BUSINESS ACQUISITION

     On March 31, 2004, the Company acquired all of the outstanding stock of Authorize.Net Corp. (“Authorize.Net”) from InfoSpace, Inc. for $81.6 million in cash. In addition, the Company incurred approximately $2.0 million in acquisition related costs. Authorize.Net provides credit card and electronic check payment processing solutions to companies that process orders for goods and services over the Internet, by phone and mail, at retail locations and on wireless devices. Authorize.Net connects IP-enabled businesses to large credit card processors and banking organizations, allowing those businesses to accept electronic payments. The results of operations of Authorize.Net have been included in the Company’s financial statements since the date of the acquisition. 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. Please refer to the Company’s 2004 Annual Report on Form 10-K for the year ended December 31, 2004 for a complete description of this acquisition. Please refer to Part II. Other Information. Item 1. Legal Proceedings for a discussion of certain pending matters related to the intellectual property of Authorize.Net.

Pro forma financial information

     The following table presents the unaudited pro forma financial information from continuing operations of the Company including Authorize.Net for the six months ended June 30, 2004, as if the acquisition had occurred at the beginning of 2004, 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 from continuing operations for the six months ended June 30, 2004 excludes the expense of IPR&D of $679,000 related to the Authorize.Net acquisition due to its non-recurring nature. These results are presented for illustrative purposes only and are not necessarily indicative of the actual operating results or financial position that would have occurred if the transaction had been consummated on January 1, 2004 (amounts in thousands, except per share amounts):

Pro forma net revenues		$	60,292
Pro forma net loss from continuing operations		$	(1,093	)
Pro forma net loss per basic and diluted share from continuing operations		$	(0.04	)
Shares used for basic and diluted computation			26,794

Goodwill impairment analysis

     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. On March 31, 2005, 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, 2005.

4. 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 three 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 call center services to telecom and other companies.
	•		Instant Conferencing Services (Instant Conferencing) — This segment provides managed instant conferencing services through its Lightbridge GroupTalkTM product.

     In the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, and the Company’s previously filed Quarterly Reports on Form 10-Q, the Company reported information on a fourth operating segment, Intelligent Network Solutions (INS), which the Company has since sold. The INS business provided wireless carriers with a real-time rating engine for voice, data and IN services for prepaid subscribers, as well as postpaid charging functionality and telecom calling card services. On April 25, 2005, the Company announced that it had entered into an asset purchase agreement for the sale of its INS business to VeriSign, which was completed on June 14, 2005. The operating results and financial condition of the INS segment have been included as part of the financial results from discontinued operations in the accompanying consolidated financial statements and accordingly, the Company’s segment information has been restated. Segment results for the INS business are no longer provided. All prior period segment financial information has been restated to conform with the current presentation. See Note 2, Discontinued Operations, for additional information about this sale.

     The Company also announced on April 25, 2005 that it would evaluate strategic alternatives for its TDS business and had engaged investment bankers to investigate a range of possibilities for the TDS 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 segment. The Company expects to continue to provide the services for GroupTalk under its agreement with America Online, Inc. (“AOL”). The Company determined that the contract with AOL was in a loss position and, accordingly, the Company has accrued additional expenses of $0.1 million for the period ended June 30, 2005.

     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 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 for the three and six months ended June 30, 2005, and 2004 were as follows (amounts in thousands):

														Sub-total
Three Months Ended						Payment				Instant				Reportable				Reconciling				Consolidated
June 30, 2005		TDS				Processing				Conferencing				Segments				Items				Total
Revenues		$	15,817			$	10,747			$	—			$	26,564			$	—			$	26,564
Gross profit (loss)			6,078				8,470				(513	)			14,035				—				14,035
Operating income (loss)			3,204				2,453				(500	)			5,157				(3,190	)(1)			1,967
Depreciation and amortization			983				1,039				37				2,059				217	(2)			2,276

														Sub-total
Three Months Ended						Payment				Instant				Reportable				Reconciling				Consolidated
June 30, 2004		TDS				Processing				Conferencing				Segments				Items				Total
Revenues		$	23,606			$	8,138			$	382			$	32,126			$	—			$	32,126
Gross profit (loss)			10,434				5,945				382				16,761				—				16,761
Operating income (loss)			4,867				1,341				(830	)			5,378				(3,726	)(1)			1,652
Depreciation and amortization			1,602				1,030				146				2,778				337	(2)			3,115

														Sub-total
Six Months Ended						Payment				Instant				Reportable				Reconciling				Consolidated
June 30, 2005		TDS				Processing				Conferencing				Segments				Items				Total
Revenues		$	32,890			$	20,847			$	—			$	53,737			$	—			$	53,737
Gross profit (loss)			11,950				16,275				(828	)			27,397				—				27,397
Operating income (loss)			5,679				4,550				(1,387	)			8,842				(6,866	)(1)			1,976
Depreciation and amortization			2,132				2,086				241				4,459				420	(2)			4,879

														Sub-total
Six Months Ended						Payment				Instant				Reportable				Reconciling				Consolidated
June 30, 2004		TDS				Processing				Conferencing				Segments				Items				Total
Revenues		$	47,414			$	8,138			$	382			$	55,934			$	—			$	55,934
Gross profit (loss)			20,867				5,945				366				27,178				—				27,178
Operating income (loss)			8,903				662				(1,902	)			7,663				(7,822	)(1)			(159	)
Depreciation and amortization			2,926				1,030				272				4,228				508	(2)			4,736

 

(1)

Reconciling items from segment operating income (loss) to consolidated operating income (loss) include the following (amounts in thousands):

		Three Months Ended June 30,
		2005				2004
Restructuring costs		$	(8	)		$	4
Unallocated corporate and centralized marketing, general and administrative expenses			3,198				3,722
Total		$	3,190			$	3,726

		Six Months Ended June 30,
		2005				2004
Restructuring costs		$	851			$	489
Unallocated corporate and centralized marketing, general and administrative expenses			6,015				7,333
Total		$	6,866			$	7,822

(2)

Represents depreciation and amortization included in the unallocated corporate or centralized marketing, general and administrative expenses.

5. COMMITMENTS AND CONTINGENCIES

     At June 30, 2005, the Company was holding funds in the amount of $4.6 million on behalf of merchants utilizing Authorize.Net’s eCheck.NetÒ 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. In addition, at June 30, 2005, the Company held funds in the amount of $1.8 million on behalf of merchants processing credit card and Automated Clearing House (“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 consolidated balance sheet. Credit card funds are 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 $0.6 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.

     In 2001, Net MoneyIN, Inc. brought a patent infringement suit in the United States District Court for the District of Arizona, entitled Net MoneyIN, Inc. v. VeriSign, Inc., et al., Case No. CIV 01-441 TUC RCC. Defendants in this case include InfoSpace, Inc. and E-Commerce Exchange, Inc.

     On March 31, 2004, the Company acquired Authorize.Net from InfoSpace, Inc. In the purchase agreement, the Company agreed to indemnify and defend InfoSpace against this lawsuit. E-Commerce Exchange, Inc. was a reseller of services provided by Authorize.Net. The reseller agreement between the parties contains provisions regarding indemnification from Authorize.Net for claims against the reseller related to services provided under that agreement. Defendant Wells Fargo Bank, N.A. has also requested indemnification, including defense costs, from Authorize.Net based on certain contracts with Authorize.Net. Neither Lightbridge nor Authorize.Net is a party to the Net MoneyIN lawsuit, but because the Company is defending the litigation and providing indemnification to some of the defendants, the Company has potential exposure to liability (in an undetermined amount) as if the Company was parties to the lawsuit. As with all major litigation, such liability could be significant and could, if the result of the lawsuit is adverse to the Company, materially adversely affect the Company’s business, operations and financial condition. Lightbridge and Authorize.Net may be added as parties at a later date.

     The lawsuit alleges infringement of certain patents involving payment processing over computer networks, and names a variety of defendants, including payment processing gateway providers and banks. Net MoneyIN alleges that numerous products or services infringe its patents, including the Authorize.Net Payment Gateway Service and eCheck.Net service, and seeks treble damages, permanent injunctive relief, attorneys’ fees and costs. Injunctive relief adverse to the Company could materially adversely affect the Company’s business operations and financial condition.

     The defendants have denied the allegations of the plaintiff and have counterclaimed, seeking a declaration that plaintiff’s patents have not been infringed and are invalid. The litigation is bifurcated, with separate liability and damages phases. The period designated for fact discovery during the liability phase has concluded. The court held a claim construction hearing on June 29-30, 2005, but has not yet issued a ruling construing the patent claims, and no liability-phase trial date has been set. The Company has incurred legal expenses in 2004 of approximately $200,000 in connection with the defense of this lawsuit following the Company’s acquisition of Authorize.Net, and expect to incur defense costs of approximately $1.2 million to $1.5 million in 2005. The Company intends to vigorously pursue the Company’s defenses to the lawsuit. The Company is not currently able to estimate the possibility of loss or range of loss, relating to this claim.

     As of June 30, 2005, 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. This letter of credit expires in January 2006.

     Leases — The Company has noncancelable 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 new headquarters lease, consisted of the following at June 30, 2005 (amounts in thousands):

		Operating
		Leases
Remainder of 2005		$	2,348
2006			3,907
2007			3,104
2008			2,854
2009			2,208
Thereafter			3,542
Total minimum lease payments		$	17,963

6. RESTRICTED CASH

     As of June 30, 2005, 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 letter of credit and this related collateral agreement expire in January 2006. In addition, as described in Note 5 above, the Company has $0.6 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.

7. STOCK-BASED COMPENSATION

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

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

     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 (amounts in thousands, except per share amounts):

		Three Months Ended June 30,								Six Months Ended June 30,
		2005				2004				2005				2004
Net income (loss) as reported		$	15,620			$	573			$	14,928			$	(168	)
Stock-based compensation recorded in net income (loss)			—				—				—				—
Stock-based compensation measured using the fair value method			408				320				977				551
Net income (loss) pro forma		$	15,212			$	253			$	13,951			$	(719	)
Basic net income (loss) per share pro forma		$	0.57			$	0.01			$	0.52			$	(0.03	)
Diluted net income (loss) per share pro forma		$	0.56			$	0.01			$	0.52			$	(0.03	)

     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 six-month periods ended June 30, 2005 and 2004 are as follows:

		Six Months Ended June 30,
		2005				2004
Risk-free interest rate			2.8	%			2.9% - 4.7	%
Expected life of option grants		1 — 5 years				1 — 5 years
Expected volatility of underlying stock			63	%			84	%
Expected dividend payment rate, as a percentage of the stock price on the date of grant			—				—

     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 are not tradable and have contractual lives of up to ten years. Please refer to Note 12. Recent Accounting Pronouncements, for a discussion of future changes to accounting for stock-based compensation.

8. EARNINGS (LOSS) 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.

     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:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
		(In thousands)
Shares for basic computation			26,623				26,639				26,592				26,794
Options and warrants (treasury stock method)			391				39				371				124
Shares for diluted computation			27,014				26,678				26,963				26,918

     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 1,945,000 and 3,996,000 for the three months ended June 30, 2005 and 2004, respectively, and approximately 2,459,000 and 3,244,000 for the six months ended June 30, 2005 and 2004, respectively. The EPS calculation has been restated to reflect the change in income from continuing operations due to the Company’s INS segment now being accounted for as discontinued operations.

9. RESTRUCTURING RESERVES

     In February 2005, the Company decided to outsource the operations of its Instant Conferencing Services business and close its Fremont, California facility, where its Instant Conferencing business was located, effective March 31, 2005. This action was part of the streamlining of the operations of the Company. This action resulted in the termination of 7 employees as follows: 5 in engineering and development, 1 in sales and marketing and 1 in general and administrative. 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, 2005. The Company anticipates that all costs related to this action will be paid by the end of 2005. Lightbridge expects to continue to provide the services for GroupTalk, its Instant Conferencing product, under an agreement with AOL.

     The following summarizes the changes to the February 2005 restructuring reserve since it was accrued (amounts in thousands):

		Balance at												Balance at
		December 31,												June 30,
		2004				Accrued				Utilized				2005
Employee severance and termination benefits		$	—			$	475			$	370			$	105

     In January 2005, the Company announced the closing its Broomfield, Colorado call center in order to take advantage of its other existing call center infrastructure and operate more efficiently. This action resulted in the termination of approximately 40 employees associated with product service and delivery at this location. The Company recorded a restructuring charge of approximately $0.4 million relating to facility closing costs and employee severance and termination benefits during the three months ended March 31, 2005. The Company anticipates that the severance costs related to this action will be paid by the end of 2005, and the Company anticipates that all other costs relating to this action, consisting principally of lease obligations on unused space, net of estimated sublease income, will be paid by the end of 2008.

     The following summarizes the changes to the January 2005 restructuring reserve since it was accrued (amounts in thousands):

		Balance at												Balance at
		December 31,												June 30,
		2004				Accrued				Utilized				2005
Employee severance and termination benefits		$	—			$	70			$	53			$	17
Facility closing and related costs			—				302				56				246
Total		$	—			$	372			$	109			$	263

     In December 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 followed the Company’s announcement of an anticipated revenue reduction as a result of the acquisition of AT&T Wireless Services, Inc.(“AT&T”) by Cingular Wireless LLC (“Cingular”). This action resulted in the termination of 38 employees, in the Company’s corporate offices in Burlington, Massachusetts as follows: 16 in product and service delivery, 11 in engineering and development, 10 in sales and marketing and 1 in general and administrative. The Company recorded a restructuring charge of approximately $1.4 million relating to employee severance and termination benefits during the three months ended December 31, 2004. Additionally, subsequent to its acquisition of Authorize.Net the Company relocated its offices in Bellevue, Washington and the remaining rent paid of $0.2 million on the vacated space was included in restructuring charges during the three months ended December 31, 2004. The Company anticipates that costs related to these actions will be paid by the end of 2005.

     The following summarizes the changes to the December 2004 restructuring reserve since December 31, 2004 (amounts in thousands):

		Balance at												Balance at
		December 31,												June 30,
		2004				Accrued				Utilized				2005
Employee severance and termination benefits		$	1,364			$	27			$	1,054			$	337

     In October 2004, the Company announced a restructuring of its business in accordance with the sale of the Fraud Centurion product suite to Subex Systems Limited - NJ (“Subex”). This action, a continuation of the Company’s emphasis on expense management, resulted in the termination of 9 employees in the Company’s Broomfield, Colorado location as follows: 2 in product and service delivery, and 7 in engineering and development. The Company recorded a restructuring charge of approximately $0.2 million relating to employee severance and termination benefits during the three months ended December 31, 2004. All costs related to this action were paid by the end of the second quarter of 2005.

     The following summarizes the changes to the October 2004 restructuring reserve since December 31, 2004 (amounts in thousands):

		Balance at												Balance at
		December 31,												June 30,
		2004				Accrued				Utilized				2005
Employee severance and termination benefits		$	25			$	(10	)		$	15			$	—

     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 Company anticipates that all costs related to this action will be paid by the end of 2005.

     The following summarizes the changes to the September 2004 restructuring reserve since December 31, 2004 (amounts in thousands):

		Balance at												Balance at
		December 31,												June 30,
		2004				Accrued				Utilized				2005
Employee severance and termination benefits		$	835			$	(9	)		$	528			$	298

     In January 2004, the Company announced a reorganization of its internal business operations. This action, a continuation of the Company’s emphasis on expense management, resulted in the termination of 10 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. All costs related to this action were paid by the end of the first quarter of 2005.

     The following summarizes the changes to the January 2004 restructuring reserves since December 31, 2004 (amounts in thousands):

		Balance at												Balance at
		December 31,												June 30,
		2004				Accrued				Utilized				2005
Employee severance and termination benefits		$	5			$	(1	)		$	4			$	—

     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 relating to employee severance and termination benefits. 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 all other costs relating to this action have been paid by the end of the first quarter of 2005.

     The following summarizes the changes to the March 2003 restructuring reserves since December 31, 2004 (amounts in thousands):

		Balance at												Balance at
		December 31,												June 30,
		2004				Accrued				Utilized				2005
Facility closing and related costs		$	3			$	(3	)		$	—			$	—

     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 relating to employee severance and termination benefits, $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 7 in general and administrative. The capital equipment write-offs and a majority of severance costs related to this action were incurred by the end of 2002, and the Company anticipates that all other costs relating to this action, 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 since December 31, 2004 (amounts in thousands):

		Balance at												Balance at
		December 31,												June 30,
		2004				Accrued				Utilized				2005
Facility closing and related costs		$	283			$	—			$	169			$	114

10. 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 six months ended June 30, 2005 of $0.1 million includes a full valuation allowance for federal and state net operating loss carryforwards expected in 2005 and a provision for foreign taxes. The income tax provision for the six months ended June 30, 2004 reflects a net benefit of $0.05 million which consists of an income tax provision at an annual effective tax rate of 132%, plus a $0.3 million tax benefit related to the recognition of prior year research and development tax credits less a $0.06 million provision to establish a tax valuation allowance against certain deferred tax assets. The 132% 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. At June 30, 2005, 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.

11. COMPREHENSIVE LOSS

     The amounts that comprise comprehensive loss for the three and six months ended June 30, 2005 and 2004 are as follows (in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
		2005				2004				2005				2004
Net income (loss) as reported		$	15,620			$	573			$	14,928			$	(168	)
Other comprehensive income:
Foreign currency gain (loss)			15				(10	)			225				(10	)
Comprehensive income (loss)		$	15,635			$	563			$	15,153			$	(178	)

12. RECENT ACCOUNTING PRONOUNCEMENTS

     In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS No. 123R). This Statement is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The Statement requires entities to recognize stock compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123R is effective for the first interim or annual reporting period that begins after December 15, 2005. The Company is evaluating the two methods of adoption allowed by SFAS No. 123R: the modified-prospective transition method and the modified-retrospective transition method.

     In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107 regarding the Staff’s interpretation of SFAS No. 123R. This interpretation provides the Staff’s views regarding interactions between SFAS No. 123R and certain SEC rules and regulations and provides interpretations of the valuation of share-based payments for public companies. The interpretive guidance is intended to assist companies in applying the provisions of SFAS No. 123R and investors and users of the financial statements in analyzing the information provided. The Company will follow the guidance prescribed in SAB No. 107 in connection with its adoption of SFAS No. 123R.

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” 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, ECHECK.NET, FRAUDBUSTER, FRAUD CENTURION, FRAUDSCREEN.NET, FRAUD SENTINEL, LIGHTBRIDGE, the Lightbridge logo, POCKET AUTHORIZE.NET, PROFILE, AND TELESTO are registered trademarks of Lightbridge, and @RISK, AUTHORIZE.NET YOUR GATEWAY TO IP TRANSACTIONS, CAS, CUSTOMER ACQUISITION SYSTEM, CDS, CREDIT DECISION SYSTEM, ECHECK, EDS, ENHANCED DECISION MANAGEMENT, FRAUD DETECTION SUITE, GROUPTALK, 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.

Critical Accounting Policies and Estimates

     Lightbridge has identified and discussed certain critical accounting policies and estimates in its Annual Report on Form 10-K for the year ended December 31, 2004. The Company did not modify its critical accounting policies during the six months ended June 30, 2005. Those policies and estimates have been applied in the preparation of the Company’s financial statements included in this Quarterly Report on Form 10-Q.

Overview and Revenue Recognition

     We develop, market and support a suite of products and services for merchants and communications providers, including payment processing, customer acquisition and qualification, risk management, prepaid billing, authentication and instant teleconferencing.

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

     Transaction services revenues related to payment processing are derived from our credit card processing and Automated Clearing House (“ACH”) processing services, and other services (collectively, payment processing services), per-transaction fees, gateway fees and set-up fees. Payment processing services revenue is based on a fee per 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.

     Other transaction service revenues are derived primarily from the processing of applications for qualification of subscribers for telecommunications services and the activation of services for those subscribers. We have expanded our telecommunications transactions 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. 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 also offer instant voice conferencing transaction services through our GroupTalk offering. No significant revenues have been recognized from our GroupTalk offering to date and the Instant Conferencing business segment is not expected to generate significant revenues in 2005. On March 31, 2005, we closed our Fremont, California facility, where our Instant Conferencing business is located. We expect to continue to provide the services for GroupTalk, our Instant Conferencing product, under our agreement with America Online, Inc. (“AOL”). We determined that the contract with AOL is in a loss position and, accordingly, we have accrued additional expenses of $0.1 million for the period ended June 30, 2005.

     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, prepay billing and risk management. The majority of consulting 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.

     Our software licensing revenues consist of revenues attributable to the licensing of our CAS Application Modules and PrePay billing software. The PrePay billing system allows carriers to market and manage prepaid wireless services to customers. Prepay is licensed as a packaged software product 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 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.

Recent Developments

     On April 25, 2005, we announced that we had entered into an asset purchase agreement for the sale of our INS business, which includes our PrePay IN product and related services, to VeriSign, Inc. (“VeriSign”). The sale was completed on June 14, 2005 for $17.45 million in cash plus assumption of certain contractual liabilities. Of the $17.45 million in consideration, $1.495 million is being held in escrow by VeriSign, and $0.25 million is being held by us as a liability to VeriSign, until 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 $450,000 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 we were to purchase an insurance policy to cover up to $5 million of indemnification obligations for certain potential breaches of our 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 the INS segment have been reported as discontinued operations in the accompanying consolidated financial statements in accordance with Statement of Financial Accounting Standards (“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. We have recorded a gain on the sale of our INS business of $12.7 million, which has been presented as a gain on sale of discontinued operations. We recorded net income from discontinued operations of $0.7 million for the three months ended June 30, 2005 and recorded a net loss from discontinued operations of $0.2 million for the six months ended June 30, 2005. Income from discontinued operations included a $1.4 million settlement of a lawsuit between Lucent Technologies, Inc. and us received the related settlement in the second quarter of 2005.

     Also on April 25, 2005, we announced that we would evaluate strategic alternatives for our Telecom Decisioning Services(“TDS”) business and had engaged investment bankers to investigate a range of possibilities for our TDS business, including a sale or other disposition.

     In November 2004, we announced that we expected that our future revenues from AT&T Wireless Services, Inc.(“AT&T”) will decline significantly as a result of the acquisition of AT&T by Cingular Wireless LLC.(“Cingular”) As a result of the acquisition, AT&T customer activations will transition from our system to Cingular’s internal system, and we do not expect that AT&T will be a significant customer in 2005. Our services agreements with Sprint Spectrum L.P. (“Sprint”) and Nextel Operations, Inc (“Nextel”) expire on December 31, 2006. On December 15, 2004, Sprint and Nextel announced that their respective Boards of Directors had approved a definitive agreement for a merger of the two companies. We are unable to predict the effect of the merger of Sprint and Nextel on our relationship with either customer including, without limitation, the timing or extent of any reductions in applications processed or other services provided under our contracts with those customers. It is possible that Sprint or Nextel could elect not to renew their agreements, to reduce the volume of products and services they purchase from us, or to request significant changes to the pricing or other terms in any renewal agreement. A loss of one or more of these major clients, a decrease in orders by one or more of these clients or a change in the combination of products and services they obtain from us would adversely affect our revenues, margins and net income.

     In 2004, we determined that we would no longer actively market or sell our Retail Management System (RMS) product or our PhonePrint product. In October 2004, we completed the sale of certain assets related to our Fraud Centurion software product to Subex Systems Limited – NJ (“Subex”). As a result of these actions, we do not expect to recognize significant future revenues from these products.

     On March 31, 2004, we acquired all of the outstanding stock of Authorize.Net from InfoSpace Inc., for $81.6 million in cash. We also incurred approximately $2.0 million in acquisition-related transaction costs. 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, by phone and mail, 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.

Operating Segments

     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, we report our operations in three 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 call center services to telecom and other companies.
	•		Instant Conferencing Services (“Instant Conferencing”) — This segment provides managed instant conferencing services through its Lightbridge GroupTalkTM product.

     In our Annual Report on Form 10-K for the year ended December 31, 2004, and our previously filed Quarterly Reports on Form 10-Q, we reported information on a fourth operating segment, Intelligent Network Solutions (“INS”), which we have since sold. The INS business provided wireless carriers with a real-time rating engine for voice, data and IN services for prepaid subscribers, as well as postpaid charging functionality and telecom calling card services. As noted below, the INS segment is now reported under discontinued operations.

     On April 25, 2005, we announced that we had entered into an asset purchase agreement for the sale of our INS business to VeriSign, which was completed on June 14, 2005. The operating results and financial condition of the INS segment have been included as part of the financial results from discontinued operations in the accompanying consolidated financial statements. Segment results for the INS business are no longer provided. All prior period segment financial information has been restated to conform with the current presentation. See Note 4, Discontinued Operations, for additional information about this sale.

     We also announced on April 25, 2005 that we would evaluate strategic alternatives for our TDS business and had engaged investment bankers to investigate a range of possibilities for the TDS business.

     In the first quarter of 2005, we made the decision to no longer actively market or sell our GroupTalk product and took actions to outsource the continuing operations of our Instant Conferencing segment. We expect to continue to provide the services for GroupTalk under our agreement with AOL. We determined that the contract with AOL is in a loss position and, accordingly, we have accrued additional expenses of $0.1 million for the period ended June 30, 2005.

     Within 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 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 RMS product, which we no longer actively market or sell, are included in our TDS segment. The historical operating results associated with our PhonePrint product, which we no longer actively market or sell, and our Fraud Centurion products, which we sold to Subex in 2004, are included in our INS segment. The historical operating results associated with our Mobile Data Manager product, which we no longer actively market or sell, are included in our Instant Conferencing segment.

Results Of Operations

Quarter Ended June 30, 2005 Compared with Quarter Ended June 30, 2004.

     Revenues. Revenues and certain revenue comparisons for the quarters ended June 30, 2005 and 2004 were as follows:

		Quarter Ended				Quarter Ended
		June 30,				June 30,				$				%
		2005				2004				Difference				Difference
		(Dollars in thousands)
Transaction services		$	25,147			$	27,306			$	(2,159	)			(7.9	)%
Consulting and maintenance services			1,417				2,961				(1,544	)			(52.1	)
Software licensing and hardware			—				1,859				(1,859	)			(100	)
Total		$	26,564			$	32,126			$	(5,562	)			(17.3	)%

     The decrease in transaction services revenues was primarily due to a $4.8 million decline in transactions services revenues from our TDS segment offset by a $2.6 million increase in Authorize.Net’s revenue. The decline in TDS transaction services revenues was primarily a result of a $4.2 million reduction in transaction fees charged to AT&T and a 8% decrease in the volume of subscriber applications processed for clients other than AT&T. Authorize.Net’s revenues for the quarter increased 32% compared to the same period in 2004. The increased revenues were the result of an increase in the number of merchant customers and increased volume of transactions processed.

     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 2005 level as a result of declining revenues from AT&T, and continued pricing pressures. We do not expect AT&T to contribute significant revenues in the quarter ending September 30, 2005. 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 including the proposed merger of Sprint and Nextel (which represented a combined $9.0 million of our TDS transaction services revenues in the second quarter of 2005), and competitive pricing pressures.

     The decrease in consulting and maintenance services revenues of $1.5 million was principally due to a decline in consulting and maintenance revenues related to our decision to no longer actively market, sell or develop our RMS product. Consulting and maintenance services revenues associated with the RMS product was $.5 million lower in the quarter ended June 30, 2005 than in the same quarter of the preceding year. In addition, consulting and maintenance services revenues from AT&T declined $.7 million in the quarter ended June 30, 2005 as compared with the same period in the prior year.

     The decline in software licensing and hardware revenues of $1.9 million in the quarter ended June 30, 2005 as compared to the same period in the prior year was due to our decision to no longer actively market, sell or develop our RMS product.

     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 call centers, changes in pricing to certain clients and changes in the mix of total revenues among transaction services revenues, consulting and maintenance services revenues, and software licensing and hardware revenues.

     Cost of revenues, gross profit and certain comparisons for the quarters ended June 30, 2005 and 2004 were as follows:

		Quarter Ended				Quarter Ended
		June 30,				June 30,				$				%
		2005				2004				Difference				Difference
		(Dollars in thousands)
Cost of revenues:
Transaction services		$	11,972			$	14,273			$	(2,301	)			(16.1)	%
Consulting and maintenance services			557				1,092				(535	)			(49.0	)
Software licensing and hardware			—				—				—				—
Total cost of revenues		$	12,529			$	15,365			$	(2,836	)			(18.5)	%
Gross profit:
Transaction services $		$	13,175			$	13,033			$	142				1.1	%
Transaction services %			52.4	%			47.7	%
Consulting and maintenance services $		$	860			$	1,869			$	(1,009	)			(54.0)	%
Consulting and maintenance services %			60.7	%			63.1	%
Software licensing and hardware $		$	—			$	1,859			$	(1,859	)			(100.0)	%
Software licensing and hardware %							100.0	%
Total gross profit $		$	14,035			$	16,761			$	(2,726	)			(16.3)	%
Total gross profit %			52.8	%			52.2	%

     Transaction services cost of revenues decreased by $2.3 million in the quarter ended June 30, 2005 from the prior year. In our TDS business, spending decreased in our call centers as a result of the closing of our Broomfield, Colorado call center, and the staffing shift from that site to our Liverpool, Nova Scotia call center. We also realized reductions in third party data and services costs as a result of processing fewer transactions for AT&T, reduced costs for maintaining systems and networks used in processing qualification and activation transactions, and headcount-related savings resultant from our 2004 restructuring activities. Transaction services gross profit and gross profit percentage increased primarily as a result of Authorize.Net’s higher contribution to the transaction services gross profit amount. Authorize.Net’s percent of the transaction services gross profit amount was 64% in quarter ended June 30, 2005 versus 46% in the same quarter of the preceding year. This increase was partially offset by a decrease in the transaction services gross profit related to our TDS segment, where the revenue reduction exceeded the cost of sales expense reduction. Authorize.Net generated a higher gross profit percentage than our TDS segment, resulting in increased transaction services gross profit percentage in the quarter ended June 30, 2005 than in the same quarter of 2004.

     Consulting and maintenance services cost of revenues decreased by $0.5 million in the second quarter of 2005. This decrease was attributable to a reduction in headcount associated with the September and December 2004 restructurings. Consulting and maintenance services gross profit and gross profit percentage decreased in the second quarter of 2005 due to lower revenues related to our RMS product and from AT&T.

     Software licensing and hardware gross profit and gross profit percentage decreased by $1.9 million in the second quarter of 2005 in comparison with the comparable period in the prior year. The decline was due to our decision to no longer actively market, sell or develop our RMS product.

     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 two revenue components, and also because of competitive pricing pressures.

     Operating Expenses. Operating expenses and certain operating expense comparisons for the three months ended June 30, 2005 and 2004 were as follows:

		Three Months				Three Months
		Ended				Ended
		June 30,				June 30,				$				%
		2005				2004				Difference				Difference
		(Dollars in thousands)
Engineering and development		$	3,495			$	5,527			$	(2,032	)			(36.8)	%
Sales and marketing			4,429				5,533				(1,104	)			(20.0	)
General and administrative			4,152				4,045				107				2.6
Restructuring			(8	)			4				(12	)			(300.0	)
Total		$	12,068			$	15,109			$	(3,041	)			(20.1)	%

     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 $2.0 million decrease in engineering and development expenses for the quarter ended June 30, 2005 as compared with the same quarter in 2004 was primarily due to cost savings associated with the 2004 restructuring activities, our decision to cease new development and enhancement of our RMS software product and our decision to outsource our Instant Conferencing support services. Engineering and development expenses as a percentage of total revenues decreased for the second quarter of 2005 as a result of lower spending.