Online Resources 10-Q 2007 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 2007
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 0-26123

ONLINE RESOURCES CORPORATION

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

Delaware	52-1623052
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)	(I.R.S. EMPLOYER IDENTIFICATION NO.)
4795 Meadow Wood Lane, Suite 300, Chantilly, Virginia (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)	20151 (ZIP CODE)

(703) 653-3100

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

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

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” inRule 12b-2 of the Exchange Act.

Large Accelerated Filero     Accelerated Filerþ     Non-accelerated filer o

As of July 27, 2007 there were 26,478,113 shares of the issuer’s common stock outstanding.

ONLINE RESOURCES CORPORATION

FORM 10-Q

TABLE OF CONTENTS

			Page
PART I  FINANCIAL INFORMATION
	Item 1:	Consolidated Financial Statements		2
		Consolidated Balance Sheets as of June 30, 2007 (unaudited) and December 31, 2006		2
		Consolidated Statements of Operations (unaudited) — Three and six months ended June 30, 2007 and 2006		3
		Consolidated Statements of Cash Flows (unaudited) — Six months ended June 30, 2007 and 2006		4
		Notes to Consolidated Financial Statements (unaudited)		5
	Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
	Item 3:	Quantitative and Qualitative Disclosures About Market Risk		27
	Item 4:	Controls and Procedures		27
PART II  OTHER INFORMATION
	Item 1:	Legal Proceedings		28
	Item 1A:	Risk Factors		28
	Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds		28
	Item 3:	Defaults Upon Senior Securities		28
	Item 4:	Submission of Matters to a Vote of Security Holders		28
	Item 5:	Other Information		28
	Item 6:	Exhibits		29
EX-31.1
EX-31.2
EX-32

1

PART I.  FINANCIAL INFORMATION

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS.

ONLINE RESOURCES CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except par values)

	June 30,			December 31,
	2007			2006
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	30,796		$	31,189
Restricted cash		1,539			3,919
Short-term investments		989			965
Accounts receivable (net of allowance of $84 and $148, respectively)		15,553			14,291
Deferred implementation costs		1,353			1,598
Deferred tax asset		1,095			2,561
Debt isssuance costs		294			890
Prepaid expenses and other current assets		2,890			2,653
Total current assets		54,509			58,066
Property and equipment, net		20,992			19,110
Deferred tax asset, less current portion		11,635			11,635
Deferred implementation costs, less current portion		1,397			1,015
Goodwill		167,920			168,085
Intangible assets		20,439			25,128
Debt isssuance costs, less current portion		1,079			3,116
Other assets		785			436
Total assets	$	278,756		$	286,591
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,781		$	2,332
Accrued expenses and other current liabilities		4,001			4,034
Accrued compensation		1,506			2,306
Notes payable, senior secured debt		3,187			—
Deferred revenues		4,975			4,919
Deferred rent		184			304
Interest payable		39			2,688
Total current liabilities		15,673			16,583
Notes payable, senior secured debt, less current portion		81,813			85,000
Deferred revenues, less current portion		3,571			3,374
Deferred rent, less current portion		2,080			2,144
Other long-term liabilities		2,494			4,047
Total liabilities		105,631			111,148
Commitments and contingencies
Redeemable convertible preferred stock:
Series A-1 convertible preferred stock, $0.01 par value; 75 shares authorized and issued (Redeemable on July 3, 2013 at $128,250)		76,271			72,108
Stockholders’ equity:
Series B junior participating preferred stock, $0.01 par value; 297.5 shares authorized; none issued		—			—
Common stock, $0.0001 par value; 70,000 shares authorized; 26,457 issued and 26,381 outstanding at June 30, 2007 and 25,865 issued and 25,789 outstanding at December 31, 2006		3			3
Additional paid-in capital		170,375			166,355
Accumulated deficit		(73,001	)		(62,388	)
Treasury stock, 76 shares		(228	)		(228	)
Accumulated other comprehensive loss		(295	)		(407	)
Total stockholders’ equity		96,854			103,335
Total liabilities and stockholders’ equity	$	278,756		$	286,591

See accompanying notes to consolidated unaudited financial statements.

2

ONLINE RESOURCES CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

	Three Months Ended June 30,					Six Months Ended June 30,
	2007			2006		2007			2006
	(Unaudited)					(Unaudited)
Revenues:
Account presentation services	$	2,203		$	1,956	$	4,465		$	3,884
Payment services		23,880			10,849		47,260			21,244
Relationship management services		2,061			2,058		4,224			4,155
Professional services and other		3,797			2,496		6,841			4,793
Total revenues		31,941			17,359		62,790			34,076
Costs and expenses:
Service costs		13,050			5,953		26,472			11,929
Implementation and other costs		1,627			1,638		3,290			3,324
Costs of revenues		14,677			7,591		29,762			15,253
Gross profit		17,264			9,768		33,028			18,823
General and administrative		6,440			4,284		13,526			8,708
Sales and marketing		6,090			2,850		11,822			5,558
Systems and development		2,123			1,064		4,451			2,207
Total expenses		14,653			8,198		29,799			16,473
Income from operations		2,611			1,570		3,229			2,350
Other (expense) income:
Interest income		400			682		737			1,280
Interest expense		(1,960	)		—		(4,499	)		(1	)
Loss on extinguishment of debt		—			—		(5,625	)		—
Total other (expense) income		(1,560	)		682		(9,387	)		1,279
Income (loss) before income tax provision		1,051			2,252		(6,158	)		3,629
Income tax provision		81			855		291			1,475
Net income (loss)		970			1,397		(6,449	)		2,154
Preferred stock accretion		2,128			—		4,163			—
Net (loss) income available to common stockholders	$	(1,158	)	$	1,397	$	(10,612	)	$	2,154
Net (loss) income available to common shareholders per share:
Basic	$	(0.04	)	$	0.05	$	(0.41	)	$	0.08
Diluted	$	(0.04	)	$	0.05	$	(0.41	)	$	0.08
Shares used in calculation of net (loss) income available to common shareholders per share:
Basic		26,184			25,523		26,056			25,410
Diluted		26,184			27,527		26,056			27,553

See accompanying notes to consolidated unaudited financial statements.

3

ONLINE RESOURCES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Six Months Ended
	June 30,
	2007			2006
	(Unaudited)
Operating activities
Net (loss) income	$	(6,449	)	$	2,154
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		9,583			3,657
Equity compensation expense		1,199			1,232
Write off and amortization of debt issuance costs		4,111			—
Loss on preferred stock derivative security		134			—
Loss on cash flow hedge derivative security		142			—
Loss on disposal of assets		166			—
Provision for losses on accounts receivable		(64	)		—
Changes in operating assets and liabilities, net of acquisitions:
Restricted cash		2,285			593
Accounts receivable		(1,172	)		(2,733	)
Prepaid expenses and other current assets		(261	)		(519	)
Deferred implementation costs		(137	)		(304	)
Other assets		(319	)		(68	)
Accounts payable		1,229			(519	)
Accrued expenses and other current liabilities		1,440			1,519
Accrued compensation		(800	)		(340	)
Interest payable		(2,649	)		—
Deferred revenues		252			1,008
Deferred rent		(32	)		39
Other long-term liabilities		(1,670	)		(593	)
Net cash provided by operating activities		6,988			5,126
Investing activities
Purchases of property and equipment		(6,816	)		(5,395	)
Net cash used by investing activities		(6,816	)		(5,395	)
Financing activities
Net proceeds from issuance of common stock		2,731			2,543
Purchase of derivative		(121	)		—
Sale of derivative		23			—
Debt issuance costs on refinancing of long-term debt		(1,478	)		—
Prepayment penalty on repayment of 2006 notes		(1,700	)		—
Proceeds from issuance of 2007 notes		85,000			—
Repayment of 2006 notes		(85,000	)		—
Repayment of capital lease obligations		(20	)		(8	)
Net cash (used) provided by financing activities		(565	)		2,535
Net (decrease) increase in cash and cash equivalents		(393	)		2,266
Cash and cash equivalents at beginning of period		31,189			55,864
Cash and cash equivalents at end of period	$	30,796		$	58,130

See accompanying notes to consolidated unaudited financial statements.

4

ONLINE RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.   DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Online Resources Corporation (the “Company”) provides outsourced, web-based financial technology services branded to over 2,700 financial institution, biller, card issuer and creditor clients. With four business lines in two primary vertical markets, the Company serves over 10 million billable consumer and business end-users. End-users may access and view their accounts online and perform various web-based self-service functions. They may also make electronic bill payments and funds transfers utilizing the Company’s unique, real-time debit architecture, ACH and other payment methods. The Company’s value-added relationship management services reinforce a favorable user experience and drive a profitable and competitive Internet channel for its clients. Further, the Company provides professional services, including software solutions, which enable various deployment options, a broad range of customization and other value-added services. The Company currently operates in two business segments — Banking and eCommerce. The operating results of the business segments exclude general corporate overhead expenses and intangible asset amortization.

INTERIM FINANCIAL INFORMATION

The accompanying consolidated unaudited financial statements have been prepared in conformity with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions forForm 10-Q and Article 10 ofRegulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the consolidated unaudited financial statements include all adjustments necessary (which are of a normal and recurring nature) for the fair presentation of the results of the interim periods presented. These consolidated unaudited financial statements should be read in conjunction with our consolidated audited financial statements for the year ended December 31, 2006 included in the Annual Report onForm 10-K filed by the Company with the Securities and Exchange Commission on March 16, 2007. The results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year. Certain amounts from prior periods have been reclassed to conform to current period presentation.

NEW ACCOUNTING STANDARDS

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”, (“SFAS No. 157”). This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. SFAS No. 157 provides a common fair value hierarchy for companies to follow in determining fair value measurements in the preparation of financial statements and expands disclosure requirements relating to how such fair value measurements were developed. SFAS No. 157 clarifies the principle that fair value should be based on the assumptions that the marketplace would use when pricing an asset or liability, rather than company specific data. The Company is currently assessing the impact that SFAS No. 157 will have on its results of operations and financial position.

In January 2007, the FASB issued SFAS No. 159,The Fair Value Options for Financial Assets and Financial Liabilities(“SFAS No. 159”). This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The Company is currently assessing the impact that SFAS No. 159 will have on its results of operations and financial position.

5

ONLINE RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2.   TERM LOANS

On February 21, 2007, the Company entered into an agreement with Bank of America to refinance its existing debt with $85 million in term loans (“2007 Notes”). The agreement also provides a $15 million revolver (“Revolver”) under which the Company can secure up to $5 million in letters of credit. Currently, there are no amounts outstanding under the Revolver, but available credit under the Revolver has been reduced by approximately $1.8 million as a result of letters of credit the bank has issued. Interest on both the Revolver and the 2007 Notes is one-month LIBOR plus 225 to 275 basis points based upon the ratio of the Company’s funded indebtedness to its earnings before interest, taxes, depreciation and amortization (“EBITDA,” as defined in the 2007 Notes), and it is payable monthly. Currently, the margin is 275 basis points. The 2007 Notes and the Revolver are secured by the assets of the Company. The Company incurred $1.5 million in deferred financing costs in conjunction with the credit facility and these costs are being amortized using the effective interest rate method over the term of the term loans. In addition, the Company incurs a commitment fee of 0.5% on any unused portion of the Revolver.

Maturities of long-term debt for each of the next five years are as follows (in thousands):

	Maturing
Year	Amounts
2007	$	—
2008	$	9,563
2009	$	15,937
2010	$	17,000
2011	$	32,938
2012	$	9,562

The Company issued $85 million of senior secured notes (the “2006 Notes”) on July 3, 2006. Interest on the 2006 Notes was one-month LIBOR plus 700 basis points, and it was payable quarterly. The 2006 Notes were refinanced with the issuance of the 2007 Notes. The Company paid a $1.7 million pre-payment penalty and wrote-off $3.9 million in deferred financing costs in conjunction with the transaction.

3.   FINANCIAL INSTRUMENTS

Derivatives Instruments and Hedging Activities

Cash Flow Hedging Strategy

On March 30, 2007, the Company entered into an interest rate cap agreement (“2007 Hedge”) that protects the cash flows on designated one-month LIBOR-based interest payments beginning on April 3, 2007 through July 31, 2009. The 2007 Hedge limits the exposure to interest rate increases in excess of 5.5%. The 2007 Hedge has a notional value of $70.0 million through September 28, 2007, $65.0 million through June 30, 2008 and $42.5 million through July 31, 2009. Approximately 82%, or $70 million, of the Company’s $85.0 million 2007 Notes had its interest payments perfectly hedged against increases in variable-rate interest payments above 5.5% by the 2007 Hedge.

The Company entered into an interest rate cap agreement (“2006 Hedge”) on July 3, 2006 that protected cash flows on designated one-month LIBOR-based payments beginning on July 3, 2006 through July 1, 2008. The 2006 Hedge limited the exposure to interest rate increases in excess of 5.5%. The 2006 Hedge had a notional value of $75.0 million through January 1, 2007, $70.0 million through July 1, 2007 and $65.0 million through July 1, 2008. Approximately, 82%, or $70.0 million, of the Company’s 2006 Notes had its interest payments perfectly hedged against increases in variable-rate interest payments over 5.5% by the 2006 Hedge up until the 2006 Notes were refinanced on February 21, 2007. The 2006 Hedge was de-designated on

6

ONLINE RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

February 21, 2007 and was sold on April 3, 2007. The 2006 Hedge was replaced by the 2007 Hedge in order to hedge against the 2007 Notes.

During the three and six months ended June 30, 2007, the Company recorded unrealized losses of $5,000 and $29,000, respectively, as part of the comprehensive loss recorded in stockholders’ equity to reflect the change in the fair value of the 2006 Hedge through February 21, 2007, the date of de-designation for the interest rate cap, and the 2007 Hedge through June 30, 2007. During the three and six months ended June 30, 2007, the Company recorded realized losses of $56,000 and $141,000, respectively, with the maturation of the 2006 and 2007 Hedge’s caplets. As additional interest rate caplets mature, the portions of the changes in fair value that are associated with the cost of the maturing caplet will be recognized as interest expense. There is no published exchange information containing the price of the Company’s interest rate cap instruments. Thus, the fair value of the interest rate caps are based on estimated fair value quotes from a broker and market maker in derivative instruments. Their estimates are based upon the June 29, 2007 LIBOR forward curve, which implies that the caplets had minimal intrinsic value at June 30, 2007.

At June 30, 2007, the Company expects to reclassify approximately $332,000 of net losses from derivative instruments from accumulated other comprehensive loss to operations (i.e., as “interest expense”) during the next twelve months due to actual payments of variable interest associated with the floating rate debt.

Liability for the Embedded Derivative

TheSeries A-1 Redeemable Convertible Preferred Stock (“SeriesA-1 Preferred Stock”) has a feature that grants holders the right to receive interest-like returns on accrued but unpaid dividends. This feature is bifurcated as an embedded derivative and is included in other long-term liabilities on the accompanying balance sheet. This liability for the fair value of the embedded derivative is adjusted to market at the end of each reporting period by adjusting interest expense, and therefore, current income. The fair value of the liability is estimated using the discounted cash flow method. The estimated fair value is affected substantially by management’s expected term (periods outstanding) of theSeries A-1 Preferred Stock and the discount rate used to compute the present value of the expected cash flows from the interest-like returns feature.

Series A-1 Preferred Stock

The Company’sSeries A-1 Preferred Stock is carried at its fair value at inception adjusted for accretion of unpaid dividends, a redemption price of 115% of the original issue price, the original fair value of the bifurcated embedded derivative and the amortized portion of its original issuance costs, which approximates its redemption value. At June 30, 2007 its carrying value is $76,271,000. See Note 4 for a detailed explanation of theSeries A-1 Preferred Stock.

4.   REDEEMABLE CONVERTIBLE PREFERRED STOCK

Pursuant to the restated certificate of incorporation, the Board of Directors has the authority, without further action by the stockholders, to issue up to 3,000,000 shares of preferred stock in one or more series. Of these 3,000,000 shares of preferred stock, 75,000 shares have been designatedSeries A-1 Preferred Stock.

Shares of theSeries A-1 Preferred Stock are initially convertible into common shares at a rate of $16.22825 per share, or 4,621,570 shares in the aggregate. Although theSeries A-1 Preferred Stock has anti-dilution protection, in no event can the number of shares of common stock issued upon conversion of theSeries A-1 Preferred Stock exceed 5,102,986 common shares. The anti-dilution protection of theSeries A-1 Preferred Stock is based on the weighted average price of shares issued below the conversion price, provided that (a) shares issued in connection with compensatory equity grants, (b) shares issued above $12.9826 and

7

ONLINE RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(c) other issuances as set forth in the certificate of designations of theSeries A-1 Preferred Stock are excluded from the anti-dilution protections of theSeries A-1 Preferred Stock.

TheSeries A-1 Preferred Stock votes on an as converted basis with the common stock and as a single class as to certain amendments to the certificate of incorporation, the issuance of additional securities or debt and the payment of dividends. The amount of the liquidation preference of theSeries A-1 Preferred Stock increases at a rate of 8% per annum of the original issuance price with an interest factor thereon based upon the iMoneyNet First Tier Institutional Average (the “Cumulative Amount”). This 8% per annum increase is convertible into shares of common stock, subject to the conversion limit noted above; however, the Company has the right to pay the 8% per annum increase in cash in lieu of conversion into common stock. TheSeries A-1 Preferred Stock has a right to participate in dividends with common stock, on an as converted basis, when the cumulative total of common dividends paid, or proposed, exceeds the Cumulative Amount. Shares ofSeries A-1 Preferred Stock are subject to put and call rights following the seventh anniversary of their issuance for an amount equal to 115% of the original issuance price plus the 8% per annum increase with the interest factor thereon. The Corporation can require the conversion of theSeries A-1 Preferred Stock if the 30 day weighted closing price per share of the Corporation’s common stock is at least 165% of the initial conversion price.

As discussed above, theSeries A-1 Preferred Stock redemption value is 115% of the face value of the stock, on or after seven years from the date of issuance. Emerging Issues Task Force Topic D-98,Classification and Measurement and of Redeemable Securities, requires the Company to account for the securities by accreting to its expected redemption value over the period from the date of issuance to the first expected redemption date. The Company recognized $0.4 million and $0.8 million of preferred stock accretion for the three and six months ended June 30, 2007, respectively, to adjust for the redemption value at maturity.

Additionally, theSeries A-1 Preferred Stock has a feature that grants holders the right to receive interest-like returns on accrued, but unpaid, dividends that accumulate at 8% per annum. The Company bifurcated this feature at the date of issuance by reclassifying $2.1 million of theSeries A-1 Preferred Stock as a liability on the date of issuance. This liability for the fair value of the embedded derivative is adjusted to market at the end of each reporting period by adjusting interest expense. At June 30, 2007, the liability was valued at $2.4 million. Interest expense of $61,000 and $134,000 has been recognized in the statement of operations for the three and six months ended June 30, 2007, respectively, regarding the changes in the fair value of the liability. Additionally, the original amount allocated to the fair value of the embedded derivative will be accreted back to theSeries A-1 Preferred Stock over the seven year life of the security. For the three and six months ended June 30, 2007, $0.1 million and $0.2 million, respectively, of accretion has been recognized for the portion of theSeries A-1 Preferred Stock that was bifurcated as a liability for the fair value of the embedded derivative. An additional $1.5 million and $3.0 million of accretion was recognized for the 8% per annum cumulative dividends during the three and six months ended June 30, 2007, respectively. Finally, the cost to issue theSeries A-1 Preferred Stock of $5.1 million is also accreted back to the redemption value of theSeries A-1 Preferred Stock and generated an additional $0.2 million and $0.4 million of accretion for the three and six months ended June 30, 2007, respectively.

5.   REPORTABLE SEGMENTS

The Company manages its business through two reportable segments: Banking and eCommerce. The Banking segment’s market consists primarily of banks, credit unions and other depository financial institutions in the U.S. The segment’s fully integrated suite of account presentation, payment, relationship management and professional services are delivered through the Internet. The eCommerce segment’s market consists of billers, card issuers, processors and other creditors such as payment acquirers. The segment’s account presentation, payment, relationship management and professional services are distributed to these clients through the Internet.

8

ONLINE RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Factors used to identify the Company’s reportable segments include the organizational structure of the Company and the financial information available for evaluation by the chief operating decision-maker in making decisions about how to allocate resources and assess performance. The Company’s operating segments have been broken out based on similar economic and other qualitative criteria. The Company operates both reporting segments in one geographical area, the United States. The Company’s management assesses the performance of its assets in the aggregate, and accordingly, they are not presented on a segment basis. The operating results of the business segments exclude general corporate overhead expenses and intangible asset amortization.

The results of operations from these reportable segments were as follows for the three and six months ended June 30, 2007 and 2006 (in thousands):

						Unallocated
	Banking		eCommerce			Expenses(1)			Total
Three months ended June 30, 2007:
Revenues	$	25,255	$	6,686		$	—		$	31,941
Costs of revenues		10,184		3,994			499			14,677
Gross profit		15,071		2,692			(499	)		17,264
Operating expenses		6,252		3,276			5,125			14,653
Income (loss) from operations	$	8,819	$	(584	)	$	(5,624	)	$	2,611
Three months ended June 30, 2006:
Revenues	$	15,404	$	1,955		$	—		$	17,359
Costs of revenues		6,208		1,292			91			7,591
Gross profit		9,196		663			(91	)		9,768
Operating expenses		5,258		874			2,066			8,198
Income (loss) from operations	$	3,938	$	(211	)	$	(2,157	)	$	1,570
Six months ended June 30, 2007:
Revenues	$	49,739	$	13,051		$	—		$	62,790
Costs of revenues		20,376		8,388			998			29,762
Gross profit		29,363		4,663			(998	)		33,028
Operating expenses		12,053		6,726			11,020			29,799
Income (loss) from operations	$	17,310	$	(2,063	)	$	(12,018	)	$	3,229
Six months ended June 30, 2006:
Revenues	$	30,101	$	3,975		$	—		$	34,076
Costs of revenues		12,414		2,657			182			15,253
Gross profit		17,687		1,318			(182	)		18,823
Operating expenses		10,481		1,737			4,255			16,473
Income (loss) from operations	$	7,206	$	(419	)	$	(4,437	)	$	2,350

(1) Unallocated expenses are comprised of general corporate overhead expenses and intangible asset amortization that are not included in the measure of segment profit or loss used internally to evaluate the segments.

9

ONLINE RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

6.   STOCK BASED COMPENSATION

At June 30, 2007, the Company had three stock-based employee compensation plans, which are described more fully below. Prior to January 1, 2006, the Company accounted for those plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations, as permitted by SFAS No. 123,Accounting for Stock-Based Compensation(“SFAS No. 123”). Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R),Share-Based Payment(“SFAS No. 123(R)”), using the modified-prospective transition method. Under that transition method, compensation cost recognized includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted on or subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R).

A portion of the stock based compensation cost has been capitalized as part of software development costs in accordance with Statement of PositionNo. 98-1,Accounting for Costs of Computer Software Developed or Obtained for Internal Use, and SFAS No. 86,Accounting for Costs of Software to be Sold, Leased, or Otherwise Marketed.For the three months ended June 30, 2007 and 2006, approximately $25,000 and $54,000, respectively, was capitalized, and $89,000 and $111,000 for the six months ended June 30, 2007 and 2006, respectively. No income tax benefit was recognized in the statement of operations for share-based compensation arrangements since the Company currently recognizes a full valuation allowance against that benefit.

Option Plans

During 1989, the Company adopted an Incentive Stock Option Plan (the “1989 Plan”), which has since been amended to allow for the issuance of up to 2,316,730 shares of common stock. The option price under the 1989 Plan cannot be less than fair market value of the Company’s common stock on the date of grant. The vesting period of the options is determined by the Board of Directors and is generally four years. Outstanding options expire after ten years.

During 1999, the Company adopted the 1999 Stock Option Plan (the “1999 Plan”), which permits the granting of both incentive stock options and nonqualified stock options to employees, directors and consultants. The aggregate number of shares that can be granted under the 1999 Plan is 5,858,331. The option exercise price under the 1999 Plan cannot be less than the fair market value of the Company’s common stock on the date of grant. The vesting period of the options is determined by the Board of Directors and is generally four years. Outstanding options expire after seven to ten years.

In May 2005, the stockholders approved the 2005 Restricted Stock and Option Plan (the “2005 Plan”), which permits the granting of restricted stock units and awards, stock appreciation rights, incentive stock options and non-statutory stock options to employees, directors and consultants. The aggregate number of shares that can be granted under the 2005 Plan is 1.7 million. The vesting period of the options and restricted stock is determined by the Board of Directors and is generally three years. Outstanding options expire after seven to ten years.

10

ONLINE RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton option-pricing formula that uses the assumptions noted in the table and discussion that follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
Dividend yield		—			—			—			—
Expected volatility		58	%		75	%		55	%		71	%
Risk-free interest rate		4.50	%		4.87	%		4.62	%		4.37	%
Expected life in years		5.9			6.4			5.1			5.4

Dividend Yield.  The Company has never declared or paid dividends and has no plans to do so in the foreseeable future.

Expected Volatility.  Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company uses the historical volatility over the average expected term of the options granted.

Risk-Free Interest Rate.  This is the U.S. Treasury rate for the week of each option grant during the quarter having a term that most closely resembles the expected term of the option.

Expected Life of Option Term.  Expected life of option term is the period of time that the options granted are expected to remain unexercised. Options granted during the quarter have a maximum term of seven to ten years. The Company used historical expected terms with further consideration given to the class of employees to whom the equity awards were granted to estimate the expected life of the option term.

Forfeiture Rate.  Forfeiture rate is the estimated percentage of equity awards granted that are expected to be forfeited or canceled on an annual basis before becoming fully vested. The Company estimates forfeiture rate based on past turnover data ranging anywhere from one to five years with further consideration given to the class of employees to whom the equity awards were granted.

A summary of option activity under the 1989, 1999 and 2005 Plans as of June 30, 2007, and changes in the period then ended is presented below (in thousands, except exercise price and remaining contract term data):

						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
	Shares			Exercise Price		Contract Term		Intrinsic Value
Outstanding at January 1, 2007		3,796		$	5.35
Granted		151		$	9.78
Exercised		(565	)	$	4.66
Forfeited or expired		(136	)	$	13.08
Outstanding at June 30, 2007		3,246		$	5.37		4.2	$	18,735
Vested or expected to vest at June 30, 2007		3,180		$	5.34		4.2	$	18,466
Exercisable at June 30, 2007		2,383		$	4.94		4.0	$	14,897

The weighted-average grant-date fair value of options granted during the three months ended June 30, 2007 and 2006 was $6.48 and $9.35, respectively, and $5.14 and $7.31 for the six months ended June 30, 2007 and 2006, respectively. In the table above, the total intrinsic value is calculated as the difference between the market price of the Company’s stock on the last trading day of the quarter and the exercise price of the options. For options exercised, intrinsic value is calculated as the difference between the market price on the date of exercise and the exercise price. The intrinsic value of options exercised in the three months ended June 30, 2007 and 2006 was $2.2 million and $0.9 million, respectively, and $3.5 million and $2.2 million for the six months ended June 30, 2007 and 2006, respectively.

11

ONLINE RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of June 30, 2007, there was $2.5 million of total unrecognized compensation cost related to stock options granted under the 1999 and 2005 Plans. That cost is expected to be recognized over a weighted average period of 1.9 years.

Restricted Stock Units

A summary of the Company’s non-vested restricted stock units as of June 30, 2007, and changes for the six months then ended, is presented below (in thousands, except grant-date fair value data):

				Weighted-
				Average Grant-
	Shares			Date Fair Value
Non-vested at January 1, 2007		126		$	11.07
Granted		406		$	9.90
Vested		(19	)	$	11.07
Forfeited		(17	)	$	9.99
Non-vested at June 30, 2007		496		$	10.15

The fair value of non-vested units is determined based on the opening trading price of the Company’s shares on the grant date. As of June 30, 2007, there was $2.2 million of total unrecognized compensation cost related to non-vested restricted stock units granted under the 2005 Plan. That cost is expected to be recognized over a weighted average period of 2.1 years.

Cash received from option exercises under all share-based payment arrangements for the three months ended June 30, 2007 and 2006 was $1.9 million and $1.1 million, respectively, and $2.6 million and $2.4 million for the six months ended June 30, 2007 and 2006. There was no tax benefit realized for the tax deductions from option exercise of the share-based payment arrangements since the Company currently recognizes a full valuation allowance against that benefit.

7.   INCOME TAXES

The Company has adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), as of January, 1, 2007. This standard modifies the previous guidance provided by SFAS No. 5,Accounting for Contingencies, and SFAS No. 109,Accounting for Income Taxes, for uncertainties related to the Company’s income tax liabilities. The Company has analyzed its income tax posture using the criteria required by FIN 48 and concluded that there is no cumulative effect allocable to equity as a result of adopting this standard, or any derecognition in deferred tax assets that were previously offset by a partial valuation allowance as a result of adopting FIN 48, which has no net balance sheet impact and has not been charged to equity in the transition.

As of June 30, 2007 and December 31, 2006, the Company doesn’t have any unrecognized tax benefits.

The tax return years from 1999 forward in the Company’s major tax jurisdictions are not settled as of January 1, 2007 and no changes in settled tax years have occurred through June 30, 2007. Due to the existence of tax attribute carryforwards (which are currently offset by a partial valuation allowance), the Company treats certain post-1999 tax positions as unsettled due to the taxing authorities’ ability to modify these attributes.

The Company estimates that it is reasonably possible that no reduction in unrecognized tax benefit may occur in the next twelve months due primarily to the expiration of the statute of limitations in various state and local jurisdictions. The Company does not currently estimate any additional material reasonably possible uncertain tax positions occurring within the next twelve month time frame.

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ONLINE RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

8.   NET (LOSS) INCOME AVAILABLE TO COMMON STOCKHOLDERS PER SHARE

The following table sets forth the computation of basic and diluted net (loss) income available to common stockholders per share (in thousands, except per share amounts):

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2007			2006		2007			2006
Net income (loss)	$	970		$	1,397	$	(6,449	)	$	2,154
Preferred stock accretion		2,128			—		4,163			—
Net (loss) income available to common shareholders	$	(1,158	)	$	1,397	$	(10,612	)	$	2,154
Weighted average shares outstanding used in calculation of net (loss) income available to common stockholders per share:
Basic		26,184			25,523		26,056			25,410
Dilutive stock options		—			2,004		—			2,143
Diluted		26,184			27,527		26,056			27,553
Net (loss) income available to common stockholders per share:
Basic	$	(0.04	)	$	0.05	$	(0.41	)	$	0.08
Diluted	$	(0.04	)	$	0.05	$	(0.41	)	$	0.08

As of June 30, 2007, the Company had options outstanding to purchase approximately 3,246,000 shares of its common stock, non-vested restricted stock units outstanding of 496,000 shares, and outstanding shares of preferred stock which if converted would result in an additional 4,989,000 common shares, that were excluded from the calculation of diluted earnings per share because of their anti-dilutive effect.

9.   COMPONENTS OF COMPREHENSIVE INCOME (LOSS)

SFAS No. 130,Reporting Comprehensive Income, requires that items defined as comprehensive income (loss) be separately classified in the financial statements and that the accumulated balance of other comprehensive income (loss) be reported separately from accumulated deficit and additional paid-in capital in the equity section of the balance sheet. The following table reconciles the Company’s net income (loss) and its total comprehensive income (loss) for the three and six months ended June 30, 2007 and 2006 (in thousands):

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2007			2006		2007			2006
Net income (loss)	$	970		$	1,397	$	(6,449	)	$	2,154
Other comprehensive loss:
Realized loss on hedging activity		56			—		141			—
Net unrealized loss on hedging activity		(5	)		—		(29	)		—
Comprehensive net income (loss)	$	1,021		$	1,397	$	(6,337	)	$	2,154

10.   SUBSEQUENT EVENT

On August 10, 2007, the Company acquired Internet Transaction Solutions, Inc. (“ITS”) for total consideration of $42.9 million including $22.5 million in common stock. Based in Columbus, Ohio, ITS provides biller services to receivables management and utility companies.

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

CAUTIONARY NOTE

The following management’s discussion and analysis should be read in conjunction with the accompanying Consolidated Condensed Unaudited Financial Statements and Notes thereto. This Quarterly Report onForm 10-Q may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, but not limited to:

•  Any statements in this document that are not statements of historical fact may be considered forward-looking;

•  Statements regarding trends in our revenues, expense levels, and liquidity and capital resources;

•  Statements about the sufficiency of the proceeds from the sale of securities and cash balances to meet currently planned working capital and capital expenditure requirements for at least the next twelve months; and

•  Other statements identified or qualified by words such as “likely”, “will”, “suggest”, “may”, “would”, “could”, “should”, “expects”, “anticipates”, “estimates”, “plans”, “projects”, “believes”, “seeks”, “intends” and other similar words that signify forward-looking statements.

These forward-looking statements represent our best judgment as of the date of the Quarterly Report onForm 10-Q, and we caution readers not to place undue reliance on such statements. Actual performance and results of operations may differ materially from those projected or suggested in the forward-looking statements due to certain risks and uncertainties, including but not limited to, the risks and uncertainties described or discussed in the section “Risk Factors” in our Annual Report onForm 10-K filed with the Securities and Exchange Commission on March 16, 2007. These risks include, among others, the following:

•  our history of prior losses and lack of certainty as to our continuing profitability;

•  our dependence on the marketing efforts of third parties;

•  the possibility that we may not be able to expand to meet increased demand for our services and related products;

•  the potential adverse impact that a loss of a material client may have on our financial results;

•  our inability to attract and retain qualified management and technical personnel and our dependence on our executive officers and key employees;

•  possible security breaches or system failures disrupting our business and the liability associated with these disruptions;

•  the failure to properly develop, market or sell new products;

•  the potential impact of the consolidation of the banking and financial services industry;

•  interference with our business from the adoption of government regulations;

•  our need to maintain satisfactory ratings from federal depository institution regulators;

•  exposure to increased compliance costs and risks associated with increasing and new regulation of corporate governance and disclosure standards;

•  the liquidation preference rights and redemption rights associated with our outstanding shares of preferred stock;

•  the voting rights of our preferred stock restricting our right to take certain actions;

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•  the possible losses we may incur from the impairment of the goodwill we have obtained from our recent acquisitions;

•  our inability to obtain additional financing to grow our business;

•  the concentration of our clients in a small number of industries, including the financial services industry, and changes within those industries reducing demand for our products and services;

•  the failure to retain existing end-users or changes in their continued use of our services adversely affecting our operating results;

•  demand for low-cost or free online financial services and competition placing significant pressure on our pricing structure and revenues;

•  exposure to greater than anticipated tax liabilities;

•  our quarterly financial results being subject to fluctuations and having a material adverse effect on the price of our stock;

•  our limited ability to protect our proprietary technology and other rights;

•  the need to redesign our products, pay royalties or enter into license agreements with third parties as a result of our infringing the proprietary rights of third parties;

•  the potential obsolescence of our technology or the offering of new, more efficient means of conducting account presentation and payments services negatively impacting our business;

•  errors and bugs existing in our internally developed software and systems as well as third-party products;

•  the disruption of our business and the diversion of management’s attention resulting from breach of contract or product liability suits;

•  difficulties in integrating acquired businesses;

•  our having limited knowledge of, or experience with, the industries served and products provided by our acquired businesses;

•  the increase in the size of our operations and the risks described herein from acquisitions or otherwise;

•  the liabilities or obligations that were not or will not be adequately disclosed from acquisitions we have made and may make;.

•  the claims that may arise from acquired companies giving us limited warranties and indemnities in connection with their businesses;

•  the effect on the trading price of our stock from the sale of the substantial number of shares of common and convertible preferred stock outstanding, including shares issued in connection with certain acquisitions and shares that may be issued upon exercise of grants under our equity compensation plans;

•  the significant amount of debt which will have to repay;

•  the adverse effect to the market price of our common stock from future offerings of debt and preferred stock which would be senior to our common stock upon liquidation; and

•  the acceleration of repayment of borrowed funds if a default under the terms of our credit agreement arises.

OVERVIEW

We provide outsourced, web-based financial technology services branded to over 2,700 financial institution, biller, card issuer and creditor clients. With four business lines in two primary vertical markets, we serve over 10 million billable consumer and business end-users. End-users may access and view their accounts

15

online and perform various web-based self-service functions. They may also make electronic bill payments and funds transfers utilizing our unique, real-time debit architecture, ACH and other payment methods. Our value-added relationship management services reinforce a favorable user experience and drive a profitable and competitive Internet channel for our clients. Further, we have professional services, including software solutions, which enable various deployment options, a broad range of customization and other value-added services. We currently operate in two business segments — Banking and eCommerce. The operating results of the business segments exclude general corporate overhead expenses and intangible asset amortization.

Registered end-users using account presentation, payment services or both, and the payment transactions executed by those end-users are the major drivers of our revenues. Since June 30, 2006, the number of users using our account presentation services increased by 47%, and the number of users using our payment services increased 560%, for an overall 207% increase in users. For the six months ended June 30, 2007, the number of payment transactions completed by payment services end-users increased by 249%. The large increase in payment services users and payment transactions in 2007 is the result of the Princeton eCom Corporation (“Princeton”) acquisition, which occurred on July 3, 2006. Exclusive of the users and payment transactions brought to us by the Princeton acquisition, users increased by 19% and payment transactions increased by 16%.

					Increase/
	Period Ended June 30,				(Decrease)
	2007		2006		Change		%
Account presentation users (000s):
Banking segment		989		776		213		27	%
eCommerce segment		2,709		1,740		969		56	%
Enterprise		3,698		2,516		1,182		47	%
Payment services users (000s):
Banking segment		3,522		1,054		2,468		234	%
eCommerce segment		3,434		—		3,434		n/a
Enterprise		6,956		1,054		5,902		560	%
Total users (000s):
Banking segment		4,317		1,666		2,651		159	%
eCommerce segment		6,143		1,740		4,403		253	%
Enterprise		10,460		3,406		7,054		207	%
Payment services transactions (000s):
Banking segment		42,125		14,245		27,880		196	%
eCommerce segment		7,654		—		7,654		n/a
Enterprise		49,779		14,245		35,534		249	%

We have long-term service contracts with most of our financial services provider clients. The majority of our revenues are recurring, though these contracts also provide for implementation,set-up and other non-recurring fees. Account presentation services revenues are based on either a monthly license fee, allowing our financial institution clients to register an unlimited number of customers, or a monthly fee for each registered customer. Payment services revenues are based on either a monthly fee for each customer enrolled, a fee per executed transaction, or a combination of both. Our clients pay nearly all of our fees and then determine if or how they want to pass these costs on to their users. They typically provide account presentation services to users free of charge, as they derive significant potential benefits including account retention, delivery and paper cost savings, account consolidation and cross-selling of other products.

As a network-based service provider, we have made substantial up-front investments in infrastructure, particularly for our proprietary systems. While we continue to incur ongoing development and maintenance costs, we believe the infrastructure we have built provides us with significant operating leverage. We continue to automate processes and develop applications that allow us to make only small increases in labor and other

16

operating costs relative to increases in customers and transactions. We believe our financial and operating performance will be based primarily on our ability to leverage additional end-users and transactions over this relatively fixed cost base.

Results of Operations

The following table presents the summarized results of operations for our two reportable segments, Banking and eCommerce (unallocated expenses are comprised of general corporate overhead and intangible asset amortization) (dollars in thousands):

	Three Months Ended June 30,										Six Months Ended June 30,
	2007					2006					2007					2006
	Dollars (000s)		%			Dollars (000s)		%			Dollars (000s)		%			Dollars (000s)		%
Revenues:
Banking	$	25,255		79	%	$	15,404		89	%	$	49,739		79	%	$	30,101		88	%
eCommerce		6,686		21	%		1,955		11	%		13,051		21	%		3,975		12	%
Total	$	31,941		100	%	$	17,359		100	%	$	62,790		100	%	$	34,076		100	%

	Dollars (000s)			Margin			Dollars (000s)			Margin			Dollars (000s)			Margin			Dollars (000s)			Margin
Gross profit:
Banking	$	15,071			60	%	$	9,196			60	%	$	29,363			59	%	$	17,687			59	%
eCommerce		2,692			40	%		663			34	%		4,663			36	%		1,318			33	%
Unallocated		(499	)					(91	)					(998	)					(182	)
Total	$	17,264			54	%	$	9,768			56	%	$	33,028			53	%	$	18,823			55	%

	Dollars (000s)		%			Dollars (000s)		%			Dollars (000s)		%			Dollars (000s)		%
Operating expenses:
Banking	$	6,252		43	%	$	5,258		64	%	$	12,053		40	%	$	10,481		64	%
eCommerce		3,276		22	%		874		11	%		6,726		23	%		1,737		11	%
Unallocated		5,125		35	%		2,066		25	%		11,020		37	%		4,255		25	%
Total	$	14,653		100	%	$	8,198		100	%	$	29,799		100	%	$	16,473		100	%

	Dollars (000s)			Margin			Dollars (000s)			Margin			Dollars (000s)			Margin			Dollars (000s)			Margin
Income from operations:
Banking	$	8,819			35	%	$	3,938			26	%	$	17,310			35	%	$	7,206			24	%
eCommerce		(584	)		−9	%		(211	)		−11	%		(2,063	)		−16	%		(419	)		−11	%
Unallocated		(5,624	)					(2,157	)					(12,018	)					(4,437	)
Total	$	2,611			8	%	$	1,570			9	%	$	3,229			5	%	$	2,350			7	%

(1) Unallocated expenses are comprised of general corporate overhead expenses and intangible asset amortization that are not included in the measure of segment profit or loss used internally to evaluate the segments.

THREE MONTHS ENDED JUNE 30, 2007 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2006

Revenues

We generate revenues from account presentation, payment, relationship management and professional services and other revenues. Revenues increased $14.6 million, or 84% to $31.9 million for the three months ended June 30, 2007, from $17.4 million for the same period of 2006. Approximately 81% of the increase was

17

attributable to the addition of revenues from our acquisition of Princeton, which we acquired on July 3, 2006, while the remaining 19% of the increase was attributable to organic growth relative to 2006.

	Three Months Ended
	June 30,						Change
	2007			2006			Difference			%
Revenues (in thousands):
Account presentation services	$	2,203		$	1,956		$	247			13	%
Payment services		23,880			10,849			13,031			120	%
Relationship management services		2,061			2,058			3			0	%
Professional services and other		3,797			2,496			1,301			52	%
Total revenues	$	31,941		$	17,359		$	14,582			84	%
Payment metrics:
Payment services clients(1)		887			841			46			5	%
Payment transactions (in thousands)(1)		42,125			14,245			27,880			196	%
Adoption rates:
Account presentation services — Banking(1)(2)		27.7	%		25.2	%		2.5	%		10	%
Payment services — Banking(1)(3)		10.9	%		9.7	%		1.2	%		12	%

Notes:

(1)	Excludes Princeton for the purposes of comparison to prior year.
(2)	Represents the percentage of users subscribing to our account presentation services out of the total number of potential users enabled for account presentation services.
(3)	Represents the percentage of users subscribing to our payment services out of the total number of potential users enabled for payment services.

Account Presentation Services.  Both the Banking and eCommerce segments contribute to account presentation services revenues, which increased 13%, or $0.2 million, to $2.2 million. None of the growth in account presentation was due to the acquisition of Princeton. The increase is the result of growth in eCommerce account presentation services offered to card issuer clients.

Payment Services.  Primarily composed of revenues from the Banking segment prior to the acquisition of Princeton, payment services revenue is now driven by both the Banking and eCommerce segments. Payment services revenues increased to $23.9 million for the three months ended June 30, 2007 from $10.8 million in the prior year. While approximately 87% of the increase was related to the addition of new revenues from the acquisition of Princeton, the remaining 13% was driven by growth in our existing business in the form of a 19% increase in the number of period-end payment services users and an 16% increase in the number of payment transactions processed during the period. The increases in period-end payment services users and the number of payment transactions processed by our existing business resulted from two factors: an increase in financial services provider clients using our payment services and an increase in payment services adoption by our payment services clients’ end-users. Compared to June 30, 2006, the number of financial services provider clients using our payment services increased from 841 to 887. Additionally, the adoption rate of our payment services increased from 9.7% at June 30, 2006 to 10.9% at June 30, 2007.

Relationship Management Services.  Primarily composed of revenues from the Banking segment, relationship management services revenues were $2.1 million in 2007 and 2006. The revenues remain static due to our decision to bundle our call center service to banking clients with our account presentation and payment services.

Professional Services and Other.  Both the Banking and eCommerce segments contribute to professional services and other revenues, which increased by $1.3 million, or 52%, to $3.8 million in the first three months of 2007 compared to $2.5 million during the same period of 2006. The increase is the result of the addition of

18

new revenues from the acquisition of Princeton, higher professional services fees in the legacy eCommerce segment, higher termination fees during the quarter and the launch of our new risk-based authentication service in the fourth quarter of 2006.

Costs and Expenses

	Three Months Ended
	June 30						Change
	2007(1)			2006(1)			Difference(1)			%
Revenues	$	31,941		$	17,359		$	14,582			84	%
Costs of revenues		14,677			7,591			7,086			93	%
Gross profit		17,264			9,768			7,496			77	%
Gross margin		54	%		56	%		−2	%		−4	%
Operating expenses
General and administrative		6,440			4,284			2,156			50	%
Sales and marketing		6,090			2,850			3,240			114	%
Systems and development		2,123			1,064			1,059			100	%
Total operating expenses		14,653			8,198			6,455			79	%
Income from operations		2,611			1,570			1,041			66	%
Other (expense) income
Interest income		400			682			(282	)		−41	%
Interest expense		(1,960	)		—			(1,960	)		n/a
Total other (expense) income		(1,560	)		682			(2,242	)		n/a
Income before tax provision		1,051			2,252			(1,201	)		−53	%
Income tax provision		81			855			(774	)		−91	%
Net income		970			1,397			(427	)		−31	%
Preferred stock accretion		2,128			—			2,128			n/a
Net (loss) income available to common stockholders	$	(1,158	)	$	1,397		$	(2,555	)		n/a
Net (loss) income available to common stockholders per share:
Basic	$	(0.04	)	$	0.05		$	(0.10	)		n/a
Diluted	$	(0.04	)	$	0.05		$	(0.09	)		n/a
Shares used in calculation of net (loss) income available to common stockholders per share:
Basic		26,184			25,523			661			3	%
Diluted		26,184			27,527			(1,343	)		−5	%

Notes:

(1) In thousands except for per share amounts.

Costs of Revenues.  Costs of revenues encompass the direct expenses associated with providing our services. These expenses include telecommunications, payment processing, systems operations, customer service, implementation and professional services work. Costs of revenues increased by $7.1 million to $14.7 million for the three months ended June 30, 2007, from $7.6 million for the same period in 2006. Seventy-seven percent (77%) of this increase is the result of additional costs of revenues associated with Princeton, which was acquired in July 2006. Additional expenses resulted from a $0.4 million increase in amortization of intangible assets, headcount increases in our call center and the release of a number of software development projects into production since the second quarter of 2006.

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Gross Profit.  Gross profit increased $7.5 million for the three months ended June 30, 2007 to $17.3 million, and gross margin decreased to 54% in 2007 from 56% in 2006. Princeton accounted for 84% of the increase in gross profit. The decrease in gross margin is the result of increased amortization of intangible assets purchased as part of the July 2006 Princeton acquisition and increased amortization of software development projects.

General and Administrative.  General and administrative expenses primarily consist of salaries for executive, administrative and financial personnel, consulting expenses and facilities costs such as office leases, insurance and depreciation. General and administrative expenses increased $2.2 million, or 50% to $6.4 million for the three months ended June 30, 2007, from $4.3 million in the same period of 2006. Forty- one percent (41%) of this increase is the direct result of additional costs associated with Princeton. The company also experienced additional expenses associated with increased payroll and increased depreciation as a result of a general increase in capital expenditures.

Sales and Marketing.  Sales and marketing expenses include salaries and commissions paid to sales and marketing personnel, corporate marketing costs and other costs incurred in marketing our services and products. Sales and marketing expenses increased $3.2 million, or 114%, to $6.1 million for the three months ended June 30, 2007, from $2.9 million in 2006. Sixty-one percent (61%) of this increase is the result of additional costs associated with Princeton including additional amortization of intangible assets totaling $1.8 million. We also experienced an increase in salary and benefits costs as a result of the expansion of our sales force in both the Banking and eCommerce segments.

Systems and Development.  Systems and development expenses include salaries, consulting fees and all other expenses incurred in supporting the research and development of new services and products and new technology to enhance existing products. Systems and development expenses increased by $1.1 million, or 100%, to $2.1 million for the three months ended June 30, 2007. Eighty-two (82%) of this increase is the result of additional costs associated with Princeton. We also had an increase in salaries and benefits due to increased headcount. We capitalized $1.3 million and $1.5 million of development costs associated with software developed for internal use or to be sold, leased or otherwise marketed during the three months ended June 30, 2007 and 2006, respectively.

Income from Operations.  Income from operations increased $1.0 million, or 66%, to $2.6 million for the three months ended June 30, 2007. The increase was due to leveraging increased services fee revenues over our relatively fixed cost based.

Interest Income.  Interest income decreased $0.3 million to $0.4 million for the quarter ended June 30, 2007 due to lower average cash resulting from our use of $35 million in cash to partially finance the Princeton acquisition in July 2006.

Interest Expense.  Interest expense was $2.0 million due to interest expense and the amortization of debt issuance costs incurred in connection with $85 million in senior secured notes outstanding during the quarter ended June 30, 2007. The senior secured notes currently outstanding carry an interest rate equal to 275 basis points above one-month LIBOR.

Income Tax Provision.  Our income tax provision for the three months ended June 30, 2007 was $0.1 million compared to $0.9 million for the three months ended June 30, 2006. The decrease in the income tax provision reflects lower anticipated taxable income for 2007 than was anticipated for 2006 as of June 30, 2006.

Preferred Stock Accretion.  TheSeries A-1 Preferred Stock was issued on July 3, 2006 and was recorded at its fair value at inception net of its issuance costs of $5.1 million and the fair market value of the embedded derivative that represents interest on unpaid accrued dividends. TheSeries A-1 Preferred Stock carries a dividend equal to 8% per annum of the original issuance price, plus a money market rate of interest on any accrued but unpaid dividend (“preferred dividend”). The security is subject to put and call rights following the seventh anniversary of its issuance for an amount equal to 115% of the original issuance price plus the preferred dividend (the “Cumulative Amount”). The Cumulative Amount, stock issuance costs and original fair market value of the embedded derivative bifurcated at inception are accreted to the carrying value of the

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Series A-1 Preferred Stock and results in theSeries A-1 Preferred Stock being carried at its estimated redemption amount. These amounts are accreted over the period from the issuance date to the first date the holders’ right to redeem the shares becomes effective, which is the seventh anniversary date of the issuance.

Net (Loss) Income Available to Common Stockholders.  Net (loss) income available to common stockholders decreased $2.5 million to a loss of $1.2 million for the three months ended June 30, 2007, compared to net income of $1.4 million for the three months ended June 30, 2006. Basic and diluted net loss per share was $0.04 for the three months ended June 30, 2007, compared to basic and diluted net income per share of $0.05 for the three months ended June 30, 2006. Basic shares outstanding increased by 3% as a result of shares issued in connection with the exercise of company-issued stock options and our employees’ participation in our employee stock purchase plan, while diluted shares outstanding decreased by 5% as s result of the anti-dilutive effect of stock options on the fully diluted earnings per share calculation for the three months ended June 30, 2007.

SIX MONTHS ENDED JUNE 30, 2007 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2006

Revenues

We generate revenues from account presentation, payment, relationship management and professional services and other revenues. Revenues increased $28.7 million, or 84%, to $62.8 million for the six months ended June 30, 2007, from $34.1 million for the same period of 2006. Approximately 80% of the increase was attributable to the addition of revenues from our acquisition of Princeton, while the remaining 20% of the increase was attributable to organic growth relative to 2006.

	Six Months Ended
	June 30,						Change
	2007			2006			Difference			%
Revenues (in thousands):
Account presentation services	$	4,465		$	3,884		$	581			15	%
Payment services		47,260			21,244			26,016			122	%
Relationship management services		4,224			4,155			69			2	%
Professional services and other		6,841			4,793			2,048			43	%
Total revenues	$	62,790		$	34,076		$	28,714			84	%
Payment metrics:
Payment services clients(1)		887			841			46			5	%
Payment transactions (in thousands)(1)		42,125			14,245			27,880			196	%
Adoption rates:
Account presentation services — Banking(1)(2)		27.7	%		25.2	%		2.5	%		10	%
Payment services — Banking(1)(3)		10.9	%		9.7	%		1.2	%		12	%

Notes:

(1)	Excludes Princeton for the purposes of comparison to prior year.
(2)	Represents the percentage of users subscribing to our account presentation services out of the total number of potential users enabled for account presentation services.
(3)	Represents the percentage of users subscribing to our payment services out of the total number of potential users enabled for payment services.

Account Presentation Services.  Both the Banking and eCommerce segments contribute to account presentation services revenues, which increased 15%, or $0.6 million, to $4.5 million. None of the growth in account presentation was due to the acquisition of Princeton. The increase is the result of growth in eCommerce account presentation services offered to card issuer clients.

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Payment Services.  Primarily composed of revenues from the Banking segment prior to the acquisition of Princeton, payment services revenue is now driven by both the Banking and eCommerce segments. Payment services revenues increased $26.0 million to $47.3 million for the six months ended June 30, 2007 from $21.2 million in the prior year. While approximately 86% of the increase was related to the addition of new revenues from the acquisition of Princeton, the remaining 14% was driven by growth in our existing business in the form of a 19% increase in the number of period-end payment services users and a 16% increase in the number of payment transactions processed during the period. The increases in period-end payment services users and the number of payment transactions processed by our existing business resulted from two factors: an increase in financial services provider clients using our payment services and an increase in payment services adoption by our payment services clients’ end-users. Compared to June 30, 2006, the number of financial services provider clients using our payment services increased from 841 to 887. Additionally, the adoption rate of our payment services increased from 9.7% at June 30, 2006 to 10.9% at June 30, 2007.

Relationship Management Services.  Primarily composed of revenues from the Banking segment, relationship management services revenues increased marginally to $4.2 million in 2007. The low rate of growth is the result of our decision to bundle our call center service to banking clients with our account presentation and payment services.

Professional Services and Other.  Both the Banking and eCommerce segments contribute to professional services and other revenues, which increased by $2.0 million, or 43%, to $6.8 million in the first six months of 2007 compared to $4.8 million in the same period of 2006. The increase is the result of the addition of new revenues from the acquisition of Princeton, higher professional services fees in the legacy eCommerce segment, higher termination fees during the first six months of 2007 and the launch of our new risk-based authentication service in the fourth quarter of 2006.

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Costs and Expenses

	Six Months Ended
	June 30						Change
	2007(1)			2006(1)			Difference(1)			%
Revenues	$	62,790		$	34,076		$	28,714			84	%
Costs of revenues		29,762			15,253			14,509			95	%
Gross profit		33,028			18,823			14,205			75	%
Gross margin		53	%		55	%		−3	%		−5	%
Operating expenses
General and administrative		13,526			8,708			4,818			55	%
Sales and marketing		11,822			5,558			6,264			113	%
Systems and development		4,451			2,207			2,244			102	%
Total operating expenses		29,799			16,473			13,326			81	%
Income from operations		3,229			2,350			879			37	%
Other (expense) income
Interest income		737			1,280			(543	)		−42	%
Interest expense		(4,499	)		(1	)		(4,498	)		n/a
Loss on extinguishment of debt		(5,625	)		—			(5,625	)		n/a
Total other (expense) income		(9,387	)		1,279			(10,666	)		n/a
(Loss) income before tax provision		(6,158	)		3,629			(9,787	)		n/a
Income tax provision		291			1,475			(1,184	)		−80	%
Net (loss) income		(6,449	)		2,154			(8,603	)		n/a
Preferred stock accretion		4,163			—			4,163			n/a
Net (loss) income available to common stockholders	$	(10,612	)	$	2,154		$	(12,766	)		n/a
Net (loss) income available to common stockholders per share:
Basic	$	(0.41	)	$	0.08		$	(0.49	)		n/a
Diluted	$	(0.41	)	$	0.08		$	(0.49	)		n/a
Shares used in calculation of net (loss) income available to common stockholders per share:
Basic		26,056			25,410			646			3	%
Diluted		26,056			27,553			(1,497	)		−5	%

Notes:

(1) In thousands except for per share amounts.

Costs of Revenues.  Costs of revenues encompass the direct expenses associated with providing our services. These expenses include telecommunications, payment processing, systems operations, customer service, implementation and professional services work. Costs of revenues increased by $14.5 million to $29.8 million for the six months ended June 30, 2007, from $15.3 million for the same period in 2006. Seventy-six percent (76%) of this increase is the result of additional costs of revenues associated with Princeton. Additional expenses resulting from a $0.8 million increase in amortization of intangible assets, headcount increases in our call center and the release of a number of software development projects into production since the second quarter of 2006.

Gross Profit.  Gross profit increased $14.2 million for the six months ended June 30, 2007 to $33.0 million, and gross margin decreased to 53% in 2007 from 55% in 2006. Princeton accounted for 85% of the increase in gross profit. The decrease in gross margin is the result of increased amortization of intangible

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assets purchased as part of the July 2006 Princeton acquisition and increased amortization of software development projects.

General and Administrative.  General and administrative expenses primarily consist of salaries for executive, administrative and financial personnel, consulting expenses and facilities costs such as office leases, insurance and depreciation. General and administrative expenses increased $4.8 million, or 55%, to $13.5 million for the six months ended June 30, 2007, from $8.7 million in the same period of 2006. Thirty-six percent (36%) of this increase is the direct result of additional costs associated with Princeton. We also experienced additional expenses associated with external accounting fees, increased payroll and increased depreciation as a result of a general increase in capital expenditures.

Sales and Marketing.  Sales and marketing expenses include salaries and commissions paid to sales and marketing personnel, corporate marketing costs and other costs incurred in marketing our services and products. Sales and marketing expenses increased $6.2 million, or 113% to $11.8 million for the six months ended June 30, 2007, from $5.6 million in 2006. Sixty percent (60%) of this increase is the result of additional costs associated with Princeton, including additional amortization of intangible assets totaling $3.6 million. We also had increased salary and benefits costs as a result of the expansion of our sales force in both the Banking and eCommerce segments.

Systems and Development.  Systems and development expenses include salaries, consulting fees and all other expenses incurred in supporting the research and development of new services and products and new technology to enhance existing products. Systems and development expenses increased by $2.3 million, or 102%, to $4.5 million for the six months ended June 30, 2007, from $2.2 million in 2006. Eighty-one percent (81%) of this increase is the result of additional costs associated with Princeton. We also had an increase in salaries and benefits due to increased headcount. We capitalized $2.7 million and $2.9 million of development costs associated with software developed for internal use or to be sold, leased or otherwise marketed during the six months ended June 30, 2007 and 2006, respectively.

Income from Operations.  Income from operations increased $0.9 million, or 37%, to $3.2 million for the six months ended June 30, 2007. The increase was due to leveraging increased service fee revenues over our relatively fixed cost base. The increased revenues were partially offset by increased amortization of intangible assets purchased as part of the July 2006 Princeton acquisition totaling $4.4 million.

Interest Income.  Interest income decreased $0.5 million to $0.7 million for the six months ended June 30, 2007 due to lower average cash balances in the first half of 2007 resulting primarily from our use of $35 million in cash to partially finance the Princeton acquisition in July 2006.

Interest Expense.  Interest expense was $4.5 million due to interest expense and the amortization of debt issuance costs incurred in connection with $85 million in senior secured notes outstanding during the six months ended June 30, 2007. The senior secured notes currently outstanding carry an interest rate equal to 275 basis points above one-month LIBOR.

Loss on Extinguishment of Debt.  We incurred a $5.6 million loss on the extinguishment of the senior secured notes issued on July 3, 2006 when we re-financed the notes with $85 million in term loans on February 21, 2007. The loss represents the write-off of $3.9 million in debt issuance costs incurred in connection with $85 million in senior secured notes issued on July 3, 2006 and a $1.7 million prepayment penalty.

Income Tax Provision.  Our income tax provision for the six months ended June 30, 2007 was $0.3 million compared to $1.5 million for the six months ended June 30, 2006. The decrease in the income tax provision reflects lower anticipated taxable income for 2007 than was anticipated for 2006 as of March 31, 2006.

Preferred Stock Accretion.  TheSeries A-1 Preferred Stock was issued on July 3, 2006 and was recorded at its fair value at inception net of its issuance costs of $5.1 million and the fair market value of the embedded derivative that represents interest on unpaid accrued dividends. TheSeries A-1 Preferred Stock carries a dividend equal to 8% per annum of the original issuance price, plus a money market rate of interest on any

24

accrued but unpaid dividend (“preferred dividend”). The security is subject to put and call rights following the seventh anniversary of its issuance for an amount equal to 115% of the original issuance price plus the preferred dividend (the “Cumulative Amount”). The Cumulative Amount, stock issuance costs and original fair market value of the embedded derivative bifurcated at inception are accreted to the carrying value of theSeries A-1 Preferred Stock and results in theSeries A-1 Preferred Stock being carried at its estimated redemption amount. These amounts are accreted over the period from the issuance date to the first date the holders’ right to redeem the shares becomes effective, which is the seventh anniversary date of the issuance.

Net (Loss) Income Available to Common Stockholders.  Net (loss) income available to common stockholders decreased $12.8 million to a loss of $10.6 million for the six months ended June 30, 2007, compared to net income of $2.2 million for the six months ended June 30, 2006. Basic and diluted net loss per share was $0.41 for the six months ended June 30, 2007, compared to basic and diluted net income per share of $0.08 for the six months ended June 30, 2006. Basic shares outstanding increased by 3% as a result of shares issued in connection with the exercise of company-issued stock options and our employees’ participation in our employee stock purchase plan, while diluted shares outstanding decreased by 5% as result of the anti-dilutive effect of stock options on the fully diluted earnings per share calculation for the six months ended June 30, 2007.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have primarily financed our operations through cash generated from operations, private placements and public offerings of our common and preferred stock and the issuance of debt. Cash and cash equivalents were $30.8 and $31.2 million as of June 30, 2007 and December 31, 2006, respectively. The $0.4 million decrease in cash and cash equivalents results primarily from $6.8 million in capital expenditures and $1.5 million in deferred financing costs and other financing activities, partially offset by $7.0 million in cash provided by operating activities and $2.7 million in cash from the issuance of common stock.

Net cash provided by operating activities was $7.0 million for the six months ended June 30, 2007. This represented a $1.9 million increase in cash provided by operating activities compared to the prior period, which was the result of increased cash flow from operating activities partially offset by $5.3 million in interest payments related to senior secured debt, which was not outstanding during the first six months of 2006.

Net cash used by investing activities for the six months ended June 30, 2007 was $6.8 million, which was the result of purchases of property and equipment.

Net cash used by financing activities was $0.6 million for the six months ended June 30, 2007, which was the result of a prepayment penalty of $1.7 million and debt issuance costs of $1.5 million both incurred in relation to the issuance of $85 million in term loans partially offset by cash provided through the exercise of company-issued stock options and our employees’ participation in our employee stock purchase plan.

On February 21, 2007, we entered into an agreement with Bank of America to refinance our existing debt with $85 million in term loans (“2007 Notes”). The agreement also provides a $15 million revolver (“Revolver”) under which we can secure up to $5 million in letters of credit. Currently, there are no amounts outstanding under the Revolver, but available credit under the Revolver has been reduced by approximately $1.8 million as a result of letters of credit which the bank has issued. Interest on both the Revolver and the 2007 Notes is one-month LIBOR plus 225 to 275 basis points based upon the ratio of our funded indebtedness to our EBITDA, and it is payable monthly. We incurred $1.5 million in deferred financing costs in conjunction with the transaction, and these costs are being amortized using the effective interest rate method over the term of the term loans. In addition, we incur a commitment fee of 0.5% on any unused portion of the Revolver.

We issued $85 million of senior secured notes (the “2006 Notes”) on July 3, 2006. Interest on the 2006 Notes was one-month LIBOR plus 700 basis points, and it was payable quarterly. The 2006 Notes were refinanced with the issuance of the 2007 Notes. We paid a $1.7 million pre-payment penalty and wrote-off $3.9 million in deferred financing costs in conjunction with the transaction.

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On March 30, 2007, we entered into an interest rate cap agreement (“2007 Hedge”) that protects the cash flows on designated one-month LIBOR-based interest payments beginning on April 3, 2007 through July 31, 2009. The 2007 Hedge limits the exposure to LIBOR interest rate increases in excess of 5.5%. The 2007 Hedge has a notional value of $70.0 million through September 28, 2007, $65.0 million through June 30, 2008 and $42.5 million through July 31, 2009. Approximately, 82%, or $70 million, of our $85.0 million 2007 Notes had its interest payments perfectly hedged against increases in variable-rate interest payments above 5.5% by the 2007 Hedge.

We entered into an interest rate cap agreement (“2006 Hedge”) on July 3, 2006 that protected cash flows on designated one-month LIBOR-based payments beginning on July 3, 2006 through July 1, 2008. The 2006 Hedge limited the exposure to interest rate increases in excess of 5.5%. Approximately 82%, or $70.0 million, of our 2006 Notes had its interest payments perfectly hedged against increases in variable-rate interest payments over 5.5% by the 2006 Hedge up until the 2006 Notes were refinanced on February 21, 2007. On February 21, 2007, the 2006 Hedge was de-designated and was sold on April 3, 2007. The 2006 Hedge was replaced by the 2007 Hedge in order to be hedged against the 2007 Notes.

Our material commitments under operating and capital leases, purchase obligations and notes payable are as follows (in thousands):

	Total		2007		2008		2009		2010		2011		Thereafter
Capital lease obligations	$	112	$	20	$	37	$	36	$	19	$	—	$	—
Operating leases		29,644		1,814		3,628		3,714		3,801		3,890		12,797
Purchase obligations		1,217		653		564		—		—		—		—
Notes payable		85,000		—		9,562		15,937		17,000		32,938		9,563
Total obligations	$	115,973	$	2,487	$	13,791	$	19,687	$	20,820	$	36,828	$	22,360

Based on the one-month LIBOR at June 30, 2007, the estimated interest payments related to the Notes payable is $3.4, $6.7, $5.6, $4.3 and $2.6 million in 2007, 2008, 2009, 2010 and 2011, respectively.

Future capital requirements will depend upon many factors, including our need to finance any future acquisitions, the timing of research and product development efforts and the expansion of our marketing effort. We expect to continue to expend significant amounts on expansion of facility infrastructure, ongoing research and development, computer and related equipment, and personnel.

We currently believe that cash on hand, investments and the cash we expect to generate from operations will be sufficient to meet our current anticipated cash requirements for at least the next twelve months. Additionally, we completed the acquisition of Princeton for $180 million on July 3, 2006. The Company financed the acquisition and related transaction costs by issuing $85 million of senior secured notes, which were re-financed on February 21, 2007, and $75 million of redeemable convertible preferred stock in addition to using approximately $35 million of our own cash. The senior secured notes were refinanced and the new senior secured notes are due February 21, 2012. Interest is payable monthly at a rate of one-month LIBOR plus 225 to 275 basis points per annum based upon the ratio of our funded indebtedness to our EBITDA. An amount equal to 8% per annum of the original purchase price of the redeemable convertible preferred stock accrues quarterly as an increase to the stockholders’ liquidation preference. Additionally, the redeemable convertible preferred stock is subject to put and call rights following the seventh anniversary of its issuance for an amount equal to 115% of the original issuance price plus the preferred dividend. We forecast that all incremental expenses related to the operations of Princeton and the monthly interest payments related to the senior secured notes can be financed out of cash provided by operating activities.

On August 10, 2007, we acquired Internet Transaction Solutions, Inc. (“ITS”) for total consideration of $42.9 million including $22.5 million in common stock. Based in Columbus, Ohio, ITS provides biller services to receivables management and utility companies.

There can be no assurance that additional capital beyond the amounts currently forecasted by us will not be required or that any such required additional capital will be available on reasonable terms, if at all, at such

26

time as required. We intend to invest our cash in excess of current operating requirements in marketable government, corporate and mortgage-backed securities.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We invest primarily in short-term, investment grade, marketable government, corporate, and mortgage-backed debt securities. Our interest income is most sensitive to changes in the general level of U.S. interest rates and given the short-term nature of our investments, our exposure to interest rate risk is not material. We do not have operations subject to risks of foreign currency fluctuations, nor do we use derivative financial instruments in our investment portfolio.

We are exposed to the impact of interest rate changes as they affect our term loans. The interest rate charged on our term loans varies based on LIBOR and, consequently, our interest expense could fluctuate with changes in the LIBOR rate through the maturity date of the term loans. We have entered into an interest rate cap agreement that effectively limits our exposure to interest rate fluctuations on $70 million of the $85 million in term loans outstanding at June 30, 2007. The remaining $15 million is not subject to any interest rate cap agreements. If LIBOR increased by one percent as of June 30, 2007, we would incur an additional $150,000 of interest expense associated with the $15 million in term loans outstanding at June 30, 2007 that is not subject to any interest rate cap agreements.

ITEM 4.   CONTROLS AND PROCEDURES.

(a) As of the end of the period covered by this Quarterly Report onForm 10-Q, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (‘CEO’) and Chief Financial Officer (‘CFO’), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange ActRules 13a-15(f) and15d-15(f)). Based on that evaluation, the CEO and CFO have concluded that, as of June 30, 2007, our disclosure controls and procedures were not effective because of the material weaknesses described in Item 9A of our Annual Report onForm 10-K for the year ended December 31, 2006, which we are still in the process of remediating. Notwithstanding the material weaknesses described in Item 9A of the 2006Form 10-K, we believe our consolidated financial statements presented in this Quarterly Report onForm 10-Q fairly represent, in all material respects, our financial position, results of operations and cash flows for all periods presented herein.

(b) As disclosed in ourForm 10-K for the fiscal year ended December 31, 2006, in the course of performing our evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, our management determined that a material weakness in internal control over financial reporting existed as of December 31, 2006. The material weakness related to inadequate staffing, systems and processes in place to support the expanded magnitude and complexity of accounting requirements of the combined company since the Princeton acquisition. During the first six months of 2007, we designed and began to implement a plan to remediate the material weakness in internal control over financial reporting disclosed in the Annual Report onForm 10-K for the year ended December 31, 2006. We have hired a person with experience in both accounting for acquisitions and public company reporting. We also integrated Princeton’s accounting function on January 1, 2007 so that we are now managing a single system and set of processes. In addition, we have conducted training programs for our accounting and non-accounting staff related to non-financial data used in the creation of our financial statements and instituted additional processes for dealing with non-routine accounting issues. We have addressed the accounting function’s additional staffing needs, and we are in the process of integrating the newly hired accounting staff into our accounting processes and practices. Finally, we continue to reassess the capability of the outside advisors we use to assist in the evaluation of complex accounting transactions and the proper application of accounting principles. Although our remediation efforts are underway, the material weaknesses will not be considered remediated until our new internal controls are fully implemented and operational for a period of time and are operating effectively.

(c) Except for changes related to the remediation of the material weakness described above, there has been no change during our fiscal quarter ended June 30, 2007 in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II.  OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS.

We are not a party to any pending material litigation nor are we aware of any pending or threatened litigation that would have a material adverse effect on us, our business or results of operation.

ITEM 1A.   RISK FACTORS.

There have been no material changes to risk factors as previously disclosed in our Annual Report onForm 10-K filed with the Securities and Exchange Commission on March 16, 2007.

ITEM 2.   UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS.

None

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

We held our annual meeting of stockholders on May 15, 2007, and the following matters were voted on at the meeting:

1. The election of Matthew P. Lawlor, Ervin R. Shames and Barry D. Wessler to serve for a three-year term of office or until their respective successor has been elected. The following chart shows the number of votes cast (in thousands) for the nominees as well as the number of broker non-votes:

					ABSTENTIONS
					AND BROKER
DIRECTOR	FOR		WITHHELD		NONVOTES
Matthew P. Lawlor		21,685		554		0
Ervin R. Shames		21,949		290		0
Barry D. Wessler		21617		622		0

2. The ratification of KPMG LLP as our independent public accountants for the fiscal year ending December 31, 2007 (in thousands).

			ABSTENTIONS
			AND BROKER
FOR	AGAINST		NONVOTES
22,122		116		1

3. The termination of the Company’s Rights Agreement.

			ABSTENTIONS
			AND BROKER
FOR	AGAINST		NONVOTES
17,420		24		13

ITEM 5.   OTHER INFORMATION.

None

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ITEM 6.   EXHIBITS.

Exhibit 10	.1	—	Credit Agreement with Bank of America dated February 21, 2007 and filed as Exhibit 99.1 to the Company’sForm 8-K on February 26, 2007
Exhibit 31	.1	—	Rule 13a-14a Certification of Chief Executive Officer
Exhibit 31	.2	—	Rule 13a-14a Certification of Chief Financial Officer
Exhibit 32		—	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections(a) and(b) of Section 1350, Chapter 63 of Title 18, United States Code)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ONLINE RESOURCES CORPORATION

By:  /s/  Matthew P. Lawlor

Matthew P. Lawlor

Chairman and Chief Executive Officer

(Principal Executive Officer)

Date: August 14, 2007

ONLINE RESOURCES CORPORATION

By:  /s/   Catherine A. Graham

Catherine A. Graham

Executive Vice President and

Chief Financial Officer

(Principal Financial Officer)

Date: August 14, 2007

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