Cybersource (CYBS) 10-Q 2009 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2009.

or

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

For the transition period from              to             .

Commission File Number: 000-26477

CYBERSOURCE CORPORATION

(Exact Name of Registrant as Specified in its Charter)

Delaware	77-0472961
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

1295 CHARLESTON ROAD

MOUNTAIN VIEW, CALIFORNIA 94043

(Address of Principal Executive Offices)(Zip Code)

(650) 965-6000

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, If Changes Since Last Report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

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

As of July 23, 2009, there were 69,417,024 shares of common stock, par value $0.001 per share, outstanding.

CYBERSOURCE CORPORATION

INDEX TO REPORT ON FORM 10-Q

FOR QUARTER ENDED JUNE 30, 2009

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):
	Condensed Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008	3
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2009 and 2008	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	20
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	20
Item 1A.	Risk Factors	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3.	Defaults Upon Senior Securities	27
Item 4.	Submission of Matters to a Vote of Security Holders	27
Item 5.	Other Information	28
Item 6.	Exhibits	28
Signatures		29

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CYBERSOURCE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	June 30, 2009			December 31, 2008 (1)
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	93,053		$	73,292
Accounts receivable, net		17,659			18,251
Prepaid expenses and other current assets		7,144			5,310
Deferred income taxes		2,635			2,635
Total current assets		120,491			99,488
Property and equipment, net		19,141			16,188
Intangible assets, net		116,362			129,643
Goodwill		289,278			289,278
Non-current deferred income taxes, net		20,027			20,512
Other non-current assets		2,818			2,539
Restricted cash		1,516			1,548
Total assets	$	569,633		$	559,196
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	662		$	588
Funds due to merchants		12,306			12,162
Other accrued liabilities		14,057			18,272
Deferred revenue		5,545			4,519
Accrued restructuring		1,179			847
Total current liabilities		33,749			36,388
Deferred revenue, less current portion		1,092			996
Accrued restructuring, less current portion		900			832
Other non-current liabilities		1,291			1,099
Other non-current tax liabilities		1,986			1,928
Total liabilities		39,018			41,243
Stockholders’ equity:
Common stock		69			69
Additional paid-in capital		805,527			796,912
Accumulated other comprehensive loss		(1,369	)		(2,225	)
Accumulated deficit		(273,612	)		(276,803	)
Total stockholders’ equity		530,615			517,953
Total liabilities and stockholders’ equity	$	569,633		$	559,196

(1) Derived from the Company’s audited consolidated financial statements as of December 31, 2008.

See notes to condensed consolidated financial statements.

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CYBERSOURCE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Revenues	$	62,889		$	55,659		$	123,380	��	$	109,079
Cost of revenues		29,231			27,558			57,212			53,386
Gross profit		33,658			28,101			66,168			55,693
Operating expenses:
Product development		6,612			5,863			13,066			11,110
Sales and marketing		17,602			16,927			35,156			33,557
General and administrative		5,997			5,786			12,977			11,288
Total operating expenses		30,211			28,576			61,199			55,955
Income (loss) from operations		3,447			(475	)		4,969			(262	)
Other income (loss), net		(14	)		92			(32	)		239
Interest income		74			364			207			758
Income (loss) before income taxes		3,507			(19	)		5,144			735
Income tax provision		1,326			26			1,953			247
Net income (loss)	$	2,181		$	(45	)	$	3,191		$	488
Basic net income (loss) per share	$	0.03		$	—		$	0.05		$	0.01
Diluted net income (loss) per share	$	0.03		$	—		$	0.05		$	0.01
Weighted average number of shares used in computing basic net income (loss) per share		69,228			69,217			69,105			69,014
Weighted average number of shares used in computing diluted net income (loss) per share		71,745			72,223			70,861			71,907

See notes to condensed consolidated financial statements.

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CYBERSOURCE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Six Months Ended June 30,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	3,191		$	488
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization expense		13,281			14,336
Depreciation expense		3,643			2,910
Income from investment in joint venture		(219	)		(99	)
Stock-based compensation		4,894			4,784
Changes in operating assets and liabilities:
Accounts receivable		592			(52	)
Prepaid expenses and other current assets		(1,834	)		(182	)
Deferred income taxes		485			—
Other non-current assets		(28	)		(67	)
Accounts payable		74			655
Accrued liabilities		(3,623	)		(53	)
Funds due to merchants		144			575
Deferred revenue		1,122			763
Other non-current tax liabilities		58			86
Net cash provided by operating activities		21,780			24,144
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(6,596	)		(5,274	)
Net cash used in investing activities		(6,596	)		(5,274	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock		3,560			5,386
Tax benefit from employee stock options		161			—
Net cash provided by financing activities		3,721			5,386
Effect of exchange rate changes on cash		856			(3	)
Increase in cash and cash equivalents		19,761			24,253
Cash and cash equivalents at beginning of period		73,292			40,393
Cash and cash equivalents at end of period	$	93,053		$	64,646

See notes to condensed consolidated financial statements.

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CYBERSOURCE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of CyberSource Corporation and its wholly-owned subsidiaries (collectively, “CyberSource” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report filed on Form 10-K for the year ended December 31, 2008 with the Securities and Exchange Commission (“SEC”) on February 27, 2009, SEC File No. 000-26477.

Accounting for Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” (“SFAS 123R”). The Company recognized stock-based compensation expenses before income taxes in the consolidated statements of income as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
Cost of revenues	$	463	$	407	$	864	$	747
Product development		550		618		1,058		1,091
Sales and marketing		546		460		1,019		881
General and administrative		1,075		1,107		1,953		2,065
	$	2,634	$	2,592	$	4,894	$	4,784

Segment Information

Operating segments are identified as components of an enterprise about which separate discrete financial information is available that is evaluated by the chief operating decision maker or decision-making group to make decisions about how to allocate resources and assess performance. The Company’s chief operating decision maker is the Chief Executive Officer (“CEO”). The Company views its operations as one segment, commerce transaction services, and manages the business based on the revenues of this segment.

Long-Lived Assets

SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) requires that the Company perform tests for impairment of its goodwill annually and between annual tests in certain circumstances. As of June 30, 2009, the Company’s goodwill, in connection with its acquisition of Authorize.Net in November 2007, had a carrying value of approximately $289.3 million. The Company evaluates the goodwill related to the Authorize.Net acquisition on an annual basis as of July 31 or when indicators of impairment may exist.

SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) requires that the Company perform tests for impairment of its intangible assets subject to amortization annually and more frequently whenever events or circumstances suggest that its intangible assets may be impaired. As of June 30, 2009, the Company had recorded intangible assets in connection with its acquisition of Authorize.Net with a carrying value of approximately $116.4 million. The Company evaluates the intangible assets on an annual basis as of July 31 or when indicators of impairment may exist.

To evaluate potential impairment, SFAS 142 and SFAS 144 require the Company to assess whether the estimated fair value of its goodwill and intangible assets are greater than their respective carrying value at the time of the test. Accordingly, there could be significant judgment in determining the fair values attributable to goodwill and intangible assets, including the determination of reporting units, estimating future cash flows, determining appropriate discount rates and other assumptions. The Company did not recognize any goodwill or intangible asset impairment charges during the six months ended June 30, 2009.

Income Taxes

Income taxes are calculated under the provisions of SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”) and Financial Accounting Standards Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). Under SFAS 109, the

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CYBERSOURCE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

liability method is used in accounting for income taxes, which includes the effects of temporary differences between financial and taxable amounts of assets and liabilities as well as the effects of net operating loss and credit carryforwards to determine deferred tax assets and liabilities. Valuation allowances are established and adjusted when necessary to reduce deferred tax assets to the amounts expected to be realized on a more likely than not basis. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109.

Subsequent Events

Pursuant to SFAS No. 165, “Subsequent Events”, the Company has evaluated subsequent events through August 7, 2009, the date the financial statements for the six months ended June 30, 2009 were issued, and concluded that there were no subsequent events that required disclosure.

Recent Pronouncements

In June 2009, the Financial Accounting Standards Board issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”), amending the consolidation guidance for variable-interest entities under FIN 46(R). The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. SFAS 167 will be effective for the Company as of January 1, 2010 and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company has not yet determined the effect on the Company’s consolidated financial statements, if any, upon the adoption of SFAS 167.

2. COMPREHENSIVE INCOME

The components of comprehensive income are as follows (in thousands):

	Three Months Ended June 30,					Six Months Ended June 30,
	2009		2008			2009		2008
Net income (loss)	$	2,181	$	(45	)	$	3,191	$	488
Change in cumulative translation adjustment		1,104		(23	)		856		(3	)
Comprehensive income (loss)	$	3,285	$	(68	)	$	4,047	$	485

3. FUNDS DUE TO MERCHANTS

As of June 30, 2009, the Company was holding funds in the amount of approximately $12.3 million due to merchants. The funds are included in cash and cash equivalents and funds due to merchants on the Company’s consolidated balance sheet. The Company typically holds certain funds related to certain electronic check transactions based on the contractual terms with the merchant, generally seven business days. The Company also holds certain funds related to certain credit card and automated clearing house transactions based on the contractual terms with the financial institution which processes the transactions, generally two to four business days. The Company’s agreements with its customers do not contain any terms or conditions that legally restrict the use of cash amounts classified on the balance sheet as funds due to merchants.

4. INTANGIBLE ASSETS, NET

The components of intangible assets, net as of June 30, 2009 are as follows (in thousands):

	Gross		Accumulated Amortization		Net
Partner contracts and related relationships	$	86,100	$	5,697	$	80,403
Merchant contracts and related relationships		49,300		27,523		21,777
Existing technology		21,900		9,180		12,720
Trade name		3,900		3,238		662
Processor relationships		1,200		400		800
Total	$	162,400	$	46,038	$	116,362

The amortization expense for the three months ended June 30, 2009 and 2008 was approximately $6.6 million and $7.2 million, respectively. The amortization expense for the six months ended June 30, 2009 and 2008 was approximately $13.3 million and $14.3 million, respectively.

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CYBERSOURCE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Estimated future amortization expense for the intangible assets recorded on the Company’s June 30, 2009 balance sheet is as follows (in thousands):

	Amount
Remainder of 2009	$	12,949
2010		21,777
2011		18,743
2012		12,903
2013		10,038
Thereafter		39,952
Total	$	116,362

5. RESTRUCTURING CHARGES

As a result of the Company’s acquisition of Authorize.Net in November 2007, the Company acquired certain restructuring accruals related to certain facilities that Authorize.Net had exited. In March 2009, the Company recorded a restructuring charge of approximately $0.9 million as a result of updating the assumptions associated with the Company’s excess office space in Burlington, Massachusetts and American Fork, Utah. The expense was included in general and administrative expenses during the six months ended June 30, 2009.

The following table summarizes the activity in the restructuring accrual for the six months ended June 30, 2009 (in thousands):

	Balance at December 31, 2008		Adjustment to Restructuring Charge	Cash Payments		Balance at June 30, 2009
Facilities related charges	$	1,679	932	(532	)	$	2,079

The Company has lease obligations related to its exited facilities which extend through the year 2012.

6. RESTRICTED CASH

As of June 30, 2009, the Company has an unsecured letter of credit in the amount of $1.0 million per the terms of the operating lease related to the Burlington, Massachusetts office facility it acquired through the acquisition of Authorize.Net. The Company also has approximately $1.0 million on deposit with the financial institution that issued the letter of credit to the Company. This amount is classified as restricted cash in the Company’s balance sheet.

In addition, the Company has $0.5 million on deposit with a financial institution to cover any deficit account balance that could occur if the amount of transactions returned or charged back exceeds the balance on deposit with the financial institution. This amount is classified as restricted cash in the Company’s balance sheet. To date, the deposit has not been applied to offset any deficit balance. The deposit will be held continuously for as long as the Company utilizes certain processing services of the financial institution, and the amount of the deposit may increase as processing volume increases.

7. LEGAL MATTERS

In July and August 2001, various class action lawsuits were filed in the United States District Court, Southern District of New York, against the Company, its Chairman and CEO, a former officer, and four brokerage firms that served as underwriters in its initial public offering. The actions were filed on behalf of persons who purchased the Company’s stock issued pursuant to or traceable to the initial public offering during the period from June 23, 1999 through December 6, 2000. The action alleges that the Company’s underwriters charged secret excessive commissions to certain of their customers in return for allocations of the Company’s stock in the offering. The two individual defendants are alleged to be liable because of their involvement in preparing and signing the registration statement for the offering, which allegedly failed to disclose the supposedly excessive commissions. On December 7, 2001, an amended complaint was filed in one of the actions to expand the purported class to persons who purchased the Company’s stock issued pursuant to or traceable to the follow-on public offering during the period from November 4, 1999 through December 6, 2000. The lawsuit filed against the Company is one of several hundred lawsuits filed against other companies based on substantially similar claims. On April 19, 2002, a consolidated amended complaint was filed to consolidate all of the complaints and claims into one case. The consolidated amended complaint alleges claims that are virtually identical to the amended complaint filed on December 7, 2001 and the original complaints. In October 2002, the claims against the Company’s officer and a former officer that were named in the amended complaint were dismissed without prejudice. In July 2002,

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CYBERSOURCE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

the Company, along with other issuer defendants in the case, filed a motion to dismiss the consolidated amended complaint with prejudice. On February 19, 2003, the district court issued a written decision denying the motion to dismiss with respect to CyberSource and the individual defendants. On July 2, 2003, a committee of the Company’s Board of Directors approved a proposed partial settlement with the plaintiffs in this matter. The settlement would have provided, among other things, a release of the Company and of the individual defendants for the alleged wrongful conduct in the Amended Complaint in exchange for a guarantee from the Company’s insurers regarding recovery from the underwriter defendants and other consideration from the Company regarding its underwriters. While the partial settlement was pending approval, the plaintiffs continued to litigate against the underwriter defendants. The district court directed that the litigation proceed within a number of “focus cases” rather than in all of the 310 cases that have been consolidated. The Company’s case is not one of these focus cases. On October 13, 2004, the district court certified the focus cases as class actions. The underwriter defendants appealed that ruling, and on December 5, 2006, the Court of Appeals for the Second Circuit reversed the district court’s class certification decision. On April 6, 2007, the Second Circuit denied plaintiffs’ petition for rehearing. In light of the Second Circuit opinion, the Company informed the district court that the settlement could not be approved because the defined settlement class, like the litigation class, could not be certified. On June 25, 2007, the district court entered an order terminating the settlement agreement. On August 14, 2007, the plaintiffs filed their second consolidated amended class action complaints against the focus cases and on September 27, 2007, again moved for class certification. On November 12, 2007, certain of the defendants in the focus cases moved to dismiss the second consolidated amended class action complaints. On March 26, 2008, the district court denied the motions to dismiss except as to Section 11 claims raised by those plaintiffs who sold their securities for a price in excess of the initial offering price and those who purchased outside the previously certified class period. Briefing on the class certification motion was filed on April 22, 2008, and briefing on these motions was completed in May 2008. On April 2, 2009, the underwriters, issuers, insurance companies, individual defendants, and plaintiffs filed with the court for approval a finalized settlement agreement that was accepted by most parties to the litigation. On June 10, 2009, the court issued a preliminary approval of the settlement. A hearing for final approval has been scheduled for September 10, 2009. Pursuant to the terms of the proposed settlement, the Company’s insurer will cover any and all legal fees and damages payments on behalf of the Company and will waive the retention portion of the coverage amount. Accordingly, the Company will incur no costs or expenses related to this litigation. Due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the matter.

On August 11, 2004, the Company filed suit in the Northern District of California against Retail Decisions, Inc. (“ReD US”) and Retail Decisions Plc (“ReD UK”) (collectively, “ReD”), Case No. 3:04-CIV-03268, alleging that ReD infringes the Company’s U.S. Patent No. 6,029,154 (the “’154 Patent”). The Company served ReD US with the complaint on August 12, 2004, and the Company served ReD UK with the complaint on August 13, 2004. On September 30, 2004, ReD responded to the Company’s complaint. ReD filed a motion to stay the case for 90 days pending a determination by the U.S. Patent and Trademark Office (“PTO”) as to whether it will grant ReD’s request that the PTO re-examine the ’154 Patent. ReD also filed a motion for a more definite statement by the Company with respect to its allegation that ReD is willfully infringing the ’154 Patent. In addition, ReD UK filed a motion to dismiss the action against it on the ground that it is not subject to personal jurisdiction in the Northern District of California. On October 27, 2004, ReD filed a request for re-examination with the PTO, based on prior art ReD discovered that allegedly invalidates the Patent. On October 28, 2004, the Company filed an opposition to ReD’s motion to stay the case for 90 days and an opposition to ReD’s motion for a more definite statement with respect to willful infringement. Based on ReD UK’s representation that ReD US is the sole entity that develops, operates, and distributes the eBitGuard service, the Company agreed to dismiss ReD UK while reserving the right to reinstitute action against ReD UK in the event the Company later discovers that ReD UK is subject to the court’s personal jurisdiction. In return, ReD UK agreed that if the Company later establishes that personal jurisdiction existed, the Company could re-file against ReD UK in this action without prejudice to its damages claim. The Company also filed an amended complaint, removing ReD UK as a named defendant and restating the willful infringement claim. On November 16, 2004, the court granted ReD’s motion to stay the proceedings pending the PTO’s decision as to whether it will grant ReD’s request for re-examination. On December 30, 2004, the PTO granted ReD’s request for a re-examination. On January 19, 2005, ReD filed a motion to dismiss the case without prejudice or to extend the stay until completion of the re-examination process. On January 24, 2005, the court extended the stay pending the re-examination process, vacated ReD’s motion to dismiss, and ordered quarterly updates as to the status of the re-examination process. On April 25, 2005, the parties filed a joint status report that was approved by the court. On June 20, 2005, the PTO issued a preliminary office action rejecting all of the claims of the ’154 Patent based on one of the prior art references cited by ReD. On July 14, 2005, the Company met with the PTO examiner handling the re-examination to distinguish the prior art from the claims of the ’154 Patent. On August 9, 2006, the PTO issued a final office action rejecting all of the claims of the ’154 Patent. On September 7, 2006, the Company filed a response to the office action requesting certain amendments to the claims. On October 10, 2006, the PTO filed a response rejecting the amendments and extending the Company’s deadline to file a notice of appeal. On October 30, 2006, the Company filed a notice of appeal. On December 22, 2006, the Company filed the appeal brief. On May 3, 2007, the PTO issued a “Notice of Intent to Issue Reexam Certificate,” reversing its action of August 9, 2006. On August 5, 2008, the PTO issued the Ex Parte Reexamination Certificate. Accordingly, the patent has been re-validated. On April 25, 2008, litigation proceedings in the case were reinstated. On July 14, 2008, a case management conference was held, at which time the parties agreed to participate in a settlement conference. The settlement conference was held on August 15, 2008, but no agreement was reached. In October 2008, ReD filed two motions for summary judgment. On November 24, 2008, the Court denied one of the motions and ruled that the other motion was premature. On January 26, 2009, ReD filed three additional motions for summary judgment.

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CYBERSOURCE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

On March 27, 2009, the Court granted summary judgment, finding the Company’s patent claims invalid based on the patentability standard articulated inIn re Bilski.On April 15, 2009, the court issued a judgment invalidating the patent.On May 13, 2009, the Company filed a notice of appeal. On July 8, 2009, the Company filed a motion to stay the appeal pending the outcome of Bilski vs. Doll, which is currently pending before the U.S. Supreme Court and which was the basis for the District Court’s March 27, 2009 decision in our case. While there can be no assurances as to the outcome of an appeal, the Company does not presently believe that the continuation of this lawsuit would have a material effect on its financial condition, results of operations, or cash flows.

On June 25, 2008, the Company filed suit in the Supreme Court of the State of New York against VeriSign, Inc. (“VeriSign”), Case No. 650207/2008, seeking declaratory judgment to order the release of $1.725 million held in escrow (“Escrow Funds”) to CyberSource. The Escrow Funds constitute a portion of the purchase price paid by VeriSign to Lightbridge, Inc. for certain assets of Lightbridge related to Lightbridge’s Intelligent Network Systems business unit, including Lightbridge’s Prepay IN software, which was acquired by VeriSign in April 2005, pursuant to an Asset Purchase Agreement (“APA”). Lightbridge, Inc., which later became Lightbridge Holdings, Inc. and then Authorize.Net Holdings, Inc. (collectively “Lightbridge”), was acquired by the Company on November 1, 2007. On December 12, 2006, Lightbridge received a letter from VeriSign asserting that Lightbridge is obliged to indemnify VeriSign with respect to a lawsuit filed against VeriSign on November 30, 2006 by Freedom Wireless, Inc. (“Freedom Wireless”), in the Eastern District of Texas (Marshall Division), which alleged that VeriSign is infringing certain patents of Freedom Wireless. VeriSign asserts that Lightbridge’s obligation to indemnify it arises in connection with certain assets purchased by VeriSign under the APA. Lightbridge objected to VeriSign’s claim in a letter dated December 15, 2006 and asked for additional information. Lightbridge received no further correspondence from VeriSign. On March 14, 2008, the Company received a letter from VeriSign advising that it was engaged in settlement discussions with Freedom Wireless. On April 14, 2008, the Company sent a letter to VeriSign denying any indemnification obligations and demanding release of the Escrow Funds. Neither Lightbridge nor the Company was ever a party to the litigation by Freedom Wireless at any time. In May 2008, VeriSign entered into a settlement with Freedom Wireless. On June 9, 2008, the Company sent another letter demanding release of the Escrow Funds. On June 19, 2008, VeriSign responded to the Company’s letter of April 14, 2008 and reiterated its position on indemnification. The indemnification obligation under the APA is limited to a maximum of $5 million. The Company filed the suit asking the court to declare that VeriSign is not entitled to indemnification under the APA and to order the escrow agent to release the Escrow Funds to CyberSource. On August 15, 2008, VeriSign filed an answer and counterclaim. Each party has served the other party with discovery demands but responses have been postponed temporarily by mutual agreement of the parties. On May 8, 2009, the Company and VeriSign entered into a settlement agreement pursuant to which each party received a certain portion of the Escrow Fund and accrued interest, each party fully released the other party from any and all claims, and the parties filed a stipulation with the court to dismiss the case with prejudice.

On April 1, 2009, John Pettitt, Murphy Labrador Corporation and Max GSD Trust filed suit in the Superior Court of the State of California, Marin County, entitled John Pettitt, et al. v. CyberSource Corporation, et al., No. CIV 091005. The Company’s stock transfer agent, American Stock Transfer & Trust Company (“AS&T”), is also a named defendant. The Company was served with a First Amended Complaint on or around April 20, 2009. The complaint alleges, among other things, breach of contract, conversion, breach of fiduciary duty, and negligent infliction of emotional distress, arising from the transfer by AS&T of 100,000 shares of CyberSource common stock that were owned by Murphy Labrador Corporation to the State of California under California’s Unclaimed Property Law (“UPL”). Upon receipt of the shares from AS&T, and pursuant to the UPL, the State of California sold the shares at approximately $6.63 per share. The proceeds of the sale of the shares were recovered by Murphy Labrador Corporation, but plaintiffs are seeking re-issuance of the 100,000 shares or alternatively special damages of $877,000, unspecified consequential damages, interest, attorney’s fees, and punitive damages. On June 4, 2009, the Company filed a demurrer to dismiss the case. Prior to a scheduled hearing on the demurrer, the plaintiff filed a Second Amended Complaint on July 24, 2009. The Company has not yet responded to the Second Amended Complaint. While there can be no assurances as to the outcome of the lawsuit, the Company does not presently believe that the lawsuit would have a material effect on its financial condition, results of operations, or cash flows.

The Company is currently party to various legal proceedings and claims which arise in the ordinary course of business. While the outcome of these matters cannot be predicted with certainty, the Company does not believe that the outcome of any of these claims or any of the above mentioned legal matters will have a material adverse effect on its consolidated financial position, results of operations or cash flows.

8. STOCK OPTIONS

Stock options to purchase the Company’s common stock are granted at prices equal to the fair market value on the grant date. Options generally vest monthly over a four year period beginning from the grant date, and generally expire six to ten years from the grant date. Options granted to non-employee directors generally become vested nine to twelve months from the grant date. Nearly all outstanding stock options are non-qualified stock options.

10

CYBERSOURCE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

A summary of the Company’s stock option activity during the six months ended June 30, 2009 is as follows:

	Shares		Weighted average exercise price per share		Weighted average remaining contractual life	Aggregate intrinsic value
Outstanding as of December 31, 2008	8,825,496		$	9.82
Granted	1,818,500		$	12.37
Exercised	(468,041	)	$	7.49
Forfeited	(27,824	)	$	15.50
Outstanding as of June 30, 2009	10,148,131		$	10.37	4.30	$	55,120,513
Vested and expected to vest as of June 30, 2009	9,772,221		$	10.29	4.28	$	53,987,125
Exercisable as of June 30, 2009	5,519,430		$	8.82	3.90	$	40,310,707

During the three and six months ended June 30, 2009, the total intrinsic value of stock options exercised was approximately $2.1 million and $3.0 million, respectively. During the three and six months ended June 30, 2008, the total intrinsic value of stock options exercised was approximately $5.8 million and $8.7 million, respectively. As of June 30, 2009, total unrecognized stock-based compensation expense related to non-vested stock options was approximately $21.7 million, which is expected to be recognized over a weighted average period of approximately 2.66 years. During the three and six months ended June 30, 2009, the total cash received from the exercise of stock options was approximately $2.7 million and $3.6 million, respectively. During the three and six months ended June 30, 2008, the total cash received from the exercise of stock options was approximately $3.7 million and $5.4 million, respectively.

For stock options granted during the three and six months ended June 30, 2009 and 2008, the Company determined the fair value at the grant date using the Black-Scholes option valuation model and the following weighted average assumptions which are evaluated and revised, as necessary, to reflect market conditions and the Company’s experience:

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009	2008
Risk-free interest rate	1.72	%	3.18	%	1.67% - 1.72%	1.86% - 3.18%
Dividend yield	—		—		—	—
Volatility	0.60		0.49		0.58 - 0.60	0.49
Expected life (years)	3.58		3.54		3.58	3.54

The expected life of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. Expected stock price volatility is based on historical volatility of the Company’s stock over the expected life of the options. The risk-free interest rate is based on the yield available on U.S. Treasury zero-coupon issues with an equivalent remaining expected life. The Company has not paid dividends in the past and does not expect to pay any dividends in the near future.

The weighted average fair value of options granted was $6.55 and $6.70 per share for options granted during the three months ended June 30, 2009 and 2008, respectively. The weighted average fair value of options granted was $5.36 and $4.98 per share for options granted during the six months ended June 30, 2009 and 2008, respectively.

As of June 30, 2009, the Company had 100,000 restricted shares outstanding, none of which have vested.

9. COMMON STOCK REPURCHASE PROGRAM

On April 22, 2008, the Board of Directors authorized management to use up to $10.0 million over a twelve-month period beginning on May 5, 2008 to repurchase shares of the Company’s common stock. During the period beginning May 5, 2008 and ended June 30, 2008, the Company did not repurchase any shares.

On November 21, 2008, the Board of Directors authorized management to use up to $15.0 million to repurchase shares of the Company’s common stock through March 31, 2009. During the period beginning November 21, 2008 and ending December 31, 2008, the Company repurchased 88,781 shares at an average price of $7.95 per share, including repurchase costs. No shares were repurchased during the six months ended June 30, 2009.

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CYBERSOURCE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

All of the repurchased shares were cancelled and returned to the status of authorized, unissued shares.

10. GUARANTEES

From time to time, the Company enters into certain types of contracts that require the Company to indemnify parties against third-party claims on a contingent basis. These contracts primarily relate to: (i) licenses for software and services; (ii) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises; and (iii) certain agreements with the Company’s officers, directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationship.

The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated. Because the obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, the Company has not been obligated to make significant payments for these obligations, and no liabilities have been recorded for these obligations on its balance sheet as of June 30, 2009.

11. NET INCOME (LOSS) PER SHARE

The components of basic and diluted net income (loss) per share are as follows (in thousands, except per share data):

	For the three months ended June 30,					For the six months ended June 30,
	2009		2008			2009		2008
Basic net income (loss) per share computation:
Net income (loss)	$	2,181	$	(45	)	$	3,191	$	488
Weighted-average common shares outstanding		69,228		69,217			69,105		69,014
Basic net income (loss) per share attributable to common stockholders	$	0.03	$	—		$	0.05	$	0.01
Diluted net income (loss) per share computation:
Net income (loss)	$	2,181	$	(45	)	$	3,191	$	488
Weighted-average common shares outstanding		69,228		69,217			69,105		69,014
Incremental shares attributable to the assumed exercise of outstanding options		2,517		3,006			1,756		2,893
Total diluted weighted average common shares		71,745		72,223			70,861		71,907
Diluted net income (loss) per share attributable to common stockholders	$	0.03	$	—		$	0.05	$	0.01

The computation of diluted net income (loss) per share excluded approximately 764,000 and 365,000 options to purchase shares of common stock for the three months ended June 30, 2009 and 2008, respectively, and approximately 882,000 and 384,000 options to purchase shares of common stock for the six months ended June 30, 2009 and 2008, respectively, because the effect would have been antidilutive.

12. INCOME TAXES

As part of the process of preparing the unaudited condensed consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves estimating the current tax liability under the most recent tax laws and assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the unaudited condensed consolidated balance sheets.

Income tax expense for the six months ended June 30, 2009 was $2.0 million, or 38% of pre-tax income, compared to $0.2 million, or 34% of pre-tax income for the six months ended June 30, 2008. The effective tax rate for the six months ended June 30, 2009 differs from the U.S. federal statutory rate of 35% primarily due to the unfavorable impact of stock-based compensation and state income taxes, partially offset by the favorable impact of tax credits and lower foreign statutory tax rates. The effective tax rate for the six months ended June 30, 2008 differs from the U.S. federal statutory rate of 35% primarily due to the favorable impact of lower foreign operation tax benefits.

As of June 30, 2009, the Company’s total gross unrecognized tax benefits did not change compared with the balance as of December 31, 2008. Of the total gross unrecognized tax benefits, $2.0 million, if recognized, would reduce the Company’s effective tax rate in the period of recognition. Interest and penalties of $0.5 million are included in the unrecognized tax benefits.

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CYBERSOURCE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

13. FAIR VALUE MEASUREMENTS

Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

• Level 1 - Quoted prices in active markets for identical assets or liabilities.

• Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

• Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Level 1 financial assets measured at fair value on a recurring basis consist of cash accounts of approximately $57.4 million and money market funds (cash equivalents) of approximately $35.7 million as of June 30, 2009. The Company has no Level 2 or Level 3 financial assets measured at fair value on a recurring basis as of June 30, 2009.

14. COMMITMENTS

On June 30, 2009, the Company entered into an agreement to purchase certain software and services for $5.5 million, of which $4.1 million is payable on July 3, 2009, $0.7 million is payable on June 30, 2010 and $0.7 million is payable on June 30, 2011.

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

Statement Regarding Forward-Looking Statements

This Report on Form 10-Q contains 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 (the “Exchange Act”) adopted pursuant to the Private Securities Litigation Reform Act of 1995. Statements that are not purely historical may be forward-looking, including statements regarding our expectations, objectives, anticipations, estimations, intentions, plans, hopes, beliefs or strategies regarding the future. Such forward-looking statements include, but are not limited to statements regarding dividend payments, changes in revenue and expense levels, sufficiency of cash resources and liquidity, realization of goodwill, impact of acquisitions, valuation determinations, the effect of competition, growth levels, fraud-prevention in connection with our services and platform, intellectual property protection, legal proceedings, and regulatory impact. Such forward looking statements include, but are not limited to our expectations:

• that analysis and design early in the project lifecycle reduces the number and costs of defects that may be found in later stages;

• regarding the effectiveness of our systems and procedures to detect and prevent consumer and merchant fraud;

• regarding our ability to prevent security breaches and maintain confidential data;

• that we will be able to prevent system disruptions and accommodate increases in volume demand;

• regarding the continuity of our bank sponsor relationship;

• strength and growth of our small business and gateway offerings as well as our channel partners;

• about the impact of our lawsuit with ReD and other litigation matters;

• about the prospect of international expansion representing a major opportunity for us to grow our business over the long term;

• regarding whether investments in channel relationships will attract new resellers and partners as well as strengthen our existing relationships;

• regarding the level of expenses and revenue growth for the remainder of 2009; and

• that our cash and cash equivalents balance as of June 30, 2009 will be sufficient to meet our working capital and capital requirements for at least the next twelve months.

We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. These risks and uncertainties include, among others, those discussed in “Part II Item 1A. Risk Factors,” of this Quarterly Report on Form 10-Q as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise.

You should read the following in conjunction with the audited consolidated financial statements and the notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on February 27, 2009 (SEC File No. 000-26477).

OVERVIEW

CyberSource Corporation provides electronic payment and risk management solutions. Our solutions enable electronic payment processing for Web, call center, and point-of-sale environments. We partner with and connect to a large network of payment processors and other payment service providers to offer merchants a single source solution that simplifies electronic payment management. Our payment solutions allow eCommerce merchants to accept a wide range of online payment options, from credit cards and electronic checks, to global payment options and emerging payment types. We also offer industry leading risk

14

management and other solutions to help online merchants address complexities such as credit card fraud, online tax requirements, and export controls. Our professional services help to design, integrate, and optimize commerce transaction processing systems for merchants.

Some key operating metrics that members of our senior management regularly review to evaluate our financial results include transaction volume, new customer sign-ups, authorization dollars processed and revenue. Key elements of our growth strategy include international expansion, risk and security management, and resellers and partner channels. International expansion represents a major opportunity for us to grow our business over the long term. We continue to enhance our fraud solutions with new features such as device fingerprinting and advanced levels of automation to increase the efficiency of order review and reduce fraud. Our reseller and partner channels have become an increasingly important part of our sales strategy. We believe that investing in these channel relationships will attract new resellers and partners as well as strengthen our existing relationships.

As of June 30, 2009, approximately 273,000 businesses used our solutions, an increase of approximately 20,000 customers since December 31, 2008. For the six months ended June 30, 2009, we processed approximately 1.1 billion transactions. The dollar value of all credit card authorization requests we processed during the six months ended June 30, 2009 was approximately $56.3 billion.

We primarily derive our revenues from monthly commerce transaction processing fees and global acquiring fees, and support service fees. Transaction and global acquiring revenues are recognized in the period in which the transactions occur and support service fees are recognized as the related services are provided and costs are incurred.

CRITICAL ACCOUNTING POLICIES

Our financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. We believe that the following are the more critical judgment areas in the application of our accounting policies that currently affect our financial condition and results of operations. A full discussion of the following accounting policies is included in our 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission and we refer you to that discussion. There were no material changes in the application of critical accounting policies during the three months ended June 30, 2009.

• Revenue Recognition

• Accounts Receivable

• Reserve for Merchant Losses

• Legal Contingencies

• Accounting for Income Taxes

• Stock-based Compensation

• Long-Lived Assets

15

RESULTS OF OPERATIONS

The following table sets forth certain items in our condensed consolidated statements of operations expressed as a percentage of revenue for the periods indicated:

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
Revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenues	46.5		49.5		46.4		48.9
Gross profit	53.5		50.5		53.6		51.1
Operating expenses:
Product development	10.5		10.5		10.6		10.2
Sales and marketing	28.0		30.4		28.5		30.8
General and administrative	9.5		10.4		10.5		10.3
Total operating expenses	48.0		51.3		49.6		51.3
Income (loss) from operations	5.5		(0.8	)	4.0		(0.2	)
Interest and other income, net	0.1		0.8		0.2		0.8
Income before income taxes	5.6		—		4.2		0.6
Income tax provision	2.1		—		1.6		0.2
Net income	3.5	%	—	%	2.6	%	0.4	%

THREE MONTHS ENDED JUNE 30, 2009 AND 2008

Revenues. Revenues were $62.9 million for the three months ended June 30, 2009, as compared to $55.7 million for the three months ended June 30, 2008, an increase of approximately $7.2 million or 13.0%. The increase in revenues was primarily from new customers as well as an increase in total transactions processed. Revenues from new customers that entered into contracts during the twelve months ended June 30, 2009 represented approximately 17% of total revenues for the three months ended June 30, 2009; while revenues from existing customers represented approximately 83% of total revenues for the three months ended June 30, 2009. Revenues from new customers that entered into contracts during the twelve months ended June 30, 2008 represented approximately 15% of total revenues for the three months ended June 30, 2008; while revenues from existing customers represented approximately 85% of total revenues for the three months ended June 30, 2008. We added approximately 38,000 gross and 11,500 net new customers during the three months ended June 30, 2009, as compared to approximately 26,000 gross and 1,000 net new customers during the three months ended June 30, 2008.

We processed approximately 579 million transactions during the three months ended June 30, 2009, as compared to approximately 449 million transactions processed during the three months ended June 30, 2008, an increase of approximately 29%. The dollar value of all credit card authorization requests we processed in the three months ended June 30, 2009 was approximately $28.6 billion, as compared to approximately $27.4 billion for the three months ended June 30, 2008, an increase of approximately 4%.

Global acquiring revenues was approximately $19.3 million, or 30.8% of total revenues for the three months ended June 30, 2009, as compared to approximately $19.7 million, or 35.3% of total revenues for the three months ended June 30, 2008. Our global acquiring revenue may also include fees generated for gateway services as it is becoming more common to charge the customer a bundled price for global acquiring and gateway services. We had approximately 5,900 global acquiring customers as of June 30, 2009 as we added approximately 850 new acquiring customers during the three months ended June 30, 2009. We had approximately 3,300 global acquiring customers as of June 30, 2008 as we added approximately 1,000 new acquiring customers during the three months ended June 30, 2008. The dollar value of all credit card authorization requests we processed as the merchant acquirer in the three months ended June 30, 2009 was approximately $700 million, as compared to approximately $630 million for the three months ended June 30, 2008, an increase of approximately 11%.

During the three months ended June 30, 2009, our European operations generated revenues of $4.5 million and $3.7 million for the three months ended June 30, 2009 and 2008, respectively. Revenues from our European operations consist primarily of commerce transaction fees as we currently are unable to offer acquiring services in Europe due to the lack of a sponsor bank. Transactions processed by our European operations were approximately 146.3 million transactions, or 25% of total transactions processed, for the three months ended June 30, 2009 as compared to approximately 87.8 million transactions, or 20% of total transactions processed, for the three months ended June 30, 2008, an increase of approximately 67%. Revenues from merchants domiciled outside the United States accounted for approximately 7.2% and 6.6% of our revenues for the three months ended June 30, 2009 and 2008, respectively.

Cost of Revenues. Cost of revenues consist primarily of costs incurred in the delivery of eCommerce transaction services, including personnel costs in our operations and customer support functions, processing and interchange fees paid relating to our global acquiring services, other third-party fees, depreciation of capital equipment used in our network infrastructure and costs

16

related to the hosting of our servers at third-party hosting centers in the United States and the United Kingdom. Cost of revenues was $29.2 million or 46.5% of revenues for the three months ended June 30, 2009, as compared to $27.6 million or 49.5% of revenues for the three months ended June 30, 2008. The increase in absolute dollars is primarily due to an increase in headcount and related compensation expense of approximately $1.0 million and an increase in depreciation expense of approximately $0.4 million. The decrease in cost of revenues as a percentage of revenues is due primarily to efficiencies resulting from the increase in transactions processed as well as the increase in revenues.

Product Development. Product development expenses consist primarily of compensation and related costs of employees engaged in the research, design and development of new services, and to a lesser extent, facility costs and related overhead. Product development expenses were $6.6 million for the three months ended June 30, 2009, as compared to $5.9 million for the three months ended June 30, 2008, an increase of approximately $0.7 million or 12.8%. The increase is primarily due to an increase in headcount and related compensation expense of approximately $0.6 million. As a percentage of revenues, product development expenses were 10.5% in both the three months ended June 30, 2009 and 2008. We expect product development expenses in the three months ended September 30, 2009 to moderately increase in absolute dollars as compared to the three months ended June 30, 2009 as we continue to increase headcount to support existing and additional development projects. As a percentage of revenues, we expect product development expenses in the three months ended September 30, 2009 to be relatively consistent with the three months ended June 30, 2009 due primarily to expected revenue growth.

Sales and Marketing. Sales and marketing expenses consist primarily of compensation of sales and marketing personnel, commissions paid to outside sales agents, market research and advertising costs, and, to a lesser extent, facility costs and related overhead. Sales and marketing expenses were $17.6 million for the three months ended June 30, 2009, as compared to $16.9 million for the three months ended June 30, 2008, an increase of approximately $0.7 million or 4.0%. The increase is primarily due to an increase in commissions paid to outside sales agents of approximately $0.7 million and an increase in compensation-related expense of approximately $0.5 million, offset by a decrease of approximately $0.4 million in intangible asset amortization expense related to the Authorize.Net trade name, partner contracts and related relationships as well as merchant contracts and related relationships. As a percentage of revenues, sales and marketing expenses decreased to 28.0% for the three months ended June 30, 2009, as compared to the 30.4% for the three months ended June 30, 2008. The decrease is primarily due to the increase in revenues for the three months ended June 30, 2009, offset to a certain extent, by the increase in sales and marketing expenses. We expect sales and marketing expenses in the three months ended September 30, 2009 to moderately increase in absolute dollars as compared to the three months ended June 30, 2009 as we continue to develop sales and marketing infrastructure to support expected revenue growth. As a percentage of revenues, we expect sales and marketing expenses in the three months ended September 30, 2009 to be relatively consistent as a percentage of revenues as compared to the three months ended June 30, 2009 due primarily to expected revenue growth.

General and Administrative. General and administrative expenses consist primarily of compensation for executive and administrative personnel, fees for outside professional services and, to a lesser extent, facility costs and related overhead. General and administrative expenses were $6.0 million for the three months ended June 30, 2009, as compared to $5.8 million for the three months ended June 30, 2008, an increase of approximately $0.2 million or 3.6%. As a percentage of revenues, general and administrative expenses were 9.5% for the three months ended June 30, 2009, as compared to the 10.4% for the three months ended June 30, 2008. The decrease is primarily due to the increase in revenues for the three months ended June 30, 2009. We expect that general and administrative expenses in the three months ended September 30, 2009 will be relatively consistent in absolute dollars as compared to the three months ended June 30, 2009. As a percentage of revenues, we expect general and administrative expenses in the three months ended September 30, 2009 to slightly decrease due primarily to expected revenue growth.

Other Income (Loss), net.Other income (loss), net consists primarily of joint venture income from CyberSource K.K. and other miscellaneous gains and losses. Other loss, net was approximately $14,000 for the three months ended June 30, 2009, as compared to other income, net of approximately $92,000 for the three months ended June 30, 2008. Other loss, net for the three months ended June 30, 2009 consisted of approximately $0.2 million of proceeds from a legal settlement and $0.1 million of income from CyberSource K.K., offset by approximately $0.4 million of loss due to foreign currency fluctuations.

Interest Income. Interest income which consists of interest earnings on cash and cash equivalents was $74,000 for the three months ended June 30, 2009 as compared to $0.4 million for the three months ended June 30, 2008. The decrease is due to lower interest rates. We expect interest income in the three months ended September 30, 2009 to be relatively consistent with the three months ended June 30, 2009.

Income Tax Provision.Income tax expense, including discrete items, for the three months ended June 30, 2009 was approximately $1.3 million on pre-tax income of $3.5 million, as compared to $26,000 on pre-tax losses of $19,000 for the three months ended June 30, 2008. The increase is primarily due to higher pre-tax income for the three months ended June 30, 2009 as compared to the three months ended June 30, 2008. The effective tax rate for the three months ended June 30, 2009 differs from the U.S. federal statutory rate of 35% primarily due to the unfavorable impact of stock-based compensation and state income taxes. The effective tax rate for the second quarter of 2008 differs from the U.S. federal statutory rate of 35% primarily due to the pre-tax losses for the quarter.

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Our effective tax rate could fluctuate significantly on a quarterly basis and could be adversely affected to the extent earnings are lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates, by changes in the valuation of our deferred tax assets or liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof. In addition, we are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities.

SIX MONTHS ENDED JUNE 30, 2009 AND 2008

Revenues. Revenues were $123.4 million for the six months ended June 30, 2009, as compared to $109.1 million for the six months ended June 30, 2008, an increase of approximately $14.3 million or 13.1%. The increase in revenues was primarily from new customers as well as an increase in total transactions processed. Revenues from new customers that entered into contracts during the twelve months ended June 30, 2009 represented approximately 15% of total revenues for the six months ended June 30, 2009; while revenues from existing customers represented approximately 85% of total revenues for the six months ended June 30, 2009. Revenues from new customers that entered into contracts during the twelve months ended June 30, 2008 represented approximately 12% of total revenues for the six months ended June 30, 2008; while revenues from existing customers represented approximately 88% of total revenues for the six months ended June 30, 2008. We added approximately 69,500 gross and 20,400 net new customers during the six months ended June 30, 2009, as compared to approximately 51,000 gross and 10,000 net new customers during the six months ended June 30, 2008.

We processed approximately 1.1 billion transactions during the six months ended June 30, 2009, as compared to approximately 894 million transactions processed during the six months ended June 30, 2008, an increase of approximately 23%. The dollar value of all credit card authorization requests we processed in the six months ended June 30, 2009 was approximately $56.3 billion, as compared to approximately $54.0 billion for the six months ended June 30, 2008, an increase of approximately 4%.

Global acquiring revenues was approximately $38.3 million, or 31.1% of total revenues, for the six months ended June 30, 2009, as compared to approximately $36.7 million, or 33.6% of total revenues, for the six months ended June 30, 2008. We had approximately 5,900 global acquiring customers as of June 30, 2009 as we added approximately 1,950 new acquiring customers during the six months ended June 30, 2009. We had approximately 3,300 global acquiring customers as of June 30, 2008 as we added approximately 1,800 new acquiring customers during the six months ended June 30, 2008. The dollar value of all credit card authorization requests we processed as the merchant acquirer in the six months ended June 30, 2009 was approximately $1.4 billion, as compared to approximately $1.2 billion for the six months ended June 30, 2008, an increase of approximately 17%.

During the six months ended June 30, 2009, our European operations generated revenues of $8.3 million and $7.1 million for the six months ended June 30, 2009 and 2008, respectively. Transactions processed by our European operations were approximately 283.1 million transactions, or 26% of total transactions processed, for the six months ended June 30, 2009 as compared to approximately 174.0 million transactions, or 19% of total transactions processed, for the six months ended June 30, 2008, an increase of approximately 63%. Revenues from merchants domiciled outside the United States accounted for 6.8% and 6.6% of our revenues for the six months ended June 30, 2009 and 2008, respectively.

Cost of Revenues. Cost of revenues was $57.2 million or 46.4% of revenues for the six months ended June 30, 2009, as compared to $53.4 million or 48.9% of revenues for the six months ended June 30, 2008. The increase in absolute dollars is primarily due to an increase in headcount and related compensation expense of approximately $2.7 million and an increase in depreciation expense of approximately $0.6 million. The decrease in cost of revenues as a percentage of revenues is due primarily to efficiencies resulting from the increase in transactions processed as well as the increase in revenues.

Product Development. Product development expenses were $13.1 million for the six months ended June 30, 2009, as compared to $11.1 million for the six months ended June 30, 2008, an increase of approximately $2.0 million or 17.6%. The increase is primarily due to an increase in headcount and related compensation expense of approximately $1.5 million. As a percentage of revenues, product development expenses was 10.6% in the six months ended June 30, 2009, relatively consistent with 10.2% for the six months ended June 30, 2008.

Sales and Marketing. Sales and marketing expenses were $35.2 million for the six months ended June 30, 2009, as compared to $33.6 million for the six months ended June 30, 2008, an increase of approximately $1.6 million or 4.8%. The increase is primarily due to an increase in commissions paid to outside sales agents of approximately $1.5 million and an increase in compensation-related expense of approximately $1.0 million, offset by a decrease of approximately $0.9 million in intangible asset amortization expense related to the Authorize.Net trade name, partner contracts and related relationships as well as merchant contracts and related relationships. As a percentage of revenues, sales and marketing expenses decreased to 28.5% for the six months ended June 30, 2009, as compared to the 30.8% for the six months ended June 30, 2008. The decrease is primarily due to the increase in revenues for the six months ended June 30, 2009, offset to a certain extent, by the increase in sales and marketing expenses.

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General and Administrative. General and administrative expenses were $13.0 million for the six months ended June 30, 2009, as compared to $11.3 million for the six months ended June 30, 2008, an increase of approximately $1.7 million or 15.0%. The increase is primarily due to a $1.1 million increase in legal fees and outside services. In addition, during the six months ended June 30, 2009, we recorded a restructuring accrual of approximately $0.9 million as a result of updating our assumptions associated with our excess office space in Burlington, Massachusetts and American Fork, Utah. As a percentage of revenues, general and administrative expenses were 10.5% for the six months ended June 30, 2009, as compared to the 10.3% for the six months ended June 30, 2008. The increase is primarily due to the increase in legal fees and outside services as well as restructuring charges in the six months ended June 30, 2009, offset to a certain extent, by the increase in revenues.

Other Income (Loss), net.Other loss, net was approximately $32,000 for the six months ended June 30, 2009, as compared to other income, net of $0.2 million for the six months ended June 30, 2008. Other loss, net for the six months ended June 30, 2009 consisted of approximately $0.2 million of proceeds from a legal settlement and $0.2 million of income from CyberSource K.K., offset by approximately $0.4 million of loss due to foreign currency fluctuations.

Interest Income. Interest income was $0.2 million for the six months ended June 30, 2009 as compared to $0.8 million for the six months ended June 30, 2008. The decrease is due to lower interest rates.

Income Tax Provision.Income tax expense for the six months ended June 30, 2009 was approximately $2.0 million on pre-tax income of $5.1 million, as compared to $0.2 million on pre-tax income of $0.7 million for the six months ended June 30, 2008. The increase is primarily due to higher pre-tax income for the six months ended June 30, 2009 as compared to the six months ended June 30, 2008. The effective tax rate for the six months ended June 30, 2009 differs from the U.S. federal statutory rate of 35% primarily due to the unfavorable impact of stock-based compensation and state income taxes, partially offset by the favorable impact of tax credits and lower foreign statutory tax rates. The effective tax rate for the six months ended June 30, 2008 differs from the U.S. federal statutory rate of 35% primarily due to the favorable impact of lower foreign tax rates, partially offset by the impact of state income taxes.

LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents were $93.1 million as of June 30, 2009 compared to $73.3 million as of December 31, 2008, an increase of approximately $19.8 million. The increase is primarily due to cash provided by operating activities of approximately $21.8 million, which is net of bonuses paid under the company-wide bonus plan of approximately $4.5 million, and proceeds from the issuance of the Company’s common stock resulting from stock option exercises of approximately $3.6 million, offset by capital expenditures of approximately $6.6 million.

We believe that our cash and cash equivalents, which consist of only money market funds, as of June 30, 2009 will be sufficient to meet our working capital and capital requirements for at least the next twelve months. Our future capital requirements will depend on many factors including the level of investment we make in new businesses, new products or new technologies. We currently have no agreements or understandings with respect to any future investments or acquisitions. To the extent that our existing cash resources and future earnings are insufficient to fund our future activities, we may need to obtain additional equity or debt financing. Additional funds may not be available or, if available, we may not be able to obtain them on favorable terms.

The following is a table summarizing our significant commitments as of June 30, 2009, consisting of future minimum lease payments under all non-cancelable operating leases (in thousands):

Contractual obligations	Total		Less than 1 year		1 – 3 years		3 – 5 years
Operating leases	$	14,990	$	5,094	$	9,896	$	—
Purchase obligations		5,526		4,122		1,404		—
Total commitments	$	20,516	$	9,216	$	11,300	$	—

We have excluded tax contingencies totaling approximately $2.0 million from the table above as there is a high degree of uncertainty regarding the timing of future cash outflows and, as a result, we are not able to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities.

Off-Balance Sheet Arrangements

As of June 30, 2009, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

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Recent Pronouncements

In June 2009, the Financial Accounting Standards Board issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”), amending the consolidation guidance for variable-interest entities under FIN 46(R). The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. SFAS 167 will be effective for us as of January 1, 2010 and for interim and annual reporting periods thereafter. Earlier application is prohibited. We have not yet determined the effect on our consolidated financial statements, if any, upon the adoption of SFAS 167.

Factors That May Affect Future Results

A description of the risk factors associated with our business is included under “Risk Factors” in Item 1A of Part II of this report.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We provide our services to customers primarily in the United States and, to a lesser extent, in Europe and elsewhere throughout the world. As a result, we are exposed to foreign currency risk. The majority of sales are currently made in U.S. dollars or pounds sterling. A strengthening of the dollar or the pound sterling could make our products less competitive in foreign markets. We also have non-functional currency cash balances that are exposed to foreign currency risk. Currently, we do not have any arrangements to hedge against the effects of currency fluctuations. For the six months ended June 30, 2009, we incurred approximately $0.4 million of loss due to foreign currency fluctuations.

Our interest income is sensitive to changes in the general level of U.S. interest rates. All of our cash equivalents are presented at fair value on our consolidated balance sheets. We generally invest our excess cash in money market funds. Due to the nature of our cash equivalents, which are money market funds, we have concluded that there is no material market risk exposure.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure. Based on the evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, our CEO and CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Our management, including the CEO and the CFO, does not expect that our disclosure controls or our internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. We confirm that our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and that our CEO and CFO have concluded that our disclosure controls and procedures are effective at that reasonable assurance level.

There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ending June 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For legal proceedings, see Note 7 – Legal Matters in the Notes to the Condensed Consolidated Financial Statements appearing in Item 1, Part I to this Quarterly Report, which is incorporated by reference into this Item 1, Part II.

ITEM 1A. RISK FACTORS

Set forth below are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this report. There have been no material changes to the Risk Factors in our Annual

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Report on Form 10-K for the fiscal year ended December 31, 2008. In addition, some risk factors below update the relevant date cited although the risk remains materially unchanged. As a matter of practice, however, we choose to fully restate the Risk Factors in our Quarterly Reports on Form 10-Q. The occurrence of any of the developments or risks identified below may make the occurrence of one or more of the other risk factors below more likely to occur.

Risks Related to Our Business

Potential system failures and lack of capacity issues could negatively affect demand for our services.

Our ability to deliver services to our merchants depends on the uninterrupted operation of our commerce transaction processing systems. Our systems and operations are vulnerable to damage or interruption from:

• “denial of service” attacks;

• computer viruses;

• war, earthquake, fire, flood and other manmade or natural disasters; and

• power loss, telecommunications or data network failure, operator negligence, improper operation by employees, physical and electronic break-ins and similar events.

Despite the fact that we have implemented redundant servers in third-party hosting centers located in San Jose, California; Seattle, Washington; Denver, Colorado; London, England; and Tokyo, Japan, we may still experience service interruptions for the reasons listed above and a variety of other reasons. If our redundant servers and data centers are not available, we may not have sufficient business interruption insurance to compensate us for resulting losses. We have experienced periodic interruptions and performance issues, affecting all or a portion of our systems, which we believe will continue to occur from time to time. For example, on July 3, 2009, our small business services were unavailable for approximately eleven hours due to a fire and subsequent loss of power at our third-party hosting center in Seattle, Washington. Any interruption to our systems that impairs our ability to provide services could damage our reputation and reduce demand for our services.

In addition, our success also depends on our ability to grow, or scale, our commerce transaction systems to accommodate increases in the volume of traffic on our systems, especially during peak periods of demand. We may not be able to anticipate increases in the use of our systems or successfully expand the capacity of our network infrastructure. Our inability to expand our systems to handle increased traffic could result in system disruptions, slower response times and other difficulties in providing services to our merchant customers, which could materially harm our business.

A breach of our eCommerce security measures could reduce demand for our services.

A requirement of the continued growth of eCommerce is the secure transmission of confidential information over public networks. We rely on public key cryptography, an encryption method that utilizes two keys, a public and a private key, for encoding and decoding data, and digital certificate technology, or identity verification, to provide the security and authentication necessary for secure transmission of confidential information. A party who is able to circumvent security measures could misappropriate proprietary information or interrupt our operations. Any compromise or elimination of security could reduce demand for our services.

We may be required to expend significant capital and other resources to protect against security breaches and to address any problems they may cause. Concerns over the security of the Internet and other online transactions and the privacy of users may also inhibit the growth of the Internet and other online services generally, and the Web in particular, especially as a means of conducting commercial transactions. Because our activities involve the storage and transmission of proprietary information, such as credit card numbers, security breaches could damage our reputation and expose us to a risk of loss, fines, or litigation and other liabilities. Our security measures may not prevent security breaches, and failure to prevent security breaches may disrupt our operations.

We could incur chargeback or merchant fraud losses that would adversely affect our earnings.

We have potential liability for certain transactions processed through our global acquiring services if the payments associated with such transactions are rejected, refused, or returned for reasons such as consumer fraud or billing disputes. For instance, if a billing dispute between a merchant and payer is not ultimately resolved in favor of the merchant, the disputed transaction may be charged back to the merchant’s bank and credited to the payer’s account. If the charged back amount cannot be recovered from the merchant’s account, or if the merchant refuses or is financially unable to reimburse its bank for the charged back amount, we may bear the loss for the amount of the refund paid to the payer’s bank. We could also incur fraud losses as a result of merchant fraud. Merchant fraud occurs when a merchant, rather than a customer, intentionally uses a stolen or counterfeit card, card

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number, or other bank account number to process a false sales transaction, or knowingly fails to deliver merchandise or services in an otherwise valid transaction. We may be responsible for any losses for certain transactions if we are unable to collect from the merchant.

We have established systems and procedures designed to detect and reduce the impact of consumer fraud and merchant fraud, but we cannot assure you that these measures are or will be effective. To date, we have not incurred any significant losses relating to chargebacks resulting from consumer fraud or merchant fraud. During the six months ended June 30, 2009, our global acquiring revenue represented approximately 31.1% of our total revenue. Our global acquiring revenue may also include fees generated for gateway services as it is becoming more common to charge the customer a bundled price for transaction services provided. To the extent our global acquiring revenue grows, our potential liability for such chargebacks or merchant fraud increases.

Our revenue and customer relationships could be impacted if we were to lose bank sponsorship.

The credit card associations require a bank sponsor that ultimately assumes chargeback or merchant fraud losses if we were financially unable to assume such losses. We regularly evaluate bank sponsorships and other relationships with financial institutions. Harris Bank, N.A. currently is our bank sponsor. Our agreement with Harris Bank renews automatically in March of each year and requires at least 180 days written notice prior to the expiration of any annual term if either party wishes to exercise its right not to renew the agreement. Accordingly, this agreement was renewed automatically in March 2009 and will remain in effect through March 2010, unless the parties mutually agree to terminate the agreement prior to any such expiration or either party exercises its right to terminate the agreement prior to any such expiration based on a material breach by the other party as set forth in the agreement. If our current bank sponsor were to terminate our agreement, and we are not able to obtain another bank sponsor in a timely manner, we would be unable to provide global acquiring services, either whole or in part, which could impact our future revenue and customer relationships.

We may not be able to adequately protect our proprietary technology and may be infringing upon third-party intellectual property rights.

Our success depends upon our proprietary technology. We rely on a combination of patent, copyright, trademark and trade secret rights, confidentiality procedures and licensing arrangements to establish and protect our proprietary rights.

As part of our confidentiality procedures, we enter into non-disclosure agreements with our employees, contractors, vendors and potential customers and alliances. Despite these precautions, third parties could copy or otherwise obtain and use our technology without authorization, or develop similar technology independently. Effective protection of intellectual property rights may be unavailable or limited in foreign countries. We cannot assure you that the protection of our proprietary rights will be adequate or that our competitors will not independently develop similar technology, duplicate our products and services or design around any patents or other intellectual property rights we hold.

We also cannot assure you that third parties will not claim that the technology employed in providing our current or future products and services infringe upon their rights. We have not conducted any search to determine whether any of our products and services or technologies may be infringing upon patent rights of third parties. As the number of products and services in our market increases and functionalities increasingly overlap, companies such as ours may become increasingly subject to infringement claims. In addition, these claims also might require us to enter into royalty or license agreements. Any infringement claims, with or without merit, could absorb significant management time and lead to costly litigation. If required to do so, we may not be able to obtain royalty or license agreements, or obtain them on terms acceptable to us.

If we are not able to fully utilize relationships with our sales alliances, we may experience lower revenue growth and higher operating costs.

Our future growth will depend in part on the success of our relationships with existing and future sales alliances that market our products and services to their merchant accounts. If these relationships are not successful or do not develop as quickly as we anticipate, our revenue growth may be adversely affected. For example, most of the new customer signups for our Authorize.Net platform come from resellers. To some degree, we compete with these resellers and conflicts may arise between the reseller and our direct sales force. While we believe we have been able to minimize any such conflict, we cannot assure you that conflicts will not increase. Accordingly, we may have to increase our sales and marketing expenses in an attempt to secure additional merchant accounts.

If we lose key management personnel, we may not be able to successfully manage our business and achieve our objectives.

Our success will depend in part upon our ability to retain key management personnel, including William S. McKiernan, our Chief Executive Officer, and other key members of management because of their experience and knowledge regarding the development, opportunities, and challenges of our business. We do not maintain any key-man insurance covering the death or disability of any of our executive officers. While we have an employment contract with Scott Cruickshank, our President and

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Chief Operating Officer, none of our current key employees are subject to legal obligations that enable us to retain them for a specific period of time. Competition for qualified personnel can be intense. We may not be successful in attracting and retaining key employees in the future. Loss of key personnel could have a material adverse effect on our business and results of operations.

Failure to manage future growth effectively may have a material adverse effect on our financial condition and results of operations.

In the event that we experience rapid growth in our operations, a significant strain may be placed upon management, administrative, operational and financial infrastructure. Our success will depend in part upon the ability of our executive officers to manage growth effectively. Our ability to grow also depends upon our ability to successfully hire, train, supervise, and manage new employees, obtain financing for our capital needs, expand our systems effectively, allocate our human resources optimally, maintain clear lines of communication between our transactional and management functions and our finance and accounting functions, and manage the pressures on our management and administrative, operational and financial infrastructure. There can be no assurance that we will be able to accurately anticipate and respond to the changing demands we will face as we continue to expand our operations, and we may not be able to manage growth effectively or to achieve growth at all. Any failure to manage future growth effectively could have a material adverse effect on our business, financial condition and results of operations.

Charges to earnings resulting from the application of the purchase method of accounting might adversely affect the market value of our common stock.

In accordance with United States generally accepted accounting principles (“GAAP”), the Authorize.Net merger which closed on November 1, 2007 was accounted for using the purchase method of accounting, which will result in charges to earnings that could have an adverse impact on the market value of our common stock. Under the purchase method of accounting, the total estimated purchase price was allocated to Authorize.Net’s net tangible assets, identifiable intangible assets or expense for research and development based on their fair values as of November 1, 2007. The excess of the purchase price over those fair values was recorded as goodwill. We will incur additional amortization expense based on the identifiable amortizable intangible assets acquired and their relative useful lives. Additionally, to the extent the value of goodwill or identifiable intangible assets or other long-lived assets may become impaired, we will be required to incur material charges relating to the impairment. These amortization and potential impairment charges could have a material impact on our results of operations. We currently estimate that we will incur approximately $26.2 million of annual amortization expense relating to the Authorize.Net merger during the year ending December 31, 2009. Changes in earnings per share, including as a result of this incremental expense, could adversely affect the trading price of our common stock.

We may pursue strategic acquisitions and our business could be materially and adversely affected if we fail to adequately integrate acquired businesses.

As part of our future business strategy, we may pursue strategic acquisitions of complementary businesses or technologies that would provide additional product or service offerings, additional industry expertise, a broader client base or an expanded geographic presence. For example, on November 1, 2007, we completed the acquisition of Authorize.Net. If we do not successfully integrate a strategic acquisition, or if the benefits of the transaction do not meet the expectations of financial or industry analysts, the market price of our common stock may decline. Any future acquisition could result in the use of significant amounts of cash, dilutive issuances of equity securities, or the incurrence of debt or amortization expenses related to goodwill and other intangible assets, any of which could materially adversely affect our business, operating results and financial condition. In addition, acquisitions involve numerous risks, including:

• difficulties in assimilating the operations, technologies, products and personnel of an acquired company;

• risks of entering markets in which we have either no or limited prior experiences;

• the diversion of management’s attention from other business concerns; and

• the potential loss of key employees of an acquired company.

Our international business is subject to additional foreign risks that could harm our business, results, and financial condition.

Products and services provided to merchants outside the United States accounted for 6.8% and 6.6% of our revenues in the six months ended June 30, 2009 and 2008, respectively. In March 2000, we entered into a joint venture agreement with Japanese partners Marubeni Corporation and Trans-Cosmos, Inc. and established CyberSource K.K. to provide commerce transaction services to the Japanese market. Conducting business outside of the United States is subject to additional risks that may affect our ability to sell our products and services and result in reduced revenues, including:

• changes in regulatory requirements;

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• reduced protection of intellectual property rights;

• the burden of complying with a variety of foreign laws; and

• war, political or economic instability or constraints on international trade.

In addition, some software contains encryption technology that renders it subject to export restrictions and we may become liable to the extent we violate these restrictions. We might not successfully market, sell or distribute our products and services in local markets and we cannot be certain that one or more of these factors will not materially adversely affect our future international operations, and consequently, our business, financial condition and operating results.

Also, sales of our products and services conducted through our subsidiary in the United Kingdom are primarily denominated in Pounds Sterling. We may experience fluctuations in revenues or operating expenses due to fluctuations in the value of the Pounds Sterling relative to the U.S. Dollar. We do not currently enter into transactions with the specific purpose to hedge against currency exchange fluctuations.

Risks Related To Our Industry

The intense competition in our industry could reduce or eliminate the demand for our products and services.

The market for our products and services is intensely competitive and subject to rapid technological change. We expect competition to intensify in the future. We face competition from merchant acquirers, independent sales organizations, and payment processors such as Chase Paymentech, First Data Corporation, and Royal Bank of Scotland. We also face competition from transaction service providers such as PayPal and Retail Decisions as well as eCommerce providers such as Bertelsmann Financial Services, Digital River, and GSI Commerce Inc. Further, other companies, including financial services and credit companies may enter the market and provide competing services.

Many of our competitors have longer operating histories, substantially greater financial, technical, marketing or other resources, or greater name recognition than we do. Our competitors may be able to respond more quickly than we can to new or emerging technologies and changes in customer requirements. Competition could seriously impede our ability to sell additional products and services on terms favorable to us. Our current and potential competitors may develop and market new technologies that render our existing or future products and services obsolete, unmarketable or less competitive. Our current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with other solution providers, thereby increasing their ability to address the needs of our existing or prospective customers. Our current and potential competitors may establish or strengthen cooperative relationships with our current or future channel partners, thereby limiting our ability to sell products and services through these channels. We expect that competitive pressures may result in the reduction of our prices or our market share or both, which could materially and adversely affect our business, results of operations or financial condition.

Our market is subject to rapid technological change and to compete we must continually enhance our systems to comply with evolving standards.

To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our products and services and the underlying network infrastructure. The Internet and the eCommerce industries are characterized by rapid technological change, changes in user requirements and preferences, frequent new product and service introductions embodying new technologies, and the emergence of new industry standards and practices that could render our technology and systems obsolete. Our success will depend, in part, on our ability to both internally develop and license leading technologies to enhance our existing products and services and develop new products and services. We must continue to address the increasingly sophisticated and varied needs of our merchants, and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. The development of proprietary technology involves significant technical and business risks. We may fail to develop new technologies effectively or to adapt our proprietary technology and systems to merchant requirements or emerging industry standards. If we are unable to adapt to changing market conditions, merchant requirements or emerging industry standards, we may be forced to compete in different ways or expend significant resources in order to remain competitive.

The demand for our products and services could be negatively affected by a reduced growth of eCommerce or delays in the development of the internet infrastructure.

We depend on the growing use and acceptance of the Internet as an effective medium of commerce by merchants and customers in the United States and internationally. The sale of goods and services over the Internet has gained acceptance more slowly outside of the United States. We cannot be certain that acceptance and use of the Internet will continue to develop or that a sufficiently broad base of merchants and consumers will adopt, and continue to use, the Internet as a medium of commerce.

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The increase in the significance of the Internet as a commercial marketplace may occur more slowly than anticipated for a number of reasons, including potentially inadequate development of the necessary network infrastructure or delayed development of enabling technologies and performance improvements. If the number of Internet users, or the use of Internet resources by existing users, continues to grow, it may overwhelm the existing Internet infrastructure. Delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity could also have a detrimental effect. These factors could result in slower response times or adversely affect usage of the Internet, resulting in lower numbers of commerce transactions and lower demand for our products and services.

Global economics, political and other conditions may adversely affect trends in consumer spending, which may adversely impact our revenue and profitability

The global electronic payments industry depends heavily upon the overall level of consumer, business and government spending. The industry also relies in part on the number and size of consumer transactions. A sustained deterioration in the general economic conditions in the United States or globally may adversely affect our financial performance by reducing the number or average purchase amount of transactions involving payment cards. A reduction in the amount of consumer spending could result in a decrease of our revenue and profits.

We may become subject to government regulation and legal uncertainties that would adversely affect our operations and financial results.

We are not currently subject to direct regulation by any domestic or foreign governmental agency, other than regulations applicable to businesses generally, export control laws and laws or regulations directly applicable to eCommerce. However, due to the increasing usage of the Internet, it is possible that a number of laws and regulations may be applicable or may be adopted in the future with respect to conducting business over the Internet covering issues such as:

• taxes;

• user privacy;

• pricing;

• content;

• right to access personal data;

• copyrights;

• distribution; and

• characteristics and quality of products and services.

For example, we believe that our fraud screen service may require us to comply with the Fair Credit Reporting Act (the “Act”). As a precaution, we have implemented processes that we believe will enable us to comply with the Act if we were deemed a consumer reporting agency. Complying with the Act requires us to provide information about personal data stored by us. Failure to comply with the Act could result in claims being made against us by individual consumers and the Federal Trade Commission.

Furthermore, the growth and development of the market for eCommerce may prompt more stringent consumer protection laws that may impose additional burdens on those companies conducting business online. The adoption of additional laws or regulations may decrease the growth of the Internet or other online services, which could, in turn, decrease the demand for our products and services and increase our cost of doing business.

The applicability of existing laws governing issues such as property ownership, copyrights, encryption and other intellectual property issues, taxation, libel, export or import matters and personal privacy to the Internet is uncertain. The vast majority of laws were adopted prior to the broad commercial use of the Internet and related technologies. As a result, they do not contemplate or address the unique issues of the Internet and related technologies. Changes to these laws intended to address these issues, including some recently proposed changes in the United States regarding taxation and encryption and in the European Union regarding contract formation and privacy, could create uncertainty in the Internet marketplace and impose additional costs and other burdens. These uncertainties, costs and burdens could reduce demand for our products and services or increase the cost of doing business due to increased litigation costs or increased service delivery costs.

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Risks Related to Ownership of Our Common Stock

Potential fluctuations of our quarterly results could cause our stock price to fluctuate or decline.

We expect that our quarterly operating results will fluctuate significantly in the future based upon a number of factors, many of which are not within our control. We base our operating expenses on anticipated market growth and our operating expenses are relatively fixed in the short term. As a result, if our revenues are lower than we expect, our quarterly operating results may not meet the expectations of public market analysts or investors, which could cause the market price of our common stock to decline. Our quarterly results may fluctuate in the future as a result of many factors, including the following:

• changes in the size and number of transactions processed on behalf of customers as a result of seasonality, success of each customer’s business, general economic conditions or regulatory requirements restricting our customers;

• our ability to attract new customers and to retain our existing customers;

• customer acceptance of new products and services we may offer, including our global acquiring business;

• customer confidence in the safety and security of transactions using our services;

• customer acceptance of our pricing model;

• customer acceptance of our software and our professional services offerings;

• the success of our sales and marketing programs;

• an interruption with one or more of our processors, other financial institutions and technology service providers;

• seasonality of the retail sector;

• changes in accounting rules and regulations;

• changes in federal, state, and local income tax laws;

• war or other international conflicts;

• weakness in the general United States and global economies and financial markets; and

• the lack of available capital for our customers and potential future customers.

Other factors that may affect our quarterly results are set forth elsewhere in this section. As a result of these factors, our revenues are not predictable with any significant degree of certainty. Due to the uncertainty surrounding our revenues and expenses, we believe that quarter-to-quarter comparisons of our historical operating results may not be indicative of our future performance.

The trading price of our common stock has fluctuated and may continue to fluctuate due to factors outside our control.

The market price for our common stock has been volatile and likely will continue to be volatile in response to various factors, some of which are outside our control, including the following:

• the announcement of new products, services or enhancements by our competitors;

• quarterly variations in our competitors’ results of operations;

• changes in earnings estimates or recommendations by securities analysts;

• developments in our industry; and

• short sales, hedging, and other derivative transactions on shares of common stock.

In addition, the stock market in general, and market for technology companies in particular, have experienced substantial price and volume fluctuations potentially unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors, as well as general economic, political and financial market conditions may materially and adversely affect the market price of our common stock.

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The anti-takeover provisions in our certificate of incorporation, including the issuance of authorized preferred stock, could adversely affect the rights of the holders of our common stock.

Anti-takeover provisions of Delaware law and our Certificate of Incorporation may make a change in control more difficult to finalize, even if a change in control would be beneficial to the stockholders. These provisions may allow our Board of Directors to prevent changes in our management and controlling interests. Under Delaware law, our Board of Directors may adopt additional anti-takeover measures in the future. One anti-takeover provision that we have is the ability of our Board of Directors to determine the terms of preferred stock and issue preferred stock without the approval of the holders of the common stock. Our Certificate of Incorporation allows the issuance of up to 5,610,969 shares of preferred stock. As of June 30, 2009, there are no shares of preferred stock outstanding. However, because the rights and preferences of any series of preferred stock may be set by our Board of Directors in its sole discretion without approval of the holders of the common stock, the rights and preferences of this preferred stock may be superior to those of the common stock. Accordingly, the rights of the holders of common stock may be adversely affected.

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

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

Our Annual Meeting of Stockholders was held on May 13, 2009. The stockholders voted on proposals to:

1. Elect seven Directors of the Company to serve until the 2010 annual meeting of stockholders.

2. Ratify the appointment of Ernst & Young, LLP as the independent auditors for the Company for the year ending December 31, 2009.

3. Ratify and approve an amendment to our Amended and Restated 1999 Stock Option Plan to increase the number of shares reserved thereunder from 15,500,000 shares to 19,100,000 shares.

4. Ratify and approve an amendment to our Amended and Restated 1999 Employee Stock Purchase Plan to extend the term of the plan until August 1, 2019.

The proposals were approved by the following votes:

1. Election of Directors

Nominee	For	Withheld
William S. McKiernan	62,992,344	2,782,238
John J. McDonnell, Jr.	60,087,652	5,686,930
Steven P. Novak	58,799,472	6,975,110
Kenneth R. Thornton	61,072,343	4,702,239
Richard Scudellari	58,105,347	7,669,235
Robert Donahue	63,058,509	2,716,073
Carl F. Pascarella	65,207,657	566,925

2. Ratify appointment of Ernst & Young, LLP

For	Against	Abstain
60,731,320	4,971,810	71,452

3. Ratify and approve an amendment to 1999 Stock Option Plan

For	Against	Abstain
46,605,649	10,847,955	1,210,117

4. Ratify and approve an amendment to our Amended and Restated 1999 Employee Stock Purchase Plan

For	Against	Abstain
57,227,614	1,356,415	79,692

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ITEM 5. OTHER INFORMATION

Performance Based Incentive Compensation

The Company’s 2009 Executive Bonus Plan (“Plan”) provides for bonuses for all eligible employees with a title of vice president or above (“Participant”) based on the Company’s achievement of certain annual financial targets. Upon the Company’s achievement of its internal, full year non-GAAP operating income target set forth in the Company’s 2009 financial plan, adopted and approved by the Board of Directors, all Participants, will receive a target bonus amount. Non-GAAP operating income excludes stock-based compensation, depreciation and amortization expense and certain nonrecurring items. For each Participant the target bonus amount is fixed. A description of the Plan is included in a Report on Form 8-K filed with the Securities and Exchange Commission on April 20, 2009.

The total, pre-tax dollar amount of the target bonus (including incremental bonus if applicable) paid to each Participant is comprised of two components. Seventy-five percent (75%) of the bonus amount is based on overall Company performance relative to its full year, non-GAAP operating income target. Twenty-five percent (25%) of the bonus amount is based on the performance of each individual Participant; however, if the non-GAAP operating target is not met, the performance bonus is not paid.

To evaluate individual performance, individual goals are set for the named executive officers. These include objectives that are directly related to each named executive officer’s specific business function over which he has responsibility. These objectives were approved by the Compensation Committee of the Board of Directors (“Committee”) on August 7, 2009. The Chief Executive Officer’s objectives are focused on corporate governance and transparency, strategic development, operational performance and organizational development. The individual objectives set for the Chief Financial Officer include emphasis on reporting and forecasting and the automation of specific functions. For the President and Chief Operating Officer, these individual objectives include achievement of revenue targets, growth of business alliances and expansion of the Company’s international operations. The individual objectives for the Chief Technology Officer include the continued focus on technical leadership and the implementation of new software systems. The objectives for the Senior Vice President of Worldwide Sales include the delivery of a net revenue plan and expansion of the Company’s revenue outside the United States. Accordingly, the actual compensation of a named executive officer reflects an element of the Committee’s subjective evaluation of the contribution of the named executive officer. This subjective evaluation of the impact of the individual contributions on actual compensation is not a formula based process resulting in a quantifiable amount of impact, but rather involves the exercise of discretion and judgment. This enables the Committee to differentiate among executives and emphasize the link between personal performance and compensation.

ITEM 6. EXHIBITS

(a) Exhibits

Exhibit Number	Description
2.1(1)	Agreement and Plan of Reorganization, dated June 17, 2007, by and among CyberSource Corporation, Authorize.Net Holdings, Inc., Congress Acquisition-Sub, Inc. and Congress Acquisition Sub 1, LLC
3.1(2)	Second Amended and Restated Certificate of Incorporation of CyberSource Corporation
3.2(3)	CyberSource Corporation’s Bylaws, as amended
10.1(4)	CyberSource Corporation 2009 Executive Bonus Plan
10.2(5)*	2009 Michael Walsh Commission and Bonus Plan
31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1) Incorporated by reference to the same numbered exhibit previously filed with the Company’s Current Report on Form 8-K filed on June 19, 2007.

(2) Incorporated by reference to the same numbered exhibit previously filed with the Company’s Annual Report on Form 10-K filed on March 11, 2008.

(3) Incorporated by reference to the same numbered exhibit previously filed with the Company’s Quarterly Report on Form 10-Q filed on May 8, 2009.

(4) Incorporated by reference to the same numbered exhibit previously filed with the Company’s Quarterly Report on Form 10-Q filed on May 8, 2009.

(5) Incorporated by reference to the same numbered exhibit previously filed with the Company’s Quarterly Report on Form 10-Q filed on May 8, 2009.

* A portion of the exhibit has been omitted pursuant to a grant of confidential treatment by the Securities and Exchange Commission

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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.

	CYBERSOURCE CORPORATION
	(Registrant)
Date: August 7, 2009	By:	/s/    Steven D. Pellizzer
		Steven D. Pellizzer
		Senior Vice President of Finance and Chief Financial Officer
		(Authorized Officer and Principal Financial Officer)

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