- Quarterly Report (10-Q)

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 September 30, 2008.

¨	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 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 ¨	Accelerated filer x	Non-accelerated filer ¨	Smaller reporting company ¨
		(Do not check if a 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 October 23, 2008, there were 69,532,280 shares of common stock, par value $0.001 per share, outstanding.

CYBERSOURCE CORPORATION

INDEX TO REPORT ON FORM 10-Q

FOR QUARTER ENDED SEPTEMBER 30, 2008


		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):

	Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007	3

	Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2008 and 2007	4

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007	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	19

Item 4.	Controls and Procedures	19

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	19

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

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

CYBERSOURCE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)


	September 30, 2008			December 31, 2007 (1)
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	73,164		$	40,393
Accounts receivable, net		16,149			15,503
Prepaid expenses and other current assets		4,721			4,189
Deferred income taxes		3,596			3,596

Total current assets		97,630			63,681
Property and equipment, net		16,492			10,664
Intangible assets, net		136,811			158,316
Goodwill		290,246			291,456
Non-current deferred income taxes, net		9,773			9,773
Other non-current assets		2,540			2,341
Restricted cash		1,543			1,516

Total assets	$	555,035		$	537,747

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,138		$	613
Funds due to merchants		13,169			11,399
Other accrued liabilities		17,426			14,297
Deferred revenue		4,393			3,772
Accrued restructuring		677			904

Total current liabilities		36,803			30,985
Deferred revenue, less current portion		987			493
Accrued restructuring, less current portion		665			860
Other non-current liabilities		1,099			—
Other non-current tax liabilities		1,100			2,195

Total liabilities		40,654			34,533

Stockholders’ equity:
Common stock		69			69
Additional paid-in capital		801,981			790,682
Accumulated other comprehensive loss		(832	)		(5	)
Accumulated deficit		(286,837	)		(287,532	)

Total stockholders’ equity		514,381			503,214

Total liabilities and stockholders’ equity	$	555,035		$	537,747

(1)	Derived from the Company’s audited consolidated financial statements as of December 31, 2007.

See notes to condensed consolidated financial statements.

CYBERSOURCE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Revenues	$	57,693		$	26,546		$	166,772		$	71,564
Cost of revenues		28,119			15,057			81,505			39,390

Gross profit		29,574			11,489			85,267			32,174
Operating expenses:
Product development		5,826			3,134			16,936			8,617
Sales and marketing		17,466			4,800			51,023			13,998
General and administrative		6,460			3,856			17,748			9,903

Total operating expenses		29,752			11,790			85,707			32,518

Loss from operations		(178	)		(301	)		(440	)		(344	)
Other income, net		145			85			384			157
Interest income		346			791			1,104			2,186

Income before income taxes		313			575			1,048			1,999
Income tax provision		106			228			353			756

Net income	$	207		$	347		$	695		$	1,243

Basic net income per share	$	—		$	0.01		$	0.01		$	0.04

Diluted net income per share	$	—		$	0.01		$	0.01		$	0.03

Weighted average number of shares used in computing basic net income per share		69,444			35,215			69,157			35,167

Weighted average number of shares used in computing diluted net income per share		72,250			37,029			72,033			37,352

See notes to condensed consolidated financial statements.

CYBERSOURCE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Nine Months Ended September, 30
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	695		$	1,243
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization expense		21,505			101
Depreciation expense		4,597			1,318
Income from investment in joint venture		(161	)		(142	)
Stock-based compensation		7,170			4,689
Loss on disposal of property and equipment		—			8
Changes in operating assets and liabilities:
Accounts receivable		(646	)		(1,444	)
Prepaid expenses and other current assets		(532	)		(1,036	)
Deferred income taxes		—			727
Other non-current assets		1,145			109
Accounts payable		525			2,744
Accrued liabilities		3,806			1,913
Funds due to merchants		1,770			—
Deferred revenue		1,115			135
Other non-current tax liabilities		(1,095	)		—

Net cash provided by operating activities		39,894			10,365
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(10,425	)		(3,543	)
Purchases of short-term investments		—			(58,358	)
Maturities of short-term investments		—			66,442

Net cash provided by (used in) investing activities		(10,425	)		4,541
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock		6,996			3,213
Repurchase of common stock		(2,867	)		(5,032	)

Net cash provided by (used in) financing activities		4,129			(1,819	)
Effect of exchange rate changes on cash		(827	)		167

Increase in cash and cash equivalents		32,771			13,254
Cash and cash equivalents at beginning of period		40,393			21,701

Cash and cash equivalents at end of period	$	73,164		$	34,955

See notes to condensed consolidated financial statements.

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 nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. 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 ending December 31, 2007 with the Securities and Exchange Commission (“SEC”) on March 11, 2008, 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 No. 123(R), “Share-Based Payment” (“SFAS 123R”). The Company recognized stock-based compensation expense of $2.4 million and $1.5 million during the three months ended September 30, 2008 and 2007, respectively, and $7.2 million and $4.7 million during the nine months ended September 30, 2008 and 2007, respectively.

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.

A summary of the Company’s stock option activity during the nine months ended September 30, 2008 is as follows:


	Shares		Weighted average exercise price per share	Weighted average remaining contractual life	Aggregate intrinsic value
Outstanding as of December 31, 2007	8,488,620		8.95
Granted	1,756,450		13.42
Exercised	(1,007,569	)	6.83
Forfeited	(167,690	)	12.49

Outstanding as of September 30, 2008	9,069,811		9.98	4.65	$	60,104,066

Vested and expected to vest as of September 30, 2008	8,274,155		9.82	4.63	$	56,554,175
Exercisable as of September 30, 2008	4,842,920		8.10	4.36	$	43,032,647

During the three and nine months ended September 30, 2008, the total intrinsic value of stock options exercised was approximately $2.3 million and $11.0 million, respectively. During the three and nine months ended September 30, 2007, the total intrinsic value of stock options exercised was approximately $2.0 million and $6.5 million, respectively. As of September 30, 2008, total unrecognized stock-based compensation expense related to non-vested stock options was approximately $18.7 million, which is expected to be recognized over a weighted average period of approximately 2.71 years. During the three and nine months ended September 30, 2008, the total cash received from the exercise of stock options was approximately $1.6 million and $7.0 million, respectively. During the three and nine months ended September 30, 2007, the total cash received from the exercise of stock options was approximately $1.1 million and $3.2 million, respectively.

For stock options granted during the three and nine months ended September 30, 2008 and 2007, 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:

CYBERSOURCE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Risk-free interest rate	2.74	%	4.63	%	1.86% - 3.18	%	4.47% - 4.74	%
Dividend yield	—		—		—		—
Volatility	0.50		0.55		0.49 – 0.50		0.51 - 0.58
Expected life (years)	3.54		3.46		3.54		3.46

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 $6.50 and $5.48 per share for options granted during the three months ended September 30, 2008 and 2007, respectively. The weighted average fair value of options granted was $5.07 and $5.49 per share for options granted during the nine months ended September 30, 2008 and 2007, respectively.

As of September 30, 2008, the Company had 100,000 restricted shares outstanding, none of which have vested.

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

Statement of Financial Accounting Standard 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 September 30, 2008, the Company had recorded goodwill in connection with its acquisition of Authorize.Net in November 2007, with a carrying value of approximately $290.2 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.

Statement of Financial Accounting Standard 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 September 30, 2008, the Company had recorded intangible assets in connection with its acquisition of Authorize.Net with a carrying value of approximately $136.8 million.

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 nine months ended September 30, 2008.

Income Taxes

Income taxes are calculated under the provisions of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”). Under SFAS 109, the 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. Effective January 1, 2007, the Company adopted Financial Accounting Standards Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109.

Recent Pronouncements

In December 2007, the FASB issued SFAS 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, including goodwill, the liabilities assumed and any non-controlling interest in the acquiree. SFAS 141R also establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for business combinations for which the acquisition date is on or after the

CYBERSOURCE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

beginning of the first annual reporting period beginning on or after December 15, 2008. The impact of adopting SFAS 141R will be dependent on the future business combinations that the Company may pursue after its effective date.

2.	ACQUISITIONS

Authorize.Net

On November 1, 2007, the Company completed the acquisition of Authorize.Net Holdings, Inc. (“Authorize.Net”), a provider of products and services primarily for businesses that sell products and services online. The Company believes that CyberSource and Authorize.Net’s respective businesses complement each other and the acquisition will increase the scale and scope of the combined company, diversify the combined company’s service offerings, and create opportunities for cost reductions through integration savings.

The acquisition has been accounted for using the purchase method of accounting. The Company has allocated the purchase price to assets and liabilities based on management’s best estimates of the respective fair values with the excess cost over the net assets acquired allocated to goodwill. Goodwill of $291.5 million and other intangible assets of $162.4 million were recorded upon the close of the acquisition and the intangible assets are being amortized over their respective estimated useful lives of two to eleven years. During the nine months ended September 30, 2008, the carrying amount of goodwill was adjusted by approximately $0.1 million to reflect the reversal of certain liabilities accrued prior to the close of the Authorize.Net acquisition and by approximately $1.1 million to release certain FIN 48 tax reserves related to Authorize.Net which were assumed as part of the acquisition. As of September 30, 2008, the carrying amount of goodwill was $290.2 million.

The components of acquired intangible assets as of September 30, 2008 are as follows (in thousands):


	Gross		Accumulated Amortization		Net
Partner contracts and related relationships	$	86,100	$	2,013	$	84,087
Merchant contracts and related relationships		49,300		16,396		32,904
Existing technology		21,900		5,196		16,704
Trade name		3,900		1,764		2,136
Processor relationships		1,200		220		980

Total	$	162,400	$	25,589	$	136,811

Estimated future amortization expense for the intangible assets recorded on the Company’s September 30, 2008 balance sheet is as follows (in thousands):


	Amount
Remainder of 2008	$	7,169
2009		26,230
2010		21,777
2011		18,743
2012		12,903
Thereafter		49,989

Total	$	136,811

See the Company’s Form 10-K for the year ended December 31, 2007 for more information on the Authorize.Net acquisition.

3.	COMPREHENSIVE INCOME (LOSS)

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


	Three Months Ended September 30,					Nine Months Ended September 30,
	2008			2007		2008			2007
Net income	$	207		$	347	$	695		$	1,243
Change in cumulative translation adjustment		(824	)		68		(827	)		167
Unrealized gain on short-term investments		—			14		—			22

Comprehensive income (loss)	$	(617	)	$	429	$	(132	)	$	1,432

CYBERSOURCE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

4.	FUNDS DUE TO MERCHANTS

At September 30, 2008, the Company was holding funds in the amount of approximately $13.2 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.

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.

5.	RESTRUCTURING CHARGES

As a result of the Company’s acquisition of Authorize.Net, the Company acquired certain restructuring accruals related to certain facilities that Authorize.Net had exited. In December 2007, the Company also exited certain redundant office space in Marlborough, Massachusetts and recorded a restructuring accrual of approximately $0.1 million. This amount represents future lease obligations, net of projected sublease rental income. The Company also recorded approximately $0.1 million of severance related to terminated employees. In March 2008, the Company consolidated certain office space in American Fork, Utah and as a result, recorded a restructuring accrual of approximately $0.1 million. In September 2008, the Company recorded a restructuring accrual of approximately $0.3 million as a result of assumption changes associated with its excess office space in Burlington, Massachusetts. The expense was included in general and administrative expenses for the nine months ended September 30, 2008.

In December 2007, the Company announced the closure of BidPay.com, Inc., a payment service provider for online auctions. As a result, the Company recorded a restructuring accrual of approximately $0.1 million, representing severance payments related to terminated employees which were paid during the nine months ended September 30, 2008.

The following table summarizes the activity in the restructuring accrual for the nine months ended September 30, 2008 (in thousands):


	Balance at December 31, 2007		Adjustment to Restructuring Charge		Cash Payments			Balance at September 30, 2008
Severance and benefits	$	189	$	—	$	(189	)	$	—
Facilities related charges		1,575		470		(703	)		1,342

	$	1,764	$	470	$	(892	)	$	1,342

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

6.	LETTER OF CREDIT

As of September 30, 2008, 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.

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

CYBERSOURCE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

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, 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 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. The Company cannot predict whether the Company will be able to renegotiate a settlement that complies with the Second Circuit’s mandate. 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. Several motions have been filed by ReD and the Company since April 25, 2008, which are still pending before the Court. 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.

CYBERSOURCE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

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 Asset Purchase Agreement 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. Due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the matter.

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.	COMMON STOCK REPURCHASE PROGRAM

On January 24, 2007, the Board of Directors authorized management to use up to $10.0 million over a twelve-month period beginning on January 30, 2007 to repurchase shares of the Company’s common stock. During the period beginning January 30, 2007 and ended January 29, 2008, the Company repurchased 420,800 shares at an average price of $11.96 per share, including repurchase costs, all of which were repurchased prior to 2008.

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 September 30, 2008, the Company repurchased 197,625 shares at an average price of $14.51 per share, including repurchase costs, all of which were repurchased during the three months ended September 30, 2008.

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

9.	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 September 30, 2008.

CYBERSOURCE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

10.	NET INCOME PER SHARE COMPUTATION

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


	For the three months ended September 30,				For the nine months ended September 30,
	2008		2007		2008		2007
Basic net income per share computation:
Net income	$	207	$	347	$	695	$	1,243

Weighted-average common shares outstanding		69,444		35,215		69,157		35,167

Basic net income per share attributable to common stockholders	$	—	$	0.01	$	0.01	$	0.04

Diluted net income per share computation:
Net income	$	207	$	347	$	695	$	1,243

Weighted-average common shares outstanding		69,444		35,215		69,157		35,167
Incremental shares attributable to the assumed exercise of outstanding options		2,806		1,814		2,876		2,185

Total diluted weighted average common shares		72,250		37,029		72,033		37,352

Diluted net income per share attributable to common stockholders	$	—	$	0.01	$	0.01	$	0.03

The computation of diluted net income per share excluded approximately 423,000 and 1.3 million options to purchase shares of common stock for the three months ended September 30, 2008 and 2007, respectively, and approximately 440,000 and 500,000 options to purchase shares of common stock for the nine months ended September 30, 2008 and 2007, respectively, because the effect would have been antidilutive.

11.	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 nine months ended September 30, 2008 was $0.4 million, or 34% of pre-tax income, compared to $0.8 million, or 38% of pre-tax income for the nine months ended September 30, 2007. The effective tax rate for the nine months ended September 30, 2008 differs from the U.S. federal statutory rate primarily due the favorable impact of lower foreign tax rates. The favorable impact was partially offset by the impact of state income taxes, primarily driven by recent legislative changes suspending the usage of California net operating loss carryforwards. The effective tax rate for the nine months ended September 30, 2007 differs from the U.S. federal statutory rate primarily due to foreign operation tax benefits.

The unrecognized tax benefits balances were $1.1 million and $2.2 million as of September 30, 2008 and December 31, 2007, respectively. The decrease of approximately $1.1 million is due primarily to the lapse of applicable state statutes of limitations.

12.	FAIR VALUE MEASUREMENTS

Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company has adopted the provisions of SFAS 157 with respect to its financial assets and liabilities only. 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.

CYBERSOURCE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

•

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.

The adoption of this statement did not have a material impact on the Company’s consolidated results of operations and financial condition. Level 1 financial assets measured at fair value on a recurring basis consist of cash accounts of approximately $26.4 million and money market funds (cash equivalents) of approximately $46.8 million as of September 30, 2008. The Company has no Level 2 or Level 3 financial assets measured at fair value on a recurring basis as of September 30, 2008.

13.	SUBSEQUENT EVENTS

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 October 1, 2008 and ended November 10, 2008, the Company repurchased 507,300 shares at an average price of $14.06 per share, including repurchase costs.

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.

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.

The following discussion should be read 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 March 11, 2008 (SEC File No. 000-26477).

OVERVIEW

CyberSource Corporation provides secure electronic payment and risk management solutions to organizations that process orders for goods and services over the Internet. CyberSource’s 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. Our risk and compliance management tools address complexities common to online merchants such as credit card fraud, online tax requirements and export controls. Our reporting and management tools facilitate the automation of the flow of complex eCommerce processes, such as recurring billing and payment reconciliation. We partner with and connect to a large network of payment processors and other payment service providers to offer merchants a single source solution.

We primarily derive our revenues from monthly commerce transaction processing fees, 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.

Authorize.Net Acquisition

On November 1, 2007, we completed the acquisition of Authorize.Net Holdings, Inc. (“Authorize.Net”), a provider of products and services primarily for businesses that sell products and services online. We believe that CyberSource and Authorize.Net’s respective businesses complement each other and the acquisition will increase the scale and scope of the combined company, diversify the combined company’s service offerings, and create opportunities for cost reductions through integration savings.

The acquisition has been accounted for using the purchase method of accounting. Under the purchase method of accounting, the total purchase price of $542.8 million was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the aggregate fair values was recorded as goodwill. The fair value assigned to identifiable intangible assets acquired is determined using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by management.

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 2007 Annual Report on Form 10-K filed with the Securities and Exchange Commission and we refer the reader to that discussion. There were no material changes in the application of critical accounting policies during the nine months ended September 30, 2008.

•

Revenue Recognition

•

Accounts Receivable

•

Reserve for Merchant Losses

•

Legal Contingencies

•

Accounting for Income Taxes

•

Stock-based Compensation

•

Long-Lived Assets

RESULTS OF OPERATIONS

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenues	48.7		56.7		48.9		55.0

Gross profit	51.3		43.3		51.1		45.0
Operating expenses:
Product development	10.1		11.8		10.2		12.1
Sales and marketing	30.3		18.1		30.6		19.6
General and administrative	11.2		14.5		10.6		13.8

Total operating expenses	51.6		44.4		51.4		45.5

Loss from operations	(0.3	)	(1.1	)	(0.3	)	(0.5	)
Interest and other income	0.9		3.3		0.9		3.3

Income before income taxes	0.6		2.2		0.6		2.8
Income tax provision	0.2		0.9		0.2		1.1

Net income	0.4	%	1.3	%	0.4	%	1.7	%

THREE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

Revenues. Revenues were $57.7 million for the three months ended September 30, 2008, as compared to $26.5 million for the three months ended September 30, 2007, an increase of approximately $31.1 million or 117.3%. Approximately 72% of the increase in revenues was attributable to Authorize.Net. Approximately 19% of the increase in revenues was from existing customers, primarily resulting from an increase in global acquiring services, as well as an increase in transaction volumes processed. The remaining increase in revenues was primarily from new customers that entered into contracts during the twelve months ended September 30, 2008. We processed approximately 469 million transactions during the three months ended September 30, 2008, as compared to approximately 287 million transactions processed during the three months ended September 30, 2007, an increase of approximately 63%. Approximately 62% of the increase in transaction volumes was attributable to Authorize.Net. Global acquiring revenues represented 34.9% of our revenues for the three months ended September 30, 2008, as compared to 45.1% for the three months ended September 30, 2007. 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.

Cost of Revenues. Cost of revenues consist primarily of costs incurred in the delivery of e-commerce 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 related to the hosting of our servers at third-party hosting centers in the United States and the United Kingdom. Cost of revenues was $28.1 million or 48.7% of revenues for the three months ended September 30, 2008, as compared to $15.1 million or 56.7% of revenues for the three months ended September 30, 2007. The increase in absolute dollars is primarily due to higher processing fees paid to third parties such as the credit card issuing banks, payment processors and card associations related to our

global acquiring services. These costs are variable and increase in absolute dollars as the related revenue increases and decrease as the related revenue decreases. In addition, cost of revenues for the three months ended September 30, 2008 includes Authorize.Net costs of revenues as well as approximately $1.5 million of intangible asset amortization expense related to existing technology and processor relationships resulting from our acquisition of Authorize.Net. 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 revenue from our acquisition of Authorize.Net as well as from existing and new customers. Included in cost of revenues for the three months ended September 30, 2008 and 2007, is approximately $0.4 million and $0.2 million, respectively, of stock-based compensation expense.

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 $5.8 million for the three months ended September 30, 2008, as compared to $3.1 million for the three months ended September 30, 2007, an increase of approximately $2.7 million or 85.9%. The increase is primarily due to an increase in headcount resulting from our acquisition of Authorize.Net and related compensation expense which increased by approximately $2.1 million. Stock-based compensation expense included in product development expenses was approximately $0.5 million and $0.3 million for the three months ended September 30, 2008 and 2007, respectively. As a percentage of revenue, product development expenses decreased to 10.1% in the three months ended September 30, 2008, as compared to 11.8% for the three months ended September 30, 2007. The decrease is primarily due to the increase in revenue from our acquisition of Authorize.Net as well as from existing and new customers, offset to a certain extent, by the increase in compensation expense due to the increase in headcount during the three months ended September 30, 2008. We expect product development expenses in the three months ended December 31, 2008 to be relatively consistent in absolute dollars and as a percentage of revenue as compared to the three months ended September 30, 2008.

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 $17.5 million for the three months ended September 30, 2008, as compared to $4.8 million for the three months ended September 30, 2007, an increase of approximately $12.7 million or 263.9%. The increase is primarily due to an increase in commissions paid to outside sales agents of approximately $5.0 million, related to sales of Authorize.Net services, and an increase in headcount and related compensation expense which increased by approximately $1.3 million. Also as a result of our acquisition of Authorize.Net, sales and marketing expenses for the three months ended September 30, 2008, include approximately $5.7 million of intangible asset amortization expense related to the Authorize.Net trade name, partner contracts and related relationships as well as merchant contracts and related relationships. Stock-based compensation expense included in sales and marketing expenses was approximately $0.5 million and $0.3 million for the three months ended September 30, 2008 and 2007, respectively. As a percentage of revenue, sales and marketing expenses increased to 30.3% for the three months ended September 30, 2008, as compared to the 18.1% for the three months ended September 30, 2007. The increase is primarily due to the increase in commissions paid to outside sales agents, the increase in compensation expense due to the increase in headcount, and the increase in amortization expense, offset to a certain extent, by the increase in revenue resulting from our acquisition of Authorize.Net and from existing and new customers. We expect that sales and marketing expenses in the three months ended December 31, 2008 to be relatively consistently in absolute dollars and as a percentage of revenue as compared to the three months ended September 30, 2008.

General and Administrative . General and administrative expenses consist primarily of compensation for administrative personnel, fees for outside professional services and, to a lesser extent, facility costs and related overhead. General and administrative expenses were $6.5 million for the three months ended September 30, 2008, as compared to $3.9 million for the three months ended September 30, 2007, an increase of approximately $2.6 million or 67.5%. The increase is primarily due to a $1.7 million increase in compensation expense resulting from increased headcount in connection with our acquisition of Authorize.Net as well as an increase of approximately $0.1 million in bad debt expense. In addition, during the three months ended September 30, 2008, we recorded a restructuring accrual related to our excess office space in Burlington, Massachusetts of approximately $0.3 million. Stock-based compensation expense included in general and administrative expenses was approximately $1.0 million and $0.7 million for the three months ended September 30, 2008 and 2007, respectively. As a percentage of revenue, general and administrative expenses were 11.2% for the three months ended September 30, 2008, as compared to the 14.5% for the three months ended September 30, 2007. The decrease is primarily due to the increase in revenue from our acquisition of Authorize.Net as well as from existing and new customers, offset to a certain extent, by the increase in compensation related expense due to the increase in headcount during the three months ended September 30, 2008. We expect that general and administrative expenses in the three months ended December 31, 2008 will moderately decrease in absolute dollars and as a percentage of revenue due primarily to a decrease in restructuring charges and anticipated continued revenue growth.

Other Income, net. Other income, net consists primarily of joint venture income from CyberSource K.K. and other miscellaneous gains and losses. Other income, net was approximately $145,000 for the three months ended September 30, 2008, as compared to $85,000 for the three months ended September 30, 2007.

Interest Income. Interest income consists of interest earnings on cash, cash equivalents and short-term investments and was $0.3 million for the three months ended September 30, 2008 as compared to $0.8 million for the three months ended September 30, 2007. The decrease is primarily due to lower investment yields. We expect interest income in the three months ended December 31, 2008 to be relatively consistent with the three months ended September 30, 2008 due to anticipated higher cash and cash equivalents balances, offset by lower investment yields.

Income Tax Provision. Income tax expense for the three months ended September 30, 2008 was approximately $0.1 million on pre-tax income of $0.3 million, as compared to $0.2 million on pre-tax income of $0.6 million for the three months ended September 30, 2007. The change in tax expense was primarily the result of the pre-tax income generated in the three months ended September 30, 2008 and the negative impact of stock-based compensation charges related to incentive stock options, which have significantly increased in the current year.

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.

During the fourth quarter of 2007, we recorded a reduction in the valuation allowance related to a portion of our deferred tax assets that will more likely than not be realized, based on future projected taxable income. We intend to maintain the remaining valuation allowance until sufficient further positive evidence exists to support further reversals of the valuation allowance. Our income tax expense recorded in the future will be reduced to the extent of offsetting decreases in our valuation allowance.

NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

Revenues. Revenues were $166.8 million for the nine months ended September 30, 2008, as compared to $71.6 million for the nine months ended September 30, 2007, an increase of approximately $95.2 million or 133.0%. Approximately 67% of the increase in revenues was attributable to Authorize.Net. Approximately 27% of the increase in revenues was from existing customers, primarily resulting from an increase in global acquiring services, as well as an increase in transaction volumes processed. The remaining increase in revenues was primarily from new customers that entered into contracts during the twelve months ended September 30, 2008. We processed approximately 1.4 billion transactions during the nine months ended September 30, 2008, as compared to approximately 820 million transactions processed during the nine months ended September 30, 2007, an increase of approximately 66%. Approximately 60% of the increase in transaction volumes was attributable to Authorize.Net. Global acquiring revenues represented 34.1% of our revenues for the nine months ended September 30, 2008, as compared to 41.8% for the nine months ended September 30, 2007.

Cost of Revenues. Cost of revenues was $81.5 million or 48.9% of revenues for the nine months ended September 30, 2008, as compared to $39.4 million or 55.0% of revenues for the nine months ended September 30, 2007. The increase in absolute dollars is primarily due to higher processing fees paid to third parties such as the credit card issuing banks, payment processors and card associations related to our global acquiring services, which are variable costs that increase in absolute dollars as the related revenue increases and decrease as the related revenue decreases. In addition, cost of revenues for the nine months ended September 30, 2008 includes Authorize.Net costs of revenues as well as approximately $4.4 million of intangible asset amortization expense related to existing technology and processor relationships resulting from our acquisition of Authorize.Net. 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 revenue from our acquisition of Authorize.Net as well as from existing and new customers. Included in cost of revenues for the nine months ended September 30, 2008 and 2007, is approximately $1.2 million and $0.6 million, respectively, of stock-based compensation expense.

Product Development. Product development expenses were $16.9 million for the nine months ended September 30, 2008, as compared to $8.6 million for the nine months ended September 30, 2007, an increase of approximately $8.3 million or 96.5%. The increase is primarily due to an increase in headcount resulting from our acquisition of Authorize.Net and related compensation expense which increased by approximately $7.2 million. Stock-based compensation expense included in product development expenses was approximately $1.6 million and $0.8 million for the nine months ended September 30, 2008 and 2007, respectively. As a percentage of revenue, product development expenses decreased to 10.2% for the nine months ended September 30, 2008, as compared to 12.1% for the nine months ended September 30, 2007. The decrease is primarily due to the increase in revenue from our acquisition of Authorize.Net as well as from existing and new customers, offset to a certain extent, by the increase in compensation expense due to the increase in headcount during the nine months ended September 30, 2008.

Sales and Marketing . Sales and marketing expenses were $51.0 million for the nine months ended September 30, 2008, as compared to $14.0 million for the nine months ended September 30, 2007, an increase of approximately $37.0 million or 264.5%. The increase is primarily due to an increase in commissions paid to outside sales agents of approximately $14.4 million, related to sales of Authorize.Net services, and an increase in headcount and related compensation expense which increased by

approximately $4.0 million. Also as a result of our acquisition of Authorize.Net, sales and marketing expenses for the nine months ended September 30, 2008 include approximately $17.2 million of intangible asset amortization expense related to the Authorize.Net trade name, partner contracts and related relationships as well as merchant contracts and related relationships. Stock-based compensation expense included in sales and marketing expenses was approximately $1.4 million and $1.0 million for the nine months ended September 30, 2008 and 2007, respectively. As a percentage of revenue, sales and marketing expenses increased to 30.6% for the nine months ended September 30, 2008, as compared to 19.6% for the nine months ended September 30, 2007. The increase is primarily due to the increase in commissions paid to outside sales agents, the increase in compensation expense due to the increase in headcount, and the increase in amortization expense, offset to a certain extent, by the increase in revenue resulting from our acquisition of Authorize.Net and from existing and new customers.

General and Administrative . General and administrative expenses were $17.7 million for the nine months ended September 30, 2008, as compared to $9.9 million for the nine months ended September 30, 2007, an increase of approximately $7.8 million or 79.2%. The increase is primarily due to an increase in headcount resulting from our acquisition of Authorize.Net and related compensation expense which increased by approximately $4.7 million, an increase in bad debt expense of approximately $0.5 million, an increase in fees for outside professional services which increased by approximately $0.5 million, an increase of approximately $0.5 million in restructuring charges, and an increase in depreciation expense of approximately $0.5 million. Stock-based compensation expense included in general and administrative expenses was approximately $3.0 million and $2.3 million for the nine months ended September 30, 2008 and 2007, respectively. As a percentage of revenue, general and administrative expenses were 10.6% for the nine months ended September 30, 2008, as compared to the 13.8% for the nine months ended September 30, 2008. The decrease is primarily due to the increase in revenue from our acquisition of Authorize.Net as well as from existing and new customers, offset to a certain extent, by the increase in compensation related expense due to the increase in headcount during the nine months ended September 30, 2008.

Other Income, net. Other income, net for the nine months ended September 30, 2008 consists primarily of joint venture income from CyberSource K.K. of approximately $0.2 million and other miscellaneous gains and losses totaling approximately $0.2 million. Other income for the nine months ended September 30, 2007 consists primarily of joint venture income of approximately $0.1 million and other miscellaneous income of approximately $14,000.

Interest Income. Interest income was $1.1 million for the nine months ended September 30, 2008, as compared to $2.2 million for the nine months ended September 30, 2007. The decrease is primarily due to lower investment yields.

Income Tax Provision. We recorded a provision for income tax expense of $0.4 million for the nine months ended September 30, 2008 as compared to $0.8 million for the nine months ended September 30, 2007. The decrease is primarily due to lower pre-tax income for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007.

LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents were $73.2 million as of September 30, 2008 compared to $40.4 million as of December 31, 2007, an increase of approximately $32.8 million. The increase is primarily due to cash provided by operating activities of approximately $39.9 million, which is net of bonuses paid under the company-wide bonus plan of approximately $2.3 million, and proceeds from the issuance of the Company’s common stock resulting from stock option exercises of approximately $7.0 million, offset by capital expenditures of approximately $10.4 million and cash used to repurchase our common stock of approximately $2.9 million.

We believe that our cash and cash equivalents, which consist of only money market funds, as of September 30, 2008 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 September 30, 2008, 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	$	18,976	$	4,797	$	10,459	$	3,720

Total commitments	$	18,976	$	4,797	$	10,459	$	3,720

We have excluded tax contingencies totaling approximately $1.1 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.

Recent Pronouncements

In December 2007, the FASB issued SFAS 141 (revised 2007), "Business Combinations" (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, including goodwill, the liabilities assumed and any non-controlling interest in the acquiree. SFAS 141R also establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The impact of adopting SFAS 141R will be dependent on the future business combinations that we may pursue after its effective date.

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, our financial results could be affected by factors, such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. 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. 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 error 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 September 30, 2008 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 Report on Form 10-K for the fiscal year ended December 31, 2007 other than as follows: “Our Revenue and Customer Relationships Could be Impacted if We Were to Lose Bank Sponsorship” provides additional information about the risk, “ Loss of Key Personnel Could Have a Material Adverse Effect on the Business and Results of Operations of the Combined Company” reflects the departure of an certain officer, and “If We Lose Key Management Personnel, We May Not be Able to Successfully Manage Our Business and Achieve Our Objections” reflects employment agreements with certain officers and the departure of one such officer. 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.

The Expected 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:

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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;

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

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

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the success of our integration of Authorize.Net;

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customer acceptance of our pricing model;

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customer acceptance of our software and our professional services offerings;

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the success of our sales and marketing programs;

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

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seasonality of the retail sector;

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changes in accounting rules and regulations;

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

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war or other international conflicts; and

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weakness in the general U.S. economy 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 should not be relied upon as an indicator of our future performance.

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:

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

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

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

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the potential loss of key employees of an acquired company.

The size and scope of the Authorize.Net acquisition increases both the scope and consequence of these ongoing integration risks. Even if the acquisition is successfully integrated, we may not receive all of the expected benefits of the transaction.

We May Fail to Realize all of the Anticipated Benefits of the Authorize.Net Merger, Which Could Adversely Affect the Value of Our Common Stock After the Merger

The Authorize.Net merger involves the integration of two former companies that have previously operated independently. We anticipate that the merger will create opportunities to achieve cost savings and revenue synergies, to share technological developments and to achieve other synergistic benefits.

The success of the Authorize.Net merger will depend, in part, on our ability to achieve the anticipated cost synergies and other strategic benefits from combining the businesses of the two former companies. We expect the combined company to benefit from operational synergies resulting from the consolidation of capabilities and elimination of redundancies, as well as greater efficiencies from increased scale and market integration. However, to realize these anticipated benefits, we must successfully combine the businesses of the two former companies. If we are not able to achieve these objectives, the anticipated cost synergies and other strategic benefits of the merger may not be realized fully or at all or may take longer to realize than expected. We may fail to realize some or all of the anticipated benefits of the transaction in the amounts and times projected for a number of reasons, including that the integration may take longer than anticipated, be more costly than anticipated or have unanticipated adverse results relating to the two former companies’ existing businesses.

Potential Customer, Merchant and Employee Uncertainty Related to the Authorize.Net Merger Could Harm the Combined Company

The potential customers of the combined company may, in response to the Authorize.Net merger, determine not to purchase services from us. Any such determinations not to purchase by our customers could seriously harm our business. Similarly, our employees may experience uncertainty about their future role following the combination. This may adversely affect our ability to attract and retain key management, marketing, sales, customer support and technical personnel, which could harm us. Furthermore, certain former Authorize.Net resellers may deem us to be a competitor because we offer merchant acquiring services that may overlap with services offered by certain resellers.

If We are Not Successful in Integrating the Authorize.Net Business and Organization, the Anticipated Benefits of the Merger May Not be Realized

Achieving the anticipated benefits of the Authorize.Net merger will depend, in part, on the integration of technology, operations and personnel of the two former companies. We cannot assure you that the integration will be successful or that the anticipated benefits of the merger will be fully realized. The challenges involved in this integration include the following:

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persuading the employees that the two former companies’ business cultures are compatible and retaining the combined company’s key personnel;

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maintaining the dedication of management resources to integration activities without diverting attention from the day-to-day business of the combined company;

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maintaining management’s ability to focus on anticipating, responding to or utilizing changing technologies in the electronic payment industry;

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maintaining former Authorize.Net’s key reseller relationships;

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demonstrating to customers that the merger has not resulted in adverse changes to the ability of the combined company to address the needs of customers of the loss of attention or business focus;

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integrating the Utah and Washington offices of Authorize.Net into our corporate structure;

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keeping existing independent sales organization channels intact; and

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keeping and retaining key former Authorize.Net employees.

It is not certain that the two companies can be successfully integrated in a timely manner or at all or that any of the anticipated benefits will be realized. In addition, we cannot assure you that there will not be substantial unanticipated costs associated with the integration process, that integration activities will not result in a decrease in revenues, a decrease in the value of our common stock, or that there will not be other material adverse effects from our integration efforts.

If we are unable to successfully integrate Authorize.Net, or if the benefits of the merger do not meet the expectations of financial or industry analysts, the market price of our common stock may decline.

Loss of Key Personnel Could Have a Material Adverse Effect on the Business and Results of Operations of the Combined Company

Our success will depend in part upon our ability to retain key employees of both legacy CyberSource and legacy Authorize.Net. Competition for qualified personnel can be very intense. In addition, key employees may depart because of issues relating to the uncertainty or difficulty of integration or a desire not to remain with the combined company. Accordingly, no assurance can be given that we will be able to retain key employees. For example, on November 6, 2008, Roy Banks, the former General Manager of Authorize.Net, notified the Company of his pending resignation as President of Authorize.Net LLC, effective November 14, 2008. Loss of key personnel could have a material adverse effect on our business and results of operations.

We Could Incur Chargeback or Merchant Fraud Losses

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 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 charged back transactions. During the three months ended September 30, 2008, our global acquiring revenue represented approximately 34.9.% 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 card associations require a bank sponsor that ultimately assumes chargeback or merchant fraud losses if we were financially unable to assume such losses. 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. The current agreement with our bank sponsor for U.S. acquiring, Harris Bank, N.A., 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. As of the date of this report, we have not received any notice of non-renewal from Harris Bank, N.A. Accordingly, this agreement will renew automatically again in March 2009 and 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.

We Face Uncertainties Related to the Effectiveness of Internal Controls

Public companies in the United States are required to review their internal controls over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will achieve its stated goal under all potential future conditions, regardless of how remote.

Although our management has determined that our internal controls were effective as of the end of our most recent fiscal year, there can be no assurance that the integration of Authorize.Net and its internal control systems and procedures, will not result in or lead to a future material weakness in our internal controls, or that we or our independent registered public accounting firm will not identify a material weakness in our internal controls in the future. A material weakness in internal controls over financial reporting would require management and the Company’s independent public accounting firm to evaluate our internal controls as ineffective. If internal controls over financial reporting are not considered adequate, we may experience a loss of public confidence, which could have an adverse effect on our business and stock price.

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 integrate and 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 the 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 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. Any excess of the purchase price over those fair values will be recorded as goodwill. We will incur additional amortization expense based on the identifiable amortizable intangible assets acquired pursuant to the merger agreement 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 $29 million of incremental annual amortization expense during the year ended December 31, 2008. Changes in earnings per share, including as a result of this incremental expense, could adversely affect the trading price of our common stock.

Our Stock Price May Fluctuate Substantially Due to Factors Outside Our Control

The market price for our common stock may be affected by a number of factors outside our control, including the following:

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

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quarterly variations in our competitors’ results of operations;

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changes in earnings estimates or recommendations by securities analysts;

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developments in our industry; and

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general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.

These factors and fluctuations, as well as general economic, political and market conditions may materially and adversely affect the market price of our common stock.

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 Solutions, 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.

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:

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“denial of service” attacks;

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computer viruses;

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

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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; Phoenix, Arizona; 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 are not available, we may not have sufficient business interruption insurance to compensate us for resulting losses. We have experienced periodic interruptions, affecting all or a portion of our systems, which we believe will continue to occur from time to time. For example, on November 12, 1999, our services were unavailable for approximately ten hours due to an internal system problem. We have also subsequently experienced service interruptions and performance issues. Any interruption in our systems that impairs our ability to efficiently and timely provide services could damage our reputation and reduce demand for our services.

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 e-Commerce 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.

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. Accordingly, we may have to increase our sales and marketing expenses in an attempt to secure additional merchant accounts.

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 e-Commerce 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, our business would be materially harmed.

The Demand for Our Products and Services Could Be Negatively Affected by a Reduced Growth of e-Commerce or Delays in the Development of the Internet Infrastructure

Sales of goods and services over the Internet do not currently represent a significant portion of overall sales of goods and services. 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.

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.

Our International Business Exposes Us to Additional Foreign Risks

Products and services provided to merchants outside the United States accounted for 6.6% and 9.7% of our revenues in the nine months ended September 30, 2008 and 2007, 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;

•

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.

Changes in Accounting Standards Regarding Stock Option Plans Will Reduce Our Profitability and Could Limit the Desirability of Granting Stock Options, Which Could Harm Our Ability to Attract and Retain Employees

We have included employee stock-based compensation costs in our results of operations for the three and nine months ended September 30, 2008 and 2007, as discussed in Note 1 in the Notes to Condensed Consolidated Financial Statements. The full impact is dependent upon, among other things, the outcome of our current assessment of different long-term incentive strategies involving stock awards in order to continue to attract and retain employees, the total number of stock awards granted and the tax benefit that we may or may not receive from stock-based expenses. In addition, new regulations implemented by The Nasdaq Stock Market requiring stockholder approval for all stock option plans could make it more difficult for us to grant options to employees in the future. To the extent that new regulations make it more difficult or expensive to grant stock options to employees, we may incur increased compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate employees, each of which could materially and adversely affect our business.

If We Lose Key Management Personnel, We May Not be Able to Successfully Manage Our Business and Achieve Our Objectives

We believe our future success will depend upon our ability to retain our 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, special opportunities and challenges of our business. While we have employment contracts with Scott Cruickshank, our President and Chief Operating Officer, and Roy Banks, our President of Authorize.Net LLC, none of our current key employees are subject to legal obligations that enable us to retain them for a specific period of time. We may not be successful in attracting and retaining key employees in the future. For example, on November 6, 2008, Mr. Banks submitted a resignation notice, effective November 14, 2008.

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.

We May Become Subject to Government Regulation and Legal Uncertainties That Would Adversely Affect Our 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 e-Commerce. 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:

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taxes;

•

user privacy;

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pricing;

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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 e-Commerce 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.

The Anti-Takeover Provisions in Our Certificate of Incorporation 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 September 30, 2008, 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.

Our Fraud Detection Services and Marketing Agreement With Visa U.S.A. Can Be Terminated

In July 2001, we entered into an agreement with Visa U.S.A. to jointly develop and promote the CyberSource Advanced Fraud Screen Service Enhanced by Visa for use in the United States. Under the terms of the agreement, Visa agreed to promote and market the new product to its member financial institutions and Internet merchants. The agreement expires in July 2009, but can be terminated by either party with ninety days prior written notice. Thereafter, the agreement renews automatically for additional periods of one year, unless terminated by either party.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On April 22, 2008, the Board of Directors adopted a common stock repurchase program that authorized management to use up to $10.0 million over a twelve-month period beginning on May 5, 2008 to repurchase additional shares of our common stock. Pursuant to the program, during the period from July 1, 2008 through September 30, 2008, we repurchased 197,625 shares at an average price of $14.51 per share, including commissions and related repurchase costs. All of the repurchased shares were cancelled and returned to the status of authorized, unissued shares.


Period	Total Number of Shares (or Units) Purchased	Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Program	Maximum Dollar Value of Shares Yet to Be Purchased Under the Program at the End of the Period (000’s)
July 1, 2008 to July 31, 2008	172,900	$	14.45	172,900	$	7,501
August 1, 2008 to August 31, 2008	—		—	—		—
September 1, 2008 to September 30, 2008	24,725		14.89	24,725		7,133

Total	197,625	$	14.51	197,625	$	7,133

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

None

ITEM 5.

OTHER INFORMATION

In accordance with Section 10A(i)(2) of the Exchange Act and Section 202 of the Sarbanes-Oxley Act of 2002, we are responsible for disclosing the non-audit services approved in the third quarter of fiscal year 2008 by the Audit Committee (“Audit Committee”) of the Board of Directors to be performed by Ernst & Young, our independent auditors. Non-audit services are defined in the law as services other than those provided in connection with an audit or a review of our financial statements. The non-audit services approved by the Audit Committee in the third quarter are each considered by us to be audit-related services which are closely related to the financial audit process. Each of the services has been pre-approved by the Audit Committee and its chairman has been given the authority to pre-approve additional services pursuant to limited authority delegated by the Audit Committee.

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		CyberSource Corporation’s Bylaws, as amended.

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 Registration Statement on Form S-1 (Registration No. 333-77545).

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: November 10, 2008	By	/s/ Steven D. Pellizzer
		Steven D. Pellizzer
	Senior Vice President of Finance and Chief Financial Officer (Authorized Officer and Principal Financial Officer)